Coast Bancorp 10QSB Quarterly report (small business)

FORM 10-QSB

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20429

(Mark One)

ý	QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended March 31, 2005
o	TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
	For the transition period from          to
	Commission File No. 000-32827

COAST BANCORP

(Exact name of Registration as Specified in its Charter)

California	77-0567091
(State of incorporation or organization)	(IRS Employer Identification No.)

500 Marsh Street, San Luis Obispo, CA 93401

(Address of principal executive offices)

(805) 541-0400

(Registrant’s telephone number, including area code)

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes:   ý   No:   o 

APPLICABLE ONLY TO CORPORATE ISSUERS

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date:

Common Stock – As of May 1, 2005, there were 660,200 shares of the issuer’s common stock outstanding.

Transitional Small Business Disclosure Format (Check one)         Yes:   o   No:   ý 

FORWARD LOOKING STATEMENTS

CERTAIN STATEMENTS IN THIS QUARTERLY REPORT ON FORM 10-QSB INCLUDE FORWARD-LOOKING INFORMATION WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, AND ARE SUBJECT TO THE “SAFE HARBOR” CREATED BY THOSE SECTIONS.  THESE FORWARD-LOOKING STATEMENTS INVOLVE CERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN THE FORWARD-LOOKING STATEMENTS.  SUCH RISKS AND UNCERTAINTIES INCLUDE, BUT ARE NOT LIMITED TO, THE FOLLOWING FACTORS: COMPETITIVE PRESSURE IN THE BANKING INDUSTRY INCREASES SIGNIFICANTLY; CHANGES IN THE INTEREST RATE ENVIRONMENT REDUCE MARGINS; GENERAL ECONOMIC CONDITIONS, EITHER NATIONALLY OR REGIONALLY, ARE LESS FAVORABLE THAN EXPECTED, RESULTING IN, AMONG OTHER THINGS A DETERIORATION IN CREDIT QUALITY AND AN INCREASE IN THE PROVISION FOR POSSIBLE LOAN LOSSES; CHANGES IN THE REGULATORY ENVIRONMENT; CHANGES IN BUSINESS CONDITIONS, PARTICULARLY IN SAN LUIS OBISPO COUNTY; VOLATILITY OF RATE SENSITIVE DEPOSITS; OPERATIONAL RISKS INCLUDING DATA PROCESSING SYSTEMS FAILURES OR FRAUD; ASSET/LIABILITY MATCHING RISKS AND LIQUIDITY RISKS; CHANGES IN THE SECURITIES MARKETS; THE ABILITY TO SATISFY THE REQUIREMENTS OF THE SARBANES-OXLEY ACT AND OTHER REGULATIONS GOVERNING INTERNAL CONTROLS; AND POTENTIAL ECONOMIC EFFECT OF THE WAR ON TERRORISM AND THE WAR IN IRAQ .

THEREFORE, THE INFORMATION CONTAINED IN THIS DOCUMENT SHOULD BE CAREFULLY CONSIDERED WHEN EVALUATING THE BUSINESS PROSPECTS OF COAST BANCORP.

MOREOVER, WHEREVER PHRASES SUCH AS SIMILAR TO, “IN MANAGEMENT’S OPINION,”“MANAGEMENT BELIEVES,” OR “MANAGEMENT CONSIDERS” ARE USED, SUCH STATEMENTS ARE AS OF, AND BASED UPON THE KNOWLEDGE OF MANAGEMENT, AT THE TIME MADE AND ARE SUBJECT TO CHANGE BY THE PASSAGE OF TIME AND/OR SUBSEQUENT EVENTS, AND ACCORDINGLY SUCH STATEMENTS ARE SUBJECT TO THE SAME RISKS AND UNCERTAINTIES NOTED ABOVE WITH RESPECT TO FORWARD-LOOKING STATEMENTS.

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INDEX

COAST BANCORP

PART I – FINANCIAL INFORMATION
Item 1 - Financial Statements
		Statement of Financial Condition
		Statement of Operations
		Statement of Changes in Shareholders’ Equity
		Cash Flow Statement
Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations
		Business Description
		Overview
		Net Interest Income
		Provision for Loan Losses
		Non-interest Income
		Non-interest Expense
		Income Taxes
		Financial Condition
		Asset Quality
		Capital
		Liquidity
Item 3 – Controls and Procedures
PART II – OTHER INFORMATION
	Item 1 – Legal Proceedings
	Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds
	Item 3 – Defaults upon Senior Securities
	Item 4 – Submission of Matters to a Vote of Security Holders
	Item 5 – Other Information
	Item 6 – Exhibits
SIGNATURES

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COAST BANCORP & SUBSIDIARY

ITEM I - FINANCIAL STATEMENTS

Consolidated Balance Sheet (Unaudited)

(in thousands)

	March 31, 2005			December 31, 2004
ASSETS
Cash and due from banks	$	9,376		$	8,640
Federal funds sold	10,300			12,050
TOTAL CASH AND CASH EQUIVALENTS	19,676			20,690
Interest-bearing deposits	—			—
Investment securities:
Securities held to maturity	—			—
Securities available for sale	12,776			12,866
TOTAL INVESTMENT SECURITIES	12,776			12,866
Loans:
Commercial	34,553			29,429
Real estate - construction	17,188			17,432
Real estate - other	68,794			66,897
Consumer	2,416			2,548
TOTAL LOANS	122,951			116,306
Net deferred loan fees	(977		)	(418		)
Allowance for loan losses	(1,168		)	(1,168		)
NET LOANS	120,806			114,720
Premises and equipment	8,379			8,729
Deferred taxes	348			360
Federal reserve bank stock, at cost	884			883
Accrued interest and other assets	1,673			1,666
TOTAL ASSETS	$	164,542		$	159,914
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Noninterest-bearing demand	$	39,897		$	39,661
Money market and NOW	36,945			37,043
Savings	8,751			8,785
Time deposits of $100,000 or more	48,268			44,492
Other time deposits	14,720			14,483
TOTAL DEPOSITS	148,581			144,464
Notes payable	61			106
Junior subordinated debt securities	5,155			5,155
Other liabilities	454			217
TOTAL LIABILITIES	154,251			149,942
Commitments and contingencies	—			—
Stockholders’ equity
Preferred stock - 10,000,000 authorized, none outstanding Common stock no par value; 10,000,000 shares authorized; issued and outstanding: 660,200 in 2005 and 639,300 in 2004	6,748			6,641
Retained earnings	3,655			3,392
Accumulated other comprehensive income - net unrealized gains on available-for-sale securities	(112		)	(61		)
TOTAL STOCKHOLDERS’ EQUITY	10,291			9,972
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	164,542		$	159,914

The accompanying notes are an integral part of these consolidated financial statements

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COAST BANCORP & SUBSIDIARY

Statement of Operations (unaudited)

(In Thousands, except for per share numbers)

	For the Three Months Ended March 31,
	2005		2004
Interest income:
Interest and fees on loans	$	2,120	$	1,873
Interest on taxable securities	80		49
Interest on federal funds sold	84		15
Other interest income	6		9
Total interest income	2,290		1,946
Interest expense:
Interest on money market and NOW accounts	106		53
Interest on savings deposits	12		13
Interest on time deposits	320		261
Interest on other borrowings	86		72
Total Interest Expense	524		399
Net interest income	1,766		1,547
Provision for loan losses	—		40
Net interest income after provision for
loan losses	1,766		1,507
Noninterest income:
Service charges on deposit accounts and other	75		69
Gain on sale of loans and servicing fees	39		275
Gain on sale of real estate	47		43
Total noninterest income	161		387
Noninterest expense:
Salaries and benefits	859		786
Net occupancy expense (net of rental income)	121		78
Equipment expense	80		63
Other expense	431		534
Total noninterest expense	1,491		1,461
Income before taxes	436		433
Income taxes	176		175
Net income	$	260	$	258
Earnings per share - Basic	$	0.40	$	0.40
Earnings per share - Diluted	$	0.37	$	0.39

The accompanying notes are an integral part of these consolidated financial statements

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COAST BANCORP & SUBSIDIARY

Statement of changes in Stockholders’ Equity (Unaudited)

(In Thousands, Except Number of Shares)

	Common Stock									Accumulated Other
	Number of Shares	Amount		Comprehensive Income			Retained Earnings			Comprehensive Income			Total
Balance at January 1, 2004	638,300	$	6,407				$	2,375		$	31		$	8,813
Exercise of stock options, including the realization of tax benefits of $58,000	14,400	234											234
Cash dividends							(97		)				(97		)
Comprehensive Income
Net income				1,115			1,115						1,115
Unrealized loss on available-for-sale securities, net of taxes of $45,672				(66		)				(66		)	(66		)
Less reclassification adjustments for gains included in net income, net of taxes of $17,779				(26		)				(26		)	(26		)
Total comprehensive income				$	1,023
Balance at December 31, 2004	652,700	$	6,641				$	3,393		$	(61	)	$	9,973
Exercise of stock options	7,500	107											107
Cash dividends
Comprehensive Income
Net income				$	262		262						262
Unrealized loss on available-for-sale securities, net of taxes $36,000.00				(51		)				(51		)	(51		)
Less reclassification adjustments for losses included in net income net of taxes
Total comprehensive income				$	173
Balance at March 31, 2005	660,200	$	6,748				$	3,655		$	(112	)	$	10,291

The accompanying notes are an integral part of these consolidated financial statements

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COAST BANCORP & SUBSIDIARIES

Statement of Cash Flows (unaudited)

(In Thousands)

	For the Three Months Ended March 31,
	2005			2004
Operating activities
Net income	$	262		$	258
Adjustments to reconcile net income to Net cash provided by operating activities:
Depreciation and amortization	115			98
Provision for loan losses	—			40
Realized gain on investment securities	—			(43		)
Other items - net	462			165
Net cash provided by operating activities	839			518
Investing activities
Purchase of investment securities	—			(2,019		)
Proceeds from sale of investment securities	—			5,094
Maturities of investment securities	—			1,000
Net change in loans	(6,086		)	(7,143		)
Purchase of premises and equipment	55			(393		)
Net cash used by investing activities	(6,031		)	(3,461		)
Financing activities
Increase in deposits	4,116			4,941
Principle payments on notes payable	(45		)	(44		)
Proceeds from exercise of options	107			16
Net cash provided (used) by financing actvities	4,178			4,913
Increase in cash and cash equivalents	(1,014		)	1,970
Cash and cash equivalents at beginning of period	20,690			14,673
Cash and cash equivalents at end of period	$	19,676		$	16,643

The accompanying notes are an integral part of these consolidated financial statements

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Note 1                    Basis of Presentation

The accompanying financial information has been prepared in accordance with the Securities and Exchange Commission rules and regulations for quarterly reporting and therefore does not necessarily include all information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles.  This information should be read in conjunction with the Company’s Annual Report for the year ended December 31, 2004 filed on Form 10-KSB.

Operating results for interim periods are not necessarily indicative of operating results for an entire fiscal year.  In the opinion of management, the unaudited financial information for the three month periods ended March 31, 2005 and 2004 reflect all adjustments, consisting only of normal recurring accruals and provisions, necessary for a fair presentation thereof.

Some matters discussed in this Form 10-QSB may be “forward-looking statements” within the meaning of the Private Litigation Reform Act of 1995 and therefore may involve risks, uncertainties and other factors which may cause our actual results to be materially different from the results expressed or implied by our forward-looking statements.  These statements generally appear with words such as “anticipate”, “believe”, “estimate”, “may”, “intend”, and “expect”.

Note 2Basis ofEarnings Per Share

Effective December 31, 1997, the Company adopted SFAS No. 128, “Earnings per Share”.  Accordingly, basic earnings per share are computed by dividing income available to common shareholders by the weighted average number of common shares outstanding during each period.  The computation of diluted earnings per share also considers the number of shares issuable upon the assumed exercise of outstanding common stock options.  All earnings per common share amounts presented have been restated in accordance with the provisions of this statement.

	For the Three Months Ended March 31,
	2005	2004
	Shares	Shares
Used in Basic EPS	656,515	637,399
Dilutive Effect of outstanding Stock Options	50,400	64,988
Earnings per share - Diluted	706,915	702,387

Note 3                    Stock-Based Compensation

SFAS No. 123, “Accounting for Stock-Based Compensation,” encourages, but does not require, companies to record compensation cost for stock-based employee compensation plans at fair value.  The Company has chosen to continue to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations.  Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Company’s stock at the date of the grant over the amount an employee must pay to acquire the stock.

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Had compensation costs for the Company’s stock option plan been determined based on the fair value at the grant dates for awards under this plan consistent with the method of SFAS No. 123, the Company’s net income and earnings per share would have been reduced for 2004 and 2003 to the pro forma amounts indicated below:

	2005			2004
Net Income:
As reported	$	260		$	258
Stock-based compensation using the intrinsic value method	—			—
Stock-Based compensation that would have been reported using the fair value method of SFAS 123	(14		)	(11		)
Pro Forma net income	$	246		$	247
Basic earnings per share:
As reported	$	0.40		$	0.40
Proforma	$	0.38		$	0.39
Diluted earnings per share:
As reported	$	0.37		$	0.39
Pro forma	$	0.36		$	0.35

Note 4    Current Accounting Pronouncements

In December 2004, Financial Accounting Standards Board (“FASB”) revised SFAS 123 and issued under its new name,
“Share-Based Payment”.  This statement eliminates the alternative to use Opinion 25’s intrinsic value method of accounting discussed in the previous paragraph.  Instead, this Statement generally requires entities to recognize the cost of employee services received in exchange for awards of stock options, or other equity instruments, based on the grant-date fair value of those awards.  This cost will be recognized over the period during which an employee is required to provide service in exchange for the award, generally the vesting period.

The Bank must adopt this Statement in 2006 for all new stock option awards as well as any existing awards that are modified, repurchased or cancelled.  In addition, the unvested portion previously awarded options will also be recognized as expense.  The Bank is unable to estimate the impact of this Statement on its financial condition or the results of operations as the decision to grant option awards is made annually on a case-by-case basis and, accordingly, the Bank cannot estimate the amount of stock awards that will be made in 2006.

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

The unaudited financial statements have been prepared in accordance with the instructions to Form 10-QSB.  This report  contains statements relating to future results of the Company that are considered to be “forward looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.  These statements relate to, among other things, credit loss reserve adequacy, and simulation of changes in interest rates and litigation results.  Actual results may differ materially from those expressed or implied as a result of certain risks and uncertainties, including, but not limited to, changes in political and economic conditions, interest rate fluctuations, competitive product and pricing pressures within the Company’s markets, equity and fixed income market fluctuations, personal and corporate customers’ bankruptcies, inflation, acquisitions and integrations of acquired businesses, technological change, changes in law, changes in fiscal, monetary, regulatory and tax policies, monetary fluctuations, political and global changes arising from the terrorist attacks of September 11, 2001 as well as the war in Iraq and its aftermath, success in gaining regulatory approvals when required as well as other risks and uncertainties detailed elsewhere in this quarterly report or from time to time in the filings of the Company with the Securities Exchange Commission.  Such forward-looking statements speak only as of the date on which such statements are made, and the corporation undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events.  The accompanying financial information should be read in conjunction with Coast Bancorp’s Annual Report on Form 10-KSB for the year ended December 31, 2004.

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Description of Business

Coast Bancorp

Coast Bancorp (the “Bancorp” or “Coast Bancorp”), headquartered in San Luis Obispo, California, is a California corporation incorporated in 2001.  Coast Bancorp became the bank holding company of Coast National Bank on May 31, 2001 through a corporate reorganization.  In the reorganization, Coast National Bank became the wholly-owned subsidiary of Coast      Bancorp and the shareholders of the Bank became shareholders of Coast Bancorp.  Coast Bancorp is operated through a two-tiered corporate structure.  At the holding company level the affairs of Coast Bancorp are overseen by a Board of Directors elected by the shareholders of Coast Bancorp at the annual meeting of shareholders.  The business of the Bank is overseen by a Board of Directors elected by Coast Bancorp, the sole owner of the Bank.  As of the date of this Form 10-QSB the respective members of the Board of Directors of the Bank and the Board of Directors of Coast Bancorp are identical.  Coast Bancorp is subject to the regulations of, and examination by, the Board of Governors of the Federal Reserve System.  At present, Coast Bancorp does not engage in any material business activities other than the ownership of the Bank.  Financial information presented herein for March 31, 2005 and comparative information for December 31, 2004 and March 31, 2004 is inclusive of the consolidated Company.

Coast National Bank

Coast National Bank (the “Bank”) was chartered June 16, 1997 (charter #23222) by The Office of the Comptroller of the Currency as a national bank.  The Bank commenced operations on that date with two offices, 16 employees and $6,250,000 in capital.  The original branch offices were located at 486 Marsh Street, San Luis Obispo and 1199 Grand Avenue, Arroyo Grande, California.  Since that time, an additional branch office was opened in June 1998 at 948 Morro Bay Boulevard in Morro Bay, California and another branch office was opened in July 1999 at 1193 Los Osos Valley Road in Los Osos, California.  In July 2002, a loan production office was opened at 930 South Broadway Street in Santa Maria, California and in July 2004 moved to 301 S. Miller Street, Ste. 110 in Santa Maria, California. In October 2004 a loan production office was opened in Santa Barbara, California at 15 West Carrillo Street, Ste. 252.  The Bank applied for and received approval from the Comptroller of the Currency for another branch office at 2138 Spring Street, Paso Robles, California which opened in March 2005.  The Bank also purchased a lot at 2045 Spring Street, Paso Robles, California with the intention of relocating the Paso Robles branch sometime in the future.

When the Bank opened for business in June 1997, it purchased the real estate and building that housed the Arroyo Grande branch office.  On October 14, 1999, the Bank purchased an adjacent lot next to the San Luis Obispo main office on Marsh Street.  A few months later on February 1, 2000, the Bank also purchased the contiguous property and building that was home to the San Luis Obispo main office at 486 Marsh Street.  Construction of a new head office building on the adjacent lot began on October 11, 2001 and was completed on November 25, 2002.  The new main office, located at 500 Marsh Street is approximately 10,700 square feet with the San Luis Obispo branch operation occupying the ground floor and the administrative offices occupying the second floor.  The original main office at 486 Marsh Street now houses the Bank’s Small Business Lending Center and the Bank’s Note Department.

On March 29, 2002, the Bank purchased a vacant site on Morro Bay Boulevard in Morro Bay that is approximately one block from the existing branch.  The purpose for this acquisition was the eventual construction and relocation of the Morro Bay branch to a larger facility with a drive-through lane.  In October 2003 construction began on the new Morro Bay facility which was completed and occupied in August 2004. The branch consists of approximately 2700 square feet with two drive through lanes.

As of March 31, 2005, the Bank had a total of 61 employees.  A number of these employees are part-time however. Part-time employees are converted to full-time equivalent employees on the percentage of their weekly hours worked compared to 40 hours.  On a full-time equivalent basis, employees represent 57 positions.  The Bank values its employees.  They are actively engaged individually and as a team in contributing to the Bank’s realization of its vision and mission.

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Critical Accounting Policies

Our accounting policies are integral to understanding the results reported.  In preparing its consolidated financial statements, the Company is required to make judgments and estimates that may have a significant impact upon its financial results.  Certain accounting policies require the Company to make significant estimates and assumptions, which have a material impact on the carrying value of certain assets and liabilities, and are considered critical accounting policies.  The estimates and assumptions used are based on the historical experiences and other factors, which are believed to be reasonable under the circumstances.  Actual results could differ significantly from these estimates and assumptions, which could have a material impact on the carrying value of assets and liabilities at the balance sheet dates and results of operations for the reporting periods.  For example, the Company’s determination of the adequacy of its allowance for loan losses is particularly susceptible to management’s judgment and estimates.  The following is a brief description of our current accounting policies involving significant management valuation judgments.

Allowance for Loan Losses

The allowance for loan losses represents management’s best estimate of losses inherent in the existing loan portfolio.  The allowance for loan losses is increased by the provision for loan losses charged to expense and reduced by loans charged off, net of recoveries.  The allowance for loan losses is determined based on management’s assessment of several factors: reviews and evaluation of individual loans, changes in the nature and volume of the loan portfolio, current economic conditions and the related impact on specific borrowers and industry groups, historical loan loss experiences and the levels of classified and nonperforming loans.

Loans are considered impaired if, based on current information and events, it is probable that we will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement.  The measurement of impaired loans is generally based on the present value of expected future cash flows discounted at the historical effective interest rate stipulated in the loan agreement, except that all collateral-dependent loans are measured for impairment based on the fair value of the collateral.  In measuring the fair value of the collateral, management uses assumptions and methodologies consistent with those that would be utilized by unrelated third parties.

Changes in the financial condition of individual borrowers, in economic conditions, in historical loss experience and in the condition of the various markets in which collateral may be sold may all affect the required level of the allowance for loan losses and the associated provision for loan losses.

Available for Sale Securities

The fair value of most securities classified as available for sale are based on quoted market prices.  If quoted market prices are not available, fair values are extrapolated from the quoted prices of similar instruments.

Overview

As of March 31, 2005, total consolidated assets of Coast Bancorp were $164.5 million in comparison to total assets of $159.9 million as of December 31, 2004. This represents an increase of $4.6 million, or 2.88%.  Compared to total assets of $147.7 million at March 31, 2004, the Company has increased assets by $16.8 million, or 11.37%, over the last twelve months.

For the three months ended March 31, 2005 the Bancorp reported consolidated net income of $262,000 or $0.37 diluted earnings per share compared to net income of $258,000 and $0.37 diluted earnings per share for the same period during 2004.

Net Interest Income

Net interest income is the amount by which the interest and amortization of fees generated from loans and other earning assets exceed the cost of funding those assets, usually deposit account interest expense.  Net interest income depends on the difference between gross interest and fees earned on the loans and investment portfolios and the interest rates paid on deposits and borrowings (the “interest rate spread”).   Net interest income was $1,766,000 for the quarter ended March 31, 2005, compared to $1,547,000 for the quarter ended March 31, 2004, representing an increase of 14.16%.  This increase was primarily the result of growth in interest-earning assets generated by the Bank’s branches and the increase in interest rates.

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The following table sets forth the components of net interest income, average earning assets and net interest margin: (in thousands)

	Three Months Ended March 31,						Year Ended December 31,
	2005			2004			2004
Interest Income	$	2,290		$	1,946		$	8,240
Interest Expense	524			399			1,727
Net Interest Income	$	1,766		$	1,547		$	6,513
Average Earning Assets	$	145,341		$	128,013		$	154,280
Net Interest Margin	4.86		%	4.83		%	4.77		%

The increase in the net interest margin in the first quarter of 2005 as compared to the net interest margin at December 31, 2004 was due primarily to the continued growth in loans while maintaining quality and the Bank’s ability to respond to the changes in interest rates.

Provision for Loan Losses

Management of the Bank and the Company believes that the allowance for loan losses is adequate.  The Bank has established a monitoring system for loans in order to identify impaired loans and potential problem loans and to permit periodic evaluation of impairment and adequacy of the allowance for loan losses in a timely manner.  The monitoring system and allowance for loan losses methodology have evolved over a period of years, and loan classifications have been incorporated into the determination of the allowance for loan losses.  This monitoring system and allowance methodology includes a loan-by-loan analysis for all classified loans as well as loss factors for the balance of the unclassified portfolio.  Classified loans are reviewed individually to estimate the amount of probable losses that needs to be included in the allowance.  These reviews include analysis of financial information as well as evaluation of collateral securing the credit.  Loss factors on the unclassified portion of the portfolio are based on such factors as historical loss experience, current portfolio delinquency and trends, and other inherent risk factors such as economic conditions, concentrations in the portfolio, risk levels of particular loan categories, internal loan review and management oversight.

The Company did not make a contribution to the allowance for loan losses for the three months ended March 31, 2005 compared to $40,000 for the same period in 2004.  Management believes that the allowance, which equals 0.95% of total loans at March 31, 2005, is adequate to cover future losses.  The allowance for loan losses at December 31, 2004 was 1.01% of total loans.

Changes in the allowance for loan losses for the quarter ended March 31, 2005 and 2004 are as follows (dollar amounts in thousands):

	Three Months Ended March 31,
	2005		2004
Allowance, Beginning of Period	$	1,168	$	1,109
Provision for Loan Losses	—		40
Net Recoveries (Charge-offs)	—		(11		)
Allowance, End of Period	$	1,168	$	1,138

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Non-interest Income

Non-interest income represents deposit account service charges and other types of fee income.  Non-interest income for the quarter ended March 31, 2005 totaled $161,000 compared to $387,000 for the same period in 2004 a 58.40% decrease.  During the three months ended March 31, 2005, the Company elected not to sell the guaranteed portion of government guaranteed loans.  It has been the Company’s policy to sell securities due in one year if the gain will result in higher income after reinvesting the proceeds.

Non-interest Expense

Non-interest expense represents salaries, occupancy expenses, professional expenses, outside services and other miscellaneous expenses necessary to conduct business.  Noninterest expense for the quarter ended March 31, 2005 totaled $1,491,000 compared to $1,461,000 for the same period in 2004 for an increase of 2.05 %.  This increase is primarily due to the continuing growth of the

Bank’s government guaranteed lending department specializing in Small Business Administration lending programs and the overall expansion of the Bank’s customer base.  The number of full time equivalent employees was 57 in March, 2005 compared to 56 for March, 2004.  The increase in loans and deposits of $6.68 million and $4.1 million respectively compared to March, 2004 required additional personnel to provide the service our customers deserve.   Other expense also reflects the cost of processing and servicing these increased loans and deposits.  Net occupancy expense increased by $43,000 due to the addition of the Paso Robles branch.

Earnings Summary

Consolidated net income for the three months ended March 31, 2005 was $262,000 or $0.37 diluted earnings per share compared to net income of $258,000 or $0.37 diluted earnings per share for the same period during 2004.

Income Taxes

The Company recorded a $176,000 tax provision during the first quarter of 2005 compared to $175,000 during the same period in 2004.

Financial Condition

Balance Sheet Summary

As of March 31, 2005, total consolidated assets of Coast Bancorp were $164.5 million in comparison to total assets of $159.9 million as of December 31, 2004. This represents an increase of $4.6 million, or 2.88%.  Compared to total assets of $147.7 million at March 31, 2004, the Company has increased assets by $16.8 million, or 11.37%, over the last twelve months.  These increases are the result of expansion of our customer base and overall growth in deposits of all types.

The majority of the growth in deposits has been reinvested in loans, which have increased by $7.9 million, or 6.91%, from $115.0 million at March 31, 2004 to $122.9 million at March 31, 2005.  The balance of the deposit growth has been invested in Fed Funds pending funding of continuing strong loan demand and to meet the ongoing liquidity needs of the Bank.

Asset Quality

As of March 31, 2005, the Company had no loans on non-accrual and no loans 90 days or more past due and still accruing.  As of March 31, 2004 the Company had one loans on nonaccrual in the amount of $21,000 and no loans 90 day past due and still accruing. As of December 31, 2004 the company had no loans on non-accrual and no loans 90 days past due and still accruing.

As of March 31, 2005 and 2004 the Company had no OREO or restructured loans.

Capital

The objective of the Company’s asset/liability strategy is to manage liquidity and interest rate risk.  Ultimately, management seeks to monitor the safety and soundness of the Bank and its capital base, while maintaining adequate net interest margins and spreads to provide an appropriate return to the stockholders.

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Stockholders equity at March 31, 2005 was $10.2 million, compared to $9.9 at December 31, 2004.  Stockholders equity increased primarily from employees exercising the vested portion of stock options of $107,000 as well as net income of $262,000.

The Company is required to meet certain minimum risk-based capital guidelines and leverage ratios set by the bank regulatory authorities. The risk-based capital standards establish capital requirements that are more sensitive to risk differences between various assets, consider off balance sheet activities in assessing capital adequacy, and minimize the disincentives to holding liquid, low risk assets.  The leverage ratio consists of tangible Tier I capital divided by average total assets.

Coast Bancorp and the Bank maintain capital ratios above the Federal regulatory guidelines for “well-capitalized” bank holding companies.  The ratios for the Company are as follows:

	Regulatory Standard		Coast National Bank	Coast Bancorp
	Adequately Capitalized	Well Capitalized	As of March 31, 2005	As of March 31, 2005
Total risk-based capital ratio	8.00%	10.00%	12.04%	12.93%
Tier 1 risk-based capital ratio	4.00%	6.00%	11.13%	10.75%
Tier 1 leverage capital ratio	4.00%	5.00%	9.11%	8.25%

Liquidity

Management is not aware of any future capital expenditures or other significant demands on commitments which would severely impair liquidity.

Item 3.  Controls and Procedures

Based on their evaluation as of March 31, 2005 of the filing of this Form 10-QSB, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.  There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect those controls subsequent to the date of their evaluation.

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PART II – OTHER INFORMATION

ITEM 1 – LEGAL PROCEEDINGS

Not applicable.

ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Not applicable.

ITEM 3 – DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4 – SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable

ITEM 5 – OTHER INFORMATION

Not applicable.

ITEM 6 – EXHIBITS

(a)	EXHIBITS
	Exhibit 11 -	EARNINGS PER SHARE (See Note 2 under Item 1 – Basis of Presentation on page 8 of this report)
	Exhibit 31 -	RULE 13a-14(a) CERTIFICATIONS
		31.1  Certification of Chief Executive Officer
		31.2  Certification of Chief Financial Officer
	Exhibit 32 -	SECTION 1350 CERTIFICATIONS
		32.1  Certification of Chief Executive Officer
		32.2  Certification of Chief Financial Officer

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Signatures

In accordance with the requirements of the Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

		COAST BANCORP
Date:	May 10, 2005	/s/Jack Wauchope
		Jack Wauchope
		President/Chief Executive Officer
		Chairman of the Board
		(Principal Executive Officer)
Date:	May 10, 2005	/s/Berta Olson
		Berta Olson
		Senior Vice President
		Chief Financial Officer
		(Principal Financial Officer)

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