Coast Bancorp 10QSB Quarterly report (small business)

FORM 10-QSB

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20429

(Mark One)

ýQUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2006

oTRANSITION 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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes:  o     No:  ý

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, 2006, there were 676,100 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 AND AFGHANISTAN.

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

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

Statement of Financial Condition

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COAST BANCORP & SUBSIDIARY

CONSOLIDATED BALANCE SHEETS (Unaudited)

March 31, 2006 and December 31, 2005

ITEM I - FINANCIAL STATEMENTS

	March 31,			December 31,
(in Thousands)	2006			2005
ASSETS
Cash and due from banks	$	7,116		$	9,770
Federal funds sold	24,950			24,900
TOTAL CASH AND CASH EQUIVALENTS	32,066			34,670
Investment securities available for sale	7,888			7,872
Loans:
Commercial	30,133			29,491
Real estate - construction	28,077			25,213
Real estate - other	72,795			76,092
Consumer	2,876			2,866
Other	—			29
TOTAL LOANS	133,881			133,691
Net deferred loan fees	(430		)	(460		)
Allowance for credit losses	(1,224		)	(1,183		)
NET LOANS	132,227			132,048
Premises and equipment	8,243			8,314
Deferred taxes	171			329
Federal Reserve Bank stock and Federal Home Loan Bank stock, at cost	923			923
Accrued interest and other assets	1,515			1,568
TOTAL ASSETS	$	183,033		$	185,724
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Noninterest-bearing demand	$	37,543		$	40,583
Money market and NOW	48,524			45,092
Savings	8,240			8,856
Time deposits of $100,000 or more	56,187			58,984
Other time deposits	15,533			15,434
TOTAL DEPOSITS	166,027			168,949
Note payable	—			45
Junior subordinated debt securities	5,155			5,155
Other liabilities	272			332
TOTAL LIABILITIES	171,454			174,481
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: 676,100 in 2006 and 674,100 in 2005	7,004			6,950
Retained earnings	4,645			4,373
Accumulated other comprehensive income - net unrealized losses on available-for-sale securities	(70		)	(80		)
TOTAL STOCKHOLDERS’ EQUITY	11,579			11,243
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	183,033		$	185,724

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

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COAST BANCORP & SUBSIDIARY

STATEMENT OF OPERATIONS (unaudited)

For the Years Ended March 31, 2006 and 2005

	For the Three Months Ended
	March 31,
(In Thousands, except for per share numbers)	2006		2005
Interest income:
Interest and fees on loans	$	2,917	$	2,120
Interest on investment securities	56		80
Interest on federal funds sold	242		84
Other interest income	8		6
TOTAL INTEREST INCOME	3,223		2,290
Interest expense:
Interest on money market and NOW accounts	267		106
Interest on savings deposits	27		12
Interest on time deposits	676		320
Interest on junior subordinated debt securities	109		86
TOTAL INTEREST EXPENSE	1,079		524
Net interest income	2,144		1,766
Provision for loan losses	40		—
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES	2,104		1,766
Noninterest income:
Service charges on deposit accounts and other	76		75
Gain on sale of loans and servicing fees	129		39
Gain on sale of real estate	—		47
Gain on sale of securities	—		—
TOTAL NONINTEREST INCOME	205		161
Noninterest expense:
Salaries and benefits	913		859
Net occupancy expense (net of rental income)	138		121
Equipment expense	86		80
Other expense	633		431
TOTAL NONINTEREST EXPENSE	1,770		1,491
INCOME BEFORE TAXES	539		436
Income taxes	267		176
NET INCOME	$	272	$	260
Per share data
Earnings per share - Basic	$	0.40	$	0.40
Earnings per share - Diluted	$	0.39	$	0.37

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)

										Accumulated
	Common Stock									Other
	Number of			Comprehensive			Retained			Comprehensive
(In Thousands, Except Number of Shares)	Shares	Amount		Income			Earnings			Income			Total
Balance at January 1, 2005	652,700	$	6,641				$	3,393		$	(61	)	$	9,973
Exercise of stock options, including the realization of tax benefits of $22,417	21,400	309											309
Cash dividends							(118		)				(118		)
Comprehensive Income
Net income				2,122			1,098						1,098
Unrealized loss on available-for-sale securities, net of taxes of $13,024				(19		)				(19		)	(19		)
Total comprehensive income				$	2,103
Balance at December 31, 2005	674,100	$	6,950				$	4,373		$	(80	)	$	11,243
Exercise of stock options including the realization of $7,716 in tax benefits	2,000	35											35
Stock-based compensation expense		19											19
Comprehensive Income
Net income				272			272						272
Unrealized loss on available-for-sale securities, net of taxes of $6,716				10						10			10
Total comprehensive income				$	2,385
Balance at March 31, 2006	676,100	$	7,004				$	4,645		$	(70	)	$	11,579

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

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COAST BANCORP & SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

For the Three Months Ended March 31, 2006 and 2005

	For the Three Months Ended
	March 31,
(In Thousands)	2006			2005
Operating activities
Net income	$	272		$	260
Adjustments to reconcile net income to
Net cash provided by operating activities:
Depreciation and amortization	125			115
Provision for credit losses	40			—
Stock-based compensation	19			—
Gain on sale of loans	(127		)	—
Other items - net	144			464
Net cash provided by operating activities	473			839
Investing activities
Net increase in loans	(1,609		)	(6,086		)
Proceeds from loans sold	1,516
Net Proceeds/Purchase of premises and equipment	(53		)	55
Net cash provided (used) by investing activities	(146		)	(6,031		)
Financing activities
Increase in deposits	(2,922		)	4,116
Principle payments on notes payable	(45		)	(45		)
Proceeds from exercise of options, including tax benefits	36			107
Net cash provided (used) by financing actvities	(2,931		)	4,178
Increase in cash and cash equivalents	(2,604		)	(1,014		)
Cash and cash equivalents at beginning of period	34,670			20,690
Cash and cash equivalents at end of period	$	32,066		$	19,676

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

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Note 1Basis 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, 2005 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, 2006 and 2005 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 of Earnings 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,
	2006	2005
	Shares	Shares
Used in Basic EPS	674,573	656,515
Dilutive Effect of Outstanding Stock Options	28,862	50,400
Used in Earnings Per Share - Diluted	703,435	706,915

Note 3Stock-Based Compensation

In December 2004, Financial Accounting Standards Board (“FASB”) revised SFAS 123 and issued under its new name, “Share-Based Payment”. This statement eliminates the previously allowable alternative to use Opinion 25’s intrinsic value method of accounting. 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 is recognized over the period during which an employee is required to provide service in exchange for the award, generally the vesting period.

The Company has adopted 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 have also been recognized as expense during the first quarter of 2006. During the first quarter of 2006, $18,674 was expensed by the Company for stock option related compensation.

Prior to January 1, 2006, the Company accounted for stock-based compensation under the FASB’s SFAS No. 123, “Accounting for Stock-Based Compensation,” which allowed companies to use an intrinsic value method prescribed in Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations.

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SFAS No. 123 (R) requires that cash flows resulting from the realization of tax deductions in excess of the compensation cost recognized (excess tax benefits) are to be classified as financing cash flows. Before the adoption of SFAS No. 123 (R), the Company presented all tax benefits realized from the exercise of stock options as operating cash flows in the Statement of Cash Flows. The $7,716 excess tax benefit classified as a financing cash inflow would have been classified as an operating cash inflow if we had not adopted SFAS 123 (R).

Had previously recognized compensation cost (prior to 2006) for the Company’s stock option plan been determined based on the fair value at the grant dates for awards under those plans consistent with the method of SFAS 123R, the Company’s net income and earnings per share would have been reduced to the pro forma amounts indicated below:

	For the Three Months Ended
	March 31,
	2006		2005
Net Income:
As reported	$	272	$	260
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		)
Pro Forma net income	$	272	$	246
Basic earnings per share:
As reported	$	0.40	$	0.40
Proforma	$	0.40	$	0.38
Diluted earnings per share:
As reported	$	0.39	$	0.37
Pro forma	$	0.39	$	0.36

Note 4Current Accounting Pronouncements

As discussed in the preceding note, SFAS No.123 (R) became effective January 1, 2006 and has been fully implemented by the Company.

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, 2005.

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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, 2006 and comparative information for December 31, 2005 and March 31, 2005 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 December 2005, the office was relocated to 411 Betteravia Rd., Ste 201, Santa Maria, California. In October 2004 a loan production office was opened in Santa Barbara, California at 15 West Carrillo Street, Ste. 252. The original lease on this facility expired and the office was closed in September2005. 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. In June 2005, the Bank opened a new loan production office at 7429 N. First St., Ste. 104, Fresno, California.

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. Half of the original main office at 486 Marsh Street now houses the Bank’s Small Business Lending Center and the Bank’s Note Department while the other half is leased to various businesses.

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, 2006, the Bank had a total of 69 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 63 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.

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

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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

Earnings Summary

Consolidated net income for the three months ended March 31, 2006 was $272,000 or $0.39 diluted earnings per share compared to net income of $260,000 or $0.37 diluted earnings per share for the same period during 2005.

Balance Sheet Summary

As of March 31, 2006, total consolidated assets of Coast Bancorp were $183.0 million in comparison to total assets of $185.7 million as of December 31, 2005. This represents a decrease of $2.7 million, or 1.45%. The decrease in noninterest-bearing demand accounts was offset by the increase in money market and NOW accounts. Time deposits of $100,000 or more decreased due to competitive interest rates offered at other institutions. The Company has responded and adjusted rates to remain strategically positioned in the market. Compared to total assets of $164.5 million at March 31, 2005, the Company has increased assets by $18.5 million, or 11.25%, over the last twelve months. These increases are the result of expansion of our customer base and overall growth in money market, NOW and time deposits accounts.

The majority of the growth in deposits has been reinvested in loans, which have increased by $10.9 million, or 8.89%, from $123.0 million at March 31, 2005 to $133.9 million at March 31, 2006. The balance of the deposit growth has been invested in Fed Funds to fund continuing strong loan demand and to meet the ongoing liquidity needs of the Bank. Deposits have decreased by $2.9 million, or 1.70% when compared to December 31, 2005. This decrease in deposits was reflected in a decrease in cash and cash equivalents.

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Earnings Analysis

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 $2,144,000 for the quarter ended March 31, 2006, compared to $1,766,000 for the quarter ended March 31, 2005, representing an increase of 21.4%. This increase was primarily the result of growth in interest-earning assets generated by the Bank’s branches and the increase in interest rates.

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

	Three Months Ended						Year Ended
	March 31,						December 31,
	2006			2005			2005
Interest Income	$	3,223		$	2,290		$	10,903
Interest Expense	1,079			524			3,171
Net Interest Income	$	2,144		$	1,766		$	7,732
Average Earning Assets	$	164,539		$	145,341		$	172,963
Net Interest Margin	5.21		%	4.86		%	5.00		%

The increase in the net interest margin in the first quarter of 2006 as compared to the net interest margin at December 31, 2005 was due primarily to the continued growth of quality loans 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 made a contribution to the allowance for loan losses for the three months ended March 31, 2006 of $40,000 as compared to no contributions made for the same period in 2005. Management believes that the allowance, which equals 0.914% of total loans at March 31, 2006, is adequate to cover future losses. The allowance for loan losses at December 31, 2005 was 0.885% of total loans.

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The following table summarizes, for the quarter ended March 31, 2006 and 2005, changes in the allowance for loan losses arising from loans charged-off, recoveries on loans previously charged-off, and additions to the allowance which have been charged to operating expenses (dollar amounts in thousands):

	Three Months Ended
	March 31,
	2006		2005
Outstanding Gross Loans
Allowance, Beginning of Period	$	1,183	$	1,168
Charge-offs	—		—
Recoveries	1		—
Net Loans Charged-Off	1		—
Provision for Loan Losses	40		—
Allowance, End of Period	$	1,224	$	1,168

Non-interest Income

Non-interest income represents deposit account service charges, other types of fee income and gains on the sales of loans and securities. Non-interest income for the quarter ended March 31, 2006 totaled $205,000 compared to $161,000 for the same period in 2005 a 27.3% increase. This is substantially due to the fact that during the three months ended March 31, 2006, the Company elected to sell the guaranteed portion of government guaranteed loans. No securities were sold during the first quarter of 2006 although 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, 2006 totaled $1,770,000 compared to $1,491,000 for the same period in 2005 for an increase of 18.7 %. This increase is primarily due to the increase in marketing and promotion as well as increased salaries and employee benefits. The number of full time equivalent employees was 63 in March, 2006 compared to 57 for March, 2005. The increase in total loans and deposits of $10.93 million and $17.45 million respectively compared to March, 2005 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 as well as occupancy expenses.

Income Taxes

Due to the Company’s increased net income of $272,000 for the quarter ended March 31, 2006 as compared $260,000 for the same period in 2005, the Company recorded a higher tax provision. The tax provision for the first quarter of 2006 was $267,000 as compared to $176,000 during the same period in 2005.

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Balance Sheet Analysis

Investment Portfolio

The following table summarizes the amounts and distribution of our investment securities held as of the dates indicated, and the weighted average yields as of March 31, 2006 (dollar amounts in thousands):

	3/31/2006
					Weighted		12/31/2005
	Book		Market		Average		Book		Market
	Value		Value		Yield		Value		Value
Available-for-Sale Securities
U.S. Treasuries:
Within One Year	$	—	$	—	0	%	$	—	$	—
One to Five Years	—		—		0	%	—		—
Five to Ten Years	—		—		0	%	—		—
After Ten Years	—		—		0	%	—		—
Total U.S. Treasury Securities	—		—		0	%	—		—
U.S. Government and Agency Securities
Within One Year	4,994		4,936		2.49	%	4,992		4,920
One to Five Years	3,012		2,952		3.25	%	3,015		2,952
Five to Ten Years	—		—		0	%	—		—
After Ten Years	—		—		0	%	—		—
Total U.S. Treasury and Government Agency Securities	8,006		7,888		2.87	%	8,007		7,872
Mutual Funds	—		—		0	%	—		—
Mortgage Backed Securities	—		—		0	%	—		—
Total Available-for-Sale Securities	$	8,006	$	7,888	2.87	%	$	8,007	$	7,872

Securities may be pledged to meet security requirements imposed as a condition to receipt of deposit of public funds and for other purposes. At March 31, 2006, the book value of securities pledged to secure public deposits and other purposes was $1,003,214 or 12.5% of available for sale securities.

Asset Quality

As of March 31, 2006, the Company had one loan on non-accrual of $4,650.53 and no loans 90 days or more past due and still accruing. As of March 31, 2005 the Company had no loans on non-accrual and no loans 90 day past due and still accruing. As of December 31, 2005, the company had one loan on non-accrual of $15,186.63 and no loans 90 days past due and still accruing.

As of March 31, 2006 and 2005 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.

Stockholders equity at March 31, 2006 was $11.6 million, compared to $11.2 at December 31, 2005. Stockholders equity increased primarily from net income of $272,000.

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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:

					Coast		Coast
	Regulatory Standard				National Bank		Bancorp
	Adequately		Well		As of		As of
	Capitalized		Capitalized		March 31, 2006		March 31, 2006
Total risk-based capital ratio	8.00	%	10.00	%	11.50	%	12.64	%
Tier 1 risk-based capital ratio	4.00	%	6.00	%	10.67	%	10.94	%
Tier 1 leverage capital ratio	4.00	%	5.00	%	9.06	%	8.52	%

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, 2006 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 15, 2006	/s/Jack C. Wauchope
	Jack C. Wauchope
	President/Chief Executive Officer
	Chairman of the Board
	(Principal Executive Officer)
Date:           May 15, 2006	/s/Karan C. Pohl
	Karan C. Pohl, CPA
	Senior Vice President
	Chief Financial Officer
	(Principal Financial Officer)

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