Coast Bancorp 10QSB Quarterly report (small business)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20429

FORM 10-QSB

(Mark One)
x	QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2007
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:     x     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:     x

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 August 7, 2007 there were 711,200 shares of the issuer’s common stock outstanding.

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

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.

2

COAST BANCORP & SUBSIDIARY

INDEX

PART I — FINANCIAL INFORMATION
Item 1 — Financial Statements
Consolidated Balance Sheets	4
Consolidate Statements of Income	5
Statement of Changes in Stockholders’ Equity	6
Consolidated Statement of Cash Flows	7
Notes to Financial Statements	8
Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview	12
Net Interest Income	12
Non-Interest Income	15
Non-Interest Expense	16
Income Taxes	16
Investment Portfolio	16
Loan Portfolio	17
Asset Quality	18
Provision for Credit Losses	18
Funding	19
Return on Equity and Assets	20
Capital Resources	20
Liquidity	21
Item 3 — Controls and Procedures	21
PART II — OTHER INFORMATION
Item 1 — Legal Proceedings	22
Item 2 — Unregistered Sales of Securities and Use of Proceeds	22
Item 3 — Defaults upon Senior Securities	22
Item 4 — Submission of Matters to a Vote of Security Holders	22
Item 5 — Other Information	22
Item 6 — Exhibits	22
SIGNATURES	23

3

COAST BANCORP & SUBSIDIARY

CONSOLIDATED BALANCE SHEETS (unaudited)

June 30, 2007 and December 31, 2006

ITEM I - FINANCIAL STATEMENTS

(In thousands)

	June 30,			December 31,
	2007			2006
ASSETS
Cash and due from banks	$	6,763		$	7,173
Federal funds sold	17,350			17,800
TOTAL CASH AND CASH EQUIVALENTS	24,113			24,973
Investment securities available for sale	9,581			7,926
Loans:
Commercial	45,406			41,726
Real estate - construction	40,655			28,126
Real estate - other	51,462			62,298
Consumer	3,751			4,705
TOTAL LOANS	141,274			136,855
Net deferred loan fees	(247		)	(352		)
Allowance for credit losses	(1,416		)	(1,388		)
NET LOANS	139,611			135,115
Premises and equipment	8,946			9,740
Deferred taxes	508			472
Federal Reserve Bank and FHLB stock, at cost	974			946
Accrued interest and other assets	1,375			1,567
TOTAL ASSETS	$	185,108		$	180,739
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Noninterest-bearing demand	$	38,708		$	39,556
Money market and NOW	49,575			50,036
Savings	6,854			6,673
Time deposits of $100,000 or more	52,778			50,709
Other time deposits	18,048			15,556
TOTAL DEPOSITS	165,963			162,530
Junior subordinated debt securities	5,155			5,155
Other liabilities	408			343
TOTAL LIABILITIES	171,526			168,028
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: 706,200 in 2007 and 679,600 in 2006	7,343			7,035
Additional paid-in capital	119			76
Retained earnings	6,134			5,611
Accumulated other comprehensive income - net unrealized losses on available-for-sale securities	(14		)	(11		)
TOTAL STOCKHOLDERS’ EQUITY	13,582			12,711
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	185,108		$	180,739

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

4

COAST BANCORP & SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME (unaudited)

For the Periods Ended June 30, 2007 and 2006

(In thousands, except for per share numbers)

	For the Three Months Ended					For the Six Months Ended
	June 30,					June 30,
	2007			2006		2007			2006
Interest income:
Interest and fees on loans	$	3,288		$	3,199	$	6,379		$	6,116
Interest on investment securities	108			52		195			108
Interest on federal funds sold	229			204		446			446
Other interest income	16			22		42			30
TOTAL INTEREST INCOME	3,641			3,477		7,062			6,700
Interest expense:
Interest on money market and NOW accounts	412			343		830			610
Interest on savings deposits	37			31		73			58
Interest on time deposits	834			693		1,629			1,369
Interest on junior subordinated debt securities	122			117		242			226
TOTAL INTEREST EXPENSE	1,405			1,184		2,774			2,263
Net interest income	2,236			2,293		4,288			4,437
Provision for loan losses	—			20		25			60
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES	2,236			2,273		4,263			4,377
Noninterest income:
Service charges on deposit accounts and other	94			90		179			166
Gain on sale of loans and servicing fees	6			17		42			146
Mortgage packaging fees	23			—		38			—
Gain on sale of premises and equipment	(6		)	—		(5		)	—
TOTAL NONINTEREST INCOME	117			107		254			312
Noninterest expense:
Salaries and benefits	937			962		1,912			1,875
Net occupancy expense (net of rental income)	121			125		250			263
Equipment expense	81			83		157			169
Other expense	667			660		1,273			1,293
TOTAL NONINTEREST EXPENSE	1,806			1,830		3,592			3,600
INCOME BEFORE TAXES	547			550		925			1,089
Income taxes	240			217		402			436
NET INCOME	$	307		$	333	$	523		$	653
Per share data
Earnings per share - Basic	$	0.45		$	0.49	$	0.76		$	0.97
Earnings per share - Diluted	$	0.42		$	0.47	$	0.72		$	0.93

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

5

COAST BANCORP & SUBSIDIARY

STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (unaudited)

(In thousands, except number of shares)

				Common Stock			Additonal					Accumulated Other
	Comprehensive Income			Number of Shares	Amount		Paid-In Capital		Retained Earnings			Comprehensive Income			Total
Balance at January 1, 2006				674,100	$	6,950	$	—	$	4,373		(80		)	$	11,243
Exercise of stock options, including the realization of $7,716 in tax benefits				5,500	85										85
Stock-based compensation expense							76								76
Cash dividends									(136		)				(136		)
Comprehensive Income
Net income	$	1,374							1,374						1,374
Unrealized loss on available-for-sale securities, net of taxes of $46,569	69											69			69
Total comprehensive income	$	1,443
Balance at December 31, 2006				679,600	$	7,035	$	76	$	5,611		$	(11	)	$	12,711
Exercise of stock options including the realization of $4,259 in tax benefits				26,600	308		13								321
Stock-based compensation expense							30								30
Comprehensive Income
Net income	$	523							523						523
Unrealized loss on available-for-sale securities, net of $1,725 in tax benefits	(3		)									(3		)	(3		)
Total comprehensive income	$	1,963
Balance at June 30, 2007				706,200	$	7,343	$	119	$	6,134		$	(14	)	$	13,582

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

6

COAST BANCORP & SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

For the Six Months Ended June 30, 2007 and 2006

(In thousands)

	For the Six Months Ended
	June 30,
	2007			2006
Operating activities:
Net income	$	523		$	653
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	215			249
Provision for credit losses	25			60
Stock-based compensation	30			38
Gain on sale of loans	(14		)	(176		)
Other items - net	333			239
NET CASH PROVIDED BY OPERATING ACTIVITIES	1,112			1,063
Investing activities:
Net increase in loans	(4,853		)	(12,024		)
Proceeds from loans sold	243			2,179
Proceeds of Federal Reserve Bank and Federal Home Loan Bank stock	(28		)	(15		)
Net proceeds/purchase of available-for-sale securities	(1,636		)	1,000
Net proceeds/purchase of premises and equipment	549			(84		)
NET CASH USED BY INVESTING ACTIVITIES	(5,725		)	(8,944		)
Financing activities:
Increase (decrease) in deposits	3,432			(2,463		)
Principle payments on notes payable	—			(45		)
Proceeds from exercise of options, including tax benefits	321			36
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES	3,753			(2,472		)
DECREASE IN CASH AND CASH EQUIVALENTS	(860		)	(10,353		)
Cash and Cash Equivalents at Beginning of Period	24,973			34,670
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	24,113		$	24,317

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

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Item 1. Financial Statements- Continued

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, 2006 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 and six month period ended June 30, 2007 and 2006 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 2                    Earnings Per Share

Effective December 31, 1997, Coast National Bank (the “Bank”) adopted SFAS No. 128, “Earnings per Share,” which has subsequently been adopted by the Coast Bancorp (the “Company” or “Coast Bancorp” or “Bancorp”).  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 are in accordance with the provisions of this statement.

Earnings Per Share Note

	For the Three Months Ended June 30,		For the Six Months Ended June 30,
	2007 Shares	2006 Shares	2007 Shares	2006 Shares
Used in Basic EPS	689,280	676,100	685,059	675,341
Dilutive Effect of Outstanding Stock Options	38,507	26,362	39,894	25,235
Used in Earnings Per Share - Diluted	727,787	702,462	724,953	700,576

Note 3                    Stock-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 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 portions of previously awarded options have also been recognized as expense during the first six months of 2007.  During the first half of 2007, $30,261 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.

8

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 $4,259 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).

Note 4                    Current 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.

In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets, an amendment of FASB Statement No. 140.”  The statement amends SFAS No. 140 by  (1) requiring the separate accounting for servicing assets and servicing liabilities, which arise from the sale of financial assets; (2) requiring all separately recognized serving assets and servicing liabilities to be initially measured at fair value, if practicable; and (3) permitting an entity to choose between an amortization method or a fair value method for subsequent measurement for each class of separately recognized servicing assets and servicing liabilities.  The Company adopted the statement as of January 1, 2007.  Management does not expect that the adoption of this new standard will have a material impact on the Company’s financial position, results of operations or cash flows.

In June 2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes.”  This interpretation applies to all tax positions accounted for in accordance with SFAS No. 109, “Accounting for Income Taxes.”  FIN 48 clarifies the application of SFAS No. 109 by defining the criteria that an individual tax position must meet in order for the position to be recognized within the financial statements and provides guidance on measurement, derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition for tax positions.  The Company adopted the interpretation in 2007.  Management does not expect that the adoption of this new interpretation will have a material impact on the Company’s financial position, results of operations or cash flows.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements.   SFAS No. 157 is effective for the Company on January 1, 2008 although early adoption is permitted. The Company has chosen not to implement the early adoption of SFAS No. 157 and is currently evaluating the impact of this standard on its consolidated financial statements.

In February 2007, FASB issued SFAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities.”  The Standard permits an entity to measure certain financial assets and financial liabilities at fair value.  The Standard’s objective is to improve financial reporting by allowing entities to mitigate volatility in reported earnings caused by the measurement of related assets and liabilities using different attributes without having to apply complex hedge accounting provisions.   The Standard becomes effective as of the beginning of the fiscal year that begins after November 15, 2007.  Early adoption is allowed, within 120 days after the first day of the fiscal year, as long as the requirements of SFAS 157 are met either currently or prior to the adoption of SFAS 159.  The Company has chosen not to implement the early adoption of SFAS 159 and is currently assessing the impact the adoption of the standard will have on its consolidated financial statements.

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 and contain 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 the simulation of changes in interest rates.  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.  Forward-looking statements speak only as of the date on which the statements are made, and the Company 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.

9

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, 2006.

Description of Business

Coast Bancorp

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 June 30, 2007 and comparative information for December 31, 2006 and June 30, 2006 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 and most recently in March 2005 at 2138 Spring Street in Paso Robles, 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.

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.  However, the lot was not adequate for the relocation of the branch and on October 26, 2006, the Bank purchased a new lot at 2110 Spring St, Paso Robles, California.  The Bank intends to relocate the Paso Robles branch to this larger lot, sometime in the future.  On March 20, 2007, the lot at 2045 Spring Street, Paso Robles, California was sold.

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.  It was decided that the Bank could more efficiently, and just as effectively, serve our Santa Barbara County customers from our San Luis Obispo SBA office, and as of April 1, 2007 the Santa Maria lease was terminated.   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 September 2005.  In June 2005, the Bank opened a new loan production office at 7429 N. First St., Ste. 104, Fresno, California.  In July of 2006, the Fresno office was relocated to 466 W. Fallbrook Ave., #109, Fresno, California.

10

As of June 30, 2007, the Bank had a total of 80 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 69 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 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 credit 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 Credit Losses

The allowance for credit 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 could 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.

Income Taxes

Deferred income taxes are computed using the asset and liability method, which recognizes a liability or asset representing the tax effects, based on current tax law, of future deductible or taxable amounts attributable to events that have been recognized in the consolidated financial statements.  A valuation allowance is established to reduce the deferred tax asset to the level at which it is “more likely than not” that the tax asset or benefits will be realized.  Realization of tax benefits of deductible temporary differences and operating loss carry forwards depends on having sufficient taxable income of an appropriate character within the carry forward periods.

11

Overview

Earnings Summary

For the three months ended June 30, 2007 the Bancorp reported consolidated net income of $307,000 or $0.42 diluted earnings per share compared to net income of $333,000 and $0.47 diluted earnings per share for the same period during 2006, a 7.8% decrease.  For the six months ended June 30, 2007 the Bancorp reported consolidated net income of $523,000 or $0.72 diluted earnings per share compared to consolidated net income of $653,000 or $0.93 diluted earnings per share for the same period in 2006, a 19.9% decrease.  The decrease in net income was primarily due to smaller gains resulting from the sale of the guaranteed portion of government guaranteed loans and an increase in interest expense.

Balance Sheet Summary

As of June 30, 2007, total consolidated assets of Coast Bancorp were $185.1 million in comparison to total assets of $180.7 million as of December 31, 2006. This represents an increase of $4.4 million, or 2.4%.  This increase in assets was funded by an increase in time deposits.  Compared to total consolidated assets of $183.9 million at June 30, 2006, assets have increased by $1.2 million, or 0.7%, over the last twelve months.

The Bank has continued to grow its loan portfolio during the first the six months of 2007.  Total loans as of June 30, 2007 were $141.3 million in comparison to total loans of $136.9 million as of December 31, 2006.  This represents an increase of $4.4 million, or 3.2%.  Compared to total loans of $143.7 million at June 30, 2006, loans have decreased by $2.4 million, or 1.7%, over the last twelve months. The decrease in the loan portfolio occurred primarily in other real estate loans but was partially offset by increases in commercial and real estate construction loans.

Total deposits as of June 30, 2007 were $166.0 million in comparison to total deposits of $162.5 million as of December 31, 2006.  This represents an increase of $3.5 million, or 2.2%. The increase is due to an increase in time deposits.  Compared to total deposits of $166.5 million at June 30, 2006, deposits have decreased by $0.5 million, or 0.3%, over the last twelve months.  The slight decrease is due to a decrease in our non-interest bearing demand deposits which is offset by increases in time deposits less than $100,000 as well as money market and NOW accounts.

Earnings Analysis

Net Interest Income

A significant component of the Bank’s earnings is 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 after provision for credit losses was $2,236,000 for the three months ended June 30, 2007, compared to $2,273,000 for the three months ended June 30, 2006, representing a decrease of 1.63%.  Net interest income after provision for credit losses was $4,263,000 for the six months ended June 30, 2007, compared to $4,377,000 for the six months ended June 30, 2006, representing a decrease of 2.6%.  This decrease was primarily the result of an increase in interest rates paid, especially in time deposit accounts.  The percentage change in the average interest rate paid on deposits increased faster than the percentage change in the average interest rates earned on loans for the three and six months ended June 30, 2007 as compared to the three and six months ended June 30, 2006.  This increase was somewhat offset by a slightly higher increase in average loans as compared to the increase in average deposits for the same time periods.

The following tables present, for the three months and six months ended June 30, 2007 and 2006, the distribution of average assets, liabilities and shareholders’ equity.  In addition, the total amounts of interest income from average interest-earning assets and the resultant yields, and the dollar amounts of interest expense and average interest-bearing liabilities, expressed both in dollars and in rates are also presented.  Non-accrual loans are included in the calculation of the average balances of loans, and interest not accrued is excluded.

12

Average Rates and Balances
For the Three Month Period Ended June 30, 2007 and 2006
(dollar amounts in thousands)

	June 30, 2007							June 30, 2006
	Average Balance			Interest Earned or Paid		Average Yield or Rate Paid		Average Balance			Interest Earned or Paid		Average Yield or Rate Paid
Assets
Interest-Earning Assets:
Investment Securities	$	8,223		$	108	5.27	%	$	7,679		$	52	2.72	%
Federal Funds Sold	17,477			229		5.26	%	16,539			204		4.95	%
Other Earning Assets	971			16		6.61	%	932			22		9.47	%
Loans	141,277			3,288		9.33	%	139,404			3,199		9.20	%
Total Interest-Earning Assets	167,948			3,641		8.70	%	164,554			3,477		8.48	%
Cash and Due from Bank	7,058							8,018
Premises and Equipment	8,986							8,190
Other Real Estate Owned	—							—
Accrued Interest and Other Assets	1,744							1,572
Allowance For Loan Losses	(1,415		)					(1,224		)
Total Assets	$	184,321						$	181,110
Liabilities and Shareholders’ Equity
Interest-Bearing Liabilities:
Money Market and NOW:	$	50,355		$	412	3.28	%	$	45,864		$	343	3.00	%
Savings	6,715			37		2.21	%	7,649			31		1.63	%
Time Deposits under $100,000	16,657			194		4.67	%	15,252			142		3.73	%
Time Deposits of $100,000 or More	51,757			640		4.96	%	54,137			551		4.08	%
Trust Preferred Securities	5,155			122		9.49	%	5,155			117		9.10	%
Total Interest-Bearing Liabilities	130,639			1,405		4.31	%	128,057			1,184		3.71	%
Non-Interest Bearing Liabilities
Demand Deposits	39,890							40,831
Other Liabilities	500							413
Shareholders’ Equity	13,292							11,809
Total Liabilities and Shareholders’ Equity	$	184,321						$	181,110
Net Interest Income				$	2,236						$	2,293
Net Yield on Interest-Earning Assets						5.34	%						5.59	%

13

Average Rates and Balances
For the Six Month Period Ended June 30, 2007 and 2006
(dollar amounts in thousands)

	June 30, 2007							June 30, 2006
	Average Balance			Interest Earned or Paid		Average Yield or Rate Paid		Average Balance			Interest Earned or Paid		Average Yield or Rate Paid
Assets
Interest-Earning Assets:
Investment Securities	$	8,077		$	195	4.87	%	$	7,775		$	108	2.80	%
Federal Funds Sold	17,140			446		5.25	%	19,249			446		4.67	%
Other Earning Assets	963			42		8.80	%	927			30		6.53	%
Loans	139,610			6,379		9.21	%	136,596			6,116		9.03	%
Total Interest-Earning Assets	165,790			7,062		8.59	%	164,547			6,700		8.21	%
Cash and Due from Bank	6,871							8,047
Premises and Equipment	9,327							8,231
Other Real Estate Owned	—							—
Accrued Interest and Other Assets	1,830							1,625
Allowance For Loan Losses	(1,402		)					(1,209		)
Total Assets	$	182,416						$	181,241
Liabilities and Shareholders’ Equity
Interest-Bearing Liabilities:
Money Market and NOW:	$	50,306		$	830	3.33	%	$	44,952		$	610	2.74	%
Savings	6,767			73		2.18	%	8,005			58		1.46	%
Time Deposits under $100,000	16,289			375		4.64	%	15,370			271		3.56	%
Time Deposits of $100,000 or More	51,335			1,254		4.93	%	55,607			1,098		3.98	%
Trust Preferred Securities	5,155			242		9.47	%	5,155			226		8.84	%
Total Interest-Bearing Liabilities	129,852			2,774		4.31	%	129,089			2,263		3.54	%
Non-Interest Bearing Liabilities
Demand Deposits	38,892							40,084
Other Liabilities	525							451
Shareholders’ Equity	13,147							11,617
Total Liabilities and Shareholders’ Equity	$	182,416						$	181,241
Net Interest Income				$	4,288						$	4,437
Net Yield on Interest-Earning Assets						5.22	%						5.44	%

Net interest income is affected by changes in the amount and mix of our interest-earning assets and interest-bearing liabilities, referred to as a “volume change.”  It is also affected by changes in the yields we earn on interest-earning assets and rates we pay on interest-bearing deposits and other borrowed funds, referred to as a “rate change.”

14

The following table sets forth changes in interest income and interest expense for each major category of interest-earning assets and interest-bearing deposit accounts, and the amount of change attributable to volume and rate changes for the three and six month periods ended June 30, 2007 and 2006.  Changes not solely attributable to rate or volume have been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the changes in each.

Rate/Volume Analysis
(dollar amounts in thousands)

	Three Months Ended June 30, 2007 compared to the Three Months Ended June, 30, 2006									Six Months Ended June 30, 2007 compared to the Six Months Ended June 30, 2006
	Increase (Decrease) in interest income and expense due to change in:									Increase (Decrease) in interest income and expense due to change in:
	Volume			Rate			Total			Volume			Rate			Total
Interest-Earning Assets:
Investment Securities	$	28		$	28		$	56		$	13		$	74		$	87
Federal Funds Sold	12			13			25			—			—			—
Other Earning Assets	1			(7		)	(6		)	1			11			12
Loans	43			46			89			136			127			263
Total Interest Income	84			80			164			150			212			362
Interest-Bearing Liabilities
Transaction Accounts	36			33			69			80			140			220
Savings	(21		)	27			6			(24		)	39			15
Time Deposits	14			38			52			17			87			104
Time Deposits $100,000 or more	(23		)	112			89			(75		)	231			156
Trust Preferred	—			5			5			—			16			16
Total Interest Expense	6			215			221			(2		)	513			511
Net Interest Income	$	78		$	(135	)	$	(57	)	$	152		$	(301	)	$	(149	)

Interest expense was $1,405,000 for the three months ended June 30, 2007 compared to $1,184,000 for the three months ended June 30, 2006, representing an increase of 18.7%.  Interest expense was $2,774,000 for the six months ended June 30, 2007, compared to $2,263,000 for the six months ended June 30, 2006, an increase of 22.6%.  These increases reflect higher interest rates paid on all interest bearing accounts.

The net interest margin is the ratio of net interest income to average earning assets. This ratio is useful in allowing the Company to monitor the spread between interest income and interest expense between reporting periods irrespective of the growth of the Company’s assets.  The net interest margin decreased 25 basis points to 5.34% for the three months ended June 30, 2007 as compared to 5.59% for the three months ended June 30, 2006.  The net interest margin, 5.22% for the six months ending June 30, 2007 was 22 basis points lower than the comparable figure, 5.44%, for the six month period ending June 30, 2006.  These decreases are primarily due to the higher rates paid on all interest bearing accounts.

Non-Interest Income

Non-interest income represents deposit account service charges and other types of fee income.  Non-interest income for the three months ended June 30, 2007 totaled $117,000 compared to $107,000 for the same period in 2006, a 9.4% increase.  This increase was due to increases in service charges on deposit accounts and mortgage packaging fees.  Non-interest income for the six months ended June 30, 2007 totaled $254,000 compared to $312,000 for the same period in 2006, an 18.6% decrease.  This decrease was substantially due to selling fewer guaranteed portions of government guaranteed loans as the volume of lending in the Small Business Administration Department has decreased.

15

Non-Interest Expense

Non-interest expense represents salaries, occupancy expenses, professional expenses, outside services and other miscellaneous expenses necessary to conduct business.  Non-interest expense for the three months ended June 30, 2007 totaled $1,806,000 compared to $1,830,000 for the same period in 2006 for a decrease of 1.3%.  Non-interest expense for the six months ended June 30, 2007 totaled $3,592,000 compared to $3,600,000 for the same period in 2006 for a decrease of 0.2%.  These decreases are primarily due to a concerted effort on the bank to reduce non-interest expenses.   

Income Taxes

The tax provision recorded for the three months ended June 30, 2007 was $240,000 as compared to $217,000 during the same period in 2006.  The tax provision for the six months ended June 30, 2007 was $402,000 as compared to $436,000 during the same period in 2006.  The smaller tax provision for the six months ended June 30, 2007 as compared to June 30, 2006, was due to the Company’s decreased net income before taxes. 

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 June 30, 2007 and December 31, 2006:

Maturity Distribution of Investment Securities
(dollar amounts in thousands)

	June 30, 2007						December 31, 2006
					Weighted
	Book		Market		Average		Book		Market
	Value		Value		Yield		Value		Value
Available-for-Sale Securities:
U.S. Government and Agency Securities
Within One Year	2,991		2,985		4.15	%	2,985		2,972
One to Five Years	6,613		6,596		4.67	%	4,960		4,954
Five to Ten Years	—		—		0.00	%	—		—
After Ten Years	—		—		0.00	%	—		—
Total U.S. Government Agency Securities	9,604		9,581		4.41	%	7,945		7,926
Total Available-for-Sale Securities	$	9,604	$	9,581	4.41	%	$	7,945	$	7,926

Securities may be pledged to meet security requirements imposed as a condition to receipt of deposit of public funds and for other purposes.  At June 30, 2007, the carrying values of securities pledged to secure public deposits and other purposes were $994,975 or 10.4% of available for sale securities.

16

Loan Portfolio

The following table sets forth the components of total net loans outstanding in each category at the date indicated:

Loan Portfolio Composition
(dollar amounts in thousands)

	June 30, 2007			December 31, 2006
Loans
Commercial	$	45,406		$	41,726
Real Estate - Construction	40,655			28,126
Real Estate - Other	51,462			62,298
Consumer	3,751			4,705
Total Loans	141,274			136,855
Net Deferred Loan Costs (Fees)	(247		)	(352		)
Allowance for Loan Losses	(1,416		)	(1,388		)
Net Loans	$	139,611		$	135,115
Commitments
Standby Letters of Credit	$	2,852		$	2,012
Undisbursed Loans and Commitments to Grant Loans	40,254			48,768
Total Commitments	$	43,106		$	50,780

The following table shows the maturity distribution of the fixed rate portion of the loan portfolio at June 30, 2007:

Maturity Distribution of Fixed Rate Loans
(dollar amounts in thousands)

	3 Months or Less		Over 3 Months through 12 Months		Due after one year to five years		Due after five years		Total
Loans
Commercial	$	1,351	$	516	$	546	$	946	$	3,359
Real Estate - Construction	2,791		988		1,247		—		5,026
Real Estate - Other	815		317		4,371		6,047		11,550
Consumer	383		54		475		306		1,218
Total Loans	$	5,340	$	1,875	$	6,639	$	7,299	21,153
Loans on Non-Accrual									—
Total Fixed Rate Loans									$	21,153

17

The following table shows the maturity distribution of the variable rate portion of the loan portfolio at June 30, 2007:

Maturity Distribution of Variable Rate Loans
(dollar amounts in thousands)

	3 Months or Less		Over 3 Months through 12 Months		Due after one year to five years		Due after five years		Total
Loans
Commercial	$	31,895	$	5,165	$	4,720	$	—	$	41,780
Real Estate - Construction	32,080		367		2,072		—		34,519
Real Estate - Other	22,651		4,806		10,284		2,170		39,911
Consumer	2,523		10		—		—		2,533
Total Loans	$	89,149	$	10,348	$	17,076	$	2,170	118,743
Loans on Non-Accrual									1,378
Total Variable Rate Loans									$	120,121

Asset Quality

As of June 30, 2007, the Company had four loan relationships on non-accrual totaling $1,378,000 and no loans 90 days or more past due and still accruing.  As of June 30, 2006 the Company had no loans on non-accrual and no loans 90 day past due and still accruing.   As of December 31, 2006, the company had five loan relationships on non-accrual totaling $2,543,000 and no loans 90 days past due and still accruing.   The non-accrual loan relationships existing as of June 30, 2007 include two SBA guaranteed loan relationships.  The two SBA guaranteed loan relationships totaling $267,000 have a non-guaranteed balance of $60,000.  The two remaining loan relationships consist of one well collateralized land development loan totaling $1,110,000 and one unsecured credit card loan totaling $1,000.

As of June 30, 2007 and December 31, 2006 the Company had no OREO or restructured loans. 

Provision for Credit Losses

Management of the Bank and the Bancorp believes that the allowance for credit 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 credit losses in a timely manner.  The monitoring system and allowance for credit losses methodology have evolved over a period of years, and loan classifications have been incorporated into the determination of the allowance for credit 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 the 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 $25,000 contribution to the allowance for credit losses for the six months ended June 30, 2007 compared to $60,000 contribution having been made in the same period in 2006.  Management believes that the allowance, which equals 1.00% of gross loans at June 30, 2007, is adequate to cover future losses.  The allowance for loan losses at December 31, 2006 was 1.01% of gross loans.

18

The following table summarizes, for the periods indicated, changes in the allowance for credit losses arising from loans charged-off, recoveries on loans previously charged-off, and additions to the allowance which have been charged to operating expenses and certain ratios relating to the allowance for credit losses:

Activity in the Allowance for Credit Losses
(dollar amounts in thousands)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2007			2006			2007			2006
Outstanding Net Loans:
Average for the Year	$	141,852		$	140,216		$	140,213		$	137,419
Allowance for Credit Losses:
Balance, beginning of period	$	1,414		$	1,224		$	1,388		$	1,183
Actual Charge-Offs:
Commercial	—			(1		)	—			(1		)
Consumer	—			—			—			—
Real Estate	—			—			—			—
Total Charge-Offs	—			(1		)	—			(1		)
Adjustments to Charge-Offs	2			—			2			—
Recoveries:
Commercial	—			—			—			—
Consumer	—			1			1			2
Real Estate	—			—			—			—
Total Recoveries	—			1			1			2
Net Loans Recovered (Charged-Off)	2			—			3			1
Provision for Credit Losses	—			20			25			60
Balance, end of period	$	1,416		$	1,244		$	1,416		$	1,244
Ratios:
Net Loans Charged-Off to Average Loans	0.00		%	0.00		%	0.00		%	0.00		%
Allowance for Loan Losses to Total Loans	1.00		%	0.89		%	1.01		%	0.91		%
Net Loans Recovered (Charged-Off) to Beginning Allowance for Credit Losses	0.14		%	0.00		%	0.22		%	0.08		%
Net Loans Recovered (Charged-Off) to Provision for Credit Losses	0.00		%	0.00		%	12.00		%	1.67		%

Funding

Deposits are our primary source of funds.  At June 30, 2007, we had a deposit mix of 46.8% in time and savings deposits, 29.9% in money market and NOW deposits, and 23.3% in non-interest-bearing demand deposits.  Our net interest income is enhanced by our percentage of non-interest-bearing deposits.  For a detailed review of the distribution of our average deposits, please refer to the Average Rates and Balances table on pages 13 and 14.

19

The scheduled maturity distribution of our time deposits of $100,000 or greater, as of June 30, 2007, were as follows:

Maturity Distribution of Time Deposits $100,000 and Greater

(dollar amounts in thousands)

Three months or less	$	24,195
Over three months to six months	14,289
Over six months to one year	14,294
	$	52,778

Return on Equity and Assets

The following table sets forth several key operating ratios for the six months ended June 30, 2007 and 2006:

Operating Ratios

	Six Months Ended
	June 30,
	2007		2006
Return on Average Assets	0.58	%	0.73	%
Return on Average Equity	8.02	%	10.65	%
Dividend Payout Ratio	0.00	%	0.00	%
Average Stockholder’s Equity to Average Total Assets	7.21	%	6.82	%

Capital Resources

Stockholders’ equity at June 30, 2007 was $13,582,000, compared to $12,711,000 at December 31, 2006, an increase of 6.8%.  Stockholders’ equity increased primarily from net income of $523,000.

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 1 capital divided by average total assets.

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

Capital Ratios

					Coast		Coast
	Regulatory Standard				National Bank		National Bank
	Adequately		Well		As of		As of
	Capitalized		Capitalized		June 30, 2007		December 31, 2006
Total Risk-Based Capital Ratio	8.00	%	10.00	%	12.75	%	12.50	%
Tier 1 Risk-Based Capital Ratio	4.00	%	6.00	%	11.80	%	11.55	%
Tier 1 Leverage Capital Ratio	4.00	%	5.00	%	9.93	%	9.65	%

20

The ratios for the Bancorp are as follows:

Capital Ratios

	Regulatory Standard				Coast Bancorp		Coast Bancorp
	Adequately		Well		As of		As of
	Capitalized		Capitalized		June 30, 2007		December 31, 2006
Total Risk-Based Capital Ratio	8.00	%	10.00	%	12.92	%	12.56	%
Tier 1 Risk-Based Capital Ratio	4.00	%	6.00	%	11.66	%	11.15	%
Tier 1 Leverage Capital Ratio	4.00	%	5.00	%	9.65	%	9.33	%

Liquidity

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.  The Bank manages liquidity by maintaining a majority of its investment portfolio in federal funds sold and other liquid investments. The ratio of net loans to deposits, a key liquidity ratio, at June 30, 2007 was 84.1%, as compared to 83.1% at December 31, 2006, which are within acceptable liquidity levels for the Company.

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

Evaluation of Disclosure and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed pursuant to the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules, regulations and related forms, and that such information is accumulated and communicated to our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

Based on their evaluation as of June 30, 2007 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.

Changes in Internal Controls

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.

21

PART II — OTHER INFORMATION

ITEM 1 — LEGAL PROCEEDINGS

Not applicable.

ITEM 2 — UNREGISTERED SALES OF 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

(a)Coast Bancorp’s 2007 Annual Meeting of Shareholders was held on June 26, 2007 (the “Meeting”).  The Meeting involved the following proposals:

1.To elect nine (9) persons to the Board of Directors to serve until the next Annual Meeting of Shareholders and until their successors are elected and have qualified.

2.To approve the appointment of Vavrinek, Trine, Day & Co. LLP as independent public accountants for the Company’s 2007 fiscal year, and

(b)Proxies for the meeting were solicited pursuant to Regulation 14A under the Securities and Exchange Act of 1934, as amended.  There were no solicitations in opposition to management’s nominees as listed in the proxy statement, and all such nominees were elected.

On Proposal No. 2 to approve the appointment of Vavrinek, Trine, Day & Co. LLP as independent public accountants for the Company’s 2007 fiscal year, 465,862 shares voted in favor of approval, 1,084 voted against approval, and 2,000 abstained, and there were zero (0) broker non-votes.  Accordingly, Proposal No. 2 was passed by the shareholders.

(c)There was no settlement between the Company and any other person terminating any solicitation subject to Rule 14a-11.

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

31.1Certification of Chief Executive Officer

31.2Certification of Chief Financial Officer

Exhibit 32 - SECTION 1350 CERTIFICATIONS

32.1Certification of Chief Executive Officer

32.2Certification of Chief Financial Officer

22

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:      August 14, 2007	/s/ Jack C. Wauchope
	Jack C. Wauchope
	Chairman of the Board
	President/Chief Executive Officer
	(Principal Executive Officer)
Date:      August 14, 2007	/s/ Karan C. Pohl
	Karan C. Pohl, CPA
	Senior Vice President
	Chief Financial Officer
	(Principal Financial Officer)

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