UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1996
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or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number: 0-28938
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Coast Bancorp
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(Exact name of registrant as specified in its charter)
California 77-0401327
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
740 Front Street Santa Cruz, California 95060
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(Address of principal executive offices) (Zip Code)
(408) 458-4500
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(Registrant's telephone number, including area code)
Not Applicable
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(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), /X/ Yes / / No
and (2) has been subject to such filing requirements for the past 90 days.
/ / Yes /X/ No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. / / Yes / / No
No. of shares of Common Stock outstanding on September 30, 1996: 2,209,659
---------
COAST BANCORP
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
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(unaudited)
ASSETS 1996 1995
--------------- ---------------
Cash and due from banks $ 18,953,000 $ 18,956,000
Federal funds sold 21,000,000 7,000,000
--------------- ---------------
Total cash and equivalents 39,953,000 25,956,000
Securities:
Available-for-sale, at fair value
(amortized cost - 1996 $61,208,000, 1995 $64,080,000) 60,926,000 64,888,000
Held-to-maturity, at amortized cost
(fair value - 1996 $5,974,000, 1995 $6,256,000) 5,917,000 6,099,000
Loans:
Commercial 34,354,000 34,263,000
Real estate - construction 14,726,000 14,008,000
Real estate - term 62,332,000 50,580,000
Installment and other 7,839,000 7,989,000
--------------- --------------
Total loans 119,251,000 106,840,000
Unearned income (1,736,000) (1,631,000)
Allowance for credit losses (3,099,000) (2,478,000)
--------------- --------------
Net loans 114,416,000 102,731,000
Bank premises and equipment - net 2,046,000 2,408,000
Other real estate owned 903,000 830,000
Accrued interest receivable and other assets 6,131,000 4,756,000
--------------- --------------
TOTAL ASSETS $230,292,000 $207,668,000
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--------------- --------------
LIABILITIES AND EQUITY
LIABILITIES:
Deposits:
Noninterest-bearing demand $ 52,562,000 $ 49,575,000
Interest-bearing demand 71,249,000 74,944,000
Savings 32,817,000 17,385,000
Time 24,459,000 22,142,000
--------------- --------------
Total deposits 181,087,000 164,046,000
Securities sold under agreements to repurchase 24,525,000 20,000,000
Accrued expenses and other liabilities 2,602,000 2,638,000
--------------- --------------
Total liabilities 208,214,000 186,684,000
STOCKHOLDERS' EQUITY:
Preferred stock - no par value;
10,000,000 shares authorized; no shares issued - -
Common stock - no par value; 20,000,000 shares authorized;
shares outstanding: 2,209,659 in 1996, 2,257,899 in 1995
11,041,000 11,282,000
Retained earnings 11,200,000 9,230,000
Net unrealized gain (loss) on available-for-sale securities (163,000) 472,000
--------------- --------------
Total stockholders' equity 22,078,000 20,984,000
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $230,292,000 $207,668,000
--------------- --------------
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See notes to unaudited consolidated financial statements
-1-
COAST BANCORP
CONSOLIDATED INCOME STATEMENTS
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
1996 1995 1996 1995
------------ ----------- ---------- ----------
Interest Income:
Loans, including fees $ 3,166,000 $ 3,025,000 $9,474,000 $8,754,000
Federal funds sold 281,000 242,000 576,000 519,000
Securities:
Taxable 1,019,000 805,000 3,112,000 2,243,000
Nontaxable 84,000 89,000 253,000 274,000
------------ ----------- ----------- ----------
Total interest income 4,550,000 4,161,000 13,415,000 11,790,000
Interest expense:
Deposits 870,000 752,000 2,525,000 2,201,000
Other borrowings 360,000 174,000 1,015,000 521,000
------------ ----------- ----------- ----------
Total interest expense 1,230,000 926,000 3,540,000 2,722,000
------------ ----------- ----------- ----------
Net interest income 3,320,000 3,235,000 9,875,000 9,068,000
Provision for credit losses 225,000 225,000 675,000 675,000
------------ ----------- ----------- ----------
Net interest income after provision for credit losses 3,095,000 3,010,000 9,200,000 8,393,000
Noninterest income:
Customer service fees 457,000 403,000 1,313,000 1,148,000
Gain on sale of loans 405,000 118,000 1,174,000 515,000
Loan servicing fees 251,000 224,000 706,000 655,000
Gain on sale of other real estate owned - 42,000 - 42,000
Gain on sale of bank premises and equipment - - - 13,000
Gains (losses) on securities transactions - (35,000) 66,000 (48,000)
Other 144,000 113,000 405,000 326,000
------------ ----------- ----------- ----------
Total noninterest income 1,257,000 865,000 3,664,000 2,651,000
Noninterest expenses:
Salaries and benefits 1,292,000 1,235,000 3,910,000 3,684,000
Equipment 291,000 261,000 857,000 765,000
Occupancy 237,000 229,000 687,000 672,000
Insurance 38,000 18,000 91,000 230,000
Stationery and postage 94,000 72,000 297,000 216,000
Legal fees 30,000 72,000 45,000 174,000
Other 672,000 529,000 1,857,000 1,558,000
------------ ----------- ----------- ----------
Total noninterest expenses 2,654,000 2,416,000 7,744,000 7,299,000
------------ ----------- ----------- ----------
Income before income taxes 1,698,000 1,459,000 5,120,000 3,745,000
Provision for income taxes 679,000 577,000 2,033,000 1,461,000
------------ ----------- ----------- ----------
Net income $ 1,019,000 $ 882,000 $ 3,087,000 $2,284,000
------------ ----------- ----------- ----------
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NET INCOME PER COMMON AND EQUIVALENT SHARE $ .46 $ .38 $ 1.38 $ 1.00
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See notes to unaudited consolidated financial statements
-2-
COAST BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1996 1995
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(unaudited) (unaudited)
CASH FLOWS FROM OPERATIONS:
Net income $ 3,087,000 $ 2,284,000
Adjustments to reconcile net income to net cash provided by
operations:
Provision for credit losses 675,000 675,000
Depreciation and amortization 16,000 (216,000)
Gain on sale of property - (13,000)
Losses (gains) on securities transactions (66,000) 48,000
Deferred income taxes (514,000) (435,000)
Proceeds from loan sales 34,942,000 20,310,000
Origination of loans held for sale (34,911,000) (22,647,000)
Accrued interest receivable and other assets (479,000) 1,231,000
Accrued expenses and other liabilities (36,000) (220,000)
Increase in unearned income 850,000 693,000
----------- -----------
Net cash provided by operations 3,564,000 1,710,000
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of available-for-sale securities 4,846,000 5,710,000
Proceeds from maturities of investment securities 14,468,000 6,320,000
Purchases of investment securities (16,348,000) (33,371,000)
Net increase in loans (12,496,000) (4,848,000)
Purchases of bank premises and equipment (245,000) (293,000)
Proceeds from disposals of bank premises and equipment - 26,000
----------- -----------
Net cash used in investing activities (9,775,000) (26,456,000)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from securities sold under
agreements to repurchase 4,525,000 11,000,000
Net increase in deposits 17,041,000 9,236,000
Payment of cash dividends (668,000) (616,000)
Repurchase of common stock (690,000) -
----------- -----------
Net cash provided by financing activities 20,208,000 19,620,000
----------- -----------
Net increase (decrease) in cash and cash equivalents 13,997,000 (5,126,000)
----------- -----------
Cash and equivalents, beginning of period 25,956,000 30,723,000
----------- -----------
Cash and equivalents, end of period $39,953,000 $25,597,000
----------- -----------
----------- -----------
OTHER CASH FLOW INFORMATION - CASH PAID DURING THE PERIOD FOR:
Interest $ 4,403,000 $ 3,202,000
Income taxes 2,710,000 1,719,000
NON-CASH INVESTING AND FINANCING TRANSACTIONS:
Additions to other real estate owned $ 98,000 -
See notes to unaudited consolidated financial statements
-3-
COAST BANCORP
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1996 and 1995
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1. BASIS OF PRESENTATION - These financial statements reflect, in
management's opinion, all adjustments, consisting of adjustments
of a normal recurring nature, which are necessary for a fair presentation
of Coast Bancorp's financial position and results of operations and
cash flows for the periods presented. The results of interim periods
are not necessarily indicative of results of operations expected for a
full year. These financial statements should be read in conjuction with
the audited financial statements for 1995 included in the Company's
Form 10.
NET INCOME PER COMMON AND EQUIVALENT SHARE - Net income per common and
equivalent share is computed using the weighted average shares outstanding
plus the dilutive effect of stock options. The number of shares used to
compute net income per share for the nine month periods ended September 30,
1996 and 1995 was 2,232,336 and 2,278,393, respectively and for the three
month periods ended September 30, 1996 and 1995 was 2,223,068 and 2,278,650,
respectively.
-4-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
Net income for the three months ended September 30, 1996 was $1,019,000
compared to $882,000 during the same period in 1995, representing an increase
of 16%. Net income for the nine months ended September 30, 1996 was
$3,087,000 compared to $2,284,000 in the first nine months of 1995, an
increase of 35%. The increase in net income was primarily due to increases
in net interest income and noninterest income partially offset by an increase
in noninterest expenses and a related increase in income tax expense.
EARNINGS SUMMARY
NET INTEREST INCOME
Net interest income refers to the difference between interest and fees earned on
loans and investments and the interest paid on deposits and other borrowed
funds. It is the largest component of the net earnings of a financial
institution. The primary factors to consider in analyzing net interest income
are the composition and volume of earning assets and interest-bearing
liabilities, the amount of noninterest bearing liabilities and nonaccrual loans,
and changes in market interest rates.
-5-
Table I sets forth average balance sheet information, interest income and
expense, average yields and rates, and net interest income and net interest
margin for the three months and nine months ended September 30, 1996 and 1995.
Table 1 Components of Net Interest Income
Three months ended September 30, 1996 1995
-------------------------------- ----------------------------
Average Average Average Average
(Dollars in thousands) Balance Interest Rate(4) Balance Interest Rate(4)
---------- -------- ------- ------- -------- -------
Assets:
Loans (2) (3) $ 119,092 $ 3,166 10.6% $ 101,415 $ 3,025 11.9%
Investment Securities:
Taxable 57,764 1,019 7.0% 49,295 805 6.5%
Nontaxable (1) 5,993 127 8.4% 6,422 135 8.4%
Federal funds sold 21,464 281 5.2% 16,899 242 5.7%
----------------------- ----------------------
Total earning assets 204,313 4,593 8.9% 174,031 4,207 9.7%
Cash and due from banks 14,121 12,620
Allowance for credit losses (3,035) (2,221)
Unearned income (1,676) (1,630)
Bank premises and equipment, 2,144 2,578
net
Other assets 6,285 6,270
---------- ---------
Total assets $ 222,152 $ 191,648
---------- ---------
---------- ---------
Interest-bearing liabilities:
Deposits:
Demand $ 69,007 346 2.0% $ 75,088 368 2.0%
Savings 29,009 223 3.1% 17,717 103 2.3%
Time 23,984 301 5.0% 20,387 281 5.5%
----------------------- ----------------------
Total deposits 122,000 870 2.8% 113,192 752 2.7%
Borrowed funds 24,518 360 5.8% 10,065 174 6.9%
----------------------- ----------------------
Total interest-bearing liabilities 146,518 1,230 3.3% 123,257 966 3.1%
Demand deposits 51,353 43,283
Other liabilities 2,353 2,445
Stockholders' equity 21,928 22,663
----------- ---------
Total liabilities and stockholders'
equity $ 222,152 $ 191,648
----------- ---------
----------- ---------
Net interest income and margin $ 3,363 6.6% $ 3,241 7.4%
--------------------- ------------------
--------------------- ------------------
(1) Tax exempt income includes $43,000 and $46,000 in 1996 and 1995,
respectively, to adjust to a fully taxable equivalent basis using the Federal
statutory rate of 34%.
(2) Loan fees totaling $166,000 and $253,000 are included in loan interest
income for the three months ended September 30, 1996 and 1995,
respectively.
(3) Average nonaccrual loans totaling $481,000 and $616,000 are included in
average loans for the three months ended September 30, 1996 and 1995,
respectively.
(4) Annualized
-6-
Nine Months Ended September 30, 1996 1995
--------------------------------------- ------------------------------------------
($ in thousands) Average Average Average Average
Balance Interest Rate(4) Balance Interest Rate(4)
--------------------------------------- ------------------------------------------
Assets:
Loans (2) (3) $ 114,572 $ 9,474 11.0% $ 98,321 $ 8,754 11.9%
Investment Securities:
Taxable 61,179 3,112 6.8% 45,505 2,243 6.6%
Nontaxable (1) 6,062 383 8.4% 6,527 416 8.5%
Federal funds sold 14,601 576 5.3% 11,928 519 5.8%
------------------------- ----------------------------
Total earning assets 196,414 13,545 9.2% 162,281 11,932 9.8%
Cash and due from banks 13,431 13,206
Allowance for credit losses (2,806) (2,043)
Unearned income (1,642) (1,592)
Bank premises and equipment, net 2,231 2,659
Other assets 6,198 5,787
----------- ---------
Total assets $ 213,826 $180,298
----------- ---------
----------- ---------
Interest-bearing liabilities:
Deposits:
Demand $ 71,632 1,034 1.9% $ 73,757 1,186 2.1%
Savings 26,586 590 3.0% 16,845 334 2.7%
Time 23,335 901 5.2% 18,132 681 5.0%
------------------------- ---------------------------
Total deposits 121,553 2,525 2.8% 108,734 2,201 2.7%
Borrowed funds 23,197 1,015 5.8% 9,990 521 7.0%
------------------------- ---------------------------
Total interest-bearing liabilities 144,750 3,540 3.2% 118,724 2,722 3.1%
Demand deposits 45,851 41,184
Other liabilities 1,798 380
Stockholders' equity 21,427 20,010
----------- -----------
Total liabilities and stockholders'
equity $ 213,826 $ 180,298
----------- -----------
----------- -----------
Net interest income and margin $10,005 6.8% $ 9,210 7.6%
------------------------ --------------------------
------------------------ --------------------------
(1) Tax exempt income includes $130,000 and $142,000 in 1996 and 1995,
respectively, to adjust to a fully taxable equivalent basis using the Federal
statutory rate of 34%.
(2) Loan fees totaling $712,000 and $746,000 are included in loan interest
income for the nine months ended September 30, 1996 and 1995, respectively.
(3) Average nonaccrual loans totaling $575,000 and $719,000 are included in
average loans for the nine months ended September 30, 1996 and 1995,
respectively.
(4) Annualized.
-7-
For the three months ended September 30, 1996, net interest income, on a fully
taxable-equivalent basis, was $3,363,000 or 6.6% of average earning assets,
an increase of 4% over $3,241,000 or 7.4% of average earning assets in the
comparable period in 1995. For the nine months ended September 30, 1996, net
interest income, on a fully taxable-equivalent basis, was $10,005,000 or 6.8%
of average earning assets, an increase of 9% over $9,210,000 or 7.6% of
average earning assets in the comparable period in 1995. The increase in 1996
reflects higher levels of earning assets partially offset by lower yields on
loans corresponding generally with declining market rates since the beginning
of 1995.
Interest income, on a fully taxable-equivalent basis, was $4,593,000 and
$4,207,000 for the three months and $13,545,000 and $11,932,000 for the nine
months ended September 30, 1996 and 1995, respectively. The increase in 1996
resulted from the growth in average earning assets. Loan yields averaged
10.6% and 11.9% for the three months ended September 30, 1996 and 1995,
respectively, and 11.0% and 11.9% for the first nine months of 1996 and 1995,
respectively, and generally reflect the pull back of interest rates in 1995.
Approximately 89% of the Bank's loans have variable interest rates indexed to
the prime rate. The Bank's average prime rate was 8.25% and 8.78% for the
three months ended September 30, 1996 and 1995, respectively, and 8.28% and
8.86% for the nine months ended September 30, 1996 and 1995, respectively.
Average earning assets were $204,313 and $196,414 for the three and nine
months of 1996, compared to $174,031 and $162,281 in the same periods in 1995.
The growth in average earning assets resulted from increased levels of deposits
and borrowings which were invested primarily in investment securities and loans.
The increases in interest income during 1996 and 1995, on a fully
taxable-equivalent basis, were partially offset by increases in interest
expense. The increases were primarily due to increases in borrowed funds and
higher rates paid on time deposit accounts, in response to competition from
other financial institutions and money market mutual funds. The average rate
paid on interest bearing deposits was 2.8% and 2.7% in the three monoth periods
ended September 30, 1996 and 1995, respectively and 2.8% and 2.7% for the
nine months ended September 30, 1996 and 1995, respectively.
-8-
NONINTEREST INCOME
Table 2 summarizes the sources of noninterest income for
the periods indicated:
Three months ended September 30,
----------------------------------
Table 2 - Noninterest Income 1996 1995
(Dollars in thousands) ---------- ---------
Customer service fees $ 457 $ 403
Gain on sale of loans 405 118
Loan servicing fees 251 224
Gain on sale of other real estate owned - 42
Losses on securities transactions - (35)
Other 144 113
---------- ----------
Total noninterest income $1,257 $ 865
---------- ----------
Nine months ended September 30,
-------------------------------
1996 1995
---------- ---------
Customer service fees $ 1,313 $ 1,148
Gain on sale of loans 1,174 515
Loan servicing fees 706 655
Gain on sale of other real estate owned - 42
Gain on sale of bank premises and equipment - 13
Gains (losses) on securities transactions 66 (48)
Other 405 326
---------- ----------
Total noninterest income $3,664 $2,651
---------- ----------
The increase in customer service fees in 1996 relates primarily to higher
merchant credit card processing fees. Gains on sale of loans increased as a
result of increased SBA loan originations during 1996. Loan servicing fees
and other noninterest income increased consistent with the growth of deposits
and loans serviced for others.
-9-
NONINTEREST EXPENSE
The major components of noninterest expense stated in dollars and as a
percentage of average earning assets are set forth in Table 3 for the periods
indicated.
Table 3 - Noninterest Expense
(Dollars in thousands)
Three months ended September 30,
-------------------------------------
1996 1995
----------------- ------------------
Salaries and Benefits $1,292 2.53% $1,235 2.83%
Equipment 291 0.57% 261 0.60%
Occupancy 237 0.46% 229 0.52%
Insurance 38 0.07% 18 0.04%
Stationery and Postage 94 0.18% 72 0.17%
Legal Fees 30 0.06% 72 0.17%
Other 672 1.32% 529 1.22%
----------------- -----------------
Total Noninterest Expense $2,654 5.19% $2,416 5.55%
----------------- -----------------
----------------- -----------------
Nine months ended September 30,
----------------------------------------
1996 1995
--------------------- -----------------
Salaries and Benefits $3,910 2.65% $3,684 3.03%
Equipment 857 0.58% 765 0.63%
Occupancy 687 0.47% 672 0.55%
Insurance 91 0.06% 230 0.19%
Stationery and Postage 297 0.20% 216 0.18%
Legal Fees 45 0.03% 174 0.14%
Other 1,857 1.26% 1,558 1.28%
--------------------- -----------------
Total Noninterest Expense $7,744 5.26% $7,299 6.00%
--------------------- -----------------
--------------------- -----------------
The increases in 1996 were primarily related to higher staff costs and
increases in other noninterest expenses partially offset by reductions in
FDIC insurance premiums. The FDIC reduced insurance premiums as the Bank
Insurance Fund reached full funding during 1995. The increase in noninterest
expenses reflects the growth in total loans, deposits and assets. The
decrease in noninterest expense as a percentage of average earning assets is
the result of the rate of growth in average earning assets in 1996 exceeding
the rate of increase in noninterest expenses.
INCOME TAXES
The Company's effective tax rate was 40.0% and 39.7% for the three and nine
month periods ended September 30, 1996 compared to 39.5% and 39.0% for the
same periods in 1995. Changes in the effective tax rate for the Company are
primarily due to fluctuations in the proportion of tax exempt income
generated from investment securities to pre-tax income.
BALANCE SHEET ANALYSIS
Total assets increased to $230.3 million at September 30, 1996, an 11%
increase from the end of 1995. Based on average balances, third quarter 1996
average total assets of $222.2 million represent an increase of 16% over the
third quarter 1995 while nine month 1996 average total assets of $213.8
million represent an increase of 19% over nine month 1995.
-10-
EARNING ASSETS
LOANS
Total gross loans at September 30, 1996 were $119.3 million, a 12% increase
from $106.8 million at December 31, 1995. Average loans in the three and
nine months of 1996 were $119,092,000 and $114,572,000 representing increases
of 17% over each of the comparable periods in 1995. The 1996 increases
reflected growth in average real estate loans which in the opinion of the
Company is due to improved local economic conditions.
Risk Elements
Lending money involves an inherent risk of nonpayment. Through the
administration of loan policies and monitoring of the portfolio, management
seeks to reduce such risks. The allowance for credit losses is an estimate to
provide a financial buffer for losses, both identified and unidentified, in the
loan portfolio.
Nonaccrual Loans, Loans Past Due and OREO
The accrual of interest is discontinued and any accrued and unpaid interest is
reversed when the payment of principal or interest is 90 days past due unless
the amount is well secured and in the process of collection. Income on such
loans is then recognized only to the extent that cash is received and where the
future collection of principal is probable. At September 30, 1996 nonaccrual
loans totaled $340,000 or .3% of total loans compared to $824,000 or .8% at
December 31, 1995.
Table 4 presents the composition of nonperforming assets at September 30,
1996.
Table 4 Nonperforming Assets
(dollars in thousands)
September 30, 1996
------
Nonperforming Assets:
Loans Past Due 90 Days or More $ 783
Nonaccrual Loans 340
------
Total Nonperforming Loans 1,123
OREO 903
------
Total Nonperforming Assets $2,026
------
------
Nonperforming loans as a Percent of Total Loans 0.94%
OREO as a Percent of Total Assets 0.39%
Nonperforming Assets as a Percent of Total Assets 0.88%
Allowance for Loan Losses $3,099
As a Percent of Total Loans 2.60%
As a Percent of Nonaccrual Loans 911%
As a Percent of Nonperforming Loans 276%
-11-
PROVISION AND ALLOWANCE FOR CREDIT LOSSES
Management has established an evaluation process designed to determine the
adequacy of the allowance for credit losses. This process attempts to assess
the risk of loss inherent in the portfolio by segregating the allowance for
credit losses into three components: "historical losses;" "specific;" and
"margin for imprecision." The "historical losses" and "specific" components
include management's judgment of the effect of current and forecasted
economic conditions on the ability of the Company's borrowers' to repay; an
evaluation of the allowance for credit losses in relation to the size of the
overall loan portfolio; an evaluation of the composition of, and growth
trends within, the loan portfolio; consideration of the relationship of the
allowance for credit losses to nonperforming loans; net charge-off trends;
and other factors. While this evaluation process utilizes historical and
other objective information, the classification of loans and the
establishment of the allowance for credit losses, relies, to a great extent,
on the judgment and experience of management. The Company evaluates the
adequacy of its allowance for credit losses quarterly.
It is the policy of management to maintain the allowance for possible credit
losses at a level adequate for known and future risks inherent in the loan
portfolio. Based on information currently available to analyze loan loss
potential, including economic factors, overall credit quality, historical
delinquency and a history of actual charge-offs, management believes that the
loan loss provision and allowance are adequate; however, no assurance of the
ultimate level of credit losses can be given with any certainty. Loans are
charged against the allowance when management believes that the
collectibility of the principal is unlikely. An analysis of activity in the
allowance for credit losses is presented in Table 5.
TABLE 5 Allowance for Credit Losses
(Dollars in thousands)
September 30, 1996
------------
Total Loans Outstanding $ 119,251
Average Total Loans 114,572
Balance, January 1 $ 2,478
Charge-offs by Loan Category:
Commercial 131
Installment and other 43
Real Estate construction -
Real Estate-other -
--------
Total Charge-Offs 174
Recoveries by Loan Category:
Commercial 68
Installment and other 9
Real Estate construction 43
Real Estate-other -
--------
Total Recoveries 120
Net Charge-offs (Recoveries) 54
Provision Charged to Expense 675
--------
Balance, September 30 $ 3,099
--------
--------
Ratios:
Net Charge-offs (Recoveries) to Average Loans 0.05%
Reserve to Total Loans 2.60%
-12-
OTHER INTEREST-EARNING ASSETS
For the three and nine months ended September 30, 1996, the average balance
of investment securities and federal funds sold totaled $85,221,000 and
$81,842,000, up from $72,616,000 and $63,960,000 for the same periods in 1995.
The 1996 increases resulted from deploying additional liquidity in the
investment securities portfolio. Sources of the additional liquidity were
borrowed funds and the excess of the increase in average deposits over the
increase in average loans which was invested. Management uses borrowed funds
to increase earning assets and enhance the Company's interest rate risk
profile.
FUNDING
Deposits represent the Bank's principal source of funds for investment.
Deposits are primarily core deposits in that they are demand, savings, and time
deposits under $100,000 generated from local businesses and individuals. These
sources represent relatively stable, long term deposit relationships which
minimize fluctuations in overall deposit balances. The Bank has never used
brokered deposits.
Deposits increased $17,041,000 from year-end or 10% to $181,087,000 as of
September 30, 1996. Average total deposits in the three and nine months of
1996 of $173,353,000 and $167,404,000 increased from $156,475,000 and
$149,918,000 in the same periods in 1995.
Another source of funding for the Company is borrowed funds. Typically,
these funds result from the use of agreements to sell investment securities
with a repurchase at a designated future date, also known as repurchase
agreements. Repurchase agreements are conducted with major banks and
investment brokerage firms. The maturity of these arrangements for the Bank
is typically 30 days, although the Bank has $4,000,000 maturing in December,
1996.
LIQUIDITY AND INTEREST RATE SENSITIVITY
Liquidity management refers to the Bank's ability to provide funds on an ongoing
basis to meet fluctuations in deposit levels as well as the credit needs and
requirements of its clients. Both assets and liabilities contribute to the
Bank's liquidity position. Federal funds lines, short-term investments and
securities, and loan repayments contribute to liquidity, along with deposit
increases, while loan funding and deposit withdrawals decrease liquidity. The
Bank assesses the likelihood of projected funding requirements by reviewing
historical funding patterns, current and forecasted economic conditions and
individual client funding needs. The Bank maintains informal lines of credit
with its correspondent banks for short-term liquidity needs. These informal
lines of credit are not committed facilities by the correspondent banks and
no fees are paid by the Bank to maintain them.
The Bank manages its liquidity by maintaining a majority of its investment
portfolio in liquid investments in addition to its federal funds sold.
Liquidity is measured by various ratios, including the liquidity ratio of net
liquid assets compared to total assets. As of September 30, 1996, this ratio
was 17.8%. Other key liquidity ratios are the ratios of loans to deposits
and federal funds sold to deposits, which were 65.9% and 11.6%, respectively,
as of September 30, 1996.
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INTEREST RATE SENSITIVITY
Interest rate sensitivity is a measure of the exposure of the Company's future
earnings due to changes in interest rates. If assets and liabilities do not
reprice simultaneously and in equal volumes, the potential for such exposure
exists. It is management's objective to achieve a modestly asset-sensitive
position, such that the net interest margin of the Company increases as market
interest rates rise and decreases when rates decline.
One quantitative measure of the "mismatch" between asset and liability
repricing is the interest rate sensitivity "gap" analysis. All
interest-earning assets and funding sources are classified as to their
expected repricing or maturity date, whichever is sooner. Within each time
period, the difference between asset and liability balances, or "gap," is
calculated. Positive cumulative gaps in early time periods suggest that
earnings will increase if interest rates rise. Negative gaps suggest that
earnings will decline when interest rates rise. Table 6 presents the gap
analyses for the Company at September 30, 1996. Mortgage backed securities
are reported in the period of their expected repricing based upon estimated
prepayments developed from recent experience.
Table 6 Interest Rate Sensitivity
(Dollars in thousands)
Next day Over three Over one
and within months and and within Over
As of September 30, 1996 Immediately three months within one year five years five years Total
------------------------------------------------------------------------------------------
Rate Sensitive Assets:
Federal Funds Sold $ 21,000 $ - $ - $ - $ - $ 21,000
Investment Securities:
Treasury and Agency Obligations - - 4,548 1,404 - 5,952
Mortgage-Backed Securities - 2,376 8,816 21,611 21,273 54,076
Municipal Securities - - 160 1,486 4,271 5,917
Other - - - - 898 898
------------------------------------------------------------------------------------------
Total Investment Securities - 2,376 13,524 24,501 26,442 66,843
Loans Excluding Nonaccrual Loans 105,061 476 2,640 4,661 6,073 118,911
------------------------------------------------------------------------------------------
Total Rate Sensitive Assets $ 126,061 $ 2,852 $ 16,164 $ 29,162 $ 32,515 $ 206,754
------------------------------------------------------------------------------------------
Rate Sensitive Liabilities:
Deposits:
Money Market, NOW, and Savings $ 104,066 - - - - $ 104,066
Time Certificates - $ 11,711 $ 11,821 $ 927 - 24,459
------------------------------------------------------------------------------------------
Total Interest-bearing Deposits 104,066 11,711 11,821 927 - 128,525
Borrowings - 24,525 - - - 24,525
------------------------------------------------------------------------------------------
Total Rate Sensitive Liabilities $ 104,066 $ 36,236 $ 11,821 $ 927 - $ 153,050
------------------------------------------------------------------------------------------
Gap $ 21,995 $ (33,384) $ 4,343 $ 28,235 $ 32,515 $ 53,704
Cumulative Gap $ 21,995 $ (11,389) $ (7,046) $ 21,189 $ 53,704
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The Company's positive cumulative total gap results from the exclusion from
the above table of noninterest-bearing demand deposits, which represent a
significant portion of the Company's funding sources. The Company maintains
a minor negative cumulative gap in the next day and within three months and
the over three months and within one year time periods and a positive
cumulative gap in all other time periods. The Company's experience indicates
money market deposit rates tend to lag changes in the prime rate which
immediately impact the prime-based loan portfolio. Even in the Company's
negative gap time periods, rising rates result in an increase in net interest
income. Should interest rates stabilize or decline in future periods, it is
reasonable to assume that the Company's net interest margin, as well as net
interest income, may decline correspondingly.
CAPITAL RESOURCES
Management seeks to maintain adequate capital to support anticipated asset
growth and credit risks, and to ensure that the Company and the Bank are in
compliance with all regulatory capital guidelines. The primary source of new
capital for the Company has been the retention of earnings. The Company does
not have any material commitments for capital expenditures as of September 30,
1996.
The Company pays a quarterly cash dividend on its common stock as part of
efforts to enhance shareholder value. The Company's goal is to maintain a
strong capital position that will permit payment of a consistent cash dividend
which may grow commensurately with earnings growth.
During 1995, the Board of Directors approved a stock repurchase program
authorizing open market purchases of up to 3% of the shares outstanding, or
approximately 68,300 shares, in order to enhance long term shareholder value. As
of September 30, 1996, the program had been completed with 68,340 shares
purchased for a total purchase price of $952,000.
The Company and the Bank are subject to capital adequacy guidelines issued by
the federal bank regulatory authorities. Under these guidelines, the minimum
total risk-based capital requirement is 10.0% of risk-weighted assets and
certain off-balance sheet items for a "well capitalized" depository institution.
At least 6.0% of the 10.0% total risk-based capital ratio must consist of Tier 1
capital, defined as tangible common equity, and the remainder may consist of
subordinated debt, cumulative preferred stock and a limited amount of the
allowance for loan losses.
The federal regulatory authorities have established minimum capital leverage
ratio guidelines for state member banks. The ratio is determined using Tier 1
capital divided by quarterly average total assets. The guidelines require a
minimum of 5.0% for a "well capitalized" depository institution.
The Company's risk-based capital ratios were in excess of regulatory
guidelines for a "well capitalized" depository institution as of September 30,
1996, and December 31, 1995. Capital ratios for the Company are set forth
in Table 7:
Table 7 Capital Ratios
September 30, December 31,
1996 1995
------------- ------------
Total risk-based capital ratio 16.9% 17.0%
Tier 1 risk-based capital ratio 15.7% 15.8%
Tier 1 leverage ratio 9.9% 10.2%
Capital ratios for the Bank at September 30, 1996 and December 31, 1995 were
15.1% and 14.3% total risk-based capital, 13.8% and 13.1% Tier 1 risk-based
capital ratio and 8.7% and 8.8% Tier 1 leverage ratio.
-15-
PART II. OTHER INFORMATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
COAST BANCORP
---------------------------------------
(REGISTRANT)
Date: January 13, 1997
/s/ BRUCE H. KENDALL
---------------------------------------
Bruce H. Kendall
Senior Vice President
and Chief Financial Officer
(Principal Financial and Accounting
Officer)
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