UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
AMENDMENT NO. 1
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1997
-------------------------------------------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
----------------------- ------------------------
Commission File Number: 0-28938
---------------------------------------------------------
Coast Bancorp
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
California 77-0401327
- --------------------------------------------------------------------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
740 Front Street Santa Cruz, California 95060
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(408) 458-4500
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
- --------------------------------------------------------------------------------
(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), and (2) has been subject to
such filing requirements for the past 90 days.
/X/ Yes / / No
No. of shares of Common Stock outstanding on June 30, 1997: 2,203,659
---------
COAST BANCORP
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1997
TABLE OF CONTENTS
PART I
Page
Item 1. Financial Statements 1
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 5
PART II
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
PART I
Item 1. Financial Statements
COAST BANCORP
CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31,
1997 1996
--------------- -----------
ASSETS (unaudited)
Cash and due from banks $ 20,601,000 $ 22,492,000
Federal funds sold 14,000,000 15,500,000
------------ ------------
Total cash and equivalents 34,601,000 37,992,000
Securities:
Available-for-sale, at fair value 67,721,000 65,486,000
Held-to-maturity, at amortized cost
(fair value - 1997 $6,006,000, 1996 $6,021,000) 5,909,000 5,914,000
Loans:
Commercial 37,535,000 35,633,000
Real estate - construction 15,280,000 15,112,000
Real estate - term 70,062,000 65,208,000
Installment and other 6,417,000 7,768,000
------------ ------------
Total loans 129,294,000 123,721,000
Unearned income (1,795,000) (1,742,000)
Allowance for credit losses (3,482,000) (3,158,000)
------------ ------------
Net loans 124,017,000 118,821,000
Bank premises and equipment - net 2,008,000 2,131,000
Other real estate owned 492,000 551,000
Accrued interest receivable and other assets 7,678,000 6,020,000
------------ ------------
TOTAL ASSETS $242,426,000 $236,915,000
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Noninterest-bearing demand $ 58,501,000 $ 56,699,000
Interest-bearing demand 71,622,000 69,305,000
Savings 28,920,000 32,296,000
Time 30,665,000 27,167,000
------------ ------------
Total deposits 189,708,000 185,467,000
Securities sold under agreements to repurchase 23,850,000 24,608,000
Accrued expenses and other liabilities 3,897,000 3,647,000
--------------- --------------
Total liabilities 217,455,000 213,722,000
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: 2,203,659 in 1997 and 2,209,659 in 1996 11,011,000 11,041,000
Retained earnings 13,795,000 12,022,000
Net unrealized gain (loss) on available-for-sale securities 165,000 130,000
------------ ------------
Total stockholders' equity 24,971,000 23,193,000
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $242,426,000 $236,915,000
------------ ------------
------------ ------------
See notes to unaudited consolidated financial statements
-1-
COAST BANCORP
CONSOLIDATED INCOME STATEMENTS
(unaudited)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------------- --------------------------
1997 1996 1997 1996
------------ ----------- ----------- ----------
Interest Income:
Loans, including fees $ 3,481,000 $ 3,236,000 $ 6,802,000 $ 6,308,000
Federal funds sold 372,000 153,000 676,000 295,000
Securities:
Taxable 1,111,000 1,008,000 2,196,000 2,093,000
Nontaxable 83,000 85,000 166,000 169,000
----------- ----------- ----------- -----------
Total interest income 5,047,000 4,482,000 9,840,000 8,865,000
Interest expense:
Deposits 1,036,000 826,000 1,983,000 1,655,000
Other borrowings 340,000 344,000 670,000 655,000
----------- ----------- ----------- -----------
Total interest expense 1,376,000 1,170,000 2,653,000 2,310,000
----------- ----------- ----------- -----------
Net interest income 3,671,000 3,312,000 7,187,000 6,555,000
Provision for credit losses 75,000 225,000 300,000 450,000
----------- ----------- ----------- -----------
Net interest income after provision for credit losses 3,596,000 3,087,000 6,887,000 6,105,000
Noninterest income:
Customer service fees 472,000 403,000 944,000 856,000
Gain on sale of loans 263,000 362,000 714,000 769,000
Loan servicing fees 265,000 235,000 522,000 455,000
Gains (losses) on securities sales - 66,000 - 66,000
Other 146,000 143,000 313,000 261,000
----------- ----------- ----------- -----------
Total noninterest income 1,146,000 1,209,000 2,493,000 2,407,000
Noninterest expenses:
Salaries and benefits 1,363,000 1,281,000 2,787,000 2,618,000
Equipment 285,000 279,000 548,000 566,000
Occupancy 235,000 224,000 473,000 450,000
Insurance 38,000 24,000 87,000 53,000
Stationery and postage 79,000 101,000 184,000 203,000
Legal fees 23,000 (5,000) 45,000 15,000
Other 679,000 655,000 1,244,000 1,185,000
----------- ----------- ----------- -----------
Total noninterest expenses 2,702,000 2,559,000 5,368,000 5,090,000
----------- ----------- ----------- -----------
Income before income taxes 2,040,000 1,737,000 4,012,000 3,422,000
Provision for income taxes 823,000 688,000 1,629,000 1,354,000
----------- ----------- ----------- -----------
Net income $ 1,217,000 $ 1,049,000 $ 2,383,000 $ 2,068,000
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
NET INCOME PER COMMON AND EQUIVALENT SHARE $ .55 $ .47 $ 1.07 $ .92
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
See notes to unaudited consolidated financial statements
-2-
COAST BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
SIX MONTHS ENDED JUNE 30,
-------------------------------
1997 1996
------------- -------------
CASH FLOWS FROM OPERATIONS:
Net income $ 2,383,000 $ 2,068,000
Adjustments to reconcile net income to net cash provided by
(used in) operations:
Provision for credit losses 300,000 450,000
Depreciation and amortization 100,000 9,000
Deferred income taxes (156,000) (382,000)
Proceeds from loan sales 25,967,000 20,093,000
Origination of loans held for sale (25,910,000) (27,108,000)
Accrued interest receivable and other assets (1,259,000) (783,000)
Accrued expenses and other liabilities 250,000 (159,000)
Increase in unearned income 531,000 504,000
Other - net (208,000) (10,000)
------------- -------------
Net cash provided by (used in) operations 1,998,000 (5,318,000)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of securities 7,782,000 11,940,000
Purchases of securities available-for-sale (10,119,000) (11,207,000)
Proceeds from sales of securities available-for-sale - 4,628,000
Net decrease (increase) in loans (5,606,000) (4,975,000)
Purchases of bank premises and equipment (289,000) (216,000)
------------- -------------
Net cash (used in) provided by investing activities (8,232,000) 170,000
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (purchases of) proceeds from securities sold under
agreements to repurchase (758,000) 4,497,000
Net increase in deposits 4,241,000 1,498,000
Payment of cash dividends (510,000) (447,000)
Repurchase of common stock (130,000) (690,000)
------------- -------------
Net cash provided by financing activities 2,843,000 4,858,000
------------- -------------
Net decrease in cash and cash equivalents (3,391,000) (290,000)
------------- -------------
Cash and equivalents, beginning of period 37,992,000 25,956,000
------------- -------------
Cash and equivalents, end of period $ 34,601,000 $ 25,666,000
------------- -------------
------------- -------------
OTHER CASH FLOW INFORMATION - CASH PAID DURING THE PERIOD FOR:
Interest $ 2,580,000 $ 3,314,000
Income taxes 1,050,000 1,712,000
NON-CASH INVESTING AND FINANCING TRANSACTIONS:
Additions to other real estate owned - $ 66,000
See notes to unaudited consolidated financial statements
-3-
COAST BANCORP
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1997 and 1996
- --------------------------------------------------------------------------------
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 athe
full year. These financial statements should be read in conjuction with
the audited financial statements for 1996 included in the Company's
Form 10-K.
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 six month periods ended
June 30, 1997 and 1996 was 2,233,487 and 2,232,336, respectively, and for
the three month periods ended June 30, 1997 and 1996 was 2,232,874 and
2,218,608, respectively.
3. In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per
Share" (SFAS 128). The Company is required to adopt SFAS 128 in the
fourth quarter of 1997 and will restate at that time earnings per share
(EPS) data for prior periods to conform with SFAS 128. Earlier
application is not permitted.
SFAS 128 replaces current EPS reporting requirements and requires a
dual presentation of basic and diluted EPS. Basic EPS excludes dilution
and is computed by dividing net income by the weighted average of common
shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock.
If SFAS 128 had been in effect during the current and prior year
periods, basic EPS and diluted EPS under SFAS 128 would
not have been significantly different than EPS currently reported for
the three months ended June 30, 1997 and 1996. For the six months ended
June 30, 1997 and 1996, basic EPS would have been $1.08 and $.93,
respectively, while diluted EPS under SFAS 128 would not have been
significantly different than EPS currently reported.
-4-
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Net income for the three months ended June 30, 1997 was $1,166217,000
compared to $1,0149,000 during the same period in 1996, representing an
increase of 164%. Net income for the six months ended June 30, 1997 was
$2,383,000 copmpared to $2,068,000 for the prior year period, a 15%
increase. The increase in net income during 1997 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 six months ended June 30, 1997 and 1996.
Table 1 Components of Net Interest Income
Three months ended June 30, 1997 1996
-------------------------------- ---------------------------------
Average Average Average Average
(Dollars in thousands) Balance Interest Rate(4) Balance Interest Rate(4)
---------- -------- ------- ---------- -------- -------
Assets:
Loans (2) (3) $ 123,240 $ 3,481 11.3% $ 115,548 $ 3,237 11.2%
Investment securities:
Taxable 65,843 1,111 6.8% 61,869 1,008 6.5%
Nontaxable (1) 5,911 126 8.5% 6,096 129 8.5%
Federal funds sold 26,858 372 5.5% 11,562 153 5.3%
--------- ------- --------- -------
Total earning assets 221,852 5,090 9.2% 195,075 4,527 9.3%
Cash and due from banks 16,532 13,426
Allowance for credit losses (3,435) (2,811)
Unearned income (1,801) (1,633)
Bank premises and equipment, net 2,098 2,223
Other assets 7,260 7,608
--------- ---------
Total assets $ 242,506 $ 213,888
--------- ---------
--------- ---------
Interest-bearing liabilities:
Deposits:
Demand $ 74,736 373 2.0% $ 68,766 330 1.9%
Savings 33,030 284 3.4% 27,451 200 2.9%
Time 29,489 379 5.1% 23,340 297 5.1%
--------- ------- --------- -------
Total deposits 137,255 1,036 3.0% 119,557 827 2.8%
Borrowed funds 24,080 340 5.7% 24,616 344 5.6%
--------- ------- --------- -------
Total interest-bearing liabilities 161,335 1,376 3.4% 144,173 1,171 3.3%
Demand deposits 53,653 45,998
Other liabilities 3,347 2,357
Stockholders' equity 24,171 21,360
--------- ---------
Total liabilities and stockholders' equity $ 242,506 $ 213,888
--------- ---------
--------- ---------
Net interest income and margin $ 3,714 6.7% $ 3,356 6.9%
-------- ----- -------- -----
-------- ----- -------- -----
(1) Tax exempt income includes $43,000 and $44,000 in 1997 and 1996,
respectively, to adjust to a fully taxable equivalent basis using the federal
statutory rate of 34%.
(2) Loan fees totaling $270,000 and $276,000 are included in loan interest
income for the three months ended June 30, 1997 and 1996,
respectively.
(3) Average nonaccrual loans totaling $103,000 and $366,000 are included in
average loans for the three months ended June 30, 1997 and 1996,
respectively.
(4) Annualized
Six months ended June 30, 1997 1996
-------------------------------- ---------------------------------
Average Average Average Average
(Dollars in thousands) Balance Interest Rate(4) Balance Interest Rate(4)
---------- -------- ------- ---------- -------- -------
Assets:
Loans (2) (3) $ 122,784 $ 6,802 11.1% $ 112,287 $ 6,308 11.2%
Investment securities:
Taxable 65,030 2,196 6.8% 63,249 2,093 6.6%
Nontaxable (1) 5,915 251 8.5% 6,097 256 8.4%
Federal funds sold 25,372 676 5.3% 11,132 295 5.3%
--------- ------- --------- -------
Total earning assets 219,101 9,925 9.1% 192,765 8,952 9.3%
Cash and due from banks 15,596 12,944
Allowance for credit losses (3,344) (2,690)
Unearned income (1,772) (1,625)
Bank premises and equipment, net 2,133 2,275
Other assets 7,054 6,154
--------- ---------
Total assets $ 238,768 $ 209,873
--------- ---------
--------- ---------
Interest-bearing liabilities:
Deposits:
Demand $ 74,698 737 2.0% $ 72,959 688 1.9%
Savings 32,447 528 3.3% 25,361 367 2.9%
Time 28,326 718 5.1% 23,007 600 5.2%
--------- ------- --------- -------
Total deposits 135,471 1,983 2.9% 121,327 1,655 2.7%
Borrowed funds 24,238 670 5.5% 22,529 655 5.8%
--------- ------- --------- -------
Total interest-bearing liabilities 159,709 2,653 3.3% 143,856 2,310 3.2%
Demand deposits 51,687 43,070
Other liabilities 3,486 1,773
Stockholders' equity 23,886 21,174
--------- ---------
Total liabilities and stockholders' equity $ 238,768 $ 209,873
--------- ---------
--------- ---------
Net interest income and margin $ 7,272 6.6% $ 6,642 6.9%
-------- ----- -------- -----
-------- ----- -------- -----
(1) Tax exempt income includes $85,000 and $87,000 in 1997 and 1996,
respectively, to adjust to a fully taxable equivalent basis using the federal
statutory rate of 34%.
(2) Loan fees totaling $513,000 and $546,000 are included in loan interest
income for the six months ended June 30, 1997 and 1996,
respectively.
(3) Average nonaccrual loans totaling $122,000 and $568,000 are included in
average loans for the six months ended June 30, 1997 and 1996,
respectively.
(4) Annualized
-6-
For the three months ended June 30, 1997, net interest income, on a fully
taxable-equivalent basis, was $3,714,000 or 6.7% of average earning assets,
an increase of 11% over $3,356,000 or 6.9% of average earning assets in the
comparable period in 1996. For the six months ended June 30, 1997, net
interest income, on a fully taxable-equivalent basis, was $7,272,000 or 6.6%
of average earnings assets, an increase of 9% over $6,6452,000 or 6.9% in the
comparable period in 1996. The increase in 1997 reflects higher levels of
earning assets.
Interest income, on a fully taxable-equivalent basis, was $5,090,000 and
$4,527,000 for the three months and $9,925,000 and $8,952,000 for the six
months ended June 30, 1997 and 1996, respectively. The increase in 1997
resulted from the growth in average earning assets. Loan yields averaged
11.3% and 11.2% for the three months ended June 30, 1997 and 1996,
respectively, and 11.1% and 11.2% for the first six months of 1997 and 1996,
respectively, and generally reflect the stability of interest rates since the
first quarter of 1996 and the 25 basis point increase in the prime rate in
March 1997. Approximately XX91% of the Bank's loans have variable interest
rates indexed to the prime rate. The Bank's average prime rate was 8.50% and
8.35% for the three months ended June 30, 1997 and 1996, respectively, and
8.38% and 8.30% for the six months ended June 30, 1997 and 1996,
respectively. Average earning assets were $221,852,000 and $219,101,000 for
the three and six months of 1997 compared to $195,075,000 and $192,48765,000
in the same periods in 1996. The growth in average earning assets resulted
from increased levels of deposits which were invested primarily in federal
funds sold and loans.
The increase in interest income during 1997 on a fully taxable-equivalent
basis, was partially offset by an increase in interest expense. The average
rate paid on interest bearing deposits was 3.4% and 3.3% in for the three
month periods ended June 30, 1997 and 1996, respectively, and 3.3% and 3.2%
for the six month periods ended June 30, 1997 and 1996, respectively.
-7-
NONINTEREST INCOME
Table 2 summarizes the sources of noninterest income for
the periods indicated:
Table 2 - Noninterest Income
(Dollars in thousands)
Three months ended June 30,
-------------------------------
1997 1996
---------- ----------
Customer service fees $ 472 $ 403
Gain on sale of loans 263 362
Loan servicing fees 265 235
Gains on securities transactions - 66
Other 146 143
---------- ----------
Total noninterest income $1,146 $1,209
---------- ----------
Six months ended June 30,
-------------------------------
1997 1996
---------- ----------
Customer service fees $ 944 $ 856
Gain on sale of loans 714 769
Loan servicing fees 522 455
Gains on securities transactions - 66
Other 313 261
---------- ----------
Total noninterest income $2,493 $2,407
---------- ----------
The increase in customer service fees in 1997 relates primarily to higher
levels of returned item fees. Gains on sale of loans decreased as a result
of a lower volume of SBA loans sold during 1997 despite an increase in the
total amount of loans sold during 1997. The Company sells SBA loans and
FHLMC conforming mortgage loans with SBA loan sales providing the primary
source of gains on sale. Loan servicing fees and other noninterest income
increased consistent with the growth of deposits and loans serviced for
others.
-8-
NONINTEREST EXPENSES
The major components of noninterest expenses stated in dollars and as a
percentage of average earning assets are set forth in Table 3 for the periods
indicated.
Table 3 - Noninterest Expenses
(Dollars in thousands)
Three months ended June 30,
-------------------------------------
1997 1996
----------------- ------------------
Salaries and benefits $1,363 2.46% $1,281 2.63%
Equipment 285 0.52% 279 0.57%
Occupancy 235 0.42% 224 0.46%
Insurance 38 0.07% 24 0.05%
Stationery and postage 79 0.14% 101 0.21%
Legal fees 23 0.04% (5) (0.01)%
Other 679 1.22% 655 1.34%
----------------- -----------------
Total noninterest expense $2,702 4.87% $2,559 5.25%
----------------- -----------------
----------------- -----------------
Six months ended June 30,
-------------------------------------
1997 1996
----------------- ------------------
Salaries and benefits $2,787 2.54% $2,618 2.72%
Equipment 548 0.50% 566 0.59%
Occupancy 473 0.43% 450 0.47%
Insurance 87 0.08% 53 0.05%
Stationery and postage 184 0.17% 203 0.21%
Legal fees 45 0.04% 15 0.02%
Other 1,244 1.14% 1,185 1.23%
----------------- -----------------
Total noninterest expense $5,368 4.90% $5,090 5.28%
----------------- -----------------
----------------- -----------------
The increases in 1997 were primarily related to higher staff costs and
increases in other noninterest expenses. 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 1997 exceeding
the rate of increase in noninterest expenses.
INCOME TAXES
The Company's effective tax rate was 40.3% and 40.6% for the three and six
months ended June 30, 1997 compared to 39.6% for both periods in 1996.
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 $242.4 million at June 30, 1997, a 2% increase from
the end of 1996. Based on average balances, second quarter 1997 average
total assets of $242.5 million represent an increase of 13% over the second
quarter 1996 while six month 1997 average total assets of $238.87 million
represent an increase of 143% over six months 1996.
-9-
EARNING ASSETS
LOANS
Total gross loans at June 30, 1997 were $129.3 million, a 215% increase from
$10623.87 million at December 31, 1996. Average loans in the three and six
months of 1997 were $123,240,000 and $122,784,000 representing increases of
7% and 9% over of the comparable periods in 1996. The 1997 increases
primarily 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 June 30, 1997
nonaccrual loans totaled $54,000 or .04% of total loans compared to $159,000
or .13% of total loans at December 31, 1996.
Table 4 presents the composition of nonperforming assets at June 30,
1997.
Table 4 Nonperforming Assets
(dollars in thousands)
June 30,
1997
-------
Nonperforming assets:
Loans past due 90 days or more $ 7
Nonaccrual loans 47
------
Total nonperforming loans 54
OREO 492
------
Total nonperforming assets $ 546
------
------
Nonperforming loans as a percent of total loans 0.04%
OREO as a percent of total assets 0.20%
Nonperforming assets as a percent of total assets 0.23%
Allowance for loan losses $3,482
As a percent of total loans 2.69%
As a percent of nonaccrual loans 7409%
As a percent of nonperforming loans 6448%
-10-
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)
For the six months ended
June 30, 1997
-------------
Total loans outstanding $ 129,294
Average total loans 122,784
Balance, January 1 $ 3,158
Charge-offs by loan category:
Commercial 36
Installment and other 14
Real estate construction -
Real estate-other -
---------
Total charge-offs 50
Recoveries by loan category:
Commercial 42
Installment and other 26
Real estate construction 6
Real estate-other -
---------
Total recoveries 74
Net charge-offs (recoveries) (24)
Provision charged to expense 300
---------
Balance, June 30 $ 3,482
---------
---------
Ratios:
Net charge-offs (recoveries) to average loans (0.02)%
Reserve to total loans 2.69%
-11-
OTHER INTEREST-EARNING ASSETS
For the three and six months ended June 30, 1997, the average balance of
investment securities and federal funds sold totaled $98,612,000 and
$96,317,000, up from $79,527,000 and $ 80,478,000 for the same periods in
1996. The 1997 increase resulted from deploying additional liquidity in
federal funds sold and investment securities. Source of the additional
liquidity was the excess of the increase in average deposits over the
increase in average loans. Management also 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 $4,241,000 from year-end or 2% to $189,708,000 as of June
30, 1997. Average total deposits in the three and six months of 1997 of
$190,908,000 and $187,158,000 increased from $1645,357555,000 and
$164,397,000 in the same periods in 1996.
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 to 90 days.
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 June 30, 1997, this ratio was
16.8%. Other key liquidity ratios are the ratios of loans to deposits and
federal funds sold to deposits, which were 68.2% and 7.4%, respectively, as
of June 30, 1997.
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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 near-matched to
modestly asset-sensitive cumulative position at one year, such that the net
interest margin of the Company increases as market interest rates rise and
decreases when short-term interest 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
analysies for the Company at June 30, 1997. 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 June 30, 1997 Immediately three months within one year five years five years Total
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Rate sensitive assets:
Federal funds sold $ 14,000 $ - $ - $ - $ - $ 14,000
Investment securities:
Treasury and agency obligations - 1,500 - 1,415 - 2,915
Mortgage-backed securities - 2,582 7,082 25,644 28,191 63,499
Municipal securities - 216 530 2,197 2,966 5,909
Other - - - - 1,307 1,307
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Total investment securities - 4,298 7,612 29,256 32,464 73,630
Loans excluding nonaccrual loans 117,860 1,428 2,102 4,683 3,174 129,247
- ---------------------------------------------------------------------------------------------------------------------------------
Total rate sensitive assets $ 131,860 $ 5,726 $ 9,714 $ 33,939 $ 35,638 $ 216,877
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Rate sensitive liabilities:
Deposits:
Money market, NOW, and savings $ 100,542 $ - $ - $ - - $ 100,542
Time certificates - 17,311 11,466 1,888 - 30,665
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Total interest-bearing deposits 100,542 17,311 11,466 1,888 - 131,207
Borrowings - 23,850 - - - 23,850
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Total rate sensitive liabilities $ 100,542 $ 41,161 $ 11,466 $ 1,888 - $ 155,057
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Gap $ 31,318 $ (35,435) $ (1,752) $ 32,051 $ 35,638 $ 61,820
Cumulative gap $ 31,318 $ (4,117) $ (5,869) $ 26,182 $ 61,820
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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 June 30,
1997.
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 1997, the Board of Directors approved a stock repurchase program
authorizing open market purchases of up to 3% of the shares outstanding, or
approximately 66,300 shares, in order to enhance long term shareholder value.
As of June 30, 1997, 6,000 shares had been purchased under the program.
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 June 30,
19967, and December 31, 1996. Capital ratios for the Company are set forth
in Table 7:
Table 7 Capital Ratios
June 30, December 31,
1997 1996
------------ ------------
Total risk-based capital ratio 17.2% 16.4%
Tier 1 risk-based capital ratio 16.0% 15.2%
Tier 1 leverage ratio 10.2% 9.8%
Capital ratios for the Bank at June 30, 1997 and December 31, 1996 were 15.5%
and 15.0% total risk-based capital, 14.3% and 13.8% Tier 1 risk-based capital
ratio and 9.1% and 8.7% Tier 1 leverage ratio.
-14-
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable.
Item 2. Changes in Securities
Not applicable
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
The Company's annual meeting was held May 20, 1997. The purpose of
the meeting was elect the company's board of directors and ratify the
appointment of Deloitte & Touche LLP as the Company's auditors for the year
ending December 31, 1997. The following directors were elected based upon
the votes cast as indicated:
Director Votes "for" Votes "against" Votes "withheld"
Richard Alderson 1,234,949 0 4,980
Douglas D. Austin 1,238,735 0 1,194
John C. Burroughs 1,238,735 0 1,194
Bud W. Cummings 1,238,735 0 1,194
Ronald M. Israel, M.D. 1,238,735 0 1,194
Malcolm D. Moore 1,238,735 0 1,194
Harvey J. Nickelson 1,238,735 0 1,194
Gus J.F. Norton 1,238,735 0 1,194
James C. Thompson 1,238,735 0 1,194
The appointment of Deloitte & Touche LLP as the Company's auditors for the
year ending December 31, 1997 was ratified with 1,237,680 votes for
ratification, no votes against, and 2,249 votes withheld.
Item 5. Other Information
On April 23, 1997, the Coast Bancorp Board of Directors declared a
dividend of eleven and one-half cents ($0.115) per share, payable May
28,1997, to shareholders of record on May 8, 1997.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
Exhibit Number
10.19 Amended and Restated Deferred Compensation Agreement with Richard
Alderson dated May 21, 1997
10.20 Amended and Restated Deferred Compensations Agreement Douglas D.
Austin dated May 21, 1997
10.21 Amended and Restated Deferred Compensation Agreement with John Burroughs
dated May 21, 1997
10.22 Amended and Restated Deferred Compensations Agreement with Bud W.
Cummings dated May 21, 1997
10.23 Amended and Restated Deferred Compensations Agreement with Ronald M.
Israel dated May 21, 1997
10.24 Amended and Restated Deferred Compensations Agreement with Malcolm D.
Moore dated May 21, 1997
10.25 Amended and Restated Deferred Compensations Agreement with Gus J.F.
Norton dated May 21, 1997
10.26 Amended and Restated Deferred Compensations Agreement with James C.
Thompson dated May 21, 1997
27 Financial Data Schedule
-15-
b. Reports on Form 8-K
On April 28, 1997 the Company filed a Form 8-K relating to a press
release dated April 22, 1997 announcing first quarter earnings and an April
23, 1997 press release announcing the declaration of an eleven and one-half
cent ($0.115) cash dividend, payable May 28,1997, to shareholders of record
on May 8, 1997.
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: August 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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