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 March 31, 1998
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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), 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 March 31, 1998: 2,189,259
---------
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1998
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
MARCH 31, DECEMBER 31,
1998 1997
------------ ------------
ASSETS (unaudited)
Cash and due from banks $ 17,486,000 $ 15,853,000
Federal funds sold 15,000,000 15,000,000
------------ ------------
Total cash and equivalents 32,486,000 30,853,000
Securities available-for-sale, at fair value 89,681,000 80,466,000
Loans:
Commercial 42,242,000 42,838,000
Real estate - construction 20,576,000 21,376,000
Real estate - term 82,453,000 76,101,000
Installment and other 5,254,000 6,112,000
------------ ------------
Total loans 150,525,000 146,427,000
Unearned income (2,632,000) (2,349,000)
Allowance for credit losses (3,660,000) (3,609,000)
------------ ------------
Net loans 144,233,000 140,469,000
Bank premises and equipment, net 2,060,000 2,045,000
Other real estate owned 302,000 112,000
Accrued interest receivable and other assets 8,787,000 7,560,000
------------ ------------
TOTAL ASSETS $277,549,000 $261,505,000
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Non-interest bearing demand $ 61,030,000 $ 66,812,000
Interest-bearing demand 78,808,000 76,123,000
Savings 26,266,000 23,942,000
Time 54,773,000 34,320,000
------------ ------------
Total deposits 220,877,000 201,197,000
Other borrowings 25,027,000 30,070,000
Accrued expenses and other liabilities 3,429,000 2,474,000
------------ ------------
Total liabilities 249,333,000 233,741,000
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: 2,189,259
in 1998 and 2,209,659 in 1997 10,964,000 11,011,000
Retained earnings 16,722,000 16,060,000
Net unrealized gain on securities
available-for-sale 530,000 693,000
------------ ------------
Total stockholders' equity 28,216,000 27,764,000
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $277,549,000 $261,505,000
------------ ------------
------------ ------------
See notes to unaudited consolidated financial statements
-1-
COAST BANCORP
CONSOLIDATED INCOME STATEMENTS
(unaudited)
THREE MONTHS ENDED MARCH 31,
----------------------------
1998 1997
------------ -----------
Interest Income:
Loans, including fees $ 4,147,000 $ 3,347,000
Federal funds sold 100,000 305,000
Securities:
Taxable 1,225,000 1,085,000
Nontaxable 145,000 83,000
----------- -----------
Total interest income 5,617,000 4,820,000
Interest expense:
Deposits 1,135,000 946,000
Other borrowings 415,000 331,000
----------- -----------
Total interest expense 1,550,000 1,277,000
----------- -----------
Net interest income 4,067,000 3,543,000
Provision for credit losses 75,000 225,000
----------- -----------
Net interest income after provision for credit
losses 3,992,000 3,318,000
Noninterest income:
Customer service fees 495,000 478,000
Gain on sale of loans 668,000 420,000
Gain on sale of OREO 6,000 -
Loan servicing fees 246,000 257,000
Losses on sales of securities (15,000) -
Other 167,000 165,000
----------- -----------
Total noninterest income 1,567,000 1,320,000
Noninterest expenses:
Salaries and benefits 1,540,000 1,424,000
Equipment 285,000 262,000
Occupancy 271,000 238,000
Stationery and postage 97,000 104,000
Insurance 59,000 49,000
Legal fees 19,000 21,000
Other 646,000 568,000
----------- -----------
Total non-interest expenses 2,917,000 2,666,000
----------- -----------
Income before income taxes 2,642,000 1,972,000
Provision for income taxes 1,086,000 806,000
----------- -----------
Net income $ 1,556,000 $ 1,166,000
----------- -----------
----------- -----------
Earnings per share:
Basic $ .71 $ .53
Diluted $ .69 $ .52
See notes to unaudited consolidated financial statements
-2-
COAST BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
THREE MONTHS ENDED MARCH 31,
-------------------------------
1998 1997
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,556,000 $ 1,166,000
Adjustments to reconcile net income to net cash
provided by
operating activiities:
Provision for credit losses 75,000 225,000
Depreciation and amortization 35,000 41,000
Losses (gains) on securities transactions 15,000 --
Deferred income taxes 132,000 (211,000)
Proceeds from loan sales 17,282,000 17,373,000
Origination of loans held for sale (18,313,000) (14,926,000)
Accrued interest receivable and other assets (1,359,000) 761,000
Accrued expenses and other liabilities 955,000 364,000
Increase in unearned income 533,000 329,000
Other - net (66,000) --
------------ ------------
Net cash provided by operating activities 845,000 5,122,000
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of securities 4,357,000 2,385,000
Purchases of securities available-for-sale (19,308,000) --
Proceeds from sales of securities
available-for-sale 5,329,000 --
Net decrease (increase) in loans (3,091,000) 2,343,000
Purchases of bank premises and equipment (195,000) (198,000)
------------ ------------
Net cash (used in) provided by investing
activities (12,908,000) 4,530,000
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from securities sold under
agreements to repurchase (5,043,000) (253,000)
Net increase in deposits 19,680,000 1,400,000
Payment of cash dividends (309,000) (255,000)
Repurchase of common stock (675,000) --
Exercise of stock options 43,000 --
------------ ------------
Net cash provided by financing activities 13,696,000 892,000
------------ ------------
Net increase in cash and cash equivalents 1,633,000 10,544,000
------------ ------------
Cash and equivalents, beginning of period 30,853,000 37,992,000
------------ ------------
Cash and equivalents, end of period $ 32,486,000 48,536,000
------------ ------------
------------ ------------
OTHER CASH FLOW INFORMATION -
CASH PAID DURING THE PERIOD FOR:
Interest $ 1,616,000 $ 1,241,000
Income taxes 331,000 275,000
NON-CASH INVESTING AND FINANCING TRANSACTIONS:
Additions to other real estate owned $ 190,000 $ -
See notes to unaudited consolidated financial statements
-3-
COAST BANCORP
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1998 and 1997
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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 athe full
year. These financial statements should be read in conjuction with the
audited financial statements for 1997 included in the Company's Form
10-K.
2. NET EARNINGS PER SHARE - Basic earnings per share is computed by dividing
net income by the number of weighted average common shares outstanding.
Diluted earnings per share reflects potential dilution from outstanding
stock options, using the treasury stock method. The number of weighted
average shares used in computing basic and diluted net income per share are
as follows:
Three months ended March 31,
----------------------------
1998 1997
---------- ----------
Basic shares 2,199,955 2,209,659
Dilutive effect of stock
options 54,856 29,554
------------------------
Diluted shares 2,254,811 2,239,213
------------------------
------------------------
3. NEW ACCOUNTING PRONOUNCEMENTS - Effective January 1, 1998, the Company
adopted Statement of Financial Accounting Standards No. 130 "Reporting
Comprehensive Income," (SFAS No. 130). This Statement requires that all items
recognized under accounting standards as components of comprehensive income be
reported in an annual financial statement that is displayed with the same
prominence as other financial statements. Annual financial statements for prior
periods will be reclassified, as required. The Company's source of other
comprehensive income is unrealized gains and losses on securities
available-for-sale. Total comprehensive income was as follows:
Three Months Ended
March 31,
--------------------------
1998 1997
--------------------------
Net income $1,556,000 $1,166,000
Other comprehensive income 163,000 (339,000)
--------------------------
Total comprehensive income $1,719,000 $827,000
--------------------------
--------------------------
4. SUBSEQUENT EVENT - On April 15, 1998, the Board of Directors declared a 10
percent stock dividend payable on May 27, 1998 to stockholders of record as of
May 7, 1998.
-4-
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Net income for the three months ended March 31, 1998 was $1,556,000
compared to $1,166,000 during the same period in 1997, representing an
increase of 33%. The increase in net income during 1998 was primarily due
to increases in net interest income and noninterest income combined with a
decrease in the provision for credit losses partially offset by an increases in
noninterest expenses and 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.
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 ended March 31, 1998 and 1997.
-5-
Table I Components of Net Interest Income
Three months ended March 31, 1998 1997
-------------------------------- --------------------------------
Average Average Average Average
(Dollars in thousands) Balance Interest Rate(4) Balance Interest Rate(4)
---------- -------- ------- ---------- -------- -------
Assets:
Loans (2) (3) $ 150,687 $ 4,146 11.0% $ 122,323 $ 3,347 10.9%
Investment securities:
Taxable 73,348 1,225 6.7% 64,209 1,085 6.8%
Nontaxable (1) 10,654 219 8.2% 5,920 126 8.5%
Federal funds sold 7,769 100 5.1% 23,870 305 5.1%
--------- ------- --------- -------
Total earning assets 242,458 5,690 9.4% 216,322 4,586 9.0%
Cash and due from banks 17,386 14,649
Allowance for credit losses (3,642) (3,253)
Unearned income (2,411) (1,742)
Bank premises and equipment, net 2,074 2,169
Other assets 8,274 7,219
--------- ---------
Total assets $ 264,139 $ 235,364
--------- ---------
--------- ---------
Interest-bearing liabilities:
Deposits:
Demand $ 77,779 391 2.0% $ 74,659 364 2.0%
Savings 27,026 213 3.2% 31,858 244 3.1%
Time 40,563 531 5.2% 27,151 338 5.0%
--------- ------- --------- -------
Total deposits 145,368 1,135 3.1% 133,668 946 2.8%
Borrowed funds 30,526 415 5.4% 25,739 331 5.2%
--------- ------- --------- -------
Total interest-bearing liabilities 175,894 1,550 3.5% 159,407 1,277 3.2%
Demand deposits 57,286 50,531
Other liabilities 2,582 1,829
Stockholders' equity 28,377 23,100
--------- ---------
Total liabilities and stockholders' equity $ 264,139 $ 234,867
--------- ---------
--------- ---------
Net interest income and margin $ 4,140 6.8% $ 3,586 6.6%
------- ---- ------- -----
------- ---- ------- -----
(1) Tax exempt income includes $74,000 and $43,000 in 1998 and 1997,
respectively, to adjust to a fully taxable equivalent basis using the federal
statutory rate of 34%.
(2) Loan fees totaling $317,000 and $243,000 are included in loan interest
income for the three months ended March 31, 1998 and 1997, respectively.
(3) Average nonaccrual loans totaling $327,000 and $159,000 are included in
average loans for the three months ended March 31, 1998 and 1997,
respectively.
(4) Annualized
-6-
For the three months ended March 31, 1998, net interest income, on a
fully taxable-equivalent basis, was $4,140,000 or 6.8% of average
earning assets, an increase of 15% over $3,586,000 or 6.6% of average
earning assets in the comparable period in 1997. The increase in 1998
reflects higher levels of earning assets.
Interest income, on a fully taxable-equivalent basis, was $5,690,000 and
$4,863,000 for the three months ended March 31, 1998 and 1997, respectively.
The increase in 1998 resulted from the growth in average earning assets.
Loan yields averaged 11.0% and 10.9% for the three months ended
March 31, 1998 and 1997, respectively. Approximately 90% of the Bank's
loans have variable interest rates indexed to the prime rate. The Bank's
average prime rate was 8.50% and 8.26% for each of the three month periods
ended March 31, 1998 and 1997, respectively. Average earning assets were
$242,458,000 and $216,322,000 for the three months ended March 31, 1998 and
1997, respectively. The growth in average earning assets resulted from
increased levels of deposits which were invested primarily in loans and
securities.
The increase in interest income during 1998 on a fully
taxable-equivalent basis, was partially offset by an increase in
interest expense. The average rate paid on interest bearing deposits
was 3.5% and 3.2% in for the three month periods ended March 31,
1998 and 1997, respectively.
NONINTEREST INCOME
Table 2 summarizes the sources of noninterest income for
the periods indicated:
Table 2 - Noninterest Income
(Dollars in thousands)
Three months ended March 31,
-------------------------------
1998 1997
---------- ----------
Customer service fees $ 495 $ 478
Gain on sale of loans 668 420
Loan servicing fees 246 257
Losses on securities transactions (15) -
Other 173 165
---------- ----------
Total noninterest income $1,567 $1,320
---------- ----------
---------- ----------
The increase in customer service fees in 1998 relates primarily to higher
levels of returned item fees. Gains on sale of loans increased as a result
of a higher volume of Small Business Administration (SBA) loans sold during
1998. 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.
-7-
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 March 31,
-------------------------------------
1998 1997
----------------- ------------------
Salaries and benefits $1,540 2.54% $1,424 2.63%
Equipment 285 0.47% 262 0.48%
Occupancy 271 0.45% 238 0.44%
Insurance 59 0.09% 49 0.09%
Stationery and postage 97 0.16% 104 0.19%
Legal fees 19 0.03% 21 0.04%
Other 646 1.07% 568 1.05%
----------------- -----------------
Total noninterest expenses $2,917 4.81% $2,666 4.93%
----------------- -----------------
----------------- -----------------
The increases in 1998 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 1998 exceeding
the rate of increase in noninterest expenses.
INCOME TAXES
The Company's effective tax rate was 41.1% for the three months ended March 31,
1998 compared to 40.9% for the comparable period in 1997. 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 $277.5 million at March 31, 1998, a 6%
increase from the end of 1997. Based on average balances, first quarter
1998 average total assets of $264.1 million represent an increase of 12%
over the first quarter 1997.
EARNING ASSETS
LOANS
Total gross loans at March 31, 1998 were $150.5 million, a 3% increase
from $146.4 million at December 31, 1997. Average loans in the three months of
1998 were $150,687,000 representing an increase of 23% over the comparable
period in 1997. The 1998 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.
-8-
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 March 31, 1998
nonaccrual loans totaled $546,000 or .36% of total loans compared to $266,000
or .18% of total loans at December 31, 1997.
Table 4 presents the composition of nonperforming assets at March 31, 1998.
Table 4 Nonperforming Assets
(dollars in thousands)
March 31,
1998
-------
Nonperforming assets:
Accruing loans past due 90 days or more $ -
Nonaccrual loans 546
------
Total nonperforming loans 546
OREO 302
------
Total nonperforming assets $ 848
------
------
Nonperforming loans as a percent of total loans 0.36%
OREO as a percent of total assets 0.11%
Nonperforming assets as a percent of total assets 0.31%
Allowance for credit losses $3,660
As a percent of total loans 2.43%
As a percent of nonaccrual loans 670%
As a percent of nonperforming loans 670%
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.
-9-
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)
Three months ended
March 31, 1998
-------------
Total loans outstanding $ 150,525
Average total loans 150,687
Balance, January 1 $ 3,609
Charge-offs by loan category:
Commercial 31
Installment and other 14
Real estate construction -
Real estate-other -
---------
Total charge-offs 45
Recoveries by loan category:
Commercial 7
Installment and other 14
Real estate construction -
Real estate-other -
---------
Total recoveries 21
Net chargeoffs (24)
Provision charged to expense 75
---------
Balance, March 31 $3,660
---------
---------
Ratios:
Net chargeoffs to average loans (0.02)%
Reserve to total loans 2.43%
OTHER INTEREST-EARNING ASSETS
For the three months ended March 31, 1998, the average balance
of investment securities and federal funds sold totaled $91,771,000, down from
$93,999,000 for the same period in 1997. The 1998 increase resulted from
shifting liquidity from federal funds sold to loans and investment securities.
Additional liquidity was generated by 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. During the first quarter of 1998, the Bank accepted a $15 million
certificate of deposit from the State of California, in part to replace borrowed
funds and to increase earning assets.
-10-
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 $19,680,000 from year-end or 10% to $220,877,000 as of
March 31, 1998. Average total deposits in the three months of
1998 of $202,654,000 increased from $184,199,000 in the same period in 1997.
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.
During the first quarter of 1998, the Bank replaced $10,000,000 of short-term
borrowings with $10,000,000 of borrowings issued by the Federal Home Loan Bank
of San Francisco (FHLBSF) maturing in 5 years at an average cost of 4.99%,
callable after one year at the option of the FHLBSF. Additionally, the Bank
issued a $15,000,000 certificate of deposit maturing in three months to the
State of California. The Bank believes the overall effect of these transactions
lowered the effective cost of borrowed funds while increasing earning assets.
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 March 31, 1998, this ratio
was 22.2%. Other key liquidity ratios are the ratios of loans to deposits
and federal funds sold to deposits, which were 68.1% and 6.8%, respectively,
as of March 31, 1998.
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.
-11-
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
analysis for the Company at March 31, 1998. 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 March 31, 1998 Immediately three months within one year five years five years Total
- ---------------------------------------------------------------------------------------------------------------------------------
Rate sensitive assets:
Federal funds sold $ 15,000 $ - $ - $ - $ - $ 15,000
Investment securities:
Treasury and agency obligations - - 3,600 4,541 - 8,141
Mortgage-backed securities - 2,550 6,983 25,848 23,260 58,641
Municipal securities - - 1,062 2,247 11,390 14,699
Other - - - - 8,200 8,200
- ---------------------------------------------------------------------------------------------------------------------------------
Total investment securities - 2,550 11,645 32,636 42,850 89,681
Loans excluding nonaccrual loans 135,820 1,251 324 3,730 8,853 149,978
- ---------------------------------------------------------------------------------------------------------------------------------
Total rate sensitive assets $ 150,820 $ 3,801 $ 11,969 $ 36,366 $ 51,703 $ 254,659
- ---------------------------------------------------------------------------------------------------------------------------------
Rate sensitive liabilities:
Deposits:
Money market, NOW, and savings $ 105,074 $ - $ - $ - - $ 105,074
Time certificates - 34,729 18,617 1,427 - 54,773
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 105,074 34,729 18,617 1,427 - 159,847
Borrowings - 15,027 - 10,000 - 25,027
- ---------------------------------------------------------------------------------------------------------------------------------
Total rate sensitive liabilities $ 105,074 $ 49,756 $ 18,617 11,427 - $ 184,874
- ---------------------------------------------------------------------------------------------------------------------------------
Gap $ 45,746 $ (45,955) $ (6,648) $ 24,939 $ 51,703 $ 69,785
Cumulative gap $ 45,746 $ ( 209) $ (6,857) $ 18,082 $ 69,785
-12-
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 March 31, 1998.
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.
On April 15, 1998, the Board of Directors declared a 10 percent stock
dividend payable on May 27, 1998 to stockholders of record as of May 7, 1998.
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 March 31, 1998, 24,000 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 March 31,
1998, and December 31, 1997. Capital ratios for the Company are set forth in
Table 7:
Table 7 Capital Ratios
March 31, December 31,
1998 1997
------------ ------------
Total risk-based capital ratio 16.0% 16.4%
Tier 1 risk-based capital ratio 14.7% 15.2%
Tier 1 leverage ratio 9.9% 9.8%
Capital ratios for the Bank at March 31, 1998 and December 31, 1997
were 14.7% and 15.1% total risk-based capital, 13.4% and 13.9% Tier 1
risk-based capital ratio and 9.0% and 9.3% Tier 1 leverage ratio.
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YEAR 2000
The approach of the year 2000 presents significant issues for many
financial, informaion, and operational systems. Many systems in use today may
not be able to interpret dates after December 31, 1999 appropriately, because
such systems allow only two digits to indicate the year in a date. As a
result, such systems are unable to distinguish January 1, 2000 from January
1, 1900, which could have adverse consequences on the operations of the
entity and integrity of information processing, causing safety, operational
and financial issues.
The Company has adopted a plan to address the year 2000 issues. Actions
include a process of inventory, analysis, modification, testing and
certification, and implementation. Reviews of the Company's information
systems and information provided by the Company's primary vendors, large
customers and suppliers has not identified any year 2000 compliance issues
which appear to be unresolvable by December 31, 1999. In the event of year
2000 failure or erroneous results, the Company could be adversely impacted in
a number of ways. Internal operations problems and problems resulting from
primary vendors and suppliers inability to perform could cause increased
costs in determining correct results and lost customers resulting in a loss
of revenue. Large customers negativley effected by year 2000 problems could
lead to deposit outflows or increased risk of collecting loans.
The Company continues to evaluate its information systems to identify systems
which may not be compliant with the year 2000 and plan for appropriate
modifications. In addition to modifying existing systems, the Company may
also replace certain equipment and software to ensure year 2000 compliance.
Amounts expensed in the first quarter of 1998 were not significant to the
Company's financial position or results of operations. Although the remaining
costs associated with achieving year 2000 compliance have not yet been
determined, management does not believe the amounts expensed over the next
two years will have a material effect on the Company's financial position or
results of operations.
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
Not applicable
Item 5. Other Information
On April 15, 1998, the Coast Bancorp Board of Directors declared a
10% stock dividend and cash dividend of fourteen cents ($0.14) per share,
payable May 27, 1998, to shareholders of record on May 7, 1998.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
Exhibit Number
10.19 Lease by and between C. Richard and Rene Deane and Coast Commercial Bank.
27 Financial Data Schedule
b. Reports on Form 8-K
Not applicable
-14-
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: May 11, 1998
/s/ HARVEY J. NICKELSON
---------------------------------------
Harvey J. Nickelson
President and Chief Executive Officer
/s/ BRUCE H. KENDALL
---------------------------------------
Bruce H. Kendall
Senior Vice President
and Chief Financial Officer
(Principal Financial and Accounting
Officer)
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