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 June 30, 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 June 30, 1998: 2,408,029
---------
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 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 16
Item 6. Exhibits and Reports on Form 8-K 16
PART I
Item 1. Financial Statements
COAST BANCORP
CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31,
1998 1997
--------------- -----------
ASSETS (unaudited)
Cash and due from banks $ 19,992,000 $ 15,853,000
Federal funds sold 25,000,000 15,000,000
------------ ------------
Total cash and equivalents 44,992,000 30,853,000
Securities available-for-sale, at fair value 89,567,000 80,466,000
Loans:
Commercial 39,933,000 42,838,000
Real estate - construction 16,388,000 21,376,000
Real estate - term 85,233,000 76,101,000
Installment and other 4,690,000 6,112,000
------------ ------------
Total loans 146,244,000 146,427,000
Unearned income (2,834,000) (2,349,000)
Allowance for credit losses (3,686,000) (3,609,000)
------------ ------------
Net loans 139,724,000 140,469,000
Bank premises and equipment, net 2,219,000 2,045,000
Other real estate owned 268,000 112,000
Accrued interest receivable and other assets 8,950,000 7,560,000
------------ ------------
TOTAL ASSETS $285,720,000 $261,505,000
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Non-interest bearing demand $ 66,584,000 $ 66,812,000
Interest-bearing demand 78,975,000 76,123,000
Savings 29,104,000 23,942,000
Time 53,583,000 34,320,000
------------ ------------
Total deposits 228,246,000 201,197,000
Other borrowings 25,500,000 30,070,000
Accrued expenses and other liabilities 2,630,000 2,474,000
--------------- --------------
Total liabilities 256,376,000 233,741,000
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: 2,408,029 in 1998 and 2,209,659 in 1997 20,452,000 11,011,000
Retained earnings 8,289,000 16,060,000
Accumualated other comprehensive income 603,000 693,000
------------ ------------
Total stockholders' equity 29,344,000 27,764,000
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $285,720,000 $261,505,000
------------ ------------
------------ ------------
See notes to unaudited consolidated financial statements
-1-
COAST BANCORP
CONSOLIDATED INCOME STATEMENTS
(unaudited)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------------- --------------------------
1998 1997 1998 1997
------------ ----------- ----------- ----------
Interest Income:
Loans, including fees $ 4,222,000 $ 3,505,000 $ 8,369,000 $ 6,852,000
Federal funds sold 253,000 372,000 353,000 676,000
Securities:
Taxable 1,226,000 1,111,000 2,451,000 2,196,000
Nontaxable 187,000 83,000 332,000 166,000
----------- ----------- ----------- -----------
Total interest income 5,888,000 5,071,000 11,505,000 9,890,000
Interest expense:
Deposits 1,312,000 1,036,000 2,447,000 1,983,000
Other borrowings 317,000 340,000 732,000 670,000
----------- ----------- ----------- -----------
Total interest expense 1,629,000 1,376,000 3,179,000 2,653,000
----------- ----------- ----------- -----------
Net interest income 4,259,000 3,695,000 8,326,000 7,237,000
Provision for credit losses 75,000 75,000 150,000 300,000
----------- ----------- ----------- -----------
Net interest income after provision for credit losses 4,184,000 3,620,000 8,176,000 6,937,000
Noninterest income:
Gain on sale of loans 628,000 233,000 1,296,000 652,000
Customer service fees 413,000 479,000 908,000 956,000
Loan servicing fees 248,000 265,000 495,000 522,000
Gains (losses) on securities sales 26,000 - 11,000 -
Other 183,000 145,000 355,000 313,000
----------- ----------- ----------- -----------
Total noninterest income 1,498,000 1,122,000 3,065,000 2,443,000
Noninterest expenses:
Salaries and benefits 1,561,000 1,363,000 3,100,000 2,787,000
Occupancy 291,000 235,000 562,000 473,000
Equipment 267,000 285,000 552,000 548,000
Stationery and postage 96,000 79,000 115,000 184,000
Insurance 56,000 38,000 193,000 87,000
Legal fees 27,000 23,000 46,000 45,000
Other 706,000 679,000 1,353,000 1,244,000
----------- ----------- ----------- -----------
Total noninterest expenses 3,004,000 2,702,000 5,921,000 5,368,000
----------- ----------- ----------- -----------
Income before income taxes 2,678,000 2,040,000 5,320,000 4,012,000
Provision for income taxes 1,121,000 823,000 2,207,000 1,629,000
----------- ----------- ----------- -----------
Net income $ 1,557,000 $ 1,217,000 $ 3,113,000 $ 2,383,000
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Earnings per share:
Basic $ .65 $ .50 $ 1.29 $ .98
Diluted $ .63 $ .50 $ 1.25 $ .97
See notes to unaudited consolidated financial statements
-2-
COAST BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
SIX MONTHS ENDED JUNE 30,
-------------------------------
1998 1997
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,113,000 $ 2,383,000
Adjustments to reconcile net income to net cash provided by
operating activiities:
Provision for credit losses 150,000 300,000
Depreciation and amortization 92,000 100,000
Gains on securities transactions (11,000) --
Deferred income taxes 188,000 (156,000)
Proceeds from loan sales 37,497,000 25,967,000
Origination of loans held for sale (40,560,000) (25,910,000)
Accrued interest receivable and other assets (1,578,000) (1,259,000)
Accrued expenses and other liabilities 156,000 250,000
Increase in unearned income 994,000 531,000
Other - net (83,000) (208,000)
------------- -------------
Net cash provided by (used in) operating activities (42,000) 1,998,000
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities available-for-sale 22,468,000 --
Proceeds from maturities of securities 11,643,000 7,782,000
Purchases of securities available-for-sale (43,598,000) (10,119,000)
Net decrease (increase) in loans 3,173,000 (5,606,000)
Purchases of bank premises and equipment (541,000) (289,000)
------------- -------------
Net cash (used in) investing activities (6,855,000) (8,232,000)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from securities sold under
agreements to repurchase (4,570,000) (758,000)
Net increase in deposits 27,049,000 4,241,000
Payment of cash dividends (646,000) (510,000)
Repurchase of common stock (834,000) (130,000)
Exercise of stock options 43,000 --
Payment of fractional shares resulting from stock dividend (6,000) --
------------- -------------
Net cash provided by financing activities 21,036,000 2,843,000
------------- -------------
Net increase (decrease) in cash and equivalents 14,139,000 (3,391,000)
------------- -------------
Cash and equivalents, beginning of period 30,853,000 37,992,000
------------- -------------
Cash and equivalents, end of period $ 44,992,000 $ 34,601,000
------------- -------------
------------- -------------
OTHER CASH FLOW INFORMATION - CASH PAID DURING THE PERIOD FOR:
Interest $ 3,145,000 $ 2,580,000
Income taxes 2,274,000 1,050,000
NON-CASH INVESTING AND FINANCING TRANSACTIONS:
Additions to other real estate owned $ 156,000 $ -
See notes to unaudited consolidated financial statements
-3-
COAST BANCORP
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED JUNE 30, 1998 and 1997
- -------------------------------------------------------------------------------
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 the 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.
1. NET EARNINGS PER SHARE AND STOCK DIVIDEND- 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 June 30,
--------------------------------------
1998 1997
---- ----
Basic shares 2,408,029 2,426,938
Dilutive effect of stock options
76,607 29,224
--------------------------------------
Diluted shares 2,484,636 2,456,162
--------------------------------------
--------------------------------------
Six months ended June 30,
--------------------------------------
1998 1997
---- ----
Basic shares 2,413,347 2,428,771
Dilutive effect of stock options
67,906 28,064
--------------------------------------
Diluted shares 2,481,253 2,456,835
--------------------------------------
--------------------------------------
On April 15, 1998, the Board of Directors declared a 10% stock dividend
paid on May 27, 1998.
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
June 30,
-----------------------------
1998 1997
-----------------------------
Net income $1,557,000 $1,217,000
Other comprehensive income 73,000 (339,000)
-----------------------------
Total comprehensive income $1,630,000 $868,000
-----------------------------
-----------------------------
-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, 1998 was $1,557,000
compared to $1,217,000 during the same period in 1997, representing an
increase of 28%. Net income for the six months ended June 30, 1998 was
$3,113,000 compared to $2,383,000 for the prior year period. The increase
in net income during 1998 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.
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 and six months ended June 30, 1998 and 1997.
-5-
Table I Components of Net Interest Income
Three months ended June 30, 1998 1997
-------------------------------- --------------------------------
Average Average Average Average
(Dollars in thousands) Balance Interest Rate(4) Balance Interest Rate(4)
---------- -------- ------- ---------- -------- -------
Assets:
Loans (2) (3) $ 149,721 $ 4,223 11.3% $ 123,245 $ 3,505 11.4%
Investment securities:
Taxable 75,207 1,226 6.5% 65,852 1,111 6.8%
Nontaxable (1) 14,655 283 7.7% 5,911 126 8.5%
Federal funds sold 19,418 253 5.2% 26,875 372 5.5%
--------- ------- --------- -------
Total earning assets 259,001 5,985 9.2% 221,883 5,114 9.2%
Cash and due from banks 18,131 16,542
Allowance for credit losses (3,682) (3,436)
Unearned income (2,685) (1,802)
Bank premises and equipment, net 2,153 2,097
Other assets 9,620 7,754
--------- ---------
Total assets $ 282,538 $ 243,038
--------- ---------
--------- ---------
Interest-bearing liabilities:
Deposits:
Demand $ 80,325 398 2.0% $ 74,737 374 2.0%
Savings 27,673 218 3.2% 33,036 284 3.4%
Time 54,740 696 5.1% 29,502 378 5.1%
--------- ------- --------- -------
Total deposits 162,738 1,312 3.2% 137,275 1,036 3.0%
Borrowed funds 25,112 317 5.1% 25,207 340 5.4%
--------- ------- --------- -------
Total interest-bearing liabilities 187,850 1,629 3.5% 162,482 1,376 3.4%
Demand deposits 63,468 54,451
Other liabilities 2,832 1,931
Stockholders' equity 28,388 24,175
--------- ---------
Total liabilities and stockholders' equity $ 282,538 $ 243,039
--------- ---------
--------- ---------
Net interest income and margin $ 4,356 6.7% $ 3,738 6.7%
-------- ----- ------- -----
-------- ----- ------- -----
(1) Tax exempt income includes $96,000 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 $352,000 and $270,000 are included in loan interest
income for the three months ended June 30, 1998 and 1997, respectively.
(3) Average nonaccrual loans totaling $373,000 and $103,000 are included in
average loans for the three months ended June 30, 1998 and 1997,
respectively.
(4) Annualized
-6-
Table I Components of Net Interest Income
Six months ended June 30, 1998 1997
-------------------------------- --------------------------------
Average Average Average Average
(Dollars in thousands) Balance Interest Rate(4) Balance Interest Rate(4)
---------- -------- ------- ---------- -------- -------
Assets:
Loans (2) (3) $ 150,201 $ 8,370 11.2% $ 122,784 $ 6,852 11.2%
Investment securities:
Taxable 74,282 2,451 6.6% 65,030 2,196 6.8%
Nontaxable (1) 12,665 503 7.9% 5,915 251 8.5%
Federal funds sold 13,625 353 5.2% 25,372 676 5.3%
--------- ------- --------- -------
Total earning assets 250,773 11,677 9.3% 219,101 9,975 9.1%
Cash and due from banks 17,761 15,596
Allowance for credit losses (3,662) (3,344)
Unearned income (2,548) (1,772)
Bank premises and equipment, net 2,114 2,133
Other assets 8,951 7,487
--------- ---------
Total assets $ 273,389 $ 239,201
--------- ---------
--------- ---------
Interest-bearing liabilities:
Deposits:
Demand $ 79,059 788 2.0% $ 74,698 737 2.0%
Savings 27,351 431 3.2% 32,447 528 3.3%
Time 47,690 1,227 5.2% 28,326 716 5.1%
--------- ------- --------- -------
Total deposits 154,100 2,446 3.1% 135,471 1,981 2.9%
Borrowed funds 27,804 732 5.3% 25,473 670 5.3%
--------- ------- --------- -------
Total interest-bearing liabilities 181,904 3,178 3.5% 160,944 2,651 3.3%
Demand deposits 60,394 52,491
Other liabilities 2,708 1,880
Stockholders' equity 28,383 23,886
--------- ---------
Total liabilities and stockholders' equity $ 273,389 $ 239,201
--------- ---------
--------- ---------
Net interest income and margin $ 8,499 6.8% $ 7,324 6.7%
-------- ----- ------- -----
-------- ----- ------- -----
(1) Tax exempt income includes $171,000 and $85,000 in 1998 and 1997,
respectively, to adjust to a fully taxable equivalent basis using the federal
statutory rate of 34%.
(2) Loan fees totaling $669,000 and $513,000 are included in loan interest
income for the six months ended June 30, 1998 and 1997, respectively.
(3) Average nonaccrual loans totaling $322,000 and $122,000 are included in
average loans for the six months ended June 30, 1998 and 1997,
respectively.
(4) Annualized
-7-
For the three months ended June 30, 1998, net interest income, on a
fully taxable-equivalent basis, was $4,356,000 or 6.7% of average
earning assets, an increase of 16% over $3,738,000 or 6.7% of average
earning assets in the comparable period in 1997. For the six months ended
June 30, 1998, net interest income, on a fully taxable-equivalent basis,
was $8,499,000 or 6.8% of average earning assets, an increase of 16% over
$7,324,000 or 6.7% 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 $5,985,000 and
$5,114,000 for the three months and $11,677,000 and $9,975,000 for the six
months ended June 30, 1998 and 1997, respectively. The increase in 1998
resulted from the growth in average earning assets. Loan yields averaged
11.3% and 11.4% for the three months ended June 30, 1998 and 1997,
respectively, and 11.2% for the first six months of both 1998 and 1997.
Approximately 89% of the Bank's loans have variable interest rates indexed
to the prime rate. The Bank's average prime rate was 8.50% for each of the
three month periods ended June 30, 1998 and 1997, and 8.50% and 8.38% for
the six months ended June 30, 1998 and 1997, respectively. Average earning
assets were $259,001,000 and $250,773,000 for the three and six months of
1998 compared to $221,883,000 and $219,101,000 for the same periods in 1997.
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 3.4% for the three
month periods ended June 30, 1998 and 1997, respectively, and 3.5% and 3.3%
for the six months ended June 30, 1998 and 1997, respectively.
-8-
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,
-------------------------------
1998 1997
---------- ----------
Gain on sale of loans 628 233
Customer service fees $ 413 $ 479
Loan servicing fees 248 265
Gains on securities transactions 26 -
Other 183 146
---------- ----------
Total noninterest income $1,498 $1,123
---------- ----------
---------- ----------
Six months ended June 30,
-------------------------------
1998 1997
---------- ----------
Customer service fees $ 908 $ 956
Gain on sale of loans 1,296 652
Loan servicing fees 495 522
Gains on securities transactions 11 -
Other 355 313
---------- ----------
Total noninterest income $3,065 $2,443
---------- ----------
---------- ----------
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. The decrease in customer service fees in 1998
relates primarily to lower levels of transactions such as returned items. Loan
servicing fees declined due to the amortization of increased servicing assets
resulting from the loan sales. Other noninterest income increased consistent
with the growth of deposits.
-9-
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,
-------------------------------------
1998 1997
----------------- ------------------
Salaries and benefits $1,561 2.41% $1,363 2.46%
Occupancy 291 0.45% 235 0.42%
Equipment 267 0.41% 285 0.51%
Stationery and postage 96 0.15% 79 0.14%
Insurance 56 0.09% 38 0.07%
Legal fees 27 0.04 23 0.04%
Other 706 1.09% 679 1.23%
----------------- -----------------
Total noninterest expenses $3,004 4.64% $2,702 4.87%
----------------- -----------------
----------------- -----------------
Six months ended June 30,
-------------------------------------
1998 1997
----------------- ------------------
Salaries and benefits $3,100 2.47% $2,787 2.54%
Occupancy 562 0.45% 473 0.43%
Equipment 552 0.44% 548 0.50%
Stationery and postage 193 0.15% 184 0.17%
Insurance 115 0.09% 87 0.08%
Legal fees 46 0.04 45 0.04%
Other 1,353 1.09% 1,244 1.14%
----------------- -----------------
Total noninterest expenses $5,921 4.72% $5,368 4.90%
----------------- -----------------
----------------- -----------------
The increases in 1998 were primarily related to higher staff costs and increases
in other noninterest expenses. The increase in noninterest expenses reflects
the additional leased space for the customer service/data processing center and
planned new branch as well as 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 41.9% and 41.5% for the three and six
months ended June 30, 1998 compared to 40.3% and 40.6% for the comparable
periods 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 $285.7 million at June 30, 1998, a 9% increase from
the end of 1997. Based on average balances, second quarter 1998 average total
assets of $282.5 million represent an increase of 16% over the second quarter
1997 while six month 1998 average total assets of $273.4 million represent an
increase of 14% over six months 1997.
-10-
EARNING ASSETS
LOANS
Total gross loans at June 30, 1998 were $146.2 million, a 0.1% decrease from
$146.4 million at December 31, 1997. Average loans in the three and six months
of 1998 were $149,721,000 and $150,201,000 representing increases of 21% and
22% over the comparable period in 1997. At June 30, 1998 loans available for
sale were $15,429,000 compared to $12,365,000 at December 31, 1997 and
$7,737,000 at June 30, 1997. The 1998 increases in average total loans and loans
available for sale reflected growth in real estate loans, particularly SBA
guaranteed commercial real estate loans and residential mortgage loans, which in
the opinion of the Company is due to improved local economic conditions and the
level of interest rates. The origination of loans available for sale is
significantly affected by the level of interest rates and general economic
conditions. There can be no assurance the Company will maintain current
origination levels in its SBA and residential mortgage lending operations as
interest rates or economic conditions change.
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, 1998 nonaccrual loans
totaled $49,000 or .03% 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 June 30, 1998.
Table 4 Nonperforming Assets
(dollars in thousands)
June 30,
1998
-------
Nonperforming assets:
Accruing loans past due 90 days or more $ -
Nonaccrual loans 49
------
Total nonperforming loans 49
OREO 268
------
Total nonperforming assets $ 317
------
------
Nonperforming loans as a percent of total loans 0.03%
OREO as a percent of total assets 0.09%
Nonperforming assets as a percent of total assets 0.11%
Allowance for credit losses $3,686
As a percent of total loans 2.52%
As a percent of nonaccrual loans 7522%
As a percent of nonperforming loans 7522%
-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)
Six months ended
June 30, 1998
-------------
Total loans outstanding $ 146,245
Average total loans 150,201
Balance, January 1 $ 3,609
Charge-offs by loan category:
Commercial 78
Installment and other 29
Real estate construction -
Real estate-other -
---------
Total charge-offs 107
Recoveries by loan category:
Commercial 15
Installment and other 19
Real estate construction -
Real estate-other -
---------
Total recoveries 34
Net chargeoffs 73
Provision charged to expense 150
---------
Balance, June 30 $3,686
---------
---------
Ratios:
Net chargeoffs to average loans 0.04%
Reserve to total loans 2.52%
-12-
OTHER INTEREST-EARNING ASSETS
For the three and six months ended June 30, 1998, the average balance of
investment securities and federal funds sold totaled $109,280,000 and
$100,572,000, up from $98,638,000 and $96,317,000 for the same periods in 1997.
The 1998 increases resulted from deploying additional liquidity in federal funds
sold 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.
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 $27,049,000 from year-end or 13% to $228,446,000 as of June
30, 1998. Average total deposits in the three and six months of 1998 of
$226,206,000 and $214,494,000 increased from $191,726,000 and $187,962,000 in
the same periods 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
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, 1998, this ratio was
24.6%. Other key liquidity ratios are the ratios of loans to deposits and
federal funds sold to deposits, which were 64.1% and 11.0%, respectively, as of
June 30, 1998.
-13-
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 analysis for the Company at June 30, 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 June 30, 1998 Immediately three months within one year five years five years Total
- ---------------------------------------------------------------------------------------------------------------------------------
Rate sensitive assets:
Federal funds sold $ 25,000 $ - $ - $ - $ - $ 25,000
Investment securities:
Treasury and agency obligations - 1,700 2,900 3,531 - 8,131
Mortgage-backed securities - 2,291 6,274 23,695 20,643 52,903
Municipal securities - 220 842 2,778 11,216 15,056
Other - - - 11 13,466 13,477
- ---------------------------------------------------------------------------------------------------------------------------------
Total investment securities - 4,211 10,016 30,015 45,325 89,567
Loans excluding nonaccrual loans 129,958 1,152 1,228 3,578 10,280 146,196
- ---------------------------------------------------------------------------------------------------------------------------------
Total rate sensitive assets $ 154,958 $ 5,363 $ 11,244 $ 33,593 $ 55,605 $ 260,763
- ---------------------------------------------------------------------------------------------------------------------------------
Rate sensitive liabilities:
Deposits:
Money market, NOW, and savings $ 108,079 $ - $ - $ - $ - $ 108,079
Time certificates - 37,223 14,531 1,829 - 53,583
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 108,079 37,223 14,531 1,829 - 161,662
Borrowings - 15,500 - 10,000 - 25,500
- ---------------------------------------------------------------------------------------------------------------------------------
Total rate sensitive liabilities $ 108,079 $ 52,723 $ 14,531 11,829 - $ 187,162
- ---------------------------------------------------------------------------------------------------------------------------------
Gap $ 46,879 $ (47,360) $ (3,287) $ 21,764 $ 55,605 $ 73,601
Cumulative gap $ 46,879 $ ( 481) $ (3,768) $ 17,996 $ 73,601
-14-
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, 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
paid 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 June 30, 1998, 27,600 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, 1998, and
December 31, 1997. Capital ratios for the Company are set forth in Table 7:
Table 7 Capital Ratios
June 30, December 31,
1998 1997
------------ ------------
Total risk-based capital ratio 16.3% 16.4%
Tier 1 risk-based capital ratio 15.0% 15.2%
Tier 1 leverage ratio 10.0% 9.8%
Capital ratios for the Bank at June 30, 1998 and December 31, 1997 were 15.3%
and 15.1% total risk-based capital, 14.0% and 13.9% Tier 1 risk-based capital
ratio and 9.3% and 9.3% Tier 1 leverage ratio.
-15-
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 readiness 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 ready for the year 2000 and plan for appropriate modifications.
The vendor supplying the Company's core transaction processing software has
provided evidence of year 2000 readiness. Efforts continue to ascertain the year
2000 readiness of various systems which integrate information into the core
processing software. Among the major actions remaining is the testing of the
core processing software and other systems. In addition to modifying existing
systems, the Company may also replace certain equipment and software to ensure
year 2000 compliance. During the third quarter of 1998 management plans to
replace six existing automated teller machines with new machines at a cost of
approximately $280,000 due in part to year 2000 issues with the existing
equipment. Amounts expensed in the first six months 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, results
of operations or cash flows.
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 19, 1998. The purpose of
the meeting was to 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, 1998. The following directors were elected based upon the
votes cast as indicated:
Director Votes "for" Votes "against" Votes "withheld"
Richard Alderson 1,889,189 0 3,149
Douglas D. Austin 1,883,378 0 8,960
John C. Burroughs 1,889,189 0 3,149
Bud W. Cummings 1,889,189 0 3,149
Ronald M. Israel, M.D. 1,889,189 0 3,149
Malcolm D. Moore 1,889,189 0 3,149
Harvey J. Nickelson 1,889,189 0 3,149
Gus J.F. Norton 1,889,189 0 3,149
James C. Thompson 1,889,189 0 3,149
The appointment of Deloitte & Touche LLP as the Company's auditors for the year
ending December 31, 1998 was ratified with 1,886,796 votes for ratification,
5,000 votes against, and 542 votes withheld.
Item 5. Other Information
On July 22, 1998, the Coast Bancorp Board of Directors declared a cash
dividend of fourteen cents ($0.14) per share, payable August 26, 1998, to
shareholders of record on August 6, 1998.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
Exhibit Number
27 Financial Data Schedule
b. Reports on Form 8-K
Not applicable
-16-
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 7, 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)
-17-