<PAGE>
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, 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
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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
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(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), /X/ Yes / / No
and (2) has been subject to such filing requirements for the past 90 days.
/X/ Yes / / No
Number of shares of Common Stock outstanding on April 30, 1997: 2,209,659
---------
<PAGE>
COAST BANCORP
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
--------------- ---------------
ASSETS 1997 1996(1)
--------------- ---------------
(unaudited)
<S> <C> <C>
Cash and due from banks $14,036,000 $ 22,492,000
Federal funds sold 34,500,000 15,500,000
--------------- ---------------
Total cash and equivalents 48,536,000 37,992,000
Securities:
Available-for-sale, at fair value 62,437,000 65,486,000
Held-to-maturity, at amortized cost
(fair value - 1997 $6,006,000, 1996 $6,021,000) 5,911,000 5,914,000
Loans:
Commercial 34,853,000 35,633,000
Real estate - construction 13,967,000 15,112,000
Real estate - term 62,914,000 65,208,000
Installment and other 7,192,000 7,768,000
--------------- --------------
Total loans 118,926,000 123,721,000
Unearned income (1,826,000) (1,742,000)
Allowance for credit losses (3,378,000) (3,158,000)
--------------- --------------
Net loans 113,722,000 118,821,000
Bank premises and equipment - net 2,128,000 2,131,000
Other real estate owned 551,000 551,000
Accrued interest receivable and other assets 5,713,000 6,020,000
--------------- --------------
TOTAL ASSETS $238,998,000 $236,915,000
--------------- --------------
--------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Noninterest-bearing demand $51,448,000 $ 56,699,000
Interest-bearing demand 75,418,000 69,305,000
Savings 32,508,000 32,296,000
Time 27,493,000 27,167,000
--------------- --------------
Total deposits 186,867,000 185,467,000
Securities sold under agreements to repurchase 24,355,000 24,608,000
<PAGE>
Accrued expenses and other liabilities 4,011,000 3,647,000
--------------- --------------
Total liabilities 215,233,000 213,722,000
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;
2,209,659 shares outstanding in 1997 and 1996 11,041,000 11,041,000
Net unrealized gain (loss) on available-for-sale securities (209,000) 130,000
Retained earnings 12,933,000 12,022,000
--------------- --------------
Total stockholders' equity 23,765,000 23,193,000
--------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $238,998,000 $236,915,000
--------------- --------------
--------------- --------------
</TABLE>
(1) Derived from the December 31, 1996 audited balance sheet included in the
Company's 1996 Annual Report on Form 10-K.
See notes to unaudited consolidated financial statements
-1-
<PAGE>
COAST BANCORP
CONSOLIDATED INCOME STATEMENTS
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
--------------------------------
1997 1996
------------ -----------
(unaudited) (unaudited)
<S> <C> <C>
Interest income:
Loans, including fees $ 3,321,000 $3,072,000
Federal funds sold 305,000 142,000
Securities:
Taxable 1,085,000 1,085,000
Nontaxable 83,000 84,000
------------ -----------
Total interest income 4,794,000 4,383,000
Interest expense:
Deposits 947,000 829,000
Other borrowings 331,000 311,000
------------ -----------
Total interest expense 1,278,000 1,140,000
------------ -----------
Net interest income 3,516,000 3,243,000
Provision for credit losses 225,000 225,000
------------ -----------
Net interest income after provision for credit losses 3,291,000 3,018,000
Noninterest income:
Customer service fees 472,000 453,000
Gain on sale of loans 451,000 407,000
Loan servicing fees 257,000 220,000
Other 167,000 118,000
------------ -----------
Total noninterest income 1,347,000 1,198,000
Noninterest expenses:
Salaries and benefits 1,424,000 1,337,000
Equipment 262,000 287,000
Occupancy 238,000 226,000
Stationery and postage 104,000 102,000
Insurance 49,000 29,000
Legal fees 21,000 20,000
Other 568,000 530,000
<PAGE>
------------ -----------
Total noninterest expenses 2,666,000 2,531,000
------------ -----------
Income before income taxes 1,972,000 1,685,000
Provision for income taxes 806,000 666,000
------------ -----------
Net income $ 1,166,000 $1,019,000
------------ -----------
NET INCOME PER COMMON AND EQUIVALENT SHARE $ .52 $ .45
------------ -----------
------------ -----------
</TABLE>
See notes to unaudited consolidated financial statements
-2-
<PAGE>
COAST BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-------------------------------
1997 1996
------------- -------------
(unaudited) (unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATIONS:
Net income $ 1,166,000 $ 1,019,000
Adjustments to reconcile net income to net cash provided by
operations:
Provision for credit losses 225,000 225,000
Depreciation and amortization 41,000 (9,000)
Deferred income taxes (211,000) (194,000)
Proceeds from loan sales 17,373,000 14,862,000
Origination of loans held for sale (14,926,000) (16,783,000)
Accrued interest receivable and other assets 761,000 (735,000)
Accrued expenses and other liabilities 364,000 (538,000)
Increase in unearned income 329,000 244,000
----------- -----------
Net cash provided by operations 5,122,000 (1,909,000)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of securities 2,385,000 8,085,000
Purchases of securities - (10,199,000)
Net decrease (increase) in loans 2,343,000 (5,763,000)
Purchases of bank premises and equipment (198,000) (27,000)
----------- -----------
Net cash provided by (used in) investing activities 4,530,000 (7,904,000)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in securities sold under
agreements to repurchase (253,000) 4,600,000
Net increase in deposits 1,400,000 26,000
Payment of cash dividends (255,000) (228,000)
Repurchase of common stock - (651,000)
----------- -----------
Net cash provided by financing activities 892,000 3,695,000
----------- -----------
<PAGE>
Net increase (decrease) in cash and equivalents 10,544,000 (6,118,000)
----------- -----------
Cash and equivalents, beginning of period 37,992,000 25,956,000
----------- -----------
Cash and equivalents, end of period $48,536,000 $19,838,000
----------- -----------
----------- -----------
OTHER CASH FLOW INFORMATION - CASH PAID DURING THE PERIOD FOR:
Interest $ 1,241,000 $ 4,195,000
Income taxes 275,000 637,000
NON-CASH INVESTING AND FINANCING TRANSACTIONS:
Additions to other real estate owned - 66,000
</TABLE>
See notes to unaudited consolidated financial statements
-3-
<PAGE>
COAST BANCORP
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 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, results of operations and cash flows for the periods
presented. The results of interim periods are not necessarily indicative
of results of operations expected for a full year. These financial
statements should be read in conjunction with the audited financial
statements for 1996 included in the Company's Form 10-K.
2. 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 three month periods ended March 31,
1997 and 1996 was 2,223,068 and 2,278,650, 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 would have been $.53 and $.46 for the quarters ended
March 31, 1997 and 1996, respectively. Diluted EPS under SFAS 128 would
not have been significantly different than EPS currently reported for
the periods.
-4-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
Net income for the three months ended March 31, 1997 was $1,166,000 compared
to $1,019,000 during the same period in 1996, representing an increase of
14%. The increase in net income was primarily due to increases in net
interest income and noninterest income partially offset by an increase in
noninterest expenses and a related increase in income tax expense.
EARNINGS SUMMARY
NET INTEREST INCOME
Net interest income refers to the difference between interest and fees earned
on loans and investments and the interest paid on deposits and other borrowed
funds. It is the largest component of the net earnings of a financial
institution. The primary factors to consider in analyzing net interest
income are the composition and volume of earning assets and interest-bearing
liabilities, the amount of noninterest bearing liabilities and nonaccrual
loans, and changes in market interest rates.
-5-
<PAGE>
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, 1997 and 1996.
<PAGE>
Table 1 Components of Net Interest Income
<TABLE>
<CAPTION>
Three months ended March 31, 1997 1996
-------------------------------- ----------------------------
Average Average Average Average
(Dollars in thousands) Balance Interest Rate(4) Balance Interest Rate(4)
---------- -------- ------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Loans (2) (3) $122,323 $3,321 10.9% $114,437 $3,072 10.7%
Securities:
Taxable 64,209 1,085 6.8% 66,396 1,085 6.5%
Nontaxable (1) 5,920 126 8.5% 6,097 128 8.4%
Federal funds sold 23,870 305 5.1% 9,000 142 5.5%
----------------------- ------------------
Total earning assets 216,322 4,837 8.9% 195,930 4,427 9.0%
Cash and due from banks 14,649 10,838
Allowance for credit losses (3,253) (2,682)
Unearned income (1,742) (1,613)
Bank premises and equipment, 2,169 2,231
net
Other assets 6,844 7,004
---------- --------
Total assets $234,989 $211,708
---------- --------
---------- --------
Interest-bearing liabilities:
Deposits:
Demand $ 74,659 364 2.0% $ 72,279 359 2.0%
Savings 31,858 244 3.1% 24,452 166 2.7%
Time 27,151 339 5.0% 22,742 304 5.4%
----------------------- -------------------
Total deposits 133,668 947 2.8% 119,473 829 2.8%
Borrowed funds 24,397 331 5.4% 24,600 304 5.1%
----------------------- -------------------
Total interest-bearing liabilities 158,065 1,278 3.2% 144,073 1,140 3.1%
Demand deposits 49,700 44,546
<PAGE>
Other liabilities 3,627 2,101
Stockholders' equity 23,597 20,988
----------- --------
Total liabilities and stockholders'
equity $234,989 $211,708
----------- --------
----------- --------
Net interest income and margin $3,559 6.6% $3,287 6.7%
--------------------- -----------------
--------------------- -----------------
</TABLE>
(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 $243,000 and $270,000 are included in loan interest
income for the three months ended March 31, 1997 and 1996, respectively.
(3) Average nonaccrual loans totaling $159,000 and $770,000 are included in
average loans for the three months ended March 31, 1997 and 1996,
respectively.
(4) Annualized
-6-
<PAGE>
For the three months ended March 31, 1997, net interest income, on a fully
taxable-equivalent basis, was $3,559,000 or 6.6% of average earning assets,
an increase of 8% over $3,287,000 or 6.7% of average earning assets in the
comparable period in 1996. The increase in 1997 reflects higher levels of
earning assets partially offset by lower yields on federal funds sold.
Interest income, on a fully taxable-equivalent basis, was $4,837,000 and
$4,427,000 for the three months ended March 31, 1997 and 1996,
respectively. The increase in 1997 resulted from the growth in average
earning assets. Loan yields averaged 10.9% and 10.7% for the three
months ended March 31, 1997 and 1996, respectively, and generally
reflect the stability of interest rates since the first quarter of 1996.
Approximately 91% of the Bank's loans have variable interest rates
indexed to the prime rate. The Bank's average prime rate was 8.26% and
8.35% for the first three months ended March 31, 1997 and 1996,
respectively. Average earning assets were $216,322,000 for the three
months of 1997 compared to $195,930,000 in the same period 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 increase was primarily due to increased balances in
interest-bearing deposit accounts. The average rate paid on interest
bearing deposits was 2.8% in both of the three month periods ended March
31, 1997 and 1996.
-7-
<PAGE>
NONINTEREST INCOME
Table 2 summarizes the sources of noninterest income for the periods
indicated:
Three months ended March 31,
--------------------------------
Table 2 - Noninterest Income 1997 1996
(Dollars in thousands) ---------- ----------
Customer service fees $ 472 $ 453
Gain on sale of loans 451 407
Loan servicing fees 257 220
Other 167 118
---------- ----------
Total noninterest income $1,347 $1,198
---------- ----------
---------- ----------
The increase in customer service fees in 1997 relates primarily to
higher levels of returned item fees. Gains on sale of loans increased
as a result of increased SBA loan sales during 1997. Loan servicing
fees and other noninterest income increased consistent with the growth
of deposits and loans serviced for others.
-8-
<PAGE>
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,
-------------------------------------
1997 1996
----------------- ------------------
Salaries and Benefits $1,424 2.63% $1,337 2.73%
Equipment 262 0.48% 287 0.59%
Occupancy 238 0.44% 226 0.46%
Insurance 49 0.09% 29 0.06%
Stationery and Postage 104 0.19% 102 0.21%
Legal Fees 21 0.04% 20 0.04%
Other 568 1.05% 530 1.08%
----------------- -----------------
Total Noninterest Expenses $2,666 4.93% $2,531 5.17%
----------------- -----------------
----------------- -----------------
The increases in 1997 were primarily related to higher staff costs and
increases in other noninterest expenses partially offset by a reduction in
equipment costs. 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 40.9% for the three months ended March
31, 1997 compared to 39.5% for the same period 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 $239.0 million at March 31, 1997, an .9%
increase from the end of 1996. Based on average balances, first quarter
1997 average total assets of $235.0 million represent an increase of 11%
over the first quarter 1996.
-9-
<PAGE>
EARNING ASSETS
LOANS
Total gross loans at March 31, 1997 were $118.9 million, a 4% decrease
from $123.7 million at December 31, 1996. Average loans in the three
months of 1997 were $122,323,000 representing an increase of 7% over of
the comparable period in 1996. The 1997increase 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 March 31, 1997 and
December 31, 1996 nonaccrual loans totaled $159,000 or .13% of total loans.
Table 4 presents the composition of nonperforming assets at March 31, 1997.
Table 4 Nonperforming Assets
(dollars in thousands)
March 31, 1997
--------------
Nonperforming Assets:
Loans Past Due 90 Days or More $ -
Nonaccrual Loans 159
------
Total Nonperforming Loans 159
OREO 551
------
Total Nonperforming Assets $ 710
------
------
Nonperforming loans as a Percent of Total Loans 0.13%
OREO as a Percent of Total Assets 0.23%
Nonperforming Assets as a Percent of Total Assets 0.30%
Allowance for Loan Losses $3,378
As a Percent of Total Loans 2.84%
As a Percent of Nonaccrual Loans 2125%
As a Percent of Nonperforming Loans 2125%
-10-
<PAGE>
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)
March 31, 1997
--------------
Total Loans Outstanding $118,926
Average Total Loans 122,323
Balance, January 1 $ 3,158
Charge-offs by Loan Category:
Commercial 32
Installment and other 8
Real Estate construction -
Real Estate-other -
--------
Total Charge-Offs 40
Recoveries by Loan Category:
Commercial 13
Installment and other 19
Real Estate construction 3
Real Estate-other -
--------
Total Recoveries 35
Net Charge-offs (Recoveries) 5
Provision Charged to Expense 225
--------
Balance, March 31 $ 3,378
--------
--------
Ratios:
Net Charge-offs (Recoveries) to Average Loans 0.00%
Reserve to Total Loans 2.84%
-11-
<PAGE>
OTHER INTEREST-EARNING ASSETS For the three months ended March 31, 1997,
the average balance of investment securities and federal funds sold
totaled $93,998,000, up from $81,493,000 for the same period in 1996.
The 1997 increase resulted from deploying additional liquidity in
federal funds sold. The source of the additional liquidity was the
excess of the increase in average deposits over the increase in average
loans. Management uses borrowed funds to increase earning assets and
enhance the Company's interest rate risk profile.
FUNDING
Deposits represent the Bank's principal source of funds for investment.
Deposits are primarily core deposits in that they are demand, savings, and
time deposits under $100,000 generated from local businesses and individuals.
These sources represent relatively stable, long term deposit relationships
which minimize fluctuations in overall deposit balances. The Bank has never
used brokered deposits.
Deposits increased $1,400,000 from year-end or 1% to $186,867,000 as of
March 31, 1997. Average total deposits in the first three months of
1997 of $183,368,000 increased from $164,019,000 in the same period 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 March 31, 1997, this ratio was
21.8%. Other key liquidity ratios are the ratios of loans to deposits and
federal funds sold to deposits, which were 63.6% and 18.5%, respectively, as
of March 31, 1997.
-12-
<PAGE>
INTEREST RATE SENSITIVITY
Interest rate sensitivity is a measure of the exposure of the Company's
future earnings due to changes in interest rates. If assets and liabilities
do not reprice simultaneously and in equal volumes, the potential for such
exposure exists. It is management's objective to achieve a modestly
asset-sensitive position, such that the net interest margin of the Company
increases as market interest rates rise and decreases when rates decline.
One quantitative measure of the "mismatch" between asset and liability
repricing is the interest rate sensitivity "gap" analysis. All
interest-earning assets and funding sources are classified as to their
expected repricing or maturity date, whichever is sooner. Within each time
period, the difference between asset and liability balances, or "gap," is
calculated. Positive cumulative gaps in early time periods suggest that
earnings will increase if interest rates rise. Negative gaps suggest that
earnings will decline when interest rates rise. Table 6 presents the gap
analysis for the Company at March 31, 1997. Mortgage backed securities are
reported in the period of their expected repricing based upon estimated
prepayments developed from recent experience.
<PAGE>
Table 6 Interest Rate Sensitivity
(Dollars in thousands)
<TABLE>
<CAPTION>
NEXT DAY OVER THREE OVER ONE
AND WITHIN MONTHS AND AND WITHIN OVER
AS OF MARCH 31, 1997 IMMEDIATELY THREE MONTHS WITHIN ONE YEAR FIVE YEARS FIVE YEARS TOTAL
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
RATE SENSITIVE ASSETS:
FEDERAL FUNDS SOLD $ 34,500 $ - $ - $ - $ - $ 34,500
INVESTMENT SECURITIES:
TREASURY AND AGENCY OBLIGATIONS - 3,000 1,500 1,438 - 5,938
MORTGAGE-BACKED SECURITIES - 2,428 6,110 24,687 22,345 55,570
MUNICIPAL SECURITIES - 112 634 2,336 2,830 5,912
OTHER - - - - 1,288 1,288
------------------------------------------------------------------------------
TOTAL INVESTMENT SECURITIES - 5,540 8,244 28,461 26,463 68,708
LOANS 108,315 1,641 1,467 4,102 3,401 118,926
------------------------------------------------------------------------------
TOTAL RATE SENSITIVE ASSETS $142,815 $ 7,181 $ 9,711 $32,563 $29,864 $222,134
------------------------------------------------------------------------------
RATE SENSITIVE LIABILITIES:
DEPOSITS:
MONEY MARKET, NOW, AND SAVINGS $107,926 - - - - $107,926
TIME CERTIFICATES - $ 14,034 $ 11,813 $ 1,646 - 27,493
------------------------------------------------------------------------------
TOTAL INTEREST-BEARING DEPOSITS 107,926 14,034 11,813 1,646 - 135,419
BORROWINGS - 24,355 - - - 24,355
------------------------------------------------------------------------------
TOTAL RATE SENSITIVE LIABILITIES $107,926 $ 38,389 $ 11,813 $ 1,646 - $159,774
------------------------------------------------------------------------------
GAP $ 34,889 $(31,208) $(2,102) $30,917 $29,864 $ 62,360
CUMULATIVE GAP $ 34,889 $ (3,681) $ 1,579 $32,496 $62,360
</TABLE>
-13-
<PAGE>
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 positive cumulative gap in each time period. 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,
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 March 31, 1997, no purchases had been made 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,
1997, and December 31, 1996. Capital ratios for the Company are set forth in
Table 7:
Table 7 Capital Ratios
March 31, December 31,
1997 1996
------------- ------------
Total risk-based capital ratio 17.4% 16.4%
Tier 1 risk-based capital ratio 16.2% 15.2%
Tier 1 leverage ratio 10.2% 9.8%
Capital ratios for the Bank at March 31, 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 9.0% and 8.7% Tier 1 leverage ratio.
-14-
<PAGE>
PART II. OTHER INFORMATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COAST BANCORP
---------------------------------------
(REGISTRANT)
Date: May 13, 1997
/s/ BRUCE H. KENDALL
---------------------------------------
Bruce H. Kendall
Senior Vice President
and Chief Financial Officer
(Principal Financial and Accounting
Officer)
-15-
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