<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 September 30, 1997
------------------------------------------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
----------------------- -----------------------
Commission File Number: 0-28938
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Coast Bancorp
- -------------------------------------------------------------------------------
(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 September 30, 1997: 2,203,659
---------
<PAGE>
COAST BANCORP
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1997
TABLE OF CONTENTS
PART I
Page
Item 1. Financial Statements 1
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 5
PART II
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
<PAGE>
PART I
Item 1. Financial Statements
COAST BANCORP
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
--------------- -----------
ASSETS (unaudited)
<S> <C> <C>
Cash and due from banks $ 18,802,000 $ 22,492,000
Federal funds sold 23,000,000 15,500,000
------------ ------------
Total cash and equivalents 41,802,000 37,992,000
Securities:
Available-for-sale, at fair value 75,321,000 65,486,000
Held-to-maturity, at amortized cost
(fair value - 1997 $5,906,000, 1996 $6,021,000) 5,746,000 5,914,000
Loans:
Commercial 36,961,000 35,633,000
Real estate - construction 18,742,000 15,112,000
Real estate - term 70,282,000 65,208,000
Installment and other 6,081,000 7,768,000
------------ ------------
Total loans 132,066,000 123,721,000
Unearned income (1,976,000) (1,742,000)
Allowance for credit losses (3,563,000) (3,158,000)
------------ ------------
Net loans 126,527,000 118,821,000
Bank premises and equipment, net 1,865,000 2,131,000
Other real estate owned 112,000 551,000
Accrued interest receivable and other assets 5,953,000 6,020,000
------------ ------------
TOTAL ASSETS $257,326,000 $236,915,000
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Noninterest-bearing demand $ 56,673,000 $ 56,699,000
Interest-bearing demand 79,239,000 69,305,000
Savings 27,928,000 32,296,000
Time 34,337,000 27,167,000
------------ ------------
Total deposits 198,177,000 185,467,000
Securities sold under agreements to repurchase 28,850,000 24,608,000
Accrued expenses and other liabilities 4,058,000 3,647,000
--------------- --------------
Total liabilities 231,085,000 213,722,000
STOCKHOLDERS' EQUITY:
Preferred stock - no par value;
10,000,000 shares authorized; no shares issued - -
Common stock - no par value; 20,000,000 shares authorized;
shares outstanding: 2,203,659 in 1997 and 2,209,659 in 1996 11,011,000 11,041,000
Retained earnings 14,866,000 12,022,000
Net unrealized gain on securities available-for-sale 364,000 130,000
------------ ------------
Total stockholders' equity 26,241,000 23,193,000
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $257,326,000 $236,915,000
------------ ------------
------------ ------------
</TABLE>
See notes to unaudited consolidated financial statements
-1-
<PAGE>
COAST BANCORP
CONSOLIDATED INCOME STATEMENTS
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
---------------------------- --------------------------
1997 1996 1997 1996
------------ ----------- ----------- ----------
<S> <C> <C> <C> <C>>
Interest Income:
Loans, including fees $ 3,693,000 $ 3,166,000 $10,496,000 $ 9,474,000
Federal funds sold 304,000 281,000 980,000 576,000
Securities:
Taxable 1,201,000 1,019,000 3,397,000 3,112,000
Nontaxable 82,000 84,000 248,000 253,000
----------- ----------- ----------- -----------
Total interest income 5,280,000 4,550,000 15,121,000 13,415,000
Interest expense:
Deposits 1,060,000 870,000 3,043,000 2,525,000
Other borrowings 371,000 360,000 1,041,000 1,015,000
----------- ----------- ----------- -----------
Total interest expense 1,431,000 1,230,000 4,084,000 3,540,000
----------- ----------- ----------- -----------
Net interest income 3,849,000 3,320,000 11,037,000 9,875,000
Provision for credit losses 75,000 225,000 375,000 675,000
----------- ----------- ----------- -----------
Net interest income after provision for credit losses 3,774,000 3,095,000 10,662,000 9,200,000
Noninterest income:
Customer service fees 463,000 457,000 1,407,000 1,313,000
Gain on sale of loans 285,000 405,000 998,000 1,174,000
Loan servicing fees 270,000 251,000 792,000 706,000
Gains (losses) on sales of securities (10,000) - (10,000) 66,000
Other 178,000 144,000 491,000 405,000
----------- ----------- ----------- -----------
Total noninterest income 1,186,000 1,257,000 3,678,000 3,664,000
Noninterest expenses:
Salaries and benefits 1,381,000 1,292,000 4,168,000 3,910,000
Equipment 319,000 291,000 867,000 857,000
Occupancy 252,000 237,000 726,000 687,000
Insurance 60,000 38,000 148,000 91,000
Stationery and postage 84,000 94,000 267,000 297,000
Legal fees 23,000 30,000 68,000 45,000
Other 637,000 672,000 1,880,000 1,857,000
----------- ----------- ----------- -----------
Total noninterest expenses 2,756,000 2,654,000 8,124,000 7,744,000
----------- ----------- ----------- -----------
Income before income taxes 2,204,000 1,698,000 6,216,000 5,120,000
Provision for income taxes 879,000 679,000 2,508,000 2,033,000
----------- ----------- ----------- -----------
Net income $ 1,325,000 $ 1,019,000 $ 3,708,000 $ 3,087,000
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
NET INCOME PER COMMON AND EQUIVALENT SHARE $ .59 $ .46 $ 1.65 $ 1.38
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
See notes to unaudited consolidated financial statements
-2-
<PAGE>
COAST BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1997 1996
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATIONS:
Net income $ 3,708,000 $ 3,087,000
Adjustments to reconcile net income to net cash provided by
operations:
Provision for credit losses 375,000 675,000
Depreciation and amortization 112,000 16,000
Losses (gains) on securities transactions (10,000) (66,000)
Deferred income taxes (306,000) (514,000)
Proceeds from loan sales 34,710,000 34,942,000
Origination of loans held for sale (39,369,000) (34,911,000)
Accrued interest receivable and other assets 616,000 (479,000)
Accrued expenses and other liabilities 411,000 (36,000)
Increase in unearned income 998,000 850,000
Other - net 30,000 --
------------- -------------
Net cash provided by operations 1,275,000 3,564,000
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of securities 12,027,000 14,468,000
Purchases of securities available-for-sale (27,064,000) (16,348,000)
Proceeds from sales of securities available-for-sale 5,552,000 4,846,000
Net increase in loans (3,656,000) (12,496,000)
Purchases of bank premises and equipment (382,000) (245,000)
------------- -------------
Net cash used in investing activities (13,523,000) (9,775,000)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from securities sold under
agreements to repurchase 4,242,000 4,525,000
Net increase in deposits 12,710,000 17,041,000
Payment of cash dividends (764,000) (668,000)
Repurchase of common stock (130,000) (690,000)
------------- -------------
Net cash provided by financing activities 16,058,000 20,208,000
------------- -------------
Net increase in cash and cash equivalents 3,810,000 13,997,000
------------- -------------
Cash and equivalents, beginning of period 37,992,000 25,956,000
------------- -------------
Cash and equivalents, end of period $ 41,802,000 $ 39,953,000
------------- -------------
------------- -------------
OTHER CASH FLOW INFORMATION - CASH PAID DURING THE PERIOD FOR:
Interest $ 3,945,000 $ 4,403,000
Income taxes 1,586,000 2,710,000
NON-CASH INVESTING AND FINANCING TRANSACTIONS:
Additions to other real estate owned $ - $ 98,000
</TABLE>
See notes to unaudited consolidated financial statements
-3-
<PAGE>
COAST BANCORP
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1997 and 1996
- -------------------------------------------------------------------------------
1. BASIS OF PRESENTATION - These financial statements reflect, in
management's opinion, all adjustments, consisting of adjustments of a
normal recurring nature, which are necessary for a fair presentation of
Coast Bancorp's financial position and results of operations and cash
flows for the periods presented. The results of interim periods are not
necessarily indicative of results of operations expected for athe full
year. These financial statements should be read in conjuction with the
audited financial statements for 1996 included in the Company's Form
10-K.
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 nine month periods
ended September 30, 1997 and 1996 was 2,253,016 and 2,232,336,
respectively, and for the three month periods ended September 30, 1997
and 1996 was 2,252,841 and 2,223,068, respectively.
3. NEW ACCOUNTING PRONOUNCEMENTS - In February 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No.
128, "Earnings per Share" (SFAS 128). The Company is required to adopt
SFAS 128 in the fourth quarter of 1997 and will restate at that time
earnings per share (EPS) data for prior periods to conform with SFAS
128. Earlier application is not permitted.
SFAS 128 replaces current EPS reporting requirements and requires a dual
presentation of basic and diluted EPS. Basic EPS excludes dilution and
is computed by dividing net income by the weighted average of common
shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock.
If SFAS 128 had been in effect during the current and prior year periods,
basic EPS and diluted EPS under SFAS 128 would not have been significantly
different than EPS currently reported for the three months ended
September 30, 1997 and 1996. For the nine months ended September 30, 1997
and 1996, basic EPS would have been $1.68 and $1.40, respectively, while
diluted EPS under SFAS 128 would not have been significantly different than
EPS currently reported.
In June 1997, the Financial Accounting Standards Board issued SFAS No.
130 "Reporting Comprehensive Income," which requires that an enterprise
rport, by major components and as a single total, the change in its net
assets during the period from nonowner sources; and SFAS No. 131
"Disclosures about Segments of an Enterprise and Related Information,"
which establishes annual and interim reporting standards for an
enterprise's business segments and related disclosures about its
products, geographic areas, and major customers. Adoption of these
statements will not impact the Company's financial position, results of
operations or cash flows. Both statements are effective for fiscal
years beginning after December 15, 1997, with earlier application
permitted.
-4-
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Net income for the three months ended September 30, 1997 was $1,325,000
compared to $1,019,000 during the same period in 1996, representing an
increase of 30%. Net income for the nine months ended September 30, 1997 was
$3,708,000 compared to $3,087,000 for the prior year period, a 20% increase.
The increase in net income during 1997 was primarily due to an increase in
net interest income and a decrease in the provision for credit losses
partially offset by an increase in noninterest expenses and a related
increase in income tax expense.
EARNINGS SUMMARY
NET INTEREST INCOME
Net interest income refers to the difference between interest and fees earned
on loans and investments and the interest paid on deposits and other borrowed
funds. It is the largest component of the net earnings of a financial
institution. The primary factors to consider in analyzing net interest
income are the composition and volume of earning assets and interest-bearing
liabilities, the amount of noninterest bearing liabilities and nonaccrual
loans, and changes in market interest rates.
-5-
Table I sets forth average balance sheet information, interest income and
expense, average yields and rates, and net interest income and net interest
margin for the three months and nine months ended September 30, 1997 and 1996.
Table I Components of Net Interest Income
<PAGE>
<TABLE>
<CAPTION>
Three months ended September 30, 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) $ 131,333 $ 3,694 11.3% $ 119,092 $ 3,166 10.6%
Investment securities:
Taxable 71,003 1,201 6.8% 57,764 1,019 7.0%
Nontaxable (1) 5,905 124 8.4% 5,993 127 8.4%
Federal funds sold 22,135 304 5.5% 21,464 281 5.2%
--------- ------- --------- -------
Total earning assets 230,376 5,323 9.2% 204,313 4,593 8.9%
Cash and due from banks 17,568 14,121
Allowance for credit losses (3,521) (3,035)
Unearned income (1,853) (1,676)
Bank premises and equipment, net 2,004 2,144
Other assets 6,871 6,285
--------- ---------
Total assets $ 251,445 $ 222,152
--------- ---------
--------- ---------
Interest-bearing liabilities:
Deposits:
Demand $ 77,782 408 2.1% $ 69,007 346 2.0%
Savings 27,726 219 3.2% 29,009 223 3.1%
Time 32,379 433 5.4% 23,984 301 5.0%
--------- ------- --------- -------
Total deposits 137,887 1,060 3.1% 122,000 870 2.8%
Borrowed funds 25,753 371 5.8% 24,518 360 5.8%
--------- ------- --------- -------
Total interest-bearing liabilities 163,640 1,431 3.5% 146,518 1,230 3.3%
Demand deposits 58,250 51,353
Other liabilities 3,743 2,353
Stockholders' equity 25,812 21,928
<PAGE>
--------- ---------
Total liabilities and stockholders' equity $ 251,445 $ 222,152
--------- ---------
--------- ---------
Net interest income and margin $ 3,892 6.8% $ 3,363 6.6%
-------- ----- ------- -----
-------- ----- ------- -----
</TABLE>
<PAGE>
(1) Tax exempt income includes $42,000 and $43,000 in 1997 and 1996,
respectively, to adjust to a fully taxable equivalent basis using the federal
statutory rate of 34%.
(2) Loan fees totaling $294,000 and $166,000 are included in loan interest
income for the three months ended September 30, 1997 and 1996, respectively.
(3) Average nonaccrual loans totaling $280,000 and $481,000 are included in
average loans for the three months ended September 30, 1997 and 1996,
respectively.
(4) Annualized
<PAGE>
<TABLE>
<CAPTION>
Nine months ended September 30, 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) $ 125,665 $10,496 11.1% $ 114,572 $ 9,474 11.0%
Investment securities:
Taxable 67,043 3,397 6.8% 61,179 3,112 6.8%
Nontaxable (1) 5,912 376 8.5% 6,062 383 8.4%
Federal funds sold 24,281 980 5.4% 14,601 576 5.3%
--------- ------- --------- -------
Total earning assets 222,901 15,249 9.1% 196,414 13,545 9.2%
Cash and due from banks 16,260 13,431
Allowance for credit losses (3,404) (2,806)
Unearned income (1,799) (1,642)
Bank premises and equipment, net 2,089 2,231
Other assets 6,992 6,198
--------- ---------
Total assets $ 243,039 $ 213,826
--------- ---------
--------- ---------
Interest-bearing liabilities:
Deposits:
Demand $ 75,737 1,145 2.0% $ 71,632 1,034 1.9%
Savings 30,856 747 3.2% 26,586 590 3.0%
Time 29,692 1,151 5.2% 23,335 901 5.2%
--------- ------- --------- -------
Total deposits 136,285 3,043 3.0% 121,553 2,525 2.8%
Borrowed funds 24,748 1,041 5.6% 23,197 1,015 5.8%
--------- ------- --------- -------
Total interest-bearing liabilities 161,033 4,084 3.4% 144,750 3,540 3.3%
Demand deposits 53,899 45,851
Other liabilities 3,573 1,798
Stockholders' equity 24,534 21,427
--------- ---------
Total liabilities and stockholders' equity $ 243,039 $ 213,826
--------- ---------
--------- ---------
Net interest income and margin $ 11,165 6.7% $10,005 6.8%
-------- ----- ------- -----
-------- ----- ------- -----
</TABLE>
<PAGE>
(1) Tax exempt income includes $128,000 and $130,000 in 1997 and 1996,
respectively, to adjust to a fully taxable equivalent basis using the federal
statutory rate of 34%.
(2) Loan fees totaling $808,000 and $712,000 are included in loan interest
income for the nine months ended September 30, 1997 and 1996, respectively.
(3) Average nonaccrual loans totaling $220,000 and $575,000 are included in
average loans for the nine months ended September 30, 1997 and 1996,
respectively.
(4) Annualized
-6-
<PAGE>
For the three months ended September 30, 1997, net interest income, on a
fully taxable-equivalent basis, was $3,892,000 or 6.8% of average
earning assets, an increase of 16% over $3,363,000 or 6.6% of average
earning assets in the comparable period in 1996. For the nine months
ended September 30, 1997, net interest income, on a fully
taxable-equivalent basis, was $11,165,000 or 6.7% of average earnings
assets, an increase of 12% over $10,005,000 or 6.8% in the comparable
period in 1996. The increase in 1997 reflects higher levels of earning
assets.
Interest income, on a fully taxable-equivalent basis, was $5,323,000 and
$4,591,000 for the three months and $15,249,000 and $13,545,000 for the
nine months ended September 30, 1997 and 1996, respectively. The
increase in 1997 resulted from the growth in average earning assets.
Loan yields averaged 11.3% and 10.6% for the three months ended
September 30, 1997 and 1996, respectively, and 11.1% and 11.0% for the
first nine months of 1997 and 1996, respectively, and generally reflect
the stability of interest rates since the first quarter of 1996 and the
25 basis point increase in the prime rate in March 1997. Approximately
90% 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 September 30, 1997 and 1996, respectively, and
8.42% and 8.28% for the nine months ended September 30, 1997 and 1996,
respectively. Average earning assets were $230,376,000 and $222,901,000
for the three and nine months of 1997 compared to $204,192,000 and
$196,414,000 in the same periods in 1996. The growth in average earning
assets resulted from increased levels of deposits which were invested
primarily in federal funds sold and loans.
The increase in interest income during 1997 on a fully
taxable-equivalent basis, was partially offset by an increase in
interest expense. The average rate paid on interest bearing deposits
was 3.1% and 2.8% in for the three month periods ended September 30,
1997 and 1996, respectively, and 3.0% and 2.8% for the nine month
periods ended September 30, 1997 and 1996, respectively.
-7-
<PAGE>
NONINTEREST INCOME
Table 2 summarizes the sources of noninterest income for
the periods indicated:
Table 2 - Noninterest Income
(Dollars in thousands)
Three months ended September 30,
-------------------------------
1997 1996
---------- ----------
Customer service fees $ 463 $ 457
Gain on sale of loans 285 405
Loan servicing fees 270 251
Losses on securities transactions (10) -
Other 178 144
---------- ----------
Total noninterest income $1,186 $1,257
---------- ----------
---------- ----------
Nine months ended September 30,
-------------------------------
1997 1996
---------- ----------
Customer service fees $1,407 $1,313
Gain on sale of loans 998 1,174
Loan servicing fees 792 706
Gains (losses) on securities
transactions (10) 66
Other 491 405
---------- ----------
Total noninterest income $3,678 $3,664
---------- ----------
---------- ----------
The increase in customer service fees in 1997 relates primarily to higher
levels of returned item fees. Gains on sale of loans decreased as a result
of a lower volume of SBA loans sold during 1997. The Company sells SBA loans
and FHLMC conforming mortgage loans with SBA loan sales providing the primary
source of gains on sale. Loan servicing fees and other noninterest income
increased consistent with the growth of deposits and loans serviced for
others.
-8-
<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 September 30,
-------------------------------------
1997 1996
----------------- ------------------
Salaries and benefits $1,381 2.40% $1,292 2.53%
Equipment 319 0.55% 291 0.57%
Occupancy 252 0.44% 237 0.46%
Insurance 60 0.10% 38 0.07%
Stationery and postage 84 0.15% 94 0.18%
Legal fees 23 0.04% 30 0.06%
Other 637 1.11% 672 1.32%
----------------- -----------------
Total noninterest expenses $2,756 4.79% $2,654 5.19%
----------------- -----------------
----------------- -----------------
Nine months ended September 30,
-------------------------------------
1997 1996
----------------- ------------------
Salaries and benefits $4,168 2.49% $3,910 2.66%
Equipment 867 0.52% 857 0.58%
Occupancy 726 0.43% 687 0.47%
Insurance 148 0.09% 91 0.06%
Stationery and postage 267 0.16% 297 0.20%
Legal fees 68 0.04% 45 0.03%
Other 1,880 1.13% 1,857 1.26%
----------------- -----------------
Total noninterest expenses $8,124 4.86% $7,744 5.26%
----------------- -----------------
----------------- -----------------
The increases in 1997 were primarily related to higher staff costs and
increases in other noninterest expenses. The increase in noninterest
expenses reflects the growth in total loans, deposits and assets. The
decrease in noninterest expense as a percentage of average earning assets is
the result of the rate of growth in average earning assets in 1997 exceeding
the rate of increase in noninterest expenses.
INCOME TAXES
The Company's effective tax rate was 39.9% and 40.9% for the three and
nine months ended September 30, 1997 compared to 40.0% and 39.7% for the
comparable periods in 1996. Changes in the effective tax rate for the
Company are primarily due to fluctuations in the proportion of tax
exempt income generated from investment securities to pre-tax income.
BALANCE SHEET ANALYSIS
Total assets increased to $257.3 million at September 30, 1997, a 9%
increase from the end of 1996. Based on average balances, third quarter
1997 average total assets of $251.4 million represent an increase of 13%
over the third quarter 1996 while nine month 1997 average total assets
of $243.0 million represent an increase of 14% over nine months 1996.
-9-
<PAGE>
EARNING ASSETS
LOANS
Total gross loans at September 30, 1997 were $132.1 million, a 7% increase
from $123.7 million at December 31, 1996. Average loans in the three and
nine months of 1997 were $131,333,000 and $125,665,000 representing increases
of 10% over each of the comparable periods in 1996. The 1997 increases
primarily reflected growth in average real estate loans which in the opinion
of the Company is due to improved local economic conditions.
Risk Elements
Lending money involves an inherent risk of nonpayment. Through the
administration of loan policies and monitoring of the portfolio, management
seeks to reduce such risks. The allowance for credit losses is an estimate
to provide a financial buffer for losses, both identified and unidentified,
in the loan portfolio.
Nonaccrual Loans, Loans Past Due and OREO
The accrual of interest is discontinued and any accrued and unpaid interest
is reversed when the payment of principal or interest is 90 days past due
unless the amount is well secured and in the process of collection. Income
on such loans is then recognized only to the extent that cash is received and
where the future collection of principal is probable. At September 30, 1997
nonaccrual loans totaled $513,000 or .39% of total loans compared to $159,000
or .13% of total loans at December 31, 1996.
Table 4 presents the composition of nonperforming assets at September 30, 1997.
Table 4 Nonperforming Assets
(dollars in thousands)
September 30,
1997
-------
Nonperforming assets:
Accruing loans past due 90 days or more $ -
Nonaccrual loans 513
------
Total nonperforming loans 513
OREO 112
------
Total nonperforming assets $ 625
------
------
Nonperforming loans as a percent of total loans 0.39%
OREO as a percent of total assets 0.04%
Nonperforming assets as a percent of total assets 0.24%
Allowance for loan losses $3,563
As a percent of total loans 2.70%
As a percent of nonaccrual loans 6945%
As a percent of nonperforming loans 6945%
-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)
For the nine months ended
September 30, 1997
-------------
Total loans outstanding $ 132,066
Average total loans 125,665
Balance, January 1 $ 3,158
Charge-offs by loan category:
Commercial 68
Installment and other 38
Real estate construction -
Real estate-other -
---------
Total charge-offs 106
Recoveries by loan category:
Commercial 95
Installment and other 35
Real estate construction 6
Real estate-other -
---------
Total recoveries 136
Net recoveries 30
Provision charged to expense 375
---------
Balance, September 30 $3,563
---------
---------
Ratios:
Net recoveries to average loans 0.02%
Reserve to total loans 2.70%
-11-
<PAGE>
OTHER INTEREST-EARNING ASSETS
For the three and nine months ended September 30, 1997, the average balance
of investment securities and federal funds sold totaled $99,043,000 and
$97,236,000, up from $85,101,000 and $81,842,000 for the same periods in
1996. The 1997 increase resulted from deploying additional liquidity in
federal funds sold and investment securities. The source of the additional
liquidity was the excess of the increase in average deposits over the
increase in average loans. Management also uses borrowed funds to increase
earning assets and enhance the Company's interest rate risk profile.
FUNDING
Deposits represent the Bank's principal source of funds for investment.
Deposits are primarily core deposits in that they are demand, savings, and
time deposits under $100,000 generated from local businesses and individuals.
These sources represent relatively stable, long term deposit relationships
which minimize fluctuations in overall deposit balances. The Bank has never
used brokered deposits.
Deposits increased $12,710,000 from year-end or 7% to $198,177,000 as of
September 30, 1997. Average total deposits in the three and nine months of
1997 of $196,137,000 and $195,184,000 increased from $173,394,000 and
$167,404,000 in the same periods in 1996.
Another source of funding for the Company is borrowed funds. Typically,
these funds result from the use of agreements to sell investment securities
with a repurchase at a designated future date, also known as repurchase
agreements. Repurchase agreements are conducted with major banks and
investment brokerage firms. The maturity of these arrangements for the Bank
is typically 30 to 90 days.
LIQUIDITY AND INTEREST RATE SENSITIVITY
Liquidity management refers to the Bank's ability to provide funds on an
ongoing basis to meet fluctuations in deposit levels as well as the credit
needs and requirements of its clients. Both assets and liabilities
contribute to the Bank's liquidity position. Federal funds lines,
short-term investments and securities, and loan repayments contribute to
liquidity, along with deposit increases, while loan funding and deposit
withdrawals decrease liquidity. The Bank assesses the likelihood of
projected funding requirements by reviewing historical funding patterns,
current and forecasted economic conditions and individual client funding
needs. The Bank maintains informal lines of credit with its correspondent
banks for short-term liquidity needs. These informal lines of credit are not
committed facilities by the correspondent banks and no fees are paid by the
Bank to maintain them.
The Bank manages its liquidity by maintaining a majority of its investment
portfolio in liquid investments in addition to its federal funds sold.
Liquidity is measured by various ratios, including the liquidity ratio of net
liquid assets compared to total assets. As of September 30, 1997, this ratio
was 20.6%. Other key liquidity ratios are the ratios of loans to deposits
and federal funds sold to deposits, which were 66.6% and 11.6%, respectively,
as of September 30, 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 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 September 30, 1997. Mortgage backed securities
are reported in the period of their expected repricing based upon estimated
prepayments developed from recent experience.
Table 6 Interest Rate Sensitivity
(Dollars in thousands)
<PAGE>
<TABLE>
<CAPTION>
Next day Over three Over one
and within months and and within Over
As of September 30, 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 $ 23,000 $ - $ - $ - $ - $ 23,000
Investment securities:
Treasury and agency obligations - - 1,200 3,900 1,997 7,097
Mortgage-backed securities - 2,491 6,903 26,545 30,958 66,897
Municipal securities - 112 1,112 2,117 2,405 5,746
Other - - - - 1,327 1,327
- ---------------------------------------------------------------------------------------------------------------------------------
Total investment securities - 2,603 9,215 32,562 36,687 81,067
Loans excluding nonaccrual loans 117,892 1,673 858 4,831 6,299 131,553
- ---------------------------------------------------------------------------------------------------------------------------------
Total rate sensitive assets $ 140,892 $ 4,276 $ 10,073 $ 37,393 $ 42,986 $ 235,620
- ---------------------------------------------------------------------------------------------------------------------------------
Rate sensitive liabilities:
Deposits:
Money market, NOW, and savings $ 107,167 $ - $ - $ - - $ 107,167
Time certificates - 15,867 16,471 1,999 - 34,337
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 107,167 15,867 16,471 1,999 - 141,504
Borrowings - 28,850 - - - 28,850
- ---------------------------------------------------------------------------------------------------------------------------------
Total rate sensitive liabilities $ 107,167 $ 44,717 $ 16,471 $ 1,999 - $ 170,354
- ---------------------------------------------------------------------------------------------------------------------------------
Gap $ 33,725 $ (40,441) $ (6,398) $ 35,394 $ 42,986 $ 65,266
Cumulative gap $ 33,725 $ (6,716) $(13,114) $ 22,280 $ 65,266
</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 minor negative cumulative gap in the next day and within three months and
the over three months and within one year time periods and a positive
cumulative gap in all other time periods. The Company's experience indicates
money market deposit rates tend to lag changes in the prime rate which
immediately impact the prime-based loan portfolio. Even in the Company's
negative gap time periods, rising rates result in an increase in net interest
income. Should interest rates stabilize or decline in future periods, it is
reasonable to assume that the Company's net interest margin, as well as net
interest income, may decline correspondingly.
CAPITAL RESOURCES Management seeks to maintain adequate capital to support
anticipated asset growth and credit risks, and to ensure that the Company and
the Bank are in compliance with all regulatory capital guidelines. The
primary source of new capital for the Company has been the retention of
earnings. The Company does not have any material commitments for capital
expenditures as of September 30, 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 September 30, 1997, 6,000 shares had been purchased under the program.
The Company and the Bank are subject to capital adequacy guidelines issued by
the federal bank regulatory authorities. Under these guidelines, the minimum
total risk-based capital requirement is 10.0% of risk-weighted assets and
certain off-balance sheet items for a "well capitalized" depository
institution. At least 6.0% of the 10.0% total risk-based capital ratio must
consist of Tier 1 capital, defined as tangible common equity, and the
remainder may consist of subordinated debt, cumulative preferred stock and a
limited amount of the allowance for loan losses.
The federal regulatory authorities have established minimum capital leverage
ratio guidelines for state member banks. The ratio is determined using Tier
1 capital divided by quarterly average total assets. The guidelines require
a minimum of 5.0% for a "well capitalized" depository institution.
The Company's risk-based capital ratios were in excess of regulatory
guidelines for a "well capitalized" depository institution as of September
30, 1997, and December 31, 1996. Capital ratios for the Company are set
forth in Table 7:
Table 7 Capital Ratios
September 30, December 31,
1997 1996
------------ ------------
Total risk-based capital ratio 17.6% 16.4%
Tier 1 risk-based capital ratio 16.4% 15.2%
Tier 1 leverage ratio 10.3% 9.8%
Capital ratios for the Bank at September 30, 1997 and December 31,
1996 were 15.9% and 15.0% total risk-based capital, 14.7% and 13.8% Tier 1
risk-based capital ratio and 9.2% and 8.7% Tier 1 leverage ratio.
-14-
<PAGE>
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 July 16, 1997, the Coast Bancorp Board of Directors declared
a dividend of eleven and one-half cents ($0.115) per share, payable
August 28, 1997, to shareholders of record on August 8, 1997.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
Exhibit Number
27 Financial Data Schedule
-15-
<PAGE>
b. Reports on Form 8-K
Not applicable
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: November 11, 1997
/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)
-16-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 18,802
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 23,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 75,321
<INVESTMENTS-CARRYING> 5,746
<INVESTMENTS-MARKET> 5,906
<LOANS> 132,066
<ALLOWANCE> 3,563
<TOTAL-ASSETS> 257,326
<DEPOSITS> 198,177
<SHORT-TERM> 28,850
<LIABILITIES-OTHER> 4,058
<LONG-TERM> 0
0
0
<COMMON> 11,011
<OTHER-SE> 14,866
<TOTAL-LIABILITIES-AND-EQUITY> 257,326
<INTEREST-LOAN> 10,496
<INTEREST-INVEST> 3,645
<INTEREST-OTHER> 980
<INTEREST-TOTAL> 15,121
<INTEREST-DEPOSIT> 3,043
<INTEREST-EXPENSE> 4,084
<INTEREST-INCOME-NET> 11,037
<LOAN-LOSSES> 375
<SECURITIES-GAINS> (10)
<EXPENSE-OTHER> 8,124
<INCOME-PRETAX> 6,216
<INCOME-PRE-EXTRAORDINARY> 6,216
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,708
<EPS-PRIMARY> 1.65
<EPS-DILUTED> 1.65
<YIELD-ACTUAL> .066
<LOANS-NON> 513
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,158
<CHARGE-OFFS> 106
<RECOVERIES> 136
<ALLOWANCE-CLOSE> 3,563
<ALLOWANCE-DOMESTIC> 3,563
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
