<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, 2000
------------------------------------------------
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
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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)
(831) 458-4500
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(Registrant's telephone number, including area code)
Not Applicable
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(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. /X/ Yes / / No
No. of shares of Common Stock outstanding on March 31, 2000: 4,826,938
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<PAGE>
COAST BANCORP
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2000
TABLE OF CONTENTS
<TABLE>
<CAPTION>
- ---------------- -------------------------------------------------------------------------------------- ------------
PART I PAGE
- ---------------- -------------------------------------------------------------------------------------- ------------
<S> <C> <C>
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 14
- ---------------- -------------------------------------------------------------------------------------- ------------
Item 2. Changes in Securities 14
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Item 3. Defaults Upon Senior Securities 14
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Item 4. Submission of Matters to a Vote of Security Holders 14
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Item 5. Other Information 14
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Item 6. Exhibits and Reports on Form 8-K 14
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</TABLE>
<PAGE>
PART I
ITEM 1. FINANCIAL STATEMENTS
COAST BANCORP
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
--------- ------------
2000 1999
---- ----
ASSETS
(unaudited)
<S> <C> <C>
Cash and due from banks $ 15,364,000 $ 18,295,000
Federal funds sold 24,400,000 15,000,000
--------------------------------------
Total cash and equivalents 39,764,000 33,295,000
Securities:
Available for sale, at fair value 140,367,000 112,764,000
Loans:
Commercial 39,015,000 35,023,000
Real estate-term 138,502,000 130,438,000
Real estate-construction 33,831,000 42,023,000
Installment and other 5,611,000 4,592,000
--------------------------------------
Total loans 216,959,000 212,076,000
Unearned income (3,934,000) (3,764,000)
Allowance for credit losses (3,830,000) (3,726,000)
--------------------------------------
Net loans 209,195,000 204,586,000
Bank premises and equipment-net 1,842,000 1,994,000
Other real estate owned - -
Accrued interest receivable and other assets 18,427,000 17,369,000
--------------------------------------
TOTAL ASSETS $409,595,000 $370,008,000
======================================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Noninterest-bearing demand $ 77,370,000 $ 83,946,000
Interest-bearing demand 103,853,000 95,871,000
Savings 73,485,000 68,739,000
Time 58,926,000 52,057,000
--------------------------------------
Total deposits 313,634,000 300,613,000
Other borrowings 56,024,000 31,500,000
Accrued expenses and other liabilities 5,472,000 4,856,000
--------------------------------------
Total liabilities 375,130,000 336,969,000
Commitments and contingencies
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; 21,494,000 21,462,000
shares outstanding: 4,826,938 in 2000 and 4,820,778 in 1999
Accumulated other comprehensive loss (3,226,000) (3,019,000)
Retained earnings 16,197,000 14,596,000
--------------------------------------
Total stockholders' equity 34,465,000 33,039,000
--------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $409,595,000 $370,008,000
======================================
</TABLE>
See notes to unaudited consolidated financial statements
-1-
<PAGE>
COAST BANCORP
CONSOLIDATED INCOME STATEMENTS
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
2000 1999
---- ----
Interest income:
<S> <C> <C>
Loans, including fees $5,701,000 $4,133,000
Securities:
Taxable 2,059,000 1,338,000
Nontaxable 246,000 192,000
Federal funds sold 217,000 374,000
-----------------------------------
Total interest income 8,223,000 6,037,000
Interest expense:
Deposits 1,983,000 1,512,000
Other borrowings 702,000 139,000
-----------------------------------
Total interest expense 2,685,000 1,651,000
-----------------------------------
Net interest income 5,538,000 4,386,000
Provision for credit losses 87,000 -
-----------------------------------
Net interest income after provision for credit losses 5,451,000 4,386,000
Noninterest income:
Customer service fees 684,000 632,000
Gain from sale of loans 344,000 511,000
Loan servicing fees 185,000 224,000
Gains from sale of securities - 61,000
Other 104,000 44,000
-----------------------------------
Total noninterest income 1,317,000 1,472,000
Noninterest expenses:
Salaries and benefits 1,856,000 1,807,000
Occupancy 329,000 295,000
Equipment 290,000 288,000
Customer services 202,000 170,000
Advertising and promotion 122,000 105,000
Stationery and postage 108,000 91,000
Professional services 114,000 79,000
Data processing 87,000 85,000
Insurance 64,000 61,000
Other 245,000 222,000
-----------------------------------
Total noninterest expenses 3,417,000 3,203,000
-----------------------------------
Income before income taxes 3,351,000 2,655,000
Income taxes 1,316,000 1,099,000
-----------------------------------
NET INCOME $2,035,000 $1,556,000
===================================
EARNINGS PER SHARE:
BASIC $ .42 $ .33
===================================
DILUTED $ .41 $ .32
===================================
</TABLE>
See notes to unaudited consolidated financial statements
-2-
<PAGE>
COAST BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
2000 1999
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,035,000 $ 1,556,000
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for credit losses 87,000 -
Depreciation and amortization (258,000) (54,000)
(Gains) on securities transactions - (61,000)
Deferred income taxes (46,000) 42,000
Proceeds from loan sales 20,205,000 25,602,000
Origination of loans held for sale (16,459,000) (22,148,000)
Accrued interest receivable and other assets (849,000) (522,000)
Accrued expenses and other liabilities 616,000 422,000
Increase in unearned income 573,000 626,000
Other operating activities - 135,000
--------------------------------------
Net cash provided by operating activities 5,904,000 5,598,000
--------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale 194,000 12,145,000
Proceeds from maturities of securities 1,978,000 5,590,000
Purchases of securities available for sale (30,110,000) (22,442,000)
Net increase in loans (8,612,000) (6,363,000)
Purchases of bank premises and equipment (28,000) (73,000)
--------------------------------------
Net cash used in investing activities (36,578,000) (11,143,000)
--------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits 13,021,000 (6,796,000)
Net proceeds from other borrowings 24,524,000 5,296,000
Payment of cash dividends (434,000) (382,000)
Exercise of stock options 32,000 82,000
--------------------------------------
Net cash provided by (used in) financing activities 37,143,000 (1,800,000)
--------------------------------------
Net increase (decrease) in cash and equivalents 6,469,000 (7,345,000)
Cash and equivalents, beginning of period 33,295,000 52,084,000
--------------------------------------
Cash and equivalents, end of period $39,764,000 $44,739,000
======================================
SUPPLEMENTAL CASH FLOW INFORMATION CASH PAID DURING THE PERIOD FOR:
Interest $ 2,313,000 $ 1,761,000
Income taxes 362,000 -
NON-CASH INVESTING AND FINANCING TRANSACTIONS:
Additions to other real estate owned $ - $ -
</TABLE>
See notes to unaudited consolidated financial statements
-3-
<PAGE>
COAST BANCORP
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2000 AND 1999
- -------------------------------------------------------------------------------
(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 conjunction with the audited consolidated
financial statements for 2000 included in the Company's Annual Report on
Form 10-K/A.
(2) EARNINGS PER SHARE - Basic earnings per share is computed by dividing net
income by the number of weighted average common shares outstanding. Diluted
earnings per share reflects potential dilution from outstanding stock
options, using the treasury stock method. The number of weighted average
shares used in computing basic and diluted earnings per share are as
follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
2000 1999
---- ----
<S> <C> <C>
Basic shares 4,823,099 4,773,483
Dilutive effect of stock options 140,876 102,770
-------------- ------------------
Diluted shares 4,963,975 4,876,253
============== ==================
</TABLE>
(3) COMPREHENSIVE INCOME - The Company's source of other comprehensive income
is unrealized gains and losses on securities available for sale. Total
comprehensive income was as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
2000 1999
---- ----
<S> <C> <C>
Net income $2,035,000 $1,556,000
Other comprehensive loss (207,000) (200,000)
-------------- ------------------
Total comprehensive income $1,828,000 $1,356,000
============== ==================
</TABLE>
-4-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Net income for the three months ended March 31, 2000 increased
$479,000 or 31% to $2,035,000 from $1,556,000 for the three months ended
March 31, 1999. During the first quarter of 2000 an increase in net interest
income was partially offset by an increase in the provision for credit
losses, increases in noninterest expenses and income tax expense and a
decrease in noninterest income.
On December 14, 1999 the Company and Greater Bay Bancorp signed a
definitive agreement for a merger of the two companies. The agreement
provides for the Company's shareholders to receive shares of Greater Bay
Bancorp stock, based on the average price of Greater Bay's stock during a 20
trading day period preceding the effective date of the merger, in a tax-free
exchange to be accounted for as a pooling of interests. Assuming the price of
Greater Bay's stock as of December 31, 1999 equaled the average price of
Greater Bay's stock during a 20 trading day period preceding the effective
date of the merger, Coast Bancorp's shareholders would receive approximately
3,072,000 shares of Greater Bay Bancorp stock. The transaction is expected to
be completed in the second quarter of 2000 subject to approval of the
transaction by the Company's and Greater Bay's shareholders and receipt of
regulatory approvals.
EARNINGS SUMMARY
NET INTEREST INCOME
Net interest income refers to the difference between interest and fees
earned on loans and investments and the interest paid on deposits and other
borrowed funds. It is the largest component of the net earnings of a financial
institution. The primary factors to consider in analyzing net interest income
are the composition and volume of earning assets and interest-bearing
liabilities, the amount of noninterest bearing liabilities and nonaccrual loans,
and changes in market interest rates.
Table I sets forth average balance sheet information, interest income
and expense, average yields and rates, and net interest income and net interest
margin for the three months ended March 31, 2000 and 1999.
-5-
<PAGE>
TABLE I COMPONENTS OF NET INTEREST INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------------------------------------------------------------------
2000 1999
----------------------------------------------------------------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE (4) BALANCE INTEREST RATE (4)
------- -------- -------- ------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Assets:
Loans (1)(2) $223,005 $5,701 10.2% $162,669 $4,133 10.2%
Securities:
Taxable 114,507 2,059 7.2% 83,758 1,338 6.4%
Nontaxable (3) 19,020 373 7.8% 15,178 291 7.7%
Federal funds sold 15,405 217 5.6% 32,029 374 4.7%
---------------------------- -------------------------------
Total earning assets 371,937 8,350 9.0% 293,634 6,136 8.4%
Cash and due from banks 16,494 15,950
Allowance for credit losses
(3,767) (3,901)
Unearned income (3,793) (3,284)
Bank premises and
equipment, net 1,947 2,377
Other assets 17,689 9,238
-------------- ---------------
Total assets $400,507 $314,014
============== ===============
Interest-bearing liabilities:
Deposits:
Demand $99,277 444 1.8% $93,381 408 1.8%
Savings 74,766 790 4.2% 57,681 522 3.6%
Time 57,814 749 5.2% 50,773 582 4.6%
---------------------------- -------------------------------
Total deposits 231,857 1,983 3.4% 201,835 1,512 3.0%
Borrowed funds 49,137 702 5.7% 11,264 139 4.9%
---------------------------- -------------------------------
Total interest-bearing
liabilities 280,994 2,685 3.8% 213,099 1,651 3.1%
Demand deposits 75,647 66,804
Other liabilities 4,534 3,312
Stockholders' equity 39,332 30,799
-------------- ---------------
Total liabilities and
stockholders' equity $400,507 $314,014
============== ===============
Net interest income and margin
$5,665 6.1% $4,485 6.1%
============== ================
</TABLE>
(1) Average nonaccrual loans totaling $1,055,000 and $1,033,000 are included in
average loans for the three months ended March 31, 2000 and 1999.
(2) Loan fees totaling $319,000 and $326,000 are included in loan interest
income for the three months ended March 31, 2000 and 1999.
(3) Tax exempt income includes $127,000 and $99,000 in 2000 and 1999, to adjust
to a fully taxable equivalent basis using the federal statutory rate of
34%.
(4) Annualized
-6-
<PAGE>
For the three months ended March 31, 2000, net interest income, on a
fully taxable-equivalent basis, was $5,665,000 or 6.1% of average earning
assets, an increase of 26% over $4,485,000 or 6.1% of average earning assets in
the comparable period in 1998. The 2000 increase in net interest income reflects
that the increase in earning assets exceeded the increase in interest bearing
liabilities.
Interest income, on a fully taxable-equivalent basis, was $8,350,000
and $6,136,000 for the three months ended March 31, 2000 and 1999. The increase
in 2000 resulted from the growth in average earning assets. Loan yields averaged
10.2% for each of the three months ended March 31, 2000 and 1999. Approximately
85% of the Bank's loans have variable interest rates indexed to the prime rate.
The Bank's average prime rate was 8.69% and 7.75% for each of the three month
periods ended March 31, 2000 and 1999. Despite the increase in the Bank's
average prime rate in the first quarter of 2000 compared to 1999, the average
yield on loans was the same for both periods as a result of a compression in the
spread over prime the Bank charged borrowers. The compression has been heavily
influenced by growing competition among lenders resulting declines in loan
pricing compared to previous years. Average earning assets were $371,937,000 and
$293,634,000 for the three months ended March 31, 2000 and 1999. The growth in
average earning assets resulted from increased levels of deposits and borrowings
that were invested primarily in loans and securities.
The increase in interest income during 2000 on a fully
taxable-equivalent basis, was partially offset by an increase in interest
expense. The average rate paid on interest bearing liabilities was 3.8% and 3.1%
for the three month periods ended March 31, 2000 and 1999.
NONINTEREST INCOME
Table 2 summarizes the sources of noninterest income for the periods
indicated:
TABLE 2 - NONINTEREST INCOME
(In thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
2000 1999
---- ----
<S> <C> <C>
Customer service fees $ 684 $ 632
Gain on sale of loans 344 511
Loan servicing fees 185 224
Gains from sale of securities - 61
Other 104 44
----------------------
Total noninterest income $1,317 $1,472
======================
</TABLE>
Gains on sale of loans decreased as a result of a lower volume of Small
Business Administration (SBA) loans sold in 2000 compared to 1999. The Company
sells SBA loans and FHLMC conforming mortgage loans with SBA loan sales
providing the primary source of gains on sale.
-7-
<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>
<CAPTION>
TABLE 3 - NONINTEREST EXPENSES
(Dollars in thousands)
THREE MONTHS ENDED MARCH 31,
----------------------------
2000 1999
--------------------------- ---------------------
<S> <C> <C> <C> <C>
Salaries and benefits $1,856 2.00% $1,807 2.46%
Occupancy 329 .35% 295 .40%
Equipment 290 .31% 288 .39%
Customer services 202 .22% 170 .23%
Advertising and promotion 122 .13% 105 .14%
Stationery and postage 108 .12% 91 .12%
Data processing 87 .09% 85 .12%
Professional services 114 .12% 79 .11%
Insurance 64 .07% 61 .08%
Other 245 .26% 222 .30%
-------------------------------------------------------
Total noninterest expenses $3,417 3.67% $3,203 4.58%
=======================================================
</TABLE>
The increases in 2000 were primarily related to higher staff and
occupancy costs and the costs related to 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 2000
exceeding the rate of increase in noninterest expenses.
INCOME TAXES
The Company's effective tax rate was 39.3% for the three months ended
March 31, 2000 compared to 41.4% for the same period in 1999. 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 were $409.6 million at March 31, 2000, an 11% increase
from the end of 1999. Based on average balances, first quarter 2000 average
total assets of $400.5 million represent an increase of 28% over the first
quarter of 1999.
EARNING ASSETS
LOANS
Total gross loans at March 31, 2000 were $217.0 million, a 2% increase
from $212.1 million at December 31, 1999. Average loans in the first three
months of 2000 were $223.0 million representing an increase of 37% over the same
period in 1999. The 2000 increases primarily reflected growth in average real
estate term 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 for losses, both identified and unidentified, in the loan portfolio.
-8-
<PAGE>
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, 2000
nonaccrual loans totaled $1,033,000 or .48% of total loans compared to
$1,098,000 or .52% of total loans at December 31, 1999.
Table 4 presents the composition of nonperforming assets at March 31,
2000.
<TABLE>
<CAPTION>
TABLE 4 NONPERFORMING ASSETS
(In thousands)
MARCH 31,
---------
2000
----
<S> <C>
Nonperforming Assets:
Loans Past Due 90 Days or More and Accruing Interest $ -
Nonaccrual Loans 1,033
-----------
Total Nonperforming Loans 1,033
OREO -
-----------
Total Nonperforming Assets $1,033
===========
Nonperforming Loans as a Percent of Total Loans 0.48%
OREO as a Percent of Total Assets -
Nonperforming Assets as a Percent of Total Assets 0.25%
Allowance for Credit Losses $3,830
As a Percent of Total Loans 1.77%
As a Percent of Nonaccrual Loans 371%
As a Percent of Nonperforming Loans 371%
</TABLE>
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" component is calculated as a
function of the prior four years loss experience for commercial, real estate and
consumer loan types. The four years are assigned weightings of 35%, 30%, 20% and
15% beginning with the most recent year. The "specific" component is established
by allocating a portion of the allowance to individual classified credits on the
basis of specific circumstances and assessments. The "margin for imprecision"
component is an unallocated portion that supplements the first two components as
a conservative margin to guard against unforeseen factors. 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. We evaluate the adequacy of our
allowance for credit losses quarterly.
-9-
<PAGE>
It is the policy of management to maintain the allowance for credit
losses at a level adequate for known and inherent risks 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>
<CAPTION>
TABLE 5 ALLOWANCE FOR CREDIT LOSSES
(Dollars in thousands)
THREE MONTHS ENDED
------------------
MARCH 31, 2000
--------------
<S> <C>
Total Loans Outstanding $216,959
Average Total Loans 223,005
Allowance for credit losses:
Balance, January 1 $3,726
Charge-offs by Loan Category:
Commercial 8
Installment and other -
Real Estate construction -
Real Estate-term -
-------------
Total Charge-Offs 8
Recoveries by Loan Category:
Commercial 25
Installment and other -
Real Estate construction -
Real Estate-term -
-------------
Total Recoveries 25
Net Recoveries (17)
Provision Charged to Expense 87
-------------
Balance, March 31 $3,830
=============
Ratios:
Net Charge-offs to Average Loans (0.01)%
Reserve to Total Loans 1.77%
</TABLE>
OTHER INTEREST-EARNING ASSETS
For the three months ended March 31, 2000, the average balance of
investment securities and federal funds sold totaled $148,932,000, up from
$130,965,000 for the same period in 1999. The 2000 increase resulted from
investing additional liquidity in federal funds sold and investment securities.
Additional liquidity was generated by the excess of the increase in average
deposits and average borrowings over the increase in average loans. Management
uses borrowed funds to increase earning assets and enhance the Company's
interest rate risk profile.
-10-
<PAGE>
FUNDING
Deposits represent the Company'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. Beginning
in 1998, we accepted time deposits from the State of California, which total $25
million at March 31, 2000, in part to replace borrowed funds and to increase
earning assets. The State of California time deposits are renewable
approximately every three months at a rate similar to the three month U.S.
Treasury bill. The Bank has never used brokered deposits.
Deposits increased $13,021,000 from year-end or 4% to $313,634,000 as
of March 31, 2000. Average total deposits in the three months of 2000 of
$307,504,000 increased from $268,639,000 in the same period in 1999.
Another source of funding for the Company is borrowed funds. Management
uses borrowed funds to increase earning assets, prudently leverage capital and
minimize interest rate risk. Typically, these funds result from the use of
advances from the FHLB and 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. Advances from the FHLB may vary in maturity from 1 to 10 years. Advances
from the FHLB at March 31, 2000 totaled $10,000,000, payable at maturity in
2002. The advances are callable by the FHLB beginning in November 2000 and bear
interest at a weighted average rate of 5.8%. The average balance of borrowed
funds was $49,137,000 and $11,264,000 during the first quarter of 2000 and 1999.
The increase in average borrowed funds reflects the additional funds acquired to
increase earning assets.
LIQUIDITY AND INTEREST RATE SENSITIVITY
Liquidity management refers to the Company'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
Company 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, 2000, this ratio was
14.8%. Other key liquidity ratios are the ratios of loans to deposits and
federal funds sold to deposits, which were 69.2% and 7.8%, as of March 31, 2000.
INTEREST RATE SENSITIVITY
Interest rate sensitivity is a measure of the exposure of the Company's
future earnings due to changes in interest rates. If assets and liabilities do
not reprice simultaneously and in equal volumes, the potential for such exposure
exists. It is management's objective to achieve a near-matched to modestly
asset-sensitive cumulative position at one year, such that the net interest
margin of the Company increases as market interest rates rise and decreases when
short-term interest rates decline.
-11-
<PAGE>
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, 1999. 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
(In thousands)
<TABLE>
<CAPTION>
NEXT DAY OVER THREE
-------- ----------
AND WITHIN MONTHS AND OVER ONE
---------- ---------- --------
THREE WITHIN ONE AND WITHIN OVER FIVE
----- ---------- ---------- ---------
IMMEDIATELY MONTHS YEAR FIVE YEARS YEARS TOTAL
----------- ------ ---- ---------- ----- -----
<S> <C> <C> <C> <C> <C> <C>
As of March 31, 2000
Rate Sensitive Assets:
Federal Funds Sold $ 24,400 $- $- $- $- $ 24,400
Investment Securities:
Treasury and Agency - - - 1,209 34 1,243
Obligations
Mortgage-Backed
Securities - 3,043 8,163 30,967 61,915 104,088
Municipal Securities - 460 540 1,612 16,245 18,857
Corporate Securities - - - - 13,179 13,179
Other - - - - 3,000 3,000
-----------------------------------------------------------------------------------------------
Total Investment - 3,503 8,703 33,788 94,373 140,367
Securities
Loans Excluding
Nonaccrual Loans 181,820 2,373 2,211 11,281 18,241 215,926
-----------------------------------------------------------------------------------------------
Total Rate Sensitive Assets $ 206,220 $ 5,876 $ 10,914 $ 45,069 $ 112,614 $380,693
-----------------------------------------------------------------------------------------------
Rate Sensitive Liabilities:
Deposits:
Demand and Savings $ 177,338 $- $ - $ - $- $177,338
Time - 45,020 12,980 926 - 58,926
-----------------------------------------------------------------------------------------------
Total Interest-bearing
Deposits 177,338 45,020 12,980 926 - 236,264
Other Borrowings - 46,024 - 10,000 - 56,024
-----------------------------------------------------------------------------------------------
Total Rate Sensitive
Liabilities $ 177,338 $ 91,044 $ 12,980 $ 10,926 $- $292,288
-----------------------------------------------------------------------------------------------
Gap $ 28,882 $(85,168) $ (2,066) $ 34,143 $ 112,614 $ 88,405
Cumulative Gap $ 28,882 $(56,286) $ (58,352) $ (24,209) $ 88,405
</TABLE>
-12-
<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
negative cumulative gap in the next day and within three months, the over three
months and within one year and over one year and within five year time periods
and a positive cumulative gap in all other time periods. The Company's
experience indicates money market deposit rates tend to lag changes in the prime
rate which immediately impact the prime-based loan portfolio. Even in the
Company's negative gap time periods, rising rates result in an increase in net
interest income. Should interest rates stabilize or decline in future periods,
it is reasonable to assume that the Company's net interest margin, as well as
net interest income, may decline correspondingly.
CAPITAL RESOURCES
Management seeks to maintain adequate capital to support anticipated
asset growth and credit risks, and to ensure that the Company and the Bank are
in compliance with all regulatory capital guidelines. The primary source of new
capital for the Company has been the retention of earnings. The Company does not
have any material commitments for capital expenditures as of March 31, 2000.
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 145,837 shares, in order to enhance long term shareholder value.
As of March 31, 2000, 145,500 shares had been purchased under the program. No
shares were repurchased during 1999 and 2000.
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 credit losses.
The federal regulatory authorities have established minimum capital
leverage ratio guidelines for bank holding companies and 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 Bank's risk-based capital ratios were in excess of regulatory
guidelines for a "well capitalized" depository institution as of March 31, 2000,
and December 31, 1999. Capital ratios for the Company and the Bank are set forth
in Table 7:
TABLE 7 CAPITAL RATIOS
<TABLE>
<CAPTION>
Consolidated:
MARCH 31, 2000 DECEMBER 31,1999
-------------- ----------------
<S> <C> <C>
Total risk-based capital ratio 14.4% 14.4%
Tier 1 risk-based capital ratio 13.1% 13.2%
Tier 1 leverage ratio 9.4% 9.8%
Coast Commercial Bank:
<CAPTION>
MARCH 31, 2000 DECEMBER 31,1999
-------------- ----------------
<S> <C> <C>
Total risk-based capital ratio 13.7% 13.8%
Tier 1 risk-based capital ratio 12.5% 12.5%
Tier 1 leverage ratio 8.9% 9.4%
</TABLE>
-13-
<PAGE>
YEAR 2000
Coast Bancorp previously recognized the material nature of the business
issues surrounding computer processing of dates into and beyond the Year 2000
and began taking corrective action as required pursuant to the interagency
statements issued by the Federal Financial Institutions Examination Council.
Management believes Coast Bancorp and Coast Commercial Bank have completed all
of the activities within their control to ensure that Coast Bancorp's and Coast
Commercial Bank's systems are Year 2000 compliant.
Coast Bancorp's Year 2000 readiness costs were approximately $400,000.
Coast Bancorp does not currently expect to apply any further funds to address
Year 2000 issues.
Neither Coast Bancorp nor Coast Commercial Bank have experienced any
material disruptions of their internal computer systems or software applications
due to the start of the Year 2000 nor have they experienced any problems with
the computer systems or software applications of their third party vendors,
suppliers or service providers. Coast Bancorp will continue to monitor these
third parties to determine the impact, if any, on the business of Coast Bancorp
and Coast Commercial Bank and the actions either must take, if any, in the event
of non-compliance by any of these third parties. Based upon Coast Bancorp's
assessment of compliance by third parties, there does not appear to be any
material business risk posed by any such non-compliance.
Although Coast Bancorp's Year 2000 rollover did not present any
material business disruption, there are some remaining Year 2000 related risks.
Management believes that appropriate actions have been taken to address these
remaining Year 2000 issues and contingency plans are in place to minimize the
financial impact to Coast Bancorp and Coast Commercial Bank. Management,
however, cannot be certain that Year 2000 issues affecting customers, suppliers
or service providers of Coast Bancorp and Coast Commercial Bank will not have a
material adverse impact on Coast Bancorp or Coast Commercial Bank.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
On April 12, 2000, the Coast Bancorp Board of Directors declared a cash
dividend of nine cents ($0.09) per share, payable May 9, 2000, to shareholders
of record on April 24, 2000.
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.
-14-
<PAGE>
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: April 28, 2000
/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)
-15-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 15,364
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 24,400
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 140,367
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 140,367
<LOANS> 216,959
<ALLOWANCE> 3,830
<TOTAL-ASSETS> 409,595
<DEPOSITS> 313,634
<SHORT-TERM> 56,024
<LIABILITIES-OTHER> 5,472
<LONG-TERM> 0
0
0
<COMMON> 21,494
<OTHER-SE> 12,971
<TOTAL-LIABILITIES-AND-EQUITY> 409,595
<INTEREST-LOAN> 5,701
<INTEREST-INVEST> 2,305
<INTEREST-OTHER> 217
<INTEREST-TOTAL> 8,223
<INTEREST-DEPOSIT> 1,983
<INTEREST-EXPENSE> 2,685
<INTEREST-INCOME-NET> 5,538
<LOAN-LOSSES> 87
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,417
<INCOME-PRETAX> 3,351
<INCOME-PRE-EXTRAORDINARY> 3,351
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,035
<EPS-BASIC> 0.42
<EPS-DILUTED> 0.41
<YIELD-ACTUAL> .060
<LOANS-NON> 1,033
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,726
<CHARGE-OFFS> 8
<RECOVERIES> 25
<ALLOWANCE-CLOSE> 3,830
<ALLOWANCE-DOMESTIC> 3,830
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
