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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K/A
(MARK ONE)
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/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NO. 0-28938
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COAST BANCORP
(Exact name of registrant as specified in its charter)
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CALIFORNIA 77-0401327
(State or other jurisdiction I.R.S. Employer
of incorporation or Identification No.)
organization)
740 FRONT STREET 95060
(Address of principal (Zip Code)
executive offices)
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SANTA CRUZ, CALIFORNIA
(City and State of principal executive offices)
Registrant's telephone number, including area code (831) 458-4500
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Securities to be registered pursuant to Section 12(b) of the Act:
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NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH EACH CLASS IS
TO BE SO REGISTERED TO BE REGISTERED
None None
Securities to be registered pursuant to Section 12(g) of the Act:
COMMON STOCK (NO PAR VALUE) NASDAQ NATIONAL MARKET SYSTEM
(Title of each class) (Name of each exchange
on which registered)
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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. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based upon the closing price of its common stock on February 23,
2000, on the NASDAQ National Market System was $85,451,950.
At February 23, 2000, 4,825,178 shares of the registrant's common stock (no
par value) were outstanding.
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TABLE OF CONTENTS
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PART I
ITEM 1. BUSINESS.................................................... 3
ITEM 2. PROPERTIES.................................................. 12
ITEM 3. LEGAL PROCEEDINGS........................................... 12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 12
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS....................................... 13
ITEM 6. SELECTED FINANCIAL DATA..................................... 14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................. 15
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK...................................................... 30
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................. 31
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.................................. 53
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.......... 53
ITEM 11. EXECUTIVE COMPENSATION...................................... 54
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................ 58
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 60
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K.................................................. 60
INDEX TO EXHIBITS..................................................... 61
SIGNATURES............................................................ 66
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PART I
ITEM 1. BUSINESS
GENERAL
Coast Bancorp is a commercial bank holding company incorporated in the State
of California in 1995. The holding company was formed to acquire Coast
Commercial Bank located in Santa Cruz, California. Coast Commercial Bank
incorporated as a California state banking corporation on April 27, 1981, and
commenced operations on February 17, 1982. We became the holding company for the
Bank on July 25, 1995.
On January 20, 1999 our board of directors approved a 2-for-1 stock split
effective for shareholders of record on February 5, 1999. Accordingly, all
historical financial information has been restated as if the stock split had
been in effect for all periods presented.
GENERAL BANKING SERVICES
We engage in a broad range of financial services activities in our primary
market of Santa Cruz County, and also serve the adjacent areas of San Benito,
Santa Clara and Monterey counties. The City of Santa Cruz, situated 80 miles
south of San Francisco and 35 miles southwest of San Jose, is the largest city
in Santa Cruz County.
We emphasize the needs of local business people and serve individuals,
retailers, professionals and small and medium-sized businesses and operate
through our corporate offices located in Santa Cruz, California and through our
branch offices located in Santa Cruz, Aptos, Capitola, Scotts Valley and
Watsonville, California. Services offered include a full range of commercial
banking services, including the acceptance of demand, savings and time deposits,
overdraft protection for checking accounts, and the making of commercial, real
estate (including residential mortgage), personal, home improvement, automobile
and other installment and term loans. We are one of the largest Small Businesses
Administration ("SBA") lenders in California and have been granted status as a
"preferred lender," allowing us to make SBA loans without first having the SBA
approve the loan, and are also a seller/servicer of Freddie Mac mortgage loans.
We also offer travelers' checks, safe deposit boxes, notary public services,
Visa credit cards, courier service for pick-up of non-cash deposits, debit cards
usable at many ATM's and retailers nationwide and a 24 hour telephone service
for deposit and loan account information. We operate automated teller machines
at our branches and at Seascape Village in Aptos, California. Our Investment
Services Department provides financial planning services, financial consulting,
asset management and the purchase and sale of stocks and bonds through a third
party provider.
The total population base in Santa Cruz County is approximately 249,000
people. Santa Cruz County's economic base has several significant components
including education (e.g., the University of California at Santa Cruz); disk
drive and software companies headquartered in the northern part of the county
due to its proximity to the high tech base of Silicon Valley in adjacent Santa
Clara County; tourism because of the beaches and Santa Cruz Boardwalk; and
agriculture in the southern part of the county in and around Watsonville.
On December 14, 1999 Coast Bancorp and Greater Bay Bancorp, the parent of
Cupertino National Bank, Mid-Peninsula Bank, Peninsula Bank of Commerce, Golden
Gate Bank, Bay Area Bank, Bay Bank of Commerce and Mt. Diablo National Bank,
signed a definitive agreement for a merger of the two companies. The agreement
provides for Coast Bancorp'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. Following the
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transaction, Coast Bancorp's shareholders will own approximately 18.4% of the
combined company's stock. The transaction is expected to be completed in the
second quarter of 2000 subject to approval of the transaction by Coast Bancorp's
and Greater Bay's shareholders and receipt of regulatory approvals. As of
December 31, 1999, based on Greater Bay's supplemental consolidated financial
statements, Greater Bay Bancorp had $2.846 billion in assets, $2.506 billion in
deposits and $173.6 million in shareholders' equity. The combined company, on a
pro-forma basis after giving effect to the merger, would have had total assets
of approximately $3.216 billion and shareholders' equity of over $206 million at
December 31, 1999.
Management believes that the merger offers significant opportunities to
enhance the spectrum of financial services offered to both existing and future
customers of Coast Bancorp.
We currently have no applications pending to open additional branch offices,
but we may increase the number of our banking facilities in the Bank's trade
areas when expansion is appropriate. Banking facilities that may be considered
in any future expansion include traditional branch offices and mini-branch
offices as in-fill strategies and loan production offices in neighboring
counties. No such facilities are currently under development. Expansion is, of
course, dependent on obtaining the necessary governmental approvals, a continued
earnings pattern and absence of adverse effects from economic conditions,
governmental monetary policies or competition. No assurance can be given that
expansion of our banking operations can be accomplished without being required
to raise additional capital in the future.
Coast Commercial Bank is a member of the Federal Deposit Insurance
Corporation ("FDIC") and each depositor's account is insured up to $100,000. We
do not directly offer trust services or international banking services and do
not plan to do so in the near future.
COMPETITION
Our service area consists of Santa Cruz County and extends into the adjacent
areas of San Benito, Santa Clara and Monterey counties. It is estimated that
Santa Cruz County contains 32 competitive banking offices, of which 3 offices
are owned by other independent banks. However, the Bank is the only independent
bank headquartered in Santa Cruz County. It is estimated that the primary
service area also contains 15 offices of savings and loan associations, and 7
offices of credit unions. Based upon total bank deposits as of June 30, 1999
(the last period for which data is available), we are fifth in market share in
Santa Cruz County.
The banking business in California generally, and in our primary service
area specifically, is highly competitive with respect to both loans and
deposits, and is dominated by a relatively small number of major banks with many
offices operating over a wide geographic area. Among the advantages such major
banks have over us are their ability to finance wide ranging advertising
campaigns and to allocate their investment assets to regions of highest yield
and demand. These institutions offer certain services such as trust services and
international banking which we do not directly offer (but are offered indirectly
through correspondent institutions), and, by virtue of their greater total
capitalization (legal lending limits to an individual customer are limited to a
percentage of a bank's total capital), they have substantially higher lending
limits than our lending limit. Other entities, both governmental and in private
industry, seeking to raise capital through the issuance and sale of debt or
equity securities also provide competition for us in the acquisition of
deposits. We also compete with money-market funds for deposits.
In order to compete with major financial institutions and other competitors
in our service areas, we build and retain our customer base by drawing upon the
experience of our executive and senior officers in serving business individuals,
and upon our specialized services, local promotional activities and the personal
contacts made by our officers, directors and employees. Our officers and
employees are strongly encouraged to participate in local civic and charitable
organizations and events, which has also served to promote our business. For
customers whose loan demand exceeds our legal lending limit, we may arrange for
large loans on a participation basis with correspondent banks. Our lending limit
is 15% of our capital
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and allowance for credit losses for unsecured loans and 25% of our capital and
allowance for credit losses for unsecured and secured loans combined.
DEPOSITS
Most of our deposits are attracted from individuals, small and medium-sized
businesses and professionals. No single customer relationship accounts for a
significant portion of our deposits.
LENDING ACTIVITIES
We engage in a full complement of lending activities, including commercial,
real estate, SBA and consumer/installment loans.
According to reports from the SBA for the federal fiscal year ended
September 30, 1999, we are one of the largest lenders in Northern California in
the SBA loan program. We make SBA loans from $20,000 to $1,500,000. SBA 7(a)
loans are for working capital, inventory and other purposes, and are government-
guaranteed up to 80% of the loan amount. We also make SBA loans for the purchase
or construction of owner occupied real estate which are also guaranteed up to
80%. The SBA loan program is subject to political and budgetary uncertainty
which in recent years has resulted in changes in the guaranteed portion and
maximum loan amounts of SBA loans.
We also make commercial real estate loans for other purposes such as the
purchase or refinance of offices, warehouses, professional and industrial
buildings. A portion of these loans are SBA loans which are guaranteed by the
U.S. government in an amount up to 90% of the loan. Commercial real estate loans
generally are fully amortized over 15 years or have a 10 year term with a
twenty-five year amortization, and typically have a maximum loan to value ratio
of 70%. SBA loans for this purpose have a term of up to 25 years and a maximum
loan to value ratio of 90%. The Bank had outstanding real estate term loans of
$130,438,000 or 62% of our loan portfolio at December 31, 1999.
We make commercial loans to small-to-medium sized businesses for working
capital, lines of credit, loans secured by inventory and receivables, and term
loans for equipment and for working capital. Typically, we obtain a security
interest in the collateral being financed or in other available assets of the
customer. Loan to value ratios vary but generally do not exceed 80%. As of
December 31, 1999, we had $35,023,000 in loans for these purposes representing
16% of our loan portfolio.
We make real estate construction loans for the construction of single and
multi-family residential units, commercial and industrial properties, and SBA
approved owner occupied commercial real estate. These loans typically have
pre-qualified take outs for permanent financing or stand-by commitments and a
maximum loan to value ratio of 70%. We also make loans for lot or land
development with a maximum loan to value ratio of 60%. Construction loans are
secured by first deeds of trust. As of December 31, 1999, we had outstanding
real estate construction loans of $42,023,000 representing 20% of our loan
portfolio.
Consumer and installment loans are made for household, family and other
personal expenditures on both a secured and unsecured basis. As of December 31,
1999 we had a total of $4,592,000 in consumer and installment loans representing
2% of our loan portfolio.
We make residential mortgage loans which are typically 30 year loans with
either adjustable or fixed interest rates. These loans are sold to Freddie Mac
on a "servicing retained" basis, i.e., we continue to be paid a fee for
collecting payments on the loan and performing other services, or to other
investors on a "servicing released" basis, i.e. we have no further involvement
in the loan.
We sell the guaranteed portion of SBA loans which we originate into the
secondary market as a source of liquidity and earnings. Additionally, we sell
residential mortgage loans we originate into the secondary market in order to
divest ourselves of the interest rate risk associated with these mostly fixed
interest rate products. No recourse is available to buyers of these loans after
90 days from the sale. Total loans serviced
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for other investors were $118,464,000 as of December 31, 1999. For the years
ended December 31, 1999, 1998 and 1997, we sold loans totaling $74,420,000,
$82,869,000, and $48,255,000, respectively.
Effective January 1, 1997, the Company adopted SFAS No. 125, "Accounting for
Transfer and Servicing of Financial Assets and Extinguishments of Liabilities".
SFAS No. 125 requires that an asset seller must meet defined conditions to
demonstrate that it has surrendered control over the assets. The failure to meet
these conditions usually results in on-balance-sheet treatment for the assets
and a liability for the sale proceeds received. SFAS No. 125 also requires that
contracts to service are recorded as an asset or a liability based on fair value
or on an allocation of the carrying amount of the financial asset. SFAS 125
covers subsequent accounting, including impairments, and eliminates the
distinction between excess and normal servicing.
Credit risk relates to the ability of a borrower to repay the principal and
interest on its loan and is managed by adherence to credit standards and the
taking of collateral to secure most of our loans. These risks are generally
inherent in commercial lending. Certain risks are specific to particular types
of lending in which we engage such as real estate lending. The major risk
inherent in real estate lending is the potential decline in the value of the
property for market reasons or due to the condition of the property.
OTHER SERVICES
Our Investment Services Department employs 2 investment professionals. The
Investment Services Department offers financial planning services; asset
management services through the use of unaffiliated investment managers;
retirement plans such as 401(k) plans, IRAs and SEPs; mutual funds; and the
purchase and sale of stocks and bonds on an unsolicited basis. Products
available through this department are not FDIC insured, and are not deposits or
other obligations of the Bank. These products are not guaranteed by the Bank,
and are subject to investment risk, including possible loss of principal amount
invested.
SUPERVISION AND REGULATION
GENERAL
COAST BANCORP
Coast Bancorp, as a bank holding company, is subject to regulation under the
Bank Holding Company Act of 1956, as amended, and is registered with and subject
to the supervision of the Board of Governors of the Federal Reserve System. It
is the policy of the Federal Reserve that each bank holding company serve as a
source of financial and managerial strength to its subsidiary banks. The Federal
Reserve has the authority to examine Coast Bancorp.
The Bank Holding Company Act requires Coast Bancorp to obtain the prior
approval of the Federal Reserve before acquisition of all or substantially all
of the assets of any bank or ownership or control of the voting shares of any
bank if, after giving effect to such acquisition, Coast Bancorp would own or
control, directly or indirectly, more than 5% of the voting shares of such bank.
Recent amendments to the Bank Holding Company Act expand the circumstances under
which a bank holding company may acquire control of or all or substantially all
of the assets of a bank located outside the State of California.
Coast Bancorp may not engage in any business other than managing or
controlling banks or furnishing services to its subsidiaries, with the exception
of certain activities which, in the opinion of the Federal Reserve, are so
closely related to banking or to managing or controlling banks as to be
incidental to banking. Recently enacted federal legislation, known as the
Gramm-Leach-Bliley Act, offers bank holding companies an opportunity to broaden
the scope of activities engaged in by electing to be treated as a financial
holding company. A financial holding company enjoys broader powers than a bank
holding company, specifically including the ability to own securities and
insurance companies in addition to financial institutions. Coast Bancorp is
generally prohibited from acquiring direct or indirect ownership or
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control of more than 5% of the voting shares of any company unless that company
is engaged in such authorized activities and the Federal Reserve approves the
acquisition.
Coast Bancorp and its subsidiaries are prohibited from engaging in certain
tie-in arrangements in connection with any extension of credit, sale or lease of
property or provision of services. For example, with certain exceptions Coast
Commercial Bank may not condition an extension of credit on a customer obtaining
other services provided by it, Coast Bancorp or any other subsidiary, or on a
promise by the customer not to obtain other services from a competitor. In
addition, federal law imposes certain restrictions on transactions between Coast
Commercial Bank and its affiliates. As affiliates, Coast Commercial Bank and
Coast Bancorp are subject, with certain exceptions, to the provisions of federal
law imposing limitations on and requiring collateral for extensions of credit by
Coast Commercial Bank to any affiliate.
COAST COMMERCIAL BANK
As a California state-chartered bank, Coast Commercial Bank is subject to
regulation, supervision and periodic examination by the California Department of
Financial Institutions. Coast Commercial Bank also is subject to regulation,
supervision and periodic examination by the Federal Deposit Insurance
Corporation. Coast Commercial Bank's deposits are insured by the FDIC to the
maximum amount permitted by law, which is currently $100,000 per depositor in
most cases. Insured banks are subject to FDIC regulations applicable to all
insured institutions.
The regulations of these state and federal bank regulatory agencies govern
most aspects of Coast Commercial Bank's businesses and operations, including but
not limited to, the scope of its business, its investments, its reserves against
deposits, the nature and amount of any collateral for loans, the timing of
availability of deposited funds, the issuance of securities, the payment of
dividends, bank expansion and bank activities, including real estate development
and insurance activities, and the payment of interest on certain deposits. Coast
Commercial Bank is also subject to the requirements and restrictions of various
consumer laws, regulations and the Community Reinvestment Act.
CAPITAL STANDARDS
The FRB, FDIC and other federal banking agencies have risk based capital
adequacy guidelines intended to provide a measure of capital adequacy that
reflects the degree of risk associated with a banking organization's operations
for both transactions reported on the balance sheet as assets, and transactions,
such as letters of credit and recourse arrangements, which are reported as
off-balance-sheet items. Under these guidelines, nominal dollar amounts of
assets and credit equivalent amounts of off-balance-sheet items are multiplied
by one of several risk adjustment percentages, which range from 0% for assets
with low credit risk, such as certain U.S. government securities, to 100% for
assets with relatively higher credit risk, such as business loans.
A banking organization's risk based capital ratios are obtained by dividing
its qualifying capital by its total risk-adjusted assets and off-balance-sheet
items. The regulators measure risk-adjusted assets and off-balance-sheet items
against both total qualifying capital (the sum of Tier 1 capital and limited
amounts of Tier 2 capital) and Tier 1 capital. Tier 1 capital consists of common
stock, retained earnings, noncumulative perpetual preferred stock and minority
interests in certain subsidiaries, less most other intangible assets. Tier 2
capital may consist of a limited amount of the allowance for probable loan and
lease losses and certain other instruments with some characteristics of equity.
The inclusion of elements of Tier 2 capital is subject to certain other
requirements and limitations of the federal banking agencies. Since
December 31, 1992, the federal banking agencies have required a minimum ratio of
qualifying total capital to risk-adjusted assets and off-balance-sheet items of
8%, and a minimum ratio of Tier 1 capital to risk-adjusted assets and
off-balance-sheet items of 4%.
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In addition to the risk-based guidelines, federal banking regulators require
banking organizations to maintain a minimum amount of Tier 1 capital to total
assets, referred to as the leverage ratio. For a banking organization rated in
the highest of the five categories used by regulators to rate banking
organizations, the minimum leverage ratio of Tier 1 capital to total assets is
3%. It is improbable, however, that an institution with a 3% leverage ratio
would receive the highest rating by the regulators since a strong capital
position is a significant part of the regulators' rating. For all banking
organizations not rated in the highest category, the minimum leverage ratio is
at least 100 to 200 basis points above the 3% minimum. Thus, the effective
minimum leverage ratio, for all practical purposes, is at least 4% or 5%. In
addition to these uniform risk-based capital guidelines and leverage ratios that
apply across the industry, the regulators have the discretion to set individual
minimum capital requirements for specific institutions at rates significantly
above the minimum guidelines and ratios.
See "Capital Resources" in Management's Discussion and Analysis of Financial
Condition and Results of Operations for our capital ratios at December 31, 1999.
PAYMENT OF DIVIDENDS
COAST BANCORP
The shareholders of Coast Bancorp are entitled to receive dividends when and
as declared by its Board of Directors, out of funds legally available, subject
to the dividends preference, if any, on preferred shares that may be outstanding
and also subject to the restrictions of the California Corporations Code. At
December 31, 1999, Coast Bancorp had no outstanding shares of preferred stock.
The principal sources of cash revenue to Coast Bancorp are dividends
received from Coast Commercial Bank. Coast Commercial Bank's ability to make
dividend payments to Coast Bancorp is subject to state and federal regulatory
restrictions.
COAST COMMERCIAL BANK
Under state law, the Board of Directors of a California state chartered bank
may declare a cash dividend, subject to the restriction that the amount
available for the payment of cash dividends is limited to the lesser of the
bank's retained earnings, or the bank's net income for the latest three fiscal
years, less dividends previously declared during that period, or, with the
approval of the Commissioner of Financial Institutions, to the greater of the
retained earnings of the bank, the net income of the bank for its last fiscal
year or the net income of the bank for its current fiscal year.
The FDIC has broad authority to prohibit a bank from engaging in banking
practices which it considers to be unsafe or unsound. It is possible, depending
upon the financial condition of the bank in question and other factors, that the
FDIC may assert that the payment of dividends or other payments by a bank is
considered an unsafe or unsound banking practice and therefore, implement
corrective action to address such a practice.
Accordingly, the future payment of cash dividends by Coast Commercial Bank
will generally depend not only on Coast Commercial Bank's earnings during any
fiscal period but also on Coast Commercial Bank's meeting certain capital
requirements and the maintenance of an adequate allowances for credit losses.
COMMUNITY REINVESTMENT ACT
Banks are subject to the Community Reinvestment Act ("CRA"), which was
enacted in 1977 to promote lending by financial institutions to individuals and
businesses located in low and moderate income areas. New CRA regulations went
into effect as of July 1, 1997. As revised the CRA regulations emphasize an
assessment of actual performance rather than of the procedures followed by a
bank, to evaluate compliance with the CRA. Overall CRA compliance continues to
be rated across a four-point scale from
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"outstanding" to "substantial noncompliance," and continues to be a factor in
review of applications to merge, establish new branches or form bank holding
companies. In addition, any bank rated in "substantial noncompliance" with the
revised CRA regulations may be subject to enforcement proceedings.
The regulations provide that "small banks", which are defined to include any
independent bank with total assets of less than $250 million, are to be
evaluated by means of a so-called "streamlined assessment method" unless such a
bank elects to be evaluated by one of the other methods provided in the
regulations. The differences between the evaluation methods may be summarized as
follows:
(1) The "streamlined assessment method" applicable to small banks requires
that a bank's CRA compliance be evaluated pursuant to five "assessment
criteria," including its (i) loan-to-deposit ratio (as adjusted for seasonal
variations and other lending-related activities, such as sales to the secondary
market or community development lending); (ii) percentage of loans and other
lending-related activities in the bank's service area(s); (iii) distribution of
loans and other lending-related activities among borrowers of different income
levels, given the demographic characteristics of its service area(s);
(iv) geographic distribution of loans and other lending-related activities
within its service area(s); and (v) record of response to written complaints, if
any, about its CRA performance.
(2) The "lending, investments and service tests method" is applicable to all
banks larger than $250 million which are not wholesale or limited purpose banks
and do not elect to be evaluated by the "strategic plan assessment method."
Central to this method is the requirement that such banks collect and report to
their primary federal banking regulators detailed information regarding home
mortgage, small business and farm and community development loans which is then
used to evaluate CRA compliance. At the bank's option, data regarding consumer
loans and any other loan distribution it may choose to provide also may be
collected and reported.
Using such data, a bank will be evaluated regarding its (i) lending
performance according to the geographic distribution of its loans, the
characteristics of its borrowers, the number and complexity of its community
development loans, the innovativeness or flexibility of its lending practices to
meet low and moderate income credit needs and, at the bank's election, lending
by affiliates or through consortia or third-parties in which the bank has an
investment interest; (ii) investment performance by measure of the bank's
"qualified investments," that is, the extent to which the bank's investments,
deposits, membership shares in a credit union, or grants primarily to benefit
low or moderate income individuals and small businesses and farms, address
affordable housing or other needs not met by the private market, or assist any
minority or women-owned depository institution by donating, selling on favorable
terms or provisioning on a rent-free basis any branch of the bank located in a
predominately minority neighborhood; and (iii) service performance by evaluating
the demographic distribution of the bank's branches and ATMs, its record of
opening and closing them, the availability of alternative retail delivery
systems (such as telephone banking, banking by mail or at work, and mobile
facilities) in low and moderate income geographies and to low and moderate
income individuals, and (given the characteristics of the bank's service area(s)
and its capacity and constraints) the extent to which the bank provides
"community development services" (services which primarily benefit low and
moderate income individuals or small farms and businesses or address affordable
housing needs not met by the private market) and their innovativeness and
responsiveness.
(3) Wholesale or limited purpose banks which do not make home mortgage,
small farm or business or consumer loans to retail customers may elect, subject
to agency approval of their status, to be evaluated by the "community
development test method," which assesses the number and amount of the bank's
community development loans, qualified investments and community development
services and their innovativeness and complexity.
(4) Any bank may request to be evaluated by the "strategic plan assessment
method" by submitting a strategic plan for review and approval. Such a plan must
involve public participation in its preparation, and contain measurable goals
for meeting low and moderate income credit needs through lending, investments
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and provision of services. Such plans generally will be evaluated by measuring
strategic plan goals against standards similar to those which will be applied in
evaluating a bank according to the "lending, investments and service test
method."
TRANSACTIONS WITH AFFILIATES
Bank holding companies are also restricted as to the extent to which they
and their subsidiaries can borrow or otherwise obtain credit from one another,
or engage in certain other transactions. The "covered transactions" that an
insured depository institution and its subsidiaries are permitted to engage in
with their nondepository affiliates are limited to the following amounts:
(1) in the case of any one such affiliate, the aggregate amount of covered
transactions of the insured depository institution and its subsidiaries cannot
exceed 10% of the capital stock and the surplus of the insured depository
institution; and (ii) in the case of all affiliates, the aggregate amount of
covered transactions of the insured depository institution and its subsidiaries
cannot exceed 20% of the capital stock and surplus of the insured depository
institution. In addition, extensions of credit that constitute covered
transactions must be collateralized in prescribed amounts.
"Covered transactions" are defined by statute to include a loan or extension
of credit to the affiliate, a purchase of securities issued by an affiliate, a
purchase of assets from the affiliate (unless otherwise exempted by the Federal
Reserve Board), the acceptance of securities issued by the affiliate as
collateral for a loan and the issuance of a guarantee, acceptance, or letter of
credit for the benefit of an affiliate. Further, a bank holding company and its
subsidiaries are prohibited from engaging in certain tie-in arrangements in
connection with any extension of credit, lease or sale of property or furnishing
of services.
YEAR 2000 DATA PROCESSING ISSUES
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, including
risks due to the fact that the Year 2000 is a leap year. 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.
10
<PAGE>
IMPACT OF MONETARY POLICIES
The earnings and growth of Coast Commercial Bank are subject to the
influence of domestic and foreign economic conditions, including inflation,
recession and unemployment. The earnings of Coast Commercial Bank is affected
not only by general economic conditions but also by the monetary and fiscal
policies of the United States and federal agencies, particularly the Federal
Reserve. The Federal Reserve can and does implement national monetary policy,
such as seeking to curb inflation and combat recession, by its open market
operations in United States Government securities and by its control of the
discount rates applicable to borrowings by banks from the Federal Reserve
System. The actions of the Federal Reserve in these areas influence the growth
of bank loans, investments and deposits and affect the interest rates charged on
loans and paid on deposits. The Federal Reserve's policies have had a
significant effect on the operating results of commercial banks and are expected
to continue to do so in the future. The nature and timing of any future changes
in monetary policies are not predictable.
RECENT AND PROPOSED LEGISLATION
The operations of Coast Bancorp and Coast Commercial Bank are subject to
extensive regulation by federal, state, and local governmental authorities and
are subject to various laws and judicial and administrative decisions imposing
requirements and restrictions on part or all of their respective operations.
Coast Bancorp believes that it is in substantial compliance in all material
respects with applicable federal, state, and local laws, rules and regulations.
Because the business of Coast Bancorp and Coast Commercial Bank is highly
regulated, the laws, rules and regulations applicable to each of them are
subject to regular modification and change.
From time to time, legislation is enacted which has the effect of increasing
the cost of doing business, limiting or expanding permissible activities or
affecting the competitive balance between banks and other financial
institutions. Proposals to change the laws and regulations governing the
operations and taxation of banks and other financial institutions are frequently
made in Congress, in the California legislature and before various bank
regulatory agencies. Most recently, President Clinton signed into law the Gramm-
Leach-Bliley Act. This legislation eliminates many of the barriers that have
separated the insurance, securities and banking industries since the Great
Depression. The federal banking agencies (the Federal Reserve, FDIC, Office of
the Comptroller of the Currency) among others, are currently drafting
regulations to implement the Gramm-Leach-Bliley Act. The likelihood of any major
change from these regulations, and the impact such change may have on Coast
Bancorp and Coast Commercial Bank is impossible to predict.
GRAMM-LEACH-BLILEY ACT
The Gramm-Leach-Bliley Act, signed into law on November 12, 1999, is the
result of a decade of debate in the Congress regarding a fundamental reformation
of the nation's financial system. The law is subdivided into seven titles, by
functional area. Title I acts to facilitate affiliations among banks, insurance
companies and securities firms. Title II narrows the exemptions from the
securities laws previously enjoyed by banks, requires the Federal Reserve and
the SEC to work together to draft rules governing certain securities activities
of banks and creates a new, voluntary investment bank holding company. Title III
restates the proposition that the states are the functional regulators for all
insurance activities, including the insurance activities of federally-chartered
banks. The law bars the states from prohibiting insurance activities by
depository institutions. The law encourages the states to develop uniform or
reciprocal rules for the licensing of insurance agents. Title IV prohibits the
creation of additional unitary thrift holding companies. Title V imposes
significant requirements on financial institutions related to the transfer of
nonpublic personal information. These provisions require each institution to
develop and distribute to accountholders an information disclosure policy, and
requires that the policy allow customers to, and for the institution to, honor a
customer's request to "opt-out" of the proposed transfer of specified nonpublic
information to third parties. Title VI reforms the Federal Home Loan Bank system
to allow broader access
11
<PAGE>
among depository institutions to the systems advance programs, and to improve
the corporate governance and capital maintenance requirements for the system.
Title VII addresses a multitude of issues including disclosure of ATM
surcharging practices, disclosure of agreements among non-governmental entities
and insured depository institutions which donate to non-governmental entities
regarding donations made in connection with the Community Reinvestment Act, and
disclosure by the recipient non-governmental entities of how such funds are
used. Additionally, the law extends the period of time between CRA examinations
of community banks.
Coast Commercial Bank and Coast Bancorp intend to comply with all provisions
of the Gramm-Leach-Bliley Act and all implementing regulations as they become
effective, and Coast Commercial Bank intends to develop appropriate policies and
procedures to meet its responsibilities in connection with the privacy
provisions of Title V of that Act.
ACCOUNTING PRONOUNCEMENTS
In June 1999, the Financial Accounting Standards Board issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities--Deferral of the
Effective Date of FASB Statement No. 133". This statement defers the effective
date of Statement No. 133 "Accounting for Derivative Instruments and Hedging
Activities" for all entities, which have not yet adopted the Statement, to be
effective for all fiscal quarters of all fiscal years beginning after June 15,
2000, with earlier application encouraged.
ENVIRONMENTAL MATTERS
We are not involved in any administrative or judicial proceedings pursuant
to federal, state or local laws or regulations regarding the discharge of
materials into the environment or whose purpose is to protect the environment.
EMPLOYEES
At December 31, 1999, we employed one hundred thirty-eight (138) persons
including thirty-three (33) part-time employees, four (4) executive officers and
twenty-four (24) other Vice Presidents and Assistant Vice Presidents. Our
employees are not currently represented by a union or covered under a collective
bargaining agreement. We believe that our employee relations are excellent.
ITEM 2. PROPERTIES
Our administrative offices are leased on a month-to-month basis. Our
branches and operations facilities are occupied under other leases which expire
at various dates through 2003 and in most instances, include options to renew or
extend at market rates and terms.
ITEM 3. LEGAL PROCEEDINGS
We are a party to routine litigation which is incidental to our business. As
of December 31, 1999, there are no pending legal proceedings to which we are a
party which may have a materially adverse effect upon our financial position or
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the holders of our common stock
during the fourth quarter of 1999.
12
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
A. Our Common Stock trades on The NASDAQ Stock Market-SM- under the symbol
CTBP. Our Common Stock began trading on the The NASDAQ Stock Market-SM- on
February 19, 1997. Prior to that time, our Common Stock was listed on the NASDAQ
Bulletin Board and was the subject of limited trading. The following information
has been adjusted to reflect the two-for-one stock split effective February 5,
1999.
The prices indicated below may not necessarily represent actual
transactions.
<TABLE>
<CAPTION>
SALE PRICE OF THE
COMPANY'S
COMMON STOCK
-------------------
QUARTER ENDED 1999 HIGH LOW
- ------------------ -------- --------
<S> <C> <C>
December 31................................................. $25.00 $17.81
September 30................................................ 23.50 18.50
June 30..................................................... 20.50 15.00
March 31.................................................... 20.00 15.00
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED 1998 HIGH LOW
- ------------------ -------- --------
<S> <C> <C>
December 31................................................. $19.00 $15.88
September 30................................................ 23.50 18.00
June 30..................................................... 22.50 17.27
March 31.................................................... 18.64 16.36
</TABLE>
B. As of February 23, 2000, the approximate number of registered holders of
our Common Stock was 387. In addition, the approximate number of beneficial
shareholders was 453.
C. We paid a cash dividend of $0.09 per share in the first quarter of 2000,
cash dividends of $0.08 per share in each quarter during 1999, and cash
dividends of $0.07 per share in each quarter during 1998. A two-for-one stock
split became effective February 5, 1999 and a 10% stock dividend in May 1998.
There can be no assurances that we will pay either cash or stock dividends
in the future.
We consider the payment of cash dividends in order to return a portion of
our profits to stockholders. In considering the amount of cash dividends to be
paid, if any, we consider the maintenance of a consistent dividend policy as
part of our efforts to make the Company's stock attractive to investors; the
amount and frequency of dividends; the payout ratio; our need to have sufficient
funds available to pay our expenses; and compliance with applicable laws,
regulations and other regulatory requirements.
California law provides that in order to declare dividends: (i) after a
corporation has paid a dividend to its stockholders, it must be likely that the
corporation will be able to meet its liabilities as they mature; and (ii) the
amount of the corporation's retained earnings immediately prior to the payment
of the dividend must be equal to or exceed the amount of the proposed cash
dividend.
Coast Bancorp's primary source of revenue is dividends from Coast Commercial
Bank. The payment of dividends by the bank is subject to various legal and
regulatory requirements. See Item 1 "Restrictions on Dividends and Other
Distributions."
13
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
Presented below is selected financial data for the last five years. The data
has been derived from our audited consolidated financial statements.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT SUMMARY:
Net interest income.................... $ 20,028 $ 17,364 $ 15,183 $ 13,562 $ 12,398
Provision for credit losses............ -- 300 450 900 900
Noninterest income..................... 4,670 5,987 4,929 4,770 3,533
Noninterest expenses................... 13,372 12,482 11,006 10,538 9,862
Income before income taxes............. 11,326 10,569 8,656 6,894 5,169
Provision for income taxes............. 4,387 4,408 3,501 2,766 2,020
Net income............................. 6,939 6,161 5,155 4,128 3,149
PERIOD END:
Total loans, gross..................... 212,076 160,976 146,427 123,721 106,840
Assets................................. 370,008 324,748 261,505 236,915 207,668
Deposits............................... 300,613 280,810 201,197 185,467 164,046
Stockholders' equity................... 33,039 30,197 27,764 23,193 20,984
AVERAGES FOR PERIOD:
Total loans, gross..................... 183,035 151,374 128,974 $ 115,743 $ 99,842
Earning assets......................... 310,558 269,640 226,650 199,588 167,089
Assets................................. 335,235 292,227 247,378 217,369 184,643
Deposits............................... 277,711 238,832 193,260 170,290 151,340
Stockholders' equity................... 32,917 28,649 25,092 21,813 20,063
SELECTED RATIOS:
Net interest margin(1)................. 6.4% 6.4% 6.7% 6.8% 7.4%
Efficiency ratio(2).................... 54.1% 53.5% 54.7% 57.5% 61.9%
Allowance for credit losses to total
loans................................ 1.8% 2.4% 2.5% 2.6% 2.3%
Return on average assets............... 2.1% 2.1% 2.1% 1.9% 1.7%
Return on beginning stockholders'
equity............................... 23.0% 22.2% 22.2% 19.7% 17.8%
Dividend payout ratio.................. 22.1% 21.4% 19.7% 21.5% 26.0%
CAPITAL RATIOS:(3)
Total risk-based capital ratio......... 14.4% 15.4% 16.7% 16.4% 16.9%
Tier 1 risk-based capital ratio........ 13.2% 14.2% 15.4% 15.2% 15.7%
Tier 1 leverage ratio.................. 9.8% 9.5% 10.3% 9.8% 10.2%
PER SHARE DATA:(4)
Diluted net income(5).................. $ 1.41 $ 1.25 $ 1.05 $ 0.84 $ 0.63
Book value(6).......................... $ 6.85 $ 6.33 $ 5.73 $ 4.77 $ 4.22
Cash dividends......................... $ .32 $ .28 $ .21 $ .18 $ 0.16
Weighted average diluted common shares
outstanding.......................... 4,910,374 4,936,192 4,931,392 4,919,495 5,016,627
</TABLE>
- --------------------------
(1) Net interest margin represents net interest income as a percentage of
average earning assets.
(2) The efficiency ratio is the ratio of noninterest expense to the sum of net
interest income and noninterest income.
(3) The risk-based and leverage ratios are defined in
Item 1--"BUSINESS--Capital Standards."
(4) All share and per share data has been adjusted to reflect stock splits and
dividends
(5) Represents net income divided by the weighted average number of shares of
common stock and common stock equivalents outstanding for the respective
period.
14
<PAGE>
(6) Represents shareholders' equity divided by the number of shares of common
stock outstanding at the end of the period indicated.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIS DOCUMENT MAY CONTAIN FORWARD-LOOKING STATEMENTS THAT ARE SUBJECT TO
RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY
FROM THOSE INDICATED. FOR A DISCUSSION OF FACTORS THAT COULD CAUSE ACTUAL
RESULTS TO DIFFER, PLEASE SEE THE DISCUSSION CONTAINED BELOW AND IN OUR PUBLICLY
AVAILABLE SECURITIES AND EXCHANGE COMMISSION FILINGS AND PRESS RELEASES.
You should read the following discussion and analysis of our financial condition
and the results of our operations as of December 31, 1999 and 1998 and for the
three years ended December 31, 1999 together with our consolidated financial
statements and the notes to consolidated financial statements included in this
Form 10-K. This discussion should be read in conjunction with those financial
statements and the related notes. Averages presented in the following tables are
substantially all based upon daily average balances.
BUSINESS ORGANIZATION
We are a California corporation organized in 1995 to act as the holding
company for Coast Commercial Bank, a California state chartered bank which
opened in 1982 with headquarters in Santa Cruz and branch offices in Aptos,
Santa Cruz, Scotts Valley and Watsonville. During 1995 we acquired through
merger all of the outstanding common stock of the bank. The merger was accounted
for similar to a pooling of interests in that the historical cost basis of Coast
Commercial Bank has been carried forward. We currently conduct no significant
business activities other than our investment in Coast Commercial Bank.
Consequently, substantially all of the our net income, assets and equity are
derived from our investment in Coast Commercial Bank. On December 14, 1999 Coast
Bancorp and Greater Bay Bancorp signed a definitive agreement for a merger of
the two companies. See Item 1--Business.
We engage in commercial and consumer banking, offering a range of
traditional banking products and services to individuals, retailers, small and
medium-sized businesses and professionals, primarily within the Santa Cruz
County area.
OVERVIEW
Net income was $6,939,000 for the year ended December 31, 1999, an increase
of 13% from 1998 net income of $6,161,000. Net income reported for 1998
represented an increase of 20% from 1997 net income of $5,155,000. On a diluted
per share basis, net income for 1999 was $1.41 compared with $1.25 and $1.05 for
the preceding two years. The increase in net income in 1999 over 1998 was
primarily the result of the increase in net interest income and a decrease in
the provision for loan losses exceeding the increase in noninterest expenses and
the decrease in noninterest income. The increase in net income in 1998 over 1997
was primarily the result of the increases in net interest income, a decrease in
the provision for loan losses and noninterest income exceeding the increase in
noninterest expenses.
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.
15
<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 years ended December 31, 1999, 1998, and 1997.
TABLE 1 COMPONENTS OF NET INTEREST INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------------------------------------
1999 1998 1997
------------------------------ ------------------------------ ------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
-------- -------- -------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Loans(1)(2)............... $183,035 $19,403 10.6% $151,374 $16,891 11.2% $128,974 $14,514 11.3%
Securities:
Taxable................. 94,148 6,244 6.6% 78,115 5,140 6.6% 68,896 4,721 6.9%
Nontaxable(3)........... 15,251 1,165 7.6% 13,683 1,073 7.8% 5,920 501 8.5%
Federal funds sold........ 18,124 885 4.9% 26,468 1,388 5.2% 22,860 1,244 5.4%
-------- ------- -------- ------- -------- -------
Total earning assets...... 310,558 27,697 8.9% 269,640 24,492 9.1% 226,650 20,980 9.3%
Cash and due from banks... 17,022 17,688 16,603
Allowance for credit
losses.................. (3,799) (3,716) (3,451)
Unearned income........... (3,695) (2,771) (1,874)
Bank premises and
equipment, net.......... 2,235 2,256 2,046
Other assets.............. 12,914 9,130 7,404
-------- -------- --------
Total assets.............. $335,235 $292,227 $247,378
======== ======== ========
Interest-bearing
liabilities:
Deposits:
Demand.................. $ 94,879 1,619 1.7% $ 86,809 1,715 2.0% $ 76,638 1,557 2.0%
Savings................. 59,002 2,153 3.6% 36,809 1,290 3.5% 29,652 950 3.2%
Time.................... 51,679 2,407 4.7% 50,531 2,584 5.1% 30,814 1,609 5.2%
-------- ------- -------- ------- -------- -------
Total deposits............ 205,560 6,179 3.0% 174,149 5,589 3.2% 137,104 4,116 3.0%
Borrowed funds............ 20,714 1,094 5.3% 21,629 1,174 5.4% 26,881 1,511 5.6%
-------- ------- -------- ------- -------- -------
Total interest-bearing
liabilities............. 226,274 7,273 3.2% 195,778 6,763 3.5% 163,985 5,627 3.4%
------- ------- -------
Demand deposits........... 72,151 64,683 56,156
Other liabilities......... 3,893 3,117 2,145
Stockholders' equity...... 32,917 28,649 25,092
-------- -------- --------
Total liabilities and
stockholders' equity.... $335,235 $292,227 $247,378
======== ======== ========
Net interest income and
margin.................. $20,424 6.6% $17,729 6.6% $15,353 6.8%
======= ======= =======
</TABLE>
- --------------------------
(1) Loan fees totaling $1,556,000, $1,320,000, and $1,172,000 are included in
loan interest income for 1999, 1998, and 1997, respectively.
(2) Average nonaccrual loans totaling $1,654,000, $458,000, and $229,000 are
included in average loans for 1999, 1998 and 1997, respectively.
(3) Tax exempt income includes $396,000, $365,000, and $170,000 in 1999, 1998,
and 1997, respectively, to adjust to a fully taxable equivalent basis using
the Federal statutory rate of 34%.
16
<PAGE>
Net interest income is affected by changes in the amount and mix of
interest-earning assets and interest-bearing liabilities, referred to as "volume
change." Net interest income is also affected by changes in yields earned on
interest-earning assets and rates paid on interest-bearing liabilities, referred
to as "rate change." Table 2 presents changes in interest income and interest
expense for each major category of interest-earning assets and interest-bearing
liabilities. The table also reflects the amount of change attributable to volume
and rate changes for the years indicated on a fully taxable equivalent basis.
TABLE 2 RATE/VOLUME ANALYSIS
<TABLE>
<CAPTION>
1999 COMPARED TO 1998 1998 COMPARED TO 1997
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO CHANGE IN DUE TO CHANGE IN
-------------------------------- --------------------------------
VOLUME RATE(1) NET CHANGE VOLUME RATE(1) NET CHANGE
-------- -------- ---------- -------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans......................................... $3,533 $(1,021) $2,512 $2,521 $(144) $2,377
Securities.................................... 1,178 18 1,196 865 126 991
Federal funds sold............................ (437) (66) (503) 196 (52) 144
------ ------- ------ ------ ----- ------
Total interest income......................... 4,274 (1,069) 3,205 3,582 (70) 3,512
Interest bearing deposits:
Demand........................................ 159 (255) (96) 207 (49) 158
Savings....................................... 887 (24) 863 229 111 340
Time.......................................... 55 (232) (177) 1,030 (55) 975
------ ------- ------ ------ ----- ------
Interest expense on deposits.................. 1,101 (511) 590 1,466 7 1,473
Interest expense on borrowings................ (50) (30) (80) (295) (42) (337)
------ ------- ------ ------ ----- ------
Total interest expense........................ 1,051 (541) 510 1,171 (35) 1,136
------ ------- ------ ------ ----- ------
Increase in net interest income............... $3,223 $ (528) $2,695 $2,411 $ (35) $2,376
====== ======= ====== ====== ===== ======
</TABLE>
- ------------------------
(1) Changes attributable to the change in interest rate on the change in volume
are allocated to the rate change.
For 1999, net interest income, on a fully taxable-equivalent basis, was
$20,424,000 or 6.6% of average earning assets, an increase of 15% over
$17,729,000 or 6.6% of average earning assets in the comparable period in 1998.
The increase in 1999 reflects higher levels of earning assets as the lower
yields on earning assets were offset by the lower rates paid on interest-bearing
liabilities. Net interest income in 1998, on a fully taxable-equivalent basis,
was $17,729,000 or 6.6% of average earning assets, an increase of 15% over
$15,353,000 or 6.8% of average earning assets in the comparable period in 1997.
The increase in 1998 reflects higher levels of earning assets partially offset
by lower yields on earning assets and higher rates paid on interest-bearing
liabilities.
Interest income, on a fully taxable-equivalent basis, was $27,697,000,
$24,492,000, and $20,980,000 for 1999, 1998 and 1997, respectively. The
increases in 1999 and 1998 resulted from the growth in average earning assets.
Loan yields averaged 10.6% in 1999, 11.2% in 1998 and 11.3% in 1997.
Approximately 78% of our loans have variable interest rates indexed to the prime
rate. Our average prime rate was 8.00%, 8.36%, and 8.44% in 1999, 1998, and
1997, respectively. Average earning assets were $310,558,000 for 1999, an
increase of 15% over $269,640,000 in 1998, which increased 19% over $226,650,000
in 1997. The growth in average earning assets resulted from increased levels of
deposits and other borrowings which were invested primarily in loans and
securities.
The increases in interest income during 1999 and 1998, on a fully
taxable-equivalent basis, were partially offset by increases in interest
expense. The increases were primarily due to increases in interest-
17
<PAGE>
bearing deposits. The average rate paid on interest bearing deposits was 3.0% in
1999, 3.2% in 1998, and 3.0% in 1997.
NONINTEREST INCOME
Table 3 summarizes the sources of noninterest income for the periods
indicated:
TABLE 3 NONINTEREST INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Customer service fees....................................... $2,686 $2,399 $2,490
Gains from sale of loans.................................... 1,019 2,365 1,249
Loan servicing fees......................................... 691 839 1,038
Gains (losses) from sale of securities...................... 52 21 (10)
Other....................................................... 222 363 162
------ ------ ------
Total noninterest income.................................. $4,670 $5,987 $4,929
====== ====== ======
</TABLE>
Customer service fees increased in 1999 as a result of fees from the bank's
investment services department and higher deposit services and merchant card
processing fees. The 1998 decline in customer service fees from 1997 reflects a
lower volume of nonsufficient funds items and lower merchant card processing
fees due to competition in attracting and retaining merchants. Gains from sale
of loans decreased in 1999 as a result of lower prices received for the
guaranteed portion of SBA loans sold. Lower prices were a result of faster than
expected prepayments in the national market due to lower loan rates through 1998
and most of 1999. The increase in gains from sale of loans in 1998 resulted from
increased SBA loan originations during 1998 and 1997. Loan servicing fees
declined during 1999 and 1998 principally from an increase in the amortization
of capitalized SBA servicing fees in response to the increased prepayments of
the loans.
NONINTEREST EXPENSES
The major components of noninterest expenses stated in dollars and as a
percentage of average earning assets are set forth in Table 4 for the periods
indicated.
18
<PAGE>
TABLE 4 NONINTEREST EXPENSES
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------
1999 1998 1997
------------------- ------------------- -------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Salaries and benefits........................... 7,390 2.38% $ 6,507 2.41% $ 5,692 2.51%
Occupancy....................................... 1,253 .40% 1,183 .44% 980 .43%
Equipment....................................... 1,170 .39% 1,118 .42% 1,120 .50%
Customer services............................... 673 .22% 698 .26% 462 .20%
Advertising and promotion....................... 506 .16% 689 .26% 629 .28%
Stationery and postage.......................... 419 .13% 413 .15% 362 .16%
Professional services........................... 377 .12% 363 .13% 414 .18%
Data processing................................. 375 .12% 321 .12% 319 .14%
Insurance....................................... 202 .07% 212 .08% 202 .09%
Other........................................... 1,007 .32% 978 .36% 826 .37%
------ ---- ------- ---- ------- ----
Total noninterest expenses.................... 13,372 4.31% $12,482 4.63% $11,006 4.86%
====== ==== ======= ==== ======= ====
</TABLE>
Total noninterest expenses of $13,372,000 increased $890,000 or 7% in 1999
over $12,482,000 in 1998, which increased $1,476,000 or 13% in 1998 over
$11,006,000 in 1997.
The 1999 increase resulted from costs associated to support the growth in
total loans, deposits and assets. The 1998 increase resulted from costs
associated with opening a sixth branch and other staffing increases. The
decrease in noninterest expenses as a percentage of average earning assets is
the result of the rate of growth in average earning assets in 1999 and 1998
exceeding the rate of increase in noninterest expenses.
INCOME TAXES
Our effective tax rate was 38.7% for 1999 compared to 41.7% for 1998 and
40.4% for 1997. Changes in our effective tax rate 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 $370.0 million at December 31, 1999, a 14%
increase from the end of 1998. Total assets increased to $324.7 million in 1998,
a 24% increase from the $261.5 million a year earlier. Based on average
balances, 1999 average total assets of $335.2 million represent an increase of
15% over 1998 average total assets of $292.2 million which represent an increase
of 18% over 1997.
EARNING ASSETS
LOANS
Total gross loans at December 31, 1999 were $212.1 million, a 32% increase
from $161.0 million at December 31, 1998 which was a 10% increase from
$146.4 million at December 31, 1997.
Table 5 summarizes the composition of the loan portfolio at December 31, for
the past five years.
19
<PAGE>
TABLE 5 LOANS BY TYPE
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Commercial, financial and agricultural.... $ 35,023 $ 38,874 $ 42,838 $ 35,633 $ 34,263
Real estate mortgage...................... 130,438 95,360 76,101 65,208 50,580
Real estate construction.................. 42,023 22,206 21,376 15,112 14,008
Installment and other..................... 4,592 4,536 6,112 7,768 7,989
-------- -------- -------- -------- --------
Total loans, gross...................... $212,076 $160,976 $146,427 $123,721 $106,840
======== ======== ======== ======== ========
</TABLE>
Average loans in 1999 were $183,035,000 representing an increase of
$31,661,000 or 21% over $151,374,000 in 1998, which represents an increase of
$22,400,000, or 17% over 1997. The 1999 and 1998 increases reflect growth in
average real estate loans, which, in the opinion of management is due to
improved local economic conditions.
Commercial loans were $35,023,000 at the end of 1999 compared to $38,874,000
and $42,838,000 at the end of 1998 and 1997, respectively. We make commercial
loans primarily to serve the short- to medium-term credit demands of
small-to-medium sized businesses and professionals located in Santa Cruz County
for lines of credit, single payment and term debt obligations. Typically, loans
are collateralized by the working capital, inventory, receivables, or equipment
being financed or other assets available to the borrower. Our commercial loan
portfolio is diversified as to industries and types of businesses with no
material industry concentrations and a profile which we believe generally
reflects the economy of Santa Cruz County. Risks include those outlined in the
Risk Elements section below.
Real estate mortgage loans were $130,438,000 at December 31, 1999 compared
to $95,360,000 and $76,101,000 at the end of 1998 and 1997, respectively. The
increases of $35,078,000 in 1999, $19,259,000 in 1998 and $10,893,000 in 1997
resulted from the retained portion of SBA loans and additional loan demand for
nonresidential real estate financing in our market area. Extensions of credit
are based on an analysis of the borrower's ability to generate debt service,
obtain other financing or sell the property. Advances on nonresidential
properties are limited in general to approximately 70% of the lower of cost or
appraised value.
Our real estate construction loan portfolio was $42,023,000 at December 31,
1999, compared to $22,206,000 and $21,376,000 at the end of 1998 and 1997,
respectively. Construction loans represented 20% of total loans at December 31,
1999 compared to 14% and 15% in 1998 and 1997. We finance the construction of
commercial and residential properties. These loans are at variable rates,
generally have maturities of less than 12 months, and are secured by first deeds
of trust on the underlying properties. Repayment is expected from the borrower's
ability to obtain take-out financing or sell the property. Advances on
residential and commercial projects are limited in general to the lower of
approximately 80% and 70%, respectively, of cost or appraised value of the
collateral.
Real estate mortgage and construction lending entail potential risks which
are not inherent in other types of loans. These potential risks include declines
in market values of underlying real property collateral and, with respect to
construction lending, delays or cost overruns which could expose us to loss. In
addition, risks in commercial real estate lending include declines in commercial
real estate values, general economic conditions surrounding the commercial real
estate properties, and vacancy rates. A decline in the general economic
conditions or real estate values within the Company's market area could have a
negative impact on the performance of the loan portfolio or value of the
collateral. Because we lend primarily within our market area, the real property
collateral for our loans is similarly concentrated, rather than diversified over
a broader geographic area. We could therefore be adversely affected by a decline
in
20
<PAGE>
real estate values in our target market, even if real estate values elsewhere in
California generally remained stable or increased. Risks also include those
outlined in the Risk Elements section below.
Installment loans were $4,592,000 compared to $4,536,000 and $6,112,000 at
the end of 1999, 1998, and 1997, respectively. The installment loan portfolio
finances customers' household, family and other personal expenditures on both a
secured and unsecured basis. Risks include those outlined in the Risk Elements
section below.
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 amounts for probable losses, both identified and unidentified, in the
loan portfolio.
Management strives to achieve a low level of credit losses by continuing
emphasis on credit quality in the loan approval process, active credit
administration and regular monitoring. An important tool in achieving a high
level of credit quality is the loan grading system to assess the risk inherent
in each loan. Additionally, management believes our ability to manage portfolio
credit risk is enhanced by lending personnel's knowledge of our service area.
Our directors, senior managers and lending personnel live in the communities we
serve and are active members of civic, charitable and service groups in our
communities. Further, we have experienced minimal turnover of senior management
since the inception of Coast Commercial Bank in 1982.
Ultimately, credit quality may be influenced by underlying trends in
economic and business cycles. Management believes that our lending policies and
underwriting standards will tend to minimize losses in an economic downturn,
however, there is no assurance that losses will be limited under such
circumstances. Our loan policies and underwriting standards include, but are not
limited to, the following: 1) maintaining a thorough understanding of our
service area and limiting investments outside of this area, 2) maintaining a
thorough understanding of the borrowers' knowledge and capacity in their field
of expertise, 3) basing real estate construction loan approval not only on
marketability of the project, but also on the borrowers' capacity to support the
project financially in the event it does not sell within the original projected
time period, and 4) maintaining conforming and prudent loan to value and loan to
cost ratios based on independent outside appraisals and ongoing inspection and
analysis by our construction lending officers. In addition, we strive to
diversify the risk inherent in the construction portfolio by avoiding
concentrations to individual borrowers and on any one project.
Management regularly reviews and monitors the loan portfolio to determine
the risk profile of each credit, and to identify credits whose risk profiles
have changed. This review includes, but is not limited to, such factors as
payment status, the financial condition of the borrower, borrower compliance
with loan covenants, underlying collateral values, potential loan
concentrations, and general economic conditions. When potential problem credits
are identified by management, action plans for each credit are developed for our
personnel to mitigate the credit risk through measures such as increased
monitoring, debt reduction goals, additional collateral and possible credit
restructuring opportunities.
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 December 31, 1999 nonaccrual
loans totaled $1,098,000 or .5% of total loans compared to $1,108,000 or .7% at
December 31, 1998 and $266,000 or .2% at December 31, 1997. Nonaccrual loans at
December 31, 1999 consist primarily of one commercial real estate term loan. If
the nonaccrual loans at December 31, 1999 had not been on nonaccrual, $184,000
of interest income would have been realized in 1999. We realized $2,000 on these
nonaccrual loans in 1999.
21
<PAGE>
Table 6 presents the composition of nonperforming assets at December 31 for
the last 5 years.
TABLE 6 NONPERFORMING ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Nonperforming Assets:
Loans Past Due 90 Days or More and Accruing
Interest........................................ $ -- $ -- $ -- $ 50 $ 3
Nonaccrual Loans.................................. 1,098 1,108 266 159 824
------ ------ ------ ------ ------
Total Nonperforming Loans........................... 1,098 1,108 266 209 827
OREO................................................ -- -- 112 551 830
------ ------ ------ ------ ------
Total Nonperforming Assets.......................... $1,098 $1,108 $ 378 $ 760 $1,657
====== ====== ====== ====== ======
Nonperforming Loans as a Percent of Total Loans..... 0.52% 0.69% 0.18% 0.17% 0.77%
OREO as a Percent of Total Assets................... -- -- 0.04% 0.23% 0.40%
Nonperforming Assets as a Percent of Total Assets... 0.30% 0.34% 0.14% 0.32% 0.80%
Allowance for Credit Losses......................... $3,726 $3,871 $3,609 $3,158 $2,478
As a Percent of Total Loans....................... 1.76% 2.40% 2.46% 2.55% 2.32%
As a Percent of Nonaccrual Loans.................. 339% 349% 1357% 1986% 301%
As a Percent of Nonperforming Loans............... 339% 349% 1357% 1511% 300%
</TABLE>
There were no loans at December 31, 1999 where management had serious doubts
about the borrower's ability to comply with loan repayment terms and which may
result in disclosure as a nonaccrual, past due or restructured loan, except as
disclosed in Table 6.
For a discussion of concentrations in the loan portfolio, see Note 10 of
Notes to Consolidated Financial Statements.
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 margin to guard against unforeseen factors. The "historical losses" and
"specific" components include management's judgment of the effect of economic
conditions on the ability of our 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.
There were no impaired loans at December 31, 1999, 1998 and 1997.
Additionally, there were no impaired loans during 1999, 1998 and 1997.
22
<PAGE>
The allowance for credit losses totaled $3,726,000 or 1.8% of total loans as
of December 31, 1999 compared to $3,871,000 or 2.4% of total loans as of
December 31, 1998, and $3,609,000 or 2.5% as of December 31, 1997. 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
7.
TABLE 7 ALLOWANCE FOR CREDIT LOSSES
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Total Loans Outstanding................... $212,076 $160,976 $146,427 $123,721 $106,840
Average Total Loans....................... 183,035 151,374 128,974 115,743 99,842
Allowance for credit losses:
Balance, January 1........................ $ 3,871 $ 3,609 $ 3,158 $ 2,478 $ 1,859
Charge-offs by Loan Category:
Commercial.............................. 256 79 108 256 293
Installment and other................... 4 34 57 96 108
Real Estate construction................ -- -- -- --
Real Estate-term........................ -- -- -- --
-------- -------- -------- -------- --------
Total Charge-Offs......................... 260 113 165 352 401
Recoveries by Loan Category:
Commercial.............................. 107 45 107 78 79
Installment and other................... 4 30 53 9 25
Real Estate construction................ 4 -- 6 45 16
Real Estate-term........................ -- -- -- -- --
-------- -------- -------- -------- --------
Total Recoveries...................... 115 75 166 132 120
Net Charge-Offs (recoveries).............. 145 38 (1) 220 281
Provision Charged to Expense.............. -- 300 450 900 900
-------- -------- -------- -------- --------
Balance, December 31...................... $ 3,726 $ 3,871 $ 3,609 $ 3,158 $ 2,478
======== ======== ======== ======== ========
Ratios:
Net Charge-offs to Average Loans........ 0.08% 0.03% 0.00% 0.19% 0.28%
Reserve to Total Loans.................. 1.76% 2.40% 2.46% 2.55% 2.32%
</TABLE>
The allowance for credit losses is allocated based upon management's review
of credit quality and is presented in Table 8. The actual amounts and categories
where losses cccur may be significantly different than the allocations.
23
<PAGE>
TABLE 8 ALLOCATION OF THE ALLOWANCE FOR CREDIT LOSSES
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------------------------
1999 1998 1997 1996
--------------------- ------------------- --------------------- --------
PERCENT OF PERCENT PERCENT OF
TOTAL OF TOTAL TOTAL
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT
-------- ---------- -------- -------- -------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Commercial........... $1,033 16.5% $1,318 24.2% $1,538 29.3% $1,658
Real estate.......... 2,517 81.3% 2,298 73.0% 1,793 66.5% 1,154
Installment and
other.............. 176 2.2% 255 2.8% 278 4.2% 346
------ ----- ------ ----- ------ ----- ------
$3,726 100.0% $3,871 100.0% $3,609 100.0% $3,158
====== ===== ====== ===== ====== ===== ======
<CAPTION>
DECEMBER 31,
----------------------------------
1996 1995
---------- ---------------------
PERCENT OF PERCENT OF
TOTAL TOTAL
LOANS AMOUNT LOANS
---------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Commercial........... 28.8% $1,338 32.1%
Real estate.......... 64.9% 991 60.4%
Installment and
other.............. 6.3% 149 7.5%
----- ------ -----
100.0% $2,478 100.0%
===== ====== =====
</TABLE>
The allocation for real estate includes real estate construction and real
estate term loans. Management has historically not allocated the allowance for
credit losses separately for real estate construction and real estate term
loans.
OTHER INTEREST EARNING ASSETS
The average balance of securities and federal funds sold increased
$9,257,000 to $127,523,000 in 1999. The average balance of securities and
federal funds sold totaled $118,266,000 in 1998, an increase of $20,590,000 from
$97,676,000 in 1997. The 1999 and 1998 increases resulted from deploying
additional liquidity in the securities portfolio. Sources of the additional
liquidity were borrowed funds and the excess of the increase in average deposits
over the increase in average loans. Management uses borrowed funds to increase
earning assets and enhance our interest rate risk profile.
FUNDING
Deposits represent our 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. We accept time deposits from the State
of California to replace other borrowed funds. The State of California time
deposit is renewable approximately every three months at a rate similar to the
three month U.S. Treasury bill rate. The amount of time deposits from the State
of California was $20,000,000 and $15,000,000 at December 31, 1999 and 1998. We
have never used brokered deposits. Table 9 presents the composition of deposits
for the five years ended December 31, 1999.
TABLE 9 COMPOSITION OF DEPOSITS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Demand, non-interest...................... $ 83,946 $ 75,978 $ 66,812 $ 56,699 $ 49,575
Demand, interest.......................... 95,871 100,707 76,123 69,305 74,944
Savings................................... 68,739 51,873 23,942 32,296 17,385
Time...................................... 52,057 52,252 34,320 27,167 22,142
-------- -------- -------- -------- --------
Total..................................... $300,613 $280,810 $201,197 $185,467 $164,046
======== ======== ======== ======== ========
</TABLE>
Deposits increased $19,803,000 or 7% to $300,613,000 as of December 31,
1999, $79,613,000 or 40% to $280,810,000 as of December 31, 1998 and $15,730,000
or 8% to $201,197,000 as of December 31, 1997.
24
<PAGE>
Average total deposits in 1999 of $277,711,000 showed an increase of $38,879,000
or 16% over the 1998 average of $238,832,000 which was an increase of
$45,572,000 or 24% over 1997. During 1999, average interest-bearing deposits
increased $31,411,000 and average non-interest bearing deposits increased
$7,468,000 over 1998.
Another source of funding is borrowed funds. Management uses borrowed funds
to increase earning assets, prudently leverage capital and minimize our interest
rate risk. Typically, these funds result from the use of advances from the FHLB
and agreements to sell securities with repurchase at a designated future date,
also known as repurchase agreements. The average balance of borrowed funds was
$20,714,000 and $21,629,000 during 1999 and 1998. The weighted average interest
rate for 1999 was 5.3% and for 1998 was 5.4%. The maximum amount of borrowings
at any month-end during 1999 was $31,500,000. The weighted average interest rate
on borrowed funds outstanding at December 31, 1999 and 1998 was 5.6% and 5.0%.
Repurchase agreements are conducted with major banks and investment brokerage
firms. The maturity of these arrangements is typically 30 to 90 days. Advances
from the FHLB may vary in maturity from 1 to 10 years. We sometimes negotiate
advances from the FHLB that permit the FHLB to call the advance prior to
maturity. At December 31, 1999, advances callable by the FHLB totaled
$15,000,000 with $5,000,000 at 4.71% callable beginning in March 2000 and
$10,000,000 at 5.75% callable beginning in November 2000.
LIQUIDITY AND INTEREST RATE SENSITIVITY
Liquidity management refers to our ability to provide funds on an ongoing
basis to meet fluctuations in deposit levels as well as the credit needs and
requirements of our clients. Both assets and liabilities contribute to our
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. We assess the
likelihood of projected funding requirements by reviewing historical funding
patterns, current and forecasted economic conditions and individual client
funding needs. We maintain informal lines of credit with our 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 to maintain them.
We manage our liquidity by maintaining a majority of our investment
portfolio in liquid investments in addition to our federal funds sold. Liquidity
is measured by various ratios, including the liquidity ratio which reflects net
liquid assets as a percent of total assets. As of December 31, 1999, this ratio
was 13.4%. Other key liquidity ratios are the ratios of gross loans to deposits
and federal funds sold to deposits, which were 70.6% and 5.0%, respectively, as
of December 31, 1999.
INTEREST RATE SENSITIVITY
Interest rate sensitivity is a measure of the exposure of our 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 our net interest margin 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". 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
10 presents our gap analyses at December 31, 1999. Mortgage backed securities
are reported in the period of their expected repricing based upon estimated
prepayments developed from recent experience.
25
<PAGE>
TABLE 10 INTEREST RATE SENSITIVITY
<TABLE>
<CAPTION>
NEXT DAY AND OVER THREE OVER ONE AND
WITHIN THREE MONTHS AND WITHIN FIVE
IMMEDIATELY MONTHS WITHIN ONE YEAR YEARS OVER FIVE YEARS TOTAL
----------- ------------ --------------- ------------ --------------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1999
Rate Sensitive Assets:
Federal Funds Sold........ $ 15,000 $ -- $ -- $ -- $ -- $ 15,000
Investment Securities:
Treasury and Agency
Obligations............. -- -- -- 7,412 -- 7,412
Mortgage-Backed
Securities.............. -- 1,732 7,373 27,762 41,623 78,490
Municipal Securities...... -- -- -- 520 14,548 15,068
Corporate Securities...... -- -- -- 7,916 6,434 14,350
Other..................... -- -- -- -- 2,607 2,607
-------- -------- -------- ------- ------- --------
Total Investment
Securities................ -- 1,732 7,373 43,610 65,212 117,927
Loans Excluding Nonaccrual
Loans..................... 164,561 2,238 4,173 24,727 15,279 210,978
-------- -------- -------- ------- ------- --------
Total Rate Sensitive
Assets.................... $179,561 $ 3,970 $ 11,546 $68,337 $80,491 $343,905
-------- -------- -------- ------- ------- --------
Rate Sensitive Liabilities:
Deposits:
Demand and Savings........ $164,610 $ -- $ -- $ -- $ -- $164,610
Time...................... -- 36,680 13,938 1,434 5 52,057
-------- -------- -------- ------- ------- --------
Total Interest-bearing
Deposits.................. 164,610 36,680 13,938 1,434 5 216,667
Other Borrowings............ -- 16,500 -- 15,000 -- 31,500
-------- -------- -------- ------- ------- --------
Total Rate Sensitive
Liabilities............. $164,610 $ 53,180 $ 13,938 $16,434 $ 5 $248,167
-------- -------- -------- ------- ------- --------
Gap......................... $ 14,951 $(49,210) $ (2,392) $51,903 $80,486 $ 95,738
Cumulative Gap.............. $ 14,951 $(34,259) $(36,651) $15,252 $95,738
</TABLE>
Our positive cumulative total gap results from the exclusion from the above
table of noninterest-bearing demand deposits, which represent a significant
portion of our funding sources. We maintain a positive cumulative gap in all
time periods except next day and within 3 months and the over 3 months and
within one year periods. Our experience indicates money market deposit rates
tend to lag changes in the prime rate which immediately impact the prime
rate-based loan portfolio. Even in our negative gap time periods, rising rates
tend to result in an increase in net interest income. Should interest rates
stabilize or decline in future periods, it is reasonable to assume that our net
interest margin, as well as net interest income, may decline correspondingly.
26
<PAGE>
Table 11 presents the contractual maturity distribution of investment
securities and the weighted average yields for each range of maturities. Yields
are presented on an actual basis.
TABLE 11 INVESTMENT MATURITY DISTRIBUTION
DECEMBER 31, 1999
<TABLE>
<CAPTION>
AFTER 1 AFTER 5
1 YEAR WEIGHTED YEAR WEIGHTED YEARS WEIGHTED MORE WEIGHTED
CARRYING OR AVERAGE THROUGH AVERAGE THROUGH AVERAGE THAN AVERAGE
VALUE LESS YIELD 5 YEARS YIELD 10 YEARS YIELD 10 YEARS YIELD
-------- -------- -------- -------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury and Agency
Obligations................ $ 7,253 $7,253 5.74%
Mortgage Backed Securities... 75,477 $245 5.80% $1,259 7.73% $73,973 6.63%
State and Municipal
Obligations................ 14,116 532 5.80% 3,819 4.83% 9,765 4.98%
Corporate debt securities.... 13,311 13,311 7.66%
Federal Home Loan Bank
Stock...................... 2,607 2,607
-------- ---- ------ ------ -------
$112,764 $245 $7,785 $5,078 $99,656
======== ==== ====== ====== =======
</TABLE>
Table 12 presents the time remaining until maturity for certificates of
deposits in denominations of $100,000 or more as of December 31, 1999.
TABLE 12 CERTIFICATES OF DEPOSIT
DENOMINATIONS OF $100,000 OR MORE
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-----------------
<S> <C>
Time remaining until maturity:
Less than 3 months.......................................... $31,708
3 months to 6 months........................................ 5,100
6 months to 12 months....................................... 3,190
More than 12 months......................................... 375
-------
Total................................................... $40,373
=======
</TABLE>
Loan maturities for commercial and real estate construction loans at
December 31, 1999, are presented in Table 13.
TABLE 13 LOAN MATURITIES
<TABLE>
<CAPTION>
AFTER ONE
BUT WITHIN AFTER
WITHIN ONE FIVE FIVE
YEAR YEARS YEARS TOTAL
---------- ---------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial............................ $20,599 $ 9,095 $5,329 $35,023
Real estate construction.............. 40,962 1,061 -- 42,023
------- ------- ------ -------
Total............................. $61,561 $10,156 $5,329 $77,046
======= ======= ====== =======
</TABLE>
27
<PAGE>
Commercial loans at December 31, 1999 maturing after one year are comprised
of fixed rate and variable rate loans as shown below:
<TABLE>
<CAPTION>
AFTER ONE
BUT WITHIN AFTER
FIVE YEARS FIVE YEARS TOTAL
---------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Fixed rate..................................... $ 240 $ 379 $ 619
Variable rate.................................. 8,855 4,950 13,805
------ ------ -------
$9,095 $5,329 $14,424
====== ====== =======
</TABLE>
CAPITAL RESOURCES
Management seeks to maintain adequate capital to support anticipated asset
growth and credit risks, and to ensure that we are in compliance with all
regulatory capital guidelines. Our primary source of new capital has been the
retention of earnings. Stockholders' equity was $33,039,000 at December 31,
1999, an increase of $2,842,000, or 9% from $30,197,000 at December 31, 1998.
This increase was due to 1999 earnings of $6,939,000 and proceeds related to
stock option exercises of $773,000, offset by cash distributions of $1,534,000
and a decrease in the net after-tax unrealized gain on securities
available-for-sale of $3,336,000. We do not have any material commitments for
capital expenditures as of December 31, 1999.
We pay a quarterly cash dividend on our common stock as part of efforts to
enhance stockholder value. Our goal is to maintain a strong capital position
that will permit payment of a consistent cash dividend which grows commensurate
with earnings growth.
During 1997, the Board of Directors approved a stock repurchase program
authorizing open market purchases of up to 145,837 of the outstanding shares, or
approximately 3%, in order to enhance long term stockholder value. As of
December 31, 1998, 145,500 shares had been acquired for a total purchase price
of $2,781,000. No shares were repurchased in 1999.
We 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 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.
28
<PAGE>
Our risk-based and leverage capital ratios were in excess of regulatory
guidelines for a "well capitalized" depository institution as of December 31,
1999, 1998 and 1997. Table 14 summarizes our capital ratios:
TABLE 14 CAPITAL RATIOS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Consolidated:
Total risk-based capital ratio.......................... 14.4% 15.4% 16.7%
Tier 1 risk-based capital ratio......................... 13.2% 14.2% 15.4%
Tier 1 leverage ratio................................... 9.8% 9.5% 10.3%
Coast Commercial Bank:
Total risk-based capital ratio.......................... 13.8% 14.8% 15.1%
Tier 1 risk-based capital ratio......................... 12.5% 13.6% 13.9%
Tier 1 leverage ratio................................... 9.4% 9.3% 9.3%
</TABLE>
For additional information on our capital levels and ratios, see Note 13 of
Notes to Consolidated Financial Statements.
EFFECTS OF INFLATION
The impact of inflation on a financial institution differs significantly
from that exerted on manufacturing, or other commercial concerns, primarily
because its assets and liabilities are largely monetary. In general, inflation
primarily affects us indirectly through its effect of increasing market rates of
interest. However, our earnings are affected by the spread between the yield on
earning assets and rates paid on interest-bearing liabilities rather than the
absolute level of interest rates. Additionally, there may be some upward
pressure on our operating expenses, such as adjustments in salaries and benefits
and occupancy expense, based upon consumer price indices. In the opinion of
management, inflation has not had a material effect on the consolidated
financial statements for the years ended December 31, 1999, 1998 and 1997.
Changes in interest rates are highly sensitive to many factors which are beyond
the control of management. Changes in interest rates will influence the growth
of loans, investments and deposits, as well as the rates charged on loans and
paid on deposits. The nature, timing and impact of future changes in interest
rates or monetary and fiscal policies are not predictable.
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
29
<PAGE>
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, including
risks due to the fact that the Year 2000 is a leap year. 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information under Item 7 of this Report under the Caption "Interest Rate
Sensitivity" is incorporated herein by reference.
Our profitability is dependent to a large extent upon our net interest
income, which is the difference between our interest income on earning assets,
such as loans and securities, and our interest expense on interest-bearing
liabilities, such as deposits and borrowings. We, like other financial
institutions, are subject to interest rate risk to the degree that our
interest-earning assets reprice differently than our interest-bearing
liabilities. We manage our mix of assets and liabilities with the goals of
limiting our exposure to interest rate risk, maintaining adequate liquidity, and
coordinating our sources and uses of funds. Specific strategies have included
increasing the volume of fixed rate securities funded in part by borrowings such
as repurchase agreements.
We seek to control our interest rate risk exposure in a manner that will
allow for adequate levels of earnings and capital over a range of possible
interest rate environments. We have adopted formal policies and practices to
monitor and manage interest rate risk exposure. As part of this effort, we use
the market value of portfolio equity (MVPE) methodology to gauge interest rate
risk exposure.
Generally, MVPE is the discounted present value of the difference between
incoming cash flows on interest-earning assets and other assets and outgoing
cash flows on interest-bearing liabilities and other liabilities. The
application of the methodology attempts to quantify interest rate risk as the
change in MVPE which would result from a theoretical 200 basis point (1 basis
point equals .01%) change in market interest rates. Both 200 basis point
increases and decreases in market rates are considered.
The following table, as of December 31, 1999 and 1998, is an analysis of our
interest rate risk as measured by changes in MVPE for instantaneous and
sustained parallel shifts of 200 basis points in market interest rates.
<TABLE>
<CAPTION>
ESTIMATED CHANGE IN MVPE
-----------------------------------------------
1999 1998
BASIS POINT (BP) ---------------------- ----------------------
CHANGE IN RATES AMOUNT % AMOUNT %
- ---------------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C>
+ 200.................................................. $(2,116,000) (4.3) $ 2,453,000 6.1
0...................................................... -- 0 -- 0
- -200................................................... $ 510,000 1.0 $(7,208,000) (17.8)
</TABLE>
The above table illustrates, for example, that an instantaneous 200 basis
point increase in market interest rates at December 31, 1999 would reduce our
MVPE by approximately $2.1 million at that date.
Management believes the MVPE methodology overcomes three shortcomings of the
typical maturity gap methodology. First, it does not use arbitrary repricing
intervals and accounts for all expected future cash flows, weighting each by its
appropriate discount factor. Second, because the MVPE method projects cash flows
of each financial instrument under different interest-rate environments, it can
incorporate the effect of embedded options on an institution's interest rate
risk exposure. Third, it allows interest rates on
30
<PAGE>
different instruments to change by varying amounts in response to a change in
market interest rates, resulting in more accurate estimates of cash flows.
However, as with any method of gauging interest rate risk, there are certain
shortcomings inherent to the MVPE methodology. The model assumes interest rate
changes are instantaneous parallel shifts in the yield curve. In reality, rate
changes are rarely instantaneous. The use of the simplifying assumption that
short-term and long-term rates change by the same degree may also misstate
historic rate patterns, which rarely show parallel yield curve shifts. Further,
the model assumes that certain assets and liabilities of similar maturity or
period to repricing will react the same to changes in rates. In reality, certain
types of financial instruments may react in advance of changes in market rates,
while the reaction of other types of financial instruments may lag behind the
change in general market rates. Additionally, the MVPE methodology may not
reflect the full impact of annual and lifetime restrictions on changes in rates
for certain assets, such as adjustable-rate mortgages. When interests rates
change, actual loan prepayments and actual early withdrawals from certificates
of deposit may deviate significantly from assumptions used in the model.
Finally, this methodology does not measure or reflect the impact that higher
rates may have on variable or adjustable-rate loan customers' ability to service
their debt. All of these factors are to be considered in monitoring our exposure
to interest rate risk.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our audited consolidated financial statements as of December 31, 1999 and
1998 and for the three years ended December 31, 1999 appear on pages 32 thru 51.
31
<PAGE>
COAST BANCORP
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Cash and due from banks..................................... $ 18,295,000 $ 23,084,000
Federal funds sold.......................................... 15,000,000 29,000,000
------------ ------------
Total cash and equivalents.............................. 33,295,000 52,084,000
Securities:
Available-for-sale, at fair value......................... 112,764,000 106,960,000
Loans:
Commercial................................................ 35,023,000 38,874,000
Real estate--term......................................... 130,438,000 95,360,000
Real estate--construction................................. 42,023,000 22,206,000
Installment and other..................................... 4,592,000 4,536,000
------------ ------------
Total loans............................................. 212,076,000 160,976,000
Unearned income........................................... (3,764,000) (3,272,000)
Allowance for credit losses............................... (3,726,000) (3,871,000)
------------ ------------
Net loans................................................... 204,586,000 153,833,000
Bank premises and equipment--net............................ 1,994,000 2,408,000
Other real estate owned..................................... -- --
Accrued interest receivable and other assets................ 17,369,000 9,463,000
------------ ------------
TOTAL ASSETS.......................................... $370,008,000 $324,748,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Noninterest-bearing demand................................ $ 83,946,000 $ 75,978,000
Interest-bearing demand................................... 95,871,000 100,707,000
Savings................................................... 68,739,000 51,873,000
Time...................................................... 52,057,000 52,252,000
------------ ------------
Total deposits.......................................... 300,613,000 280,810,000
Other borrowings............................................ 31,500,000 10,416,000
Accrued expenses and other liabilities...................... 4,856,000 3,325,000
------------ ------------
Total liabilities..................................... 336,969,000 294,551,000
Commitments and contingencies...............................
STOCKHOLDERS' EQUITY:
Preferred stock--no par value; 10,000,000 shares authorized;
no shares issued.......................................... -- --
Common stock--no par value; 40,000,000 shares authorized;
shares outstanding: 4,820,778 in 1999 and 4,768,678 in
1998...................................................... 21,462,000 20,689,000
Accumulated other comprehensive income (loss)............... (3,019,000) 317,000
Retained earnings........................................... 14,596,000 9,191,000
------------ ------------
Total stockholders' equity................................ 33,039,000 30,197,000
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............ $370,008,000 $324,748,000
============ ============
</TABLE>
See notes to consolidated financial statements
32
<PAGE>
COAST BANCORP
CONSOLIDATED INCOME STATEMENTS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Interest income:
Loans, including fees............................... $19,403,000 $16,891,000 $14,514,000
Securities:
Taxable........................................... 6,244,000 5,140,000 4,721,000
Nontaxable........................................ 769,000 708,000 331,000
Federal funds sold.................................. 885,000 1,388,000 1,244,000
----------- ----------- -----------
Total interest income................................. 27,301,000 24,127,000 20,810,000
Interest expense:
Deposits............................................ 6,179,000 5,589,000 4,116,000
Other borrowings.................................... 1,094,000 1,174,000 1,511,000
----------- ----------- -----------
Total interest expense................................ 7,273,000 6,763,000 5,627,000
----------- ----------- -----------
Net interest income................................... 20,028,000 17,364,000 15,183,000
Provision for credit losses........................... -- 300,000 450,000
----------- ----------- -----------
Net interest income after provision for credit
losses.............................................. 20,028,000 17,064,000 14,733,000
Noninterest income:
Customer service fees............................... 2,686,000 2,399,000 2,490,000
Gains from sale of loans............................ 1,019,000 2,365,000 1,249,000
Loan servicing fees................................. 691,000 839,000 1,038,000
Gains (losses) from sale of securities.............. 52,000 21,000 (10,000)
Other............................................... 222,000 363,000 162,000
----------- ----------- -----------
Total noninterest income.............................. 4,670,000 5,987,000 4,929,000
Noninterest expenses:
Salaries and benefits............................... 7,390,000 6,507,000 5,692,000
Occupancy........................................... 1,253,000 1,183,000 980,000
Equipment........................................... 1,170,000 1,118,000 1,120,000
Customer services................................... 673,000 698,000 462,000
Advertising and promotion........................... 506,000 689,000 629,000
Stationery and postage.............................. 419,000 413,000 362,000
Professional services............................... 377,000 363,000 414,000
Data processing..................................... 375,000 321,000 319,000
Insurance........................................... 202,000 212,000 202,000
Other............................................... 1,007,000 978,000 826,000
----------- ----------- -----------
Total noninterest expenses............................ 13,372,000 12,482,000 11,006,000
----------- ----------- -----------
Income before income taxes............................ 11,326,000 10,569,000 8,656,000
Provision for income taxes............................ 4,387,000 4,408,000 3,501,000
----------- ----------- -----------
Net income............................................ $ 6,939,000 $ 6,161,000 $ 5,155,000
=========== =========== ===========
Net income per share:
Basic................................................. $ 1.45 $ 1.28 $ 1.06
=========== =========== ===========
Diluted............................................... $ 1.41 $ 1.25 $ 1.05
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements
33
<PAGE>
COAST BANCORP
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK OTHER TOTAL
----------------------- COMPREHENSIVE COMPREHENSIVE RETAINED STOCKHOLDERS'
SHARES AMOUNT INCOME INCOME (LOSS) EARNINGS EQUITY
--------- ----------- -------------- -------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balances, January 1, 1997.............. 4,419,318 $11,041,000 $ 3,786,000 $ 130,000 $12,022,000 $23,193,000
===========
Cash dividends paid.................... (1,017,000) (1,017,000)
Net increase in value of
available-for-sale securities, net of
tax of $400,000...................... $ 563,000 563,000 563,000
Repurchase of common stock............. (12,000) (30,000) (100,000) (130,000)
Net income............................. 5,155,000 5,155,000 5,155,000
--------- ----------- ----------- ----------- ----------- -----------
Balances, December 31, 1997............ 4,407,318 11,011,000 $ 5,718,000 693,000 16,060,000 27,764,000
===========
10% stock dividend..................... 437,540 9,516,000 (9,516,000) --
Cash paid in-lieu of fractional
shares............................... (7,000) (7,000)
Cash dividends paid.................... (1,317,000) (1,317,000)
Net decrease in value of
available-for-sale securities, net of
tax of $272,000...................... $ (376,000) (376,000) (376,000)
Exercise of stock options.............. 52,520 338,000 338,000
Income tax benefit from stock options
exercised............................ 285,000 285,000
Repurchase of common stock............. (128,700) (461,000) (2,190,000) (2,651,000)
Net income............................. 6,161,000 6,161,000 6,161,000
--------- ----------- ----------- ----------- ----------- -----------
Balances, December 31, 1998............ 4,768,678 $20,689,000 $ 5,785,000 $ 317,000 $ 9,191,000 $30,197,000
===========
Cash dividends paid.................... (1,534,000) (1,534,000)
Net decrease in value of
available-for-sale securities, net of
tax of $2,348,000.................... $(3,336,000) (3,336,000) (3,336,000)
Exercise of stock options.............. 52,100 629,000 629,000
Income tax benefit from stock options
exercised............................ 144,000 144,000
Net income............................. 6,939,000 6,939,000 6,939,000
--------- ----------- ----------- ----------- ----------- -----------
Balances, December 31, 1999............ 4,820,778 $21,462,000 $ 3,603,000 $(3,019,000) $14,596,000 $33,039,000
========= =========== =========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements
34
<PAGE>
COAST BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.......................................... $ 6,939,000 $ 6,161,000 $ 5,155,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for credit losses....................... -- 300,000 450,000
Depreciation and amortization..................... (912,000) (179,000) (39,000)
(Gains) losses on securities transactions......... (52,000) (21,000) 10,000
Deferred income taxes............................. 321,000 43,000 (257,000)
Proceeds from loan sales.......................... 74,420,000 82,869,000 48,255,000
Origination of loans held for sale................ (74,514,000) (84,432,000) (52,827,000)
Effect of changes in:
Accrued interest receivable and other assets.... (5,879,000) (1,788,000) (1,265,000)
Accrued expenses and other liabilities.......... 1,531,000 851,000 (1,173,000)
Unearned income................................. 2,305,000 2,025,000 1,783,000
------------ ------------ ------------
Net cash provided by operating activities........... 4,159,000 5,829,000 92,000
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities
available-for-sale................................ 4,775,000 27,927,000 5,552,000
Proceeds from maturities of securities.............. 28,036,000 21,574,000 15,291,000
Purchases of securities available-for-sale.......... (44,412,000) (77,006,000) (29,236,000)
Net increase in loans............................... (51,151,000) (13,293,000) (18,133,000)
Purchases of bank premises and equipment............ (322,000) (921,000) (750,000)
Proceeds from sale of other real estate owned....... -- 514,000 --
------------ ------------ ------------
Net cash used in investing activities............... (63,074,000) (41,205,000) (27,276,000)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits............................ 19,803,000 79,613,000 15,730,000
Net proceeds from other borrowings.................. 21,084,000 (19,654,000) 5,462,000
Payment of cash dividends........................... (1,534,000) (1,317,000) (1,017,000)
Payment of cash in-lieu of fractional shares........ -- (7,000) --
Exercise of stock options........................... 773,000 623,000 --
Repurchase of common stock.......................... -- (2,651,000) (130,000)
------------ ------------ ------------
Net cash provided by financing activities........... 40,126,000 56,607,000 20,045,000
------------ ------------ ------------
Net increase (decrease) in cash and equivalents..... (18,789,000) 21,231,000 (7,139,000)
Cash and equivalents, beginning of year............. 52,084,000 30,853,000 37,992,000
------------ ------------ ------------
Cash and equivalents, end of year................... $ 33,295,000 $ 52,084,000 $ 30,853,000
============ ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION CASH PAID DURING
THE YEAR FOR:
Interest............................................ $ 7,294,000 $ 6,593,000 $ 5,362,000
Income taxes........................................ $ 3,661,000 $ 4,334,000 3,675,000
NON-CASH INVESTING AND FINANCING TRANSACTIONS:
Additions to other real estate owned................ $ -- $ -- $ --
</TABLE>
See notes to consolidated financial statements
35
<PAGE>
COAST BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION--In May 1995, the stockholders of Coast Commercial Bank (the
Bank) approved a plan which provided for the formation of Coast Bancorp (a bank
holding company) (the Company) and the conversion of each share of outstanding
Bank common stock into one share of Company common stock. Effective July 25,
1995 the Company issued 4,555,998 shares of its common stock for all the
outstanding shares of the Bank through a merger which has been accounted for
similar to a pooling of interests in that the historical cost basis of the Bank
has been carried forward. As a result of the merger, the Bank became a
wholly-owned subsidiary of the Company.
On January 20, 1999, the Company's board of directors approved the
declaration of a 2-for-1 stock split effective for shareholders of record
February 5, 1999. Accordingly, all historical financial information has been
restated as if the stock split had been in effect for all periods presented.
NATURE OF OPERATIONS--The Company and its subsidiary, Coast Commercial Bank,
operate 6 branches in Santa Cruz County, California. The Company's primary
source of revenue is loans to customers, who are predominately small and
middle-market businesses, professionals and middle-income individuals in Santa
Cruz County. Banking products and services offered include commercial and
consumer banking services such as commercial, construction, real estate, SBA
guaranteed, personal, home equity and other consumer loans as well as checking
and savings accounts, time deposits, overdraft protection, credit and debit
cards, merchant credit card processing, safe deposit boxes and related services.
On December 14, 1999 the Company and Greater Bay Bancorp, the parent of
Cupertino National Bank, Mid-Peninsula Bank, Peninsula Bank of Commerce, Golden
Gate Bank, Bay Area Bank, Bay Bank of Commerce and Mt. Diablo National Bank,
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.
BASIS OF PRESENTATION--The accounting and reporting policies of the Company
and the Bank conform to generally accepted accounting principles and to
prevailing practices within the banking industry. The methods of applying those
principles which materially affect the consolidated financial statements are
summarized below. In preparing financial statements in conformity with generally
accepted accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities, as of the dates of the balance
sheets, and revenues and expenses for the periods indicated. The allowance for
credit losses is a material estimate. Actual results could differ from those
estimates.
CONSOLIDATION--The consolidated financial statements include the accounts of
the Company and the Bank. All material intercompany accounts and transactions
have been eliminated.
CASH AND EQUIVALENTS--For purposes of reporting cash flows, cash and
equivalents include cash on hand, amounts due from banks and federal funds sold.
Generally, federal funds are sold for one-day periods.
36
<PAGE>
COAST BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SECURITIES--At the time of purchase, investments in debt and equity
securities are classified as held-to-maturity and measured at amortized cost
only if the Company has the positive intent and ability to hold such securities
to maturity. All other investments in debt and equity securities are classified
as available-for-sale, which are carried at market value with a corresponding
recognition of the unrealized holding gain or loss, net of income taxes, as a
net amount within accumulated other comprehensive income, which is a separate
component of stockholders' equity, until realized.
Amortization of premiums and accretion of discounts arising at acquisition
of securities are included in income using methods that approximate the interest
method. Market values are based on quoted market prices or dealer quotes. Gains
or losses on the sale of securities are computed using the specific
identification method.
LOANS--Loans are stated at principal amount outstanding. Loans held for sale
are carried at the lower of cost or market. Interest on loans is credited to
income as earned.
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
nonaccrual loans is then recognized only to the extent that cash is received and
where the future collection of principal is probable.
The Bank measures impaired loans based upon the present value of expected
future cash flows discounted at the loan's effective interest rate, except that
as a practical expedient, an impairment may be measured based on a loan's
observable market price or the fair value of the collateral if the loan is
collateral dependent. A loan is impaired when, based upon current information
and events, it is probable that the Bank will be unable to collect all amounts
due according to the contractual terms of the loan agreement.
Loan origination fees and costs are deferred and amortized to income by a
method approximating the effective interest method over the estimated lives of
the underlying loans. Fees received by the Company relating to mortgage loans
held for sale are recognized when the loans are sold.
The Company originates loans that are guaranteed in part by the Small
Business Administration (SBA). The guaranteed portion of such loans can be sold
without recourse. The Company retains the servicing for the portion sold and has
credit risk for the remaining unguaranteed portion. Gains or losses realized on
loans sold are determined by allocating the recorded investment between the
portion of the loan sold and the portion retained based on an estimate of the
relative fair values of those portions as of the date the loan is sold.
The Company also originates and sells residential mortgage loans to the
Federal Home Loan Mortgage Corporation (FHLMC) and other participants in the
mortgage markets.
ALLOWANCE FOR CREDIT LOSSES--The Company maintains an allowance for credit
losses to absorb losses inherent in existing loans and commitments to extend
credit. The allowance is based on quarterly evaluations of collectibility and
prior loan loss experience. The evaluations take into consideration factors such
as specific problem graded loans, impaired loans, and local economic conditions
that may affect the borrowers' ability to pay. The allowance is increased by a
provision for credit losses, which is charged to current period operating
results, and decreased by the amount of chargeoffs, net of recoveries. Loans are
charged against the allowance when management believes that the collectibility
of the principal is unlikely.
37
<PAGE>
COAST BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The allowance also incorporates the results of measuring impaired loans by
adjusting an allocation of the existing allowance for credit losses.
In evaluating the probability of collection, management is required to make
estimates and assumptions that affect the reported amounts of loans, allowance
for credit losses and the provision for credit losses charged to operations.
Actual results could differ significantly from those estimates.
BANK PREMISES AND EQUIPMENT--Bank premises and equipment are stated at cost
less accumulated depreciation and amortization. Depreciation and amortization
are computed on a straight-line basis over the estimated useful lives of three
to twenty years. The Company evaluates the recoverability of long-lived assets
on an ongoing basis.
OTHER REAL ESTATE OWNED--Other real estate owned consists of property
acquired as a result of a foreclosure proceeding or through receipt of a
deed-in-lieu of foreclosure. Other real estate owned is carried at the lower of
cost or fair value less estimated costs to sell. Any excess of the loan balance
over the fair value when the property is acquired is charged to the allowance
for credit losses. Subsequent declines in fair value, if any, and disposition
gains and losses are included in noninterest income and noninterest expenses.
ACCRUED INTEREST RECEIVABLE AND OTHER ASSETS--Accrued interest receivable
and other assets includes the cash surrender value of single premium insurance
policies of $7,064,000 and $2,455,000 at December 31, 1999 and 1998,
respectively.
ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND
LIABILITIES--The Company accounts for the transfer and servicing of financial
assets based on the financial and servicing assets it controls and liabilities
it has incurred, derecognizes financial assets when control has been
surrendered, and derecognizes liabilities when extinguished. Servicing assets
are measured at fair value and amortized over the period of net servicing income
and are assessed for impairment on an ongoing basis. Any servicing assets in
excess of the contractually specified servicing fees are measured at fair value
as an interest-only strip receivable and treated as similar to an
available-for-sale security. Servicing assets, net of any required valuation
allowance, and interest-only strip receivables are included in other assets.
INCOME TAXES--Income taxes are provided at current rates. Deferred income
taxes reflect the net tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and amounts
used for income tax purposes.
STOCK-BASED COMPENSATION--The Company accounts for stock-based awards to
employees using the intrinsic value method in accordance with Accounting
Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to
Employees." Under the intrinsic value method, compensation cost is measured as
the amount by which the quoted market value of the Company's stock at the date
of grant exceeds the stock option exercise price.
NET INCOME PER SHARE--Basic net income per share is computed by dividing net
income by the number of weighted average common shares outstanding. Diluted net
income per share reflects potential dilution from outstanding stock options,
using the treasury stock method. There was no difference in the net income used
in the calculation of basic and diluted net income per share for 1999, 1998 and
1997. The
38
<PAGE>
COAST BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
number of weighted average shares used in computing basic and diluted net income
per share are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Basic....................................... 4,791,973 4,803,016 4,852,758
Dilutive effect of stock options, using the
treasury stock method..................... 118,401 133,176 78,634
--------- --------- ---------
Diluted..................................... 4,910,374 4,936,192 4,931,392
========= ========= =========
</TABLE>
COMPREHENSIVE INCOME--The Company has retroactively adopted SFAS No. 130,
"Reporting Comprehensive Income", which requires that an enterprise report and
display, by major components and as a single total, the change in its net assets
during the period fron non-owner sources. The adoption of this statement
resulted in a change in the financial statement presentation, but did not have
an impact on the Company's consolidated financial position, results of
operations or cash flows.
SEGMENT REPORTING-- Coast Bancorp's only operating unit is Coast Commercial
Bank, a commercial bank, which offers banking products to customers located in
Santa Cruz and surrounding counties of Northern California. Accordingly,
management evaluates the Company's performance as a whole and does not allocate
resources based on the performance of different lending or transaction
activities and the Company operates as one business segment.
RECLASSIFICATIONS--Certain amounts in the 1998 and 1997 financial statements
have been reclassified to conform to the 1999 presentation. These
reclassifications had no impact on stockholders' equity or net income.
NEW ACCOUNTING PRONOUNCEMENTS--In June 1999, the Financial Accounting
Standards Board issued SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities--Deferral of the Effective Date of FASB Statement No. 133".
This statement defers the effective date of Statement No. 133 "Accounting for
Derivative Instruments and Hedging Activities" for all entities, which have not
yet adopted the Statement, to be effective for all fiscal quarters of all fiscal
years beginning after June 15, 2000, with earlier application encouraged.
2. RESTRICTED CASH BALANCES
The Company, through its bank subsidiary, is required to maintain reserves
with the Federal Reserve Bank of San Francisco. Reserve requirements are based
on a percentage of certain deposits. At December 31, 1999 the Company maintained
reserves of $1,479,000 in the form of vault cash and balances at the Federal
Reserve which satisfied the regulatory requirements.
39
<PAGE>
COAST BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
3. SECURITIES
The amortized cost and estimated fair values of securities at December 31,
are as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED FAIR
COST GAIN LOSS VALUE
------------ ---------- ----------- --------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1999
Available-for-sale:
U.S. Treasury and agency securities.... $ 7,412,000 $ -- $ (159,000) $ 7,253,000
Mortgage-backed securities............. 78,490,000 94,000 (3,107,000) 75,477,000
State and municipal obligations........ 15,068,000 30,000 (982,000) 14,116,000
Corporate debt securities.............. 14,350,000 -- (1,039,000) 13,311,000
Federal Home Loan Bank capital stock..... 2,607,000 -- -- 2,607,000
------------ ---------- ----------- ------------
Total.................................... $117,927,000 $ 124,000 $(5,287,000) $112,764,000
============ ========== =========== ============
DECEMBER 31, 1998
Available-for-sale:
U.S. Treasury and agency securities.... $ 18,092,000 $ 27,000 $ (27,000) $ 18,092,000
Mortgage-backed securities............. 57,781,000 712,000 (66,000) 58,427,000
State and municipal obligations........ 14,457,000 342,000 -- 14,799,000
Corporate debt securities.............. 14,606,000 50,000 (517,000) 14,139,000
Federal Home Loan Bank capital stock..... 1,503,000 -- -- 1,503,000
------------ ---------- ----------- ------------
Total.................................... $106,439,000 $1,131,000 $ (610,000) $106,960,000
============ ========== =========== ============
</TABLE>
The amortized cost and estimated fair value of debt securities at
December 31, 1999, by contractual maturity, are presented below. Mortgage-backed
securities generally have stated maturities from 5 to 30 years, but are subject
to substantial prepayments which effectively accelerate maturities.
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE
---------------------------
ESTIMATED
AMORTIZED MARKET
COST VALUE
------------ ------------
<S> <C> <C>
DECEMBER 31, 1999
U.S. Treasury and agency, state and municipal and
corporate debt securities:
Due within one year.............................. $ -- $ --
Due after 1 year through 5 years................. 7,932,000 7,785,000
Due after 5 years through 10 years............... 3,807,000 3,819,000
Due after 10 years............................... 25,091,000 23,076,000
------------ ------------
36,830,000 34,680,000
Mortgage-backed securities....................... 78,490,000 75,477,000
------------ ------------
Total............................................ $115,320,000 $110,157,000
============ ============
</TABLE>
Gross realized gains and gross realized losses from sales of securities
available-for-sale were $61,000 and $9,000 in 1999, $73,000 and $52,000 in 1998,
and $43,000 and $53,000 in 1997.
40
<PAGE>
COAST BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
3. SECURITIES (CONTINUED)
At December 31, 1999, investment securities with a carrying value of
$77,299,000 were pledged to collateralize public deposits and for other purposes
as required by law or contract.
4. ALLOWANCE FOR CREDIT LOSSES
Changes in the allowance for credit losses are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Balance, beginning of year............... $3,871,000 $3,609,000 $3,158,000
Provision charged to expense............. -- 300,000 450,000
Loans charged off........................ (260,000) (113,000) (165,000)
Recoveries............................... 115,000 75,000 166,000
---------- ---------- ----------
Balance, end of year..................... $3,726,000 $3,871,000 $3,609,000
========== ========== ==========
</TABLE>
Nonaccrual loans were $1,098,000, $1,108,000, and $266,000 at December 31,
1999, 1998, and 1997, respectively. If interest on nonaccrual loans had been
accrued, such income would have approximated $184,000 in 1999, $124,000 in 1998
and $24,000 in 1997. Interest income of $2,000 in 1999, $74,000 in 1998 and
$18,000 in 1997 was recorded when it was received on nonaccrual loans.
There were no impaired loans at December 31, 1999, 1998, and 1997 or during
1999, 1998 and 1997.
5. LOAN SALES AND SERVICING
Sales of SBA loans totaled $18,214,000, $25,601,000, and $13,431,000 in
1999, 1998, and 1997. SBA loans serviced for other investors were $83,320,000
and $89,114,000 at December 31, 1999 and 1998. Sales of residential mortgage
loans totaled $56,206,000, $57,268,000, and $34,824,000 in 1999, 1998, and 1997.
Residential mortgage loans serviced for other investors were $35,144,000 and
$38,078,000 at December 31, 1999 and 1998.
SBA loans held for sale were $11,218,000 and $6,349,000 at December 31, 1999
and 1998. Mortgage loans held by the Company pending completion of their sale to
the FHLMC or other investors were $2,804,000 and $9,242,000 at December 31, 1999
and 1998. The Company does not anticipate any loss on the sale of SBA loans.
Loans held for or pending completion of sale are included in loans in the
consolidated balance sheets. SBA loans are carried at cost, which is lower than
market value while mortgage loans are carried at the lower of cost or market
value.
At December 31, 1999 the balance of servicing assets generated by the sale
of loans was $1,043,000, which approximates market value. Interest-only strip
receivables were recorded at $907,000 including an unrealized gain of $34,000.
These assets represent the servicing spread generated from the sold guaranteed
portions of SBA loans. Servicing income from these loans was $691,000, $839,000
and $1,038,000 in 1999, 1998 and 1997. Amortization of the related assets for
these same periods was $430,000, $267,000 and $27,000. In recording the initial
value of the servicing assets and interest-only strip receivable, the Company
uses estimates which are made based on expectations of future prepayment rates
and other considerations. If actual prepayments with respect to sold loans occur
more quickly than projected the carrying value of the servicing assets may have
to be adjusted through a charge to earnings. A decrease in
41
<PAGE>
COAST BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
5. LOAN SALES AND SERVICING (CONTINUED)
the value of the interest-only strip receivable would also be expected. There
was no valuation allowance at December 31, 1999, 1998 and 1997.
6. BANK PREMISES AND EQUIPMENT
Bank premises and equipment at December 31 are comprised of the following:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Buildings and leasehold improvements................. 2,556,000 2,550,000
Furniture and equipment.............................. 5,441,000 6,007,000
---------- ----------
Total................................................ 7,997,000 8,557,000
Accumulated depreciation and amortization............ (6,003,000) (6,149,000)
---------- ----------
Bank premises and equipment-net...................... 1,994,000 2,408,000
========== ==========
</TABLE>
Depreciation expense totaled $736,000, $754,000 and $838,000 in 1999, 1998
and 1997.
Certain of the Company's premises are leased under various noncancelable
operating leases expiring in 2003 which have, in certain instances, renewal
options. Future minimum lease payments are as follows:
<TABLE>
<S> <C>
2000........................................................ $ 749,000
2001........................................................ 510,000
2002........................................................ 226,000
2003........................................................ 20,000
----------
Total....................................................... $1,505,000
==========
</TABLE>
Rent expense under operating leases was $815,000, $787,000 and $652,000 in
1999, 1998 and 1997, respectively.
7. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Current:
Federal................................ $3,475,000 $3,271,000 $2,832,000
State.................................. 1,233,000 1,094,000 926,000
---------- ---------- ----------
Total current........................ 4,708,000 4,365,000 3,758,000
Deferred:
Federal................................ (247,000) 41,000 (228,000)
State.................................. (74,000) 2,000 (29,000)
---------- ---------- ----------
Total deferred....................... (321,000) 43,000 (257,000)
---------- ---------- ----------
Total................................ $4,387,000 $4,408,000 $3,501,000
========== ========== ==========
</TABLE>
42
<PAGE>
COAST BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
7. INCOME TAXES (CONTINUED)
The effective tax rate differs from the federal statutory rate as follows:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Statutory federal income tax rate......................... 35.0% 35.0% 35.0%
State income taxes, net of federal tax effect............. 6.8 6.8 6.8
Tax exempt income......................................... (2.2) (2.0) (1.2)
Other-net................................................. (0.9) 1.9 (0.2)
---- ---- ----
Total..................................................... 38.7% 41.7% 40.4%
==== ==== ====
</TABLE>
The Company's net deferred tax assets at December 31, are comprised of the
following:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Deferred tax assets:
Provision for credit losses........................ $1,520,000 $1,538,000
Deferred compensation.............................. 685,000 529,000
Accelerated depreciation........................... 372,000 402,000
State income tax................................... 217,000 191,000
Mark-to-market adjustment.......................... 158,000 90,000
Unrealized losses on securities available-for
sale............................................. 2,111,000 --
Other.............................................. 139,000 8,000
---------- ----------
Total deferred tax assets........................ 5,202,000 2,758,000
Deferred tax liabilities:
Real estate investment............................. (253,000) (269,000)
Unrealized gains on securities available-for
sale............................................. -- (222,000)
FHLB dividends..................................... (115,000) (87,000)
---------- ----------
Total deferred tax liabilities................... (368,000) (578,000)
---------- ----------
Net deferred tax assets.......................... $4,834,000 $2,180,000
========== ==========
</TABLE>
There was no valuation allowance at December 31, 1999 and 1998.
8. DEPOSITS
The aggregate amount of time deposits each with a minimum denomination of
$100,000 or more was $40,373,000 and $36,199,000 at December 31, 1999 and 1998,
respectively. Included in time deposits at December 31, 1999 is a $20,000,000
deposit of public funds due within three months. Securities were delivered to a
safekeeping agent to collateralize the deposit (See Note 3).
43
<PAGE>
COAST BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
8. DEPOSITS (CONTINUED)
At December 31, 1999, the scheduled maturities of time deposits are as
follows:
<TABLE>
<S> <C>
2000........................................................ $50,618,000
2001........................................................ 1,386,000
2002........................................................ 53,000
-----------
$52,057,000
===========
</TABLE>
9. OTHER BORROWINGS
Other borrowings consist of the following:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Advances from the Federal Home Loan Bank of San
Francisco........................................ $15,000,000 $10,000,000
Securities sold under agreements to repurchase..... 15,000,000 --
Treasury, tax and loan note........................ 1,500,000 416,000
----------- -----------
$31,500,000 $10,416,000
=========== ===========
</TABLE>
Information concerning securities sold under agreements to repurchase is
summarized as follows:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Average balance during the year.................... $ 6,370,000 $11,975,000
Average interest rate during the year.............. 5.4% 5.7%
Maximum month-end balance during the year.......... $15,000,000 $22,800,000
Average rate at December 31........................ 5.8% --
</TABLE>
The Bank also receives advances from the FHLB payable at maturity in
5 years, callable at the option of the FHLB beginning one year after funding the
advance. A $5,000,000 advance may be called beginning in March 2000 and a
$10,000,000 advance may be called beginning in November 2000. The weighted
average interest rate on the callable advances outstanding at December 31, 1999
was 5.4%. The securities sold under agreements to repurchase at December 31,
1999 mature within three months.
Mortgage-backed securities were delivered to the broker-dealers who arranged
the transactions to secure the advances and securities sold under agreements to
repurchase (See Note 3).
In order to receive advances and sell securities under agreements to
repurchase from the FHLB, the Bank is required to own capital stock of the FHLB
(See Note 3).
10. COMMITMENTS AND CONTINGENT LIABILITIES
In the normal course of business, there are outstanding various commitments
and contingent liabilities which are not reflected in the consolidated financial
statements. The Company does not anticipate losses as a result of these
commitments. Undisbursed loan commitments totaled $86,523,000 and $73,724,000 at
44
<PAGE>
COAST BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
10. COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
December 31, 1999 and 1998. Standby letters of credit were $5,541,000 and
$4,652,000 at December 31, 1999 and 1998. The Company's exposure to credit loss
is limited to amounts funded or drawn.
Loan commitments are typically contingent upon the borrower meeting certain
financial and other covenants and such commitments typically have fixed
expiration dates and require payment of a fee. As many of these commitments are
expected to expire without being drawn upon, the total commitments do not
necessarily represent future cash requirements. The Company evaluates each
potential borrower and the necessary collateral on an individual basis.
Collateral varies, but may include real property, bank deposits or business or
personal assets.
Standby letters of credit are conditional commitments written by the Company
to guarantee the performance of a customer to a third party. These guarantees
are issued primarily relating to inventory purchases by the Company's commercial
customers and such guarantees are typically short-term. Credit risk is similar
to that involved in extending loan commitments to customers and the Company,
accordingly, uses evaluation and collateral requirements similar to those for
loan commitments. Virtually all of such commitments are collateralized.
11. LOAN CONCENTRATIONS
The Bank's customers are primarily located in Santa Cruz, Monterey and San
Benito counties, an area on the California coast south of San Francisco.
Commercial loans represent 16% of total loans at December 31, 1999, with no
particular industry representing a significant portion. Approximately 20% of the
Company's loans at December 31, 1999 are for real estate construction including
single family residential and commercial properties. Other real estate secured
loans, primarily for commercial properties, represent another 62% of loans at
December 31, 1999. Installment and other loans, primarily automobile and mobile
home loans, represent the remainder of loans. Many of the Company's customers
are employed by or are otherwise dependent on the tourism, high technology,
agriculture and real estate development industries and, accordingly, the ability
of any of the Company's borrowers to repay loans may be affected by the
performance of these sectors of the economy. Virtually all loans are
collateralized. Generally, real estate loans are secured by real property and
commercial and other loans are secured by bank deposits or business or personal
assets. Repayment is generally expected from refinancing or sale of the related
property for real estate construction loans and from cash flows of the borrower
for other loans.
12. RELATED PARTY LOANS
The Bank may make loans to directors and their associates subject to
approval by the Board of Directors. These transactions are at terms and rates
comparable to those granted to other customers of the Company. Loans to related
parties were $429,000 and $223,000 at December 31, 1999 and 1998, respectively.
During 1999, new loans to these related parties were $274,000 and repayments
were $68,000.
13. REGULATORY MATTERS
The Company and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Company's financial statements. Under capital
adequacy guidelines and the
45
<PAGE>
COAST BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
13. REGULATORY MATTERS (CONTINUED)
regulatory framework for prompt corrective action, the Company and the Bank must
meet specific capital guidelines that involve quantitative measures of assets,
liabilities, and certain off-balance sheet items as calculated under regulatory
accounting practices. The Company's and Bank's capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier I capital (as defined in the
regulations) to risk weighted assets (as defined), and of Tier I capital (as
defined) to average assets (as defined). Management believes, as of
December 31, 1999, that the Company and Bank meet all capital adequacy
requirements to which they are subject.
As of December 31, 1999 and 1998, the most recent notification from the
Federal Deposit Insurance Corporation categorized the Bank as well capitalized
under the regulatory framework for prompt corrective action. To be categorized
as adequately capitalized the Bank must maintain minimum total risk-based, Tier
I risk-based, and Tier I leverage ratios as set forth in the table. There are no
conditions or events since that notification that management believes have
changed the institution's category.
Actual capital amounts and ratios are as follows:
<TABLE>
<CAPTION>
TO BE CATEGORIZED AS
WELL
CAPITALIZED UNDER
MINIMUM FOR PROMPT
CAPITAL ADEQUACY CORRECTIVE ACTION
ACTUAL PURPOSES: PROVISIONS:
---------------------- ---------------------- ----------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
----------- -------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
THE COMPANY:
As of December 31, 1999:
Total Capital (to Risk Weighted
Assets)................................ $39,401,000 14.4% $21,825,000 8.0% n/a n/a
Tier I Capital (to Risk Weighted
Assets)................................ $35,987,000 13.2% $10,913,000 4.0% n/a n/a
Tier I Capital (to Average Assets)....... $35,987,000 9.8% $14,632,000 4.0% n/a n/a
As of December 31, 1998:
Total Capital (to Risk Weighted
Assets)................................ $32,529,000 15.4% $16,856,000 8.0% n/a n/a
Tier I Capital (to Risk Weighted
Assets)................................ $29,880,000 14.2% $ 8,428,000 4.0% n/a n/a
Tier I Capital (to Average Assets)....... $29,880,000 9.5% $12,574,000 4.0% n/a n/a
THE BANK:
As of December 31, 1999:
Total Capital (to Risk Weighted
Assets)................................ $37,426,000 13.8% $21,771,000 8.0% $27,213,000 10.0%
Tier I Capital (to Risk Weighted
Assets)................................ $34,020,000 12.5% $10,885,000 4.0% $16,328,000 6.0%
Tier I Capital (to Average Assets)....... $34,020,000 9.4% $14,538,000 4.0% $18,172,000 5.0%
As of December 31, 1998:
Total Capital (to Risk Weighted
Assets)................................ $31,198,000 14.8% $16,856,000 8.0% $21,069,000 10.0%
Tier I Capital (to Risk Weighted
Assets)................................ $28,549,000 13.6% $ 8,428,000 4.0% $12,642,000 6.0%
Tier I Capital (to Average Assets)....... $28,549,000 9.1% $12,574,000 4.0% $15,717,000 5.0%
</TABLE>
46
<PAGE>
COAST BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
14. EMPLOYEE BENEFIT PLANS
The Company has a 401(k) tax-deferred savings plan under which eligible
employees may elect to have a portion of their salary deferred and contributed
to the plan. The Company is not obligated to, but may contribute to the plan. In
1999 and 1998, the Company matched each employee's contribution up to $1,000, an
increase from $500 in 1997, aggregating $101,000 in 1999, $90,000 in 1998 and
$42,000 in 1997. Participants may elect several investment options.
Substantially all employees with at least 1,000 hours of service are covered
by a discretionary employee stock ownership plan (ESOP). The Company's
contribution to the ESOP was $120,000 in 1997. No contribution was made during
1999 and 1998.
The Bank established a profit sharing plan for eligible employees during
1998. Distributions under the profit sharing plan are tied to the Bank's net
income. The Bank accrued $191,000 in 1999 and $180,000 in 1998 for profit
sharing distributions.
The Bank has an unfunded salary continuation plan for selected officers
which provides for retirement benefits upon reaching age 62. The Bank accrues
such post-retirement benefits over the estimated service period. In the event of
termination following a change in control of the Company, the officers' benefits
will fully vest. The Bank accrued $242,000, $61,000, and $72,000 in 1999, 1998,
and 1997, respectively. The liability under the salary continuation plan was
$717,000 and $474,000 at December 31, 1999 and 1998, respectively. The discount
rate used to measure the liability was 7.00% and 7.05% at December 31, 1999 and
1998, respectively.
The Bank has a deferred compensation plan whereby certain directors defer
their fees until age 65 or 70. Amounts deferred accrue interest at a rate
determined annually by the Board of Directors (5.9% and 6.7% for 1999 and 1998,
respectively). Accumulated benefits are paid over 8 to 13 years. Total deferred
director fees at December 31, 1999 and 1998 were $810,000 and $705,000,
respectively.
Under the 1995 stock option plan (Plan) the Company may grant options to
purchase up to 880,000 shares of common stock to employees, directors and
consultants at prices not less than the fair market value at date of grant.
Employee options generally expire 5 to 10 years from the date of grant and vest
over a 5-year period. Under the Plan non-employee directors of the Company are
automatically granted options to purchase 4,400 shares of common stock at the
fair market value at the date of grant each year that such person remains a
director of the Company. Options granted under the Plan to non-employee
directors are exercisable after 6 months and expire 5 years from the date of
grant. The maximum number of shares which may be issued to an individual
non-employee director under the Plan is 22,000.
47
<PAGE>
COAST BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
14. EMPLOYEE BENEFIT PLANS (CONTINUED)
Option activity under the plan is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------------------------------
1999 1998 1997
---------------------------- ---------------------------- ----------------------------
NUMBER OF WEIGHTED-AVERAGE NUMBER OF WEIGHTED-AVERAGE NUMBER OF WEIGHTED-AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
--------- ---------------- --------- ---------------- --------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding,
beginning of year...... 311,960 $10.98 268,400 $7.84 171,600 $6.15
Granted.................. 39,600 17.70 96,800 17.12 96,800 10.83
Exercised................ (52,100) 12.07 (53,240) 6.34 --
------- ------- -------
Options outstanding, end
of year................ 299,460 11.67 311,960 10.98 268,400 7.84
======= ======= =======
Options exercisable, end
of year................ 154,260 11.11 127,160 10.05 114,400 6.98
======= ======= =======
</TABLE>
The weighted-average fair value of options granted was $6.73 during 1999,
$8.47 during 1998 and $6.79 during 1997.
Additional information regarding options outstanding as of December 31, 1999
is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------------------------------------ OPTIONS EXERCISABLE
WEIGHTED AVERAGE ------------------------------
RANGE OF NUMBER REMAINING CONTRACTUAL WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE
EXERCISE PRICES OUTSTANDING LIFE (YRS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- --------------------- ----------- --------------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$ 4.66 4,400 0.1 $ 4.66 4,400 $ 4.66
6.48 103,660 5.9 6.48 59,660 6.48
10.17--$11.14 79,200 6.4 10.98 39,600 10.82
17.10--$17.84 112,200 6.8 17.24 50,600 17.37
------- -------
299,460 11.67 154,260 11.11
======= =======
</TABLE>
At December 31, 1999, 475,200 shares were available for future grants under
the option plan.
As discussed in Note 1, the Company continues to account for its stock-based
awards using the intrinsic value method in accordance with APB Opinion No. 25,
"Accounting for Stock Issued to Employees" and its related interpretations.
Accordingly, no compensation expense has been recognized in the financial
statements for employee stock arrangements.
SFAS No. 123, "Accounting for Stock-Based Compensation," requires the
disclosure of pro forma net income and earnings per share had the Company
adopted the fair value method as of the beginning of fiscal 1995. Under
SFAS 123, the fair value of stock-based awards to employees is calculated
through the use of option pricing models, even though such models were developed
to estimate the fair value of freely tradable, fully transferable options
without vesting restrictions, which significantly differ from the Company's
stock option awards. These models also require subjective assumptions, including
future stock price volatility and expected time to exercise, which greatly
affect the calculated values. The Company's calculations were made using the
Black-Scholes option pricing model with the following weighted average
48
<PAGE>
COAST BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
14. EMPLOYEE BENEFIT PLANS (CONTINUED)
assumptions: expected life following grant, 73 months in 1999, 100 months in
1998, and 101 months in 1997; stock volatility, 50% in 1999, 1998 and 1997; risk
free interest rates, 4.98% in 1999, 5.54% in 1998, and 6.55% in 1997; and 24%
dividends during the expected term. The Company's calculations are based on a
single option valuation approach and forfeitures are recognized as they occur.
If the computed fair values of the stock option awards had been amortized to
expense over the vesting period of the awards, pro forma net income would have
been as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Proforma net income...................................... $6,636,000 $5,872,000 $4,978,000
Proforma net income per share:
Basic.................................................. $ 1.38 $ 1.22 $ 1.03
Diluted................................................ $ 1.35 $ 1.19 $ 1.01
</TABLE>
15. DISCLOSURE OF FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value amounts have been determined by using available
market information and appropriate valuation methodologies. However,
considerable judgment is required to interpret market data to develop the
estimates of fair value. Accordingly, the estimates presented are not
necessarily indicative of the amounts that could be realized in a current market
exchange. The use of different market assumptions and/or estimation techniques
may have a material effect on the estimated fair value amounts.
The following table presents the carrying amount and estimated fair value of
certain assets and liabilities held by the Company at December 31, 1998 and
1997. The carrying amounts reported in the consolidated balance sheets
approximate fair value for the following financial instruments: cash and due
from banks, federal funds sold, cash surrender value of life insurance and
demand and savings deposits. See Note 3 for a summary of the estimated fair
value of securities.
<TABLE>
<CAPTION>
1999 1998
--------------------------- ---------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Loans, net............................ $204,586,000 $204,112,000 $153,833,000 $152,382,000
Time deposits......................... $ 52,057,000 $ 52,050,000 $ 52,252,000 $ 52,261,000
Other borrowings...................... $ 31,500,000 $ 31,381,000 $ 10,416,000 $ 10,475,000
</TABLE>
The following methods and assumptions were used by the Company in computing
the estimated fair values in the above table:
LOANS, NET--The fair value of variable rate loans is the carrying value as
these loans are regularly adjusted to market rates. The fair value of fixed rate
loans is estimated by discounting the future cash flows using current rates at
which similar loans would be made to borrowers with similar credit ratings for
the same remaining maturities. The fair value calculations are adjusted by the
allowance for credit losses.
TIME DEPOSITS--The fair value of fixed rate time deposits was estimated by
discounting the cash flows using rates currently offered for deposits of similar
remaining maturities.
49
<PAGE>
COAST BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
15. DISCLOSURE OF FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
OTHER BORROWINGS--The fair value of fixed rate other borrowings was
estimated by discounting the cash flows using rates currently offered for these
types of borrowings of similar remaining maturities.
UNUSED COMMITMENTS TO EXTEND CREDIT--The fair value of letters of credit and
standby letters of credit is not significant.
16. PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
The condensed financial statements of Coast Bancorp (parent company only)
follow:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1999 1998
----------- -----------
<S> <C> <C>
CONDENSED BALANCE SHEET
Cash............................................... $ 1,238,000 $ 1,295,000
Investment in Coast Commercial Bank................ 31,072,000 28,866,000
Other assets....................................... 752,000 61,000
----------- -----------
Total............................................ $33,062,000 $30,222,000
=========== ===========
Liabilities........................................ $ 23,000 $ 25,000
Stockholders' equity............................... 33,039,000 30,197,000
----------- -----------
Total............................................ $33,062,000 $30,222,000
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
CONDENSED STATEMENTS OF INCOME AND
COMPREHENSIVE INCOME
Interest income.......................... $ 32,000 $ 52,000 $ 85,000
General and administrative expenses...... (93,000) (105,000) (154,000)
---------- ---------- ----------
Loss before equity in net income of Coast
Commercial Bank........................ (61,000) (53,000) (69,000)
Equity in net income of Coast Commercial
Bank:
Dividends received..................... 1,580,000 2,340,000 1,048,000
Equity in net income greater than
dividends received................... 5,399,000 3,858,000 4,155,000
Income tax benefit....................... 21,000 16,000 21,000
---------- ---------- ----------
Net income............................... $6,939,000 $6,161,000 $5,155,000
Net change in accumulated other
comprehensive income................... (3,336,000) (376,000) 563,000
---------- ---------- ----------
Comprehensive income..................... $3,603,000 $5,785,000 $5,718,000
========== ========== ==========
</TABLE>
50
<PAGE>
COAST BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
16. PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
CONDENSED STATEMENT OF CASH FLOWS
Cash flows from operating activities:
Net income............................... $6,939,000 $6,161,000 $5,155,000
Reconciliation of net income to net cash
provided by operations:
Undistributed equity in net income..... (5,399,000) (3,858,000) (4,155,000)
Other assets and liabilities........... (692,000) (14,000) (40,000)
---------- ---------- ----------
Net cash provided by operating
activities............................. 848,000 2,289,000 960,000
Cash flows from financing activities:
Cash dividends paid...................... (1,534,000) (1,317,000) (1,017,000)
Cash paid in-lieu of fractional shares... -- (7,000) --
Exercise of stock options................ 629,000 338,000 --
Repurchase of common stock............... -- (2,651,000) (130,000)
---------- ---------- ----------
Net cash used in financing activities.... (905,000) (3,637,000) (1,147,000)
---------- ---------- ----------
Net decrease in cash..................... (57,000) (1,348,000) (187,000)
Cash, beginning of period................ 1,295,000 2,643,000 2,830,000
---------- ---------- ----------
Cash, end of period...................... $1,238,000 $1,295,000 $2,643,000
========== ========== ==========
</TABLE>
A principal source of cash for the Company is dividends from the Bank.
Banking regulations limit the amount of dividends that may be paid without prior
approval of the Company's regulatory agencies to the lesser of retained earnings
or the net income of the Company for its last three fiscal years, less any
distributions during those years, subject to capital adequacy requirements. At
December 31, 1999, the Company has approximately $14,412,000 available for
payment of dividends which would not require the prior approval of the banking
regulators under this limitation.
51
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Coast Bancorp:
We have audited the accompanying consolidated balance sheets of Coast
Bancorp and its subsidiary as of December 31, 1999 and 1998, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the three years in the period ended December 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Coast Bancorp and its
subsidiary as of December 31, 1999 and 1998, and the results of their operations
and their cash flows for each of the three years in the period ended
December 31, 1999 in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
San Jose, California
January 21, 2000
52
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
INFORMATION ABOUT DIRECTORS
The following table sets forth certain information with respect to the
directors of the Company.
<TABLE>
<CAPTION>
DIRECTOR SINCE
NAME AGE PRINCIPAL OCCUPATION RELATIONSHIP WITH COMPANY (COMPANY/BANK)
- ---- -------- ----------------------------- ----------------------------- ---------------
<S> <C> <C> <C> <C>
Richard E. Alderson(1)...... 61 Private investor Director 1995/1993
Douglas D. Austin........... 59 President, Austin Insurance Director 1995/1982
Agency, Inc.
John C. Burroughs........... 55 Vice President, Investment Director and Vice President 1995/1982
Services Department, Coast
Commercial Bank
Bud W. Cummings............. 68 Retired in 1986 as proprietor Director 1995/1982
of the Santa Cruz Coin
Exchange
Ronald M. Israel, M. D...... 63 Private investor Director 1995/1982
Harvey J. Nickelson......... 56 President, Chief Executive President, Chief Executive 1995/1982
Officer and Director of Officer and Director
Coast Bancorp and Coast
Commercial Bank
Gus J.F. Norton............. 59 Broker of record and partner Director 1995/1982
in Sun Properties, a real
estate sales and
development association
James C. Thompson........... 60 Partner, Comstock, Thompson, Chairman of the Board 1995/1982
Kontz and Brenner law firm
</TABLE>
- ------------------------------
(1) Mr. Alderson resigned as a director of the Company and the Bank in February,
2000.
53
<PAGE>
EXECUTIVE OFFICERS
The following table sets forth certain information with respect to the
executive officers of Coast Bancorp. Each of the executive officers has served
as an executive officer of the Company for at least five years.
<TABLE>
<CAPTION>
OFFICER SINCE
NAME AGE PRINCIPAL OCCUPATION AND BUSINESS EXPERIENCE (COMPANY/BANK)
- ---- -------- ------------------------------------------------------------ ---------------
<S> <C> <C> <C>
Harvey J. Nickelson..... 56 President, Chief Executive Officer and Director of Coast 1995/1982
Bancorp and Coast Commercial Bank.
David V. Heald.......... 51 Executive Vice President of the Company; Executive Vice 1995/1982
President and Chief Banking Officer of the Bank.
Richard G Hofstetter.... 45 Senior Vice President and Senior Lending Officer of the --/1987
Bank. Prior to 1992, Mr. Hofstetter was Manager of the
Bank's Real Estate Department.
Bruce H. Kendall........ 42 Senior Vice President and Chief Financial Officer of the 1995/1995
Company and the Bank. From October 1990 to August 1994, Mr.
Kendall was employed by Silicon Valley Bank, most recently
as Senior Vice President of Finance.
</TABLE>
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE BY DIRECTORS AND
EXECUTIVE OFFICERS
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors, and any person who owns more than ten percent of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
("SEC"). Officers, directors and greater than ten percent shareholders are
required by SEC regulations to furnish the Company with copies of all Section
16(a) forms they file. To the best knowledge of the Company, no person owns ten
percent or more of the Company's Common Stock.
Based solely on its review of the copies of such forms received by it, or
written representations from certain persons that no Form 5 was required to be
filed, the Company believes that for the period from January 1, 1999 through
December 31, 1999, its officers and directors complied with all applicable
filing requirements.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth a summary of the compensation paid (for
services rendered in all capacities) during the past three fiscal years to the
Chief Executive Officer of the Company and to the only other executive officers
of the Company whose annual compensation for 1999 exceeded $100,000 ("Named
Executive Officers"). All compensation has been paid by the Bank.
54
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS--
OTHER ANNUAL OPTIONS
NAME POSITION YEAR SALARY BONUS COMPENSATION(1) GRANTED(2)
- ---- ----------------------- ---- -------- -------- --------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Harvey J. Nickelson.... President, Chief 1999 $177,750 $166,000 -0- -0-
Executive Officer 1998 $170,250 $154,000 -0- 22,000
1997 $164,000 $128,000 -0- 22,000
David V. Heald......... Executive Vice 1999 $128,062 $ 90,000 -0- -0-
President and Chief 1998 $122,833 $ 80,000 -0- 11,000
Banking Officer 1997 $118,250 $ 68,000 -0- 11,000
Richard G Hofstetter... Senior Vice President 1999 $110,612 $ 70,000 -0- -0-
and Senior Lending 1998 $103,425 $ 60,000 -0- 8,800
Officer 1997 $ 99,300 $ 50,000 -0- 8,800
Bruce H. Kendall....... Senior Vice President 1999 $107,826 $ 85,000 -0- -0-
and Chief Financial 1998 $ 98,500 $ 55,000 -0- 6,600
Officer 1997 $ 94,000 $ 47,500 -0- 6,600
<CAPTION>
ALL OTHER
NAME COMPENSATION
- ---- ------------
<S> <C>
Harvey J. Nickelson.... $24,780(3)(4)
$25,573(3)(4)
$24,012(3)(4)
David V. Heald......... $15,954(3)
$16,384(3)
$12,556(3)
Richard G Hofstetter... $15,330(3)
$16,233(3)
$11,868(3)
Bruce H. Kendall....... $12,789(3)
$11,801(3)
$11,131(3)
</TABLE>
- ------------------------------
(1) Certain incidental personal benefits to Named Executive Officers (not
otherwise disclosed herein) may result from expenses incurred by the Company
in the interest of attracting and retaining qualified personnel. With
respect to each Named Executive Officer, the aggregate amount of such
compensation for the fiscal year indicated did not exceed the lesser of
$50,000 or ten percent (10%) of the compensation reported in the Summary
Compensation Table for such Named Executive Officer.
(2) Represents shares of common stock underlying stock options granted
(3) Includes profit sharing distributions in 1999 and 1998, amounts contributed
to the Company's Employee Stock Ownership Plan in 1997, amounts contributed
to a 401(k) Plan and additional health insurance benefits.
(4) Includes director's fees of $12,000 per year.
OPTION GRANTS IN 1999
There were no stock options granted during 1999 to the Named Executive
Officers.
AGGREGATED OPTION EXERCISES AND OPTION VALUES
No stock options were exercised during 1999 by the Named Executive Officers.
The following table shows the value at December 31, 1999 of unexercised stock
options held by the Named Executive Officers of the Company.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED IN-
UNDERLYING OPTIONS AT THE-MONEY OPTIONS AT
FISCAL YEAR-END(#) FISCAL YEAR-END($)(1)
SHARES ACQUIRED ------------------------- -------------------------
NAME ON EXERCISE(#) VALUE REALIZED($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ---- --------------- ----------------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Harvey J. Nickelson........ -0- -0- 26,400 / 39,600 $378,024 / $449,849
David V. Heald............. -0- -0- 13,200 / 19,800 $189,012 / $224,924
Richard G. Hofstetter...... -0- -0- 10,560 / 15,840 $151,210 / $179,940
Bruce H. Kendall........... -0- -0- 7,920 / 11,880 $113,407 / $134,955
</TABLE>
- ------------------------
(1) Based on a bid price per share at December 31, 1999 of $24.125.
EMPLOYMENT AGREEMENT, CHANGE IN CONTROL ARRANGEMENTS AND TERMINATION OF
EMPLOYMENT
EMPLOYMENT AGREEMENT. Effective June 16, 1999, Coast Bancorp entered into a
four and one-half year agreement with its President and Chief Executive Officer,
Harvey J. Nickelson. The agreement
55
<PAGE>
provides for, among other things: (a) a base salary of $179,000, which the Board
may adjust; (b) a discretionary annual cash bonus; (c) use of an automobile; (d)
four weeks annual vacation; (e) annual directors fees of at least $12,000; (f) a
salary continuation agreement (see "Executive Salary Continuation Plans" below);
(g) reimbursement for ordinary and necessary expenses incurred by Mr. Nickelson
in connection with his employment; (h) in the event that Mr. Nickelson becomes
disabled so that he cannot perform his duties, payment to him of his base salary
and bonus for six months, reduced by any payments received under a disability
insurance policy purchased by the Bank. Coast Bancorp may terminate the
agreement with or without cause.
If Mr. Nickelson is terminated without cause for any reason, Mr. Nickelson
will be entitled to severance benefits of 12 months of current salary and bonus
for the most recently completed fiscal year. In the event of a termination of
his employment following a change in control of Coast Bancorp, Mr. Nickelson
will be entitled to two times his regular annual salary and bonus he was paid
for the most recently completed fiscal year.
On December 14, 1999, Coast Bancorp, Greater Bay Bancorp and Mr. Nickelson
entered into an amendment of the employment agreement that provides that, among
other things: (a) Mr. Nickelson will receive an option for 10,000 shares of
Greater Bay common stock upon closing of the merger of Coast Bancorp into
Greater Bay Bancorp that will vest at a rate of 20% each year; (b) Mr. Nickelson
will be eligible for an option for an additional 10,000 shares on the first
anniversary of closing of the merger subject to the achievement by Coast
Commercial Bank of profitability goals; (c) Mr. Nickelson will not be entitled
to the severance benefits in the employment agreement if he voluntarily resigns
within two years of closing of the merger unless Greater Bay undergoes a change
in control within those two years; (d) beginning on the second anniversary of
closing of the merger, Mr. Nickelson's severance benefits will change to 24
months of pay, as defined in the Greater Bay Bancorp Termination and Layoff Plan
I and Change in Control Plan I at the Executive Management Committee level. The
amendment to Mr. Nickelson's employment agreement will be rescinded
automatically if the proposed merger of Coast Bancorp with and into Greater Bay
Bancorp is terminated prior to closing.
EXECUTIVE SALARY CONTINUATION PLANS. During 1999, the Bank entered into
Executive Salary Continuation Agreements with certain officers including all the
executive officers. The salary continuation agreements permit retirement at age
62 and provide annual payments after retirement for the life of the officer as
follows: Mr. Nickelson $120,000, Mr. Heald $75,000, Mr. Hofstetter $50,000 and
Mr. Kendall $50,000. The annual payments will increase 2% each year after
retirement. The agreements contain vesting schedules for each executive officer.
At December 31, 1999, Mr. Nickelson and Mr. Heald were 50% vested while Mr.
Hofstetter and Mr. Kendall were 30% vested. If the executive officer elects
early retirement after age 55 but prior to attaining age 62, the annual payments
are reduced by 5% per year for each year retirement precedes age 62 and payments
are limited to the vested portion of the benefit. In the event of the executive
officer's death or disability, the executive officer's beneficiary is entitled
to the benefits.
The Bank has purchased insurance policies on the life of these officers to
enable the Bank to make the payments required by the salary continuation
agreements. In connection with these life insurance policies, the Bank entered
into a split dollar life insurance agreement with each of the executive
officers. Under the split dollar life insurance agreement, the executive
officer's beneficiary will receive a specified payment following the executive
officer's death. The specified payment amounts are: Mr. Nickelson $1,500,000
until age 70 and $1,000,000 after age 70; Mr. Heald $1,000,000 until age 70 and
$750,000 after age 70; Mr. Hofstetter and Mr. Kendall $750,000. The split dollar
life insurance agreements terminate at the option of the Bank if the executive
officer's right to receive benefits under the salary continuation agreement
terminates for any reason other than death or for termination for cause.
The salary continuation agreements contain a "change in control" provision
that takes effect after a change in control and when one of the following events
occurs within two years of the change in control:
56
<PAGE>
(a) the executive officer's employment is terminated; (b) the executive
officer's compensation and benefits are reduced from the levels on the date of
the change in control; (c) the executive officer's duties, responsibilities and
authority are reduced from those of his position on the date of the change in
control; or (d) the executive officer's site of employment is changed more than
50 miles. If the change in control provision takes effect, the executive officer
becomes fully vested.
STOCK OPTION PLAN. The Coast Bancorp Board of Directors adopted the Coast
Bancorp 1995 Stock Option Plan in 1995, as amended in 1997. Options granted
under the plan prior to the 1997 amendment contain a provision that accelerates
the vesting of any outstanding, unvested options upon a "change in control" of
Coast Bancorp. The 1995 Stock Option Plan allows Coast Bancorp to offer key,
full-time salaried employees and officers of the Company, as well as
non-employee directors of the Company an opportunity to purchase Coast Bancorp
common stock. Through this plan, the Board hopes to motivate such individuals by
giving them an ownership in Coast Bancorp's success.
COAST COMMERCIAL BANK EMPLOYEE STOCK OWNERSHIP PLAN. In November 1991, the
Bank amended and restated the Coast Commercial Bank Employee Savings Plan and it
was renamed the Coast Commercial Bank Employee Stock Ownership Plan, which
contains 401(k) provisions (KSOP). The KSOP is considered by the Board of
Directors to be a means of recognizing and rewarding the contributions made to
the Bank's successful operation by its employees. The KSOP contains three major
elements: (a) a purchase of the Company's common stock for the account of
employees; (b) employee salary deferral contributions combined with a matching
contribution by the Bank; and (c) profit sharing contribution made at the
discretion of the Bank. Employees vest 20% per year in the account containing
the purchases of the Company's common stock beginning with the third year of
employment and vest immediately in the other two accounts.
The KSOP contains a provision that takes effect upon a "change in control"
of Coast Bancorp. Upon a change in control, employees become 100% vested in the
account containing the purchases of Company stock.
DIRECTOR COMPENSATION
DIRECTOR FEES. During 1999 non-employee directors of the Company received a
retainer of $4,800 per year and also received $850 for attending Bank Board
meetings, $350 for loan committee meetings and $250 for other committee
meetings. The Chairman of the Company receives a retainer of $8,500 per quarter
for his services and receives no other cash compensation. Employee directors of
the Company receive $3,000 per quarter for attending Bank Board meetings and no
compensation for attending Coast Bancorp meetings.
In addition, each non-employee director of the Company received grants of
stock options for 4,400 shares for each of the five years beginning in 1995.
DIRECTORS' DEFERRED COMPENSATION. In November 1992, the Bank entered into
Deferred Compensation Agreements ("Compensation Agreements") with its directors,
except Harvey J. Nickelson. Under the Compensation Agreements, the directors may
elect before January 1 of each year to defer all or a part of their directors'
fees, and they will be credited with interest based upon the deferred amount.
The interest rate on the deferred amount of the directors' compensation is
presently 7.71%. The deferred amount of the directors' compensation is to be
paid to each director at the earlier of termination of their service as a
director of the Bank; attainment of age 65; or upon 180 days advance notice to
the director by the Bank. In the event of a director's death prior to
termination of his service with the Bank or age 65, his beneficiary will be
entitled to receive the payments under the Compensation Agreement. The Bank has
purchased an insurance policy on the life of each of the participating directors
to enable the Bank to make payments as required by the Compensation Agreements.
57
<PAGE>
PERFORMANCE GRAPH
The following chart compares the yearly percentage change in the cumulative
total stockholder return on the Company's Common Stock assuming that all cash
dividends have been reinvested, during the five years ended December 31, 1999
with the cumulative total return on the NASDAQ Bank Index, the SNL Securities,
Inc. Index for Banks under $500 million in asset size, and the S&P 500 Total
Return Index. The comparison assumes $100 was invested on December 31, 1994 in
the Company's Common Stock in each of the foregoing indices and the reinvestment
of dividends.
There can be no assurance as to future trends in the cumulative total return
of the Company's Common Stock or of the following indices. The Company does not
make or endorse any predictions as to future stock performance.
COAST BANCORP
TOTAL RETURN PERFORMANCE
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
COAST BANCORP S&P 500 NASDAQ BANK INDEX SNL
<S> <C> <C> <C> <C>
12/31/94 100.00 100.00 100.00 100.00
12/31/95 140.55 137.58 149.00 136.80
12/31/96 200.05 149.00 196.73 176.08
12/31/97 410.22 225.44 329.39 300.16
12/31/98 401.73 289.79 327.11 274.06
12/31/99 606.99 350.50 314.42 253.69
</TABLE>
<TABLE>
<CAPTION>
INDEX VALUE
--------------------------------------------
COAST NASDAQ BANK
BANCORP S&P 500 INDEX SNL
-------- -------- ----------- --------
<S> <C> <C> <C> <C>
12/31/94................................. 100.00 100.00 100.00 100.00
12/31/95................................. 140.55 137.58 149.00 136.80
12/31/96................................. 200.05 149.00 196.73 176.08
12/31/97................................. 410.22 225.44 329.39 300.16
12/31/98................................. 401.73 289.79 327.11 274.06
12/31/99................................. 606.99 350.50 314.42 253.69
</TABLE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Company is of the opinion that there is no person who possesses directly
or indirectly the power to direct or cause to direct the management and policies
of the Company, nor is it aware of the existence of a group of persons formed
for such purpose, whether through the ownership of voting securities, by
contract, or otherwise.
58
<PAGE>
The following table sets forth information as of March 22, 2000, pertaining
to securities ownership by persons known to the Company to own 5% or more of any
class of the Company's voting securities. The information contained herein has
been obtained from the Company's records, and from information furnished
directly by the individual to the Company.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED(1)
-----------------------------------
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER OF SHARES PERCENT OF CLASS
- ------------------------------------ ---------------- ----------------
<S> <C> <C>
Richard E. Alderson ........................... 408,510(2) 8.45%
4542 Arana Creek Way
Santa Cruz, CA 95065
Ronald M. Israel, M.D. ........................ 398,780(3) 8.25%
c/o Coast Bancorp
740 Front Street, Suite 240
Santa Cruz, California 95060
</TABLE>
- ------------------------
(1) Unless otherwise indicated, the beneficial owner of these securities has
sole voting and investment power.
(2) Mr. Alderson disclaims beneficial ownership of 9,746 shares held in trust
for his children. Mr. Alderson has sole voting and investment power over
374,304 shares held in various trusts. Includes options for 6,600 shares
exercisable within 60 days of March 22, 2000. Mr. Alderson resigned as a
director of Coast Bancorp in February 2000.
(3) Includes options for 8,800 shares exercisable within 60 days of March 22,
2000.
COAST BANCORP STOCK OWNED BY DIRECTORS AND EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
NAME BENEFICIAL OWNERSHIP(1) PERCENTAGE OF CLASS
- ---- ----------------------- -------------------
<S> <C> <C>
Douglas D. Austin....................... 51,404(2) 1.06%
John C. Burroughs....................... 70,250(3) 1.45%
Bud W. Cummings......................... 121,736(4) 2.52%
David Heald............................. 58,290(5) 1.20%
Rick Hofstetter......................... 70,385(6) 1.45%
Ronald M. Israel, M.D................... 398,780(4) 8.25%
Bruce Kendall........................... 17,540(7) 0.36%
Harvey J. Nickelson..................... 188,312(8) 3.87%
Gus J.F. Norton......................... 127,034(9) 2.62%
James C. Thompson....................... 312,339(10) 6.47%
All directors and executive officers as
a Group (10 in number)................ 1,416,070(11) 28.49%
</TABLE>
- ------------------------
(1) Unless otherwise indicated, the beneficial owner of these securities has
sole voting and investment power.
(2) Includes options for 13,200 shares exercisable within 60 days of March 22,
2000.
59
<PAGE>
(3) Includes 48,000 shares held in a trust over which Mr. Burroughs has shared
voting and investment power, 6,570 shares in the Company's Employee Stock
Ownership Plan (with 401(k) provisions) and options for 9,680 shares
exercisable within 60 days of March 22, 2000.
(4) Includes options for 8,800 shares exercisable within 60 days of March 22,
2000.
(5) Includes 16,128 shares held in a trust over which Mr. Heald has shared
voting and investment power, 13,980 shares in the Company's Employee Stock
Ownership Plan (with 401(k) provisions) and options for 19,800 shares
exercisable within 60 days of March 22, 2000.
(6) Includes 29,630 shares held in various trusts over which Mr. Hofstetter has
voting and investment power, 8,249 shares in the Company's Employee Stock
Ownership Plan (with 401(k) provisions) and options for 15,840 shares
exercisable within 60 days of March 22, 2000.
(7) Includes 3,460 shares in the Company's Employee Stock Ownership Plan (with
401(k) provisions) and options for 11,880 shares exercisable within 60 days
of March 22, 2000.
(8) Includes 132,000 shares held in a trust over which Mr. Nickelson has shared
voting and investment power, 16,712 shares in the Company's Employee Stock
Ownership Plan (with 401(k) provisions) and options for 39,600 shares
exercisable within 60 days of March 22, 2000.
(9) Includes 109,434 shares in a trust over which Mr. Norton has sole voting
and investment power and options for 17,600 shares exercisable within 60
days of March 22, 2000.
(10) Includes 191,996 shares in a trust over which Mr. Thompson has shared
voting and investment power and 114,143 shares held as trustee of a second
trust over which he holds sole voting power, and as to which he disclaims
beneficial ownership.
(11) Includes options for 151,800 shares exercisable within 60 days of March
22, 2000.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Some of the directors and officers of the Company and the companies with
which they are associated have been customers of, and have had banking
transactions with, Coast Commercial Bank in the ordinary course of the Bank's
business since January 1, 1999, and the Bank expects to have such banking
transactions in the future. All loans and commitments to lend included in such
transactions were made on substantially the same terms, including interest rates
and collateral, as those prevailing at the time for comparable transactions with
other persons and, in the opinion of the Bank, did not involve more than the
normal risk of collectibility or present other unfavorable features.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. and 2.
The financial statements and supplementary data contained in Item 8 of this
report are filed as part of this report.
All schedules are omitted because of the absence of the conditions under
which they are required or because the required information is included in the
financial statements or related notes.
(a) 3.
Exhibits are listed in the Index to Exhibits beginning on page 54 of this
report.
(b) Reports on Form 8-K.
60
<PAGE>
The Company filed a Current Report on Form 8-K dated December 17, 1999 which
reported, under Item 5 Other Events, that the Company had entered into an
Agreement and Plan of Reorganization with Greater Bay Bancorp dated as of
December 14, 1999 providing for the merger of the Company with and into Greater
Bay Bancorp. No financial statements were filed with the Current Report. Except
for the foregoing, no reports on Form 8-K were filed by the Company during the
quarter ended December 31, 1999.
61
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT
------- ------------------------------------------------------------
<S> <C>
2.1 Plan of Reorganization and Merger Agreement dated March 7,
1995 by and between CoastCommercial, Coast Merger
Corporation and Coast Bancorp.(1)
2.2 Agreement and Plan of Reorganization by and between Greater
Bay Bancorp and Coast Bancorp dated December 14, 1999.(6)
3.1 Articles of Incorporation of Coast Bancorp as amended to
date.(2)
3.2 Bylaws of Coast Bancorp.(1)
4 Not applicable
9 Not applicable
10.1 Salary Continuation Agreement dated September 19, 1992 by
and between Coast Commercial Bank and Harvey J.
Nickelson.(1)
10.2 Salary Continuation Agreement dated September 19, 1992 by
and between Coast Commercial Bank and David V. Heald.(1)
10.3 Lease by and between Friend, Friend and Friend and Coast
Commercial Bank dated November, 1986, for 720 Front Street,
Santa Cruz, California.(1)
10.4 Lease by and between Green Valley Corporation and Coast
Commercial Bank dated July 12, 1988, for 740 Front Street,
Santa Cruz, California.(1)
10.5 Lease by and between Heffernan Family Trust and Coast
Commercial Bank dated June 21, 1989, for 1975 Soquel Drive,
Santa Cruz, California.(1)
10.6 Lease by and between Martin N. Boone and Robin Sherman and
Coast Commercial Bank dated July 16, 1986, for 7775 Soquel
Drive, Aptos, California.(1)
10.7 Lease by and between Scott Valley Partners and Coast
Commercial Bank dated November 6,1991, for 203A Mt. Hermon
Road, Scotts Valley.(1)
10.8 Lease by and between Jay Paul and Coast Commercial Bank
dated December 1, 1989, for 1055 S. Green Valley Road,
Watsonville.(1)
10.9 Lease by and between Dubois Office Plaza and Coast
Commercial Bank dated January 23, 1993, for 140 Dubois
Street, Santa Cruz.(1)
10.10 Coast Commercial Bank Employee Stock Ownership Plan.(1)
10.11 Coast Bancorp 1995 Amended and Restated Stock Option
Plan.(7)
10.12 Deferred Compensation Agreement with Richard E. Alderson
dated November 2, 1992.(1)
10.13 Deferred Compensation Agreement with Douglas D. Austin Dated
November 2, 1992.(1)
10.14 Deferred Compensation Agreement with Bud W. Cummings Dated
November 2, 1992.(1)
10.15 Deferred Compensation Agreement with Ronald M. Israel Dated
November 2, 1992.(1)
10.16 Deferred Compensation Agreement with Malcolm D. Moore Dated
November 2, 1992.(1)
10.17 Deferred Compensation Agreement with Gus J.F. Norton Dated
November 2, 1992.(1)
10.18 Deferred Compensation Agreement with James C. Thompson Dated
November 2, 1992.(1)
10.19 Amended and Restated Deferred Compensation Agreement with
Richard Alderson dated May 21, 1997.(3)
10.20 Amended and Restated Deferred Compensation Agreement with
Douglas D. Austin dated May 21, 1997.(3)
</TABLE>
61
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT
------- ------------------------------------------------------------
<S> <C>
10.21 Amended and Restated Deferred Compensation Agreement with
John Burroughs dated May 21, 1997.(3)
10.22 Amended and Restated Deferred Compensation Agreement with
Bud W. Cummings dated May 21, 1997.(3)
10.23 Amended and Restated Deferred Compensation Agreement with
Ronald M. Israel dated May 21, 1997(3)
10.24 Amended and Restated Deferred Compensation Agreement with
Malcolm D. Moore dated May 21, 1997(3)
10.25 Amended and Restated Deferred Compensation Agreement with
Gus J. F. Norton dated May 21, 1997(3)
10.26 Amended and Restated Deferred Compensation Agreement with
James C. Thompson dated May 21, 1997(3)
10.27 Employment Agreement between Coast Bancorp, Coast Commercial
Bank and Harvey J. Nickelson dated June 21, 1999(4)
10.28 Amendment No. 1 to Employment Agreement between Coast
Bancorp, Coast Commercial Bank and Harvey J. Nickelson dated
December 14, 1999
10.29 Consulting Agreement by and between Coast Bancorp, Coast
Commercial Bank and Harvey J. Nickelson dated July 22,
1999(5)
10.30 Amended and Restated Salary Continuation Agreement by and
between Coast Bancorp, Coast Commercial Bank and Harvey J.
Nickelson dated July 23, 1999(5)
10.31 Amended and Restated Salary Continuation Agreement by and
between Coast Bancorp, Coast Commercial Bank and David V.
Heald dated July 23, 1999(5)
10.32 Executive Salary Continuation Agreement by and between Coast
Bancorp, Coast Commercial Bank and Sandra Anderson dated
July 23, 1999(5)
10.33 Executive Salary Continuation Agreement by and between Coast
Bancorp, Coast Commercial Bank and Terry A. Chandler dated
July 23, 1999(5)
10.34 Executive Salary Continuation Agreement by and between Coast
Bancorp, Coast Commercial Bank and Richard Hofstetter dated
July 23, 1999(5)
10.35 Executive Salary Continuation Agreement by and between Coast
Bancorp, Coast Commercial Bank and Bruce H. Kendall dated
July 23, 1999(5)
10.36 Life Insurance Endorsement Method Split Dollar Plan
Agreement between Coast Bancorp, Coast Commercial Bank and
Harvey J. Nickelson(5)
10.37 Life Insurance Endorsement Method Split Dollar Plan
Agreement between Coast Bancorp, Coast Commercial Bank and
David V. Heald(5)
10.38 Life Insurance Endorsement Method Split Dollar Plan
Agreement between Coast Bancorp, Coast Commercial Bank and
Sandra Anderson(5)
10.39 Life Insurance Endorsement Method Split Dollar Plan
Agreement between Coast Bancorp, Coast Commercial Bank and
Terry A. Chandler(5)
10.40 Life Insurance Endorsement Method Split Dollar Plan
Agreement between Coast Bancorp, Coast Commercial Bank and
Richard Hofstetter(5)
10.41 Life Insurance Endorsement Method Split Dollar Plan
Agreement between Coast Bancorp, Coast Commercial Bank and
Bruce H. Kendall(5)
10.42 Stock Option Agreement by and between Coast Bancorp and
Greater Bay Bancorp dated December 14, 1999.(6)
11 Not applicable
12 Not applicable
18 Not applicable
21 Subsidiaries
</TABLE>
62
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT
------- ------------------------------------------------------------
<S> <C>
22 Not applicable
23 Consent of Deloitte & Touche L.L.P.
27 Financial Data Schedule
</TABLE>
- ------------------------
(1) Filed as exhibits to the Company's Registration Statement on Form 10 dated
October 1, 1996, which is incorporated herein by this reference.
(2) Filed as Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the
Quarter Ended March 31, 1999, which is incorporated herein by this
reference.
(3) Filed as exhibits to the Company's Quarterly Report on Form 10-Q for the
Quarter Ended June 30, 1997, which is incorporated herein by this reference.
(4) Filed as Exhibit 10.19 to the Company's Quarterly Report on Form 10-Q for
the Quarter Ended June 30, 1999, which is incorporated herein by this
reference.
(5) Filed as exhibits 10.20 through 10.32 to the Company's Quarterly Report on
Form 10-Q for the Quarter Ended September 30, 1999, which is incorporated
herein by this reference.
(6) Filed as Exhibits 2 and 10.1 to the Company's Current Report on Form 8-K
dated December 17, 1999, which is incorporated herein by this reference.
(7) Filed as Exhibit 4 to the Company's Registration Statement on Form S-8,
Registration No. 333-26205, filed April 30, 1997, which is incorporated
herein by this reference.
63
<PAGE>
EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS
1. Salary Continuation Agreement dated September 19, 1992 by and between Coast
Commercial Bank and Harvey J. Nickelson -Form 10 dated October 1, 1996,
Exhibit 10.1.
2. Salary Continuation Agreement dated September 19, 1992 by and between Coast
Commercial Bank and David V. Heald-Form 10 dated October 1, 1996,
Exhibit 10.2.
3. Coast Commercial Bank Employee Stock Ownership Plan-Form 10 dated
October 1, 1996, Exhibit 10.10
4. Coast Bancorp 1995 Amended and Restated Stock Option Plan-Form S-8
Registration No. 333-26205 dated April 30, 1997, Exhibit 4.
5. Deferred Compensation Agreement with Richard E. Alderson dated November 2,
1992-Form 10 dated October 1, 1996, Exhibit 10.12.
6. Deferred Compensation Agreement with Douglas D. Austin Dated November 2,
1992-Form 10 dated October 1, 1996, Exhibit 10.13.
7. Deferred Compensation Agreement with Bud W. Cummings Dated November 2,
1992-Form 10 dated October 1, 1996, Exhibit 10.14.
8. Deferred Compensation Agreement with Ronald M. Israel Dated November 2,
1992-Form 10 dated October 1, 1996, Exhibit 10.15.
9. Deferred Compensation Agreement with Malcolm D. Moore Dated November 2,
1992-Form 10 dated October 1, 1996, Exhibit 10.16.
10. Deferred Compensation Agreement with Gus J.F. Norton Dated November 2,
1992-Form 10 dated October 1, 1996, Exhibit 10.17.
11. Deferred Compensation Agreement with James C. Thompson Dated November 2,
1992-Form 10 dated October 1, 1996, Exhibit 10.18.
12. Amended and Restated Deferred Compensation Agreement with Richard Alderson
dated May 21, 1997-Form 10-Q for the Quarter Ended June 30, 1997, Exhibit
10.19.
13. Amended and Restated Deferred Compensation Agreement with Douglas D. Austin
dated May 21, 1997-Form 10-Q for the Quarter Ended June 30, 1997, Exhibit
10.20.
14. Amended and Restated Deferred Compensation Agreement with John Burroughs
dated May 21, 1997-Form 10-Q for the Quarter Ended June 30, 1997, Exhibit
10.21.
15. Amended and Restated Deferred Compensation Agreement with Bud W. Cummings
dated May 21, 1997-Form 10-Q for the Quarter Ended June 30, 1997, Exhibit
10.22.
16. Amended and Restated Deferred Compensation Agreement with Ronald M. Israel
dated May 21, 1997-Form 10-Q for the Quarter Ended June 30, 1997, Exhibit
10.23.
17. Amended and Restated Deferred Compensation Agreement with Malcolm D. Moore
dated May 21, 1997-Form 10-Q for the Quarter Ended June 30, 1997, Exhibit
10.24.
18. Amended and Restated Deferred Compensation Agreement with Gus J. F. Norton
dated May 21, 1997-Form 10-Q for the Quarter Ended June 30, 1997, Exhibit
10.25.
19. Amended and Restated Deferred Compensation Agreement with James C. Thompson
dated May 21, 1997-Form 10-Q for the Quarter Ended June 30, 1997, Exhibit
10.26.
64
<PAGE>
20. Employment Agreement between Coast Bancorp, Coast Commercial Bank and Harvey
J. Nickelson dated June 21, 1999-Form 10-Q for the Quarter Ended June 30,
1999, Exhibit 10.19.
21. Amendment No. 1 to Employment Agreement between Coast Bancorp, Coast
Commercial Bank and Harvey J. Nickelson dated December 14, 1999-Form 10-K
for the Year Ended December 31, 1999, Exhibit 10.28.
22. Consulting Agreement by and between Coast Bancorp, Coast Commercial Bank and
Harvey J. Nickelson dated July 22, 1999-Form 10-Q for the Quarter Ended
September 30, 1999, Exhibit 10.20.
23. Amended and Restated Salary Continuation Agreement by and between Coast
Bancorp, Coast Commercial Bank and Harvey J. Nickelson dated July 23,
1999-Form 10-Q for the Quarter Ended September 30, 1999, Exhibit 10.21.
24. Amended and Restated Salary Continuation Agreement by and between Coast
Bancorp, Coast Commercial Bank and David V. Heald dated July 23, 1999-Form
10-Q for the Quarter Ended September 30, 1999, Exhibit 10.22.
25. Executive Salary Continuation Agreement by and between Coast Bancorp, Coast
Commercial Bank and Sandra Anderson dated July 23, 1999-Form 10-Q for the
Quarter Ended September 30, 1999, Exhibit 10.23.
26. Executive Salary Continuation Agreement by and between Coast Bancorp, Coast
Commercial Bank and Terry A. Chandler dated July 23, 1999-Form 10-Q for the
Quarter Ended September 30, 1999, Exhibit 10.24.
27. Executive Salary Continuation Agreement by and between Coast Bancorp, Coast
Commercial Bank and Richard Hofstetter dated July 23, 1999-Form 10-Q for the
Quarter Ended September 30, 1999, Exhibit 10.25.
28. Executive Salary Continuation Agreement by and between Coast Bancorp, Coast
Commercial Bank and Bruce H. Kendall dated July 23, 1999-Form 10-Q for the
Quarter Ended September 30, 1999, Exhibit 10.26.
29. Life Insurance Endorsement Method Split Dollar Plan Agreement between Coast
Bancorp, Coast Commercial Bank and Harvey J. Nickelson-Form 10-Q for the
Quarter Ended September 30, 1999, Exhibit 10.27.
30. Life Insurance Endorsement Method Split Dollar Plan Agreement between Coast
Bancorp, Coast Commercial Bank and David V. Heald-Form 10-Q for the Quarter
Ended September 30, 1999, Exhibit 10.28.
31. Life Insurance Endorsement Method Split Dollar Plan Agreement between Coast
Bancorp, Coast Commercial Bank and Sandra Anderson-Form 10-Q for the Quarter
Ended September 30, 1999, Exhibit 10.29.
32. Life Insurance Endorsement Method Split Dollar Plan Agreement between Coast
Bancorp, Coast Commercial Bank and Terry A. Chandler-Form 10-Q for the
Quarter Ended September 30, 1999, Exhibit 10.30.
33. Life Insurance Endorsement Method Split Dollar Plan Agreement between Coast
Bancorp, Coast Commercial Bank and Richard Hofstetter-Form 10-Q for the
Quarter Ended September 30, 1999, Exhibit 10.31.
34. Life Insurance Endorsement Method Split Dollar Plan Agreement between Coast
Bancorp, Coast Commercial Bank and Bruce H. Kendall-Form 10-Q for the
Quarter Ended September 30, 1999, Exhibit 10.32.
65
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly issued this registration statement
to be signed on its behalf by the undersigned, thereunto duly authorized.
<TABLE>
<S> <C> <C>
COAST BANCORP
Date: February 16, 2000
By: /s/ HARVEY J. NICKELSON
---------------------------------------
Harvey J. Nickelson
PRESIDENT AND CHIEF EXECUTIVE OFFICER
</TABLE>
Pursuant to the requirements of the Securities Act of 1934, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ DOUGLAS D. AUSTIN
------------------------------------------- Director February 16, 2000
Douglas D. Austin
/s/ JOHN C. BURROUGHS
------------------------------------------- Director February 16, 2000
John C. Burroughs
/s/ BUD W. CUMMINGS
------------------------------------------- Director February 16, 2000
Bud W. Cummings
------------------------------------------- Director February 16, 2000
Ronald M. Israel
Senior Vice President and
/s/ BRUCE H. KENDALL Chief Financial Officer
------------------------------------------- (Principal Financial and February 16, 2000
Bruce H. Kendall Accounting Officer)
/s/ HARVEY J. NICKELSON
------------------------------------------- President, Chief Executive February 16, 2000
Harvey J. Nickelson Officer and Director
/s/ GUS J.F. NORTON
------------------------------------------- Director February 16, 2000
Gus J.F. Norton
</TABLE>
66
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ JAMES C. THOMPSON
------------------------------------------- Chairman of the Board of February 16, 2000
James C. Thompson Directors
</TABLE>
67
<PAGE>
EXHIBIT 10.28
AMENDMENT NO. 1
EMPLOYMENT AGREEMENT
This Amendment No. 1, dated as of December 14, 1999, to be effective upon
the Effective Time of the Merger (as defined in the Agreement and Plan of
Reorganization (the "Reorganization Agreement"), dated as of December 14, 1999,
by and between Greater Bay Bancorp ("GBB") and Coast Bancorp ("Coast")), is made
to that certain Employment Agreement (the "Employment Agreement"), dated as of
June 16, 1999, by and between Coast , Coast Commercial Bank ("CCB") and Harvey
J. Nickelson ("Executive").
RECITALS:
A. The Reorganization Agreement provides for the merger of Coast with and
into GBB, as a result of which CCB will become a wholly owned subsidiary of GBB
(the "Merger").
B. Executive has served as the President and Chief Executive Officer of CCB
since 1982 and as such has been a significant factor in CCB's growth and
success.
C. GBB, therefore, determined that the continuing service of Executive
following the merger was an important factor in the decision of GBB to enter
into the Reorganization Agreement.Executive desires to continue in the employ of
CCB and currently intends to continue in his current positions with CCB for at
least two years from the Effective Time of the Merger. Accordingly, GBB, CCB and
Executive have agreed to amend the Employment Agreement on the terms and
conditions set forth herein, to become effective upon the Effective Time of the
Merger.
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants,
terms and conditions contained in this Amendment No. 1, GBB, CCB and Executive
agree as follows, subject to the consummation of the Merger:
1. Section 5 of the Employment Agreement is hereby amended by adding a new
subsection (g) to read in its entirety as follows:
(g) Upon the Effective Time of the Merger, GBB shall grant Executive an
option to acquire 10,000 shares of GBB's common stock under GBB's 1996 Stock
Option Plan, as amended (the "Option Plan"). Such option will have an
exercise price equal to the last transaction price quoted on The Nasdaq
National Market on the date on which the Effective Time of the Merger occurs
and will vest at a rate of 20% on the first anniversary of such date and 20%
on each anniversary thereafter. Executive shall also be eligible to receive
an additional similar option for 10,000 shares under the Option Plan on the
first anniversary of the date on which the Effective Time of the Merger
occurs, subject to the achievement by CCB of profitability goals and
ratification by GBB's Board of Directors.
2. Section 6(f) of the Employment Agreement is hereby amended by changing
the numbering of subsections (i), (ii), (iii) and (iv) in the definition of
"Change in Control" to (w), (x), (y) and (z), respectively.
3. Section 6 of the Employment Agreement is hereby amended by adding a new
subsection (g) and a new subsection (h) to read in their entirety as follows:
(g) Notwithstanding the provisions of Section 6(f) hereof, in the event
Executive voluntarily resigns from his employment with CCB under
circumstances other than those described in Section 6(ii), (iii) or (iv),
within the two year period following the Effective Time of the Merger,
Executive shall not be entitled to the benefits contained in Section 6(f);
provided, however, this subsection (g) shall have no effect in the event of
the occurrence of a Change in Control of GBB within such two year period.
<PAGE>
(h) Beginning on the second anniversary of the Effective Time of the
Merger, Sections 6(a) and 6(f) shall be rescinded and in lieu thereof
Executive shall be entitled to participate in GBB's Termination and Layoff
Pay Plan I and Change in Control Pay Plan I at the Executive Management
Committee level; provided, however, that, under the Change in Control Pay
Plan I, Executive shall be entitled to a "Base Benefit" and an "Added
Benefit" equal to 24 months of "Pay", as such terms are defined therein.
Copies of the Termination and Layoff Pay Plan I and the Change in Control
Pay Plan I are attached hereto and incorporated herein by reference.
4. Except as expressly amended hereby, the remaining terms and conditions
of the Employment Agreement shall remain in full force and effect after the
Effective Time of the Merger.
5. In the event the Reorganization Agreement is terminated, this Amendment
No. 1 shall be automatically rescinded as of the date such termination.
IN WITNESS WHEREOF, the parties have executed this Amendment No. 1 as of the
first date above written.
<TABLE>
<S> <C> <C>
GREATER BAY BANCORP
By: /s/ DAVID L. KALKBRENNER
-----------------------------------------
David L. Kalkbrenner
President and Chief Executive Officer
COAST BANCORP
By: /s/ JAMES C. THOMPSON
-----------------------------------------
Name: James C. Thompson
Title: Chairman of the Board
COAST COMMERCIAL BANK
By: /s/ JAMES C. THOMPSON
-----------------------------------------
Name: James C. Thompson
Title: Chairman of the Board
/s/ HARVEY J. NICKELSON
-----------------------------------------
Harvey J. Nickelson
</TABLE>
2
<PAGE>
EXHIBIT 21
SUBSIDIARIES
The only subsidiary of the Registrant is Coast Commercial Bank, a California
state banking corporation, which conducts its business under the same name.
<PAGE>
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
333-26205 of Coast Bancorp on Form S-8 of our report dated January 21, 2000,
appearing in this Annual Report on Form 10-K of Coast Bancorp for the year ended
December 31, 1999.
DELOITTE & TOUCHE LLP
San Jose, California
April 5, 2000
