-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RY1xWqtJ2QEBfjWURFSt18u3+sZ/+hpA3zKmPN/0qu+02qiOclje6kOc7x5XZ0aC xvpxCCDyxNHj4Klyu9fOgw== 0000912057-00-016534.txt : 20000407 0000912057-00-016534.hdr.sgml : 20000407 ACCESSION NUMBER: 0000912057-00-016534 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000406 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COAST BANCORP CENTRAL INDEX KEY: 0001021006 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 770401327 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: SEC FILE NUMBER: 001-12253 FILM NUMBER: 595059 BUSINESS ADDRESS: STREET 1: 740 FRONT ST STREET 2: SUITE 240 CITY: SANTA CRUZ STATE: CA ZIP: 95066 BUSINESS PHONE: 4084584500 MAIL ADDRESS: STREET 1: 740 FRONT ST STREET 2: SUITE 240 CITY: SANTA CRUZ STATE: CA ZIP: 95066 10-K/A 1 FORM 10K/A - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K/A (MARK ONE) /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
-------------------------- COAST BANCORP (Exact name of registrant as specified in its charter) CALIFORNIA 77-0401327 (State or other jurisdiction I.R.S. Employer of incorporation or Identification No.) organization) 740 FRONT STREET 95060 (Address of principal (Zip Code) executive offices)
SANTA CRUZ, CALIFORNIA (City and State of principal executive offices) Registrant's telephone number, including area code (831) 458-4500 -------------------------- Securities to be registered pursuant to Section 12(b) of the Act: 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)
-------------------------- 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. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- TABLE OF CONTENTS
PAGE -------- 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
2 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 3 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 4 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 5 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 6 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%. 7 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 8 "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 9 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 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 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 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.
SALE PRICE OF THE COMPANY'S COMMON STOCK ------------------- QUARTER ENDED 1999 HIGH LOW - ------------------ -------- -------- December 31................................................. $25.00 $17.81 September 30................................................ 23.50 18.50 June 30..................................................... 20.50 15.00 March 31.................................................... 20.00 15.00
QUARTER ENDED 1998 HIGH LOW - ------------------ -------- -------- December 31................................................. $19.00 $15.88 September 30................................................ 23.50 18.00 June 30..................................................... 22.50 17.27 March 31.................................................... 18.64 16.36
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 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.
DECEMBER 31, -------------------------------------------------------------- 1999 1998 1997 1996 1995 ---------- ---------- ---------- ---------- ---------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE INFORMATION) 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
- -------------------------- (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 (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 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
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) 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% ======= ======= =======
- -------------------------- (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 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
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) 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 ====== ======= ====== ====== ===== ======
- ------------------------ (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 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
YEARS ENDED DECEMBER 31, ------------------------------ 1999 1998 1997 -------- -------- -------- (DOLLARS IN THOUSANDS) 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 ====== ====== ======
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 TABLE 4 NONINTEREST EXPENSES
YEARS ENDED DECEMBER 31, --------------------------------------------------------------- 1999 1998 1997 ------------------- ------------------- ------------------- (DOLLARS IN THOUSANDS) 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% ====== ==== ======= ==== ======= ====
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 TABLE 5 LOANS BY TYPE
DECEMBER 31, ---------------------------------------------------- 1999 1998 1997 1996 1995 -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS) 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 ======== ======== ======== ======== ========
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 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 Table 6 presents the composition of nonperforming assets at December 31 for the last 5 years. TABLE 6 NONPERFORMING ASSETS
DECEMBER 31, ---------------------------------------------------- 1999 1998 1997 1996 1995 -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS) 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%
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 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
DECEMBER 31, ---------------------------------------------------- 1999 1998 1997 1996 1995 -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS) 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%
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 TABLE 8 ALLOCATION OF THE ALLOWANCE FOR CREDIT LOSSES
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) 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 ====== ===== ====== ===== ====== ===== ====== DECEMBER 31, ---------------------------------- 1996 1995 ---------- --------------------- PERCENT OF PERCENT OF TOTAL TOTAL LOANS AMOUNT LOANS ---------- -------- ---------- (DOLLARS IN THOUSANDS) 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% ===== ====== =====
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
DECEMBER 31, ---------------------------------------------------- 1999 1998 1997 1996 1995 -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS) 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 ======== ======== ======== ======== ========
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 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 TABLE 10 INTEREST RATE SENSITIVITY
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) 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
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 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
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 -------- -------- -------- -------- -------- --------- -------- --------- -------- 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 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)
DECEMBER 31, 1999 ----------------- 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 =======
Loan maturities for commercial and real estate construction loans at December 31, 1999, are presented in Table 13. TABLE 13 LOAN MATURITIES
AFTER ONE BUT WITHIN AFTER WITHIN ONE FIVE FIVE YEAR YEARS YEARS TOTAL ---------- ---------- -------- -------- (DOLLARS IN THOUSANDS) 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 ======= ======= ====== =======
27 Commercial loans at December 31, 1999 maturing after one year are comprised of fixed rate and variable rate loans as shown below:
AFTER ONE BUT WITHIN AFTER FIVE YEARS FIVE YEARS TOTAL ---------- ---------- -------- (DOLLARS IN THOUSANDS) Fixed rate..................................... $ 240 $ 379 $ 619 Variable rate.................................. 8,855 4,950 13,805 ------ ------ ------- $9,095 $5,329 $14,424 ====== ====== =======
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 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
DECEMBER 31, ------------------------------ 1999 1998 1997 -------- -------- -------- 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%
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 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.
ESTIMATED CHANGE IN MVPE ----------------------------------------------- 1999 1998 BASIS POINT (BP) ---------------------- ---------------------- CHANGE IN RATES AMOUNT % AMOUNT % - ---------------- ----------- -------- ----------- -------- + 200.................................................. $(2,116,000) (4.3) $ 2,453,000 6.1 0...................................................... -- 0 -- 0 - -200................................................... $ 510,000 1.0 $(7,208,000) (17.8)
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 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 COAST BANCORP CONSOLIDATED BALANCE SHEETS
DECEMBER 31, --------------------------- 1999 1998 ------------ ------------ 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 ============ ============
See notes to consolidated financial statements 32 COAST BANCORP CONSOLIDATED INCOME STATEMENTS
YEARS ENDED DECEMBER 31, --------------------------------------- 1999 1998 1997 ----------- ----------- ----------- 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 =========== =========== ===========
See notes to consolidated financial statements 33 COAST BANCORP CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
ACCUMULATED COMMON STOCK OTHER TOTAL ----------------------- COMPREHENSIVE COMPREHENSIVE RETAINED STOCKHOLDERS' SHARES AMOUNT INCOME INCOME (LOSS) EARNINGS EQUITY --------- ----------- -------------- -------------- ----------- ------------- 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 ========= =========== =========== =========== =========== ===========
See notes to consolidated financial statements 34 COAST BANCORP CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, ------------------------------------------ 1999 1998 1997 ------------ ------------ ------------ 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................ $ -- $ -- $ --
See notes to consolidated financial statements 35 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 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 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 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:
YEARS ENDED DECEMBER 31, --------------------------------- 1999 1998 1997 --------- --------- --------- 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 ========= ========= =========
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 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:
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED ESTIMATED FAIR COST GAIN LOSS VALUE ------------ ---------- ----------- -------------- 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 ============ ========== =========== ============
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.
AVAILABLE-FOR-SALE --------------------------- ESTIMATED AMORTIZED MARKET COST VALUE ------------ ------------ 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 ============ ============
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 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:
YEARS ENDED DECEMBER 31, ------------------------------------ 1999 1998 1997 ---------- ---------- ---------- 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 ========== ========== ==========
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 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:
1999 1998 ---------- ---------- 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 ========== ==========
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: 2000........................................................ $ 749,000 2001........................................................ 510,000 2002........................................................ 226,000 2003........................................................ 20,000 ---------- Total....................................................... $1,505,000 ==========
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:
YEARS ENDED DECEMBER 31, ------------------------------------ 1999 1998 1997 ---------- ---------- ---------- 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 ========== ========== ==========
42 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:
YEARS ENDED DECEMBER 31, ------------------------------ 1999 1998 1997 -------- -------- -------- 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% ==== ==== ====
The Company's net deferred tax assets at December 31, are comprised of the following:
1999 1998 ---------- ---------- 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 ========== ==========
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 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: 2000........................................................ $50,618,000 2001........................................................ 1,386,000 2002........................................................ 53,000 ----------- $52,057,000 ===========
9. OTHER BORROWINGS Other borrowings consist of the following:
1999 1998 ----------- ----------- 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 =========== ===========
Information concerning securities sold under agreements to repurchase is summarized as follows:
1999 1998 ----------- ----------- 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% --
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 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 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:
TO BE CATEGORIZED AS WELL CAPITALIZED UNDER MINIMUM FOR PROMPT CAPITAL ADEQUACY CORRECTIVE ACTION ACTUAL PURPOSES: PROVISIONS: ---------------------- ---------------------- ---------------------- AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO ----------- -------- ----------- -------- ----------- -------- 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%
46 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 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:
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 --------- ---------------- --------- ---------------- --------- ---------------- 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 ======= ======= =======
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:
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 - --------------------- ----------- --------------------- ---------------- ----------- ---------------- $ 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 ======= =======
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 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:
YEARS ENDED DECEMBER 31, ------------------------------------ 1999 1998 1997 ---------- ---------- ---------- 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
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.
1999 1998 --------------------------- --------------------------- CARRYING ESTIMATED CARRYING ESTIMATED AMOUNT FAIR VALUE AMOUNT FAIR VALUE ------------ ------------ ------------ ------------ 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
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 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:
DECEMBER 31, ------------------------- 1999 1998 ----------- ----------- 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 =========== ===========
YEARS ENDED DECEMBER 31, ------------------------------------ 1999 1998 1997 ---------- ---------- ---------- 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 ========== ========== ==========
50 COAST BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 16. PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION (CONTINUED)
YEARS ENDED DECEMBER 31, ------------------------------------ 1999 1998 1997 ---------- ---------- ---------- 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 ========== ========== ==========
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 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 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.
DIRECTOR SINCE NAME AGE PRINCIPAL OCCUPATION RELATIONSHIP WITH COMPANY (COMPANY/BANK) - ---- -------- ----------------------------- ----------------------------- --------------- 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
- ------------------------------ (1) Mr. Alderson resigned as a director of the Company and the Bank in February, 2000. 53 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.
OFFICER SINCE NAME AGE PRINCIPAL OCCUPATION AND BUSINESS EXPERIENCE (COMPANY/BANK) - ---- -------- ------------------------------------------------------------ --------------- 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.
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 SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION AWARDS-- OTHER ANNUAL OPTIONS NAME POSITION YEAR SALARY BONUS COMPENSATION(1) GRANTED(2) - ---- ----------------------- ---- -------- -------- --------------- ------------ 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 ALL OTHER NAME COMPENSATION - ---- ------------ 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)
- ------------------------------ (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 $12,000 per year. OPTION GRANTS IN 1999 There were no stock options granted during 1999 to the Named Executive Officers. AGGREGATED OPTION EXERCISES AND OPTION VALUES No stock options were exercised during 1999 by the Named Executive Officers. The following table shows the value at December 31, 1999 of unexercised stock options held by the Named Executive Officers of the Company.
NUMBER OF SECURITIES VALUE OF UNEXERCISED IN- UNDERLYING OPTIONS AT THE-MONEY OPTIONS AT FISCAL YEAR-END(#) FISCAL YEAR-END($)(1) SHARES ACQUIRED ------------------------- ------------------------- NAME ON EXERCISE(#) VALUE REALIZED($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE - ---- --------------- ----------------- ------------------------- ------------------------- 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
- ------------------------ (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 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 (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 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
COAST BANCORP S&P 500 NASDAQ BANK INDEX SNL 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
INDEX VALUE -------------------------------------------- COAST NASDAQ BANK BANCORP S&P 500 INDEX SNL -------- -------- ----------- -------- 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
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 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.
SHARES BENEFICIALLY OWNED(1) ----------------------------------- NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER OF SHARES PERCENT OF CLASS - ------------------------------------ ---------------- ---------------- 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
- ------------------------ (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
AMOUNT AND NATURE OF NAME BENEFICIAL OWNERSHIP(1) PERCENTAGE OF CLASS - ---- ----------------------- ------------------- 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%
- ------------------------ (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 (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 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 EXHIBIT INDEX
EXHIBIT NO. EXHIBIT ------- ------------------------------------------------------------ 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)
61
EXHIBIT NO. EXHIBIT ------- ------------------------------------------------------------ 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
62
EXHIBIT NO. EXHIBIT ------- ------------------------------------------------------------ 22 Not applicable 23 Consent of Deloitte & Touche L.L.P. 27 Financial Data Schedule
- ------------------------ (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 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 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 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. COAST BANCORP Date: February 16, 2000 By: /s/ HARVEY J. NICKELSON --------------------------------------- Harvey J. Nickelson PRESIDENT AND CHIEF EXECUTIVE OFFICER
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.
SIGNATURE TITLE DATE --------- ----- ---- /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
66
SIGNATURE TITLE DATE --------- ----- ---- /s/ JAMES C. THOMPSON ------------------------------------------- Chairman of the Board of February 16, 2000 James C. Thompson Directors
67 EX-10.28 2 EXHIBIT 10.28 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. (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. 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
2 EX-21 3 EXHIBIT 21 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. EX-23 4 EXHIBIT 23 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 -----END PRIVACY-ENHANCED MESSAGE-----