-----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, P/QLdYlxRcNRZvkqVfbQetAwMAIbiRL/aiEqdihLowvmiugv0Qg1BAyFEzWPMxEA mA5rKozp4wmLXJIrImk7iw== 0001047469-98-040480.txt : 19981116 0001047469-98-040480.hdr.sgml : 19981116 ACCESSION NUMBER: 0001047469-98-040480 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981113 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-Q SEC ACT: SEC FILE NUMBER: 001-12253 FILM NUMBER: 98746327 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-Q 1 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1998 ------------------------------------------------ or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ----------------------- ----------------------- Commission File Number: 0-28938 -------------------------------------------------------- Coast Bancorp - ------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) California 77-0401327 - ------------------------------------------------------------------------------- (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 740 Front Street, Santa Cruz, California 95060 - ------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (408) 458-4500 - ------------------------------------------------------------------------------- (Registrant's telephone number, including area code) Not Applicable - ------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. /X/ Yes / / No No. of shares of Common Stock outstanding on November 5, 1998: 2,383,679 --------- COAST BANCORP FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1998 TABLE OF CONTENTS PART I
Page Item 1. Financial Statements 1 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 5 PART II Item 1. Legal Proceedings 18 Item 2. Changes in Securities 18 Item 3. Defaults Upon Senior Securities 18 Item 4. Submission of Matters to a Vote of Security Holders 18 Item 5. Other Information 18 Item 6. Exhibits and Reports on Form 8-K 18
PART I Item 1. Financial Statements COAST BANCORP CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31, 1998 1997 --------------- ----------- ASSETS (unaudited) Cash and due from banks $ 16,287,000 $ 15,853,000 Federal funds sold 37,000,000 15,000,000 ------------ ------------ Total cash and equivalents 53,287,000 30,853,000 Securities available-for-sale, at fair value 98,890,000 80,466,000 Loans: Commercial 39,748,000 42,838,000 Real estate - construction 20,413,000 21,376,000 Real estate - term 87,299,000 76,101,000 Installment and other 4,502,000 6,112,000 ------------ ------------ Total loans 151,962,000 146,427,000 Unearned income (3,161,000) (2,349,000) Allowance for credit losses (3,776,000) (3,609,000) ------------ ------------ Net loans 145,025,000 140,469,000 Bank premises and equipment, net 2,412,000 2,045,000 Other real estate owned 197,000 112,000 Accrued interest receivable and other assets 8,687,000 7,560,000 ------------ ------------ TOTAL ASSETS $308,498,000 $261,505,000 ------------ ------------ ------------ ------------ LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES: Deposits: Non-interest bearing demand $ 66,184,000 $ 66,812,000 Interest-bearing demand 96,643,000 76,123,000 Savings 49,003,000 23,942,000 Time 53,548,000 34,320,000 ------------ ------------ Total deposits 265,378,000 201,197,000 Other borrowings 10,656,000 30,070,000 Accrued expenses and other liabilities 3,223,000 2,474,000 --------------- -------------- Total liabilities 279,257,000 233,741,000 STOCKHOLDERS' EQUITY: Preferred stock - no par value; 10,000,000 shares authorized; no shares issued -- -- Common stock - no par value; 20,000,000 shares authorized; shares outstanding: 2,372,679 in 1998 and 2,203,659 in 1997 20,253,000 11,011,000 Retained earnings 8,044,000 16,060,000 Accumulated other comprehensive income 944,000 693,000 ------------ ------------ Total stockholders' equity 29,241,000 27,764,000 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $308,498,000 $261,505,000 ------------ ------------ ------------ ------------
See notes to unaudited consolidated financial statements -1- COAST BANCORP CONSOLIDATED INCOME STATEMENTS (unaudited)
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30, ---------------------------- -------------------------- 1998 1997 1998 1997 ------------ ----------- ----------- ---------- Interest Income: Loans, including fees $ 4,125,000 $ 3,718,000 $12,495,000 $10,570,000 Federal funds sold 596,000 304,000 949,000 980,000 Securities: Taxable 1,306,000 1,201,000 3,757,000 3,397,000 Nontaxable 191,000 82,000 523,000 248,000 ----------- ----------- ----------- ----------- Total interest income 6,218,000 5,305,000 17,724,000 15,195,000 Interest expense: Deposits 1,571,000 1,058,000 4,018,000 3,039,000 Other borrowings 258,000 371,000 990,000 1,041,000 ----------- ----------- ----------- ----------- Total interest expense 1,829,000 1,429,000 5,008,000 4,080,000 ----------- ----------- ----------- ----------- Net interest income 4,389,000 3,876,000 12,716,000 11,115,000 Provision for credit losses 75,000 75,000 225,000 375,000 ----------- ----------- ----------- ----------- Net interest income after provision for credit losses 4,314,000 3,801,000 12,491,000 10,740,000 Noninterest income: Gain on sale of loans 599,000 252,000 1,895,000 905,000 Customer service fees 460,000 471,000 1,368,000 1,427,000 Loan servicing fees 255,000 270,000 750,000 792,000 Gains (losses) on securities sales 1,000 (10,000) 13,000 (10,000) Other 172,000 177,000 528,000 489,000 ----------- ----------- ----------- ----------- Total noninterest income 1,487,000 1,160,000 4,554,000 3,603,000 Noninterest expenses: Salaries and benefits 1,672,000 1,381,000 4,773,000 4,168,000 Occupancy 297,000 253,000 859,000 867,000 Equipment 276,000 319,000 828,000 726,000 Stationery and postage 106,000 84,000 299,000 267,000 Insurance 47,000 61,000 163,000 148,000 Legal fees 22,000 23,000 68,000 68,000 Other 693,000 636,000 2,047,000 1,883,000 ----------- ----------- ----------- ----------- Total noninterest expenses 3,113,000 2,757,000 9,037,000 8,127,000 ----------- ----------- ----------- ----------- Income before income taxes 2,688,000 2,204,000 8,008,000 6,216,000 Provision for income taxes 1,120,000 879,000 3,327,000 2,508,000 ----------- ----------- ----------- ----------- Net income $ 1,568,000 $ 1,325,000 $ 4,681,000 $ 3,708,000 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Earnings per share: Basic $ .65 $ .55 $ 1.94 $ 1.53 Diluted $ .63 $ .53 $ 1.89 $ 1.50
See notes to unaudited consolidated financial statements -2- COAST BANCORP CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
NINE MONTHS ENDED SEPTEMBER 30, ------------------------------- 1998 1997 ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 4,681,000 $ 3,708,000 Adjustments to reconcile net income to net cash provided by operating activities: Provision for credit losses 225,000 375,000 Depreciation and amortization 88,000 112,000 Gains on securities transactions (13,000) (10,000) Deferred income taxes 100,000 (306,000) Proceeds from loan sales 60,028,000 34,710,000 Origination of loans held for sale (63,509,000) (39,369,000) Accrued interest receivable and other assets (1,228,000) 616,000 Accrued expenses and other liabilities 749,000 411,000 Increase in unearned income 1,582,000 998,000 Other - net (252,000) 30,000 ------------- ------------- Net cash provided by operating activities 2,451,000 1,275,000 ------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sales of securities available-for-sale 25,418,000 5,552,000 Proceeds from maturities of securities 15,787,000 12,027,000 Purchases of securities available-for-sale (59,498,000) (27,064,000) Net increase in loans (2,111,000) (3,656,000) Purchases of bank premises and equipment (925,000) (382,000) ------------- ------------- Net cash (used in) investing activities (21,329,000) (13,523,000) ------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from securities sold under agreements to repurchase (19,414,000) 4,242,000 Net increase in deposits 64,181,000 12,710,000 Payment of cash dividends (983,000) (764,000) Repurchase of common stock (2,651,000) (130,000) Exercise of stock options 186,000 -- Payment of fractional shares resulting from stock dividend (7,000) -- ------------- ------------- Net cash provided by financing activities 41,312,000 16,058,000 ------------- ------------- Net increase in cash and equivalents 22,434,000 3,810,000 ------------- ------------- Cash and equivalents, beginning of period 30,853,000 37,992,000 ------------- ------------- Cash and equivalents, end of period $ 53,287,000 $ 41,802,000 ------------- ------------- ------------- ------------- OTHER CASH FLOW INFORMATION - CASH PAID DURING THE PERIOD FOR: Interest $ 4,907,000 $ 3,945,000 Income taxes 3,146,000 1,586,000 NON-CASH INVESTING AND FINANCING TRANSACTIONS: Additions to other real estate owned $ 85,000 $ --
See notes to unaudited consolidated financial statements -3- COAST BANCORP NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS THREE MONTHS ENDED SEPTEMBER 30, 1998 and 1997 - ------------------------------------------------------------------------------- 1. BASIS OF PRESENTATION - These financial statements reflect, in management's opinion, all adjustments, consisting of adjustments of a normal recurring nature, which are necessary for a fair presentation of Coast Bancorp's financial position and results of operations and cash flows for the periods presented. The results of interim periods are not necessarily indicative of results of operations expected for the full year. These financial statements should be read in conjunction with the audited financial statements for 1997 included in the Company's Form 10-K. 2. NET EARNINGS PER SHARE AND STOCK DIVIDEND- Basic earnings per share is computed by dividing net income by the number of weighted average common shares outstanding. Diluted earnings per share reflects potential dilution from outstanding stock options, using the treasury stock method. The number of weighted average shares used in computing basic and diluted net income per share are as follows:
Three months ended September 30, ----------------------------------- 1998 1997 ---- ---- Basic shares 2,398,079 2,424,025 Dilutive effect of stock options 75,778 54,100 ----------------------------------- Diluted shares 2,473,857 2,478,125 -----------------------------------
Nine months ended September 30, ----------------------------------- 1998 1997 ---- ---- Basic shares 2,407,767 2,427,172 Dilutive effect of stock options 70,502 51,146 ----------------------------------- Diluted shares 2,478,269 2,478,318 -----------------------------------
On April 15, 1998, the Board of Directors declared a 10% stock dividend paid on May 27, 1998. 3. NEW ACCOUNTING PRONOUNCEMENTS - Effective January 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 130 "Reporting Comprehensive Income," (SFAS No. 130). This Statement requires that all items recognized under accounting standards as components of comprehensive income be reported in an annual financial statement that is displayed with the same prominence as other financial statements. Annual financial statements for prior periods will be reclassified, as required. The Company's source of other comprehensive income is unrealized gains and losses on securities available-for-sale. Total comprehensive income was as follows:
Three Months Ended September 30, ----------------------------------- 1998 1997 ----------------------------------- Net income $1,568,000 $1,325,000 Other comprehensive income 341,000 199,000 ----------------------------------- Total comprehensive income $1,909,000 $1,524,000 -----------------------------------
Nine Months Ended September 30, ----------------------------------- 1998 1997 ----------------------------------- Net income $4,681,000 $3,708,000 Other comprehensive income 251,000 264,000 Total comprehensive income $4,932,000 $3,972,000 -----------------------------------
-4- Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Net income for the three months ended September 30, 1998 was $1,568,000 compared to $1,325,000 during the same period in 1997, representing an increase of 18%. Net income for the nine months ended September 30, 1998 was $4,681,000 compared to $3,708,000 for the prior year period. The increase in net income during 1998 was primarily due to increases in net interest income and noninterest income partially offset by an increase in noninterest expenses and a related increase in income tax expense. EARNINGS SUMMARY NET INTEREST INCOME Net interest income refers to the difference between interest and fees earned on loans and investments and the interest paid on deposits and other borrowed funds. It is the largest component of the net earnings of a financial institution. The primary factors to consider in analyzing net interest income are the composition and volume of earning assets and interest-bearing liabilities, the amount of noninterest bearing liabilities and nonaccrual loans, and changes in market interest rates. Table I sets forth average balance sheet information, interest income and expense, average yields and rates, and net interest income and net interest margin for the three and nine months ended September 30, 1998 and 1997. -5- Table I Components of Net Interest Income
Three months ended September 30, 1998 1997 -------------------------------- ------------------------------- Average Average Average Average (Dollars in thousands) Balance Interest Rate(4) Balance Interest Rate(4) ---------- -------- ------- ---------- -------- ------- Assets: Loans (2) (3) $ 148,602 $ 4,126 11.1% $ 131,364 $ 3,718 11.3% Investment securities: Taxable 78,113 1,306 6.7% 71,025 1,201 6.8% Nontaxable (1) 14,192 290 7.8% 5,905 124 8.4% Federal funds sold 42,560 596 5.6% 22,123 304 5.5% --------- ------- --------- -------- Total earning assets 284,187 6,318 8.9% 222,901 15,323 9.3% Cash and due from banks 18,177 17,575 Allowance for credit losses (3,723) (3,522) Unearned income (2,899) (1,853) Bank premises and equipment, net 2,376 2,003 Other assets 9,049 7,340 --------- --------- Total assets $ 307,167 $ 251,960 --------- --------- --------- --------- Interest-bearing liabilities: Deposits: Demand $ 91,787 476 2.1% $ 77,794 408 2.1% Savings 42,090 435 4.1% 27,709 261 3.8% Time 53,938 660 4.9% 32,393 389 4.8% --------- ------- --------- -------- Total deposits 187,815 1,571 3.4% 137,896 1,058 3.1% Borrowed funds 20,079 258 5.1% 26,763 371 5.5% --------- ------- --------- -------- Total interest-bearing liabilities 207,894 1,829 3.5% 164,659 1,429 3.5% Demand deposits 68,317 59,261 Other liabilities 3,174 2,223 Stockholders' equity 27,782 25,817 --------- --------- Total liabilities and stockholders' equity $ 307,167 $ 251,960 --------- --------- --------- --------- Net interest income and margin $ 4,489 6.3% $ 3,918 6.8% -------- ----- -------- ------- -------- ----- -------- -------
(1) Tax exempt income includes $99,000 and $42,000 in 1998 and 1997, respectively, to adjust to a fully taxable equivalent basis using the federal statutory rate of 34%. (2) Loan fees totaling $281,000 and $294,000 are included in loan interest income for the three months ended September 30, 1998 and 1997, respectively. (3) Average nonaccrual loans totaling $58,000 and $280,000 are included in average loans for the three months ended September 30, 1998 and 1997, respectively. (4) Annualized -6- Table I Components of Net Interest Income Nine months ended September 30, 1998 1997 -------------------------------- -------------------------------- Average Average Average Average (Dollars in thousands) Balance Interest Rate(4) Balance Interest Rate(4) ---------- -------- ------- ---------- -------- ------- Assets: Loans (2) (3) $ 149,662 $12,496 11.1% $ 125,665 $10,570 11.2% Investment securities: Taxable 75,573 3,757 6.6% 67,043 3,397 6.8% Nontaxable (1) 13,423 792 7.9% 5,912 376 8.5% Federal funds sold 23,376 949 5.4% 24,281 980 5.4% --------- ------- --------- -------- Total earning assets 262,034 17,994 9.2% 222,901 15,323 9.2% Cash and due from banks 17,901 16,260 Allowance for credit losses (3,682) (3,404) Unearned income (2,666) (1,799) Bank premises and equipment, net 2,202 2,089 Other assets 8,983 7,437 --------- --------- Total assets $ 284,772 $ 243,484 --------- --------- --------- --------- Interest-bearing liabilities: Deposits: Demand $ 83,348 1,265 2.0% $ 75,737 1,145 2.0% Savings 32,318 957 3.9% 30,856 872 3.8% Time 49,796 1,796 4.8% 29,692 1,021 4.6% --------- ------- --------- -------- Total deposits 165,462 4,018 3.2% 136,285 3,038 3.0% Borrowed funds 25,201 990 5.2% 25,906 1,041 5.4% --------- ------- --------- -------- Total interest-bearing liabilities 190,663 5,008 3.5% 162,191 4,079 3.4% Demand deposits 63,064 54,764 Other liabilities 2,865 1,995 Stockholders' equity 28,180 24,484 --------- --------- Total liabilities and stockholders' equity $ 284,772 $ 243,484 --------- --------- --------- --------- Net interest income and margin $12,986 6.6% $11,244 6.7% -------- ----- -------- ------- -------- ----- -------- -------
(1) Tax exempt income includes $269,000 and $128,000 in 1998 and 1997, respectively, to adjust to a fully taxable equivalent basis using the federal statutory rate of 34%. (2) Loan fees totaling $950,000 and $808,000 are included in loan interest income for the nine months ended September 30, 1998 and 1997, respectively. (3) Average nonaccrual loans totaling $243,000 and $220,000 are included in average loans for the nine months ended September 30, 1998 and 1997, respectively. (4) Annualized -7- For the three months ended September 30, 1998, net interest income, on a fully taxable-equivalent basis, was $4,489,000 or 6.3% of average earning assets, an increase of 15% over $3,918,000 or 6.8% of average earning assets in the comparable period in 1997. For the nine months ended September 30, 1998, net interest income, on a fully taxable-equivalent basis, was $12,986,000 or 6.6% of average earning assets, an increase of 15% over $11,244,000 or 6.7% of average earning assets in the comparable period in 1997. The increase in 1998 reflects higher levels of earning assets. Interest income, on a fully taxable-equivalent basis, was $6,318,000 and $5,347,000 for the three months and $17,994,000 and $15,323,000 for the nine months ended September 30, 1998 and 1997, respectively. The increase in 1998 resulted from the growth in average earning assets. Loan yields averaged 11.1% and 11.3% for the three months ended September 30, 1998 and 1997, respectively, and 11.1% and 11.2% for the nine months of 1998 and 1997. Approximately 89% of the Bank's loans have variable interest rates indexed to the prime rate. The Bank's average prime rate was 8.50% for each of the three month periods ended September 30, 1998 and 1997, and 8.50% and 8.42% for the nine months ended September 30, 1998 and 1997, respectively. Average earning assets were $284,187,000 and $262,034,000 for the three and nine months of 1998 compared to $230,417,000 and $222,901,000 for the same periods in 1997. The growth in average earning assets resulted from increased levels of deposits which were invested in loans, securities and federal funds sold. The increase in interest income during 1998 on a fully taxable-equivalent basis, was partially offset by an increase in interest expense. The average rate paid on interest bearing deposits was 3.5% in each of the three month periods ended September 30, 1998 and 1997, and 3.5% and 3.4% for the nine months ended September 30, 1998 and 1997, respectively. -8- NONINTEREST INCOME Table 2 summarizes the sources of noninterest income for the periods indicated: Table 2 - Noninterest Income (Dollars in thousands) Three months ended September 30, ------------------------------- 1998 1997 ---------- ---------- Gain on sale of loans $ 599 $ 252 Customer service fees 460 471 Loan servicing fees 255 270 Gains (losses)on securities transactions 1 (10) Other 172 177 ---------- ---------- Total noninterest income $1,487 $1,160 ---------- ---------- ---------- ----------
Nine months ended September 30, ------------------------------- 1998 1997 ---------- ---------- Gain on sale of loans $1,895 $ 905 Customer service fees 1,368 1,427 Loan servicing fees 750 792 Gains (losses) on securities transactions 13 (10) Other 528 489 ---------- ---------- Total noninterest income $4,554 $3,603 ---------- ---------- ---------- ----------
Gains on sale of loans increased as a result of a higher volume of Small Business Administration (SBA) loans sold during 1998. The Company sells SBA loans and FHLMC conforming mortgage loans with SBA loan sales providing the primary source of gains on sale. The decrease in customer service fees in 1998 relates primarily to lower levels of fees from returned items. Loan servicing fees declined due to the amortization of increased servicing assets resulting from the loan sales. Other noninterest income increased consistent with the growth of deposits. -9- NONINTEREST EXPENSES The major components of noninterest expenses stated in dollars and as a percentage of average earning assets are set forth in Table 3 for the periods indicated. Table 3 - Noninterest Expenses (Dollars in thousands)
Three months ended September 30, ------------------------------------- 1998 1997 ----------------- ------------------ Salaries and benefits $1,672 2.35% $1,381 2.40% Occupancy 297 0.42% 253 0.44% Equipment 276 0.39% 319 0.55% Stationery and postage 106 0.15% 84 0.15% Insurance 47 0.07% 61 0.11% Legal fees 22 0.03 23 0.04% Other 693 0.98% 636 1.10% ----------------- ----------------- Total noninterest expenses $3,113 4.38% $2,757 4.79% ----------------- ----------------- ----------------- -----------------
Nine months ended September 30, ------------------------------------- 1998 1997 ----------------- ------------------ Salaries and benefits $4,773 2.43% $4,168 2.49% Occupancy 859 0.44% 726 0.43% Equipment 828 0.42% 867 0.52% Stationery and postage 299 0.15% 267 0.16% Insurance 163 0.08% 148 0.09% Legal fees 68 0.03 68 0.04% Other 2,047 1.04% 1,883 1.13% ----------------- ----------------- Total noninterest expenses $9,037 4.60% $8,127 4.86% ----------------- ----------------- ----------------- -----------------
The increases in 1998 were primarily related to higher staff costs and increases in other noninterest expenses. The increase in noninterest expenses reflects the additional leased space for the customer service/data processing center and new branch as well as the growth in total loans, deposits and assets. The decrease in noninterest expense as a percentage of average earning assets is the result of the rate of growth in average earning assets in 1998 exceeding the rate of increase in noninterest expenses. INCOME TAXES The Company's effective tax rate was 41.7% and 41.5% for the three and nine months ended September 30, 1998 compared to 39.9% and 40.3% for the comparable periods in 1997. Changes in the effective tax rate for the Company are primarily due to fluctuations in the proportion of tax exempt income generated from investment securities to pre-tax income. BALANCE SHEET ANALYSIS Total assets increased to $308.5 million at September 30, 1998, a 18% increase from the end of 1997. Based on average balances, third quarter 1998 average total assets of $307.2 million represent an increase of 22% over the third quarter 1997 while nine month 1998 average total assets of $284.8 million represent an increase of 17% over nine months 1997. -10- EARNING ASSETS LOANS Total gross loans at September 30, 1998 were $152.0 million, a 3.8% increase from $146.4 million at December 31, 1997. Average loans in the three and nine months of 1998 were $148,602,000 and $149,662,000 representing an increases of 13% and 19% over the comparable period in 1997. At September 30, 1998 loans available for sale were $15,846,000 compared to $12,365,000 at December 31, 1997 and $10,048,000 at September 30, 1997. The 1998 increases in average total loans and loans available for sale reflected growth in real estate loans, particularly SBA guaranteed commercial real estate loans and residential mortgage loans, which in the opinion of the Company is due to improved local economic conditions and the level of interest rates. The origination of loans available for sale is significantly affected by the level of interest rates and general economic conditions. There can be no assurance the Company will maintain current origination levels in its SBA and residential mortgage lending operations as interest rates or economic conditions change. Risk Elements Lending money involves an inherent risk of nonpayment. Through the administration of loan policies and monitoring of the portfolio, management seeks to reduce such risks. The allowance for credit losses is an estimate to provide a financial buffer for losses, both identified and unidentified, in the loan portfolio. Nonaccrual Loans, Loans Past Due and OREO The accrual of interest is discontinued and any accrued and unpaid interest is reversed when the payment of principal or interest is 90 days past due unless the amount is well secured and in the process of collection. Income on such loans is then recognized only to the extent that cash is received and where the future collection of principal is probable. At September 30, 1998 there were no nonaccrual loans compared to $266,000 or .18% of total loans at December 31, 1997. Table 4 presents the composition of nonperforming assets at September 30, 1998. Table 4 Nonperforming Assets (dollars in thousands)
September 30, 1998 ------------- Nonperforming assets: Accruing loans past due 90 days or more $ -- Nonaccrual loans -- ------ Total nonperforming loans -- OREO 197 ------ Total nonperforming assets $ 197 ------ ------ Nonperforming loans as a percent of total loans 0.00% OREO as a percent of total assets 0.06% Nonperforming assets as a percent of total assets 0.06% Allowance for credit losses $3,776 As a percent of total loans 2.48% As a percent of nonaccrual loans n/m% As a percent of nonperforming loans n/m%
-11- PROVISION AND ALLOWANCE FOR CREDIT LOSSES Management has established an evaluation process designed to determine the adequacy of the allowance for credit losses. This process attempts to assess the risk of loss inherent in the portfolio by segregating the allowance for credit losses into three components: "historical losses;" "specific;" and "margin for imprecision." The "historical losses" and "specific" components include management's judgment of the effect of current and forecasted economic conditions on the ability of the Company's borrowers' to repay; an evaluation of the allowance for credit losses in relation to the size of the overall loan portfolio; an evaluation of the composition of, and growth trends within, the loan portfolio; consideration of the relationship of the allowance for credit losses to nonperforming loans; net charge-off trends; and other factors. While this evaluation process utilizes historical and other objective information, the classification of loans and the establishment of the allowance for credit losses, relies, to a great extent, on the judgment and experience of management. The Company evaluates the adequacy of its allowance for credit losses quarterly. It is the policy of management to maintain the allowance for credit losses at a level adequate for known and future risks inherent in the loan portfolio. Based on information currently available to analyze loan loss potential, including economic factors, overall credit quality, historical delinquency and a history of actual charge-offs, management believes that the loan loss provision and allowance are adequate; however, no assurance of the ultimate level of credit losses can be given with any certainty. Loans are charged against the allowance when management believes that the collectibility of the principal is unlikely. An analysis of activity in the allowance for credit losses is presented in Table 5. TABLE 5 Allowance for Credit Losses (Dollars in thousands)
Nine months ended September 30, 1998 ------------- Total loans outstanding $ 151,961 Average total loans 149,662 Balance, January 1 $ 3,609 Charge-offs by loan category: Commercial 79 Installment and other 31 Real estate construction -- Real estate-other -- --------- Total charge-offs 110 Recoveries by loan category: Commercial 26 Installment and other 26 Real estate construction -- Real estate-other -- --------- Total recoveries 52 --------- Net chargeoffs 58 Provision charged to expense 225 --------- Balance, September 30 $ 3,776 --------- --------- Ratios: Net chargeoffs to average loans 0.04% Reserve to total loans 2.48%
-12- OTHER INTEREST-EARNING ASSETS For the three and nine months ended September 30, 1998, the average balance of investment securities and federal funds sold totaled $135,585,000 and $112,372,000, up from $99,043,000 and $97,236,000 for the same periods in 1997. The 1998 increases resulted from deploying additional liquidity in federal funds sold and investment securities. Additional liquidity was generated by the excess of the increase in average deposits over the increase in average loans. Management also uses borrowed funds to increase earning assets and enhance the Company's interest rate risk profile. During the first quarter of 1998, the Bank accepted a $15 million certificate of deposit from the State of California, in part to replace borrowed funds and to increase earning assets. FUNDING Deposits represent the Bank's principal source of funds for investment. Deposits are primarily core deposits in that they are demand, savings, and time deposits under $100,000 generated from local businesses and individuals. These sources represent relatively stable, long term deposit relationships which minimize fluctuations in overall deposit balances. The Bank has never used brokered deposits. Deposits increased $64,181,000 from year-end or 32% to $265,378,000 as of September 30, 1998. Average total deposits in the three and nine months of 1998 of $256,132,000 and $228,526,000 increased from $197,157,000 and $197,049,000 in the same periods in 1997. Another source of funding for the Company is borrowed funds. Typically, these funds result from the use of agreements to sell investment securities with a repurchase at a designated future date, also known as repurchase agreements. Repurchase agreements are conducted with major banks and investment brokerage firms. The maturity of these arrangements for the Bank is typically 30 to 90 days. During the first quarter of 1998, the Bank replaced $10,000,000 of short-term borrowings with $10,000,000 of borrowings issued by the Federal Home Loan Bank of San Francisco (FHLBSF) maturing in 5 years at an average cost of 4.99%, callable after one year at the option of the FHLBSF. Additionally, the Bank issued a $15,000,000 certificate of deposit maturing in three months to the State of California. The Bank believes the overall effect of these transactions lowered the effective cost of borrowed funds while increasing earning assets. LIQUIDITY Liquidity management refers to the Bank's ability to provide funds on an ongoing basis to meet fluctuations in deposit levels as well as the credit needs and requirements of its clients. Both assets and liabilities contribute to the Bank's liquidity position. Federal funds lines, short-term investments and securities, and loan repayments contribute to liquidity, along with deposit increases, while loan funding and deposit withdrawals decrease liquidity. The Bank assesses the likelihood of projected funding requirements by reviewing historical funding patterns, current and forecasted economic conditions and individual client funding needs. The Bank maintains informal lines of credit with its correspondent banks for short-term liquidity needs. These informal lines of credit are not committed facilities by the correspondent banks and no fees are paid by the Bank to maintain them. The Bank manages its liquidity by maintaining a majority of its investment portfolio in liquid investments in addition to its federal funds sold. Liquidity is measured by various ratios, including the liquidity ratio of net liquid assets compared to total assets. The Bank targets a minimum of 10% for this ratio. As of September 30, 1998, this ratio was 33.3%. Other key liquidity ratios are the ratios of loans to deposits and federal funds sold to deposits, which were 57.3% and 13.9%, respectively, as of September 30, 1998. -13- INTEREST RATE SENSITIVITY Interest rate sensitivity is a measure of the exposure of the Company's future earnings due to changes in interest rates. If assets and liabilities do not reprice simultaneously and in equal volumes, the potential for such exposure exists. It is management's objective to achieve a near-matched to modestly asset-sensitive cumulative position at one year, such that the net interest margin of the Company increases as market interest rates rise and decreases when short-term interest rates decline. One quantitative measure of the "mismatch" between asset and liability repricing is the interest rate sensitivity "gap" analysis. All interest-earning assets and funding sources are classified as to their expected repricing or maturity date, whichever is sooner. Within each time period, the difference between asset and liability balances, or "gap," is calculated. Positive cumulative gaps in early time periods suggest that earnings will increase if interest rates rise. Negative gaps suggest that earnings will decline when interest rates rise. Table 6 presents the gap analysis for the Company at September 30, 1998. Mortgage backed securities are reported in the period of their expected repricing based upon estimated prepayments developed from recent experience. Table 6 Interest Rate Sensitivity (Dollars in thousands)
Next day Over three Over one and within months and and within Over As of September 30, 1998 Immediately three months within one year five years five years Total - --------------------------------------------------------------------------------------------------------------------------------- Rate sensitive assets: Federal funds sold $ 37,000 $ -- $ -- $ -- $ -- $ 37,000 Investment securities: Treasury and agency obligations -- 2,500 5,600 1,044 -- 9,144 Mortgage-backed securities -- 2,833 7,654 21,575 26,193 58,255 Municipal securities -- 694 148 3,606 10,593 15,041 Corporate debt securities -- -- -- 1,090 13,879 14,969 Other -- -- -- -- 1,481 1,481 - --------------------------------------------------------------------------------------------------------------------------------- Total investment securities -- 6,027 13,402 27,315 52,146 98,890 Loans excluding nonaccrual loans 135,394 1,794 1,676 3,792 9,305 151,961 - --------------------------------------------------------------------------------------------------------------------------------- Total rate sensitive assets $ 172,394 $ 7,821 $ 15,078 $ 31,107 $ 61,451 $ 287,851 - --------------------------------------------------------------------------------------------------------------------------------- Rate sensitive liabilities: Deposits: Money market, NOW, and savings $ 145,646 $ -- $ -- $ -- $ -- $ 145,646 Time certificates -- 33,514 17,182 2,852 -- 53,548 - --------------------------------------------------------------------------------------------------------------------------------- Total interest-bearing deposits 145,646 33,514 17,182 2,852 -- 199,194 Borrowings -- -- -- 10,000 -- 10,000 - --------------------------------------------------------------------------------------------------------------------------------- Total rate sensitive liabilities $ 145,646 $ 33,514 $ 17,182 12,852 -- $ 209,194 - --------------------------------------------------------------------------------------------------------------------------------- Gap $ 26,748 $ (25,693) $ (2,104) $ 18,255 $ 61,451 $ 78,657 Cumulative gap $ 26,748 $ (1,055) $ (1,049) $ 17,206 $ 78,657
-14- The Company's positive cumulative total gap results from the exclusion from the above table of noninterest-bearing demand deposits, which represent a significant portion of the Company's funding sources. The Company maintains a minor negative cumulative gap in the over three months and within one year time period and a positive cumulative gap in all other time periods. The Company's experience indicates money market deposit rates tend to lag changes in the prime rate which immediately impact the prime-based loan portfolio. Even in the Company's negative gap time periods, rising rates result in an increase in net interest income. Should interest rates stabilize or decline in future periods, it is reasonable to assume that the Company's net interest margin, as well as net interest income, may decline correspondingly. CAPITAL RESOURCES Management seeks to maintain adequate capital to support anticipated asset growth and credit risks, and to ensure that the Company and the Bank are in compliance with all regulatory capital guidelines. The primary source of new capital for the Company has been the retention of earnings. The Company does not have any material commitments for capital expenditures as of September 30, 1998. The Company pays a quarterly cash dividend on its common stock as part of efforts to enhance shareholder value. The Company's goal is to maintain a strong capital position that will permit payment of a consistent cash dividend which may grow commensurately with earnings growth. On April 15, 1998, the Board of Directors declared a 10 percent stock dividend paid on May 27, 1998 to stockholders of record as of May 7, 1998. During 1997, the Board of Directors approved a stock repurchase program authorizing open market purchases of up to 3% of the shares outstanding, or approximately 70,519 shares on a post stock dividend basis, in order to enhance long term shareholder value. As of September 30, 1998, 70,350 shares had been purchased under the program. The Company and the Bank are subject to capital adequacy guidelines issued by the federal bank regulatory authorities. Under these guidelines, the minimum total risk-based capital requirement is 10.0% of risk-weighted assets and certain off-balance sheet items for a "well capitalized" depository institution. At least 6.0% of the 10.0% total risk-based capital ratio must consist of Tier 1 capital, defined as tangible common equity, and the remainder may consist of subordinated debt, cumulative preferred stock and a limited amount of the allowance for loan losses. The federal regulatory authorities have established minimum capital leverage ratio guidelines for state member banks. The ratio is determined using Tier 1 capital divided by quarterly average total assets. The guidelines require a minimum of 5.0% for a "well capitalized" depository institution. The Company's risk-based capital ratios were in excess of regulatory guidelines for a "well capitalized" depository institution as of September 30, 1998, and December 31, 1997. Capital ratios for the Company are set forth in Table 7: Table 7 Capital Ratios
September 30, December 31, 1998 1997 ------------ ------------ The Company: Total risk-based capital ratio 14.9% 16.4% Tier 1 risk-based capital ratio 13.7% 15.2% Tier 1 leverage ratio 9.7% 9.8% The Bank: Total risk-based capital ratio 14.4% 15.1% Tier 1 risk-based capital ratio 13.1% 13.9% Tier 1 leverage ratio 8.6% 9.3%
-15- YEAR 2000 The approach of the year 2000 presents significant issues for many financial, information, and operational systems. Many computer systems use only two digits to refer to a year. This convention could affect date-sensitive calculations that treat "00" as the year 1900 rather than 2000. Another issue is that the year 2000 is a leap year and some programs may not properly provide for February 29, 2000. The following discussion of the implications of the year 2000 problem for the Company contains numerous forward-looking statements on inherently uncertain information. The cost of the project and the date on which the Company plans to complete the internal year 2000 modifications are based on management's best estimates, which were derived utilizing a number of assumptions of future events including the continued availability of internal and external resources, third party modifications and other factors. However, there can be no guarantee that these estimates will be achieved and actual results could differ. Moreover, although management believes it will be able to make the necessary modifications in advance, there can be no guarantee that the failure to modify the systems would not have a material adverse impact on the Company. READINESS PREPARATION The Company's plan to address the year 2000 issues includes a process of inventory, analysis, modification, testing and certification, and implementation. In 1997 the Company alerted its business customers of the year 2000 problem and is now assessing the readiness preparations of its major customers and suppliers. Reviews of the Company's information systems and information provided by the Company's primary vendors, large customers and suppliers has not identified any year 2000 readiness issues which appear to be unresolvable by December 31, 1999. The Company's major critical information system is its core transaction processing software which provides transaction processing for loans, deposits and general ledger. The vendor supplying the Company's core transaction processing software has provided evidence of year 2000 readiness. Efforts continue to ascertain the year 2000 readiness of various systems that integrate information into the core processing software. To date, no significant information systems have been found not ready for year 2000. Among the major actions remaining is the testing of the core processing software and other systems which integrate into the core processing software. Other purchased software and systems supported by external parties are also being tested as part of the year 2000 program. In addition, contingency plans are being developed to reduce the impact of potential events that may occur. However, there can be no guarantee that the systems of vendors or customers with which the Company does business will be completed on a timely basis, or that contingency plans will shield operations from failures that may occur. The Company does not significantly rely on embedded technology in its critical processes. Embedded technology typically controls operations such as power management and related facilities functions. Year 2000 risks associated with embedded technology in the Company's facilities appear low. The Company is reliant on suppliers and customers, and year 2000 issues with both groups are being addressed. Inquiries regarding year 2000 readiness plans will be directed to vendors upon whom there is significant reliance and those vendors found to pose a significant risk will be asked to demonstrate how that risk will be addressed. Appropriate measures to minimize risk will be undertaken with those that appear to pose a significant risk. Replacements may be effected where necessary. The Company, however, has no viable alternative for some suppliers, such as power distribution and local telephone companies. These companies are still being monitored and the results will be used as information for contingency planning. As with all financial institutions, the Company places a high degree of reliance on the systems of other institutions, including government agencies, to settle transactions. Principal settlement methods associated with major payment systems will be tested as part of their integration with the core processing system. The Company is also reliant on its customers to make necessary preparations for year 2000 so that their business operations will not be interrupted, thus threatening their ability to honor their financial commitments. Borrowers, funding sources and large depositors are being reviewed to determine those with financial volumes sufficiently large to warrant inquiry and assessment of the year 2000 readiness preparation. Financial volumes include loans and unused commitments, collected deposit balances, ACH, foreign exchange, etc. -16- The population of customers with loans and unused commitments outstanding ("borrowers") pose the highest risk level of concern for any lender. Business purpose borrowings exceeding $50,000 are being assigned one of three year 2000 risk levels: low, medium or high. Completion of the assignment of risk is expected in the fourth quarter of 1998. Ongoing reassessments with risk mitigation plans will be made for all levels of risk. Customers with low and medium risk will be reassessed annually, while customers with high risk will be reassessed at least quarterly. The risk mitigation plan will evaluate whether year 2000 issues will materially affect the customer's cash flows, asset account values related to its balance sheet, and/or collateral pledged to the Bank. The risk mitigation plan is incorporated into the normal credit review process. COST Amounts expensed in the first nine months of 1998 were not significant to the Company's financial position or results of operations. Although the remaining costs associated with achieving year 2000 compliance have not yet been determined, management does not believe the amounts expensed during 1998 and 1999 will have a material effect on the Company's financial position, results of operations or cash flows. In addition, the Company may also replace certain equipment and software to ensure year 2000 readiness. The cost of the replacement items will be expensed over the useful lives of those assets. During the third quarter of 1998 six existing automated teller machines were replaced with new machines at a cost of approximately $300,000 due in part to year 2000 issues with the existing equipment. The cost of other identified replacement items and contingency equipment is estimated at less than $100,000. Estimated total costs could change as analysis continues. RISKS The principal risks associated with the year 2000 problem can be grouped into three categories. The first is the risk that the Company does not successfully ready its operations for the next century. The second is the risk of disruption of the Company's operations due to operational failures of third parties. The third is the risk of business interruption among fund providers and obligors such that expected funding and repayment does not take place. The only risk largely under the Company's control is preparing its internal operations for the year 2000. The Company, like other financial institutions, is heavily dependent on its computer systems. The complexity of these systems and their dependence on one another makes it impossible to switch to other systems almost immediately as would be necessary if necessary corrections were not made in advance. Management believes it will be able to make the necessary corrections in advance. Failure of third parties may jeopardize Company operations, but how seriously depends on the nature and duration of such failures. The most serious impact on the Company operations from suppliers would result if basic services such as telecommunications, electric power suppliers and services provided by other financial institutions and governmental agencies were disrupted. Significant public disclosure of the state of readiness among basic infrastructure and other suppliers has not generally been available. Although the Company's inquiries are underway, the Company does not yet have the information to estimate the likelihood of significant disruptions among its suppliers. Operational failures among the Company's sources of major funding, larger borrowers and capital market counterparties could affect their ability to continue to provide funding or meet obligations when due. Similar to the situation outlined above with suppliers, public information has been scant. Although the Company's inquiries are underway, the Company does not yet have the information to estimate the likelihood of significant disruptions among its funding sources and obligors. PROGRAM ASSESSMENT Senior management and banking regulators regularly assess the Company's year 2000 preparations. Additionally, a consulting and services firm has been retained to review and advise senior management on internally developed testing plans for critical systems. -17- CONTINGENCY PLANS The Company is developing remediation contingency plans and business resumption contingency plans specific to the year 2000. Remediation contingency plans address the actions to be taken if the current approach to remediating a system is falling behind schedule or otherwise appears in jeopardy of failing to deliver a year 2000 ready system when needed. Business resumption contingency plans address the actions that would be taken if critical business functions can not be carried out in the normal manner upon entering the next century due to system or supplier failure. Most contingent action plans prepared at this time involve manual processing of transactions. Given the size, scope and complexity of the Company's operations, manual processing appears a viable alternative for most information systems other than the core processing system. PART II. OTHER INFORMATION Item 1. Legal Proceedings Not applicable. Item 2. Changes in Securities Not applicable Item 3. Defaults Upon Senior Securities Not applicable Item 4. Submission of Matters to a Vote of Security Holders Not applicable Item 5. Other Information On October 21, 1998, the Coast Bancorp Board of Directors declared a cash dividend of fourteen cents ($0.14) per share, payable November 25, 1998, to shareholders of record on November 5, 1998. Item 6. Exhibits and Reports on Form 8-K a. Exhibits Exhibit Number 27 Financial Data Schedule b. Reports on Form 8-K Not applicable -18- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. COAST BANCORP --------------------------------------- (REGISTRANT) Date: November 12, 1998 /s/ HARVEY J. NICKELSON --------------------------------------- Harvey J. Nickelson President and Chief Executive Officer /s/ BRUCE H. KENDALL --------------------------------------- Bruce H. Kendall Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) -19- EX-27 2 EXHIBIT 27
9 1,000 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 16,287 0 37,000 0 98,287 0 98,287 148,801 3,776 308,498 265,378 10,656 3,233 0 0 0 20,253 8,988 308,498 12,495 4,280 523 17,724 4,018 5,008 12,716 225 13 9,037 8,008 8,008 0 0 4,681 1.94 1.89 .065 0 0 0 0 3,609 110 52 3,776 3,776 0 0
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