-----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, U4TTWqLaS5CGj/fxdrHK/5/ZAnCVX6JQLw5yE6X60KhO+QsU9VS6nUp6mWw97yy1 COyZTEMvpulI8/cMjpRfqg== 0001047469-99-016594.txt : 19990428 0001047469-99-016594.hdr.sgml : 19990428 ACCESSION NUMBER: 0001047469-99-016594 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990427 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: 99602207 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 March 31, 1999 -------------- 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) (831) 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 March 31, 1999: 4,778,858 --------- COAST BANCORP FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1999 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 16 Item 2. Changes in Securities 16 Item 3. Defaults Upon Senior Securities 16 Item 4. Submission of Matters to a Vote of Security Holders 16 Item 5. Other Information 16 Item 6. Exhibits and Reports on Form 8-K 16
PART I Item 1. Financial Statements COAST BANCORP CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31, 1999 1998 ------------ ------------- (unaudited) ASSETS Cash and due from banks $ 15,739,000 $ 23,084,000 Federal funds sold 29,000,000 29,000,000 ------------------------------- Total cash and equivalents 44,739,000 52,084,000 Securities: Available for sale, at fair value 111,333,000 106,960,000 Loans: Commercial 38,470,000 38,874,000 Real estate-term 95,919,000 95,360,000 Real estate-construction 24,819,000 22,206,000 Installment and other 4,688,000 4,536,000 ------------------------------- Total loans 163,896,000 160,976,000 Unearned income (3,604,000) (3,272,000) Allowance for credit losses (3,882,000) (3,871,000) ------------------------------- Net loans 156,410,000 153,833,000 Bank premises and equipment-net 2,301,000 2,408,000 Accrued interest receivable and other assets 9,943,000 9,463,000 ------------------------------- TOTAL ASSETS $324,726,000 $324,748,000 ------------------------------- ------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES: Deposits: Noninterest-bearing demand $ 67,942,000 $ 75,978,000 Interest-bearing demand 94,718,000 100,707,000 Savings 58,938,000 51,873,000 Time 52,415,000 52,252,000 ------------------------------- Total deposits 274,013,000 280,810,000 Other borrowings 15,712,000 10,416,000 Accrued expenses and other liabilities 3,748,000 3,325,000 ------------------------------- Total liabilities 293,473,000 294,551,000 Commitments and contingencies STOCKHOLDERS' EQUITY: Preferred stock-no par value; 10,000,000 shares authorized; no shares issued - - Common stock-no par value; 20,000,000 shares authorized; shares outstanding: 4,778,858 in 1999 and 4,768,678 in 1998 20,771,000 20,689,000 Accumulated other comprehensive income 117,000 317,000 Retained earnings 10,365,000 9,191,000 ------------------------------- Total stockholders' equity 31,253,000 30,197,000 ------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $324,726,000 $324,748,000 ------------------------------- -------------------------------
See notes to unaudited consolidated financial statements -1- COAST BANCORP CONSOLIDATED INCOME STATEMENTS (unaudited)
THREE MONTHS ENDED MARCH 31, 1999 1998 ------------ ------------- Interest income: Loans, including fees $4,133,000 $4,147,000 Securities: Taxable 1,338,000 1,225,000 Nontaxable 192,000 145,000 Federal funds sold 374,000 100,000 ------------------------------- Total interest income 6,037,000 5,617,000 Interest expense: Deposits 1,512,000 1,120,000 Other borrowings 139,000 430,000 ------------------------------- Total interest expense 1,651,000 1,550,000 ------------------------------- Net interest income 4,386,000 4,067,000 Provision for credit losses - 75,000 ------------------------------- Net interest income after provision for credit losses 4,386,000 3,992,000 Noninterest income: Customer service fees 632,000 622,000 Gain from sale of loans 511,000 668,000 Loan servicing fees 224,000 246,000 Gains (losses) from sale of securities 61,000 (15,000) Other 44,000 46,000 ------------------------------- Total noninterest income 1,472,000 1,567,000 Noninterest expenses: Salaries and benefits 1,807,000 1,540,000 Occupancy 295,000 271,000 Equipment 288,000 285,000 Customer services 170,000 165,000 Advertising and promotion 105,000 132,000 Stationery and postage 91,000 97,000 Professional services 79,000 123,000 Data processing 85,000 68,000 Insurance 61,000 60,000 Other 222,000 176,000 ------------------------------- Total noninterest expenses 3,203,000 2,917,000 ------------------------------- Income before income taxes 2,655,000 2,642,000 Income taxes 1,099,000 1,086,000 ------------------------------- Net income $1,556,000 $1,556,000 ------------------------------- ------------------------------- Earnings per share: Basic $.33 $.32 ------------------------------- ------------------------------- Diluted $.32 $.31 ------------------------------- -------------------------------
See notes to unaudited consolidated financial statements -2- COAST BANCORP CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
THREE MONTHS ENDED MARCH 31, 1999 1998 ------------ ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $1,556,000 $1,556,000 Adjustments to reconcile net income to net cash provided by operating activities: Provision for credit losses - 75,000 Depreciation and amortization (54,000) 35,000 (Gains) losses on securities transactions (61,000) 15,000 Deferred income taxes 42,000 132,000 Proceeds from loan sales 25,602,000 17,282,000 Origination of loans held for sale (22,148,000) (18,313,000) Accrued interest receivable and other assets (522,000) (1,359,000) Accrued expenses and other liabilities 422,000 955,000 Increase in unearned income 626,000 533,000 Other operating activities 135,000 (66,000) ------------------------------- Net cash provided by operating activities 5,598,000 845,000 ------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sales of securities Available for sale 12,145,000 5,329,000 Proceeds from maturities of securities 5,590,000 4,357,000 Purchases of securities available for sale (22,442,000) (19,308,000) Net increase in loans (6,363,000) (3,091,000) Purchases of bank premises and equipment (73,000) (195,000) ------------------------------- Net cash used in investing activities (11,143,000) (12,908,000) ------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net (decrease) increase in deposits (6,796,000) 19,680,000 Net proceeds from other borrowings 5,296,000 (5,043,000) Repurchase of common stock - (675,000) Payment of cash dividends (382,000) (309,000) Exercise of stock options 82,000 43,000 ------------------------------- Net cash (used in) provided by financing activities (1,800,000) 13,696,000 ------------------------------- Net (decrease) increase in cash and equivalents (7,345,000) 1,633,000 Cash and equivalents, beginning of period 52,084,000 30,853,000 ------------------------------- Cash and equivalents, end of period $44,739,000 $32,486,000 ------------------------------- ------------------------------- SUPPLEMENTAL CASH FLOW INFORMATION CASH PAID DURING THE PERIOD FOR: Interest $1,761,000 $1,616,000 Income taxes - 331,000 NON-CASH INVESTING AND FINANCING TRANSACTIONS: Additions to other real estate owned $- $190,000
See notes to unaudited consolidated financial statements -3- COAST BANCORP NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS THREE MONTHS ENDED MARCH 31, 1999 and 1998 - ------------------------------------------------------------------------------- 1. BASIS OF PRESENTATION - These financial statements reflect, in management's opinion, all adjustments, consisting of adjustments of a normal recurring nature, which are necessary for a fair presentation of Coast Bancorp's financial position and results of operations and cash flows for the periods presented. The results of interim periods are not necessarily indicative of results of operations expected for the full year. These financial statements should be read in conjunction with the audited consolidated financial statements for 1998 included in the Company's Annual Report on Form 10-K. 2. EARNINGS PER SHARE - Basic earnings per share is computed by dividing net income by the number of weighted average common shares outstanding. Diluted earnings per share reflects potential dilution from outstanding stock options, using the treasury stock method. The number of weighted average shares used in computing basic and diluted earnings per share are as follows:
THREE MONTHS ENDED MARCH 31, ----------------------- 1999 1998 --------- --------- Basic shares 4,773,483 4,839,901 Dilutive effect of stock options 102,770 120,683 ----------------------- Diluted shares 4,876,253 4,960,584 ----------------------- -----------------------
3. COMPREHENSIVE INCOME - The Company's source of other comprehensive income is unrealized gains and losses on securities available for sale. Total comprehensive income was as follows:
THREE MONTHS ENDED MARCH 31, -------------------------- 1999 1998 ---------- ---------- Net income $1,556,000 $1,556,000 Other comprehensive income (200,000) (163,000) -------------------------- Total comprehensive income $1,356,000 $1,393,000 -------------------------- --------------------------
-4- Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Net income for each of the three months ended March 31, 1999 and 1998 was $1,556,000. During the first quarter of 1999 an increase in net interest income combined with a decrease in the provision for credit losses was offset by a decrease in noninterest income and increases in noninterest expenses and 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 months ended March 31, 1999 and 1998. -5- Table I Components of Net Interest Income
THREE MONTHS ENDED MARCH 31, ----------------------------------------------------------------- 1999 1998 ------------------------------ ------------------------------- AVERAGE AVERAGE AVERAGE AVERAGE BALANCE INTEREST RATE BALANCE INTEREST RATE -------- -------- ------- -------- -------- ------- (DOLLARS IN THOUSANDS) Assets: Loans (1)(2) $162,669 $4,133 10.2% $150,687 $4,147 11.0% Securities: Taxable 83,758 1,338 6.4% 73,348 1,225 6.7% Nontaxable (3) 15,178 291 7.7% 10,654 219 8.2% Federal funds sold 32,029 374 4.7% 7,769 100 5.1% ------------------ ------------------- Total earning assets 293,634 6,136 8.4% 242,458 5,691 9.4% Cash and due from banks 15,950 17,386 Allowance for credit losses (3,901) (3,642) Unearned income (3,284) (2,411) Bank premises and equipment, net 2,377 2,074 Other assets 9,238 8,274 -------- -------- Total assets $314,014 $264,139 -------- -------- -------- -------- Interest-bearing liabilities: Deposits: Demand $ 93,381 408 1.8% $77,779 376 1.9% Savings 57,681 522 3.6% 27,026 213 3.2% Time 50,773 582 4.6% 40,563 531 5.2% ------------------ ------------------- Total deposits 201,835 1,512 3.0% 145,368 1,120 3.1% Borrowed funds 11,264 139 4.9% 30,526 430 5.6% ------------------ ------------------- Total interest-bearing liabilities 213,099 1,651 3.1% 175,894 1,550 3.5% Demand deposits 66,804 57,286 Other liabilities 3,312 2,582 Stockholders' equity 30,799 28,377 -------- -------- Total liabilities and stockholders' equity $314,014 $264,139 -------- -------- -------- -------- Net interest income and margin $4,485 6.1% $4,141 6.8% ------ ------ ------ ------
(1) Tax exempt income includes $99,000 and $74,000 in 1999 and 1998, to adjust to a fully taxable equivalent basis using the federal statutory rate of 34%. (2) Loan fees totaling $326,000 and $317,000 are included in loan interest income for the three months ended March 31, 1999 and 1998. (3) Average nonaccrual loans totaling $1,033,000 and $327,000 are included in average loans for the three months ended March 31, 1999 and 1998. (4) Annualized -6- For the three months ended March 31, 1999, net interest income, on a fully taxable-equivalent basis, was $4,485,000 or 6.1% of average earning assets, an increase of 8% over $4,141,000 or 6.8% of average earning assets in the comparable period in 1998. The increase in 1999 reflects higher levels of earning assets. Interest income, on a fully taxable-equivalent basis, was $6,136,000 and $5,690,000 for the three months ended March 31, 1999 and 1998. The increase in 1999 resulted from the growth in average earning assets. Loan yields averaged 10.2% and 11.0% for the three months ended March 31, 1999 and 1998. Approximately 85% of the Bank's loans have variable interest rates indexed to the prime rate. The Bank's average prime rate was 7.75% and 8.50% for each of the three month periods ended March 31, 1999 and 1998. Average earning assets were $293,634,000 and $242,458,000 for the three months ended March 31, 1999 and 1998. The growth in average earning assets resulted from increased levels of deposits which were invested primarily in loans and securities. The increase in interest income during 1999 on a fully taxable-equivalent basis, was partially offset by an increase in interest expense. The average rate paid on interest bearing deposits was 3.1% and 3.5% for the three month periods ended March 31, 1999 and 1998. NONINTEREST INCOME Table 2 summarizes the sources of noninterest income for the periods indicated: Table 2 - Noninterest Income (Dollars in thousands)
THREE MONTHS ENDED MARCH 31, ------------------ 1999 1998 ------ ------ Customer service fees $ 632 $ 622 Gain on sale of loans 511 668 Loan servicing fees 224 246 Gains (losses) from sale of securities 61 (15) Other 44 46 Total noninterest income $1,472 $1,567 ------------------ ------------------
Gains on sale of loans decreased as a result of a lower volume of Small Business Administration (SBA) loans sold and a decline in market prices for SBA loans in 1999 compared to 1998. The Company sells SBA loans and FHLMC conforming mortgage loans with SBA loan sales providing the primary source of gains on sale. -7- 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 MARCH 31, ------------------------------------- 1999 1998 ---- ---- Salaries and benefits $1,807 2.46% $1,540 2.54% Occupancy 295 .40% 271 .45% Equipment 288 .39% 285 .47% Customer services 170 .23% 165 .27% Advertising and promotion 105 .14% 132 .22% Stationery and postage 91 .12% 97 .16% Data processing 85 .12% 68 .11% Professional services 79 .11% 123 .20% Insurance 61 .08% 60 .10% Other 222 .30% 176 .29% ------------------------------------- Total noninterest expenses $3,203 4.58% $2,917 4.86% ------------------------------------- -------------------------------------
The increases in 1999 were primarily related to higher staff and occupancy costs and increases in data processing and other noninterest expenses partially offset by decreases in advertising and promotion and professional services. The increase in noninterest expenses reflects the opening of a new branch in August 1998 and 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 1999 exceeding the rate of increase in noninterest expenses. INCOME TAXES The Company's effective tax rate was 41.4% for the three months ended March 31, 1999 compared to 41.1% for the same period in 1998. Changes in the effective tax rate for the Company are primarily due to fluctuations in the proportion of tax exempt income generated from investment securities to pre-tax income. BALANCE SHEET ANALYSIS Total assets were $324.7 million at March 31, 1999, no material change from the end of 1998. Based on average balances, first quarter 1999 average total assets of $314.0 million represent an increase of 19% over the first quarter of 1998. EARNING ASSETS LOANS Total gross loans at March 31, 1999 were $163.9 million, a 2% increase from $161.0 million at December 31, 1998. Average loans in the three months of 1999 were $162,669,000 representing an increase of 8% over the same period in 1998. The 1999 increases primarily reflected growth in average real estate loans which in the opinion of the Company is due to improved local economic conditions. Risk Elements Lending money involves an inherent risk of nonpayment. Through the administration of loan policies and monitoring of the portfolio, management seeks to reduce such risks. The allowance for credit losses is an estimate to provide a financial buffer for losses, both identified and unidentified, in the loan portfolio. -8- Nonaccrual Loans, Loans Past Due and OREO The accrual of interest is discontinued and any accrued and unpaid interest is reversed when the payment of principal or interest is 90 days past due unless the amount is well secured and in the process of collection. Income on such loans is then recognized only to the extent that cash is received and where the future collection of principal is probable. At March 31, 1999 nonaccrual loans totaled $1,033,000 or .63% of total loans compared to $1,108,000 or .69% of total loans at December 31, 1998. Table 4 presents the composition of nonperforming assets at March 31, 1999. Table 4 Nonperforming Assets (dollars in thousands)
MARCH 31, 1999 -------------- Nonperforming Assets: Loans Past Due 90 Days or More $ - Nonaccrual Loans 1,033 ------ Total Nonperforming Loans 1,033 OREO - ------ Total Nonperforming Assets $1,033 ------ ------ Nonperforming Loans as a Percent of Total Loans 0.63% OREO as a Percent of Total Assets - Nonperforming Assets as a Percent of Total Assets 0.32% Allowance for Credit Losses $3,882 As a Percent of Total Loans 2.37% As a Percent of Nonaccrual Loans 376% As a Percent of Nonperforming Loans 376%
PROVISION AND ALLOWANCE FOR CREDIT LOSSES Management has established an evaluation process designed to determine the adequacy of the allowance for credit losses. This process attempts to assess the risk of loss inherent in the portfolio by segregating the allowance for credit losses into three components: "historical losses;" "specific;" and "margin for imprecision." The "historical losses" component is calculated as a function of the prior four years loss experience for commercial, real estate and consumer loan types. The four years are assigned weightings of 35%, 30%, 20% and 15% beginning with the most recent year. The "specific" component is established by allocating a portion of the allowance to individual classified credits on the basis of specific circumstances and assessments. The "margin for imprecision" component is an unallocated portion that supplements the first two components as a conservative margin to guard against unforeseen factors. The "historical losses" and "specific" components include management's judgment of the effect of current and forecasted economic conditions on the ability of the Company's borrowers' to repay; an evaluation of the allowance for credit losses in relation to the size of the overall loan portfolio; an evaluation of the composition of, and growth trends within, the loan portfolio; consideration of the relationship of the allowance for credit losses to nonperforming loans; net charge-off trends; and other factors. While this evaluation process utilizes historical and other objective information, the classification of loans and the establishment of the allowance for credit losses, relies, to a great extent, on the judgment and experience of management. We evaluate the adequacy of our allowance for credit losses quarterly. -9- It is the policy of management to maintain the allowance for credit losses at a level adequate for known and inherent risks in the loan portfolio. Based on information currently available to analyze loan loss potential, including economic factors, overall credit quality, historical delinquency and a history of actual charge-offs, management believes that the loan loss provision and allowance are adequate; however, no assurance of the ultimate level of credit losses can be given with any certainty. Loans are charged against the allowance when management believes that the collectibility of the principal is unlikely. An analysis of activity in the allowance for credit losses is presented in Table 5. TABLE 5 Allowance for Credit Losses (Dollars in thousands)
THREE MONTHS ENDED MARCH 31, 1999 ------------------ Total Loans Outstanding $163,896 Average Total Loans 162,669 Allowance for credit losses: Balance, January 1 $ 3,871 Charge-offs by Loan Category: Commercial - Installment and other 3 Real Estate construction - Real Estate-term - -------- Total Charge-Offs 3 Recoveries by Loan Category: Commercial 13 Installment and other - Real Estate construction - Real Estate-term 1 -------- Total Recoveries 14 Net Charge-Offs (recoveries) (11) Provision Charged to Expense - -------- -------- Balance, March 31 $ 3,882 -------- -------- Ratios: Net Charge-offs to Average Loans (0.01)% Reserve to Total Loans 2.37%
OTHER INTEREST-EARNING ASSETS For the three months ended March 31, 1999, the average balance of investment securities and federal funds sold totaled $130,965,000, down from $91,771,000 for the same period in 1998. The 1999 increase resulted from investing additional liquidity in federal funds sold and investment securities. Additional liquidity was generated by the excess of the increase in average deposits over the increase in average loans. Management also uses borrowed funds to increase earning assets and enhance the Company's interest rate risk profile. -10- FUNDING Deposits represent the Company's principal source of funds for investment. Deposits are primarily core deposits in that they are demand, savings, and time deposits under $100,000 generated from local businesses and individuals. These sources represent relatively stable, long term deposit relationships which minimize fluctuations in overall deposit balances. During 1998, we accepted a $15 million time deposit from the State of California, which was increased to $20 million during 1999, in part to replace borrowed funds and to increase earning assets. The State of California time deposit is renewable approximately every three months at a rate similar to the three month U.S. Treasury bill. The Bank has never used brokered deposits. Deposits decreased $6,797,000 from year-end or 2% to $274,013,000 as of March 31, 1999. Average total deposits in the three months of 1999 of $268,639,000 increased from $202,654,000 in the same period in 1998. Another source of funding for the Company is borrowed funds. Management uses borrowed funds to increase earning assets, prudently leverage capital and minimize interest rate risk. Typically, these funds result from the use of advances from the FHLB and agreements to sell investment securities with a repurchase at a designated future date, also known as repurchase agreements. Repurchase agreements are conducted with major banks and investment brokerage firms. The maturity of these arrangements for the Bank is typically 30 to 90 days. Advances from the FHLB may vary in maturity from 1 to 10 years. Advances from the FHLB at March 31, 1999 totaled $15,000,000, payable at maturity in 2003 and 2004. The advances are callable by the FHLB beginning in February 1999 ($10,000,000) and March 2000 ($5,000,000) and bear interest at a weighted average of 4.9%. The average balance of borrowed funds was $11,264,000 and $30,526,000 during the first quarter of 1999 and 1998, respectively. The decrease in average borrowed funds reflects the substitution of the $15,000,000 in time deposits from the State of California for borrowed funds. LIQUIDITY AND INTEREST RATE SENSITIVITY Liquidity management refers to the Company's ability to provide funds on an ongoing basis to meet fluctuations in deposit levels as well as the credit needs and requirements of its clients. Both assets and liabilities contribute to the Bank's liquidity position. Federal funds lines, short-term investments and securities, and loan repayments contribute to liquidity, along with deposit increases, while loan funding and deposit withdrawals decrease liquidity. The Company assesses the likelihood of projected funding requirements by reviewing historical funding patterns, current and forecasted economic conditions and individual client funding needs. The Bank maintains informal lines of credit with its correspondent banks for short-term liquidity needs. These informal lines of credit are not committed facilities by the correspondent banks and no fees are paid by the Bank to maintain them. The Bank manages its liquidity by maintaining a majority of its investment portfolio in liquid investments in addition to its federal funds sold. Liquidity is measured by various ratios, including the liquidity ratio of net liquid assets compared to total assets. As of March 31, 1999, this ratio was 31.2%. Other key liquidity ratios are the ratios of loans to deposits and federal funds sold to deposits, which were 59.8% and 10.6%, respectively, as of March 31, 1999. INTEREST RATE SENSITIVITY Interest rate sensitivity is a measure of the exposure of the Company's future earnings due to changes in interest rates. If assets and liabilities do not reprice simultaneously and in equal volumes, the potential for such exposure exists. It is management's objective to achieve a near-matched to modestly asset-sensitive cumulative position at one year, such that the net interest margin of the Company increases as market interest rates rise and decreases when short-term interest rates decline. -11- One quantitative measure of the "mismatch" between asset and liability repricing is the interest rate sensitivity "gap" analysis. All interest-earning assets and funding sources are classified as to their expected repricing or maturity date, whichever is sooner. Within each time period, the difference between asset and liability balances, or "gap," is calculated. Positive cumulative gaps in early time periods suggest that earnings will increase if interest rates rise. Negative gaps suggest that earnings will decline when interest rates rise. Table 6 presents the gap analysis for the Company at March 31, 1999. Mortgage backed securities are reported in the period of their expected repricing based upon estimated prepayments developed from recent experience. Table 6 Interest Rate Sensitivity (Dollars in thousands)
NEXT DAY OVER THREE AND WITHIN MONTHS AND OVER ONE THREE WITHIN ONE AND WITHIN OVER FIVE IMMEDIATELY MONTHS YEAR FIVE YEARS YEARS TOTAL ----------- ---------- ----------- ---------- --------- -------- (DOLLARS IN THOUSANDS) As of March 31, 1999 Rate Sensitive Assets: Federal Funds Sold $ 29,000 $ - $ - $ - $ - $ 29,000 Investment Securities: Treasury and Agency Obligations - 1,000 2,500 4,600 - 8,100 Mortgage-Backed Securities - 2,727 7,956 29,278 32,973 72,934 Municipal Securities - - 225 3,177 12,112 15,514 Corporate Securities - - - - 13,261 13,261 Other - - - - 1,524 1,524 ----------------------------------------------------------------------------- Total Investment Securities - 3,727 10,681 37,055 59,870 111,333 Loans Excluding Nonaccrual Loans 138,050 1,808 3,725 7,816 11,464 162,863 ----------------------------------------------------------------------------- Total Rate Sensitive Assets $167,050 $ 5,535 $ 14,406 $44,871 $71,334 $303,196 ----------------------------------------------------------------------------- ----------------------------------------------------------------------------- Rate Sensitive Liabilities: Deposits: Demand and Savings $153,653 $ - $ - $ - $ - $153,653 Time - 39,099 10,591 2,725 - 52,415 ----------------------------------------------------------------------------- Total Interest-bearing Deposits 153,653 39,099 10,591 2,725 - 206,068 Other Borrowings - 712 - 15,000 - 15,712 ----------------------------------------------------------------------------- Total Rate Sensitive Liabilities $153,653 $ 39,811 $ 10,591 $17,725 $ - $221,780 ----------------------------------------------------------------------------- ----------------------------------------------------------------------------- Gap $ 13,397 $(34,276) $ 3,815 $27,146 $71,334 $ 81,416 Cumulative Gap $ 13,397 $(20,879) $(17,064) $10,082 $81,416
-12- The Company's positive cumulative total gap results from the exclusion from the above table of noninterest-bearing demand deposits, which represent a significant portion of the Company's funding sources. The Company maintains a negative cumulative gap in the next day and within three months and the over three months and within one year time periods and a positive cumulative gap in all other time periods. The Company's experience indicates money market deposit rates tend to lag changes in the prime rate which immediately impact the prime-based loan portfolio. Even in the Company's negative gap time periods, rising rates result in an increase in net interest income. Should interest rates stabilize or decline in future periods, it is reasonable to assume that the Company's net interest margin, as well as net interest income, may decline correspondingly. CAPITAL RESOURCES Management seeks to maintain adequate capital to support anticipated asset growth and credit risks, and to ensure that the Company and the Bank are in compliance with all regulatory capital guidelines. The primary source of new capital for the Company has been the retention of earnings. The Company does not have any material commitments for capital expenditures as of March 31, 1999. The Company pays a quarterly cash dividend on its common stock as part of efforts to enhance shareholder value. The Company's goal is to maintain a strong capital position that will permit payment of a consistent cash dividend which may grow commensurately with earnings growth. During 1997, the Board of Directors approved a stock repurchase program authorizing open market purchases of up to 3% of the shares outstanding, or approximately 145,837 shares, in order to enhance long term shareholder value. As of March 31, 1999, 145,500 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 credit 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 Bank's risk-based capital ratios were in excess of regulatory guidelines for a "well capitalized" depository institution as of March 31, 1999, and December 31, 1998. Capital ratios for the Company and the Bank are set forth in Table 7: Table 7 Capital Ratios Consolidated:
MARCH 31, 1999 DECEMBER 31, 1998 -------------- ----------------- Total risk-based capital ratio 15.9% 15.4% Tier 1 risk-based capital ratio 14.6% 14.2% Tier 1 leverage ratio 9.9% 9.5%
Coast Commercial Bank:
MARCH 31, 1999 DECEMBER 31, 1998 -------------- ----------------- Total risk-based capital ratio 15.2% 14.8% Tier 1 risk-based capital ratio 13.9% 13.6% Tier 1 leverage ratio 9.4% 9.3%
-13- YEAR 2000 The year 2000 problem exists because many computer systems use only the last 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. This discussion of the implications of the year 2000 problem for us contains numerous forward-looking statements on inherently uncertain information. The cost of the project and the date on which we plan 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. We cannot guarantee, however, these estimates, 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 us. Readiness Preparation Our plan to address the year 2000 issues includes a process of inventory, analysis, modification, testing and certification, and implementation. In 1997 we alerted our business customers of the year 2000 problem and are now assessing the readiness preparations of our major customers and suppliers. Reviews of our information systems and information provided by our primary vendors, large customers and suppliers have not identified any year 2000 readiness issues which appear to be unresolvable by December 31, 1999. Our major critical information system is our core transaction processing software which provides transaction processing for loans, deposits and general ledger. The vendor supplying our 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. We cannot guarantee, however, the systems of vendors or customers with which we conduct business will be completed on a timely basis, or that contingency plans will shield operations from failures that may occur. We do not significantly rely on embedded technology in our critical processes. Embedded technology typically controls operations such as power management and related facilities functions. Year 2000 risks associated with embedded technology in our facilities appear low. We rely on suppliers and customers, and we are addressing year 2000 issues with both groups. We have identified vendors upon whom there is significant reliance and made inquiries regarding year 2000 readiness plans and status. Appropriate measures to minimize risk will be undertaken with those that appear to pose a significant risk. Replacements may be effected where necessary. We have, however, no viable alternative for some suppliers, such as power distribution and local telephone companies. We are still evaluating these companies, and we will use the results as information for contingency planning. As with all financial institutions, we place 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. We also rely on our 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, and foreign exchange, etc. -14- 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 were assigned one of three year 2000 risk levels: low, medium or high. Borrowers representing 3% and 28% of outstanding loans were assigned high and medium year 2000 risk levels, respectively. 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 us. The risk mitigation plan is incorporated into the normal credit review process. Cost Amounts expensed in the first three months of 1999 were not significant to our financial position or results of operations. Although the remaining costs associated with achieving year 2000 compliance have not yet been determined, management believes the amounts expensed during 1999 will not have a material effect on the our financial position, results of operations or cash flows. In addition, we 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 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 our analysis continues. Risks The principal risks associated with the year 2000 problem can be grouped into three categories: - we do not successfully ready our operations for the next century, - disruption of our operations due to operational failures of third parties, and - business interruption among fund providers and obligors such that expected funding and repayment does not take place. The only risk largely under our control is preparing our internal operations for the year 2000. We, like other financial institutions, are heavily dependent on our computer systems. The complexity of these systems and their interdependence make it impracticable to switch to alternative systems without interruptions if necessary modifications are not completed on schedule. Management believes it will be able to make the necessary modifications on schedule. Failure of third parties may jeopardize our operations, but the seriousness of this risk depends on the nature and duration of the failures. The most serious impact on our 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. Some public disclosure about readiness preparation among basic infrastructure and other suppliers is now available. We are unable, however, to estimate the likelihood of significant disruptions among our basic infrastructure suppliers. In view of the unknown probability of occurrence and impact on operations, we consider the loss of basic infrastructure services to be the most reasonably likely worst case year 2000 scenario. Operational failures among our customers could affect their ability to continue to provide funding or meet obligations when due. The information we develop in the customer assessments described earlier allows us to identify those customers that exhibit a risk of not making the adequate preparations for the century change. We are taking appropriate actions to manage these risks. Program Assessment Senior management and banking regulators regularly assess our 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. -15- Contingency Plans We are 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 our 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 April 21, 1999, the Coast Bancorp Board of Directors declared a cash dividend of eight cents ($0.08) per share, payable May 27, 1999, to shareholders of record on May 7, 1999. Item 6. Exhibits and Reports on Form 8-K a. Exhibits
Exhibit Number 3.1 Articles of incorporation of Coast Bancorp, as amended January 20, 1999 27 Financial Data Schedule
b. Reports on Form 8-K Not applicable -16- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. COAST BANCORP -------------------------------------- (REGISTRANT) Date: April 26, 1999 /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) -17- EX-3.1 2 EXHIBIT 3.1 Exhibit 3.1 ARTICLES OF INCORPORATION OF COAST BANCORP AS AMENDED ARTICLE I The name of this corporation is Coast Bancorp. ARTICLE II The purpose of this corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of California other than the banking business, the trust company business or the practice of a profession permitted to be incorporated by the California Corporations Code. ARTICLE III The name and address in the State of California of this corporation's initial agent for service of process is David V. Heald, 740 Front Street, Suite 240, Santa Cruz, California 95061-1818. ARTICLE IV (a) This corporation is authorized to issue two classes of shares designated "Preferred Stock" and "Common Stock," respectively. The number of shares of Preferred Stock authorized to be issued is Ten Million (10,000,000) and the number of Common Stock to be issued is Forty Million (40,000,000). Upon amendment of this Article, each one (1) outstanding share of Common Stock is split into two (2) shares of Common Stock. (b) The Preferred Stock may be divided into such number of shares as the Board of Directors may determine. The Board of Directors is authorized to determine and later the rights, preferences, priviledges and restrictions granted to and imposed upon any wholly unissued series of Preferred Stock, and to fix the number of shares of any series of Preferred Stock and the designation of any such series of Preferred Stock. The Board of Directors, within the limits and restrictions stated in any resolution or resolutions of the Board of Directors originally fixing the number of shares constituting any series, may increase or decrease (but not below the number of shares of such series then outstanding) the number of shares of any series subsequent to the issue of share of that series. ARTICLE V (a) The liability of directors of the corporation for monetary damages shall be eliminated to the fullest extent permissable under California law. (b) The corporation is authorized to provide indemnification of agents (as defined in Section 317 of the California Corporations Code) through Bylaw provisions, agreements with agents, vote of the shareholders or disinterested directors or otherwise, to the fullest extent permissable under California law. (c) Any amendment, repeal or modification of any provision of the Article V shall not adversely affect any right or protection of an agent of this corporation existing at the time of such amendment, repeal or modification. EX-27 3 EXHIBIT 27
9 1,000 3-MOS DEC-31-1999 JAN-01-1999 MAR-31-1999 15,739 0 29,000 0 111,333 0 111,333 163,896 3,882 324,726 274,013 15,712 3,748 0 0 0 20,771 10,482 324,726 4,133 1,530 374 6,037 1,512 1,651 4,386 0 61 3,203 2,655 2,655 0 0 1,556 0.33 0.32 .060 1,033 0 0 0 3,871 3 14 3,882 3,882 0 0
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