-----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, II5wJcqB0bt1ljNpETKQpM08gDNbOriJ4++RJjmn/ld9bC+4+5rDa6Wqryp4mWYh LLMLXPd+Ljw/xKcx8aY+8Q== 0001047469-99-028588.txt : 19990727 0001047469-99-028588.hdr.sgml : 19990727 ACCESSION NUMBER: 0001047469-99-028588 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990726 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: 99670199 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 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 June 30, 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 June 30, 1999: 4,783,378 --------- COAST BANCORP FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 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
JUNE 30, DECEMBER 31, 1999 1998 ------------- ------------- ASSETS (unaudited) Cash and due from banks $ 18,981,000 $ 23,084,000 Federal funds sold 4,650,000 29,000,000 ------------ ------------ Total cash and equivalents 23,631,000 52,084,000 Securities: Available for sale, at fair value 111,465,000 106,960,000 Loans: Commercial 38,380,000 38,874,000 Real estate-term 109,078,000 95,360,000 Real estate-construction 31,474,000 22,206,000 Installment and other 4,853,000 4,536,000 ------------ ------------ Total loans 183,785,000 160,976,000 Unearned income (3,763,000) (3,272,000) Allowance for credit losses (3,829,000) (3,871,000) ------------ ------------ Net loans 176,193,000 153,833,000 Bank premises and equipment-net 2,205,000 2,408,000 Accrued interest receivable and other assets 10,273,000 9,463,000 ------------ ------------ TOTAL ASSETS $323,767,000 $324,748,000 ------------ ------------ ------------ ------------ LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES: Deposits: Noninterest-bearing demand $ 70,227,000 $ 75,978,000 Interest-bearing demand 91,708,000 100,707,000 Savings 53,045,000 51,873,000 Time 52,161,000 52,252,000 ------------ ------------ Total deposits 267,141,000 280,810,000 Other borrowings 21,500,000 10,416,000 Accrued expenses and other liabilities 3,787,000 3,325,000 ------------ ------------ Total liabilities 292,428,000 294,551,000 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 20,801,000 20,689,000 authorized; shares outstanding: 4,783,378 in 1999 and 4,768,678 in 1998 Accumulated other comprehensive income (loss) (1,033,000) 317,000 Retained earnings 11,571,000 9,191,000 ------------ ------------ Total stockholders' equity 31,339,000 30,197,000 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $323,767,000 $324,748,000 ------------ ------------ ------------ ------------
See notes to unaudited consolidated financial statements -1- COAST BANCORP CONSOLIDATED INCOME STATEMENTS (unaudited)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, --------------------------- ------------------------- 1999 1998 1999 1998 ---- ---- ---- ---- Interest income: Loans, including fees $ 4,429,000 $ 4,223,000 $ 8,562,000 $ 8,370,000 Securities: Taxable 1,539,000 1,226,000 2,877,000 2,451,000 Nontaxable 192,000 187,000 384,000 332,000 Federal funds sold 199,000 253,000 573,000 353,000 ------------------------------------------------------------------ Total interest income 6,359,000 5,889,000 12,396,000 11,506,000 Interest expense: Deposits 1,467,000 1,299,000 2,979,000 2,419,000 Other borrowings 202,000 330,000 341,000 760,000 ------------------------------------------------------------------ Total interest expense 1,669,000 1,629,000 3,320,000 3,179,000 ------------------------------------------------------------------ Net interest income 4,690,000 4,260,000 9,076,000 8,327,000 Provision for credit losses - 75,000 - 150,000 ------------------------------------------------------------------ Net interest income after provision for credit losses 4,690,000 4,185,000 9,076,000 8,177,000 Noninterest income: Customer service fees 645,000 555,000 1,277,000 1,177,000 Gain from sale of loans 119,000 628,000 630,000 1,294,000 Loan servicing fees 214,000 248,000 438,000 495,000 Gains (losses) on sales of securities (9,000) 26,000 52,000 11,000 Other 40,000 41,000 84,000 88,000 ------------------------------------------------------------------ Total noninterest income 1,009,000 1,498,000 2,481,000 3,065,000 Noninterest expenses: Salaries and benefits 1,733,000 1,561,000 3,540,000 3,100,000 Occupancy 313,000 291,000 608,000 562,000 Equipment 282,000 267,000 570,000 552,000 Customer services 172,000 168,000 342,000 333,000 Advertising and promotion 140,000 170,000 245,000 303,000 Stationery and postage 112,000 96,000 203,000 193,000 Professional services 99,000 80,000 178,000 202,000 Data processing 97,000 77,000 182,000 145,000 Insurance 47,000 57,000 108,000 117,000 Other 224,000 238,000 446,000 415,000 ------------------------------------------------------------------ Total noninterest expenses 3,219,000 3,005,000 6,422,000 5,922,000 ------------------------------------------------------------------ Income before income taxes 2,480,000 2,678,000 5,135,000 5,320,000 Income taxes 891,000 1,121,000 1,990,000 2,207,000 ------------------------------------------------------------------ Net income $ 1,589,000 $ 1,557,000 $ 3,145,000 $ 3,113,000 ------------------------------------------------------------------ ------------------------------------------------------------------ Earnings per share: Basic $.33 $.32 $.66 $.65 ------------------------------------------------------------------ ------------------------------------------------------------------ Diluted $.32 $.31 $.64 $.63 ------------------------------------------------------------------ ------------------------------------------------------------------
See notes to unaudited consolidated financial statements -2- COAST BANCORP CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
SIX MONTHS ENDED JUNE 30, -------------------------------- 1999 1998 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 3,145,000 $ 3,113,000 Adjustments to reconcile net income to net cash provided by operating activities: Provision for credit losses - 150,000 Depreciation and amortization (147,000) 92,000 (Gains) on securities transactions (52,000) (11,000) Deferred income taxes (265,000) 188,000 Proceeds from loan sales 41,626,000 37,497,000 Origination of loans held for sale (41,509,000) (40,560,000) Accrued interest receivable and other assets (545,000) (1,578,000) Accrued expenses and other liabilities 462,000 156,000 Increase in unearned income 1,134,000 994,000 Other operating activities 943,000 (83,000) -------------------------------- Net cash provided by (used in) operating activities 4,792,000 (42,000) -------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sales of securities available for sale 14,600,000 22,468,000 Proceeds from maturities of securities 10,411,000 11,643,000 Purchases of securities available for sale (31,874,000) (43,598,000) Net increase (decrease) in loans (22,968,000) 3,173,000 Purchases of bank premises and equipment (176,000) (541,000) -------------------------------- Net cash used in investing activities (30,007,000) (6,855,000) -------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net (decrease) increase in deposits (13,669,000) 27,049,000 Net proceeds from other borrowings 11,084,000 (4,570,000) Repurchase of common stock - (834,000) Payment of cash dividends (765,000) (646,000) Exercise of stock options 112,000 43,000 Payment of fractional shares resulting from stock dividend - (6,000) -------------------------------- Net cash (used in) provided by financing activities (3,238,000) 21,036,000 -------------------------------- Net (decrease) increase in cash and equivalents (28,453,000) 14,139,000 Cash and equivalents, beginning of period 52,084,000 30,853,000 -------------------------------- Cash and equivalents, end of period $ 23,631,000 $ 44,992,000 -------------------------------- -------------------------------- SUPPLEMENTAL CASH FLOW INFORMATION CASH PAID DURING THE PERIOD FOR: Interest $ 3,402,000 $ 3,145,000 Income taxes 1,264,000 2,274,000 NON-CASH INVESTING AND FINANCING TRANSACTIONS: Additions to other real estate owned $ - $ 156,000
See notes to unaudited consolidated financial statements -3- COAST BANCORP NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS THREE MONTHS ENDED JUNE 30, 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 June 30, ---------------------------------- 1999 1998 ---- ---- Basic shares 4,781,414 4,816,058 Dilutive effect of stock options 120,755 153,214 ---------------------------------- Diluted shares 4,902,169 4,969,272 ---------------------------------- ---------------------------------- Six months ended June 30, ---------------------------------- 1999 1998 ---- ---- Basic shares 4,777,470 4,826,694 Dilutive effect of stock options 112,287 135,812 ---------------------------------- Diluted shares 4,889,757 4,962,506 ---------------------------------- ----------------------------------
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 computed as follows:
Three Months Ended June 30, -------------------------------- 1999 1998 -------------------------------- Net income $ 1,589,000 $1,557,000 Other comprehensive income (loss) (1,150,000) 73,000 -------------------------------- Total comprehensive income $439,000 $1,630,000 -------------------------------- -------------------------------- Six Months Ended June 30, -------------------------------- 1999 1998 -------------------------------- Net income $ 3,145,000 $3,113,000 Other comprehensive income (loss) (1,350,000) (90,000) -------------------------------- Total comprehensive income $ 1,795,000 $3,023,000 -------------------------------- --------------------------------
-4- Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Net income for the three months ended June 30, 1999 was $1,589,000 compared to $1,557,000 for the three months ended June 30, 1998. Net income for the six months ended June 30, 1999 was $3,145,000 compared to $3,113,000 for the six months ended June 30, 1998. During 1999 an increase in net interest income combined with decreases in the provision for credit losses and provision for income taxes was offset by a decrease in noninterest income and an increase in noninterest expenses. EARNINGS SUMMARY NET INTEREST INCOME Net interest income refers to the difference between interest and fees earned on loans and investments and the interest paid on deposits and other borrowed funds. It is the largest component of the net earnings of a financial institution. The primary factors to consider in analyzing net interest income are the composition and volume of earning assets and interest-bearing liabilities, the amount of noninterest bearing liabilities and nonaccrual loans, and changes in market interest rates. 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 June 30, 1999 and 1998. -5- Table I Components of Net Interest Income
THREE MONTHS ENDED JUNE 30, ---------------------------------------------------------------------------------- 1999 1998 ------------------------------------- ------------------------------------- AVERAGE AVERAGE AVERAGE AVERAGE BALANCE INTEREST RATE (4) BALANCE INTEREST RATE (4) ------- -------- -------- ------- -------- -------- (DOLLARS IN THOUSANDS) Assets: Loans (1)(2) $172,917 $4,429 10.2% $149,716 $4,223 11.3% Securities: Taxable 95,615 1,539 6.4% 75,217 1,226 6.5% Nontaxable (3) 15,305 291 7.6% 14,677 283 7.7% Federal funds sold 16,675 199 4.8% 19,482 253 5.2% -------- -------- ------- -------- Total earning assets 300,512 6,458 8.6% 259,092 5,985 9.2% Cash and due from banks 15,632 18,136 Allowance for credit losses (3,835) (3,683) Unearned income (3,685) (2,686) Bank premises and equipment, net 2,386 2,154 Other assets 10,924 9,628 -------- ------- Total assets $321,834 $282,641 -------- ------- -------- ------- Interest-bearing liabilities: Deposits: Demand $93,772 394 1.7% $80,339 385 1.9% Savings 54,641 479 3.5% 27,677 218 3.2% Time 52,190 594 4.6% 54,818 696 5.1% -------- -------- ------- -------- Total deposits 200,603 1,467 2.9% 162,834 1,299 3.2% Borrowed funds 14,600 202 4.9% 25,083 330 5.3% -------- -------- ------- -------- Total interest-bearing liabilities 215,203 1,669 3.1% 187,917 1,629 3.5% Demand deposits 68,379 63,502 Other liabilities 3,718 2,834 Stockholders' equity 34,534 28,388 -------- ------- Total liabilities and stockholders' equity $321,834 $282,641 -------- ------- -------- ------- Net interest income and margin $4,789 6.4% $4,356 6.7% -------- -------- -------- --------
(1) Loan fees totaling $420,000 and $352,000 are included in loan interest income for the three months ended June 30, 1999 and 1998. (2) Average nonaccrual loans totaling $1,999,000 and $373,000 are included in average loans for the three months ended June 30, 1999 and 1998. (3) Tax exempt income includes $99,000 and $96,000 in 1999 and 1998, to adjust to a fully taxable equivalent basis using the federal statutory rate of 34%. (4) Annualized -6- Table I Components of Net Interest Income
SIX MONTHS ENDED JUNE 30, ---------------------------------------------------------------------------------- 1999 1998 ------------------------------------- ------------------------------------- AVERAGE AVERAGE AVERAGE AVERAGE BALANCE INTEREST RATE (4) BALANCE INTEREST RATE (4) ------- -------- -------- ------- -------- -------- (DOLLARS IN THOUSANDS) Assets: Loans (1)(2) $167,822 $ 8,562 10.2% $150,201 $ 8,370 11.0% Securities: Taxable 89,719 2,877 6.4% 74,282 2,451 6.7% Nontaxable (3) 15,241 582 7.6% 12,665 332 8.2% Federal funds sold 24,309 573 4.7% 13,625 171 5.1% -------- -------- ------- -------- Total earning assets 297,091 12,594 8.5% 250,773 11,677 9.4% Cash and due from banks 15,790 17,761 Allowance for credit losses (3,868) (3,662) Unearned income (3,486) (2,548) Bank premises and equipment, net 2,331 2,1144 Other assets 10,087 8,951 -------- ------- Total assets $317,945 $273,389 -------- ------- -------- ------- Interest-bearing liabilities: Deposits: Demand $ 93,577 803 1.7% $ 79,059 761 1.9% Savings 56,153 1,001 3.6% 27,351 431 3.2% Time 51,485 1,175 4.6% 47,690 1,227 5.2% -------- -------- ------- -------- Total deposits 201,215 2,979 3.0% 154,100 2,419 3.1% Borrowed funds 12,941 341 5.3% 27,804 760 5.5% -------- -------- ------- -------- Total interest-bearing liabilities 214,156 3,320 3.1% 181,904 3,179 3.5% Demand deposits 66,804 60,394 Other liabilities 3,516 2,708 Stockholders' equity 32,677 28,383 -------- ------- Total liabilities and stockholders' equity $317,945 $273,389 -------- ------- -------- ------- Net interest income and margin $ 9,274 6.2% $8,498 6.8% -------- -------- -------- --------
(1) Loan fees totaling $746,000 and $669,000 are included in loan interest income for the six months ended June 30, 1999 and 1998. (2) Average nonaccrual loans totaling $1,516,000 and $322,000 are included in average loans for the six months ended June 30, 1999 and 1998. (3) Tax exempt income includes $198,000 and $171,000 in 1999 and 1998, to adjust to a fully taxable equivalent basis using the federal statutory rate of 34%. (4) Annualized -7- For the three months ended June 30, 1999, net interest income, on a fully taxable-equivalent basis, was $4,788,000 or 6.4% of average earning assets, an increase of 10% over $4,356,000 or 6.7% of average earning assets in the comparable period in 1998. For the six months ended June 30, 1999, net interest income, on a fully taxable-equivalent basis, was $9,275,000 or 6.2% of average earning assets, an increase of 9% over $8,498,000 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 $6,458,000 and $5,985,000 for the three months and $12,594,000 and $11,677,000 for the six months ended June 30, 1999 and 1998. The increase in 1999 resulted from the growth in average earning assets. Loan yields averaged 10.2% and 11.3% for the three months and 10.2% and 11.0% for the six months ended June 30, 1999 and 1998. Approximately 84% of the Bank's loans have interest rates indexed to the prime rate which are variable or reset within 3 months. The Bank's average prime rate was 7.75% and 8.50% for the three month and six month periods ended June 30, 1999 and 1998. Average earning assets were $300,512,000 and $297,091,000 for the three and six months ended June 30, 1999 compared to $259,092,000 and $250,773,000 for the same periods in 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 2.9% and 3.2% for the three months ended June 30, 1999 and 1998 and 3.0% and 3.1% for the six months ended June 30, 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 JUNE 30, ------------------ 1999 1998 ------ ------ Customer service fees $ 645 $ 555 Gain on sale of loans 119 628 Loan servicing fees 214 248 Gains (losses) on sales of securities (9) 26 Other 40 41 ------- ------- Total noninterest income $1,009 $1,498 ------- ------- ------- ------- SIX MONTHS ENDED JUNE 30, ------------------ 1999 1998 ------ ------ Customer service fees $1,277 $1,177 Gain on sale of loans 630 1,294 Loan servicing fees 438 495 Gains on sales of securities 52 11 Other 84 88 ------ ------ Total noninterest income $2,481 $3,065 ------ ------ ------ ------
The Company sells SBA loans and FHLMC conforming mortgage loans with SBA loan sales providing the primary source of gains on sale. Gains on sale of loans decreased as a result of a lower volume of Small Business Administration (SBA) loans sold and a significant decline in market prices for SBA loans in 1999 compared to 1998. During the second quarter of 1999 the Company retained SBA loans ready for sale due to declining market prices. The Company will attempt to sell the seasoned SBA loans should market prices return to levels seen during 1995 through 1998. -8- 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 JUNE 30, ---------------------------------------- 1999 1998 ---------------- ----------------- Salaries and benefits $1,733 2.31% $1,561 2.41% Occupancy 313 .42% 291 .45% Equipment 282 .38% 267 .47% Customer services 172 .23% 168 .26% Advertising and promotion 140 .19% 170 .26% Stationery and postage 112 .15% 96 .15% Data processing 97 .13% 77 .12% Professional services 99 .13% 80 .12% Insurance 47 .06% 57 .09% Other 224 .30% 238 .37% ---------------------------------------- Total noninterest expenses $3,219 4.28% $3,005 4.64% ---------------------------------------- ----------------------------------------
SIX MONTHS ENDED JUNE 30, ---------------------------------------- 1999 1998 ---------------- ----------------- Salaries and benefits $3,540 2.38% $3,100 2.47% Occupancy 608 .41% 562 .45% Equipment 570 .38% 552 .44% Customer services 342 .23% 333 .27% Advertising and promotion 245 .16% 303 .24% Stationery and postage 203 .14% 193 .15% Data processing 182 .12% 145 .12% Professional services 178 .12% 202 .16% Insurance 108 .07% 117 .09% Other 446 .30% 415 .33% ---------------------------------------- Total noninterest expenses $6,422 4.32% $5,922 4.72% ---------------------------------------- ----------------------------------------
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 35.9% and 38.8% for the three and six months ended June 30, 1999 compared to 41.9% and 41.5% for the same periods 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 $323.8 million at June 30, 1999, compared to $324.7 million at the end of 1998. Based on average balances, second quarter 1999 average total assets of $321.8 million represent an increase of 14% over the second quarter of 1998 while six month 1999 average total assets of $317.9 million represent an increase of 16% over six months 1998. EARNING ASSETS LOANS Total gross loans at June 30, 1999 were $183.8 million, a 14% increase from $161.0 million at December 31, 1998. Average loans in the three and six months of 1999 were $172,917,000 and $167,822,000 representing increases of 15% and 12% over the same period in 1998. The 1999 increases primarily reflected growth in average real estate loans, particularly commercial real estate, SBA guaranteed commercial real estate, construction and residential mortgage loans, which in the opinion of the Company is due to favorable local economic conditions and the level of interest rates. The origination of all types of real estate loans 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 construction, SBA, commercial real estate and residential mortgage lending operations as interest rates or economic conditions change. -9- 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 June 30, 1999 nonaccrual loans totaled $2,091,000 or 1.14% of total loans compared to $1,108,000 or .69% of total loans at December 31, 1998. Nonaccrual loans at June 30, 1999 consist of one commercial real estate loan, partially guaranteed by the SBA, and one commercial borrower. Collateral supporting the commercial borrower's loans includes business and real estate assets. Table 4 presents the composition of nonperforming assets at June 30, 1999. Table 4 Nonperforming Assets (dollars in thousands)
JUNE 30, 1999 ------------- Nonperforming Assets: Loans Past Due 90 Days or More $ 10 Nonaccrual Loans 2,091 ------------ Total Nonperforming Loans 2,101 OREO - ------------ Total Nonperforming Assets $2,101 ------------ ------------ Nonperforming Loans as a Percent of Total Loans 1.14% OREO as a Percent of Total Assets - Nonperforming Assets as a Percent of Total Assets 0.65% Allowance for Credit Losses $3,829 As a Percent of Total Loans 2.08% As a Percent of Nonaccrual Loans 183% As a Percent of Nonperforming Loans 182%
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. -10- 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)
SIX MONTHS ENDED JUNE 30, 1999 ---------------- Total Loans Outstanding $183,785 Average Total Loans 167,822 Allowance for credit losses: Balance, January 1 $ 3,871 Charge-offs by Loan Category: Commercial 78 Installment and other 3 Real Estate construction - Real Estate-term - ------------- Total Charge-Offs 81 Recoveries by Loan Category: Commercial 36 Installment and other - Real Estate construction - Real Estate-term 3 ------------- Total Recoveries 39 Net Charge-Offs 42 Provision Charged to Expense - ------------- Balance, June 30 $ 3,829 ------------- ------------- Ratios: Net Charge-offs to Average Loans 0.03% Reserve to Total Loans 2.08%
OTHER INTEREST-EARNING ASSETS For the three and six months ended June 30, 1999, the average balance of investment securities and federal funds sold totaled $127,595,000, and $129,269,000, up from $109,376,000 and $100,572,000 for the same periods in 1998. The 1999 increases 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. -11- 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. We have accepted a $20 million time deposit from the State of California 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 $13,669,000 from year-end or 5% to $267,141,000 as of June 30, 1999. Average total deposits in the three and six months of 1999 of $268,982,000 and $268,019,000 increased from $226,336,000 and $214,494,000 in the same periods 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. Repurchase agreements totaled $5,000,000 at June 30, 1999. Advances from the FHLB may vary in maturity from 1 to 10 years. Advances from the FHLB at June 30, 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 $14,600,000 and $12,941,000 during the three and six months ended June 30, 1999 compared to $25,083,000 and $27,804,000 for the same periods in 1998. The decrease in average borrowed funds reflects the substitution of 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 June 30, 1999, this ratio was 22.6%. Other key liquidity ratios are the ratios of loans to deposits and federal funds sold to deposits, which were 68.8% and 1.7%, respectively, as of June 30, 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. -12- 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 June 30, 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 AND OVER THREE OVER ONE AND WITHIN THREE MONTHS AND WITHIN FIVE OVER FIVE IMMEDIATELY MONTHS WITHIN ONE YEAR YEARS YEARS TOTAL ----------- ------------ --------------- ------------ --------- --------- (DOLLARS IN THOUSANDS) As of June 30, 1999 Rate Sensitive Assets: Federal Funds Sold $ 4,650 $ - $ - $ - $ - $ 4,650 Investment Securities: Treasury and Agency Obligations - - - 8,042 - 8,042 Mortgage-Backed Securities - 2,200 6,764 27,123 36,119 72,206 Municipal Securities - - 225 3,402 11,395 15,022 Corporate Securities - 10,078 - - 4,283 14,361 Other - - - - 1,834 1,834 ----------- ------------ --------------- ------------ --------- --------- ----------- ------------ --------------- ------------ --------- --------- Total Investment Securities - 12,278 6,989 38,567 53,631 111,465 Loans Excluding Nonaccrual Loans 92,851 59,033 1,828 12,771 15,211 181,694 ----------- ------------ --------------- ------------ --------- --------- ----------- ------------ --------------- ------------ --------- --------- Total Rate Sensitive Assets $ 97,501 $ 71,311 $ 8,817 $ 51,338 $ 68,842 $ 297,809 ----------- ------------ --------------- ------------ --------- --------- Rate Sensitive Liabilities: Deposits: Demand and Savings $ 144,753 $ - $ - $ - $ - $ 144,753 Time - 39,711 11,245 1,205 - 52,161 ----------- ------------ --------------- ------------ --------- --------- ----------- ------------ --------------- ------------ --------- --------- Total Interest-bearing Deposits 144,753 39,711 11,245 1,205 - 196,914 Other Borrowings - 6,500 - 15,000 - 21,500 ----------- ------------ --------------- ------------ --------- --------- ----------- ------------ --------------- ------------ --------- --------- Total Rate Sensitive Liabilities $ 144,753 $ 46,211 $ 11,245 $ 16,205 $ - $ 218,414 ----------- ------------ --------------- ------------ --------- --------- ----------- ------------ --------------- ------------ --------- --------- Gap $ (47,252) $ 25,100 $ (2,428) $ 35,133 $ 68,842 $ 79,395 Cumulative Gap $ (47,252) $ (22,152) $ (24,580) $ 10,553 $ 79,395
-13- 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 immediate, 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 June 30, 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 June 30, 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 June 30, 1999, and December 31, 1998. Capital ratios for the Company and the Bank are set forth in Table 7: Table 7 Capital Ratios
The Company: JUNE 30, 1999 DECEMBER 31,1998 ------------- ---------------- Total risk-based capital ratio 15.1% 15.4% Tier 1 risk-based capital ratio 13.9% 14.2% Tier 1 leverage ratio 10.0% 9.5% Coast Commercial Bank: JUNE 30, 1999 DECEMBER 31,1998 ------------- ---------------- Total risk-based capital ratio 14.6% 14.8% Tier 1 risk-based capital ratio 13.3% 13.6% Tier 1 leverage ratio 9.6% 9.3%
-14- 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. Testing of the core processing software and other systems which integrate into the core processing software is substantially complete. Other purchased software and systems supported by external parties are also being tested as part of the year 2000 program. To date, no significant information systems have been found not ready for year 2000. Additional testing may be conducted as on-going product updates by software vendors are installed. In addition, contingency plans have been 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 have been 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 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. -15- 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 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. -16- Contingency Plans We have developed 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 our information systems. 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 The Company's annual meeting was held May 18, 1999. The purpose of the meeting was to elect the company's board of directors and ratify the appointment of Deloitte & Touche LLP as the Company's auditors for the year ending December 31, 1999. The following directors were elected based upon the votes cast as indicated:
Director Votes "for" Votes "against" Votes "withheld" Richard Alderson 3,883,253 0 18,532 Douglas D. Austin 3,872,083 0 29,702 John C. Burroughs 3,884,867 0 16,918 Bud W. Cummings 3,884,867 0 16,918 Ronald M. Israel, M.D. 3,884,867 0 16,918 Harvey J. Nickelson 3,884,867 0 16,918 Gus J.F. Norton 3,884,867 0 16,918 James C. Thompson 3,884,867 0 16,918
The appointment of Deloitte & Touche LLP as the Company's auditors for the year ending December 31, 1999 was ratified with 3,901,785 votes for ratification, 13,286 votes against, and 2,306 votes withheld. Item 5. Other Information On July 21, 1999, the Coast Bancorp Board of Directors declared a cash dividend of eight cents ($0.08) per share, payable August 26, 1999, to shareholders of record on August 6, 1999. Item 6. Exhibits and Reports on Form 8-K a. Exhibits Exhibit Number 10.19 Employment Agreement between Coast Bancorp, Coast Commercial Bank and Harvey J. Nickelson dated June 21, 1999 27 Financial Data Schedule b. Reports on Form 8-K Not applicable -17- 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: July 23, 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) -18- EX-10.19 2 EXHIBIT 10.19 EMPLOYMENT AGREEMENT This Employment Agreement (the "Agreement") is made effective as of June 16, 1999, by and between Coast Bancorp, a California corporation and Coast Commercial Bank, a California banking corporation on the one hand ("Employer") and Harvey J. Nickelson ("Employee"). Employer desires to continue to employ, as President and Chief Executive Officer of the Employer, a person of high executive caliber with significant prior experience in the banking services which Employer provides. Employee being willing to continue to be employed by Employer as President and Chief Executive Officer and Employer being willing to continue to employ Employee on the terms, covenants and conditions hereinafter set forth, it is agreed as follows: 1. POSITION. Employee is hereby employed as President and Chief Executive Officer of Employer. 2. EMPLOYMENT TERM. The term of this Agreement shall commence effective June 16, 1999, and continue for 4 1/2 years thereafter through December 31, 2003, unless earlier terminated pursuant to Paragraph 6 below, such period being the term of this Agreement. 3. EMPLOYEE DUTIES. Employee shall perform the duties of the position of President and Chief Executive Officer designated by the By-Laws of Employer and as directed by Employer's Board of Directors. 4. EXTENT OF SERVICES. Employee shall devote his full time, attention and energies to the business of Employer, and shall not, during the term of this Agreement, engage directly or indirectly, in any other business activity, except personal investments, charitable and community activities, without the prior written consent of Employer. 5. COMPENSATION AND BENEFITS. Employee's salary shall be at the rate of $179,000 per year, prorated for any partial year in which this Agreement is in effect. Said salary shall be payable in equal semi-monthly installments. Any salary increase shall be at the sole discretion of the Board. Employer agrees to review and evaluate Employee's performance at the end of each fiscal year to determine whether Employee should be paid a cash bonus. The amount of such bonus, if any, will be determined in the sole discretion of Employer's Board of Directors. In addition, Employee shall receive the following benefits: (a) AUTOMOBILE. Employer shall provide Employee with the use of an automobile during the term of this Agreement. In addition, the Bank will pay all operating costs for the operation of the automobile including license, gas, insurance and maintenance. (b) INSURANCE. Employee shall be a participant in such group life insurance, health and long-term disability plans as are maintained by Employer, upon the same terms and conditions as other executives of Employer. (c) VACATION. Employee shall receive four (4) weeks paid vacation per year, prorated for any partial calendar year in which this Agreement is in effect, which shall be taken at such time or times as mutually agreed upon by Employee and the Board, provided that at least two (2) weeks of such vacation shall be taken consecutively per calendar year. (d) GENERAL EXPENSES. Employer shall, upon submission and approval of written statements and bills in accordance with the then-regular procedures of Employer, pay or reimburse Employee for any and all necessary, customary and usual expenses (including entertainment) incurred by employee for or on behalf of Employer in the normal course of business as determined to be appropriate by Employer. (e) Employee shall be entitled to receive directors' fees of at least $12,000 per year, participation in Employer's KSOP and existing Salary Continuation Agreement. (f) OTHER BENEFITS. In the event that Employer in the future establishes any other benefit plan for its senior executives generally, Employee shall be eligible to participate in such plan on the terms and conditions stated in the legal documents for such plan. 6. TERMINATION. This Agreement may be terminated prior to December 31, 2003, with or without cause in accordance with this Paragraph 6(a) through 6(g). In the event of such termination, Employee shall be released from all obligations under this Agreement, except that Employee shall remain subject to Paragraphs 7, 8, 11(c) and 11(i), and Employer shall be released from all obligations under this Agreement, except as otherwise provided in this Paragraph and Paragraphs 11(c), 11(e), and 11(i). (a) EARLY TERMINATION BY EMPLOYER WITHOUT CAUSE. This Agreement may be terminated without cause, for any reason whatsoever, in the sole, absolute and unreviewable discretion of Employer, upon six (6) months' written notice by Employer to Employee. If this Agreement is terminated pursuant to this Paragraph 6(a), or if the term of this Agreement is not extended upon expiration thereof, Employee shall receive his then current salary, the amount of his bonus for the most recently completed fiscal year and the insurance benefits as provided under the terms of this Agreement, for a period of twelve (12) months from the date of such termination provided Employee shall, at his discretion, be entitled to receive such salary payment in two lump sums, the first on his last date of employment, and the second six (6) months later, in lieu of receiving such salary payments over a period of twelve (12) months following termination. Such salary, bonus and insurance benefits shall be in full and complete satisfaction of any and all rights which Employee may enjoy under this Agreement and shall be the sole compensation and/or damages payable to Employee as the result of termination of this Agreement without cause. (b) EARLY TERMINATION BY EMPLOYER FOR CAUSE. This Agreement may be terminated for cause by Employer immediately upon written notice to Employee, and Employee shall not be entitled to receive compensation or other benefits for any period after termination for cause. Cause for termination pursuant to this Paragraph 6(b) shall include termination because of the Employee's personal dishonesty, incompetence, willful misconduct, embezzlement, fraud, breach of fiduciary duty involving personal profit, intentional failure to perform stated duties or to comply with Employer's policies, willful violation of any law, rule, or regulation (other than traffic violations or similar offenses), or material breach of any provision of this Agreement. (c) EARLY TERMINATION BY EMPLOYEE. This Agreement may be terminated by Employee upon ninety (90) days' written notice to Employer. (d) EARLY TERMINATION UPON DISABILITY. If Employee becomes disabled due to a physical or mental disability so that he is unable to perform the essential functions of his position and the disability cannot be reasonably accommodated without undue hardship, Employer may at its option terminate this Agreement. Employee shall be entitled to the salary and bonus provided for in Paragraph 5 of this Agreement for a period not to exceed six (6) months from the date of Employee's first absence due to the disability, but not beyond the termination date of this Agreement, and to accrued but unused vacation leave. Employee's salary and bonus in the event of disability and termination therefor shall be offset by any payments received by Employee as a result of any disability insurance policy purchased by Employer for Employee. All other benefits provided for under this Agreement shall cease as of the date of termination. For purposes of this Agreement, physical or mental disability shall mean the inability of Employee to fully perform under this Agreement for a continuous period of ninety (90) days, as determined by a physician in the case of physical disability, or a psychiatrist in the case of mental disability, licensed to practice medicine in California and selected jointly by Employer and Employee. Upon demand by Employer, Employee or Employee's representative (but not counsel) if Employee is not physically able to do so shall act promptly to select such physician or psychiatrist jointly with Employer, shall consent to undergo any reasonable examination or test and shall authorize release of all pertinent medical records to Employer. Recurrent disabilities will be treated as separate disabilities if they result from unrelated causes or if they result from the same or related cause or causes and are separated by a continuous period of at least six (6) full months during which Employee was able to perform his duties hereunder equal to at least eighty percent (80%) of his capacity prior to disability. Otherwise, recurrent disabilities will be treated a a continuation of previous disabilities for the purpose of determining the limitations established in this paragraph. (e) DEATH DURING EMPLOYMENT. This Agreement shall terminate immediately upon the death of Employee. (f) CHANGE OF CONTROL. It is the Employer's desire that the Employee not suffer any personal or financial loss as a result of a Change in Control. Accordingly, if within two years of a Change of Control Employee's: (i) employment is terminated for any reason other than death or cause; (ii) aggregate compensation (base salary, any bonus or benefits) is reduced below the amount he is entitled to receive on the day before any Change of Control occurs; (iii) situs of his employment is changed; or (iv) duties and responsibilities are significantly reduced from those on the day before any Change of Control, then Employee shall be entitled to a payment sufficient to insure he will receive in compensation for that period a sum equal to two times the aggregate of his then regular annual salary and the bonus he was paid for the most recently completed fiscal year. A "Change of Control" shall be deemed to have occurred if (i) a tender offer shall be made and consummated for the ownership of 25% or more of the outstanding voting securities of Employer, (ii) the Employer shall be merged or consolidated with another corporation or bank and as a result of such merger or consolidation less than 75% of the outstanding voting securities of the surviving or resulting bank or corporation shall be owned in the aggregate by the former shareholders of Employer, other than affiliates (within the meaning of the Securities Exchange Act of 1934) of any party to such merger or consolidation, as the same shall have existed immediately prior to such merger or consolidation, (iii) Employer shall sell substantially all of its assets to another bank or corporation which is not a wholly owned subsidiary, or (iv) a person, within the meaning of Section 3(a)(9) or of Section 13(d)(3) (as in effect on the date hereof) of the Securities Exchange Act of 1934, shall acquire 25% or more of the outstanding voting securities of Employer (whether directly, indirectly, beneficially or of record). For purposes hereof, ownership of voting securities shall take into account and shall include ownership as determined by applying the provisions of Rule 13d-3(d)(1)(i) (as in effect on the date hereof) pursuant to the Securities Exchange Act of 1934. 7. PRINTED MATERIAL. All written or printed materials used by Employee in performing duties for Employer are and shall remain the property of Employer. Upon termination of employment, Employee shall promptly return such written or printed materials to Employer. 8. DISCLOSURE OF INFORMATION. Employee recognizes and acknowledges that Employer possess information concerning their business affairs and methods of operation which constitute valuable, special and unique assets of their businesses. Employee shall not, at any time before or after termination of this Agreement, disclose to anyone any confidential information relating to Employer or any affiliate of Employer. For purpose of this paragraph, confidential information includes all information regarding products, services, processes, know-how, customers, suppliers, product and/or service development, business plans, research, finances, marketing, pricing, costs and any other proprietary matters relating to Employer, or any affiliate of Employer. Employee recognizes and acknowledges that all financial information concerning any of Employer's customers is strictly confidential, and Employee shall not at any time before or after termination of this Agreement disclose to anyone any such financial information or any part thereof, for any reason or purpose whatsoever. 9. NONCOMPETITION BY EMPLOYEE. During the term of this Agreement, Employee shall not, directly or indirectly, either as an employee, employer, consultant, agent, principal, partner, stockholder, corporate officer, director, or in any other individual or representative capacity, engage or participate in any competing banking business; provided, however, Employee shall not be restricted by this paragraph from owning securities of corporations listed on a national securities exchange or regularly traded by national securities dealers, so long as such investment does not exceed one percent (1%) of the market value of the outstanding securities of such corporation. 10. SURETY BOND. Employee agrees that he will furnish all information and take any steps necessary to enable Employer to obtain or maintain a fidelity bond, satisfactory to Employer, conditional on the rendering of a true account by Employee of all monies, goods or other property which may come into the custody, charge or possession of Employee during the term of this employment. Employer shall pay all premiums on the bond. If Employee cannot qualify for a surety bond at any time during the term of this Agreement, Employer shall have the option to terminate this Agreement immediately. 11. GENERAL PROVISIONS. This Agreement is further governed by the following provisions: (a) ENTIRE AGREEMENT. This Agreement supersedes any and all other agreements, either oral or in writing, among the parties hereto with respect to the employment of Employee by Employer and contains all of the covenants and agreements among the parties with respect to such employment. Each party acknowledges that no representations, inducements, promises or agreements, oral or otherwise, have been made by any party or anyone acting on behalf of a party which are not embodied herein, and that no other agreement, statement, representation, inducement or promise not contained in this Agreement shall be valid or binding. Any modification, waiver or amendment of this Agreement will be effective only if it is in writing and signed by the party to be charged. (b) WAIVER. Any waiver by any party of a breach of any provision of this Agreement shall not operate as or be construed to be a waiver of any other breach of such provisions or of any breach of any other provision of this Agreement. The failure of a party to insist upon strict adherence to any term of this Agreement on one or more occasions shall not be considered a waiver or deprive that party of the right thereafter to insist upon strict adherence to that term or any other term of this Agreement. (c) CHOICE OF LAW AND FORUM. This Agreement shall be governed by and construed in accordance with the laws of the State of California, except to the extent preempted by the laws of the United States. Any action or proceeding brought upon or arising out of this Agreement or its termination shall be brought in a forum located in Santa Cruz, California. (d) BINDING EFFECT OF AGREEMENT. This Agreement shall inure to the benefit of and be binding upon Employer, its successors and assigns, including without limitation, any person, partnership or corporation which may acquire all or substantially all of Employer's assets and business, or with or into which Employer may be consolidated, merged or otherwise reorganized, and this provision shall apply in the event of any subsequent merger, consolidation, reorganization or transfer. The provisions of this Agreement shall be binding upon and inure to the benefit of Employee and his heirs and personal representatives. The rights and obligations of Employee under this Agreement shall not be transferable by Employee by assignment or otherwise and such rights shall not be subject to commutation, encumbrance or the claims of Employee's creditors, and any attempt to do any of the foregoing shall be void. (e) INDEMNIFICATION. Employer shall indemnify Employee to the maximum extent permitted under the Articles of Incorporation and By-Laws of Employer and applicable laws and regulations for any liability or loss arising out of Employee's actual or asserted misfeasance or nonfeasance in the good faith performance of his duties or out of any actual or asserted wrongful act against or by Employer, including, but not limited to, judgments, fines, settlements and expenses incurred in the defense of actions, proceedings and appeals therefrom. If available at reasonable rates, which shall be determined by the Employer in its sole discretion, Employer shall endeavor to apply for and obtain Directors' and Officers' Liability Insurance to indemnify and insure Employer and Employee from such liability or loss. (f) SEVERABILITY. In the event that any term or condition contained in this Agreement shall, for any reason be held by a court of competent jurisdiction to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other term or condition of this Agreement, but this Agreement shall be construed as if such invalid or illegal or unenforceable term or condition had never been contained herein. (g) HEADINGS. The headings in this Agreement are solely for convenience of reference and shall be given no effect in the construction or interpretation of this Agreement. (h) NOTICES. Any notices to be given hereunder by and party to another party may be effected either by personal delivery, in writing or by mail, registered or certified, postage prepaid with return receipt requested. Mailed notices shall be addressed to the parties at the addresses indicated at the end of this Agreement, but each party may change his or her address by written notice in accordance with this paragraph. Notices delivered personally shall be deemed communicated as of actual receipt; mailed notices shall be deemed communicated as of five (5) days after mailing. (i) ATTORNEYS' FEES AND COSTS. If any action at law or in equity is brought by a party upon or arising out of this Agreement or its termination, the prevailing party shall be entitled to reasonable attorneys' fees, costs and necessary disbursements incurred in the action, in addition to any other relief to which he may be entitled. IN WITNESS WHEREOF, the parties hereto have set their hands this 21st day of June, 1999, in the City of Santa Cruz, State of California. EMPLOYER: COAST BANCORP By: /s/ JAMES C. THOMPSON -------------------------- James C. Thompson, Chairman COAST COMMERCIAL BANK By: /s/ JAMES C. THOMPSON -------------------------- James C. Thompson, Chairman EMPLOYEE: /s/ HARVEY J. NICKELSON -------------------------- Harvey J. Nickelson EX-27 3 EXHIBIT 27
9 1,000 6-MOS DEC-31-1999 JAN-01-1999 JUN-30-1999 18,981 0 4,650 0 111,465 0 111,465 183,785 3,829 323,767 267,141 21,500 3,787 0 0 0 20,801 10,538 323,767 8,562 3,261 573 12,396 2,979 3,320 9,076 0 52 6,422 5,135 5,135 0 0 3,145 0.66 0.64 .061 2,101 0 0 0 3,871 81 39 3,829 3,829 0 0
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