UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] Quarterly Report Under Section 13 or 15 (d) of
the Securities Exchange Act of 1934
For the Quarterly Period Ended MARCH 31, 1997
[ ] 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: 0-24526
COASTAL BANCORP, INC.
(Exact name of Registrant as specified in its charter)
Texas 76-0428727
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8 Greenway Plaza, Suite 1500
Houston, Texas 77046
(Address of principal executive office)
(713) 623-2600
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.
COMMON STOCK ISSUED AND OUTSTANDING: 4,968,591 AS OF MARCH 31, 1997
<PAGE>
COASTAL BANCORP, INC. AND SUBSIDIARIES
Table of Contents
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
<S> <C> <C>
Item 1 Financial Statements
Consolidated Statements of Financial Condition at March 31, 1997 (unaudited) and
December 31, 1996 1
Consolidated Statements of Income for the Three-Month Periods Ended March 31, 1997
and 1996 (unaudited) 2
Consolidated Statements of Cash Flows for the Three-Month Periods Ended March 31, 1997
and 1996 (unaudited) 3
Notes to Consolidated Financial Statements 5
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations 13
</TABLE>
PART II. OTHER INFORMATION
<TABLE>
<CAPTION>
<S> <C> <C>
Item 1 Legal Proceedings 16
Item 2 Changes in Securities 16
Item 3 Default upon Senior Securities 16
Item 4 Submission of Matters to a Vote of Securities Holders 16
Item 5 Other Information 16
Item 6 Exhibits and Reports on Form 8-K 16
</TABLE>
SIGNATURES
4
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
COASTAL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(IN THOUSANDS, EXCEPT SHARE DATA)
March 31, December 31,
1997 1996
------------ -------------
ASSETS (Unaudited)
<S> <C> <C>
Cash and amounts due from depository institutions $ 24,336 $ 27,735
Loans receivable (note 4) 1,226,687 1,229,748
Mortgage-backed securities held-to-maturity (note 3) 1,337,588 1,344,587
Mortgage-backed securities available-for-sale, at market value 181,634 180,656
U.S. Treasury security available-for-sale, at market value 11 11
Mortgage loans held for sale 1,231 298
Accrued interest receivable 14,525 14,690
Property and equipment 15,026 14,987
Stock in the Federal Home Loan Bank of Dallas (FHLB) 17,341 25,971
Goodwill 15,159 15,596
Mortgage servicing rights 6,530 6,810
Prepaid expenses and other assets 12,699 14,818
------------ -------------
$ 2,852,767 $ 2,875,907
============ =============
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Liabilities:
Savings deposits (note 5) $1,315,751 $1,310,835
Advances from the FHLB (note 6) 325,836 409,720
Securities sold under agreements to repurchase (note 6) 1,011,929 966,987
Senior notes payable (note 7) 50,000 50,000
Advances from borrowers for taxes and insurance 7,672 4,676
Other liabilities and accrued expenses 15,226 10,791
----------- -----------
Total liabilities 2,726,414 2,753,009
----------- -----------
9.0% noncumulative preferred stock of Coastal Banc ssb 28,750 28,750
Commitments and contingencies (notes 4 and 8)
Stockholders' equity (notes 2 and 10):
Preferred stock, no par value; authorized shares 5,000,000;
no shares issued -- --
Common stock, $.01 par value; authorized shares 30,000,000;
4,968,591 and 4,966,941 shares issued and outstanding in
1997 and 1996 50 50
Additional paid-in capital 32,625 32,604
Retained earnings 67,338 64,597
Unrealized gain (loss) on securities available-for-sale (2,410) (3,103)
----------- -----------
Total stockholders' equity 97,603 94,148
----------- -----------
$2,852,767 $2,875,907
=========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
<PAGE>
COASTAL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------
1997 1996
-------------------- --------
(Unaudited)
<S> <C> <C>
Interest income:
Mortgage-backed securities $ 23,192 $24,497
Loans receivable 26,015 23,680
Investment securities, certificates, time deposits and
other investments 397 377
-------------------- --------
49,604 48,554
-------------------- --------
Interest expense:
Savings deposits 15,166 15,082
Other borrowed money 13,780 13,997
Senior notes payable 1,250 1,250
Advances from the FHLB:
Short-term 1,856 1,119
Long-term 2,904 3,259
------------------ --------
34,956 34,707
------------------ --------
Net interest income 14,648 13,847
Provision for loan losses (note 4) 450 575
------------------ -------
Net interest income after provision for loan losses 14,198 13,272
------------------ --------
Noninterest income:
Loan fees and service charges 894 795
Loan servicing income, net 407 393
Gain (loss) on sales of mortgage-backed securities
available-for-sale, net -- (4)
Other 168 111
------------------ --------
1,469 1,295
------------------ --------
Noninterest expense:
Compensation, payroll taxes and other benefits 4,625 3,887
Office occupancy 1,611 1,417
Insurance premiums 271 746
Data processing 513 598
Amortization of goodwill 437 448
Real estate owned 239 253
Other 1,861 1,791
------------------ --------
9,557 9,140
------------------ --------
Income before provision for Federal income taxes 6,110 5,427
Provision for Federal income taxes 2,225 1,987
------------------ --------
Net income before preferred stock dividends 3,885 3,440
Preferred stock dividends of Coastal Banc ssb 647 647
------------------ --------
Net income after preferred stock dividends $ 3,238 $ 2,793
================== ========
Net earnings per share (note 9) $ 0.64 $ 0.56
================== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
<PAGE>
COASTAL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------
1997 1996
---------------- ---------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income before preferred stock dividends $ 3,885 $ 3,440
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization of property and equipment,
purchased loans servicing rights, capitalized excess servicing fees
and prepaid expenses and other assets 1,648 1,273
Net premium amortization 112 466
Provision for loan losses 450 575
Amortization of goodwill 437 448
Originations and purchases of mortgage loans held for sale (4,162) (7,579)
Sales of mortgage loans held for sale 3,229 5,901
Loss on sales of mortgage-backed securities available-for-sale -- 4
Decrease (increase) in:
Accrued interest receivable 165 757
Other, net 7,558 10,756
Stock dividends from the FHLB (370) (262)
-------------------- ---------
Net cash provided by operating activities 12,952 15,779
-------------------- ---------
Cash flows from investing activities:
Principal repayments on mortgage-backed securities 6,995 10,970
Principal repayments on mortgage-backed securities
available-for-sale 88 88
Proceeds from sales of mortgage-backed securities available-for-sale -- 856
Purchases of loans receivable (9,232) (11,300)
Net (increase) decrease in loans receivable 9,727 (15,217)
Net purchases of property and equipment (746) (1,176)
Purchase of FHLB stock -- --
Proceeds from sales of FHLB stock 9,000 5,000
-------------------- ---------
Net cash provided (used) by investing activities 15,832 (10,779)
-------------------- ---------
</TABLE>
<PAGE>
COASTAL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------
1997 1996
--------- ---------
(Unaudited)
<S> <C> <C>
Cash flows from financing activities:
Net increase (decrease) in savings deposits $ 4,886 $ (16,619)
Advances from the FHLB 1,295,000 461,050
Principal payments on advances from the FHLB (1,378,884) (464,449)
Securities sold under agreements to repurchase 2,588,007 2,462,224
Purchases of securities sold under agreements to repurchase (2,543,065) (2,433,971)
Exercise of stock options for purchase of common stock, net 21 --
Net increase in advances from borrowers for taxes and insurance 2,996 1,441
Dividends paid (1,144) (1,143)
-------------------- ------------
Net cash provided (used) by financing activities (32,183) 8,533
-------------------- ------------
Net increase (decrease) in cash and cash equivalents (3,399) 13,533
Cash and cash equivalents at beginning of period 27,735 10,044
-------------------- ------------
Cash and cash equivalents at end of period $ 24,336 $ 23,577
==================== ============
Supplemental schedule of cash flows-interest paid $ 32,704 $ 36,375
==================== ============
Supplemental schedule of noncash investing and financing activities:
Foreclosures of loans receivable $ 2,037 $ 1,474
==================== ============
</TABLE>
COASTAL BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5
(1) BASIS OF PRESENTATION
The accompanying unaudited Consolidated Financial Statements were
prepared in accordance with the instructions for Form 10-Q and, therefore, do
not include all disclosures necessary for a complete presentation of financial
condition, results of operations, and cash flows in conformity with generally
accepted accounting principles. All adjustments which are, in the opinion of
management, of a normal recurring nature and are necessary for a fair
presentation of the interim financial statements, have been included. The
results of operations for the period ended March 31, 1997 are not necessarily
indicative of the results that may be expected for the entire fiscal year or
any other interim period.
(2) PRINCIPLES OF CONSOLIDATION
The accompanying unaudited Consolidated Financial Statements include the
accounts of Coastal Bancorp, Inc. and its wholly-owned subsidiary, Coastal
Banc Holding Company, Inc. and its wholly-owned subsidiary, Coastal Banc ssb
and subsidiaries (collectively, Coastal). Coastal Banc ssb's subsidiaries
include CoastalBanc Financial Corp., CBS Mortgage Corp., and CBS Asset Corp.
(collectively with Coastal Banc ssb, the Bank). All significant intercompany
balances and transactions have been eliminated in consolidation.
Certain amounts within the accompanying consolidated financial statements
and the related notes have been reclassified to conform to the current year
presentation. Such reclassifications had no effect on net income or total
stockholders' equity.
(3) MORTGAGE-BACKED SECURITIES
Mortgage-backed securities at March 31, 1997 (unaudited) were as follows
(dollars in thousands):
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Held-to-Maturity:
REMICS - Agency $ 930,734 $ 3,994 $ (29,518) $ 905,210
REMICS - Non-agency 275,879 883 (12,060) 264,702
FNMA certificates 78,742 5 (1,861) 76,886
GNMA certificates 33,022 111 -- 33,133
Non-agency securities 19,178 186 (243) 19,121
Interest-only securities 33 2 -- 35
--------- ---------- ----------- ---------
$ 1,337,588 $ 5,181 $ (43,682) $ 1,299,087
========= ========== =========== =========
Available-for-sale:
REMICS - Agency $ 182,468 $ 1,104 $ (4,783) $ 178,789
REMICS - Non-agency 2,874 -- (29) 2,845
--------- ---------- ----------- ---------
$ 185,342 $ 1,104 $ (4,812) $ 181,634
========= ========== =========== =========
</TABLE>
9
Mortgage-backed securities at December 31, 1996 were as follows (dollars
in thousands):
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Held-to-maturity:
REMICS - Agency $ 932,488 $ 4,730 $ (31,142) $ 906,076
REMICS - Non-agency 278,612 834 (9,958) 269,488
FNMA certificates 79,628 72 (1,072) 78,628
GNMA certificates 34,031 282 -- 34,313
Non-agency securities 19,790 363 (95) 20,058
Interest-only securities 38 -- (3) 35
--------- ---------- ---------- ---------
$ 1,344,587 $ 6,281 $ (42,270) $ 1,308,598
========= ========== =========== =========
Available-for-sale:
REMICS - Agency $ 182,467 $ 1,207 $ (5,946) $ 177,728
REMICS - Non-agency 2,962 -- (34) 2,928
--------- ---------- ---------- ---------
$ 185,429 $ 1,207 $ (5,980) $ 180,656
========= ========== =========== =========
</TABLE>
(4) LOANS RECEIVABLE
Loans receivable at March 31, 1997 and December 31, 1996 were as follows
(dollars in thousands):
<TABLE>
<CAPTION>
March 31, 1997 December 31, 1996
--------------- ------------------
(Unaudited)
<S> <C> <C> <C> <C>
Real estate mortgage loans:
First-lien mortgage, primarily residential $ 763,971 $ 791,337
Multifamily 137,661 139,486
Residential construction 76,607 77,146
Acquisition and development 29,619 26,132
Commercial 141,021 119,004
Commercial construction 5,140 3,963
Commercial loans, secured by residential mortgage
loans held for sale 58,112 53,573
Commercial loans, secured by mortgage servicing rights 18,956 21,380
Commercial, financial and industrial 24,302 21,965
Loans secured by savings deposits 8,063 8,849
Consumer and other loans 13,423 14,400
--------------- ------------------
1,276,875 1,277,235
Loans in process (41,363) (38,742)
Allowance for loan losses (6,906) (6,880)
Unearned loan fees (2,379) (2,344)
Premium to record purchased loans, net 460 479
--------------- ------------------
$ 1,226,687 $ 1,229,748
=============== ==================
Weighted average yield 8.50% 8.37%
=============== ==================
</TABLE>
At March 31, 1997, Coastal had outstanding commitments to originate or
purchase $36.9 million of real estate mortgage and other loans and had
commitments under lines of credit to originate primary construction and other
loans of approximately $92.3 million. In addition, at March 31, 1997, Coastal
had $1.4 million of outstanding letters of credit. Management anticipates the
funding of these commitments through normal operations.
At March 31, 1997 and December 31, 1996, the carrying value of loans that
were considered to be impaired totaled approximately $895,000 and $725,000,
respectively, (all of which are on nonaccrual) and the related allowance for
loan losses on those impaired loans totaled $564,000 and $524,000,
respectively. The average recorded investment in impaired loans during the
three months ended March 31, 1997 and 1996 was $722,000 and $1.2 million,
respectively.
An analysis of activity in the allowance for loan losses for the three
months ended March 31, 1997 and 1996 is as follows (in thousands):
<TABLE>
<CAPTION>
Three months ended March 31,
------------------------------
1997 1996
------------------------------ -------
(Unaudited)
<S> <C> <C>
Balance, beginning of period $ 6,880 $5,703
Provision for loan losses 450 575
Charge-offs, net of recoveries (424) (205)
---------------- -------
Balance, end of period $ 6,906 $6,073
=============== =======
</TABLE>
Coastal services for others loans receivable which are not included in
the Consolidated Financial Statements. The total amounts of such loans were
$753.1 million and $776.7 million at March 31, 1997 and December 31, 1996,
respectively.
<PAGE>
(5) SAVINGS DEPOSITS
Savings deposits, their stated rates and the related weighted average
interest rates at March 31, 1997 and December 31, 1996 are summarized as
follows (dollars in thousands):
<TABLE>
<CAPTION>
Stated Rate March 31, 1997 December 31, 1996
---------------- --------------- --------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Noninterest-bearing checking 0.00% $ 79,610 $ 85,259
NOW accounts 2.00 56,380 56,862
Savings accounts 2.28 - 2.75 22,075 22,135
Money market demand accounts 3.15 - 4.65 156,226 151,046
--------------- ------------------
314,291 315,302
--------------- ------------------
Certificate accounts 2.00 - 2.99 15,310 12,930
3.00 - 3.99 1,641 1,905
4.00 - 4.99 74,152 95,087
5.00 - 5.99 817,470 776,765
6.00 - 6.99 79,741 91,128
7.00 - 7.99 8,585 12,964
8.00 - 8.99 3,504 3,515
9.00 - 9.99 963 1,171
10.00 - 10.99 245 249
11.00 - 11.99 17 17
-------------- ------------------
1,001,628 995,731
--------------- ------------------
Discount to record savings deposits
at fair value, net (168) (198)
--------------- --------------
$ 1,315,751 $ 1,310,835
=============== =================
Weighted average rate 4.71% 4.67%
=============== =================
</TABLE>
The scheduled maturities of certificate accounts outstanding at March 31,
1997 were as follows (dollars in thousands):
<TABLE>
<CAPTION>
March 31, 1997
---------------
(Unaudited)
<S> <C> <C>
0 to 12 months $ 753,417
12 to 24 months 189,039
24 to 36 months 45,159
36 to 48 months 8,417
48 to 60 months 5,470
Over 60 months 126
---------------
$ 1,001,628
===============
</TABLE>
<PAGE>
(6) SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND FHLB ADVANCES
(a) The weighted average interest rates on securities sold under
agreements to repurchase at March 31, 1997 and December 31, 1996 were 5.49%
and 5.55%, respectively. The stated interest rates on securities sold under
agreements to repurchase ranged from 5.27% to 5.66% at March 31, 1997.
(b) The weighted average interest rate on advances from the FHLB at
March 31, 1997 and December 31, 1996 were 5.60% and 5.61%, respectively. FHLB
advances and related interest rates and maturities at March 31, 1997 and
December 31, 1996 are summarized as follows (dollars in thousands):
<TABLE>
<CAPTION>
Maturity Interest rates March 31, 1997 December 31, 1996
- -------- --------------- -------------- -----------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
1997 4.93 - 8.31% $ 155,683 $ 189,127
1998 5.25 - 6.96 19,636 19,674
1999 4.95 - 8.11 120,759 170,871
2000 5.57 - 7.76 8,245 8,320
2001 6.03 - 6.46 8,805 8,854
2004 6.52 3,117 3,201
2006 6.91 3,155 3,167
2007 6.80 - 7.94 484 488
2009 8.25 4,629 4,681
2011 6.35 - 7.24 1,323 1,337
-------------- -----------------
$ 325,836 $ 409,720
============== =================
</TABLE>
FHLB advances are secured by certain first-lien mortgage loans and
mortgage-backed securities owned by Coastal.
(7) SENIOR NOTES PAYABLE
On June 30, 1995, Coastal issued $50.0 million of 10.0% Senior Notes due
June 30, 2002. The Senior Notes are redeemable at Coastal's option, in whole
or in part, on or after June 30, 2000, at par, plus accrued interest to the
redemption date. Interest on the Senior Notes is payable quarterly.
(8) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
Coastal is a party to financial instruments with off-balance sheet risk
in the normal course of business to reduce its own exposure to fluctuations in
interest rates. These financial instruments include interest rate swap
agreements and interest rate cap agreements.
Coastal is a party to interest rate swap and interest rate cap agreements
in order to reduce its exposure to floating interest rates by altering the
interest rate sensitivity of a portion of its variable-rate assets and
borrowings. At March 31, 1997, Coastal had interest rate swap and cap
agreements totaling $60.9 million and $403.2 million, respectively.
<PAGE>
The terms of the interest rate swap agreements outstanding at March 31,
1997 (unaudited) and December 31, 1996 are summarized as follows (dollars in
thousands):
<TABLE>
<CAPTION>
Floating Rate Fair Value at
Notional LIBOR Fixed at End of Period
---------------
Maturity Amount Index Rate End of Period gain (loss)
- --------------------- -------- ----------- ------ --------------
<S> <C> <C> <C> <C> <C> <C>
At March 31, 1997:
1997 $ 5,000 One-month 4.990% 5.477% $ 13
6,000 Three-month 6.493 5.473 (14)
1998 4,400 Three-month 6.709 5.473 (14)
1999 14,600 Three-month 6.926 5.473 (64)
2000 4,800 Three-month 6.170 5.598 90
2,625 Three-month 6.000 5.750 66
2005 23,442 Three-month 6.500 5.539 45
-------- ---------------
$ 60,867 $ 122
======== ===============
At December 31, 1996:
1997 $ 5,000 One-month 4.990% 5.633% $ 6
6,000 Three-month 6.493 5.500 (65)
1998 4,400 Three-month 6.709 5.500 (111)
1999 14,600 Three-month 6.926 5.500 (619)
2000 4,800 Three-month 6.170 5.543 (64)
2,660 Three-month 6.000 5.617 24
2005 23,442 Three-month 6.500 5.500 (15)
-------- ---------------
$ 60,902 $ (844)
======== ===============
</TABLE>
The agreements provide for Coastal to make weighted average fixed
interest payments and receive payments based on a floating LIBOR index, as
defined in each agreement. The weighted average interest received rate on all
of the interest rate swap agreements was approximately 5.51% and the weighted
average interest payment rate on all of the interest rate swap agreements was
approximately 6.41% for the three months ended March 31, 1997. Payments on the
interest rate swap agreements are based on the notional principal amount of
the agreements; no funds were actually borrowed or are to be repaid. The
interest rate swap agreements are used to alter the interest rate sensitivity
of a portion of Coastal's variable-rate borrowings. As such, Coastal records
net interest expense or income related to these agreements on a monthly basis
in "interest expense" in the accompanying consolidated statements of
operations. The net interest expense related to these agreements was
approximately $137,000 for the three months ended March 31, 1997 and
approximately $114,000 for the three months ended March 31, 1996. Coastal had
pledged approximately $6.1 million of mortgage-backed securities to secure
interest rate swap agreements at March 31, 1997.
Coastal has interest rate cap agreements with various counterparties.
The agreements provide for the counterparties to make payments to Coastal
whenever a defined floating rate exceeds rates ranging from 5.0% to 12.5%,
depending on the agreement. Payments on the interest rate cap agreements are
based on the notional principal amount of the agreements; no funds were
actually borrowed or are to be repaid. The
<PAGE>
purchase prices of the interest rate cap agreements are capitalized and
included in "prepaid expenses and other assets" in the accompanying
consolidated statements of financial condition and are amortized over the life
of the agreements using the straight-line method. The unamortized portion of
the purchase price of the interest rate cap agreements was approximately
$802,000 and $1.1 million at March 31, 1997 and December 31, 1996,
respectively, with the estimated fair value of the agreements being $1.3
million and $639,000 at March 31, 1997 and December 31, 1996, respectively.
The interest rate cap agreements are used to alter the interest rate
sensitivity of a portion of Coastal's mortgage-backed securities, loans
receivable and their related funding sources. As such, the amortization of the
purchase price and interest income from the interest rate cap agreements are
recorded in "interest income on mortgage-backed securities or loans
receivable," as appropriate, in the accompanying consolidated statements of
operations. The net decrease in interest income related to the interest rate
cap agreements was approximately $134,000 and $113,000 for the three months
ended March 31, 1997 and 1996 respectively.
Interest rate cap agreements outstanding at March 31, 1997 expire as
follows (dollars in thousands):
<TABLE>
<CAPTION>
Year of Strike rate Notional
expiration range amount
- ---------- -------------- ---------
<S> <C> <C>
1997 5.0 - 9.0% $ 195,650
1998 5.0 - 12.5 156,400
1999 7.25 - 11.0 43,162
2000 8.5 - 9.5 8,000
---------
$ 403,212
=========
</TABLE>
Market risk, or the risk of loss due to movement in market prices or
rates, is quantified by Coastal through a risk monitoring process of marking
to market the mortgage-backed securities portfolio to expected market level
changes in an instantaneous shock of plus and minus 200 basis points on a
monthly basis and 300 basis points on a quarterly basis. This process
discloses the effects on market values of the assets and liabilities,
unrealized gains and losses, including off-balance sheet items, as well as
potential changes in net interest income.
The fluctuation in the market value, however, has no effect on the level
of earnings of Coastal because the securities are categorized as
"held-to-maturity" or "available-for-sale".
Coastal is exposed to credit loss in the event of nonperformance by the
counterparty to the swap or cap and controls this risk through credit
monitoring procedures. The notional principal amount does not represent
Coastal's exposure to credit loss.
<PAGE>
(9) NET EARNINGS PER SHARE
Net earnings per share is calculated by dividing net income after
preferred stock dividends by the weighted average number of common shares and
common stock equivalents. Stock options outstanding are regarded as common
stock equivalents and are, therefore, considered in earnings per share
calculations if dilutive. Common stock equivalents are computed using the
treasury stock method. The weighted average number of shares used in the
computation of earnings per share is 5,097,829 and 5,010,101 for the three
months ended March 31, 1997 and 1996, respectively (unaudited).
On February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
(Statement 128). Statement 128 supersedes APB Opinion No. 15, "Earnings Per
Share" and specifies the computation, presentation and disclosure requirements
for earnings per share (EPS) for entities with publicly held common stock.
Statement 128 replaces the presentation of primary and fully diluted EPS with
basic EPS and diluted EPS, respectively. Statement 128 is effective for
financial statements for both interim and annual periods ending after December
15, 1997. After adoption, all prior-period EPS data presented will be
restated to conform with Statement 128. The adoption of Statement 128 is not
expected to have a material impact on Coastal's consolidated financial
statements.
(10) STATUTORY CAPITAL REQUIREMENTS
The applicable regulations require federally insured institutions, which
are not the highest rated, to have a minimum regulatory tier 1 (core) capital
to total assets ratio equal to a minimum of 4.0%, a tier 1 risk-based capital
to risk-weighted assets ratio of 4.0% and total risk-based capital to
risk-weighted assets ratio of 8.0%.
At March 31, 1997, the Bank's regulatory capital (unaudited) in relation
to its current existing regulatory capital requirements were as follows
(dollars in thousands):
<TABLE>
<CAPTION>
Actual Requirement Excess
-------- ----------- -------
Capital Requirement Dollar Percent Dollar Percent Dollar Percent
- -------------------- -------- -------- ----------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Tier 1 (Core) $155,778 5.46% $ 114,058 4.00% $ 41,720 1.46%
Tier 1 risk-based 155,778 11.98 52,010 4.00 103,768 7.98
Total risk-based 162,684 12.51 104,021 8.00 58,663 4.51
</TABLE>
At March 31, 1997, the Bank, according to certain capital requirements
outlined by the FDIC, was categorized as "well capitalized".
(11) PENDING BRANCH PURCHASE
On March 12, 1997, Coastal announced the execution of a definitive
agreement to purchase the Wells Fargo Bank (Texas) branch located at 441
Austin Avenue in Port Arthur, Texas. At March 31, 1997, the Port Arthur
location had approximately $65.4 million in deposits.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Financial Condition
Total assets decreased 0.8% or $23.1 million from December 31, 1996 to
March 31, 1997. The net decrease resulted primarily from decrease in stock in
the Federal Home Loan Bank of Dallas of $8.6 million, a decrease in
mortgage-backed securities held-to-maturity of $7.0 million due to principal
repayments received, a decrease in amounts due from depository institutions of
$3.4 million and a decrease in loans receivable of $3.1 million.
Savings deposits increased slightly by 0.4% or $4.9 million from December
31, 1996 to March 31, 1997. This increase was due to a $5.9 million increase
in certificate accounts, due to interest credited, offset by a $1.0 million
decrease in other types of savings deposits. Advances from the FHLB decreased
by $83.9 million or 20.5% and securities sold under agreements to repurchase
increased 4.7% or $44.9 million from December 31, 1996 to March 31, 1997,
which resulted in a net decrease in borrowings of $38.9 million or 2.8%. The
reallocation of the borrowings outstanding during such period was directly
attributable to Coastal's change in funding sources to take advantage of more
favorable interest rates. Stockholders' equity increased 3.7% or $3.5 million
from December 31, 1996 to March 31, 1997 as a result primarily of net income
and a $693,000 decrease in the unrealized loss on securities
available-for-sale, offset by dividends declared.
Results of Operations for the Three Months Ended March 31, 1997 and 1996
General
For the three months ended March 31, 1997, net income before preferred
stock dividends increased 12.9% to $3.9 million from $3.4 million for the
three months ended March 31, 1996. Net interest income increased $801,000 for
the three months ended March 31, 1997 as compared to the three months ended
March 31, 1996 as a result of increased interest income of $1.1 million which
was partially offset by increased interest expense of $249,000. Noninterest
income increased during such period by $174,000. Noninterest expense
increased by $417,000.
Interest Income
Interest income for the three months ended March 31, 1997 increased $1.1
million or 2.2% from the three months ended March 31, 1996. The increase was
primarily due to an increase of $2.3 million in interest earned on loans
receivable over the prior comparable quarter. The increase in interest income
on loans receivable was due to a $129.3 million increase in the average
balance of loans receivable offset by a slight decrease in the average yield
from 8.54% for the three months ended March 31, 1996 to 8.40% for the three
months ended March 31, 1997. This increase was offset by a $1.3 million
decrease in interest income on mortgage-backed securities primarily due to a
lower average balance. Total interest-earning assets for the three months
ended March 31, 1997 averaged $2.8 billion as compared to $2.7 billion for the
three months ended March 31, 1996.
Interest Expense
Interest expense on interest-bearing liabilities was $35.0 million for
the three months ended March 31, 1997, as compared to $34.7 million for the
same period in 1996. The increase in interest expense was due to a $77.7
million increase in the average balance of interest-bearing liabilities during
such period offset by a decrease in the average rate paid on interest-bearing
liabilities from 5.43% for the three months ended March 31, 1996 to 5.31% for
the three months ended March 31, 1997. The increase in average
interest-bearing liabilities consisted of a $5.4 million increase in
securities sold under agreements to repurchase, a $38.6 million increase in
interest-bearing savings deposits and a $33.7 million increase in FHLB
advances.
Net Interest Income
Net interest income was $14.6 million for the three months ended March
31, 1997 as compared to $13.8 million for the same period in 1996. The
increase in net interest income was due to the improved net interest margin
(Margin) and net interest rate spread (Spread) percentages. Margin
increased from 2.04% for the three months ended March 31, 1996 to 2.10% for
the three months ended March 31, 1997. Margin represents net interest income
as a percentage of average interest-earning assets. Spread, defined to
exclude noninterest-bearing deposits, increased from 1.72% for the three months
ended March 31, 1996 to 1.79% for the three months ended March 31, 1997.
Management also calculates an alternative Spread which includes
noninterest-bearing deposits. Under this calculation, the Spread for the three
months ended March 31, 1997 and 1996 were 1.94% and 1.88%, respectively. Margin
and Spread are affected by the changes in the amount and composition of
interest-earning assets and interest-bearing liabilities. The increase
in the Margin and Spread were primarily due to the decrease in the average
interest rates on interest-bearing liabilities from 5.43% for the three months
ended March 31, 1996 to 5.31% for the same period in 1997, offset by a slight
decrease in the average yield on interest-earning assets from 7.15% for the
three months ended March 31, 1996 to 7.10% for the same period in 1997. In
addition, average net interest-earning assets increased $2.2 million from the
three months ended March 31, 1996 to the three months ended March 31, 1997.
The improvement in the Margin and Spread levels is consistent with
management's goal of achieving a more desirable asset/liability composition
which is less vulnerable to market interest rate fluctuations, primarily
through the addition of loans tied to variable rates such as the London
Interbank offered Rate (LIBOR) and local and regional prime rates. To continue
the improvement in the Margin and Spread levels, management intends to
gradually increase commercial business loans to approximately 15% of total
assets and commercial business deposits to approximately 10% of total deposits
within three to five years.
Provision for Loan Losses
Provision for loan losses was $450,000 for the three months ended March
31, 1997 as compared to $575,000 for the three months ended March 31, 1996.
The decrease in the provision for loan losses was due to the adequacy of the
allowance for loan losses established based on Coastal's loan loss policy.
The allowance for loan losses as a percentage of total loans was 0.56% at
March 31, 1997 and 0.54% at March 31, 1996. Although no assurance can be
given, management believes that the present allowance for loan losses is
adequate considering historical loss experience, delinquency trends and
current economic conditions. Management will continue to review its loan loss
allowance policy as Coastal's loan portfolio grows and diversifies to
determine if changes to the policy are necessary.
Noninterest Income
For the three months ended March 31, 1997, noninterest income increased
$174,000 or 13.4% to $1.5 million, compared to $1.3 million for the three
months ended March 31, 1996. The increase in noninterest income was primarily
due to an increase of $99,000 in loan fees and service charges and a $57,000
increase in other noninterest income. The increase in loan fees and service
charges was due to an increase of $105,000 in service charges on deposit
accounts, offset by a slight decrease in loan related fees and charges.
<PAGE>
Noninterest Expense
For the three months ended March 31, 1997, noninterest expense increased
$417,000 or 4.6% to $9.6 million compared to $9.1 million for the three months
ended March 31, 1996. Compensation, payroll taxes and other benefits as well
as office occupancy expense increased $738,000 and $194,000, respectively,
from the three months ended March 31, 1996 to the three months ended March 31,
1997, primarily due to the staffing increases related to the expansion of the
loan product base and the continuing development of commercial business
lending programs. In addition, other expenses increased slightly by $70,000.
These increases were somewhat offset by a $475,000 decrease in insurance
premiums. This decrease from the prior related quarter was due primarily to
the decreased deposit insurance premiums as a result of the lower assessment
rates applicable to Coastal in 1997 pursuant to the passage of the Deposit
Insurance Funds Act of 1996. Other decreases included an $85,000 decrease in
data processing expenses, a $14,000 decrease in expenses related to real
estate owned and a $11,000 decrease in the amortization of goodwill.
Provision for Federal Income Taxes
For the three months ended March 31, 1997, the provision for Federal
income taxes was $2.2 million compared to $2.0 million for the three months
ended March 31, 1996 at an average effective rate of approximately 36.5%.
Liquidity and Capital Resources
Coastal's primary sources of funds consist of savings deposits bearing
market rates of interest, securities sold under agreements to repurchase,
advances from the FHLB and principal payments on loans receivable and
mortgage-backed securities. Coastal uses its funding resources principally to
meet its ongoing commitments to fund maturing deposits and deposit
withdrawals, repay borrowings, purchase loans receivable and mortgage-backed
securities, fund existing and continuing loan commitments, maintain its
liquidity, meet operating expenses and fund acquisitions of other banks and
thrifts, either branch office or whole bank acquisitions. At March 31, 1997,
Coastal had binding commitments to originate or purchase loans totaling
approximately $36.9 million and had $41.4 million of undisbursed loans in
process. Scheduled maturities of certificates of deposit during the 12 months
following March 31, 1997 totaled $753.4 million at March 31, 1997. Management
believes that Coastal has adequate resources to fund all of its commitments.
As of March 31, 1997, Coastal operated 36 retail banking offices in Texas
cities, including Houston, Austin, Corpus Christi and small cities in central
and south Texas. Management's five year goal is to have over $5 billion in
assets, over $3 billion in deposits, $2.5 billion in loans and 80 branches in
cities throughout central and south Texas, although there can be no assurance
that this goal can be accomplished through growth or acquisitions.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Coastal is involved in routine legal proceedings occurring in the
ordinary course of business which, in the aggregate, are believed by
management to be immaterial.
Item 2. Changes in Securities
a) Not applicable.
b) Not applicable.
Item 3. Default Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
a) The following exhibits are filed as part of this report:
Exhibit 27 - Financial Data Schedule
Exhibit 99 - Forward-Looking Information
b)(1) Form 8-K filed on March 18, 1997 concerning the execution of a
definitive agreement to purchase the Wells Fargo Bank (Texas) branch in Port
Arthur, Texas.
(2) Form 8-K filed on May 5, 1997 to disclose an increase in the dividends
declared on common stock from $0.10 to $0.12 per common share for the first
quarter of 1997 for shareholders of record on May 15, 1997, payable on June
15, 1997.
SIGNATURES
Pursuant to the requirement 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.
Dated: 5/13/97 By/s/ Manuel J. Mehos
Manuel J. Mehos
Chairman of the Board
Chief Executive Officer
Dated: 5/13/97 By/s/ Catherine N. Wylie
Catherine N. Wylie
Chief Financial Officer
Exhibit 99
Forward-Looking Information
The information included in Item 2 (Management's Discussion and Analysis
of Financial Condition and Results of Operations) should be read in
conjunction with the information contained in the Consolidated Financial
Statements and the Notes thereto. The above information contains "forward-
looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995 (the "Reform Act"), and is subject to the safe harbor created
by that Reform Act. The words "estimate," "project," "anticipate," "expect,"
"intend," "believe," "plans," and similar expressions are intended to identify
forward-looking statements. Because such forward-looking statements involve
risks and uncertainties, there are important factors that could cause actual
results to differ materially from those expressed or implied by such forward-
looking statements. Factors, all of which are difficult to predict and many
of which are beyond the control of Coastal, that could cause actual results to
differ materially include, but are not limited to: risks related to Coastal's
acquisition strategy, including risks of adversely changing results of
operations and factors affecting Coastal's ability to consummate further
acquisitions; changes in general economic and business conditions; changes
in market rates of interest; changes in the laws and regulations applicable
to Coastal; the risks associated with the Bank's Non-Traditional lending
(loans other than single-family residential mortgage loans such as
multifamily, real estate acquisition and development, commercial, warehouse
and mortgage servicing rights loans); and changes in business strategies and
other factors as discussed in Coastal's Annual Report on Form 10-K as filed
with the Securities and Exchange Commission.
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated statement of financial condition and the consolidated statement of
operations and notes thereto found on pages 1 through 12 of the Company's Form
10-Q for year-to-date and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 24,336
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 181,645
<INVESTMENTS-CARRYING> 1,337,588
<INVESTMENTS-MARKET> 1,299,087
<LOANS> 1,226,687
<ALLOWANCE> 6,906
<TOTAL-ASSETS> 2,852,767
<DEPOSITS> 1,315,751
<SHORT-TERM> 1,167,612
<LIABILITIES-OTHER> 51,648
<LONG-TERM> 220,153
0
0
<COMMON> 50
<OTHER-SE> 97,553
<TOTAL-LIABILITIES-AND-EQUITY> 2,852,767
<INTEREST-LOAN> 26,015
<INTEREST-INVEST> 23,192
<INTEREST-OTHER> 397
<INTEREST-TOTAL> 49,604
<INTEREST-DEPOSIT> 15,166
<INTEREST-EXPENSE> 34,956
<INTEREST-INCOME-NET> 14,648
<LOAN-LOSSES> 450
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 10,204
<INCOME-PRETAX> 5,463
<INCOME-PRE-EXTRAORDINARY> 5,463
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,238
<EPS-PRIMARY> 0.64
<EPS-DILUTED> 0.64
<YIELD-ACTUAL> 0
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 6,880
<CHARGE-OFFS> 442
<RECOVERIES> 18
<ALLOWANCE-CLOSE> 6,906
<ALLOWANCE-DOMESTIC> 6,906
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
