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 September 30, 1998
[ ] 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.)
5718 Westheimer, Suite 600
Houston, Texas 77057
---------------------------
(Address of principal executive office)
(713) 435-5000
---------------
(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 OUTSTANDING: 7,107,319 AS OF OCTOBER 31, 1998
<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 September 30, 1998
(unaudited) and December 31, 1997 1
Consolidated Statements of Income for the Nine-Month Periods Ended
September 30, 1998 and 1997 (unaudited) 2
Consolidated Statements of Income for the Three-Month Periods Ended
September 30, 1998 and 1997 (unaudited) 3
Consolidated Statements of Comprehensive Income (Loss) for the Nine-Month
Periods Ended September 30, 1998 and 1997 (unaudited) 4
Consolidated Statements of Cash Flows for the Nine-Month Periods
Ended September 30, 1998 and 1997 (unaudited) 5
Notes to Consolidated Financial Statements 7
Item 2 Management's Discussion and Analysis of Financial Condition and Results
of Operations 18
Item 3 Quantitative and Qualitative Disclosures About Market Risk 25
</TABLE>
PART II. OTHER INFORMATION
- --------- ------------------
<TABLE>
<CAPTION>
<S> <C> <C>
Item 1 Legal Proceedings 26
Item 2 Changes in Securities 26
Item 3 Default upon Senior Securities 26
Item 4 Submission of Matters to a Vote of Security Holders 26
Item 5 Other Information 26
Item 6 Exhibits and Reports on Form 8-K 27
</TABLE>
SIGNATURES
ITEM 1. FINANCIAL STATEMENTS
- -------- ---------------------
<TABLE>
<CAPTION>
COASTAL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(IN THOUSANDS, EXCEPT SHARE DATA)
September 30, December 31,
1998 1997
--------------- ------------
ASSETS (Unaudited)
- -----------------------------------------------------------
<S> <C> <C> <C>
Cash and cash equivalents $ 56,200 $ 37,096
Federal funds sold 4,300 --
Loans receivable (note 4) 1,545,507 1,261,435
Mortgage-backed securities held-to-maturity (note 3) 1,234,840 1,345,090
Mortgage-backed securities available-for-sale, at market
value (note 3) 125,787 169,997
U.S. Treasury security available-for-sale, at market value 2,008 --
Accrued interest receivable 17,075 14,813
Property and equipment 33,452 22,250
Stock in the Federal Home Loan Bank of Dallas (FHLB) 49,107 27,801
Goodwill 31,455 15,717
Mortgage servicing rights 4,490 5,653
Prepaid expenses and other assets 22,065 11,558
------------- ----------
$ 3,126,286 $2,911,410
============= ==========
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
---------------------------------------
<S> <C> <C>
Liabilities:
Savings deposits (note 5) $1,704,571 $1,375,060
Advances from the FHLB (note 6) 952,247 540,475
Securities sold under agreements to repurchase (note 6) 244,712 791,760
Senior notes payable (note 7) 50,000 50,000
Advances from borrowers for taxes and insurance 11,192 3,975
Other liabilities and accrued expenses 19,401 16,560
Total liabilities 2,982,123 2,777,830
----------- -----------
9.0% noncumulative preferred stock of Coastal Banc ssb (note 10) 28,750 28,750
Commitments and contingencies (notes 4 and 8)
Stockholders' equity (notes 1, 3, 9 and 11):
Preferred stock, no par value; authorized shares 5,000,000;
no shares issued -- --
Common stock, $.00667 par value; authorized shares
45,000,000; 7,566,757 and 7,513,389 shares issued
in 1998 and 1997, respectively 50 50
Additional paid-in capital 33,703 33,186
Retained earnings 85,714 73,868
Accumulated other comprehensive income (loss) -
unrealized loss on securities available-for-sale (783) (2,274)
Treasury stock at cost (205,000 shares in 1998) (3,271) --
--------- -----------
Total stockholders' equity 115,413 104,830
--------- -----------
$3,126,286 $2,911,410
=========== ===========
</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>
Nine Months Ended
September 30,
-------------------
1998 1997
---------- --------
(Unaudited)
<S> <C> <C>
Interest income:
Loans receivable $ 87,495 $ 80,249
Mortgage-backed securities 67,938 69,395
Federal funds sold, certificates of deposit and other investments 2,007 1,109
157,440 150,753
------------ --------
Interest expense:
Savings deposits 48,166 46,659
Other borrowed money 29,807 41,985
Senior notes payable 3,750 3,750
Advances from the FHLB:
Short-term 11,567 5,798
Long-term 15,613 9,450
------------- --------
108,903 107,642
------------- --------
Net interest income 48,537 43,111
Provision for loan losses 2,350 1,350
Net interest income after provision for loan losses 46,187 41,761
------------- --------
Noninterest income:
Loan fees and service charges on deposit accounts 3,894 2,913
Loan servicing income, net 571 1,097
Gain on sale of mortgage-backed securities available-for-sale -- 237
Writedown of purchased mortgage loan premium (709) --
Other 996 515
4,752 4,762
------------- --------
Noninterest expense:
Compensation, payroll taxes and other benefits 16,156 14,024
Office occupancy 6,437 5,288
Data processing 1,806 1,676
Amortization of goodwill 1,517 1,361
Insurance premiums 912 819
Real estate owned 693 628
Other 5,872 5,830
33,393 29,626
------------- --------
Income before provision for Federal income taxes 17,546 16,897
Provision for Federal income taxes (note 12) 1,944 6,182
------------- --------
Net income before preferred stock dividends 15,602 10,715
Preferred stock dividends of Coastal Banc ssb (Series A) (note 10) 1,941 1,941
------------- --------
Net income available to common stockholders $ 13,661 $ 8,774
============= ========
Basic earnings per share (note 9) $ 1.81 $ 1.18
============= ========
Diluted earnings per share (note 9) $ 1.75 $ 1.14
============= ========
</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
September 30,
1998 1997
------ -------
(Unaudited)
<S> <C> <C>
Interest income:
Loans receivable $ 31,468 $27,819
Mortgage-backed securities 21,740 22,994
Federal funds sold, certificates of deposit and other investments 971 438
54,179 51,251
---------- -------
Interest expense:
Savings deposits 17,167 16,114
Other borrowed money 6,766 14,209
Senior notes payable 1,250 1,250
Advances from the FHLB:
Short-term 3,988 2,086
Long-term 7,753 3,393
---------- -------
36,924 37,052
---------- -------
Net interest income 17,255 14,199
Provision for loan losses 450 450
Net interest income after provision for loan losses 16,805 13,749
---------- -------
Noninterest income:
Loan fees and service charges on deposit accounts 1,428 1,038
Loan servicing income, net 171 333
Gain on sale of mortgage-backed securities available-for-sale -- 237
Other 453 135
2,052 1,743
---------- -------
Noninterest expense:
Compensation, payroll taxes and other benefits 6,059 4,706
Office occupancy 2,406 2,024
Data processing 625 566
Amortization of goodwill 574 479
Insurance premiums 387 274
Real estate owned 270 146
Other 2,154 1,980
12,475 10,175
---------- -------
Income before provision for Federal income taxes 6,382 5,317
Provision for Federal income taxes (note 12) 1,994 1,953
---------- -------
Net income before preferred stock dividends 4,388 3,364
Preferred stock dividends of Coastal Banc ssb (Series A) (note 10) 647 647
---------- -------
Net income available to common stockholders $ 3,741 $ 2,717
========== =======
Basic earnings per share (note 9) $ 0.50 $ 0.36
========== =======
Diluted earnings per share (note 9) $ 0.48 $ 0.35
========== =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements
<PAGE>
COASTAL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1998 1997
----------- ---------
(Unaudited)
<S> <C> <C>
Net income available to common stockholders $ 13,661 $8,774
Other comprehensive income (loss), net of tax:
Unrealized holding gains (losses) on securities available-for-sale
arising during period 1,491 52
----------- ------
Total comprehensive income $ 15,152 $8,826
=========== ======
</TABLE>
See accompanying Notes to Consolidated Financial Statements
<PAGE>
COASTAL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1998 1997
------------ ----------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income before preferred stock dividends $ 15,602 $ 10,715
Adjustments to reconcile net income before preferred stock dividends
to net cash provided by operating activities:
Depreciation and amortization of property and equipment,
mortgage servicing rights and prepaid expenses and other assets 6,381 5,334
Net premium amortization 2,352 1,458
Provision for loan losses 2,350 1,350
Amortization of goodwill 1,517 1,361
Originations and purchases of mortgage loans held for sale (26,536) (8,063)
Sales of mortgage loans held for sale 26,287 8,361
Gain on sales of mortgage-backed securities available-for-sale -- (237)
Stock dividends from the FHLB (1,536) (951)
Decrease (increase) in:
Accrued interest receivable 306 (698)
Other, net (6,056) 7,133
---------- ----------
Net cash provided by operating activities 20,667 25,763
---------- ----------
Cash flows from investing activities:
Net increase in federal funds sold (4,300) (5,000)
Purchase of mortgage-backed securities held-to-maturity (8,203) (20,257)
Principal repayments on mortgage-backed securities held-to-maturity 118,427 39,140
Principal repayments on mortgage-backed securities
available-for-sale 20,249 452
Proceeds from maturity of U.S. Treasury securities available-for-sale 25,000 11
Proceeds from sales of mortgage-backed securities available-for-sale 26,250 11,545
Purchases of loans receivable (319,630) (120,024)
Net decrease in loans receivable 204,384 44,400
Net purchases of property and equipment (3,477) (9,224)
Purchase of FHLB stock (19,770) (2,556)
Proceeds from sales of FHLB stock -- 9,000
Cash and cash equivalents received in business combination
transaction 120,085 52,098
----------- ----------
Net cash provided (used) by investing activities 159,015 (415)
----------- ----------
</TABLE>
<PAGE>
COASTAL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1998 1997
----------- -----------
(Unaudited)
<S> <C> <C>
Cash flows from financing activities:
Net increase (decrease) in savings deposits $ (26,009) $ 26,744
Advances from the FHLB 3,435,277 2,539,800
Principal payments on advances from the FHLB (3,023,505) (2,566,518)
Securities sold under agreements to repurchase 3,948,611 7,722,507
Purchases of securities sold under agreements to repurchase (4,495,659) (7,741,112)
Net increase in advances from borrowers for taxes and insurance 7,217 7,641
Exercise of stock options for purchase of common stock, net 517 373
Purchase of Treasury Stock (3,271) --
Dividends paid (3,756) (3,632)
------------ ------------
Net cash used by financing activities (160,578) (14,197)
------------ ------------
Net increase in cash and cash equivalents 19,104 11,151
Cash and cash equivalents at beginning of period 37,096 27,735
------------ ------------
Cash and cash equivalents at end of period $ 56,200 $ 38,886
============ ============
Supplemental schedule of cash flows-interest paid $ 105,971 $ 105,216
============ ============
Supplemental schedule of noncash investing and financing activities:
Foreclosures of loans receivable $ 2,937 $ 3,883
============ ============
In connection with the branch office purchases in 1998 and 1997,
Coastal recorded the following assets and liabilities:
Loans receivable $ 176,157 $ --
U.S. Treasury securities 26,942 --
Goodwill 17,255 1,956
Property and equipment 10,743 693
Accrued interest receivable and other assets 5,437 --
Savings deposits 355,425 54,563
Accrued interest payable and other liabilities 1,194 184
</TABLE>
See accompanying Notes to Consolidated Financial Statements
COASTAL BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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 periods ended September 30, 1998 are not necessarily indicative of the
results that may be expected for the entire fiscal year or any other interim
period.
COASTAL BANCORP, INC. AND SUBSIDIARIES ADOPTED THE FINANCIAL ACCOUNTING
STANDARDS BOARDS STATEMENT NO. 130 ("STATEMENT 130"), "REPORTING COMPREHENSIVE
INCOME" AS OF JANUARY 1, 1998. STATEMENT 130 REQUIRES THE DISCLOSURE OF ALL
COMPONENTS OF COMPREHENSIVE INCOME, WHICH INCLUDES NET INCOME AND OTHER
COMPREHENSIVE INCOME. OTHER COMPREHENSIVE INCOME INCLUDES ALL NONOWNER RELATED
CHANGES TO STOCKHOLDERS' EQUITY, WHICH IS THE UNREALIZED GAIN (LOSS) ON
SECURITIES AVAILABLE-FOR-SALE. THESE AMOUNTS HAVE BEEN DISCLOSED ON THE
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME. STATEMENT 130 DID NOT CHANGE
THE CURRENT ACCOUNTING TREATMENT FOR COMPONENTS OF OTHER COMPREHENSIVE INCOME
(I.E. CHANGES IN UNREALIZED GAIN (LOSS) ON SECURITIES AVAILABLE-FOR-SALE).
On April 23, 1998, the Board of Directors declared a 3:2 stock split on the
common stock of Coastal Bancorp, Inc. payable on June 15, 1998 to the
stockholders of record at the close of business on May 15, 1998. Accordingly,
all common stock share data have been adjusted to include the effect of the
stock split for all periods presented.
On September 1, 1998, Coastal announced that the Board of Directors had
authorized the repurchase of up to 6.6% (approximately 500,000 shares) of the
outstanding shares of common stock. As of September 30, 1998, 205,000 shares
had been repurchased at a cost of $3.3 million and as of this date 460,600
shares have been repurchased at a total cost of $7.2 million.
(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 subsidiaries, Coastal Banc ssb and
subsidiaries and Coastal Banc Capital Corp. (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.
<PAGE>
(3) MORTGAGE-BACKED SECURITIES
Mortgage-backed securities at September 30, 1998 (unaudited) were as
follows (dollars in thousands):
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ----------- ---------- -------
<S> <C> <C> <C> <C>
Held-to-Maturity:
REMICS - Agency $ 882,871 $ 4,759 $ (5,584) $ 882,046
REMICS - Non-agency 249,567 1,193 (2,392) 248,368
FNMA certificates 66,978 261 (604) 66,635
GNMA certificates 23,301 335 -- 23,636
Non-agency securities 12,117 170 (64) 12,223
Interest-only securities 6 -- -- 6
$ 1,234,840 $ 6,718 $ (8,644) $ 1,232,914
=========== ======= ========= ===========
Available-for-sale:
REMICS - Agency $ 125,408 $ 16 $ (1,213) $ 124,211
REMICS - Non-agency 1,584 -- (8) 1,576
----------- ------- --------- -----------
$ 126,992 $ 16 $ (1,221) $ 125,787
=========== ======= ========= ===========
</TABLE>
Proceeds from sales of mortgage-backed securities available-for-sale for
the nine months ended September 30, 1998 were approximately $26.3 million.
These securities were sold at amortized cost, therefore no gain or loss was
recorded.
Mortgage-backed securities at December 31, 1997 were as follows (dollars in
thousands):
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ----------- ---------- -------
<S> <C> <C> <C> <C>
Held-to-maturity:
REMICS - Agency $ 950,689 $ 5,022 $ (20,478) $ 935,233
REMICS - Non-agency 279,131 701 (5,610) 274,222
FNMA certificates 71,887 144 (683) 71,348
GNMA certificates 28,808 566 -- 29,374
Non-agency securities 14,555 239 (23) 14,771
Interest-only securities 20 -- -- 20
$ 1,345,090 $ 6,672 $ (26,794) $ 1,324,968
=========== ======= ========== ===========
Available-for-sale:
REMICS - Agency $ 171,167 $ 579 $ (4,044) $ 167,702
REMICS - Non-agency 2,328 -- (33) 2,295
$ 173,495 $ 579 $ (4,077) $ 169,997
=========== ======= ========== ===========
</TABLE>
<PAGE>
(4) LOANS RECEIVABLE
Loans receivable at September 30, 1998 and December 31, 1997 were as
follows (dollars in thousands):
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
-------------------- -----------------
(Unaudited)
<S> <C> <C> <C>
Real estate mortgage loans:
First-lien mortgage, primarily residential $ 765,109 $ 689,767
Commercial 242,170 181,315
Multifamily 127,477 131,454
Residential construction 113,341 83,359
Acquisition and development 59,447 31,619
Commercial construction 27,079 14,506
Commercial loans, secured by residential mortgage
loans held for sale 122,799 98,679
Commercial loans, secured by mortgage servicing
rights 19,263 32,685
Commercial, financial and industrial 89,235 30,877
Loans secured by savings deposits 14,865 8,695
Consumer and other loans 59,502 15,030
--------------- -----------
1,640,287 1,317,986
Loans in process (84,795) (47,893)
Allowance for loan losses (11,043) (7,412)
Unearned interest and loan fees (3,398) (2,926)
Premium to record purchased loans, net 4,456 1,680
--------------- -----------
$ 1,545,507 $1,261,435
=============== ===========
Weighted average yield 8.35% 8.30%
=============== ===========
</TABLE>
At September 30, 1998, Coastal had outstanding commitments to originate or
purchase $124.1 million of real estate mortgage and other loans and had
commitments under lines of credit to originate primary construction and other
loans of approximately $132.8 million. In addition, at September 30, 1998,
Coastal had $3.9 million of outstanding letters of credit. Management
anticipates the funding of these commitments through normal operations.
At September 30, 1998 and December 31, 1997, the carrying value of loans
that were considered to be impaired totaled approximately $2.0 million and the
related allowance for loan losses on those impaired loans totaled $950,000 and
$1.1 million at September 30, 1998 and December 31, 1997, respectively. The
average recorded investment in impaired loans during the nine months ended
September 30, 1998 and 1997 was $1.8 million and $770,000, respectively.
<PAGE>
Coastal services for others loans receivable which are not included in the
Consolidated Financial Statements. The total amounts of such loans were $567.2
million and $675.7 million at September 30, 1998 and December 31, 1997,
respectively.
An analysis of activity in the allowance for loan losses for the nine
months ended September 30, 1998 and 1997 is as follows (in thousands):
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1998 1997
------------ --------
(Unaudited)
<S> <C> <C> <C>
Balance, beginning of period $ 7,412 $ 6,880
Acquisition allowance adjustment 2,257 --
Provision for loan losses 2,350 1,350
Charge-offs, net of recoveries (976) (1,148)
------------ --------
Balance, end of period $ 11,043 $ 7,082
============ ========
</TABLE>
The acquisition allowance adjustment of $2.3 million was recorded during
the nine months ended September 30, 1998 in connection with the recording of the
loans receivable acquired in the branch purchase on August 14, 1998 (see note
14).
<PAGE>
(5) SAVINGS DEPOSITS
Savings deposits, their stated rates and the related weighted average
interest rates at September 30, 1998 and December 31, 1997 are summarized as
follows (dollars in thousands):
<TABLE>
<CAPTION>
Stated Rate September 30, 1998 December 31, 1997
-------------- ------------------- -------------------
(Unaudited)
<S> <C> <C> <C> <C>
Noninterest-bearing checking 0.00% $ 86,537 $ 101,782
Interest-bearing checking 1.49 - 2.00 51,266 69,972
Savings accounts 2.18 - 2.75 48,904 25,555
Money market demand accounts 0.00 - 4.60 335,016 165,986
--------- -----------
521,723 363,295
--------- -----------
Certificate accounts 2.00 - 2.99 7,407 5,142
3.00 - 3.99 5,526 2,763
4.00 - 4.99 118,971 64,478
5.00 - 5.99 949,210 834,727
6.00 - 6.99 90,871 94,405
7.00 - 7.99 8,903 7,624
8.00 - 8.99 1,063 1,854
9.00 - 9.99 305 847
over 10.00 16 --
---------- -----------
1,182,272 1,011,840
---------- -----------
Premium (discount) to record purchased
savings deposits, net 576 (75)
---------- -----------
$ 1,704,571 $1,375,060
========== ===========
Weighted average rate 4.35% 4.67%
========== ===========
</TABLE>
Effective January 1, 1998, Coastal implemented a program whereby a portion
of the balances in noninterest-bearing and interest-bearing checking accounts
are reclassified to money market demand accounts under Federal Reserve
Regulation D.
The scheduled maturities of certificate accounts outstanding at September
30, 1998 were as follows (dollars in thousands):
<TABLE>
<CAPTION>
September 30, 1998
--------------------
(Unaudited)
<S> <C>
0 to 12 months $ 993,744
12 to 24 months 139,592
24 to 36 months 26,219
36 to 48 months 9,860
48 to 60 months 12,575
Over 60 months 282
--------------------
$ 1,182,272
====================
</TABLE>
(6) SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND ADVANCES FROM THE FHLB
The weighted average interest rates on securities sold under agreements to
repurchase at September 30, 1998 and December 31, 1997 were 5.28% and 6.00%,
respectively. The stated interest rates on securities sold under agreements to
repurchase ranged from 4.93% to 5.63% at September 30, 1998.
The weighted average interest rates on advances from the FHLB at September
30, 1998 and December 31, 1997 were 5.44% and 5.95%, respectively. The
scheduled maturities and related weighted average interest rates on advances
from the FHLB at September 30, 1998 are summarized as follows (dollars in
thousands) (unaudited):
<TABLE>
<CAPTION>
Due during the year Weighted Average
ended December 31, Interest Rate Amount
- ------------------- ---------------- -----------------
<S> <C> <C> <C>
1998 5.30% $378,100
1999 5.57 416,638
2000 5.93 6,845
2001 6.21 8,595
2002 5.52 69,673
2003 5.52 111
2004 6.48 2,699
2005 5.57 129
2006 6.85 3,213
2007 6.64 1,176
2008 4.70 51,336
2009 8.15 4,472
2010 5.66 187
2011 6.63 1,441
2012 5.68 217
2013 5.71 6,871
2018 6.00 544
--------
$952,247
========
</TABLE>
Advances from the FHLB 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.
<PAGE>
(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 utilizes interest rate swap and interest rate cap agreements to
reduce exposure to floating interest rates by altering the interest rate
sensitivity of a portion of its variable-rate assets and borrowings. At
September 30, 1998, Coastal had interest rate swap and cap agreements having
notional principal amounts totaling $45.7 million and $255.3 million,
respectively.
The terms of the interest rate swap agreements outstanding at September 30,
1998 (unaudited) and December 31, 1997 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>
At September 30, 1998:
1998 $ 4,400 Three-month 6.709% 5.688% $ (5)
1999 14,600 Three-month 6.926 5.688 (302)
2000 4,800 Three-month 6.170 5.500 (126)
2000 2,415 Three-month 6.000 5.313 (57)
2005 19,527 Three-month 6.500 5.688 (1,212)
---------
$ 45,742 $(1,702)
========= ========
At December 31, 1997:
1998 $ 4,400 Three-month 6.709% 5.875% $ (28)
1999 14,600 Three-month 6.926 5.875 (239)
2000 4,800 Three-month 6.170 5.906 (99)
2000 2,520 Three-month 6.000 5.906 --
2005 19,527 Three-month 6.500 5.879 (230)
--------- -------
$ 45,847 $ (596)
========= =======
</TABLE>
The interest rate swap 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 rate of
payments received on all of the interest rate swap agreements was approximately
5.80% and the weighted average interest payment rate on all of the interest rate
swap agreements was approximately 6.61% for the nine months ended September 30,
1998. 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 on other borrowed money" in the accompanying
consolidated statements of income. The net interest expense related to these
agreements was approximately $278,000 for the nine months ended September 30,
1998 and approximately $338,000 for the nine months ended September 30, 1997.
Coastal had pledged approximately $6.8 million of mortgage-backed securities to
secure interest rate swap agreements at September 30, 1998.
Coastal has interest rate cap agreements with third parties. The
agreements provide for the third parties to make payments to Coastal whenever a
defined floating rate exceeds rates ranging from 5.0% to 11.0%, 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 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 $165,000 and $286,000 at September 30, 1998 and December 31, 1997,
respectively, with the estimated fair value of the agreements being $88,000 and
$300,000 at September 30, 1998 and December 31, 1997, 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 income. The net decrease in
interest income related to the interest rate cap agreements was approximately
$38,000 and $202,000 for the nine months ended September 30, 1998 and 1997,
respectively.
Interest rate cap agreements outstanding at September 30, 1998 (unaudited)
expire as follows (dollars in thousands):
<TABLE>
<CAPTION>
Year of Strike rate Notional
expiration Range amount
- ---------- --------------- ---------
<S> <C> <C>
1998 5.00 - 11.00% $ 54,300
1999 7.25 - 11.00 63,564
2000 8.50 - 9.50 11,620
2001 7.00 - 9.00 26,792
2003 8.00 - 8.50 99,000
---------
$ 255,276
=========
</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 portfolio to expected market level changes in an instantaneous shock of plus
and minus 200 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) EARNINGS PER SHARE
The following summarizes information related to the computation of basic
and diluted earnings per share ("EPS") for the nine- and three- month periods
ended September 30, 1998 and 1997 (dollars in thousands, except per share data)
(unaudited):
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------
<S> <C> <C>
1998 1997
---------- ----------
Net income available to common stockholders $ 13,661 $ 8,774
========== ==========
Weighted average number of common shares
outstanding used in basic EPS calculation 7,534,947 7,463,546
Add assumed exercise of outstanding stock
options as adjusted for dilutive securities 252,887 242,664
---------- ----------
Weighted average number of common shares
outstanding used in diluted EPS calculation 7,787,834 7,706,210
========== ==========
Basic EPS $ 1.81 $ 1.18
========== ==========
Diluted EPS $ 1.75 $ 1.14
========== ==========
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
September 30,
------------------
<S> <C> <C> <C>
1998 1997
---------- ----------
Net income available to common stockholders $ 3,741 $ 2,717
========== ==========
Weighted average number of common shares
outstanding used in basic EPS calculation 7,499,625 7,482,030
Add assumed exercise of outstanding stock
options as adjusted for dilutive securities 226,704 284,675
---------- ----------
Weighted average number of common shares
outstanding used in diluted EPS calculation 7,726,329 7,766,705
========== ==========
Basic EPS $ 0.50 $ 0.36
========== ==========
Diluted EPS $ 0.48 $ 0.35
========== ==========
</TABLE>
(10) COASTAL BANC SSB PREFERRED STOCK
On October 21, 1993, the Bank issued 1,150,000 shares of 9.0% Noncumulative
Preferred Stock, no par Series A, at a price of $25 per share to the public.
Dividends on the Preferred Stock are payable quarterly at the annual rate of
$2.25 per share, when, as and if declared by the Board of Directors of the Bank.
At any time on or after December 15, 1998, the Preferred Stock may be redeemed
in whole or in part only at the Bank's option at $25 per share plus unpaid
dividends (whether or not earned or declared) for the then current dividend
period to the date fixed for redemption.
<PAGE>
(11) 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 September 30, 1998, the Bank's regulatory capital (unaudited) in
relation to its existing regulatory capital requirements for capital adequacy
purposes were as follows (dollars in thousands):
<TABLE>
<CAPTION>
Minimum For Capital Well-Capitalized
Actual Adequacy Purposes Requirements
<S> <C> <C> <C> <C> <C> <C>
Capital Requirement Amount Ratio Amount Ratio Amount Ratio
- ------------------- ----------- --------- -------- ------ -------- ------
Tier 1 (core) $ 155,777 5.10% $122,066 4.00% $152,583 5.00%
Tier 1 risk-based 155,777 9.29 67,049 4.00 100,574 6.00
Total risk-based 166,820 9.95 134,098 8.00 167,623 10.00
</TABLE>
As of September 30, 1998, the most recent notification from the Federal
Deposit Insurance Corporation ("FDIC") categorized the Bank as well capitalized
under the regulatory framework for prompt corrective action. Due to the
acquisition completed during the third quarter of 1998, the Bank's total
risk-based capital as of September 30, 1998, as reported, has fallen below the
Well-Capitalized Requirement. Management believes that this is a temporary
situation and anticipates meeting the total risk-based Well-Capitalized
Requirement as of December 31, 1998.
(12) FEDERAL INCOME TAXES
In March 1998, Coastal announced that it had successfully resolved an
outstanding tax benefit issue with the FDIC as Manager of the Federal Savings
and Loan Insurance Corporation Resolution Fund. The resolution of the issue
resulted in Coastal recording a $3.7 million, or 47 cents per diluted share,
reversal of accrued income taxes during the nine months ended September 30,
1998; resulting in a one-time positive effect on net income. The resolution of
the tax benefit issue also contributes an ongoing quarterly tax benefit of
$226,000 or approximately 3 cents per diluted share, as of September 30, 1998.
This tax benefit is expected to continue for approximately 3 years.
(13) RECENT ACCOUNTING STANDARDS
The Financial Accounting Standards Board's Statement No. 131 ("Statement
131"), "Disclosure about Segments of an Enterprise and Related Information,"
requires public companies to report certain information about their operating
segments in their annual financial statements and quarterly reports issued to
stockholders for years after implementation. It also requires public companies
to report certain information about their products and services, the geographic
areas in which they operate, and their major customers. Statement 131 is
effective for fiscal years beginning after December 15, 1997. Coastal
anticipates implementing Statement 131 for its fiscal 1998 Annual Report on Form
10-K. Implementation of Statement 131 should have no material effect on
Coastal's Consolidated Financial Statements.
The Financial Accounting Standards Board's Statement No. 133 ("Statement
133"), "Accounting for Derivative Instruments and for Hedging Activities," was
issued in June 1998. Statement 133 requires companies to recognize all
derivatives as either assets or liabilities in the statement of financial
condition and measure those instruments at fair value. Statement 133 requires
that changes in fair value of a derivative be recognized currently in earnings
unless specific hedge accounting criteria are met. Statement 133 is effective
for fiscal years beginning after June 15, 1999. Coastal is evaluating the
impact, if any, Statement 133 may have on its future consolidated financial
statements.
(14) BRANCH PURCHASE
On August 14, 1998, Coastal completed the acquisition of the Valley
branches of Pacific Southwest Bank, also known as San Benito Bank and Trust
Company, a unit of Pacific Southwest Bank ("Valley Branches"). Twelve branches
located in Harlingen, San Benito, Mission, Pharr, Edinburg, Brownsville, McAllen
and South Padre Island were acquired in this transaction. Summarized below are
the assets and liabilities recorded at fair value at the date of acquisition (in
thousands):
<TABLE>
<CAPTION>
<S> <C> <C>
<C> <C>
Assets:
Cash $120,085
Loans receivable 176,157
U.S. Treasury securities 26,942
Goodwill 17,255
Property and equipment 10,743
Other assets 5,437
--------
Total assets $356,619
========
Liabilities:
Deposits $355,425
Other liabilities 1,194
--------
Total liabilities $356,619
========
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
---------------------------------------------------------------
Financial Condition
- --------------------
On August 14, 1998, Coastal completed the acquisition of the Valley
branches of Pacific Southwest Bank, also known as San Benito Bank and Trust
Company, a unit of Pacific Southwest Bank (the "Valley Acquisition"). This
acquisition added twelve branches, approximately $176.2 million in loans
receivable and $355.4 in deposits to Coastal's existing organization.
Total assets increased 7.4% or $214.9 million from December 31, 1997 to
September 30, 1998. The net increase resulted primarily from an increase in
loans receivable of $284.1 million, a $21.3 million increase in stock in the
Federal Home Loan Bank of Dallas ("FHLB"), a $19.1 million increase in cash and
cash equivalents, a $15.7 million increase in goodwill and an $11.2 million
increase in property and equipment, offset by decreases of $110.3 million and
$44.2 million in mortgage-backed securities held-to-maturity and mortgage-backed
securities available-for-sale, respectively. The increase in loans receivable
was primarily due to bulk residential mortgage loan purchases of $294.0 million,
$176.2 million loans acquired in the Valley Acquisition (net of the $2.3 million
allowance for loan losses recorded at acquisition) and $25.6 million of consumer
loan purchases from correspondent lenders, in addition to an increase of $24.1
million in commercial loans, secured by residential mortgage loans held for
sale, during the nine months ended September 30, 1998. These increases were
somewhat offset by principal payments received. The increase in stock in the
FHLB was due to the increased amounts required to be maintained based on the
level of FHLB advances outstanding. The increase in goodwill was due to $17.3
million of goodwill recorded due to the Valley Acquisition offset by current
year amortization. The increase in property and equipment was also primarily
due to the Valley Acquisition. The decrease in mortgage-backed securities was
due to principal payments received and the sale of $26.3 million of
mortgage-backed securities available-for-sale.
Savings deposits increased $329.5 million or 24.0% from December 31, 1997
to September 30, 1998 due to the $355.4 million of deposits acquired in the
Valley Acquisition offset by decreases in existing deposits. Securities sold
under agreements to repurchase decreased 69.1% or $547.0 million and advances
from the FHLB increased 76.2% or $411.8 million from December 31, 1997 to
September 30, 1998 due to a reallocation of borrowings to take advantage of more
favorable interest rates. Stockholders' equity increased 10.1% or $10.6 million
from December 31, 1997 to September 30, 1998 as a result primarily of net income
and a $1.5 million decrease in accumulated other comprehensive income (loss)
offset by dividends declared and treasury stock acquired of $3.3 million.
Results of Operations for the Nine Months Ended September 30, 1998 and 1997
- --------------------------------------------------------------------------------
General
-------
For the nine months ended September 30, 1998, net income before preferred
stock dividends was $15.6 million compared to $10.7 million for the nine months
ended September 30, 1997. The increase in net income in the first nine months
of 1998 was primarily due to the resolution of an outstanding tax benefit issue
with the Federal Deposit Insurance Corporation as Manager of the Federal Savings
and Loan Insurance Corporation Resolution Fund. The resolution of the issue
resulted in Coastal recording a $3.7 million, or 47 cents per diluted share,
reversal of accrued income taxes; resulting in a one-time positive effect on net
income. The resolution of the tax benefit issue will also contribute an ongoing
quarterly tax benefit of $226,000 or approximately 3 cents per diluted share (as
of September 30, 1998). This tax benefit is expected to continue for
approximately 3 years.
Net income for the first three months of 1998 also included an additional
provision for loan losses of $1.0 million (above the current quarterly provision
of $450,000) and a writedown of purchased mortgage loan premium of $709,000.
The additional provision for loan losses of $1.0 million, or 8 cents per diluted
share after tax, was recorded to increase the allowance for loan losses due to
the continuing change in the composition of the loans receivable portfolio as
a result of management's emphasis on business lending. The writedown of the
purchased mortgage loan premium of $709,000, or 6 cents per diluted share after
tax, was related to an adjustable rate whole loan package purchased in the
second quarter of 1997, on which Coastal experienced high prepayments during
1997 and through the first quarter of 1998, resulting from a comparatively lower
current interest rate environment.
Net interest income increased $5.4 million for the nine months ended
September 30, 1998 as compared to the nine months ended September 30, 1997.
Noninterest income (excluding the writedown of purchased mortgage loan premium)
increased during such period by $699,000. Noninterest expense increased by $3.8
million and the provision for federal income taxes (excluding the one-time
effect of the $3.7 million reversal of accrued income taxes) decreased by
$559,000 from the 1997 to the 1998 nine month period due to the ongoing
quarterly benefit attributable to the tax benefit issue and the tax effect of
the recording of the additional provision for loan losses and the writedown of
the purchased mortgage loan premium during the first nine months of 1998.
Interest Income
----------------
Interest income for the nine months ended September 30, 1998 increased $6.7
million or 4.4% from the nine months ended September 30, 1997. The increase was
primarily due to an increase of $7.2 million in interest earned on loans
receivable over the prior comparable period. The increase in interest income on
loans receivable was due to a $158.0 million increase in the average balance of
loans receivable offset by a decrease in the average yield from 8.68% for the
nine months ended September 30, 1997 to 8.39% for the nine months ended
September 30, 1998. The decrease in the average yield on loans receivable was
due in part to $749,000 (or 6 cents per diluted share after tax) of additional
amortization of purchased mortgage loan premium during the nine months ended
September 30, 1998. This amortization was attributable to an adjustable rate
whole loan package purchased in the second quarter of 1997, on which Coastal
experienced high prepayments during 1997 and through the first quarter of 1998.
As discussed previously, Coastal recorded a $709,000 writedown of the purchased
mortgage loan premium on this package in March 1998, which has positively
impacted the average yield since March 31, 1998.
Interest income on federal funds sold, certificates of deposit and other
investments increased $898,000 which was offset by a $1.5 million decrease in
interest income on mortgage-backed securities. Total interest-earning assets
for the nine months ended September 30, 1998 averaged $2.9 billion as compared
to $2.8 billion for the nine months ended September 30, 1997.
Interest Expense
-----------------
Interest expense on interest-bearing liabilities was $108.9 million for the
nine months ended September 30, 1998, as compared to $107.6 million for the same
period in 1997. The increase in interest expense was due to a $58.6 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 5.42% for the nine months ended September 30, 1997 to 5.36% for
the nine months ended September 30, 1998. The increase in average
interest-bearing liabilities consisted of a $288.8 million increase in FHLB
advances, a $63.5 million increase in interest-bearing savings deposits, offset
by a $293.7 million decrease in securities sold under agreements to repurchase
and federal funds purchased. The reallocation of the borrowings outstanding
during the nine month periods was directly attributable to Coastal's change in
funding sources to take advantage of more favorable interest rates.
<PAGE>
Net Interest Income
---------------------
Net interest income was $48.5 million for the nine months ended Setpember
30, 1998 and $43.1 million for the same period in 1997. Net interest margin
("Margin") was 2.23% for the nine months ended September 30, 1998 compared to
2.07% for the same period in 1997. Margin represents net interest income as a
percentage of average interest-earning assets. Net interest spread ("Spread"),
defined to exclude noninterest-bearing deposits, increased from 1.83% for the
nine months ended September 30, 1997 to 1.86% for the nine months ended
September 30, 1998. Management also calculates an alternative spread which
includes noninterest-bearing deposits. Under this calculation, the alternative
spreads for the nine months ended September 30, 1998 and 1997 were 2.05% and
2.00%, respectively. Margin and spread are affected by the changes in the
amount and composition of interest-earning assets and interest-bearing
liabilities. The overall increase in net interest spread was primarily due to
the decrease in the average rate paid on interest-bearing liabilities of 6 basis
points. The decrease in the average rate paid on interest-bearing liabilities
was due primarily to the overall decrease in wholesale funding costs. In
addition, the average balance of loans receivable increased $158.0 million from
the nine months ended September 30, 1997 to the nine months ended September 30,
1998, while the average yield decreased from 8.68% to 8.39% and the average
balance of mortgage-backed securities decreased $46.3 million from the nine
months ended September 30, 1997 to the nine months ended September 30, 1998,
while the average yield increased from 6.10% to 6.16%. Average net
interest-earning assets increased $73.7 million from the nine months ended
September 30, 1997 to the nine months ended September 30, 1998.
Spread for the nine months ended September 30, 1998 was also negatively
affected by the additional amortization of purchased mortgage loan premium as
discussed previously. The writedown of the purchased mortgage loan premium
recorded in March 1998 has decreased the ongoing amortization effect of
prepayments related to the adjustable rate whole loan package.
Management's goal is to achieve 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 LIBOR and
local and regional prime rates and through the efforts to replace LIBOR based
borrowings with lower cost deposits. In addition, management intends to
gradually increase commercial business loans to approximately 15% of total
assets and commercial business (noninterest-bearing) deposits to approximately
10% of total deposits within three to five years.
Provision for Loan Losses
----------------------------
The provision for loan losses was $2.4 million for the nine months ended
September 30, 1998 and $1.4 million for the nine months ended September 30,
1997. During the nine months ended September 30, 1998, the increased provision,
above the current quarterly provision of $450,000, was recorded to increase the
allowance for loan losses due to the continuing change in the composition of the
loans receivable portfolio. This change is occurring as a result of
management's emphasis on business lending. The allowance for loan losses as a
percentage of total loans was 0.71% at September 30, 1998 and 0.55% at September
30, 1997. At September 30, 1998, the allowance for loan losses included the
$2.3 million acquisition allowance adjustment as a result of the loans acquired
in the Valley Acquisition, of which approximately 58% were commercial real
estate and commercial, financial and industrial loans. Although no assurance
can be given, management believes that the present allowance for loan losses is
adequate considering the changing composition of the loans receivable portfolio,
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 and
resulting allowance for loan losses are necessary.
<PAGE>
Noninterest Income
-------------------
For the nine months ended September 30, 1998, noninterest income (excluding
the writedown of purchased mortgage loan premium) increased $699,000 or 14.7% to
$5.5 million, compared to $4.8 million for the nine months ended September 30,
1997. The increase in noninterest income was primarily due to an increase of
$981,000 in loan fees and service charges on deposit accounts and a $481,000
increase in other noninterest income. The increase in loan fees and service
charges on deposit accounts consisted of a $250,000 increase in loan fees and a
$731,000 increase in service charges on deposit accounts due to the increase in
transaction type deposit accounts, including the transaction type deposit
accounts acquired in the Valley Acquisition. These increases were somewhat
offset by a $526,000 decrease in loan servicing income due to the reducing
servicing portfolio. In addition, as discussed previously, during the nine
months ended September 30, 1998, Coastal recorded a writedown of purchased
mortgage loan premium of $709,000.
Noninterest Expense
--------------------
For the nine months ended September 30, 1998, noninterest expense increased
$3.8 million from the nine months ended September 30, 1997. Compensation,
payroll taxes and other benefits as well as office occupancy expense increased
$2.1 million and $1.1 million, respectively, from the nine months ended
September 30, 1997 to the nine months ended September 30, 1998, 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 to
the staffing expenses related to the Valley Acquisition. Occupancy expenses
also increased due to the acquisition of assets and other expenses related to
the relocation of Coastal's corporate headquarters in the third quarter of 1997
and the acquisition of the twelve branches in the Valley Acquisition. In
addition, data processing expenses and the amortization of goodwill increased
$130,000 and $156,000, respectively, primarily due to the Valley Acquisition.
Other changes included a $65,000 increase in real estate owned expenses, a
$93,000 increase in insurance premiums (which includes deposit insurance
premiums) and a $42,000 increase in other operating expenses. During the nine
months ended September 30, 1998, noninterest expense included approximately
$120,000 in nonrecurring expenses incurred due to the Valley Acquisition.
Provision for Federal Income Taxes
--------------------------------------
For the nine months ended September 30, 1998, the provision for federal
income taxes (excluding the one-time effect of the $3.7 million reversal of
accrued income taxes) was $5.6 million compared to $6.2 million for the nine
months ended September 30, 1997. The decrease from 1997 to 1998 was due
primarily to the ongoing quarterly benefit attributable to the tax benefit issue
(a benefit of approximately $226,000 per quarter) and the tax benefit effect of
the recording of the additional provision for loan losses and the writedown of
the purchased mortgage loan premium during the first nine months of 1998.
Results of Operations for the Three Months Ended September 30, 1998 and 1997
- --------------------------------------------------------------------------------
General
-------
For the three months ended September 30, 1998, net income before preferred
stock dividends was $4.4 million compared to $3.4 million for the three months
ended September 30, 1997. The increase was primarily due to a $3.1 million
increase in net interest income for the three months ended September 30, 1998 as
compared to the three months ended September 30, 1997. Noninterest income
increased during such period by $309,000. Noninterest expense increased by $2.3
million and the provision for federal income taxes increased by $41,000 from the
1997 to the 1998 three month period.
<PAGE>
Interest Income
----------------
Interest income for the three months ended September 30, 1998 increased
$2.9 million or 5.7% from the three months ended September 30, 1997. The
increase was primarily due to an increase of $3.6 million in interest earned on
loans receivable over the prior comparable quarter. The increase in interest
income on loans receivable was due to a $142.5 million increase in the average
balance of loans receivable and an increase in the average yield from 8.28% for
the three months ended September 30, 1997 to 8.47% for the three months ended
September 30, 1998.
In addition, interest income on federal funds sold, certificates of deposit
and other investments increased $533,000 while interest income on
mortgage-backed securities decreased $1.3 million due to a lower average
balance. Total interest-earning assets for the three months ended September 30,
1998 averaged $3.0 billion as compared to $2.9 billion for the three months
ended September 30, 1997.
Interest Expense
-----------------
Interest expense on interest-bearing liabilities was $36.9 million for the
three months ended September 30, 1998, as compared to $37.1 million for the same
period in 1997. The decrease in interest expense was due to a decrease in the
average rate paid on interest-bearing liabilities from 5.47% for the three
months ended September 30, 1997 to 5.33% for the three months ended September
30, 1998 offset somewhat by a $74.8 million increase in the average balance of
interest-bearing liabilities. The increase in average interest-bearing
liabilities consisted of a $454.2 million increase in FHLB advances, a $133.9
million increase in interest-bearing savings deposits, offset by a $513.3
million decrease in securities sold under agreements to repurchase. The
reallocation of the borrowings outstanding during the three month periods was
directly attributable to Coastal's change in funding sources to take advantage
of more favorable interest rates.
Net Interest Income
---------------------
Net interest income was $17.3 million for the three months ended September
30, 1998 and $14.2 million for the same period in 1997. Net interest margin
("Margin") was 2.32% for the three months ended September 30, 1998 compared to
1.98% for the three months ended September 30, 1997. Margin represents net
interest income as a percentage of average interest-earning assets. Net
interest spread ("Spread"), defined to exclude noninterest-bearing deposits,
increased from 1.66% for the three months ended September 30, 1997 to 1.95% for
the three months ended September 30, 1998. Management also calculates an
alternative spread which includes noninterest-bearing deposits. Under this
calculation, the alternative spreads for the three months ended September 30,
1998 and 1997 were 2.16% and 1.86%, respectively. Margin and spread are
affected by the changes in the amount and composition of interest-earning assets
and interest-bearing liabilities. The overall increase in net interest spread
was primarily due to an increase in the average yield on interest-earning assets
of 15 basis points and a decrease in the average rate paid on interest-bearing
liabilities of 14 basis points. The average balance of loans receivable
increased $142.5 million from the three months ended September 30, 1997 to the
three months ended September 30, 1998, while the average yield increased from
8.28% to 8.47%. The average balance of mortgage-backed securities decreased
$80.3 million from the three months ended September 30, 1997 to the three months
ended September 30, 1998, while the average yield remained at 6.12%. The
decrease in the average rate paid on interest-bearing liabilities was due
primarily to the overall decrease in wholesale funding costs. Average net
interest-earning assets increased $24.6 million from the three months ended
September 30, 1997 to the three months ended September 30, 1998.
<PAGE>
Management's goal is to achieve 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 LIBOR and
local and regional prime rates and through the efforts to replace LIBOR based
borrowings with lower cost deposits. In addition, management intends to
gradually increase commercial business loans to approximately 15% of total
assets and commercial business (noninterest-bearing) deposits to approximately
10% of total deposits within three to five years.
Provision for Loan Losses
----------------------------
The provision for loan losses was $450,000 for both the three months ended
September 30, 1998 and the three months ended September 30, 1997. The allowance
for loan losses as a percentage of total loans was 0.71% at September 30, 1998
and 0.55% at September 30, 1997. At September 30, 1998, the allowance for loan
losses included the $2.3 million acquisition allowance adjustment as a result of
the loans acquired in the Valley Acquisition, of which approximately 58% were
commercial real estate and commercial, financial and industrial loans. Although
no assurance can be given, management believes that the present allowance for
loan losses is adequate considering the changing composition of the loans
receivable portfolio, 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 and resulting allowance for loan losses are necessary.
Noninterest Income
-------------------
For the three months ended September 30, 1998, noninterest income increased
$309,000 or 17.7% to $2.1 million, compared to $1.7 million for the three months
ended September 30, 1997. The increase in noninterest income was primarily due
to an increase of $390,000 in loan fees and service charges on deposit accounts
and a $318,000 increase in other noninterest income. The increase in loan fees
and service charges on deposit accounts consisted of a $330,000 increase in
service charges on deposit accounts and a $60,000 increase in loan fees. These
increases were somewhat offset by a $162,000 decrease in loan servicing income
and a $237,000 decrease in the gain on sales of mortgage-backed securities
available-for-sale.
Noninterest Expense
--------------------
For the three months ended September 30, 1998, noninterest expense
increased $2.3 million from the three months ended September 30, 1997.
Compensation, payroll taxes and other benefits as well as office occupancy
expense increased $1.4 million and $382,000, respectively, from the three months
ended September 30, 1997 to the three months ended September 30, 1998, 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 to the staffing expenses related to the Valley Acquisition. Occupancy
expenses also increased due to the acquisition of assets and other expenses
related to the relocation of Coastal's corporate headquarters in the third
quarter of 1997 and the acquisition of the twelve branches in the Valley
Acquisition. In addition, the amortization of goodwill increased $95,000 and
insurance premiums increased $113,000 primarily due to the Valley Acquisition.
Other changes included a $124,000 increase in real estate owned expenses, a
$59,000 increase in data processing expense and a $174,000 increase in other
operating expenses. During the three months ended September 30, 1998,
noninterest expense included approximately $120,000 in nonrecurring expenses
incurred due to the Valley Acquisition.
Provision for Federal Income Taxes
--------------------------------------
For the three months ended September 30, 1998 and 1997, the provision for
federal income taxes was $2.0 million. The provision in 1998 includes the
ongoing quarterly benefit attributable to the tax benefit issue resolved in the
first quarter of the year (a benefit of approximately $226,000 per quarter).
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, federal funds purchased 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 on a branch office or whole bank acquisition basis. At
September 30, 1998, Coastal had binding commitments to originate or purchase
loans totaling approximately $124.1 million and had $84.8 million of undisbursed
loans in process. Scheduled maturities of certificates of deposit during the 12
months following September 30, 1998 totaled $993.7 million at September 30,
1998. Management believes that Coastal has adequate resources to fund all of
its commitments. In addition, Coastal has historically experienced a retention
rate of maturing certificates of deposit of $5,000 or greater of approximately
80%.
As of September 30, 1998, Coastal operated 49 retail banking offices in
Texas cities, including Houston, Austin, Corpus Christi, the Rio Grande Valley
and small cities in the southeast quadrant of 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.
The Year 2000
---------------
Many existing computer programs, including many utilized by Coastal, use
only two digits to identify a year in the date field. These programs were
designed and developed without considering the impact of the upcoming change in
the century. Because of the year 2000 implications, Coastal formally initiated
a project during the first quarter of 1997 to ensure that its operational and
financial systems will not be adversely affected by year 2000 software problems.
The year 2000 project team, which includes all levels of management, is
identifying its computer applications which could fail or create erroneous
results because of the year 2000, and is developing alternate ("contingent")
operating systems for these applications.
An inventory of all core systems and products that could be affected by the
year 2000 date change has been developed by Coastal. The software for Coastal's
systems is primarily provided through third party service bureaus and software
vendors. Coastal is requiring its third party service bureaus, software
providers and vendors to demonstrate and represent that the products provided
are or will be year 2000 compliant. Coastal has an internal compliance testing
program in place for testing with the external service bureaus and other
software providers, as well as testing other internally used systems. Coastal
expects to complete its testing and remediation by June 1999.
The costs associated with the year 2000 issues are estimated not to exceed
$300,000 in the aggregate. Such costs will be capitalized and amortized over an
estimated three to five year period.
Planning and testing will not ensure that any organization will be able to
conduct business around and after the year 2000. Testing does not ensure that
our customers and other business partners will be able to conduct business.
Coastal is performing due diligence on our customers and other business partners
by the implementation of processes for evaluating our customers' and business
partners' readiness for the year 2000 which will be continuously monitored.
Coastal has implemented procedures and continues to refine its processes
for evaluating its business readiness in addition to developing contingency
plans to ensure that alternate operating systems are available in the event of
unforeseen problems. The effect of many business disruptions at the same time
may impact Coastal. Coastal will continue to review its contingency plans to
reasonably address these incidents.
Forward-Looking Information
----------------------------
"Safe Harbor" Statement under the Private Securities Litigation Reform Act
of 1995: The statements contained in this Quarterly Report on Form 10-Q which
are not historical facts contain forward looking information with respect to
plans, projections or future performance of the Company, the occurrence of which
involve certain risks and uncertainties detailed in the Company's filings with
the Securities and Exchange Commission ("SEC").
The Management's Discussion and Analysis of Financial Condition and Results
of Operations set forth in the Form 10-Q should be read in conjunction with the
information contained in the Consolidated Financial Statements and the Notes
thereto. Such discussion 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; risks involved in
Coastal's ability to quickly and efficiently integrate the operations of
acquired entities with those of Coastal; 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
real estate, commercial business, 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 for the year ended December 31, 1997, as
filed with the SEC on March 24, 1998.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
--------------------------------------------------------------
There have been no material changes in Coastal's interest rate risk
position since December 31, 1997. Coastal's principal market risk exposure is to
interest rates. See note 8 of the Notes to Consolidated Financial Statements.
<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
------------------
Important Dates Relating to Stockholder Proposals for the 1999 Annual
Meeting of Shareholders.
---------------------------------------------------------------------------
As noted in the Company's definitive Proxy Statement for the Annual Meeting
of Stockholders to be held April 23, 1998 under the caption "Stockholder
Proposals," any proposal which a stockholder of the Company wishes to have
included in the Company's proxy solicitation materials to be used in connection
with the Company's 1999 Annual Meeting of Shareholders, must be received at the
principal executive offices of the Company, Coastal Banc Plaza, 5718 Westheimer,
Suite 600, Houston, Texas 77057, Attention: Secretary, no later than November
24, 1998.
If the notice of such proposal is received after November 24, 1998, it will
not be considered timely pursuant to Proxy Rule 14a-8 and such proposal will not
be included in the Company's proxy soliciting materials.
STOCKHOLDER PROPOSALS WHICH ARE NOT SUBMITTED FOR INCLUSION IN THE
COMPANY'S PROXY MATERIALS PURSUANT TO RULE 14A-8 UNDER THE SECURITIES EXCHANGE
ACT OF 1934 MAY BE BROUGHT BEFORE AN ANNUAL MEETING PURSUANT TO THE COMPANY'S
ARTICLES OF INCORPORATION, WHICH PROVIDE THAT BUSINESS MUST BE PROPERLY BROUGHT
BEFORE THE MEETING BY OR AT THE DIRECTION OF THE BOARD OF DIRECTORS, OR
OTHERWISE PROPERLY BROUGHT BEFORE THE MEETING BY A STOCKHOLDER. FOR BUSINESS TO
BE PROPERLY BROUGHT BEFORE AN ANNUAL MEETING BY A STOCKHOLDER, THE STOCKHOLDER
MUST HAVE GIVEN TIMELY NOTICE THEREOF IN WRITING TO THE SECRETARY OF THE
COMPANY. TO BE TIMELY, A STOCKHOLDER'S NOTICE MUST BE DELIVERED TO, OR MAILED
AND RECEIVED AT, THE PRINCIPAL EXECUTIVE OFFICES OF THE COMPANY ON OR BEFORE
JANUARY 23, 1999.* A STOCKHOLDER'S NOTICE SHALL SET FORTH AS TO EACH MATTER THE
STOCKHOLDER PROPOSES TO BRING BEFORE AN ANNUAL MEETING FOR SUCH INFORMATION
REQUIRED BY THE COMPANY'S ARTICLES OF INCORPORATION. IF THE PROPOSAL IS NOT
MADE IN ACCORDANCE WITH THE TERMS OF THE ARTICLES OF INCORPORATION, SUCH
PROPOSAL WILL NOT BE ACTED UPON AT THE 1999 ANNUAL MEETING.
______________
*[WHICH IS THE DATE WHICH IS NOT LESS THAN 60 DAYS PRIOR TO THE ANNIVERSARY DATE
OF THE MAILING OF PROXY MATERIALS BY THE COMPANY IN CONNECTION WITH THE
IMMEDIATELY PRECEDING ANNUAL MEETING OF STOCKHOLDERS.]
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) Form 8-K filed on August 25, 1998 concerning the announcement that
Coastal had completed the acquisition of the Valley Branches of Pacific
Southwest Bank also known as San Benito Bank and Trust, a Unit of Pacific
Southwest Bank.
(c) Form 8-K filed on September 14, 1998 concerning the announcement that
the Board of Directors had authorized the repurchase of up to 6.6%
(approximately 500,000 shares) of the outstanding shares of common stock.
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: 11/13/98 By/s/ Manuel J. Mehos
-------- ----------------------
Manuel J. Mehos
Chairman of the Board
Chief Executive Officer
Dated: 11/13/98 By/s/ Catherine N. Wylie
-------- -----------------------
Catherine N. Wylie
Chief Financial Officer
Exhibit 27
Financial Data Schedule
Exhibit 99
Forward-Looking Information
EXHIBIT 99
Forward-Looking Information
"Safe Harbor" Statement under the Private Securities Litigation Reform Act
of 1995: The statements contained in this Quarterly Report on Form 10-Q which
are not historical facts contain forward looking information with respect to
plans, projections or future performance of the Company, the occurrence of which
involve certain risks and uncertainties detailed in the Company's filings with
the Securities and Exchange Commission ("SEC").
The Management's Discussion and Analysis of Financial Condition and Results
of Operations set forth in the Form 10-Q should be read in conjunction with the
information contained in the Consolidated Financial Statements and the Notes
thereto. Such discussion 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; risks involved in
Coastal's ability to quickly and efficiently integrate the operations of
acquired entities with those of Coastal; 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
real estate, commercial business, 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 for the year ended December 31, 1997, as
filed with the SEC on March 24, 1998.
template1
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated statement of financial condition, the consolidated statement of
income and notes thereto found on pages 1 through 17 of the Company's Form
10-Q for the year-to-date September 30, 1998 and is qualified in its entirety by
reference to such financial statements
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 56,200
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 4,300
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 127,795
<INVESTMENTS-CARRYING> 1,234,840
<INVESTMENTS-MARKET> 1,232,914
<LOANS> 1,545,507
<ALLOWANCE> 11,043
<TOTAL-ASSETS> 3,126,286
<DEPOSITS> 1,704,571
<SHORT-TERM> 938,309
<LIABILITIES-OTHER> 59,343
<LONG-TERM> 308,650
0
0
<COMMON> 50
<OTHER-SE> 114,580
<TOTAL-LIABILITIES-AND-EQUITY> 3,126,286
<INTEREST-LOAN> 87,495
<INTEREST-INVEST> 67,938
<INTEREST-OTHER> 2,007
<INTEREST-TOTAL> 157,440
<INTEREST-DEPOSIT> 48,166
<INTEREST-EXPENSE> 108,903
<INTEREST-INCOME-NET> 48,537
<LOAN-LOSSES> 2,350
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 35,334
<INCOME-PRETAX> 15,605
<INCOME-PRE-EXTRAORDINARY> 13,661
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,661
<EPS-PRIMARY> 1.81
<EPS-DILUTED> 1.75
<YIELD-ACTUAL> 0
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 7,412
<CHARGE-OFFS> 1,235
<RECOVERIES> 259
<ALLOWANCE-CLOSE> 11,043
<ALLOWANCE-DOMESTIC> 11,043
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
