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 June 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 ISSUED AND OUTSTANDING: 7,565,913 AS OF JULY 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 June 30, 1998
(unaudited) and December 31, 1997 1
Consolidated Statements of Income for the Six-Month Periods Ended
June 30, 1998 and 1997 (unaudited) 2
Consolidated Statements of Income for the Three-Month Periods Ended
June 30, 1998 and 1997 (unaudited) 3
Consolidated Statements of Comprehensive Income (Loss) for the Six-Month
Periods Ended June 30, 1998 and 1997 (unaudited) 4
Consolidated Statements of Cash Flows for the Six-Month Periods
Ended June 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 17
Item 3 Quantitative and Qualitative Disclosures About Market Risk 23
</TABLE>
PART II. OTHER INFORMATION
- --------- ------------------
<TABLE>
<CAPTION>
<S> <C> <C>
Item 1 Legal Proceedings 24
Item 2 Changes in Securities 24
Item 3 Default upon Senior Securities 24
Item 4 Submission of Matters to a Vote of Security Holders 24
Item 5 Other Information 25
Item 6 Exhibits and Reports on Form 8-K 25
</TABLE>
SIGNATURES
ITEM 1. FINANCIAL STATEMENTS
- -------- ---------------------
<TABLE>
<CAPTION>
COASTAL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(IN THOUSANDS, EXCEPT SHARE DATA)
June 30, December 31,
1998 1997
------------ ---------------
ASSETS (Unaudited)
- ------------------------------------------------
<S> <C> <C> <C>
Cash and amounts due from depository institutions $ 25,824 $ 37,096
Loans receivable (note 4) 1,413,328 1,261,435
Mortgage-backed securities held-to-maturity (note 3) 1,283,521 1,345,090
Mortgage-backed securities available-for-sale, at market
value (note 3) 159,677 169,997
Accrued interest receivable 15,349 14,813
Property and equipment 22,513 22,250
Stock in the Federal Home Loan Bank of Dallas (FHLB) 31,694 27,801
Goodwill 14,774 15,717
Mortgage servicing rights 4,865 5,653
Prepaid expenses and other assets 8,983 11,558
------------ ----------
$ 2,980,528 $2,911,410
============ ==========
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
---------------------------------------
<S> <C> <C>
Liabilities:
Savings deposits (note 5) $1,358,899 $1,375,060
Advances from the FHLB (note 6) 624,838 540,475
Securities sold under agreements to repurchase (note 6) 777,712 791,760
Senior notes payable (note 7) 50,000 50,000
Advances from borrowers for taxes and insurance 9,438 3,975
Other liabilities and accrued expenses 16,181 16,560
Total liabilities 2,837,068 2,777,830
----------- -----------
9.0% noncumulative preferred stock of Coastal Banc ssb 28,750 28,750
Commitments and contingencies (notes 4 and 8)
Stockholders' equity (notes 3, 9 and 10):
Preferred stock, no par value; authorized shares 5,000,000;
no shares issued -- --
Common stock, $.00667 par value; authorized shares
45,000,000; 7,562,535 and 7,513,389 shares issued and
outstanding in 1998 and 1997, respectively 50 50
Additional paid-in capital 33,657 33,186
Retained earnings 82,579 73,868
Accumulated other comprehensive income (loss) -
unrealized loss on securities available-for-sale (1,576) (2,274)
Total stockholders' equity 114,710 104,830
----------- -----------
$2,980,528 $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>
Six Months Ended
June 30,
1998 1997
------- -------
(Unaudited)
<S> <C> <C>
Interest income:
Mortgage-backed securities $ 46,198 $46,401
Loans receivable 56,027 52,430
Federal funds sold, certificates of deposit and other investments 1,036 671
103,261 99,502
----------- -------
Interest expense:
Savings deposits 30,999 30,545
Other borrowed money 23,041 27,776
Senior notes payable 2,500 2,500
Advances from the FHLB:
Short-term 7,579 3,712
Long-term 7,860 6,057
----------- -------
71,979 70,590
----------- -------
Net interest income 31,282 28,912
Provision for loan losses 1,900 900
Net interest income after provision for loan losses 29,382 28,012
----------- -------
Noninterest income:
Loan fees and service charges on deposit accounts 2,466 1,875
Loan servicing income, net 400 764
Writedown of purchased mortgage loan premium (709) --
Other 543 380
2,700 3,019
----------- -------
Noninterest expense:
Compensation, payroll taxes and other benefits 10,097 9,318
Office occupancy 4,031 3,264
Insurance premiums 525 545
Data processing 1,181 1,110
Amortization of goodwill 943 882
Real estate owned 423 482
Other 3,718 3,850
20,918 19,451
----------- -------
Income before provision (benefit) for Federal income taxes 11,164 11,580
Provision (benefit) for Federal income taxes (note 11) (50) 4,229
----------- -------
Net income before preferred stock dividends 11,214 7,351
Preferred stock dividends of Coastal Banc ssb (Series A) 1,294 1,294
----------- -------
Net income available to common stockholders $ 9,920 $ 6,057
=========== =======
Basic earnings per share (note 9) $ 1.31 $ 0.81
=========== =======
Diluted earnings per share (note 9) $ 1.27 $ 0.79
=========== =======
</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
June 30,
1998 1997
-------- --------
(Unaudited)
<S> <C> <C>
Interest income:
Mortgage-backed securities $ 22,752 $23,209
Loans receivable 29,087 26,415
Federal funds sold, certificates of deposit and other investments 534 274
52,373 49,898
------------- -------
Interest expense:
Savings deposits 15,492 15,379
Other borrowed money 11,812 13,996
Senior notes payable 1,250 1,250
Advances from the FHLB:
Short-term 3,624 1,856
Long-term 3,913 3,153
------------- -------
36,091 35,634
------------- -------
Net interest income 16,282 14,264
Provision for loan losses 450 450
Net interest income after provision for loan losses 15,832 13,814
------------- -------
Noninterest income:
Loan fees and service charges on deposit accounts 1,142 981
Loan servicing income, net 160 357
Other 351 212
1,653 1,550
------------- -------
Noninterest expense:
Compensation, payroll taxes and other benefits 5,157 4,693
Office occupancy 2,042 1,653
Insurance premiums 260 274
Data processing 573 597
Amortization of goodwill 474 445
Real estate owned 171 243
Other 1,906 1,989
10,583 9,894
------------- -------
Income before provision for Federal income taxes 6,902 5,470
Provision for Federal income taxes (note 11) 2,276 2,004
------------- -------
Net income before preferred stock dividends 4,626 3,466
Preferred stock dividends of Coastal Banc ssb (Series A) 647 647
------------- -------
Net income available to common stockholders $ 3,979 $ 2,819
============= =======
Basic earnings per share (note 9) $ 0.53 $ 0.38
============= =======
Diluted earnings per share (note 9) $ 0.51 $ 0.37
============= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements
<PAGE>
COASTAL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------
1998 1997
-------- -------
(Unaudited)
<S> <C> <C>
Net income available to common stockholders $ 9,920 $6,057
Other comprehensive income (loss), net of tax:
Unrealized holding gains (losses) on securities available-for-sale
arising during period 698 (481)
--------- -------
Total comprehensive income $ 10,618 $5,576
========= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements
<PAGE>
COASTAL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1998 1997
------------- ------------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income before preferred stock dividends $ 11,214 $ 7,351
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization of property and equipment,
mortgage servicing rights and prepaid expenses and other assets 4,087 3,397
Net premium amortization 1,985 516
Provision for loan losses 1,900 900
Amortization of goodwill 943 882
Originations and purchases of mortgage loans held for sale (11,299) (6,549)
Sales of mortgage loans held for sale 11,050 6,490
Decrease (increase) in:
Accrued interest receivable (536) (428)
Other, net 2,459 8,936
Stock dividends from the FHLB (882) (644)
------------ ------------
Net cash provided by operating activities 20,921 20,851
------------ ------------
Cash flows from investing activities:
Net increase in federal funds sold -- (6,300)
Purchase of mortgage-backed securities held-to-maturity -- (257)
Principal repayments on mortgage-backed securities held-to-maturity 61,518 21,976
Principal repayments on mortgage-backed securities
available-for-sale 11,392 255
Proceeds from maturity of U.S. Treasury security available-for-sale -- 11
Purchases of loans receivable (273,600) (113,194)
Net decrease in loans receivable 116,140 1,872
Net purchases of property and equipment (2,180) (6,115)
Purchase of FHLB stock (3,011) (2,556)
Proceeds from sales of FHLB stock -- 9,000
Cash and cash equivalents received in business combination
transaction -- 52,119
----------- ------------
Net cash used by investing activities (89,741) (43,189)
----------- ------------
(continued)
</TABLE>
<PAGE>
COASTAL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(IN THOUSANDS)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1998 1997
------------------ ------------
(Unaudited)
<S> <C> <C>
Cash flows from financing activities:
Net decrease in savings deposits $ (16,198) $ (700)
Advances from the FHLB 1,948,839 2,087,700
Principal payments on advances from the FHLB (1,864,476) (2,099,484)
Securities sold under agreements to repurchase 3,602,376 5,192,412
Purchases of securities sold under agreements to repurchase (3,616,424) (5,161,000)
Exercise of stock options for purchase of common stock, net 471 63
Net increase in advances from borrowers for taxes and insurance 5,463 5,806
Dividends paid (2,503) (2,387)
------------------ ------------
Net cash provided by financing activities 57,548 22,410
------------------ ------------
Net increase (decrease) in cash and cash equivalents (11,272) 72
Cash and cash equivalents at beginning of period 37,096 27,735
------------------ ------------
Cash and cash equivalents at end of period $ 25,824 $ 27,807
================== ============
Supplemental schedule of cash flows-interest paid $ 70,583 $ 69,390
================== ============
Supplemental schedule of noncash investing and financing activities:
Foreclosures of loans receivable $ 2,020 $ 3,065
================== ============
In connection with the purchase of a branch office in 1997, Coastal
recorded the following assets and liabilities:
Savings deposits acquired $ -- $ 54,563
Goodwill -- 1,935
Accrued interest payable and other liabilities acquired -- 184
Property and equipment acquired -- 693
================== ============
</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 June 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.
(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 June 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> <C> <C>
Held-to-Maturity:
REMICS - Agency $ 919,630 $ 6,373 $ (13,098) $ 912,905
REMICS - Non-agency 262,086 672 (5,090) 257,668
FNMA certificates 63,444 132 (848) 62,728
GNMA certificates 25,039 1,141 -- 26,180
Non-agency securities 13,311 200 (68) 13,443
Interest-only securities 11 -- -- 11
$ 1,283,521 $ 8,518 $ (19,104) $ 1,272,935
=========== ======= ========== ===========
Available-for-sale:
REMICS - Agency $ 160,190 $ 186 $ (2,600) $ 157,776
REMICS - Non-agency 1,912 -- (11) 1,901
----------- ------- ---------- -----------
$ 162,102 $ 186 $ (2,611) $ 159,677
=========== ======= ========== ===========
</TABLE>
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> <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 June 30, 1998 and December 31, 1997 were as follows
(dollars in thousands):
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997
--------------- -----------------
(Unaudited)
<S> <C> <C> <C>
Real estate mortgage loans:
First-lien mortgage, primarily residential $ 790,371 $ 689,767
Commercial 187,245 181,315
Multifamily 121,384 131,454
Residential construction 83,778 83,359
Acquisition and development 39,111 31,619
Commercial construction 14,013 14,506
Commercial loans, secured by residential mortgage
loans held for sale 141,285 98,679
Commercial loans, secured by mortgage servicing 19,420 32,685
rights
Commercial, financial and industrial 33,938 30,877
Loans secured by savings deposits 8,039 8,695
Consumer and other loans 35,861 15,030
--------------- -----------
1,474,445 1,317,986
Loans in process (52,767) (47,893)
Allowance for loan losses (8,850) (7,412)
Unearned interest and loan fees (2,758) (2,926)
Premium to record purchased loans, net 3,258 1,680
--------------- -----------
$ 1,413,328 $1,261,435
=============== ===========
Weighted average yield 8.37% 8.30%
=============== ===========
</TABLE>
At June 30, 1998, Coastal had outstanding commitments to originate or
purchase $70.3 million of real estate mortgage and other loans and had
commitments under lines of credit to originate primary construction and other
loans of approximately $120.4 million. In addition, at June 30, 1998, Coastal
had $2.4 million of outstanding letters of credit. Management anticipates the
funding of these commitments through normal operations.
At June 30, 1998 and December 31, 1997, the carrying value of loans that
were considered to be impaired totaled approximately $1.7 million and $2.0
million, respectively (all of which were on nonaccrual), and the related
allowance for loan losses on those impaired loans totaled $1.2 million and $1.1
million at June 30, 1998 and December 31, 1997, respectively. The average
recorded investment in impaired loans during the six months ended June 30, 1998
and 1997 was $1.7 million and $735,000, respectively.
<PAGE>
An analysis of activity in the allowance for loan losses for the six months
ended June 30, 1998 and 1997 is as follows (in thousands):
<TABLE>
<CAPTION>
Six months ended June 30,
--------------------------
1998 1997
------------ -------
(Unaudited)
<S> <C> <C> <C>
Balance, beginning of period $ 7,412 $6,880
Provision for loan losses 1,900 900
Charge-offs, net of recoveries (462) (918)
------------ -------
Balance, end of period $ 8,850 $6,862
============ =======
</TABLE>
Coastal services for others loans receivable which are not included in the
Consolidated Financial Statements. The total amounts of such loans were $595.8
million and $675.7 million at June 30, 1998 and December 31, 1997, respectively.
<PAGE>
(5) SAVINGS DEPOSITS
Savings deposits, their stated rates and the related weighted average
interest rates at June 30, 1998 and December 31, 1997 are summarized as follows
(dollars in thousands):
<TABLE>
<CAPTION>
Stated Rate June 30, 1998 December 31, 1997
-------------- -------------- -------------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Noninterest-bearing checking 0.00% $ 38,488 $ 101,782
Interest-bearing checking 1.49 - 2.00 5,093 69,972
Savings accounts 2.18 - 2.75 25,806 25,555
Money market demand accounts 0.00 - 4.60 296,674 165,986
---------- -----------
366,061 363,295
--------- -----------
Certificate accounts 2.00 - 2.99 6,934 5,142
3.00 - 3.99 3,732 2,763
4.00 - 4.99 67,130 64,478
5.00 - 5.99 823,932 834,727
6.00 - 6.99 84,488 94,405
7.00 - 7.99 4,883 7,624
8.00 - 8.99 1,472 1,854
9.00 - 9.99 305 847
992,876 1,011,840
--------- -----------
Discount to record savings deposits
at fair value, net (38) (75)
--------- -----------
$ 1,358,899 $ $1,375,060
=========== ==============
Weighted average rate 4.58% 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 June 30,
1998 were as follows (dollars in thousands):
<TABLE>
<CAPTION>
June 30, 1998
---------------
(Unaudited)
<S> <C>
0 to 12 months. $ 829,997
12 to 24 months 129,368
24 to 36 months 19,197
36 to 48 months 6,281
48 to 60 months 7,927
Over 60 months. 106
---------------
$ 992,876
===============
</TABLE>
(6) SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND FHLB ADVANCES
(a) The weighted average interest rates on securities sold under
agreements to repurchase at June 30, 1998 and December 31, 1997 were 5.52% and
6.00%, respectively. The stated interest rates on securities sold under
agreements to repurchase ranged from 4.93% to 5.69% at June 30, 1998.
(b) The weighted average interest rates on advances from the FHLB at
June 30, 1998 and December 31, 1997 were 5.57% and 5.95%, respectively. The
scheduled maturities and related weighted average interest rates on advances
from the FHLB at June 30, 1998 are summarized as follows (dollars in thousands)
(unaudited):
<TABLE>
<CAPTION>
Due during the year ended December 31, Weighted Average
Interest Rate Amount
- -------------------------------------- ----------------- ---------
<S> <C> <C> <C>
1998 5.56% $360,261
1999 5.73 115,038
2000 5.93 6,831
2001 6.22 8,552
2002 5.59 69,610
2004 6.52 2,672
2006 6.91 3,088
2007 6.79 1,041
2008 4.70 51,189
2009 8.25 4,356
2011 6.78 1,253
2013 6.05 399
2018 6.00 548
--------
$624,838
========
</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.
<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 June
30, 1998, Coastal had interest rate swap and cap agreements having notional
principal amounts totaling $45.8 million and $173.3 million, respectively.
The terms of the interest rate swap agreements outstanding at June 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 June 30, 1998:
1998 $ 4,400 Three-month 6.709% 5.699% $ (14)
1999 14,600 Three-month 6.926 5.699 (205)
2000 4,800 Three-month 6.170 5.688 (116)
2,450 Three-month 6.000 5.688 (9)
2005 19,527 Three-month 6.500 5.688 (382)
---------
$ 45,777 $ (726)
========= ===========
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)
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
5.79% and the weighted average interest payment rate on all of the interest rate
swap agreements was approximately 6.60% for the six months ended June 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 $185,000 for the six months ended June 30, 1998 and
approximately $246,000 for the six months ended June 30, 1997. Coastal had
pledged approximately $548,000 of mortgage-backed securities to secure interest
rate swap agreements at June 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 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 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 $113,000 and $286,000 at June 30, 1998 and December 31, 1997,
respectively, with the estimated fair value of the agreements being $124,000 and
$300,000 at June 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 $30,000 and
$201,000 for the six months ended June 30, 1998 and 1997, respectively.
Interest rate cap agreements outstanding at June 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 - 12.50% $ 73,200
1999 7.25 - 11.00 63,564
2000 8.50 - 9.50 11,620
2001 7.00 - 9.00 24,915
---------
$ 173,299
=========
</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 six- and three- month periods
ended June 30, 1998 and 1997 (dollars in thousands, except per share data):
<TABLE>
<CAPTION>
Six Months Ended
June 30,
----------------
<S> <C> <C> <C>
1998 1997
---------- ----------
Net income available to common stockholders $ 9,920 $ 6,057
========== ==========
Weighted average number of common shares
outstanding used in basic EPS calculation 7,550,276 7,454,151
Add assumed exercise of outstanding stock
options as adjusted for dilutive securities 265,364 221,312
---------- ----------
Weighted average number of common shares
outstanding used in diluted EPS calculation 7,815,640 7,675,463
========== ==========
Basic EPS $ 1.31 $ 0.81
========== ==========
Diluted EPS $ 1.27 $ 0.79
========== ==========
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
June 30,
<S> <C> <C> <C>
1998 1997
---------- ----------
Net income available to common stockholders $ 3,979 $ 2,819
========== ==========
Weighted average number of common shares
outstanding used in basic EPS calculation 7,559,922 7,456,092
Add assumed exercise of outstanding stock
options as adjusted for dilutive securities 277,562 232,749
---------- ----------
Weighted average number of common shares
outstanding used in diluted EPS calculation 7,837,484 7,688,841
========== ==========
Basic EPS $ 0.53 $ 0.38
========== ==========
Diluted EPS $ 0.51 $ 0.37
========== ==========
</TABLE>
(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%.
<PAGE>
At June 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) $ 169,875 5.78% $117,636 4.00% $147,016 5.00%
Tier 1 risk-based 169,875 11.30 60,127 4.00 90,191 6.00
Total risk-based 178,725 11.89 120,255 8.00 150,319 10.00
</TABLE>
As of June 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. There are no conditions
or events since that notification that management believes have changed the
institution's category.
(11) 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 six months ended June 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 June 30, 1998. This tax
benefit is expected to continue for approximately 3 to 4 years.
(12) 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.
(13) PENDING BRANCH PURCHASE
On May 4, 1998, Coastal announced the execution of a definitive agreement
to purchase the Valley Branches of Pacific Southwest Bank, also known as San
Benito Bank and Trust Company, a unit of Pacific Southwest Bank. Twelve
branches located in Harlingen, San Benito, Mission, Pharr, Edinburg,
Brownsville, McAllen and South Padre with deposits of approximately $357 million
and loans of approximately $175 million, will be acquired in this transaction.
The acquisition is expected to close in the third quarter of 1998.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
---------------------------------------------------------------
Financial Condition
- --------------------
Total assets increased 2.4% or $69.1 million from December 31, 1997 to June
30, 1998. The net increase resulted primarily from an increase in loans
receivable of $151.9 million and a $3.9 million increase in Stock in the Federal
Home Loan Bank of Dallas, offset by decreases of $61.6 million, $11.3 million
and $10.3 million in mortgage-backed securities held-to-maturity, cash and
amounts due from depository institutions and mortgage-backed securities
available-for-sale, respectively. The increase in loans receivable was
primarily due to bulk residential mortgage loan purchases of $258.0 million and
$15.5 million of consumer loan purchases from correspondent lenders, in addition
to an increase of $42.6 million in commercial loans, secured by residential
mortgage loans held for sale, during the six months ended June 30, 1998. These
increases were somewhat offset by principal payments received. The decrease in
mortgage-backed securities was due to principal payments received.
Savings deposits decreased slightly by 1.2% or $16.2 million from December
31, 1997 to June 30, 1998. Securities sold under agreements to repurchase also
decreased 1.8% or $14.0 million and advances from the FHLB increased 15.6% or
$84.4 million from December 31, 1997 to June 30, 1998. Stockholders' equity
increased 9.4% or $9.9 million from December 31, 1997 to June 30, 1998 as a
result primarily of net income and a $698,000 decrease in accumulated other
comprehensive income (loss) offset by dividends declared.
Results of Operations for the Six Months Ended June 30, 1998 and 1997
- --------------------------------------------------------------------------------
General
- -------
For the six months ended June 30, 1998, net income before preferred stock
dividends was $11.2 million compared to $7.4 million for the six months ended
June 30, 1997. The increase in net income in the first six 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 June 30, 1998). This tax benefit is expected to continue for approximately 3
to 4 years.
The positive effect of the tax benefit issue resolution was somewhat offset
by the recording in the first six months of 1998 of an additional provision for
loan losses of $1.0 million 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. This change is occurring 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 continuing into 1998,
resulting from a comparatively lower current interest rate environment.
The net benefit of recording the resolution of the tax issue after these
adjustments (net of their applicable income tax effects) amounted to $2.6
million or approximately 33 cents per diluted share. Excluding the net benefit
from these nonrecurring items recorded during the six months ended June 30,
1998, net income available to common stockholders from ongoing core operations
was $7.4 million or 94 cents per diluted share (as of June 30, 1998).
Net interest income increased $2.4 million for the six months ended June
30, 1998 as compared to the six months ended June 30, 1997. Noninterest income
(excluding the writedown of purchased mortgage loan premium) increased during
such period by $390,000. Noninterest expense increased by $1.5 million and the
provision (benefit) for federal income taxes (excluding the one-time effect of
the $3.7 million reversal of accrued income taxes) decreased by $600,000 from
the 1997 to the 1998 six 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 six months of 1998.
Interest Income
- ----------------
Interest income for the six months ended June 30, 1998 increased $3.8
million or 3.8% from the six months ended June 30, 1997. The increase was
primarily due to an increase of $3.6 million in interest earned on loans
receivable over the prior comparable period. The increase in interest income on
loans receivable was due to a $98.1 million increase in the average balance of
loans receivable offset by a decrease in the average yield from 8.44% for the
six months ended June 30, 1997 to 8.35% for the six months ended June 30, 1998.
The decrease in the average yield on loans receivable was primarily due to
$749,000 (or 6 cents per diluted share after tax) of additional amortization of
purchased mortgage loan premium during the six months ended June 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 $365,000 which was somewhat offset by a $203,000 decrease
in interest income on mortgage-backed securities. Total interest-earning assets
for the six months ended June 30, 1998 averaged $2.9 billion as compared to $2.8
billion for the six months ended June 30, 1997.
Interest Expense
- -----------------
Interest expense on interest-bearing liabilities was $72.0 million for the
six months ended June 30, 1998, as compared to $70.6 million for the same period
in 1997. The increase in interest expense was due to a $54.9 million increase
in the average balance of interest-bearing liabilities during such period offset
by a slight decrease in the average rate paid on interest-bearing liabilities
from 5.38% for the six months ended June 30, 1997 to 5.37% for the six months
ended June 30, 1998. The increase in average interest-bearing liabilities
consisted of a $204.7 million increase in FHLB advances, a $32.3 million
increase in interest-bearing savings deposits, offset by a $182.0 million
decrease in securities sold under agreements to repurchase.
Net Interest Income
- ---------------------
Net interest income was $31.3 million for the six months ended June 30,
1998 and $28.9 million for the same period in 1997. Net interest margin
("Margin") was 2.18% for the six months ended June 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 1.75% for the
six months ended June 30, 1997 to 1.82% for the six months ended June 30, 1998.
Management also calculates an alternative Spread which includes
noninterest-bearing deposits. Under this calculation, the alternative Spreads
for the six months ended June 30, 1998 and 1997 were 2.00% and 1.91%,
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 6 basis points and a decrease in the
average rate paid on interest-bearing liabilities of 1 basis point. The average
balance of loans receivable increased $98.1 million from the six months ended
June 30, 1997 to the six months ended June 30, 1998, while the average yield
decreased from 8.44% to 8.35%. The average balance of mortgage-backed
securities decreased $29.0 million from the six months ended June 30, 1997 to
the six months ended June 30, 1998, while the average yield increased from 6.09%
to 6.19%. The decrease in the average rate paid on interest-bearing liabilities
was due primarily to the overall decrease in wholesale funding costs. In
addition, average net interest-earning assets increased $26.4 million from the
six months ended June 30, 1997 to the six months ended June 30, 1998.
Spread for the six months ended June 30, 1998 was 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 $1.9 million for the six months ended
June 30, 1998 and $900,000 for the six months ended June 30, 1997. During the
six months ended June 30, 1998, Coastal recorded an additional provision for
loan losses of $1.0 million 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 0.63% at June
30, 1998 and 0.51% at June 30, 1997. 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 six months ended June 30, 1998, noninterest income (excluding the
writedown of purchased mortgage loan premium) increased $390,000 or 12.9% to
$3.4 million, compared to $3.0 million for the six months ended June 30, 1997.
The increase in noninterest income was primarily due to an increase of $591,000
in loan fees and service charges on deposit accounts and a $163,000 increase in
other noninterest income. The increase in loan fees and service charges on
deposit accounts consisted of a $189,000 increase in loan fees and a $402,000
increase in service charges on deposit accounts due to the increase in
transaction type deposit accounts. These increases were somewhat offset by a
$364,000 decrease in loan servicing income due to the reducing servicing
portfolio. In addition, as discussed previously, during the six months ended
June 30, 1998, Coastal recorded a writedown of purchased mortgage loan premium
of $709,000.
Noninterest Expense
- --------------------
For the six months ended June 30, 1998, noninterest expense increased $1.5
million from the six months ended June 30, 1997. Compensation, payroll taxes
and other benefits as well as office occupancy expense increased $779,000 and
$767,000, respectively, from the six months ended June 30, 1997 to the six
months ended June 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, 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. In
addition, data processing expenses and the amortization of goodwill increased
$71,000 and $61,000, respectively. Other changes included a $59,000 decrease in
real estate owned expenses, a $20,000 decrease in insurance premiums (which
includes deposit insurance premiums) and a $132,000 decrease in other operating
expenses.
Provision (Benefit) for Federal Income Taxes
- -------------------------------------------------
For the six months ended June 30, 1998, the provision (benefit) for federal
income taxes (excluding the one-time effect of the $3.7 million reversal of
accrued income taxes) was $3.6 million compared to $4.2 million for the six
months ended June 30, 1997. The decrease from 1997 to 1998 was due primarily to
the ongoing quarterly benefit attributable to the tax benefit issue 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 six months
of 1998.
Results of Operations for the Three Months Ended June 30, 1998 and 1997
- --------------------------------------------------------------------------------
General
- -------
For the three months ended June 30, 1998, net income before preferred stock
dividends was $4.6 million compared to $3.5 million for the three months ended
June 30, 1997. The increase was primarily due to a $2.0 million increase in
net interest income for the three months ended June 30, 1998 as compared to the
three months ended June 30, 1997. Noninterest income increased during such
period by $103,000. Noninterest expense increased by $689,000 and the provision
for federal income taxes increased by $272,000 from the 1997 to the 1998 three
month period.
Interest Income
- ----------------
Interest income for the three months ended June 30, 1998 increased $2.5
million or 5.0% from the three months ended June 30, 1997. The increase was
primarily due to an increase of $2.7 million in interest earned on loans
receivable over the prior comparable quarter. The increase in interest income
on loans receivable was due to a $121.5 million increase in the average balance
of loans receivable and an increase in the average yield from 8.47% for the
three months ended June 30, 1997 to 8.50% for the three months ended June 30,
1998.
In addition, interest income on federal funds sold, certificates of deposit
and other investments increased $260,000 while interest income on
mortgage-backed securities decreased $457,000 due to a lower average balance.
Total interest-earning assets for the three months ended June 30, 1998 averaged
$2.9 billion as compared to $2.8 billion for the three months ended June 30,
1997.
Interest Expense
- -----------------
Interest expense on interest-bearing liabilities was $36.1 million for the
three months ended June 30, 1998, as compared to $35.6 million for the same
period in 1997. The increase in interest expense was due to a $70.3 million
increase in the average balance of interest-bearing liabilities during such
period offset somewhat by a decrease in the average rate paid on
interest-bearing liabilities from 5.45% for the three months ended June 30, 1997
to 5.35% for the three months ended June 30, 1998. The increase in average
interest-bearing liabilities consisted of a $189.0 million increase in FHLB
advances, a $30.5 million increase in interest-bearing savings deposits, offset
by a $148.8 million decrease in securities sold under agreements to repurchase.
Net Interest Income
- ---------------------
Net interest income was $16.3 million for the three months ended June 30,
1998 and $14.3 million for the same period in 1997. Net interest margin
("Margin") was 2.26% for the three months ended June 30, 1998 compared to 2.05%
for the three months ended June 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
1.71% for the three months ended June 30, 1997 to 1.92% for the three months
ended June 30, 1998. Management also calculates an alternative Spread which
includes noninterest-bearing deposits. Under this calculation, the alternative
Spreads for the three months ended June 30, 1998 and 1997 were 2.08% 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
overall increase in net interest spread was primarily due to an increase in the
average yield on interest-earning assets of 11 basis points and a decrease in
the average rate paid on interest-bearing liabilities of 10 basis points. The
average balance of loans receivable increased $121.5 million from the three
months ended June 30, 1997 to the three months ended June 30, 1998, while the
average yield increased from 8.47% to 8.50%. The average balance of
mortgage-backed securities decreased $42.0 million from the three months ended
June 30, 1997 to the three months ended June 30, 1998, while the average yield
increased from 6.11% to 6.16%. The decrease in the average rate paid on
interest-bearing liabilities was due primarily to the overall decrease in
wholesale funding costs. In addition, average net interest-earning assets
increased $25.1 million from the three months ended June 30, 1997 to the three
months ended June 30, 1998.
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 the three months ended June
30, 1998 and for the three months ended June 30, 1997. The allowance for loan
losses as a percentage of total loans was 0.63% at June 30, 1998 and 0.51% at
June 30, 1997. 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 June 30, 1998, noninterest income increased
$103,000 or 6.7% to $1.7 million, compared to $1.6 million for the three months
ended June 30, 1997. The increase in noninterest income was primarily due to an
increase of $161,000 in loan fees and service charges on deposit accounts and a
$139,000 increase in other noninterest income. These increases were somewhat
offset by a $197,000 decrease in loan servicing income.
Noninterest Expense
- --------------------
For the three months ended June 30, 1998, noninterest expense increased
$689,000 from the three months ended June 30, 1997. Compensation, payroll taxes
and other benefits as well as office occupancy expense increased $464,000 and
$389,000, respectively, from the three months ended June 30, 1997 to the three
months ended June 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, 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. In
addition, the amortization of goodwill increased $29,000. Other changes
included a $72,000 decrease in real estate owned expenses, a $24,000 decrease in
data processing expense, a $14,000 decrease in insurance premiums and a $83,000
decrease in other operating expenses.
Provision for Federal Income Taxes
- --------------------------------------
For the three months ended June 30, 1998, the provision for federal income
taxes was $2.3 million compared to $2.0 million for the three months ended June
30, 1997.
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
June 30, 1998, Coastal had binding commitments to originate or purchase loans
totaling approximately $70.3 million and had $52.8 million of undisbursed loans
in process. Scheduled maturities of certificates of deposit during the 12 months
following June 30, 1998 totaled $830.0 million at June 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 June 30, 1998, Coastal operated 37 retail banking offices in Texas
cities, including Houston, Austin, Corpus Christi 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, such as 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 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. The software for Coastal's systems is
primarily provided through third party service bureaus and software vendors.
Coastal is requiring its software providers and vendors to demonstrate and
represent that the products provided are or will be year 2000 compliant.
Coastal has an internal testing program in place for testing for compliance.
The costs associated with the year 2000 issues are estimated to approximate
$75,000 to $100,000. Such costs will be capitalized and amortized over an
estimated three to five year period.
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.
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 are 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 Securities and Exchange Commission (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
-----------------------------------------------------------
On April 23, 1998, at the Annual Meeting of Stockholders of Coastal
Bancorp, Inc. (the Company), the stockholders voted upon and approved the
election of three directors and the ratification of the appointment of KPMG Peat
Marwick LLP as the Company's independent auditors for the fiscal year ending
December 31, 1998. With respect to such matters, the results of the votes were
as follows (retroactively adjusted for the effect of the stock split):
1) Election of directors:
<TABLE>
<CAPTION>
Number of Votes
---------------
In favor Withheld
--------- --------
<S> <C> <C>
R. Edwin Allday. . . 5,648,337 131,172
D. Fort Flowers, Jr. 5,649,237 130,272
Dennis S. Frank. . . 5,649,087 130,422
</TABLE>
2) Ratification of KPMG Peat Marwick LLP as the Company's independent
auditors for the year ended December 31, 1998:
<TABLE>
<CAPTION>
<S> <C>
Number of votes in favor 5,753,532
Number of votes against 24,740
Number of votes abstaining 1,237
</TABLE>
<PAGE>
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
immediate 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 April 28, 1998 concerning the declaration of a 3:2
stock split to be paid on June 15, 1998 to stockholders of record on May 15,
1998.
(c) Form 8-K filed on May 6, 1998 concerning the announcement that Coastal
had executed a definitive agreement to purchase the Valley Branches of Pacific
Southwest Bank also known as San Benito Bank and Trust, a Unit of Pacific
Southwest Bank.
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: 8/14/98 By/s/ Manuel J. Mehos
------- ----------------------------
Manuel J. Mehos
Chairman of the Board
Chief Executive Officer
Dated: 8/14/98 By/s/ Catherine N. Wylie
------- --------------------------
Catherine N. Wylie
Chief Financial Officer
Exhibit 27
Financial Data Schedule
Exhibit 99
Forward-Looking Information
<PAGE>
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.
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 are 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 Securities and Exchange Commission (SEC) on March 24, 1998.
<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 14 of the Company's Form
10-Q for the year-to-date June 30, 1998 and is qualified in its entirety by
reference to such financial statements
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 25,824
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 159,677
<INVESTMENTS-CARRYING> 1,283,521
<INVESTMENTS-MARKET> 1,324,968
<LOANS> 1,413,328
<ALLOWANCE> 8,850
<TOTAL-ASSETS> 2,980,528
<DEPOSITS> 1,358,899
<SHORT-TERM> 1,151,767
<LIABILITIES-OTHER> 54,369
<LONG-TERM> 300,783
0
0
<COMMON> 50
<OTHER-SE> 116,236
<TOTAL-LIABILITIES-AND-EQUITY> 2,980,528
<INTEREST-LOAN> 56,027
<INTEREST-INVEST> 46,198
<INTEREST-OTHER> 1,036
<INTEREST-TOTAL> 103,261
<INTEREST-DEPOSIT> 30,999
<INTEREST-EXPENSE> 71,979
<INTEREST-INCOME-NET> 31,282
<LOAN-LOSSES> 1,900
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 22,212
<INCOME-PRETAX> 9,870
<INCOME-PRE-EXTRAORDINARY> 9,920
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,920
<EPS-PRIMARY> 1.31
<EPS-DILUTED> 1.27
<YIELD-ACTUAL> 0
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 7,412
<CHARGE-OFFS> 692
<RECOVERIES> 230
<ALLOWANCE-CLOSE> 8,850
<ALLOWANCE-DOMESTIC> 8,850
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
