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, 1999
[ ] 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: 6,327,803 AS OF OCTOBER 31, 1999
<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, 1999
(unaudited) and December 31, 1998 1
Consolidated Statements of Income for the Nine-Month Periods Ended
September 30, 1999 and 1998 (unaudited) 2
Consolidated Statements of Income for the Three-Month Periods Ended
September 30, 1999 and 1998 (unaudited) 3
Consolidated Statements of Comprehensive Income for the Nine-Month
Periods Ended September 30, 1999 and 1998 (unaudited) 4
Consolidated Statements of Cash Flows for the Nine-Month Periods
Ended September 30, 1999 and 1998 (unaudited) 5
Notes to Consolidated Financial Statements 7
Management's Discussion and Analysis of Financial Condition and Results
Item 2 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
<PAGE>
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,
1999 1998
--------------- ------------
ASSETS (Unaudited)
- -------------------------------------------------------------
<S> <C> <C>
Cash and cash equivalents $ 31,375 $ 45,453
Federal funds sold 4,800 --
Loans receivable (note 4) 1,749,303 1,538,149
Mortgage-backed securities held-to-maturity (notes 3 and 8) 931,179 1,154,116
Mortgage-backed securities available-for-sale, at fair value
(notes 3 and 8) 101,613 96,609
U.S. Treasury security held-to-maturity 299 --
U.S. Treasury security available-for-sale, at fair value -- 2,016
Mortgage loans held for sale 3,880 --
Accrued interest receivable 15,952 15,518
Property and equipment 31,674 33,116
Stock in the Federal Home Loan Bank of Dallas (FHLB) 52,775 49,819
Goodwill 28,405 30,687
Mortgage servicing rights 3,215 4,049
Prepaid expenses and other assets 12,146 12,629
--------------- ----------
$ 2,966,616 $2,982,161
=============== ==========
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES, MINORITY INTEREST AND STOCKHOLDERS' EQUITY
------------------------------------------------------------
<S> <C> <C>
Liabilities:
Deposits (note 5) $1,601,001 $1,705,004
Advances from the FHLB (note 6) 1,029,853 966,720
Securities sold under agreements to repurchase (note 6) 100,000 100,000
Senior notes payable, net (note 7) 46,900 50,000
Advances from borrowers for taxes and insurance 10,269 3,340
Other liabilities and accrued expenses 16,009 15,583
----------- -----------
Total liabilities 2,804,032 2,840,647
----------- -----------
Minority interest - 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, 11 and 14):
Preferred stock, no par value; authorized shares 5,000,000;
9.12% Cumulative, Series A, 1,100,000 shares issued and
outstanding in 1999 27,500 --
Common stock, $.01 par value; authorized shares
30,000,000; 7,579,252 and 7,568,255 shares issued
in 1999 and 1998, respectively 76 76
Additional paid-in capital 32,250 33,696
Retained earnings 95,478 88,144
Accumulated other comprehensive income (loss) -
unrealized loss on securities available-for-sale (1,007) (1,374)
Treasury stock at cost (1,283,679 and 499,600 shares in 1999
and 1998) (20,463) (7,778)
----------- -----------
Total stockholders' equity 133,834 112,764
----------- -----------
$2,966,616 $2,982,161
=========== ===========
</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,
-------------------
1999 1998
------------------- ---------
(Unaudited)
<S> <C> <C>
Interest income:
Loans receivable $ 98,766 $ 87,495
Mortgage-backed securities 48,633 67,938
FHLB stock, federal funds sold and other interest-earning assets 2,348 2,007
------------ ---------
149,747 157,440
------------ ---------
Interest expense:
Deposits 48,637 48,166
Advances from the FHLB:
Short-term 12,449 11,567
Long-term 22,755 15,613
Other borrowed money 5,482 29,807
Senior notes payable 3,600 3,750
------------ ---------
92,923 108,903
------------ ---------
Net interest income 56,824 48,537
Provision for loan losses 4,366 2,350
------------ ---------
Net interest income after provision for loan losses 52,458 46,187
------------ ---------
Noninterest income:
Loan fees and service charges on deposit accounts 5,755 3,894
Loan servicing income, net 470 571
Writedown of purchased mortgage loan premium -- (709)
Other 1,198 996
------------ ---------
7,423 4,752
------------ ---------
Noninterest expense:
Compensation, payroll taxes and other benefits 21,682 16,156
Office occupancy 8,495 6,437
Data processing 2,550 1,806
Amortization of goodwill 2,282 1,517
Insurance premiums 907 912
Real estate owned 333 693
Other 6,585 5,872
------------ ---------
42,834 33,393
------------ ---------
Income before provision for Federal income taxes and minority
interest 17,047 17,546
Provision for Federal income taxes (note 12) 5,242 1,944
------------ ---------
Income before minority interest 11,805 15,602
Minority interest - preferred stock dividends of Coastal Banc ssb
(Series A) (note 10) 1,941 1,941
------------ ---------
Net income $ 9,864 $ 13,661
============ =========
Net income available to common stockholders $ 8,907 $ 13,661
============ =========
Basic earnings per share (note 9) $ 1.36 $ 1.81
============ =========
Diluted earnings per share (note 9) $ 1.33 $ 1.75
============ =========
</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,
--------------------
1999 1998
-------------------- -------
(Unaudited)
<S> <C> <C>
Interest income:
Loans receivable $ 34,938 $31,468
Mortgage-backed securities 15,144 21,740
FHLB stock, federal funds sold and other interest-earning assets 788 971
------------- -------
50,870 54,179
------------- -------
Interest expense:
Deposits 15,759 17,167
Advances from the FHLB:
Short-term 5,350 3,988
Long-term 7,623 7,753
Other borrowed money 1,391 6,766
Senior notes payable 1,186 1,250
------------- -------
31,309 36,924
------------- -------
Net interest income 19,561 17,255
Provision for loan losses 1,360 450
------------- -------
Net interest income after provision for loan losses 18,201 16,805
------------- -------
Noninterest income:
Loan fees and service charges on deposit accounts 2,031 1,428
Loan servicing income, net 184 171
Other 355 453
------------- -------
2,570 2,052
------------- -------
Noninterest expense:
Compensation, payroll taxes and other benefits 7,277 6,059
Office occupancy 2,856 2,406
Data processing 788 625
Amortization of goodwill 768 574
Insurance premiums 292 387
Real estate owned 56 270
Other 2,499 2,154
------------- -------
14,536 12,475
------------- -------
Income before provision for Federal income taxes
and minority interest 6,235 6,382
Provision for Federal income taxes (note 12) 1,843 1,994
------------- -------
Income before minority interest 4,392 4,388
Minority interest - preferred stock dividends of Coastal Banc ssb
(Series A) (note 10) 647 647
------------- -------
Net income $ 3,745 $ 3,741
============= =======
Net income available to common stockholders $ 3,118 $ 3,741
============= =======
Basic earnings per share (note 9) $ 0.50 $ 0.50
============= =======
Diluted earnings per share (note 9) $ 0.48 $ 0.48
============= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements
<PAGE>
COASTAL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------
1999 1998
-------------- -------
(Unaudited)
<S> <C> <C>
Net income $ 9,864 $13,661
Other comprehensive income, net of tax:
Unrealized holding gains on securities available-for-sale
arising during period 367 1,491
------------ -------
Total comprehensive income $ 10,231 $15,152
============ =======
</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,
-------------------
1999 1998
-------------------------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 9,864 $ 13,661
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 7,383 6,381
Net premium amortization 1,239 2,352
Provision for loan losses 4,366 2,350
Amortization of goodwill 2,282 1,517
Originations and purchases of mortgage loans held for sale (6,237) (26,536)
Sales of mortgage loans held for sale 2,025 26,287
Stock dividends from the FHLB (2,040) (1,536)
Decrease (increase) in:
Accrued interest receivable (434) 306
Other, net 1,479 (6,056)
------------ ----------
Net cash provided by operating activities 19,927 18,726
------------ ----------
Cash flows from investing activities:
Net increase in federal funds sold (4,800) (4,300)
Purchases of mortgage-backed securities held-to-maturity (3,080) (8,203)
Purchases of mortgage-backed securities available-for-sale (26,489) --
Purchase of U.S. Treasury securities held-to-maturity (299) --
Principal repayments on mortgage-backed securities held-to-maturity 226,497 118,427
Principal repayments on mortgage-backed securities
available-for-sale 22,059 20,249
Proceeds from maturity of U.S. Treasury securities available-for-sale 2,000 25,000
Proceeds from sales of mortgage-backed securities available-for-sale -- 26,250
Purchases of loans receivable (374,290) (319,630)
Net decrease in loans receivable 153,737 204,384
Net purchases of property and equipment (2,379) (3,477)
Purchases of FHLB stock (2,608) (19,770)
Proceeds from sales of FHLB stock 1,692 --
Cash and cash equivalents received in business combination
transaction -- 120,085
------------- ----------
Net cash provided (used) by investing activities (7,960) 159,015
------------ ----------
</TABLE>
<PAGE>
COASTAL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------
1999 1998
------------- ------------
(Unaudited)
<S> <C> <C>
Cash flows from financing activities:
Net decrease in deposits $ (103,846) $ (26,009)
Advances from the FHLB 6,448,344 3,435,277
Principal payments on advances from the FHLB (6,385,211) (3,023,505)
Securities sold under agreements to repurchase and federal funds
purchased 319,340 3,948,611
Purchases of securities sold under agreements to repurchase and
federal funds purchased (319,340) (4,495,659)
Net increase in advances from borrowers for taxes and insurance 6,929 7,217
Proceeds from issuance of preferred stock, net 25,942 --
Exercise of stock options for purchase of common stock, net 112 517
Purchase of Treasury Stock (12,685) (3,271)
Repurchase of Senior Notes (3,100) --
Dividends paid (2,530) (1,815)
------------------- ------------
Net cash used by financing activities (26,045) (158,637)
------------------- ------------
Net decrease in cash and cash equivalents (14,078) 19,104
Cash and cash equivalents at beginning of period 45,453 37,096
------------------- ------------
Cash and cash equivalents at end of period $ 31,375 $ 56,200
=================== ============
Supplemental schedule of cash flows-interest paid $ 92,736 $ 105,971
=================== ============
Supplemental schedule of noncash investing and financing activities:
Foreclosures of loans receivable $ 3,494 $ 2,937
=================== ============
In connection with the branch office purchase in 1998, Coastal
recorded the following assets and liabilities:
Loans receivable $ -- $ 176,157
U.S. Treasury securities -- 26,942
Goodwill -- 17,254
Property and equipment -- 10,743
Accrued interest receivable and other assets -- 5,438
Savings deposits -- 355,425
Accrued interest payable and other liabilities -- 1,194
=================== ============
</TABLE>
See accompanying Notes to Consolidated Financial Statements
<PAGE>
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, 1999 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 in the
consolidated statements of comprehensive income.
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. All applicable
common stock share data have been adjusted to include the effect of the stock
split for all periods presented.
On August 27, 1998, December 21, 1998 and February 25, 1999, the Board of
Directors authorized three separate repurchase plans for up to 500,000 shares
each of the outstanding shares of common stock through an open-market repurchase
program and privately negotiated repurchases, if any. As of September 30, 1999,
1,283,679 shares had been repurchased in the open market at an average price of
$15.94 per share for a total cost of $20.5 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
its subsidiary, CoastalBanc Financial Corp. (collectively, the "Bank"), and
Coastal Banc Capital Corp. (collectively with Coastal Bancorp, Inc. and the
Bank, "Coastal"). All significant intercompany balances and transactions have
been eliminated in consolidation.
<PAGE>
(3) MORTGAGE-BACKED SECURITIES
Mortgage-backed securities at September 30, 1999 (unaudited) were as
follows (dollars in thousands):
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Held-to-Maturity:
REMICS - Agency $ 664,813 $ 3,625 $ (7,741) $ 660,697
REMICS - Non-agency 183,850 76 (3,106) 180,820
FNMA certificates 57,614 21 (1,916) 55,719
GNMA certificates 16,983 18 (13) 16,988
Non-agency securities 7,919 -- (146) 7,773
----------- ------- ---------- ---------
$ 931,179 $ 3,740 $ (12,922) $ 921,997
=========== ======= ========== =========
Available-for-sale:
REMICS - Agency $ 77,364 $ -- $ (1,314) $ 76,050
REMICS - Non-agency 392 -- (6) 386
GNMA certificates 25,407 -- (230) 25,177
----------- ------- ---------- ---------
$ 103,163 $ -- $ (1,550) $ 101,613
=========== ======= ========== =========
</TABLE>
Mortgage-backed securities at December 31, 1998 were as follows (dollars in
thousands):
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Held-to-maturity:
REMICS - Agency $ 839,593 $ 3,770 $ (10,349) $ 833,014
REMICS - Non-agency 218,500 598 (2,186) 216,912
FNMA certificates 63,199 147 (810) 62,536
GNMA certificates 21,311 16 (23) 21,304
Non-agency securities 11,512 113 (23) 11,602
Interest-only securities 1 -- -- 1
----------- ------- ---------- -----------
$ 1,154,116 $ 4,644 $ (13,391) $ 1,145,369
=========== ======= ========== ===========
Available-for-sale:
REMICS - Agency $ 97,695 $ -- $ (2,115) $ 95,580
REMICS - Non-agency 1,037 -- (8) 1,029
----------- ------- ---------- -----------
$ 98,732 $ -- $ (2,123) $ 96,609
=========== ======= ========== ===========
</TABLE>
<PAGE>
(4) LOANS RECEIVABLE
Loans receivable at September 30, 1999 and December 31, 1998 were as
follows (dollars in thousands):
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
-------------------- -----------------
(Unaudited)
<S> <C> <C> <C>
Real estate mortgage loans:
First-lien mortgage, primarily residential $ 863,953 $ 690,510
Commercial 310,852 257,723
Multifamily 156,050 119,447
Residential construction 147,809 115,714
Acquisition and development 90,129 75,932
Commercial construction 56,786 40,344
Commercial loans, secured by residential mortgage
loans held for sale 65,206 173,124
Commercial loans, secured by mortgage servicing
rights 690 3,867
Commercial, financial and industrial 113,021 92,218
Loans secured by savings deposits 13,491 13,164
Consumer and other loans 66,303 66,989
-------------------- -----------
1,884,290 1,649,032
Loans in process (118,449) (99,790)
Allowance for loan losses (14,364) (11,358)
Unearned interest and loan fees (3,043) (3,493)
Premium to record purchased loans, net 869 3,758
-------------------- -----------
$ 1,749,303 $1,538,149
==================== ===========
Weighted average yield 8.10% 8.55%
==================== ===========
</TABLE>
At September 30, 1999, Coastal had outstanding commitments to originate or
purchase $117.6 million of real estate mortgage and other loans and had
commitments under lines of credit to originate primary construction and other
loans of approximately $167.1 million. In addition, at September 30, 1999,
Coastal had $7.5 million of outstanding letters of credit. Management
anticipates the funding of these commitments through normal operations.
At September 30, 1999 and December 31, 1998, the carrying value of loans
that were considered to be impaired totaled approximately $12.7 million and $1.7
million, respectively and the related allowance for loan losses on those
impaired loans totaled $5.3 million and $880,000 at September 30, 1999 and
December 31, 1998, respectively. The average recorded investment in impaired
loans during the nine months ended September 30, 1999 and 1998 was $11.1 million
and $1.8 million, respectively.
<PAGE>
An analysis of activity in the allowance for loan losses for the nine
months ended September 30, 1999 and 1998 is as follows (in thousands):
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1999 1998
------------ --------
(Unaudited)
<S> <C> <C> <C>
Balance, beginning of period $ 11,358 $ 7,412
Provision for loan losses 4,366 2,350
Allowance of acquired entity -- 2,257
Charge-offs (1,572) (1,235)
Recoveries 212 259
------------ --------
Balance, end of period $ 14,364 $11,043
============ ========
</TABLE>
On August 11, 1998, Coastal approved the purchase of a $10.0 million
participation in a warehouse loan aggregating $25.0 million to MCA Financial
Corp., and certain of its affiliates, of Southfield, Michigan (collectively the
"Mortgage Banker"). The lead lender ("Lead Lender") in this facility is a major
commercial bank and the loan is secured by subprime residential loans. In late
January 1999, due to a lack of liquidity, the Mortgage Banker ceased operations
and shortly thereafter was seized by the Michigan Bureau of Financial
Institutions. A conservator was appointed to take control of the Mortgage
Banker's books and records, marshal that company's assets and continue its loan
servicing operations. A voluntary petition under Chapter 11 of the U.S.
Bankruptcy Code was filed in the U.S. Bankruptcy Court for the Eastern District
of Michigan for the Mortgage Banker on or about February 11, 1999, by the
conservator, who has been appointed the "debtor-in-possession", to allow the
conservator time to develop a plan of reorganization while protecting the assets
of the Mortgage Banker.
Coastal has hired special bankruptcy counsel to represent it in this
situation and has been involved in discussions with the Lead Lender regarding
the status of the loan. Although Coastal has been informed by the Lead Lender
that Coastal's loan is collateralized by residential loans, Coastal, as of the
date hereof, has been unable to verify the extent to which the collateral, if
any, is sufficient to prevent Coastal from incurring a loss or the amount of any
loss, should one occur. Effective December 31, 1998, Coastal placed this loan
on nonaccrual with an allocation of $1.5 million of the general allowance for
loan losses. As of September 30, 1999, Coastal has allocated $3.4 million of
the general allowance to this loan. Coastal is working with the Lead Lender to
obtain the release of the collateral from the bankruptcy court and prepare the
collateral for sale. To date, Coastal has received approximately $250,000 in
principal reductions from the bankruptcy trustee. Coastal remains unable to
determine the timing, probability, or the amount of any loss which might result
from the default by the Mortgage Banker due to the limited information available
from the bankruptcy trustee as to the value of the underlying collateral.
Coastal is continuing to monitor this situation and will make additions to the
overall allowance for loan losses as considered necessary based on its existing
policy.
During the third quarter of 1999, Coastal purchased approximately $10.1
million of the underlying loans securing a $13.2 million warehouse line of
credit. Coastal is currently servicing the purchased loans and has recorded
these loans as part of the loans receivable portfolio at September 30, 1999. As
of September 30, 1999, the remaining balance on this warehouse line of $1.0
million is on nonaccrual with an allocation of $1.0 million of the allowance for
loan losses.
Coastal services for others loans receivable which are not included in the
Consolidated Financial Statements. The total amounts of such loans were $427.3
million and $519.2 million at September 30, 1999 and December 31, 1998,
respectively.
(5) DEPOSITS
Deposits, their stated rates and the related weighted average interest
rates, at September 30, 1999 and December 31, 1998 are summarized as follows
(dollars in thousands):
<TABLE>
<CAPTION>
Stated Rate September 30, 1999 December 31, 1998
-------------- ------------------ -----------------
(Unaudited)
<S> <C> <C> <C>
Noninterest-bearing checking 0.00% $ 88,982 $ 95,398
Interest-bearing checking 1.00 - 2.00 57,627 63,067
Savings accounts 1.49 - 2.75 48,647 48,571
Money market demand accounts 0.00 - 4.57 336,572 339,481
---------------- -----------
531,828 546,517
---------------- -----------
Certificate accounts 2.00 - 2.99 807 6,538
3.00 - 3.99 69,756 38,614
4.00 - 4.99 510,961 272,325
5.00 - 5.99 440,251 747,585
6.00 - 6.99 38,476 83,277
7.00 - 7.99 8,457 8,727
8.00 - 8.99 104 699
9.00 - 9.99 99 305
over 10.00 20 18
---------------- -----------
1,068,931 1,158,088
---------------- -----------
Premium to record purchased deposits 242 399
----------------- ---
$ 1,601,001 $1,705,004
================= ===========
Weighted average interest rate 3.85% 4.11%
================= ===========
</TABLE>
The scheduled maturities of certificate accounts outstanding at September
30, 1999 were as follows (dollars in thousands):
<TABLE>
<CAPTION>
September 30, 1999
--------------------
(Unaudited)
<S> <C>
0 to 12 months $ 928,028
13 to 24 months 107,134
25 to 36 months 16,572
37 to 48 months 12,136
49 to 60 months 4,803
Over 60 months 258
--------------------
$ 1,068,931
====================
</TABLE>
<PAGE>
(6) SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND ADVANCES FROM THE
FHLB
The weighted average and stated interest rates on securities sold under
agreements to repurchase at September 30, 1999 and December 31, 1998 was 4.93%.
The weighted average interest rates on advances from the FHLB at September
30, 1999 and December 31, 1998 were 5.45% and 5.24%, respectively. The
scheduled maturities and related weighted average interest rates on advances
from the FHLB at September 30, 1999 are summarized as follows (dollars in
thousands) (unaudited):
<TABLE>
<CAPTION>
Weighted Average
Due during the year ended December 31, Interest Rate Amount
- -------------------------------------- ----------------- -----------------
<S> <C> <C> <C>
1999 5.46% $ 295,600
2000 5.43 402,078
2001 6.05 32,211
2002 5.31 268,731
2003 5.22 778
2004 5.75 5,336
2005 5.57 129
2006 6.85 3,154
2007 6.66 1,111
2008 5.71 2,751
2009 8.14 4,227
2010 5.66 187
2011 6.62 1,379
2012 5.68 217
2013 5.71 6,829
2014 5.43 2,977
2018 5.28 2,158
----------
$1,029,853
==========
</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. During the
nine months ended September 30, 1999, Coastal, after receipt of unsolicited
offers, repurchased $3.1 million of the Senior Notes outstanding at par.
<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 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, 1999, Coastal had interest rate swap and cap agreements having
notional principal amounts totaling $62.8 million and $177.2 million,
respectively.
The terms of the interest rate swap agreements outstanding at September 30,
1999 (unaudited) and December 31, 1998 are summarized as follows (dollars in
thousands):
<TABLE>
<CAPTION>
Fair Value at
Floating Rate End of
Notional LIBOR Fixed At Period
Maturity Amount Index Rate End of Period (gain (loss))
- ---------------------- --------- ----------- ------ -------------- ---------------
<S> <C> <C> <C> <C> <C>
At September 30, 1999:
1999 . . . . . . . . . $ 14,600 Three-month 6.926% 5.478% $ (22)
2000 . . . . . . . . . 4,800 Three-month 6.170 5.513 (15)
2000 . . . . . . . . . 2,275 Three-month 6.000 5.509 (1)
2003 . . . . . . . . . 21,016 One-month 5.345 5.371 162
2004 . . . . . . . . . 3,862 One-month 5.635 5.380 101
2005 . . . . . . . . . 16,225 Three-month 6.500 5.051 (268)
--------- ---------------
$ 62,778 $ (43)
========= ===============
At December 31, 1998:
1999 . . . . . . . . . $ 14,600 Three-month 6.926% 5.399% $ (218)
2000 . . . . . . . . . 4,800 Three-month 6.170 5.226 (164)
2000 . . . . . . . . . 2,380 Three-month 6.000 5.281 (38)
2005 . . . . . . . . . 16,225 Three-month 6.500 5.261 (707)
--------- ---------------
$ 38,005 $ (1,127)
========= ===============
</TABLE>
The interest rate swap agreements provide for Coastal to make 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 5.19% and
the weighted average interest payment rate on all of the interest rate swap
agreements was approximately 6.24% for the nine months ended September 30, 1999.
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 $441,000 for the nine months ended September 30,
1999 and approximately $278,000 for the nine months ended September 30, 1998.
Coastal had pledged approximately $6.3 million of mortgage-backed securities to
secure interest rate swap agreements at September 30, 1999.
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 7.0% 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 $96,000 and $115,000 at September 30, 1999 and December 31, 1998,
respectively, with the estimated fair value of the agreements being $606,000 and
$888,000 at September 30, 1999 and December 31, 1998, 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
$19,000 and $38,000 for the nine months ended September 30, 1999 and 1998,
respectively.
Interest rate cap agreements outstanding at September 30, 1999 (unaudited)
expire as follows (dollars in thousands):
<TABLE>
<CAPTION>
Year of Strike Rate Notional
Expiration Range Amount
- ---------- --------------- ---------
<S> <C> <C>
1999 8.50 - 11.00% $ 18,595
2000 8.50 - 9.50 11,620
2001 7.00 - 9.00 34,509
2002 8.75 - 9.00 13,525
2003 8.00 - 8.50 99,000
---------
$ 177,249
=========
</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 attempts to control 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, 1999 and 1998 (dollars in thousands, except per share data)
(unaudited):
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------
<S> <C> <C> <C>
1999 1998
----------- ----------
Net income $ 9,864 $ 13,661
Preferred stock dividends (957) --
----------- ----------
Net income available to common stockholders $ 8,907 $ 13,661
=========== ==========
Weighted average number of common shares
outstanding used in basic EPS calculation 6,543,873 7,534,947
Add assumed exercise of outstanding stock
options as adjusted for dilutive securities 158,128 252,887
----------- ----------
Weighted average number of common shares
outstanding used in diluted EPS calculation 6,702,001 7,787,834
=========== ==========
Basic EPS $ 1.36 $ 1.81
=========== ==========
Diluted EPS $ 1.33 $ 1.75
=========== ==========
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
September 30,
------------------
<S> <C> <C> <C>
1999 1998
----------- ----------
Net income $ 3,745 $ 3,741
Preferred stock dividends (627) --
----------- ----------
Net income available to common stockholders $ 3,118 $ 3,741
=========== ==========
Weighted average number of common shares
outstanding used in basic EPS calculation 6,299,145 7,499,625
Add assumed exercise of outstanding stock
options as adjusted for dilutive securities 169,267 226,704
----------- ----------
Weighted average number of common shares
outstanding used in diluted EPS calculation 6,468,412 7,726,329
=========== ==========
Basic EPS $ 0.50 $ 0.50
=========== ==========
Diluted EPS $ 0.48 $ 0.48
=========== ==========
</TABLE>
The weighted average number of common shares outstanding has been reduced
by the treasury stock held by Coastal. As of September 30, 1999 and 1998,
Coastal had 1,283,679 and 205,000 common shares in treasury, respectively.
<PAGE>
(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 value, 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.
(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, 1999, the Bank's regulatory capital (unaudited) in
relation to its existing regulatory capital requirements for capital adequacy
purposes was as follows (dollars in thousands):
<TABLE>
<CAPTION>
Minimum For Capital Well-Capitalized
Actual Adequacy Purposes Requirements
------------------ ------------------- ------------------
<S> <C> <C> <C> <C> <C>
Capital Requirement Amount Ratio Amount Ratio Amount Ratio
- -------------------- ---------- -------- -------- ------ -------- ------
Tier 1 (core) $ 167,543 5.79% $115,760 4.00% $144,701 5.00%
Tier 1 risk-based 167,543 9.54 70,222 4.00 105,333 6.00
Total risk-based 181,907 10.36 140,444 8.00 175,555 10.00
</TABLE>
As of September 30, 1999, 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. To be categorized
as well capitalized, the Bank must maintain minimum Tier 1 (core), Tier 1
risk-based and total risk-based ratios as set forth in the table above. There
are no conditions or events since that notification that management believes
have changed the institution's category.
(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, 1999.
This tax benefit is expected to continue through the end of 2002.
(13) RECENT ACCOUNTING STANDARDS
The Financial Accounting Standards Board ("FASB") Statement No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133, an Amendment of FASB Statement No.
133" ("Statement 137") was issued in June 1999. Statement 137 defers the
effective date of FASB Statement 133, "Accounting for Derivative Instruments and
Hedging Activities" ("Statement 133") for one year. Statement 133, as amended,
is now effective for all fiscal quarters of all fiscal years beginning after
June 15, 2000.
Statement 133 generally requires that derivatives embedded in hybrid
instruments be separated from their host contracts and be accounted for
separately as derivative contracts. For instruments existing at the date of
adoption, Statement 133 provides an entity the option of not applying this
provision to such hybrid instruments entered into before January 1, 1998 and not
substantially modified thereafter. Consistent with the deferral of the
effective date for one year, Statement 137 provides an entity the option of not
applying this provision to hybrid instruments entered into before January 1,
1998 or 1999 and not substantially modified thereafter. Coastal is evaluating
the impact, if any, Statement 133 may have on its future consolidated financial
statements.
(14) COASTAL BANCORP, INC. PREFERRED STOCK
On May 11, 1999, Coastal Bancorp, Inc. ("Bancorp") issued 1,100,000 shares
of 9.12% Series A Cumulative Preferred Stock, no par value, to the public at a
price of $25 per share. Dividends on the preferred stock are payable quarterly
at the annual rate of $2.28 per share. The preferred stock is callable on May
15, 2003 at Bancorp's option. The $26.0 million net proceeds has been used for
repurchases in the open market of Bancorp's outstanding common stock and of
Bancorp's outstanding 10% Senior Notes, with the remaining being invested on a
short-term basis. Pursuant to Coastal's tax benefit agreement with the FDIC,
Coastal receives a tax benefit for dividends declared on this preferred stock.
The ongoing quarterly tax benefit will be approximately $219,000, or 3 cents per
diluted share, and is expected to continue through the end of 2002.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
-------------------------------------------------------------------
Financial Condition
- --------------------
Total assets decreased 0.5% or $15.5 million from December 31, 1998 to
September 30, 1999. The net decrease resulted primarily from a decrease of
$222.9 million in mortgage-backed securities held-to-maturity, a decrease of
$14.1 million in cash and cash equivalents, offset by an increase in loans
receivable of $211.2 million and an increase in mortgage-backed securities
available-for-sale of $5.0 million. The decrease in mortgage-backed securities
held-to-maturity was due to principal payments received. The increase in loans
receivable was primarily due to residential mortgage loan purchases of $353.0
million and $10.2 million of consumer loan purchases from correspondent lenders,
offset by principal payments received and a decrease of $107.9 million in
commercial loans, secured by residential mortgage loans held for sale, because
of Coastal's decreased emphasis on this type of lending. The increase in
mortgage-backed securities available-for-sale was due to the purchase of $26.5
million offset by principal payments received.
Deposits decreased $104.0 million or 6.1% from December 31, 1998 to
September 30, 1999 and advances from the FHLB increased 6.5% or $63.1 million.
Stockholders' equity increased 18.7% or $21.1 million from December 31, 1998 to
September 30, 1999 as a result of the $26.0 million in net proceeds received
from the issuance of the 9.12% Series A Cumulative Preferred Stock on May 11,
1999 ("Bancorp Preferred Stock"), net income of $9.9 million and a $367,000
decrease in accumulated other comprehensive loss, offset by additional treasury
stock acquired of $12.7 million and dividends declared.
Results of Operations for the Nine Months Ended September 30, 1999 and 1998
- --------------------------------------------------------------------------------
General
-------
For the nine months ended September 30, 1999, net income was $9.9 million
compared to $13.7 million for the nine months ended September 30, 1998. During
the first nine months of 1999, net income was negatively impacted by a $1.7
million additional provision for loan losses recorded during the first quarter
of the year. The additional provision for loan losses was due in part to a $10.0
million participation in a warehouse loan to MCA Financial Corp., and certain of
its affiliates, of Southfield, Michigan (collectively the "Mortgage Banker"),
that, during January 1999, was placed on nonaccrual effective December 31, 1998
with an allocation of $1.5 million of the general allowance, due to the fact
that the Mortgage Banker ceased operations in late January 1999 and shortly
thereafter was seized by the Michigan Bureau of Financial Institutions.
Coastal, as of the date hereof, has been unable to verify the extent to which
the collateral, if any, is sufficient to prevent Coastal from incurring a loss
or the amount of any loss, should one occur. As of September 30, 1999, Coastal
has allocated $3.4 million of the general allowance to this loan. Coastal is
working with the lead lender in the participation to obtain the release of the
collateral from the bankruptcy court and prepare the collateral for sale. To
date, Coastal has received approximately $250,000 in principal reductions from
the bankruptcy trustee. Coastal remains unable to determine the timing,
probability, or the amount of any loss which might result from the default by
the Mortgage Banker due to the limited information available from the bankruptcy
trustee as to the value of the underlying collateral. Coastal is continuing to
monitor this situation and will make additions to the overall allowance for loan
losses as it deems necessary based on its existing policy. The additional
provision for loan losses is also attributable to other changes and growth in
Coastal's loan portfolio, including the commercial type loans acquired in the
1998 acquisition of 12 branch offices from Pacific Southwest Bank (the "1998
Branch Acquisition").
Net income for the first nine months of 1998 was positively affected by a
one-time income benefit of $2.6 million (net) or 33 cents per diluted share.
This benefit was the result of the resolution of an outstanding tax benefit
issue with the Federal Deposit Insurance Corporation ("FDIC") as manager of the
Federal Savings and Loan Insurance Corporation Resolution Fund. The $3.7 million
one-time tax benefit was offset by the recording of an additional provision for
loan losses of $1.0 million and a writedown of purchased mortgage loan premium
of $709,000. The resolution of the one-time tax benefit issue is also
contributing an ongoing quarterly tax benefit of $226,000 or approximately 3
cents per diluted share which is estimated to continue through the end of 2002.
Net interest income increased $8.3 million and noninterest income
(excluding the writedown of purchased mortgage loan premium in 1998) increased
$2.0 million from the nine months ended September 30, 1998 to the nine months
ended September 30, 1999. These increases were offset by the increase in the
provision for loan losses of $2.0 million and the increase in noninterest
expense of $9.4 million. The provision for federal income taxes (excluding the
one-time effect of the $3.7 million reversal of accrued income taxes in 1998)
decreased $381,000 due to the decreased income before provision for federal
income taxes and minority interest and the tax benefit received by Coastal for
the dividends on the recently issued Bancorp Preferred Stock.
Interest Income
----------------
Interest income for the nine months ended September 30, 1999 decreased $7.7
million or 4.9% from the nine months ended September 30, 1998. The decrease is
due to a decrease in average interest-earning assets of $108.3 million, and a
decrease in the average yield from 7.22% for the nine months ended September 30,
1998 to 7.14% for the nine months ended September 30, 1999. Interest income on
loans receivable increased $11.3 million due to a $224.4 million increase in the
average balance, offset slightly by a decrease in the average yield from 8.39%
for the nine months ended September 30, 1998 to 8.16% for the same period in
1999. Interest income on mortgage-backed securities decreased $19.3 million due
to a $345.2 million decrease in the average balance and a decrease in the
average yield from 6.16% for the nine months ended September 30, 1998 to 5.77%
for the same period in 1999.
In addition, interest income on FHLB stock, federal funds sold and other
interest-earning assets increased $341,000. Total interest-earning assets for
the nine months ended September 30, 1999 averaged $2.8 billion compared to $2.9
billion for the nine months ended September 30, 1998.
Interest Expense
-----------------
Interest expense on interest-bearing liabilities was $92.9 million for the
nine months ended September 30, 1999, as compared to $108.9 million for the same
period in 1998. The decrease in interest expense was due to a decrease in the
average rate paid on interest-bearing liabilities from 5.36% for the nine months
ended September 30, 1998 to 4.78% for the nine months ended September 30, 1999
and a $117.6 million decrease in the average balance of interest-bearing
liabilities. The 0.58% decrease in the average rate paid on interest-bearing
liabilities was primarily due to the lower cost deposits acquired in the 1998
Branch Acquisition, the new pricing strategies for certificates of deposit that
reduced Coastal's cost of retail deposits and lower wholesale funding costs.
The decrease in average interest-bearing liabilities consisted primarily of a
$568.6 million decrease in securities sold under agreements to repurchase offset
by a $264.6 million increase in advances from the FHLB and a $188.6 million
increase in interest-bearing deposits. The reallocation of borrowings from
securities sold under agreements to repurchase to FHLB advances was done to take
advantage of more favorable interest rates.
Net Interest Income
---------------------
Net interest income was $56.8 million for the nine months ended September
30, 1999 and $48.5 million for the same period in 1998. Net interest margin
("Margin") was 2.71% for the nine months ended September 30, 1999 compared to
2.23% for the nine months ended September 30, 1998. 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 1.86% for the nine months ended September 30, 1998 to 2.36% for
the nine months ended September 30, 1999. Management also calculates an
alternative Spread which includes noninterest-bearing deposits to show a spread
that considers the cost of all deposits as part of the overall cost of funds.
Under this calculation, the alternative Spreads for the nine months ended
September 30, 1999 and 1998 were 2.62% and 2.05%, 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 Margin and Spread was primarily due to the decrease in the average rate paid
on interest-bearing liabilities of 0.58%. This decrease in the average rate
paid on interest-bearing liabilities was slightly offset by a 0.08% decrease in
the average yield on interest-earning assets. Average net interest-earning
assets increased $9.2 million from the nine months ended September 30, 1998 to
the nine months ended September 30, 1999.
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 retail deposits. In addition, management intends to
gradually increase commercial business loans and noninterest-bearing deposits as
a percentage of total assets and deposits, respectively.
Provision for Loan Losses
----------------------------
The provision for loan losses was $4.4 million for the nine months ended
September 30, 1999 compared to $2.4 million for the nine months ended September
30, 1998. The increase in the provision for loan losses was in part due to the
$10.0 million warehouse loan participation placed on nonaccrual effective
December 31, 1998, as discussed previously, as well as other changes and growth
in Coastal's loan portfolio, including the commercial type loans acquired in the
1998 Branch Acquisition. The allowance for loan losses as a percentage of total
loans was 0.82% at September 30, 1999 and 0.71% at September 30, 1998.
Although no assurance can be given, management believes that the allowance
for loan losses at September 30, 1999 is adequate considering the above specific
situation with a Mortgage Banker, 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 nine months ended September 30, 1999, noninterest income (excluding
the writedown of purchased mortgage loan premium in 1998) increased $1.9 million
to $7.4 million, compared to $5.5 million for the nine months ended September
30, 1998. The increase in noninterest income was primarily due to an increase
of $1.9 million in loan fees and service charges on deposit accounts and a
$202,000 increase in other noninterest income. The increase in loan fees and
service charges on deposit accounts consisted of a $2.2 million increase in
service charges on deposit accounts due to the increase in transaction type
deposit accounts, including those acquired in the 1998 Branch Acquisition,
offset somewhat by a $296,000 decrease in loan fees. These increases were
partially offset by a $101,000 decrease in loan servicing income due to the
declining loan servicing portfolio.
Noninterest Expense
--------------------
For the nine months ended September 30, 1999, noninterest expense increased
$9.4 million from the nine months ended September 30, 1998. Compensation,
payroll taxes and other benefits as well as office occupancy expense increased
$5.5 million and $2.1 million, respectively, from the nine months ended
September 30, 1998 to the nine months ended September 30, 1999, 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 and occupancy expenses related to the operation of the 12 branches
acquired in the 1998 Branch Acquisition. In addition, the amortization of
goodwill increased $765,000 and data processing expense increased $744,000
primarily due to the effect of the branches added in the 1998 Branch
Acquisition. Other changes included a $713,000 increase in other operating
expenses, a $360,000 decrease in real estate owned expense and a $5,000 decrease
in insurance premiums.
<PAGE>
Provision for Federal Income Taxes
--------------------------------------
The provision for federal income taxes for the nine months ended September
30, 1999 was $5.2 million compared to the provision for federal income taxes
(excluding the one-time effect of the $3.7 million reversal of accrued income
taxes) for the nine months ended September 30, 1998 of $5.6 million. The slight
decrease was due to the decreased income before provision for federal income
taxes and minority interest and the tax benefit received by Coastal for the
dividends on the recently issued Bancorp Preferred Stock. Pursuant to Coastal's
tax benefit agreement with the FDIC, Coastal receives a tax benefit for the
dividends on the Bancorp Preferred Stock. The ongoing quarterly tax benefit
will be approximately $219,000, or 3 cents per diluted share, and is expected to
continue through the end of 2002.
Results of Operations for the Three Months Ended September 30, 1999 and 1998
- --------------------------------------------------------------------------------
General
-------
For the three months ended September 30, 1999 and 1998, net income was $3.7
million. Net interest income increased $2.3 million and noninterest income
increased $518,000 from the three months ended September 30, 1998 to the three
months ended September 30, 1999. These increases were offset by the increase in
the provision for loan losses of $910,000 and the increase in noninterest
expense of $2.1 million. The provision for federal income taxes decreased
$151,000 primarily due to the tax benefit received by Coastal for the dividends
on the recently issued Bancorp Preferred Stock.
Interest Income
----------------
Interest income for the three months ended September 30, 1999 decreased
$3.3 million or 6.1% from the three months ended September 30, 1998. The
decrease is due to a decrease in average interest-earning assets of $161.3
million and a decrease in the average yield from 7.28% for the three months
ended September 30, 1998 to 7.23% for the three months ended September 30, 1999.
Interest income on loans receivable increased $3.5 million due to a $210.7
million increase in the average balance, offset slightly by a decrease in the
average yield from 8.47% for the three months ended September 30, 1998 to 8.23%
for the same period in 1999. Interest income on mortgage-backed securities
decreased $6.6 million due to a $363.0 million decrease in the average balance
and a decrease in the average yield from 6.12% for the three months ended
September 30, 1998 to 5.72% for the same period in 1999.
In addition, interest income on FHLB stock, federal funds sold and other
interest-earning assets decreased $183,000, due to a decrease in the average
balance of these assets. Total interest-earning assets for the three months
ended September 30, 1999 averaged $2.8 billion compared to $3.0 billion for the
three months ended September 30, 1998.
Interest Expense
-----------------
Interest expense on interest-bearing liabilities was $31.3 million for the
three months ended September 30, 1999, as compared to $36.9 million for the same
period in 1998. The decrease in interest expense was due to a decrease in the
average rate paid on interest-bearing liabilities from 5.33% for the three
months ended September 30, 1998 to 4.78% for the three months ended September
30, 1999 and a $177.2 million decrease in the average balance of
interest-bearing liabilities. The 0.55% decrease in the average rate paid on
interest-bearing liabilities was due to the lower cost deposits acquired in the
1998 Branch Acquisition, the new pricing strategies for certificates of deposit
that reduced Coastal's cost of retail deposits and lower wholesale funding
costs. The decrease in average interest-bearing liabilities consisted primarily
of a $377.5 million decrease in securities sold under agreements to repurchase
offset somewhat by a $138.4 million increase in advances from the FHLB and a
$64.4 million increase in interest-bearing deposits. The reallocation of
borrowings from securities sold under agreements to repurchase to FHLB advances
was done to take advantage of more favorable interest rates.
Net Interest Income
---------------------
Net interest income was $19.6 million for the three months ended September
30, 1999 and $17.3 million for the same period in 1998. Margin was 2.78% for
the three months ended September 30, 1999 compared to 2.32% for the three months
ended September 30, 1998. Margin represents net interest income as a percentage
of average interest-earning assets. Spread, defined to exclude
noninterest-bearing deposits, increased to 2.45% for the three months ended
September 30, 1999 from 1.95% for the three months ended September 30, 1998.
Management also calculates an alternative Spread which includes
noninterest-bearing deposits to show a spread that considers the cost of all
deposits as part of the overall cost of funds. Under this calculation, the
alternative Spreads for the three months ended September 30, 1999 and 1998 were
2.72% and 2.16%, 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 Margin and Spread was primarily due to the
decrease in the average rate paid on interest-bearing liabilities of 0.55%,
somewhat offset by a 0.05% decrease in the average yield on interest-earning
assets. Average net interest-earning assets increased $15.9 million from the
three months ended September 30, 1998 to the three months ended September 30,
1999.
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 retail deposits. In addition, management intends to
gradually increase the percentage of commercial business loans and
noninterest-bearing deposits to total assets and deposits, respectively.
Provision for Loan Losses
----------------------------
The provision for loan losses was $1.4 million for the three months ended
September 30, 1999 compared to $450,000 for the three months ended September 30,
1998. The increase in the provision for loan losses was due in part to the
$10.0 million warehouse loan participation placed on nonaccrual effective
December 31, 1998, as discussed previously as well as other changes and growth
in Coastal's loan portfolio, including the commercial type loans acquired in the
1998 Branch Acquisition. The allowance for loan losses as a percentage of total
loans was 0.82% at September 30, 1999 and 0.71% at September 30, 1998.
Noninterest Income
-------------------
For the three months ended September 30, 1999, noninterest income increased
$518,000 to $2.6 million, compared to $2.1 million for the three months ended
September 30, 1998. The increase in noninterest income was primarily due to an
increase of $603,000 in loan fees and service charges on deposit accounts. The
increase in loan fees and service charges on deposit accounts consisted of a
$712,000 increase in service charges on deposit accounts due to the increase in
transaction type deposit accounts, including those acquired in the 1998 Branch
Acquisition, offset somewhat by a $109,000 decrease in loan fees.
Noninterest Expense
--------------------
For the three months ended September 30, 1999, noninterest expense
increased $2.1 million from the three months ended September 30, 1998.
Compensation, payroll taxes and other benefits as well as office occupancy
expense increased $1.2 million and $450,000, respectively, from the three months
ended September 30, 1998 to the three months ended September 30, 1999, 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 and occupancy expenses related to the operation of the
12 branches acquired in the 1998 Branch Acquisition. In addition, the
amortization of goodwill increased $194,000 and data processing expense
increased $163,000 primarily due to the effect of the branches added in the 1998
Branch Acquisition. Other changes included a $214,000 decrease in real estate
owned expense, a $95,000 decrease in insurance premiums and a $345,000 increase
in other operating expenses.
<PAGE>
Provision for Federal Income Taxes
--------------------------------------
The provision for federal income taxes for the three months ended September
30, 1999 was $1.8 million compared to $2.0 million for the three months ended
September 30, 1998. The decrease was primarily due to the tax benefit received
by Coastal for the dividends on the recently issued Bancorp Preferred Stock.
Pursuant to Coastal's tax benefit agreement with the FDIC, Coastal receives a
tax benefit for dividends on the Bancorp Preferred Stock. The ongoing quarterly
tax benefit will be approximately $219,000, or 3 cents per diluted share, and is
expected to continue through the end of 2002.
Liquidity and Capital Resources
----------------------------------
Coastal's primary sources of funds consist of deposits bearing market rates
of interest, advances from the FHLB, securities sold under agreements to
repurchase, 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, 1999, Coastal had binding commitments to originate or purchase loans
totaling approximately $117.6 million and had $118.4 million of undisbursed
loans in process. Scheduled maturities of certificates of deposit during the 12
months following September 30, 1999 totaled $928.0 million at September 30,
1999. 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, 1999, Coastal operated 50 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 the computer applications which could fail or create erroneous
results because of the Year 2000, and is developing alternate ("contingent")
operating systems for these applications. Coastal has included in its Year 2000
project the following phases:
- - inventory and assessment;
- - renovation, which includes repair or replacement;
- - validation, which includes the testing of computer systems and Coastal's
connections with other computer systems and service bureaus;
- - due diligence of third-party servicers;
- - development of contingency plans.
Regular Year 2000 progress reports have been and will continue to be made
to Coastal's Board of Directors.
<PAGE>
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 is performing due diligence on its
customers and other business partners by the implementation and continuous
monitoring of processes for evaluating its customers' and business partners'
readiness for the Year 2000. 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. As of July 6,
1999, all of Coastal's mission critical core processing systems were confirmed
as Year 2000 compliant through internal and joint testing of systems, including
those provided by third party servicing bureaus, software providers and vendors.
Coastal will continue to conduct additional testing on other systems and revise
contingency plans through the end of 1999 as considered necessary.
While Coastal does not believe that the process of making its computer
systems Year 2000 ready will result in an adverse material impact on its
operations or liquidity, a substantial amount of management and staff time has
been and will continue to be devoted to the Year 2000 project. The direct costs
associated with the Year 2000 issues are estimated not to exceed $300,000 in the
aggregate. A portion of such costs representing hardware and software purchases
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. The
failure of Coastal, its customers and its other business partners to address the
Year 2000 software problems could have a material adverse effect on Coastal's
financial condition, results of operations or liquidity.
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. While Coastal has contingency plans in
place to address a temporary disruption in services, there can be no assurance
that any disruption or failure will be only temporary, that Coastal's
contingency plans will function as anticipated, or that the results of
operations, financial condition, or liquidity of Coastal will not be adversely
affected in the event of a prolonged disruption or failure.
Year 2000 Readiness Disclosure
---------------------------------
Notice is hereby given that the Year 2000 statements set forth in this Form
10-Q are being designated as a Year 2000 Readiness Disclosure in accordance with
Section 3(9) of the Year 2000 Information and Readiness Disclosure Act.
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 Coastal, the occurrence of which
involve certain risks and uncertainties detailed in Coastal'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 the 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
Exhibit 99, attached hereto, and in Coastal's Annual Report on Form 10-K for the
year ended December 31, 1998, as filed with the SEC on March 23, 1999.
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, 1998. 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
------------------
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
-------------------------------------
(a) The following exhibits are filed as part
of this report:
Exhibit 27 - Financial Data Schedule
Exhibit 99 - Forward-Looking Information
(b) Form 8-K filed on July 19, 1999 concerning the launching
of Internet Banking on Coastal's web site.
<PAGE>
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: 11/15/99 By /s/ Manuel J. Mehos
-------- --------------------------
Manuel J. Mehos
Chairman of the Board
Chief Executive Officer
Dated: 11/15/99 By /s/ Catherine N. Wylie
-------- ---------------------------
Catherine N. Wylie
Chief Financial Officer
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Sequential Page
Exhibit No. Description Number
- ----------- ------------------------------------------- ---------------
<S> <C> <C>
27 Financial Data Schedule (for SEC use only).
99 Forward-Looking Information
</TABLE>
<PAGE>
<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, 1999 and is qualified in its
entirety by reference to such financial statements
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 31,375
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 4,800
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 101,613
<INVESTMENTS-CARRYING> 931,179
<INVESTMENTS-MARKET> 921,997
<LOANS> 1,753,183
<ALLOWANCE> 14,364
<TOTAL-ASSETS> 2,966,616
<DEPOSITS> 1,601,001
<SHORT-TERM> 795,028
<LIABILITIES-OTHER> 55,028
<LONG-TERM> 381,725
0
27,500
<COMMON> 76
<OTHER-SE> 106,258
<TOTAL-LIABILITIES-AND-EQUITY> 2,966,616
<INTEREST-LOAN> 98,766
<INTEREST-INVEST> 48,633
<INTEREST-OTHER> 2,348
<INTEREST-TOTAL> 149,747
<INTEREST-DEPOSIT> 48,637
<INTEREST-EXPENSE> 92,923
<INTEREST-INCOME-NET> 56,824
<LOAN-LOSSES> 4,366
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 44,775
<INCOME-PRETAX> 15,106
<INCOME-PRE-EXTRAORDINARY> 9,864
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,864
<EPS-BASIC> 1.36
<EPS-DILUTED> 1.33
<YIELD-ACTUAL> 0
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 11,358
<CHARGE-OFFS> 1,572
<RECOVERIES> 212
<ALLOWANCE-CLOSE> 14,364
<ALLOWANCE-DOMESTIC> 14,364
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
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 Coastal, the occurrence of which
involve certain risks and uncertainties detailed in Coastal'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, 1998, as
filed with the SEC on March 23, 1999.
