UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] Quarterly Report Under Section 13 or 15 (d) of
the Securities Exchange Act of 1934
For the Quarterly Period Ended March 31, 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: 6,412,774 AS OF APRIL 30, 1999
<PAGE>
COASTAL BANCORP, INC. AND SUBSIDIARIES
Table of Contents
PART I. FINANCIAL INFORMATION
- -------- ----------------------
<TABLE>
<CAPTION>
<S> <C>
Item 1
Financial Statements
Consolidated Statements of Financial Condition at March 31, 1999
(unaudited) and December 31, 1998 1
Consolidated Statements of Income for the Three-Month Periods Ended
March 31, 1999 and 1998 (unaudited) 2
Consolidated Statements of Comprehensive Income for the Three-Month
Periods Ended March 31, 1999 and 1998 (unaudited) 3
Consolidated Statements of Cash Flows for the Three-Month Periods
Ended March 31, 1999 and 1998 (unaudited) 4
Notes to Consolidated Financial Statements 6
Item 2
Management's Discussion and Analysis of Financial Condition and Results
of Operations 16
Item 3
Quantitative and Qualitative Disclosures About Market Risk 21
</TABLE>
PART II. OTHER INFORMATION
- --------- ------------------
<TABLE>
<CAPTION>
<S> <C> <C>
Item 1 Legal Proceedings 22
Item 2 Changes in Securities 22
Item 3 Default upon Senior Securities 22
Item 4 Submission of Matters to a Vote of Security Holders 22
Item 5 Other Information 22
Item 6 Exhibits and Reports on Form 8-K 22
</TABLE>
SIGNATURES
ITEM 1. FINANCIAL STATEMENTS
- -------- ---------------------
<TABLE>
<CAPTION>
COASTAL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(IN THOUSANDS, EXCEPT SHARE DATA)
March 31, December 31,
1999 1998
------------ -------------
ASSETS (Unaudited)
- ---------------------------------------------------------------------
<S> <C> <C>
Cash and cash equivalents $ 47,801 $ 45,453
Federal funds sold 18,000 --
Loans receivable (note 4) 1,603,898 1,538,149
Mortgage-backed securities held-to-maturity (note 3) 1,062,264 1,154,116
Mortgage-backed securities available-for-sale, at fair value (note 3) 85,878 96,609
U.S. Treasury security available-for-sale, at fair value 2,009 2,016
Mortgage loans held for sale 2,381 --
Accrued interest receivable 15,186 15,518
Property and equipment 32,618 33,116
Stock in the Federal Home Loan Bank of Dallas (FHLB) 50,505 49,819
Goodwill 29,934 30,687
Mortgage servicing rights 3,721 4,049
Prepaid expenses and other assets 10,720 12,629
------------ -------------
$ 2,964,915 $ 2,982,161
============ =============
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
---------------------------------------
<S> <C> <C>
Liabilities:
Deposits (note 5) $1,665,176 $1,705,004
Advances from the FHLB (note 6) 996,576 966,720
Securities sold under agreements to repurchase (note 6) 100,000 100,000
Senior notes payable, net (note 7) 47,900 50,000
Advances from borrowers for taxes and insurance 5,546 3,340
Other liabilities and accrued expenses 16,312 15,583
----------- -----------
Total liabilities 2,831,510 2,840,647
----------- -----------
9.0% noncumulative preferred stock of Coastal Banc ssb (note 10) 28,750 28,750
Commitments and contingencies (notes 4 and 8)
Stockholders' equity (notes 1, 3, 9 and 11):
Preferred stock, no par value; authorized shares 5,000,000;
no shares issued -- --
Common stock, $.01 par value; authorized shares
30,000,000; 7,570,043 and 7,568,255 shares issued
in 1999 and 1998, respectively 76 76
Additional paid-in capital 33,714 33,696
Retained earnings 90,360 88,144
Accumulated other comprehensive income (loss) -
unrealized loss on securities available-for-sale (1,058) (1,374)
Treasury stock at cost (1,160,679 and 499,600 shares in 1999
and 1998) (18,437) (7,778)
----------- -----------
Total stockholders' equity 104,655 112,764
----------- -----------
$2,964,915 $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>
Three Months Ended
March 31,
-------------------
1999 1998
------------------- --------
(Unaudited)
<S> <C> <C>
Interest income:
Loans receivable $ 31,004 $26,940
Mortgage-backed securities 17,750 23,446
FHLB stock, federal funds sold and other interest-earning assets 772 502
------------------- --------
49,526 50,888
------------------- --------
Interest expense:
Deposits 16,810 15,507
Advances from the FHLB:
Short-term 4,006 3,955
Long-term 7,559 3,947
Other borrowed money 1,518 11,229
Senior notes payable 1,217 1,250
------------------- --------
31,110 35,888
------------------- --------
Net interest income 18,416 15,000
Provision for loan losses 2,331 1,450
------------------- --------
Net interest income after provision for loan losses 16,085 13,550
------------------- --------
Noninterest income:
Loan fees and service charges on deposit accounts 1,814 1,324
Loan servicing income, net 134 240
Writedown of purchased mortgage loan premium -- (709)
Other 492 192
------------------- --------
2,440 1,047
------------------- --------
Noninterest expense:
Compensation, payroll taxes and other benefits 7,115 4,940
Office occupancy 2,802 1,989
Data processing 899 608
Amortization of goodwill 753 469
Insurance premiums 303 265
Real estate owned 154 252
Other 1,454 1,812
------------------- --------
13,480 10,335
------------------- --------
Income before provision (benefit) for Federal income taxes 5,045 4,262
Provision (benefit) for Federal income taxes (note 12) 1,626 (2,326)
------------------- --------
Net income before preferred stock dividends 3,419 6,588
Preferred stock dividends of Coastal Banc ssb (Series A) (note 10) 647 647
------------------- --------
Net income available to common stockholders $ 2,772 $ 5,941
=================== ========
Basic earnings per share (note 9) $ 0.40 $ 0.79
=================== ========
Diluted earnings per share (note 9) $ 0.40 $ 0.76
=================== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
<PAGE>
COASTAL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------
1999 1998
------------------- -------
(Unaudited)
<S> <C> <C>
Net income available to common stockholders $ 2,772 $5,941
Other comprehensive income, net of tax:
Unrealized holding gains (losses) on securities available-for-sale
arising during period 316 (29)
------------------- -------
Total comprehensive income $ 3,088 $5,912
=================== =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements
<PAGE>
COASTAL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------
1999 1998
-------------------- ----------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income available to common stockholders $ 2,772 $ 5,941
Adjustments to reconcile net income to common stockholders
to net cash provided by operating activities:
Depreciation and amortization of property and equipment,
mortgage servicing rights and prepaid expenses and other assets 2,437 2,004
Net premium amortization 140 1,867
Provision for loan losses 2,331 1,450
Amortization of goodwill 753 469
Originations and purchases of mortgage loans held for sale (2,381) (7,154)
Stock dividends from the FHLB (676) (431)
Decrease (increase) in:
Accrued interest receivable 332 (406)
Other, net 2,159 1,714
-------------------- ----------
Net cash provided by operating activities 7,867 5,454
-------------------- ----------
Cash flows from investing activities:
Net increase in federal funds sold (18,000) (3,500)
Purchases of mortgage-backed securities held-to-maturity (3,080) --
Principal repayments on mortgage-backed securities held-to-maturity 95,269 19,794
Principal repayments on mortgage-backed securities
available-for-sale 11,219 169
Purchases of loans receivable (143,690) (121,593)
Net decrease in loans receivable 74,556 42,226
Net purchases of property and equipment (772) (1,661)
Purchases of FHLB stock (10) (1,930)
-------------------- ----------
Net cash provided (used) by investing activities 15,492 (66,495)
-------------------- ----------
</TABLE>
<PAGE>
COASTAL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------
1999 1998
-------------------- ------------
(Unaudited)
<S> <C> <C>
Cash flows from financing activities:
Net decrease in deposits $ (39,776) $ (7,707)
Advances from the FHLB 1,602,772 1,013,550
Principal payments on advances from the FHLB (1,572,916) (997,220)
Securities sold under agreements to repurchase and federal funds
purchased 37,783 1,817,924
Purchases of securities sold under agreements to repurchase and
federal funds purchased (37,783) (1,780,482)
Net increase in advances from borrowers for taxes and insurance 2,206 3,141
Exercise of stock options for purchase of common stock, net 18 369
Purchase of Treasury Stock (10,659) --
Repurchase of Senior Notes (2,100) --
Dividends paid (556) (604)
-------------------- ------------
Net cash provided (used) by financing activities (21,011) 48,971
-------------------- ------------
Net increase (decrease) in cash and cash equivalents 2,348 (12,070)
Cash and cash equivalents at beginning of period 45,453 37,096
-------------------- ------------
Cash and cash equivalents at end of period $ 47,801 $ 25,026
==================== ============
Supplemental schedule of cash flows-interest paid $ 31,463 $ 33,920
==================== ============
Supplemental schedule of noncash investing and financing activities:
Foreclosures of loans receivable $ 528 $ 1,595
==================== ============
</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 March 31, 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. Accordingly,
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 March 31, 1999,
1,160,679 shares had been repurchased in the open market at an average
repurchase price of $15.88 per share for a total cost of $18.4 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 March 31, 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 $ 769,561 $ 4,381 $ (7,252) $ 766,690
REMICS - Non-agency 199,569 403 (1,360) 198,612
FNMA certificates 62,882 171 (847) 62,206
GNMA certificates 19,523 17 (19) 19,521
Non-agency securities 10,729 86 (23) 10,792
----------- ----------- ------------ -----------
$ 1,062,264 $ 5,058 $ (9,501) $ 1,057,821
=========== =========== ============ ===========
Available-for-sale:
REMICS - Agency $ 86,715 $ 3 $ (1,630) $ 85,088
REMICS - Non-agency 797 -- (7) 790
----------- ----------- ------------ -----------
$ 87,512 $ 3 $ (1,637) $ 85,878
=========== =========== ============ ===========
</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 March 31, 1999 and December 31, 1998 were as follows
(dollars in thousands):
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
---------------- -------------------
(Unaudited)
<S> <C> <C>
Real estate mortgage loans:
First-lien mortgage, primarily residential $ 763,904 $ 690,510
Commercial 277,608 257,723
Multifamily 115,914 119,447
Residential construction 133,222 115,714
Acquisition and development 71,541 75,932
Commercial construction 42,790 40,344
Commercial loans, secured by residential mortgage
loans held for sale 104,278 173,124
Commercial loans, secured by mortgage servicing
rights 8,054 3,867
Commercial, financial and industrial 112,048 92,218
Loans secured by savings deposits 12,717 13,164
Consumer and other loans 71,606 66,989
---------------- -------------------
1,713,682 1,649,032
Loans in process (97,239) (99,790)
Allowance for loan losses (13,157) (11,358)
Unearned interest and loan fees (2,907) (3,493)
Premium to record purchased loans, net 3,519 3,758
---------------- -------------------
$ 1,603,898 $ 1,538,149
================ ===================
Weighted average yield 8.27% 8.55%
================ ===================
</TABLE>
At March 31, 1999, Coastal had outstanding commitments to originate or
purchase $123.1 million of real estate mortgage and other loans and had
commitments under lines of credit to originate primary construction and other
loans of approximately $189.3 million. In addition, at March 31, 1999, Coastal
had $7.2 million of outstanding letters of credit. Management anticipates the
funding of these commitments through normal operations.
At March 31, 1999 and December 31, 1998, the carrying value of loans that
were considered to be impaired totaled approximately $12.1 million and $1.7
million, respectively and the related allowance for loan losses on those
impaired loans totaled $3.1 million and $880,000 at March 31, 1999 and December
31, 1998, respectively. The average recorded investment in impaired loans
during the three months ended March 31, 1999 and 1998 was $9.4 million and $1.9
million, respectively.
<PAGE>
An analysis of activity in the allowance for loan losses for the three
months ended March 31, 1999 and 1998 is as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended March 31,
------------------------------
1999 1998
------------------------------ -------
(Unaudited)
<S> <C> <C>
Balance, beginning of period $ 11,358 $7,412
Provision for loan losses 2,331 1,450
Charge-offs (553) (350)
Recoveries 21 173
------------------------------ -------
Balance, end of period $ 13,157 $8,685
============================== =======
</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. At this time, Coastal is unable to determine the timing,
probability, or the amount of any loss which might result from the default by
the Mortgage Banker. 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.
Coastal services for others loans receivable which are not included in the
Consolidated Financial Statements. The total amounts of such loans were $483.5
million and $519.2 million at March 31, 1999 and December 31, 1998,
respectively.
<PAGE>
(5) DEPOSITS
Deposits, their stated rates and the related weighted average interest
rates, at March 31, 1999 and December 31, 1998 are summarized as follows
(dollars in thousands):
<TABLE>
<CAPTION>
Stated Rate March 31, 1999 December 31, 1998
--------------- ---------------- ------------------
(Unaudited)
<S> <C> <C> <C>
Noninterest-bearing checking 0.00% $ 83,166 $ 95,398
Interest-bearing checking 1.00 - 2.00 51,262 63,067
Savings accounts 1.98 - 2.75 49,810 48,571
Money market demand accounts 0.00 - 4.51 347,170 339,481
---------------- ------------------
531,408 546,517
------------------ ----------------
Certificate accounts 2.00 - 2.99 2,694 6,538
3.00 - 3.99 80,377 38,614
4.00 - 4.99 411,456 272,325
5.00 - 5.99 552,305 747,585
6.00 - 6.99 77,325 83,277
7.00 - 7.99 8,463 8,727
8.00 - 8.99 478 699
9.00 - 9.99 305 305
over 10.00 18 18
--------------- ----------------
1,133,421 1,158,088
--------------- ----------------
Premium (discount) to record purchased
deposits, net 347 399
--------------- ----------------
$ 1,665,176 $ 1,705,004
=============== ================
Weighted average rate 4.03% 4.11%
=============== ================
</TABLE>
The scheduled maturities of certificate accounts outstanding at March 31,
1999 were as follows (dollars in thousands):
<TABLE>
<CAPTION>
March 31, 1999
----------------
(Unaudited)
<S> <C>
0 to 12 months $ 976,636
13 to 24 months 117,099
25 to 36 months 18,365
37 to 48 months 12,533
49 to 60 months 8,527
Over 60 months 261
----------------
$ 1,133,421
================
</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 March 31, 1999 and December 31, 1998 was 4.93%.
The weighted average interest rates on advances from the FHLB at March 31,
1999 and December 31, 1998 were 5.02% and 5.24%, respectively. The scheduled
maturities and related weighted average interest rates on advances from the FHLB
at March 31, 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>
1999 4.98% $818,914
2000 5.53 12,237
2001 5.89 12,847
2002 4.91 73,815
2003 5.22 794
2004 6.47 2,508
2005 5.57 129
2006 6.85 3,184
2007 6.65 1,144
2008 4.72 52,801
2009 8.15 4,352
2010 5.66 187
2011 6.62 1,410
2012 5.68 217
2013 5.71 6,850
2014 5.43 2,997
2018 5.28 2,190
--------
$996,576
========
</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
first quarter of 1999, Coastal, after receipt of an unsolicited offer,
repurchased $2.1 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 March
31, 1999, Coastal had interest rate swap and cap agreements having notional
principal amounts totaling $41.9 million and $195.0 million, respectively.
The terms of the interest rate swap agreements outstanding at March 31,
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 March 31, 1999:
1999 $ 14,600 Three-month 6.926% 5.000% $ (155)
2000 4,800 Three-month 6.170 5.000 (63)
2000 2,345 Three-month 6.000 5.000 (24)
2004 3,900 One-month 5.635 4.939 15
2005 16,225 Three-month 6.500 5.020 (691)
--------------- --------------
41,870 $ (918)
=============== ==============
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 5.23% and
the weighted average interest payment rate on all of the interest rate swap
agreements was approximately 6.63% for the three months ended March 31, 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 $134,000 for the three months ended March 31, 1999
and approximately $86,000 for the three months ended March 31, 1998. Coastal
had pledged approximately $6.6 million of mortgage-backed securities to secure
interest rate swap agreements at March 31, 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 $109,000 and $115,000 at March 31, 1999 and December 31, 1998,
respectively, with the estimated fair value of the agreements being $480,000 and
$888,000 at March 31, 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 $6,000 and
$24,000 for the three months ended March 31, 1999 and 1998, respectively.
Interest rate cap agreements outstanding at March 31, 1999 (unaudited)
expire as follows (dollars in thousands):
<TABLE>
<CAPTION>
Year of Strike Rate Notional
Expiration Range Amount
- ----------- --------------- ---------
<S> <C> <C>
1999 7.25 - 11.00% $ 49,339
2000 8.50 - 9.50 11,620
2001 7.00 - 9.00 35,051
2003 8.00 - 8.50 99,000
---------
195,010
=========
</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 three- month periods ended March
31, 1999 and 1998 (dollars in thousands, except per share data) (unaudited):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------
<S> <C> <C>
1999 1998
------------------- ----------
Net income available to common stockholders $ 2,772 $ 5,941
=================== ==========
Weighted average number of common shares
outstanding used in basic EPS calculation 6,856,505 7,541,310
Add assumed exercise of outstanding stock
options as adjusted for dilutive securities 155,166 257,877
------------------- ----------
Weighted average number of common shares
outstanding used in diluted EPS calculation 7,011,671 7,799,187
=================== ==========
Basic EPS $ 0.40 $ 0.79
=================== ==========
Diluted EPS $ 0.40 $ 0.76
=================== ==========
</TABLE>
The weighted average number of common shares outstanding has been reduced
in 1999 by the treasury stock held by Coastal. As of March 31, 1999, Coastal
had 1,160,679 common shares in treasury.
(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 March 31, 1999, 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
Capital Requirement Amount Ratio Amount Ratio Amount Ratio
- -------------------- ------- ------ -------------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Tier 1 (core) $ 161,145 5.59% $ 115,238 4.00% $144,047 5.00%
Tier 1 risk-based 161,145 9.39 68,666 4.00 102,999 6.00
Total risk-based 174,302 10.15 137,331 8.00 171,664 10.00
</TABLE>
As of March 31, 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 three months ended March 31, 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 March 31, 1999. This tax benefit
is expected to continue until the second quarter of 2001.
(13) RECENT ACCOUNTING STANDARDS
The Financial Accounting Standards Board's Statement No. 133 ("Statement
133"), "Accounting for Derivative Instruments and for Hedging Activities," was
issued in June 1998. Statement 133 requires companies to recognize all
derivatives as either assets or liabilities in the statement of financial
condition and measure those instruments at fair value. Statement 133 requires
that changes in fair value of a derivative be recognized currently in earnings
unless specific hedge accounting criteria are met. Statement 133 is effective
for fiscal years beginning after June 15, 1999. Coastal is evaluating the
impact, if any, Statement 133 may have on its future consolidated financial
statements.
(14) Coastal Bancorp, Inc. Preferred Stock
The week of May 10, 1999, Coastal Bancorp, Inc. ("Bancorp") issued
1,100,000 shares of 9.12% Series A Cumulative Preferred Stock, no par value, at
a price of $25 per share to the public. 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, 203 at Bancorp's option. The estimated $26.4 million net
proceeds may be used for acquisitions, although there are presently no
agreements or understandings with respect to any such acquisition; repurchases
in the open market of Bancorp's outstanding common stock; repurchases in the
open market of the outstanding 10% Senior Notes Due 2002; and capital
contributions to the Bank to support growth and to provide working capital. The
proceeds may be invested temporarily in short-term investments.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
-------------------------------------------------------------------
RESULTS OF OPERATIONS
-------------------
Financial Condition
- --------------------
Total assets decreased 0.6% or $17.2 million from December 31, 1998 to
March 31, 1999. The net decrease resulted primarily from decreases of $91.9
million and $10.7 million in mortgage-backed securities held-to-maturity and
mortgage-backed securities available-for-sale, respectively, offset by an
increase in loans receivable of $65.7 million and an increase in federal funds
sold of $18.0 million. The decrease in mortgage-backed securities was due to
principal payments received. The increase in loans receivable was primarily due
to bulk residential mortgage loan purchases of $135.6 million and $8.1 million
of consumer loan purchases from correspondent lenders, offset by principal
payments received and a decrease of $68.8 million in commercial loans, secured
by residential mortgage loans held for sale, because of the decreased activity
during the period by these types of customers.
Deposits decreased $39.8 million or 2.34% from December 31, 1998 to March
31, 1999 and advances from the FHLB increased 3.09% or $29.9 million from
December 31, 1998 to March 31, 1999. Stockholders' equity decreased 7.2% or
$8.1 million from December 31, 1998 to March 31, 1999 as a result of additional
treasury stock acquired of $10.7 million and dividends declared, offset somewhat
by net income and a $316,000 decrease in accumulated other comprehensive income.
Results of Operations for the Three Months Ended March 31, 1999 and 1998
- --------------------------------------------------------------------------------
General
-------
For the three months ended March 31, 1999, net income available to common
stockholders was $2.8 million compared to $5.9 million for the three months
ended March 31, 1998. During the first quarter of 1999, net income was reduced
by a $1.7 million additional provision for loan losses (above the planned
quarterly provision of $675,000). 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, 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. At this time, Coastal is unable to determine the timing, probability, or
the amount of any loss which might result from the default by the Mortgage
Banker. 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 loans
acquired in the 1998 acquisition of 12 branch offices from Pacific Southwest
Bank (the "Valley Acquisition").
Net income in the first quarter of 1998 was 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 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 until the second quarter of 2001. Excluding the
net benefit from these nonrecurring items, net income available to common
stockholders from ongoing core operations was $3.4 million or $0.43 per diluted
share for the three months ended March 31, 1998.
<PAGE>
Net interest income increased $3.4 million and noninterest income
(excluding the writedown of purchased mortgage loan premium in 1998) increased
$684,000 from the three months ended March 31, 1998 to the three months ended
March 31, 1999. These increases were offset by the increase in the provision
for loan losses of $881,000 and the increase in noninterest expense of $3.1
million. The provision (benefit) for federal income taxes (excluding the
one-time effect of the $3.7 million reversal of accrued income taxes in 1998)
increased $273,000 due to the increased income before provision for federal
income taxes.
Interest Income
----------------
Interest income for the three months ended March 31, 1999 decreased $1.4
million or 2.7% from the three months ended March 31, 1998. The decrease is due
to a decrease in average interest-earning assets of $74.7 million, while the
average yield remained constant at 7.11%. Interest income on loans receivable
increased $4.1 million due to a $208.0 million increase in the average balance,
offset slightly by a decrease in the average yield from 8.20% for the three
months ended March 31, 1998 to 8.15% for the same period in 1999. Interest
income on mortgage-backed securities decreased $5.7 million due to a $304.6
million decrease in the average balance and a decrease in the average yield from
6.21% for the three months ended March 31, 1998 to 5.89% for the same period in
1999.
In addition, interest income on FHLB stock, federal funds sold and other
interest-earning assets increased $270,000. Total interest-earning assets for
the three months ended March 31, 1999 averaged $2.8 billion as compared to $2.9
billion for the three months ended March 31, 1998.
Interest Expense
-----------------
Interest expense on interest-bearing liabilities was $31.1 million for the
three months ended March 31, 1999, as compared to $35.9 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 5.37% for the three
months ended March 31, 1998 to 4.81% for the three months ended March 31, 1999
and a $68.3 million decrease in the average balance of interest-bearing
liabilities. The 56 basis point decrease in the average rate paid on
interest-bearing liabilities was due to the lower cost deposits acquired in the
1998 Valley 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 $683.8 million decrease in securities sold under agreements to repurchase
offset somewhat by a $353.2 million increase in advances from the FHLB and a
$263.8 million increase in interest-bearing deposits.
Net Interest Income
---------------------
Net interest income was $18.4 million for the three months ended March 31,
1999 and $15.0 million for the same period in 1998. Net interest margin
("Margin") was 2.64% for the three months ended March 31, 1999 compared to 2.10%
for the three months ended March 31, 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
1.74% for the three months ended March 31, 1998 to 2.30% for the three months
ended March 31, 1999. Management also calculates an alternative Spread which
includes noninterest-bearing deposits. Under this calculation, the alternative
Spreads for the three months ended March 31, 1999 and 1998 were 2.55% and 1.92%,
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 56 basis points. Average
net interest-earning assets decreased $6.4 million from the three months ended
March 31, 1998 to the three months ended March 31, 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 to approximately 15% of total
assets and noninterest-bearing deposits to approximately 10% of total deposits
within three to five years.
Provision for Loan Losses
----------------------------
The provision for loan losses was $2.3 million for the three months ended
March 31, 1999 compared to $1.5 million for the three months ended March 31,
1998. The increase in the provision for loan losses (over the planned quarterly
provision of $675,000) 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 loans acquired in the 1998 Valley Acquisition. During the three
months ended March 31, 1998, an additional provision for loan losses of $1.0
million (over the planned quarterly provision of $450,000) was recorded due to
the changes in the composition of the loan portfolio and Coastal's emphasis on
business lending during that period. The allowance for loan losses as a
percentage of total loans was 0.82% at March 31, 1999 and 0.65% at March 31,
1998. 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 March 31, 1999, noninterest income (excluding
the writedown of purchased mortgage loan premium in 1998) increased $684,000 to
$2.4 million, compared to $1.8 million for the three months ended March 31,
1998. The increase in noninterest income was primarily due to an increase of
$490,000 in loan fees and service charges on deposit accounts and a $300,000
increase in other noninterest income. The increase in loan fees and service
charges on deposit accounts consisted of a $650,000 increase in service charges
on deposit accounts due to the increase in transaction type deposit accounts,
including those acquired in the Valley Acquisition, offset somewhat by a
$160,000 decrease in loan fees. These increases were somewhat offset by a
$106,000 decrease in loan servicing income due to the declining loan servicing
portfolio.
Noninterest Expense
--------------------
For the three months ended March 31, 1999, noninterest expense increased
$3.1 million from the three months ended March 31, 1998. Compensation, payroll
taxes and other benefits as well as office occupancy expense increased $2.2
million and $813,000, respectively, from the three months ended March 31, 1998
to the three months ended March 31, 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 Valley Acquisition. In addition, the
amortization of goodwill increased $284,000 and data processing expense
increased $291,000 primarily due to the Valley Acquisition. Other changes
included a $38,000 increase in insurance premiums, a $98,000 decrease in real
estate owned expense and a $358,000 decrease in other operating expenses.
Provision (benefit) for Federal Income Taxes
-------------------------------------------------
The provision for federal income taxes for the three months ended March 31,
1999 was $1.6 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 three months ended March 31, 1998 of $1.4 million. The slight
increase was due to the increased income before provision (benefit) for federal
income taxes in 1999.
<PAGE>
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 March 31,
1999, Coastal had binding commitments to originate or purchase loans totaling
approximately $123.1 million and had $97.2 million of undisbursed loans in
process. Scheduled maturities of certificates of deposit during the 12 months
following March 31, 1999 totaled $976.6 million at March 31, 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 March 31, 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 the 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.
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 by June 30, 1999. 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. Coastal
anticipates that mission critical systems will be Year 2000 compliant by June
30, 1999.
<PAGE>
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 will have 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.
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.
<PAGE>
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 8K filed on February 1, 1999 concerning the announcement that a
member of the Board of Directors had resigned effective November 24, 1998.
(c) Form 8K filed on February 8, 1999 concerning the election of Paul W.
Hobby to the Board of Directors effective February 1, 1999.
(d) Form 8K filed on March 15, 1999 concerning the announcement that Coastal
completed the repurchase of an additional 500,000 shares of its common stock
under the December 21, 1998 stock repurchase plan. In addition to the
announcement that on February 25, 1999, the Board of Directors authorized the
extension of the repurchase plan for up to an additional 500,000 shares.
(e) Form 8K filed on March 31, 1999 concerning the status of a nonaccrual
loan and the related allowance for loan losses.
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: 5/14/99 By /s/ Manuel J. Mehos
------- --------------------
Manuel J. Mehos
Chairman of the Board
Chief Executive Officer
Dated: 5/14/99 By /s/ Catherine N. Wylie
------- -----------------------
Catherine N. Wylie
Chief Financial Officer
Exhibit 27
Financial Data Schedule
Exhibit 99
Forward-Looking Information
EXHIBIT 99
Forward-Looking Information
"Safe Harbor" Statement under the Private Securities Litigation Reform Act
of 1995: The statements contained in this Quarterly Report on Form 10-Q which
are not historical facts contain forward looking information with respect to
plans, projections or future performance of 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.
\\enterprise\data\acctexe\watkins\word\form-10q\33199edg.rtf
<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 15 of the Company's Form
10-Q for the year-to-date March 31, 1999 and is qualified in its entirety by
reference to such financial statements
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 47,801
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 18,000
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0
0
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<ALLOWANCE-DOMESTIC> 13,157
<ALLOWANCE-FOREIGN> 0
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</TABLE>
