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, 2000
[ ] 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: 5,676,783 AS OF OCTOBER 31, 2000
<PAGE>
COASTAL BANCORP, INC. AND SUBSIDIARIES
Table of Contents
PART I. FINANCIAL INFORMATION
-------- ----------------------
<TABLE>
<CAPTION>
<S> <C> <C>
Item 1 Financial Statements (unaudited)
Consolidated Statements of Financial Condition at September 30, 2000
and December 31, 1999 1
Consolidated Statements of Income for the Nine-Month Periods Ended
September 30, 2000 and 1999 2
Consolidated Statements of Income for the Three-Month Periods Ended
September 30, 2000 and 1999 3
Consolidated Statements of Comprehensive Income for the Nine-Month and
Three-Month Periods Ended September 30, 2000 and 1999 4
Consolidated Statements of Cash Flows for the Nine-Month Periods
Ended September 30, 2000 and 1999 5
Notes to Consolidated Financial Statements 7
Management's Discussion and Analysis of Financial Condition and Results
Item 2 of Operations 17
Item 3 Quantitative and Qualitative Disclosures About Market Risk 23
</TABLE>
PART II. OTHER INFORMATION
--------- ------------------
<TABLE>
<CAPTION>
<S> <C> <C>
Item 1 Legal Proceedings 24
Item 2 Changes in Securities and Use of Proceeds 24
Item 3 Default upon Senior Securities 24
Item 4 Submission of Matters to a Vote of Security Holders 24
Item 5 Other Information 24
Item 6 Exhibits and Reports on Form 8-K 24
</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,
ASSETS 2000 1999
--------------------------------------------------------------------- --------------- ----------------
(Unaudited)
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 32,963 $ 48,098
Federal funds sold 10,000 --
Loans receivable (note 4) 1,881,763 1,735,081
Mortgage-backed securities held-to-maturity (fair value of
$844,174 in 2000 and $899,934 in 1999) (note 3) 891,967 917,212
Mortgage-backed securities available-for-sale, at fair value (note 3) 93,729 99,665
U.S. Treasury securities held-to-maturity 995 299
Accrued interest receivable 18,294 16,150
Property and equipment 28,628 30,708
Stock in the Federal Home Loan Bank of Dallas (FHLB) 29,470 56,753
Goodwill 25,360 27,636
Mortgage servicing rights (note 4) -- 3,035
Prepaid expenses and other assets 11,453 13,315
-------------- --------------
$ 3,024,622 $ 2,947,952
============== ==============
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
---------------------------------------
<S> <C> <C>
Liabilities:
Deposits (note 5) $ 1,649,027 $ 1,624,289
Advances from the FHLB (note 6) 558,220 1,096,931
Securities sold under agreements to repurchase and federal
funds purchased 579,371 --
Senior notes payable, net (note 7) 46,900 46,900
Advances from borrowers for taxes and insurance 13,167 3,852
Other liabilities and accrued expenses 16,395 13,774
-------------- --------------
Total liabilities 2,863,080 2,785,746
-------------- --------------
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 13):
Preferred stock, no par value; authorized shares 5,000,000;
9.12% Cumulative, Series A, 1,100,000 shares issued and
outstanding 27,500 27,500
Common stock, $.01 par value; authorized shares
30,000,000; 7,648,503 and 7,616,227 shares issued
in 2000 and 1999 76 76
Additional paid-in capital 32,956 32,683
Retained earnings 106,928 95,508
Accumulated other comprehensive loss -
unrealized loss on securities available-for-sale (3,323) (1,848)
Treasury stock at cost (2,000,000 and 1,283,679 shares in 2000
and 1999) (31,345) (20,463)
-------------- --------------
Total stockholders' equity 132,792 133,456
-------------- --------------
$ 3,024,622 $ 2,947,952
============== ==============
</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,
-----------------------------
2000 1999
------------ ----------
(Unaudited)
<S> <C> <C>
Interest income:
Loans receivable $ 124,319 $ 98,766
Mortgage-backed securities 47,642 48,633
FHLB stock, federal funds sold and other interest-earning assets 4,306 2,348
------------ ----------
176,267 149,747
------------ ----------
Interest expense:
Deposits 53,005 48,637
Advances from the FHLB 49,383 35,204
Other borrowed money 7,045 5,482
Senior notes payable 3,517 3,600
------------ ----------
112,950 92,923
------------ ----------
Net interest income 63,317 56,824
Provision for loan losses 4,890 4,366
------------ ----------
Net interest income after provision for loan losses 58,427 52,458
------------ ----------
Noninterest income:
Loan fees and service charges on deposit accounts 6,022 5,755
Loan servicing income, net 244 470
Other 977 1,198
Gain on sale of mortgage servicing rights 2,172 --
------------ ----------
9,415 7,423
------------ ----------
Noninterest expense:
Compensation, payroll taxes and other benefits 21,973 21,682
Office occupancy 8,502 8,495
Data processing 2,512 2,550
Amortization of goodwill 2,276 2,282
Insurance premiums 447 907
Real estate owned 347 333
Other 7,603 6,585
------------ ----------
43,660 42,834
------------ ----------
Income before provision for Federal income taxes and
minority interest 24,182 17,047
Provision for Federal income taxes 7,378 5,242
------------ ----------
Income before minority interest 16,804 11,805
Minority interest - preferred stock dividends of Coastal Banc ssb
(Series A) (note 10) 1,941 1,941
------------ ----------
Net income $ 14,863 $ 9,864
============ ==========
Net income available to common stockholders $ 12,982 $ 8,907
============ ==========
Basic earnings per common share (note 9) $ 2.17 $ 1.36
============ ==========
Diluted earnings per common share (note 9) $ 2.12 $ 1.33
============ ==========
</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,
---------------------------
2000 1999
---------- ----------
(Unaudited)
<S> <C> <C>
Interest income:
Loans receivable $43,199 $34,938
Mortgage-backed securities 16,398 15,144
FHLB stock, federal funds sold and other interest-earning assets 1,158 788
------- -------
60,755 50,870
------- -------
Interest expense:
Deposits 19,022 15,759
Advances from the FHLB 12,894 12,973
Other borrowed money 7,044 1,391
Senior notes payable 1,172 1,186
------- -------
40,132 31,309
------- -------
Net interest income 20,623 19,561
Provision for loan losses 900 1,360
------- -------
Net interest income after provision for loan losses 19,723 18,201
------- -------
Noninterest income:
Loan fees and service charges on deposit accounts 1,970 2,031
Loan servicing income, net -- 184
Other 395 355
------- -------
2,365 2,570
------- -------
Noninterest expense:
Compensation, payroll taxes and other benefits 7,260 7,277
Office occupancy 2,822 2,856
Data processing 812 788
Amortization of goodwill 762 768
Insurance premiums 149 292
Real estate owned 138 56
Other 2,430 2,499
------- -------
14,373 14,536
------- -------
Income before provision for Federal income taxes and
minority interest 7,715 6,235
Provision for Federal income taxes 2,338 1,843
------- -------
Income before minority interest 5,377 4,392
Minority interest - preferred stock dividends of Coastal Banc ssb
(Series A) (note 10) 647 647
------- -------
Net income $ 4,730 $ 3,745
======= =======
Net income available to common stockholders $ 4,103 $ 3,118
======== =======
Basic earnings per common share (note 9) $ 0.73 $ 0.50
======== ========
Diluted earnings per common share (note 9) $ 0.71 $ 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,
-------------------
2000 1999
------------ -----------
(Unaudited)
<S> <C> <C>
Net income $ 14,863 $ 9,864
Other comprehensive income (loss), net of tax:
Unrealized holding gains (losses) on securities available-for-sale
arising during period (1,475) 367
------------ -----------
Total comprehensive income $ 13,388 $ 10,231
============ ===========
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
September 30,
----------------------------
2000 1999
---------- ----------
(Unaudited)
<S> <C> <C>
Net income $ 4,730 $ 3,745
Other comprehensive income (loss), net of tax:
Unrealized holding gains (losses) on securities available-for-sale
arising during period 531 94
---------- ----------
Total comprehensive income $ 5,261 $ 3,839
========== ==========
</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,
-------------------------------
2000 1999
------------------- ----------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 14,863 $ 9,864
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 7,055 7,383
Net premium amortization 463 1,239
Provision for loan losses 4,890 4,366
Amortization of goodwill 2,276 2,282
Originations and purchases of mortgage loans held for sale (2,876) (6,237)
Sales of mortgage loans for held for sale 2,898 2,025
Stock dividends from the FHLB (4,114) (2,040)
Gain on sale of mortgage servicing rights (2,172) --
Decrease (increase) in:
Accrued interest receivable (2,144) (434)
Other, net 4,909 1,479
-------------- ----------
Net cash provided by operating activities 26,048 19,927
-------------- ----------
Cash flows from investing activities:
Net increase in federal funds sold (10,000) (4,800)
Purchases of mortgage-backed securities held-to-maturity (2,300) (3,080)
Purchase of mortgage-backed securities available-for-sale -- (26,489)
Purchase of U.S. Treasury securities (692) (299)
Principal repayments on mortgage-backed securities held-to-maturity 27,416 226,497
Principal repayments on mortgage-backed securities
available-for-sale 3,647 22,059
Proceeds from maturity of U.S. Treasury securities available-for-sale -- 2,000
Purchases of loans receivable (236,970) (374,290)
Net decrease in loans receivable 82,186 153,737
Net purchases of property and equipment (1,629) (2,379)
Purchases of FHLB stock (7,603) (2,608)
Proceeds from sales of FHLB stock 39,000 1,692
Proceeds from the sale of mortgage servicing rights 5,001 --
-------------- ----------
Net cash used by investing activities (101,944) (7,960)
-------------- ----------
</TABLE>
<PAGE>
COASTAL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
---------------------------------
2000 1999
------------------- ------------
(Unaudited)
<S> <C> <C>
Cash flows from financing activities:
Net increase (decrease) in deposits $ 24,838 $ (103,846)
Advances from the FHLB 8,133,597 6,448,344
Principal payments on advances from the FHLB (8,672,308) (6,385,211)
Securities sold under agreements to repurchase and federal funds
purchased 1,403,567 319,340
Purchases of securities sold under agreements to repurchase and
federal funds purchased (824,196) (319,340)
Net increase in advances from borrowers for taxes and insurance 9,315 6,929
Proceeds from issuance of preferred stock, net -- 25,942
Exercise of stock options for purchase of common stock, net 273 112
Purchase of treasury stock (10,882) (12,685)
Repurchase of senior notes -- (3,100)
Dividends paid (3,443) (2,530)
--------------- ------------
Net cash provided (used) by financing activities 60,761 (26,045)
--------------- ------------
Net decrease in cash and cash equivalents (15,135) (14,078)
Cash and cash equivalents at beginning of period 48,098 45,453
--------------- ------------
Cash and cash equivalents at end of period $ 32,963 $ 31,375
=============== ============
Supplemental schedule of cash flows-interest paid $ 113,594 $ 92,736
=============== ============
Supplemental schedule of noncash investing and financing activities:
Foreclosures of loans receivable $ 2,794 $ 3,494
=============== ============
</TABLE>
See accompanying Notes to Consolidated Financial Statements
<PAGE>
COASTAL BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
16
(1) BASIS OF PRESENTATION
The accompanying unaudited Consolidated Financial Statements were prepared
in accordance with the instructions for Form 10-Q and, therefore, do not include
all disclosures necessary for a complete presentation of financial condition,
results of operations, and cash flows in conformity with generally accepted
accounting principles. All adjustments which are, in the opinion of management,
of a normal recurring nature and are necessary for a fair presentation of the
interim financial statements, have been included. The results of operations for
the period ended September 30, 2000 are not necessarily indicative of the
results that may be expected for the entire fiscal year or any other interim
period.
On August 27, 1998, December 21, 1998, February 25, 1999, April 27, 2000
and July 27, 2000, the Board of Directors authorized five separate repurchase
plans each for up to 500,000 shares of the outstanding shares of common stock
through an open-market repurchase program and privately negotiated repurchases,
if any. As of September 30, 2000, 2,000,000 shares had been repurchased in the
open market at an average repurchase price of $15.67 per share for a total cost
of $31.3 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 subsidiaries, CoastalBanc Financial Corp. and Coastal Banc Insurance Agency,
Inc. (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.
(3) MORTGAGE-BACKED SECURITIES
Mortgage-backed securities at September 30, 2000 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 $ 646,130 $ 726 $ (35,934) $ 610,922
REMICS - Non-agency 171,318 -- (10,605) 160,713
FNMA certificates 51,847 -- (1,868) 49,979
GNMA certificates 16,030 64 (4) 16,090
Non-agency securities 6,642 -- (172) 6,470
----------- ------ ---------- ---------
$ 891,967 $ 790 $ (48,583) $ 844,174
=========== ====== ========== =========
Available-for-sale:
REMICS - Agency $ 77,506 $ -- $ (5,010) $ 72,496
GNMA certificates 21,335 -- (102) 21,233
----------- ------ ---------- ---------
$ 98,841 $ -- $ (5,112) $ 93,729
=========== ====== ========== =========
</TABLE>
<PAGE>
Mortgage-backed securities at December 31, 1999 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 $ 657,305 $ 2,560 $ (13,224) $ 646,641
REMICS - Non-agency 180,163 41 (4,094) 176,110
FNMA certificates 56,068 9 (2,306) 53,771
GNMA certificates 16,129 -- (89) 16,040
Non-agency securities 7,547 -- (175) 7,372
----------- ------ ---------- ---------
$ 917,212 $ 2,610 $ (19,888) $ 899,934
=========== ======= ========== =========
Available-for-sale:
REMICS - Agency $ 77,343 $ -- $ (2,400) $ 74,943
REMICS - Non-agency 372 -- (4) 368
GNMA certificates 24,792 -- (438) 24,354
----------- ------- ---------- ---------
$ 102,507 $ -- $ (2,842) $ 99,665
=========== ======= ========== =========
</TABLE>
(4) LOANS RECEIVABLE
Loans receivable at September 30, 2000 and December 31, 1999 were as
follows (dollars in thousands):
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
-------------------- -----------------
<S> <C> <C>
Real estate mortgage loans:
First-lien mortgage, primarily residential $ 949,169 $ 836,005
Commercial 333,270 314,292
Multifamily 213,791 163,059
Residential construction 108,826 136,675
Acquisition and development 125,554 103,357
Commercial construction 98,815 65,934
Commercial loans, secured by residential mortgage
loans held for sale 2,934 60,372
Commercial, financial and industrial 99,342 100,195
Loans secured by savings deposits 13,939 13,094
Consumer and other loans 57,801 63,383
-------------------- -----------
2,003,441 1,856,366
Loans in process (99,090) (108,561)
Allowance for loan losses (14,210) (10,493)
Unearned interest and loan fees (3,850) (2,947)
(Discount) premium to record purchased loans, net (4,528) 716
-------------------- -----------------
$ 1,881,763 $ 1,735,081
==================== =================
Weighted average yield 9.19% 8.67%
==================== =================
</TABLE>
<PAGE>
At September 30, 2000, Coastal had outstanding commitments to originate or
purchase $141.8 million of real estate mortgage and other loans and had
commitments under existing lines of credit to originate primary construction and
other loans of approximately $112.9 million. In addition, at September 30,
2000, Coastal had $7.7 million of outstanding letters of credit. Management
anticipates the funding of these commitments through normal operations.
At September 30, 2000 and December 31, 1999, the carrying value of loans
that were considered to be impaired totaled approximately $4.0 million and $2.0
million, respectively and the related allowance for loan losses on those
impaired loans totaled $742,000 and $778,000 at September 30, 2000 and December
31, 1999, respectively. The average recorded investment in impaired loans during
the nine months ended September 30, 2000 and 1999 was $3.3 million and $11.1
million, respectively.
An analysis of activity in the allowance for loan losses for the nine
months ended September 30, 2000 and 1999 is as follows (in thousands):
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
2000 1999
-------- --------
<S> <C> <C> <C>
Balance, beginning of period $10,493 $11,358
Provision for loan losses 4,890 4,366
Charge-offs (1,545) (1,572)
Recoveries 372 212
-------- --------
Balance, end of period $14,210 $14,364
======== ========
</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
"MCA"). The lead lender ("Lead Lender") in this facility is a major commercial
bank and the loan was secured by subprime residential loans. In late January
1999, due to a lack of liquidity, MCA ceased operations and shortly thereafter
was seized by the Michigan Bureau of Financial Institutions. A conservator was
appointed to take control of MCA'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 MCA on or about February 10, 1999, by
the conservator, who was appointed the "debtor-in-possession," to allow the
conservator time to develop a plan of reorganization while protecting the assets
of MCA.
Effective December 31, 1998, Coastal placed this loan on nonaccrual and had
allocated $1.5 million of the general allowance to this loan. During 1999,
based on updated information received, management made the decision to provide
for and charge-off the remaining balance of the loan. Throughout 1999, Coastal
worked with the Lead Lender and the bankruptcy trustee to determine the value of
and sell the underlying collateral. As of December 31, 1999, Coastal had
received only $1.1 million in proceeds from the collateral on the MCA loan. In
addition, on January 12, 2000, Coastal filed a lawsuit against the Lead Lender
in the participation seeking to recover losses incurred as a result of actions
or omissions of the Lead Lender related to the loan to MCA. Due to the
uncertainty of the value of the remaining collateral, its marketability and the
timing of recovery, if any, from the lawsuit, Coastal charged-off the remaining
$8.9 million balance of this loan in 1999. Coastal will continue to work with
the Lead Lender and the bankruptcy trustee to recover any funds, if possible,
from the collateral or MCA. During the three months ended March 31, 2000,
Coastal received $180,000 in proceeds from the MCA loan which was recorded as a
recovery in the allowance for loan losses during the period. No other proceeds
were received during the nine months ended September 30, 2000.
Effective March 31, 2000, Coastal sold its mortgage servicing rights
portfolio and recorded a nonrecurring gain of $2.2 million. Pursuant to a
purchase and sale agreement, Coastal sold its rights to service approximately
$389.1 million of mortgage loans for third party investors. Coastal will
continue to service the loans in its own loans receivable portfolio.
(5) DEPOSITS
Deposits, their stated rates and the related weighted average interest
rates, at September 30, 2000 and December 31, 1999, are summarized as follows
(dollars in thousands):
<TABLE>
<CAPTION>
Stated Rate September 30, 2000 December 31, 1999
-------------- ------------------ -------------------
<S> <C> <C> <C>
Noninterest-bearing checking 0.00% $ 69,767 $ 97,146
Interest-bearing checking 0.75 - 2.00 52,841 65,229
Savings accounts 1.49 - 3.00 45,047 46,011
Money market demand accounts 0.00 - 6.31 372,013 331,082
------------------- --------------------
539,668 539,468
------------------- --------------------
Certificate accounts 2.00 - 2.99 146 461
3.00 - 3.99 797 23,288
4.00 - 4.99 58,979 446,746
5.00 - 5.99 381,495 543,980
6.00 - 6.99 663,083 62,363
7.00 - 7.99 4,563 7,580
8.00 - 8.99 108 103
9.00 - 9.99 99 99
over 10.00 -- 12
------------------- --------------------
1,109,270 1,084,632
------------------- --------------------
Premium on purchased deposits 89 189
------------------- --------------------
$ 1,649,027 $1,624,289
=================== ====================
Weighted average interest rate 4.72% 3.96%
=================== ====================
</TABLE>
The scheduled maturities of certificate accounts outstanding at September
30, 2000 were as follows (dollars in thousands):
<TABLE>
<CAPTION>
September 30, 2000
-------------------
<S> <C>
0 through 12 months $ 1,017,655
13 through 24 months 66,691
25 through 36 months 15,758
37 through 48 months 4,359
49 through 60 months 4,595
Over 60 months 212
-------------------
$ 1,109,270
===================
</TABLE>
(6) ADVANCES FROM THE FHLB AND SECURITIES SOLD UNDER AGREEMENTS TO
REPURCHASE
(A) The weighted average interest rates on advances from the FHLB at
September 30, 2000 and December 31, 1999 were 6.59% and 5.72%, respectively.
The scheduled maturities and related weighted average interest rates on advances
from the FHLB at September 30, 2000 are summarized as follows (dollars in
thousands):
<TABLE>
<CAPTION>
Weighted Average
Due during the year ending December 31, Interest Rate Amount
--------------------------------------- ----------------- -------------
<S> <C> <C> <C>
2000 6.70% $203,650
2001 6.23 38,879
2002 6.60 279,406
2003 6.98 5,769
2004 5.80 5,305
2005 6.44 289
2006 6.86 3,241
2007 6.73 1,173
2008 5.61 1,859
2009 8.11 4,061
2010 6.85 862
2011 6.61 1,313
2012 5.68 217
2013 5.75 7,684
2014 5.43 2,935
2018 5.05 1,577
-------------- ------------
6.59% $558,220
============== ============
</TABLE>
Advances from the FHLB are secured by certain first-lien mortgage and
multifamily loans and mortgage-backed securities owned by Coastal.
(B) The weighted average interest rate on securities sold under
agreements to repurchase at September 30, 2000 was 6.56% with the stated
interest rates ranging from 6.54% to 6.58%.
(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
1999, Coastal, after receipt of unsolicited offers, repurchased $3.1 million of
the Senior Notes outstanding at par.
(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, 2000, Coastal had interest rate swap and cap agreements having
notional principal amounts totaling $33.8 million and $158.4 million,
respectively.
The terms of the interest rate swap agreements outstanding at September 30,
2000 and December 31, 1999 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, 2000:
2000 $ 2,135 Three-month 6.000% 6.660% $ 4
2003 14,470 One-month 5.345 6.628 122
2004 3,780 One-month 5.635 6.621 103
2005 13,440 Three-month 6.500 6.680 (127)
--------- -------
$ 33,825 $ 102
========= =======
At December 31, 1999:
2000 $ 4,800 Three-month 6.170% 6.140% $ (70)
2000 2,240 Three-month 6.000 6.184 10
2003 19,290 One-month 5.345 6.476 248
2004 3,842 One-month 5.635 6.463 160
2005 13,440 Three-month 6.500 6.110 215
--------- -------
$ 43,612 $ 563
========= =======
</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 6.42% and
the weighted average interest payment rate on all of the interest rate swap
agreements was approximately 5.92% for the nine months ended September 30, 2000.
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 reduction in interest expense related
to these agreements was $152,000 for the nine months ended September 30, 2000
and the net interest expense related to these agreements was approximately
$441,000 for the nine months ended September 30, 1999. Coastal had pledged
approximately $902,000 of mortgage-backed securities to secure interest rate
swap agreements at September 30, 2000.
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 9.5%, depending on the
agreement. Payments on the interest rate cap agreements are based on the
notional principal amount of the agreements; no funds were actually borrowed or
are to be repaid. The purchase prices of the interest rate cap agreements are
capitalized and included in "prepaid expenses and other assets" in the
accompanying consolidated statements of financial condition and are amortized
over the life of the agreements using the straight-line method. The unamortized
portion of the purchase price of the interest rate cap agreements was
approximately $71,000 and $90,000 at September 30, 2000 and December 31, 1999,
respectively, with the estimated fair value of the agreements being $111,000 and
$750,000 at September 30, 2000 and December 31, 1999, respectively. The
interest rate cap agreements are used to alter the interest rate sensitivity of
a portion of Coastal's mortgage-backed securities and loans receivable. 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 for the nine
months ended September 30, 2000 and 1999. No payments were made to Coastal
under the interest rate cap agreements during the nine months ended September
30, 2000 or 1999.
Interest rate cap agreements outstanding at September 30, 2000 expire as
follows (dollars in thousands):
<TABLE>
<CAPTION>
Year of Strike Rate Notional
Expiration Range Amount
---------- -------------- ---------
<S> <C> <C>
2000 9.50% $ 3,000
2001 7.00 - 9.00 33,426
2002 8.75 - 9.00 18,625
2003 8.00 - 9.00 103,300
---------
$ 158,351
=========
</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 common share ("EPS") for the nine-and three-month
periods ended September 30, 2000 and 1999 (dollars in thousands, except per
share data):
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------------
<S> <C> <C> <C>
2000 1999
----------- -----------
Net income $ 14,863 $ 9,864
Preferred stock dividends (1,881) (957)
----------- -----------
Net income available to common stockholders $ 12,982 $ 8,907
=========== ===========
Weighted average number of common shares
outstanding used in basic EPS calculation 5,990,397 6,543,873
Add assumed exercise of outstanding stock
options as adjusted for dilutive securities 119,624 158,128
----------- -----------
Weighted average number of common shares
outstanding used in diluted EPS calculation 6,110,021 6,702,001
=========== ===========
Basic EPS $ 2.17 $ 1.36
=========== ===========
Diluted EPS $ 2.12 $ 1.33
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
September 30,
-------------------------
<S> <C> <C> <C>
2000 1999
----------- -----------
Net income $ 4,730 $ 3,745
Preferred stock dividends (627) (627)
----------- -----------
Net income available to common stockholders $ 4,103 $ 3,118
=========== ===========
Weighted average number of common shares
outstanding used in basic EPS calculation 5,645,330 6,299,145
Add assumed exercise of outstanding stock
options as adjusted for dilutive securities 146,142 169,267
----------- -----------
Weighted average number of common shares
outstanding used in diluted EPS calculation 5,791,472 6,468,412
=========== ===========
Basic EPS $ 0.73 $ 0.50
=========== ===========
Diluted EPS $ 0.71 $ 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, 2000 and 1999,
Coastal had 2,000,000 and 1,283,679 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, 2000, the Bank's regulatory capital 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) $181,749 5.98% $121,516 4.00% $151,896 5.00%
Tier 1 risk-based 181,749 9.93 73,217 4.00 109,825 6.00
Total risk-based 195,959 10.71 146,433 8.00 183,041 10.00
</TABLE>
As of September 30, 2000, 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) 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 effective for all fiscal quarters of all fiscal years beginning after June
15, 2000. Statement 133 generally requires that changes in fair value of a
derivative be recognized currently in earnings unless specific hedge accounting
criteria are met. Upon implementation of Statement 133, hedging relationships
may be redesignated and securities held-to-maturity may be transferred to
available-for-sale or trading. In June 2000, FASB Statement No. 138 "Accounting
for Certain Derivative Instruments and Certain Hedging Activities" ("Statement
138") was issued. Statement 138 amended the accounting and reporting standards
of Statement 133 for certain derivative instruments, hedging activities and
decisions made by the Derivatives Implementation Group. Coastal will adopt
Statement 133 on January 1, 2001 and is evaluating the impact that Statement
133, as amended, may have on its future consolidated financial statements.
Coastal anticipates that the adoption of this statement could increase the
volatility of reported earnings and stockholders' equity.
<PAGE>
(13) 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, at a price of $25
per share to the public ("Bancorp Preferred Stock"). Dividends on the Bancorp
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 paid on the Bancorp Preferred Stock.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
-------------------------------------------------------------------
Financial Condition
--------------------
Total assets increased 2.6% or $76.7 million from December 31, 1999 to
September 30, 2000. The net increase resulted primarily from an increase of
$146.7 million in loans receivable, in addition to an increase of $10.0 million
in federal funds sold. These increases were somewhat offset by decreases of
$15.1 million, $25.2 million, $5.9 million and $27.3 million in cash and cash
equivalents, mortgage-backed securities held-to-maturity, mortgage-backed
securities available-for-sale and stock in the FHLB, respectively. The increase
in loans receivable was primarily due to a bulk residential mortgage loan
purchase during the first quarter of 2000 of $225.2 million (net of purchase
discount) which was partially offset by principal payments received and a
decrease of $57.4 million in commercial loans secured by residential mortgage
loans held for sale, because of the decreased emphasis on this type of lending.
The decrease in mortgage-backed securities was due to principal payments
received and the decrease in stock in the FHLB was due to the decreased amounts
required to be maintained based on the decreased level of FHLB advances
outstanding.
Deposits increased $24.7 million or 1.5% from December 31, 1999 to
September 30, 2000 and securities sold under agreements to repurchase and
federal funds purchased increased 100.0% or $579.4 million. Advances from the
FHLB decreased $538.7 million or 49.1% during the period due to a reallocation
of borrowings to securities sold under agreements to repurchase with more
favorable market rates. Stockholders' equity decreased 0.5% or $664,000 from
December 31, 1999 to September 30, 2000 as a result of net income, offset by
additional treasury stock acquired of $10.9 million, a $1.5 million increase in
accumulated other comprehensive loss and dividends declared.
Results of Operations for the Nine Months Ended September 30, 2000 and 1999
--------------------------------------------------------------------------------
General
-------
For the nine months ended September 30, 2000, net income was $14.9 million
compared to $9.9 million for the nine months ended September 30, 1999. The
increase in net income for the nine months ended September 30, 2000 was
comprised of the following: a $6.5 million increase in net interest income and
a $2.0 million increase in noninterest income, which was partially offset by a
$524,000 increase in the provision for loan losses, a $826,000 increase in
noninterest expense (although it would have been a $315,000 decrease excluding
the $1.1 million reversal of certain accrued liabilities in 1999), and a $2.1
million increase in the provision for Federal income taxes. The increase in net
interest income was due primarily to the increase in net interest margin to
2.86% for the nine months ended September 30, 2000 from 2.71% for the same
period in 1999. The net interest margin for the period in 2000 includes the
effect of the FHLB special dividend as described below. The increase in
noninterest income was primarily due to the $2.2 million gain recorded on the
sale of Coastal's mortgage servicing rights during the first quarter of 2000, as
discussed below. The increase in noninterest expense was primarily because of
the reversal of certain accrued liabilities totaling $1.1 million during the
first quarter of 1999 and a $291,000 increase in compensation, payroll taxes and
other benefits, which was somewhat offset by a decrease of $460,000 in insurance
premiums expense, primarily due to a decrease in deposit insurance rates, in
addition to small changes in other expense categories.
Interest Income
----------------
Interest income for the nine months ended September 30, 2000 increased
$26.5 million or 17.7% from the nine months ended September 30, 1999. The
increase was due to an increase in average interest-earning assets of $152.7
million and an increase in the average yield to 7.97% (including the effect of
the FHLB special dividend as described below) for the nine months ended
September 30, 2000 from 7.14% for the nine months ended September 30, 1999.
Interest income on loans receivable increased $25.6 million due to a $260.0
million increase in the average balance and an increase in the average yield to
8.84% for the nine months ended September 30, 2000 from 8.16% for the same
period in 1999. Interest income on mortgage-backed securities decreased
$991,000, or 2.0%, due to a $116.9 million decrease in the average balance which
was partially offset by an increase in the average yield to 6.31% for the nine
months ended September 30, 2000 from 5.77% for the same period in 1999.
In addition, interest income on FHLB stock, federal funds sold and other
interest-earning assets increased $2.0 million during the nine months ended
September 30, 2000, as compared to the same period in 1999. The increase was
due to the $9.6 million increase in the average balance and to a special
dividend recorded in the second quarter of 2000. The special dividend was
declared by the FHLB equal to 1.625% of each members' FHLB stock held as of
March 31, 2000 (the "special dividend"). The special dividend amounted to $1.1
million for Coastal and was paid in the form of FHLB stock on April 28, 2000.
The average yield on Coastal's interest-earning assets was 7.92% for the
nine months ended September 30, 2000, excluding the effect of the special
dividend. Total interest-earning assets for the nine months ended September 30,
2000 averaged $3.0 billion compared to $2.8 billion for the nine months ended
September 30, 1999.
Interest Expense
-----------------
Interest expense on interest-bearing liabilities was $113.0 million for the
nine months ended September 30, 2000, as compared to $92.9 million for the same
period in 1999, which represents an increase of $20.0 million, or 21.6%. The
increase in interest expense was due to an increase in the average rate paid on
interest-bearing liabilities to 5.53% for the nine months ended September 30,
2000 from 4.78% for the nine months ended September 30, 1999 and a $133.1
million increase in the average balance of interest-bearing liabilities. The
0.75% increase in the average rate paid on interest-bearing liabilities was
primarily due to higher wholesale funding costs and a higher cost of deposits.
The increase in average interest-bearing liabilities consisted primarily of a
$148.3 million increase in advances from the FHLB, and a $5.5 million increase
in securities sold under agreements to repurchase which were partially offset by
decreases of $19.7 million in interest-bearing deposits and $1.0 million in
senior notes payable due to repurchases. The overall increase in the average
balance of interest-bearing liabilities was primarily due to the additional
borrowing in the first quarter of 2000 to finance the $225.2 million loan
purchase mentioned earlier.
Net Interest Income
---------------------
Net interest income was $63.3 million for the nine months ended September
30, 2000 and $56.8 million for the same period in 1999. Net interest margin
("Margin") was 2.86% (2.81% excluding the effect of the special dividend) for
the nine months ended September 30, 2000 compared to 2.71% for the nine months
ended September 30, 1999. Margin represents net interest income as a percentage
of average interest-earning assets. Net interest spread ("Spread"), defined to
exclude noninterest-bearing deposits, increased to 2.44% (2.39% excluding the
effect of the special dividend) for the nine months ended September 30, 2000
from 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, 2000 and 1999 were 2.72% (2.67% excluding the effect
of the special dividend) and 2.62%, 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 0.83% (0.78% excluding the effect of the special dividend)
increase in the average yield on interest-earning assets during the nine months
ended September 30, 2000 compared to the first nine months of 1999. This
increase in the average yield on interest-earning assets was somewhat offset by
a 0.75% increase in the average rate on interest-bearing liabilities. Average
net interest-earning assets increased $19.6 million for the nine months ended
September 30, 2000 from 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 the amount of generally higher yielding commercial, financial
and industrial loans and noninterest-bearing deposits as a percentage of total
assets and deposits, respectively.
Provision for Loan Losses
----------------------------
The provision for loan losses was $4.9 million for the nine months ended
September 30, 2000 compared to $4.4 million for the nine months ended September
30, 1999. The increase in the provision for loan losses was primarily due
Coastal's continuing focus on more commercial loans and Coastal's plan to
continue to build the allowance for loan losses to a benchmark of approximately
100% of nonperforming loans. Nonperforming loans are those loans on nonaccrual
status as well as those loans greater than ninety (90) days delinquent and still
accruing. At September 30, 2000, Coastal had nonperforming loans totaling $19.5
million, of which $2.5 million were greater than 90 days delinquent and still
accruing interest. Of these nonperforming loans, $14.1 million, or 72.2%, were
first lien residential (single family) mortgage loans, $2.3 million were
commercial, financial and industrial loans, $2.1 million were commercial real
estate loans, with the balance in the residential construction, multifamily
mortgage and consumer and other categories. At September 30, 2000, 82% of the
nonperforming first lien residential mortgage loans were purchased and 18% were
originated. At September 30, 2000, the allowance for loan losses as a
percentage of nonperforming loans was 72.9% compared to 61.3% at December 31,
1999.
Although no assurance can be given, management believes that the allowance
for loan losses at September 30, 2000 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 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, 2000, noninterest income increased
$2.0 million to $9.4 million, compared to $7.4 million for the nine months ended
September 30, 1999. As mentioned previously, the increase in noninterest income
was primarily due to the $2.2 million gain recorded on the sale of Coastal's
mortgage servicing rights during the first quarter of 2000. Due to the
declining servicing portfolio (with an average loan life of approximately seven
years), management decided to take the opportunity to sell Coastal's rights to
service $389.1 million of loans for third party investors, which comprised
Coastal's entire portfolio of loans serviced for others, based on the current
market conditions for loan servicing rights and the expected declining income
benefits of that servicing portfolio on an ongoing basis. As part of the
decision to sell Coastal's mortgage servicing rights, management also decided to
purchase a $230.6 million ($225.2 million net of the purchase discount) package
of single family mortgage loans, which at the time of purchase was expected to
provide net interest income of approximately $750,000 per quarter (or $490,000
net of tax) for the first year. This positive earnings impact is substantially
offsetting the ongoing negative impact on noninterest income of the March 2000
servicing sale (due to the loss of the related loan servicing income, which
amounted to a decrease of $226,000 comparing the 2000 and 1999 periods).
In addition to the effect of the servicing sale, comparing the first nine
months of 2000 to the first nine months of 1999, loan fees and service charges
on deposit accounts increased $267,000 and other noninterest income decreased
$221,000.
Noninterest Expense
--------------------
For the nine months ended September 30, 2000, noninterest expense increased
$826,000 from the nine months ended September 30, 1999, although it would have
been a $315,000 overall decrease excluding the $1.1 million reduction of certain
accrued liabilities during the first quarter of 1999. Other changes included an
increase in compensation, payroll taxes and other benefits of $291,000 and a
decrease of $460,000 in insurance premiums. The decrease in insurance premiums
was primarily due to a decrease in deposit insurance rates.
Provision for Federal Income Taxes
--------------------------------------
The provision for Federal income taxes for the nine months ended September
30, 2000 was $7.4 million compared to the provision for Federal income taxes for
the nine months ended September 30, 1999 of $5.2 million. The increase was due
to the increased income before provision for Federal income taxes and minority
interest in 2000, with the effective tax rate for both periods being
approximately 31%.
Results of Operations for the Three Months Ended September 30, 2000 and 1999
--------------------------------------------------------------------------------
General
-------
For the three months ended September 30, 2000, net income was $4.7 million
compared to $3.7 million for the three months ended September 30, 1999. The
increase was due to a $1.1 million increase in net interest income, a decrease
of $460,000 in the provision for loan losses and a $163,000 decrease in
noninterest expense, which were partially offset by a $205,000 decrease in
noninterest income and a $495,000 increase in the provision for Federal income
taxes.
Interest Income
----------------
Interest income for the three months ended September 30, 2000 increased
$9.9 million or 19.4% from the three months ended September 30, 1999. The
increase was due to an increase in average interest-earning assets of $147.8
million and an increase in the average yield of 0.98% to 8.21% for the three
months ended September 30, 2000. Interest income on loans receivable increased
$8.3 million due to a $195.1 million increase in the average balance and an
increase in the average yield to 9.13% for the three months ended September 30,
2000 from 8.23% for the same period in 1999. Interest income on mortgage-backed
securities increased $1.3 million due to an increase in the average yield to
6.57% for the three months ended September 30, 2000 from 5.72% for the same
period in 1999, offset by a decrease in the average balance of $60.1 million due
to principal payments received.
In addition, interest income on FHLB stock, federal funds sold and other
interest-earning assets increased $370,000. The increase was due primarily to
the increase in the average balance of other interest-earning assets of $12.8
million. Total interest-earning assets for the three months ended September 30,
2000 averaged $3.0 billion as compared to $2.8 billion for the three months
ended September 30, 1999.
Interest Expense
-----------------
Interest expense on interest-bearing liabilities was $40.1 million for the
three months ended September 30, 2000, as compared to $31.3 million for the same
period in 1999. The increase in interest expense was due to an increase in the
average rate paid on interest-bearing liabilities to 5.80% for the three months
ended September 30, 2000 from 4.78% for the three months ended September 30,
1999 and a $144.4 million increase in the average balance of interest-bearing
liabilities. The 1.02% increase in the average rate paid on interest-bearing
liabilities was due primarily to higher market and wholesale funding costs,
including higher deposit costs. The increase in average interest-bearing
liabilities consisted primarily of a $319.18 million increase in the average
balance of securities sold under agreements to repurchase and a $17.5 million
increase in the average balance of interest-bearing deposits, offset by
decreases of $192.3 million and $522,000 in the average balances of advances
from the FHLB and senior notes payable, respectively. The increase in the
average balance of interest-bearing liabilities was primarily due to the
additional borrowing during the first three months of 2000 to finance the loan
purchase mentioned earlier.
<PAGE>
Net Interest Income
---------------------
Net interest income was $20.6 million for the three months ended September
30, 2000 and $19.6 million for the same period in 1999. The increase in net
interest income was primarily due to the increase in Margin to 2.79% for the
three months ended September 30, 2000 from 2.78% for the three months ended
September 30, 1999. Spread decreased to 2.41% for the three months ended
September 30, 2000 from 2.45% for the three months ended September 30, 1999.
Management also calculates an alternative Spread which includes
noninterest-bearing deposits. Under this calculation, the alternative Spreads
for the three months ended September 30, 2000 and 1999 were 2.70% and 2.72%,
respectively. Margin and Spread are affected by the changes in the amount and
composition of interest-earning assets and interest-bearing liabilities. The
overall decreases in Margin and Spread were primarily due to the 0.98% increase
in the average yield on interest-earning assets, primarily on loans receivable,
and the 1.02% increase in the average rate paid on interest-bearing liabilities.
Average net interest-earning assets increased $3.4 million for the three months
ended September 30, 2000 from the three months ended September 30, 1999.
Provision for Loan Losses
----------------------------
The provision for loan losses was $900,000 for the three months ended
September 30, 2000 compared to $1.4 million for the three months ended September
30, 1999. The allowance for loan losses as a percentage of nonperforming loans
was 72.9% at September 30, 2000 and 61.3% at December 31, 1999. The increasing
ratio of the allowance for loan losses to nonperforming loans is due to
Coastal's continuing focus on more commercial loans and Coastal's plan to
continue to build the allowance for loan losses to a benchmark of approximately
100% of nonperforming loans. 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 allowance for loan
losses as Coastal's loan portfolio diversifies to determine if changes or
additions are necessary.
Noninterest Income
-------------------
For the three months ended September 30, 2000, noninterest income decreased
slightly by $205,000 to $2.4 million, compared to $2.6 million for the three
months ended September 30, 1999. The decrease was primarily due to the $184,000
decrease in loan servicing income due to the sale of the mortgage servicing
portfolio in the first quarter of 2000 and a $61,000 decrease in loan fees and
service charges on deposit accounts.
Noninterest Expense
--------------------
For the three months ended September 30, 2000, noninterest expense
decreased $163,000 from the three months ended September 30, 1999. The decrease
was due primarily to a decrease of $143,000 in insurance premiums expense due to
a decrease in deposit insurance premiums.
Provision for Federal Income Taxes
--------------------------------------
The provision for Federal income taxes for the three months ended September
30, 2000 was $2.3 million compared to $1.8 million for the three months ended
September 30, 1999. The increase was due to the increased income before
provision for federal income taxes and minority interest in 2000, with the
effective tax rate for both periods being approximately 30%.
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, in addition
to purchasing treasury stock. At September 30, 2000, Coastal had binding
commitments to originate or purchase loans totaling approximately $141.8 million
and had $99.1 million of undisbursed loans in process. Scheduled maturities of
certificates of deposit during the 12 months following September 30, 2000
totaled $1.0 billion at September 30, 2000. 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, 2000, 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
---------------
Coastal has not experienced any significant disruptions to its financial or
operating activities resulting from Year 2000 issues. Management does not
expect Year 2000 issues to have a material adverse effect on Coastal's
operations or financial results in 2000.
Forward-Looking Information
----------------------------
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 Coastal'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 and warehouse and 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, 1999, as filed with the SEC on March
28, 2000.
<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, 1999. 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 to the financial condition of Coastal.
Item 2. Changes in Securities and Use of Proceeds
-----------------------------------------------
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) Exhibit 27 - Financial Data Schedule is filed as a part of this
report.
(b) Form 8K filed on August 14, 2000 concerning the announcement that the
Board of Directors voted to increase the second quarter of 2000 common stock
dividend to $0.10 per share.
Form 8K filed on August 14, 2000 concerning the announcement that the Board
of Directors had authorized the repurchase of up to 500,000 shares of the
outstanding shares of common stock.
<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: 11/14/00 By /s/ Manuel J. Mehos
----------------------------
Manuel J. Mehos
Chief Executive Officer
Dated: 11/14/00 By /s/ Catherine N. Wylie
----------------------------
Catherine N. Wylie
Chief Financial Officer
<PAGE>
Exhibit 27
Financial Data Schedule
[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 16 of the Company's Form
10-Q for the year-to-date September 30, 2000 and is qualified in its
entirety by reference to such financial statements
[/LEGEND]
<TABLE>
<S> <C>
[PERIOD-TYPE] 9-MOS
[FISCAL-YEAR-END] DEC-31-2000
[PERIOD-START] JAN-01-2000
[PERIOD-END] SEP-30-2000
[CASH] 32,963
[INT-BEARING-DEPOSITS] 0
[FED-FUNDS-SOLD] 10,000
[TRADING-ASSETS] 0
[INVESTMENTS-HELD-FOR-SALE] 93,729
[INVESTMENTS-CARRYING] 892,962
[INVESTMENTS-MARKET] 845,169
[LOANS] 1,881,763
[ALLOWANCE] 14,210
[TOTAL-ASSETS] 3,024,622
[DEPOSITS] 1,649,027
[SHORT-TERM] 821,400
[LIABILITIES-OTHER] 58,312
[LONG-TERM] 363,091
[PREFERRED-MANDATORY] 0
[PREFERRED] 27,500
[COMMON] 76
[OTHER-SE] 105,216
[TOTAL-LIABILITIES-AND-EQUITY] 3,024,622
[INTEREST-LOAN] 124,319
[INTEREST-INVEST] 47,642
[INTEREST-OTHER] 4,306
[INTEREST-TOTAL] 176,267
[INTEREST-DEPOSIT] 53,005
[INTEREST-EXPENSE] 112,950
[INTEREST-INCOME-NET] 63,317
[LOAN-LOSSES] 4,890
[SECURITIES-GAINS] 0
[EXPENSE-OTHER] 45,601
[INCOME-PRETAX] 22,241
[INCOME-PRE-EXTRAORDINARY] 14,863
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] 14,863
[EPS-BASIC] 2.17
[EPS-DILUTED] 2.12
[YIELD-ACTUAL] 0
[LOANS-NON] 0
[LOANS-PAST] 0
[LOANS-TROUBLED] 0
[LOANS-PROBLEM] 0
[ALLOWANCE-OPEN] 10,493
[CHARGE-OFFS] 1,545
[RECOVERIES] 372
[ALLOWANCE-CLOSE] 14,210
[ALLOWANCE-DOMESTIC] 14,210
[ALLOWANCE-FOREIGN] 0
[ALLOWANCE-UNALLOCATED] 0
</TABLE>
