UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] Quarterly Report Under Section 13 or 15 (d) of
the Securities Exchange Act of 1934
For the Quarterly Period Ended June 30, 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: 5,643,903 AS OF JULY 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 June 30, 2000
and December 31, 1999 1
Consolidated Statements of Income for the Six-Month Periods Ended
June 30, 2000 and 1999 2
Consolidated Statements of Income for the Three-Month Periods Ended
June 30, 2000 and 1999 3
Consolidated Statements of Comprehensive Income for the Six-Month and
Three-Month Periods Ended June 30, 2000 and 1999 4
Consolidated Statements of Cash Flows for the Six-Month Periods
Ended June 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 24
</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>
6
ITEM 1. FINANCIAL STATEMENTS
-------- ---------------------
<TABLE>
<CAPTION>
COASTAL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(IN THOUSANDS, EXCEPT SHARE DATA)
June 30, December 31,
ASSETS 2000 1999
--------------------------------------------------------------------- ---------- ------------
(Unaudited)
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 37,742 $ 48,098
Federal funds sold 1,900 --
Loans receivable (note 4) 1,881,644 1,735,081
Mortgage-backed securities held-to-maturity (fair value of
$853,528 in 2000 and $899,934 in 1999) (note 3) 904,641 917,212
Mortgage-backed securities available-for-sale, at fair value (note 3) 94,230 99,665
U.S. Treasury securities held-to-maturity 994 299
Accrued interest receivable 17,965 16,150
Property and equipment 28,742 30,708
Stock in the Federal Home Loan Bank of Dallas (FHLB) 67,367 56,753
Goodwill 26,122 27,636
Mortgage servicing rights (note 4) -- 3,035
Prepaid expenses and other assets 11,938 13,315
---------- ----------
$3,073,285 $2,947,952
========== ==========
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
---------------------------------------
<S> <C> <C>
Liabilities:
Deposits (note 5) $1,616,251 $1,624,289
Advances from the FHLB (note 6) 1,224,948 1,096,931
Senior notes payable, net (note 7) 46,900 46,900
Advances from borrowers for taxes and insurance 10,609 3,852
Other liabilities and accrued expenses 17,149 13,774
----------- -----------
Total liabilities 2,915,857 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; 7,643,453 and 7,616,227 shares issued
in 2000 and 1999, respectively 76 76
Additional paid-in capital 32,912 32,683
Retained earnings 103,389 95,508
Accumulated other comprehensive loss -
unrealized loss on securities available-for-sale (3,854) (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 128,678 133,456
----------- -----------
$3,073,285 $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>
Six Months Ended
June 30,
-----------------------
2000 1999
-----------------------
(Unaudited)
<S> <C> <C>
Interest income:
Loans receivable $ 81,120 $63,828
Mortgage-backed securities 31,244 33,489
FHLB stock, federal funds sold and other interest-earning assets 3,148 1,560
--------------- -------
115,512 98,877
--------------- -------
Interest expense:
Deposits 33,983 32,878
Advances from the FHLB 36,489 22,231
Other borrowed money 1 4,091
Senior notes payable 2,345 2,414
--------------- -------
72,818 61,614
--------------- -------
Net interest income 42,694 37,263
Provision for loan losses 3,990 3,006
--------------- -------
Net interest income after provision for loan losses 38,704 34,257
--------------- -------
Noninterest income:
Loan fees and service charges on deposit accounts 4,052 3,724
Loan servicing income, net 244 286
Other 582 843
Gain on sale of mortgage servicing rights 2,172 --
--------------- -------
7,050 4,853
--------------- -------
Noninterest expense:
Compensation, payroll taxes and other benefits 14,713 14,405
Office occupancy 5,680 5,639
Data processing 1,700 1,762
Amortization of goodwill 1,514 1,514
Insurance premiums 298 615
Real estate owned 209 277
Other 5,173 4,086
--------------- -------
29,287 28,298
--------------- -------
Income before provision for Federal income taxes and
minority interest 16,467 10,812
Provision for Federal income taxes 5,040 3,399
--------------- -------
Income before minority interest 11,427 7,413
Minority interest - preferred stock dividends of Coastal Banc ssb
(Series A) (note 10) 1,294 1,294
--------------- -------
Net income $ 10,133 $ 6,119
=============== =======
Net income available to common stockholders $ 8,879 $ 5,789
=============== =======
Basic earnings per share (note 9) $ 1.45 $ 0.87
=============== =======
Diluted earnings per share (note 9) $ 1.42 $ 0.85
================== =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements
<PAGE>
COASTAL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended
June 30,
-----------------------------
2000 1999
-----------------------------
(Unaudited)
<S> <C> <C>
Interest income:
Loans receivable $ 42,614 $32,824
Mortgage-backed securities 15,811 15,739
FHLB stock, federal funds sold and other interest-earning assets 2,173 788
------------- -------
60,598 49,351
------------- -------
Interest expense:
Deposits 17,450 16,068
Advances from the FHLB 19,394 10,666
Other borrowed money -- 2,573
Senior notes payable 1,172 1,197
------------- -------
38,016 30,504
------------- -------
Net interest income 22,582 18,847
Provision for loan losses 1,590 675
------------- -------
Net interest income after provision for loan losses 20,992 18,172
------------- -------
Noninterest income:
Loan fees and service charges on deposit accounts 1,995 1,910
Loan servicing income, net 43 152
Other 486 351
------------- -------
2,524 2,413
------------- -------
Noninterest expense:
Compensation, payroll taxes and other benefits 7,244 7,290
Office occupancy 2,874 2,837
Data processing 841 863
Amortization of goodwill 761 761
Insurance premiums 149 312
Real estate owned 82 123
Other 2,442 2,632
------------- -------
14,393 14,818
------------- -------
Income before provision for Federal income taxes and
minority interest 9,123 5,767
Provision for Federal income taxes 2,831 1,773
------------- -------
Income before minority interest 6,292 3,994
Minority interest - preferred stock dividends of Coastal Banc ssb
(Series A) (note 10) 647 647
------------ -------
Net income $ 5,645 $ 3,347
============ =======
Net income available to common stockholders $ 5,018 $ 3,017
============ =======
Basic earnings per share (note 9) $ 0.84 $ 0.47
============ =======
Diluted earnings per share (note 9) $ 0.83 $ 0.46
============ =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements
<PAGE>
COASTAL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------------
2000 1999
---------------- ------
(Unaudited)
<S> <C> <C>
Net income $ 10,133 $6,119
Other comprehensive income (loss), net of tax:
Unrealized holding gains (losses) on securities available-for-sale
arising during period (2,006) 273
-------------- ------
Total comprehensive income $ 8,127 $6,392
============== ======
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
June 30,
-----------------------------
2000 1999
-----------------------------
(Unaudited)
<S> <C> <C>
Net income $ 5,645 $3,347
Other comprehensive income (loss), net of tax:
Unrealized holding gains (losses) on securities available-for-sale
arising during period (108) (43)
-------------- -------
Total comprehensive income $ 5,537 $3,304
============== =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements
<PAGE>
COASTAL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------------------
2000 1999
------------------ ----------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 10,133 $ 6,119
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization of property and equipment,
mortgage servicing rights and prepaid expenses and other assets 4,554 4,928
Net premium amortization 357 747
Provision for loan losses 3,990 3,006
Amortization of goodwill 1,514 1,514
Originations and purchases of mortgage loans held for sale (2,876) (2,358)
Sales of mortgage loans for held for sale 2,898 1,936
Stock dividends from the FHLB (3,011) (1,337)
Gain on sale of mortgage servicing rights (2,172) --
Decrease (increase) in:
Accrued interest receivable (1,815) 11
Other, net 5,625 (496)
------------- ----------
Net cash provided by operating activities 19,197 14,070
------------- ----------
Cash flows from investing activities:
Net increase in federal funds sold (1,900) (2,900)
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) --
Principal repayments on mortgage-backed securities held-to-maturity 14,778 179,796
Principal repayments on mortgage-backed securities
available-for-sale 2,333 19,406
Purchases of loans receivable (236,394) (235,485)
Net decrease in loans receivable 83,842 93,384
Net purchases of property and equipment (515) (1,722)
Purchases of FHLB stock (7,603) (10)
Proceeds from the sale of mortgage servicing rights 5,001 --
-------------- ----------
Net cash provided (used) by investing activities (143,450) 22,900
-------------- ----------
</TABLE>
<PAGE>
COASTAL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(IN THOUSANDS)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------------------------------
2000 1999
--------------------------------
(Unaudited)
<S> <C> <C>
Cash flows from financing activities:
Net decrease in deposits $ (7,972) $ (80,285)
Advances from the FHLB 5,467,693 2,763,444
Principal payments on advances from the FHLB (5,339,676) (2,743,155)
Securities sold under agreements to repurchase and federal funds
purchased 6,400 319,340
Purchases of securities sold under agreements to repurchase and
federal funds purchased (6,400) (319,340)
Net increase in advances from borrowers for taxes and insurance 6,757 4,680
Proceeds from issuance of preferred stock, net -- 26,024
Exercise of stock options for purchase of common stock, net 229 54
Purchase of treasury stock (10,882) (12,508)
Repurchase of senior notes -- (2,100)
Dividends paid (2,252) (1,399)
------------------ ------------
Net cash provided (used) by financing activities 113,897 (45,245)
------------------ ------------
Net decrease in cash and cash equivalents (10,356) (8,275)
Cash and cash equivalents at beginning of period 48,098 45,453
------------------ ------------
Cash and cash equivalents at end of period $ 37,742 $ 37,178
================== ============
Supplemental schedule of cash flows-interest paid $ 71,907 $ 62,969
================== ============
Supplemental schedule of noncash investing and financing activities:
Foreclosures of loans receivable $ 1,682 $ 2,583
================== ============
</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 June 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 and April 27,
2000, the Board of Directors authorized four 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 June 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.
On July 27, 2000, the Board of Directors authorized a fifth repurchase plan for
up to an additional 500,000 shares of the outstanding shares of common stock.
(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 June 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> <C>
Held-to-maturity:
REMICS - Agency $ 653,445 $ 858 $ (37,945) $ 616,358
REMICS - Non-agency 174,248 -- (11,372) 162,876
FNMA certificates 53,016 15 (2,360) 50,671
GNMA certificates 16,939 -- (92) 16,847
Non-agency securities 6,993 3 (220) 6,776
----------- ------ ---------- ---------
$ 904,641 $ 876 $ (51,989) $ 853,528
=========== ====== ========== =========
Available-for-sale:
REMICS - Agency $ 77,347 $ -- $ (5,694) $ 71,653
REMICS - Non-agency 210 13 -- 223
GNMA certificates 22,602 -- (248) 22,354
----------- ------ ---------- ---------
$ 100,159 $ 13 $ (5,942) $ 94,230
=========== ====== ========== =========
</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 June 30, 2000 and December 31, 1999 were as follows
(dollars in thousands):
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
--------------- -----------------
<S> <C> <C> <C>
Real estate mortgage loans:
First-lien mortgage, primarily residential $ 995,312 $ 836,005
Commercial 314,922 314,292
Multifamily 202,432 163,059
Residential construction 151,828 136,675
Acquisition and development 97,208 103,357
Commercial construction 77,051 65,934
Commercial loans, secured by residential mortgage
loans held for sale 13,933 60,372
Commercial, financial and industrial 95,885 100,195
Loans secured by savings deposits 13,707 13,094
Consumer and other loans 59,002 63,383
--------------- -----------
2,021,280 1,856,366
Loans in process (117,551) (108,561)
Allowance for loan losses (13,782) (10,493)
Unearned interest and loan fees (3,654) (2,947)
(Discount) premium to record purchased loans, net (4,649) 716
--------------- -----------
$ 1,881,644 $1,735,081
=============== ===========
Weighted average yield 8.91% 8.67%
=============== ===========
</TABLE>
<PAGE>
At June 30, 2000, Coastal had outstanding commitments to originate or
purchase $107.0 million of real estate mortgage and other loans and had
commitments under lines of credit to originate primary construction and other
loans of approximately $86.7 million. In addition, at June 30, 2000, Coastal
had $6.4 million of outstanding letters of credit. Management anticipates the
funding of these commitments through normal operations.
At June 30, 2000 and December 31, 1999, the carrying value of loans that
were considered to be impaired totaled approximately $4.2 million and $2.0
million, respectively and the related allowance for loan losses on those
impaired loans totaled $1.0 million and $778,000 at June 30, 2000 and December
31, 1999, respectively. The average recorded investment in impaired loans during
the six months ended June 30, 2000 and 1999 was $3.0 million and $10.6 million,
respectively.
An analysis of activity in the allowance for loan losses for the six months
ended June 30, 2000 and 1999 is as follows (in thousands):
<TABLE>
<CAPTION>
Six Months Ended June 30,
------------------------
2000 1999
-------- --------
<S> <C> <C> <C>
Balance, beginning of period $10,493 $11,358
Provision for loan losses 3,990 3,006
Charge-offs (1,012) (1,107)
Recoveries 311 127
-------- --------
Balance, end of period $13,782 $13,384
======== ========
</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 proceeds were
received during the three months ended June 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 June 30, 2000 and December 31, 1999, are summarized as follows
(dollars in thousands):
<TABLE>
<CAPTION>
Stated Rate June 30, 2000 December 31, 1999
-------------- ------------- -------------------
<S> <C> <C> <C> <C>
Noninterest-bearing checking 0.00% $ 82,859 $ 97,146
Interest-bearing checking 0.75 - 2.00 58,556 65,229
Savings accounts 1.49 - 3.00 46,698 46,011
Money market demand accounts 0.00 - 6.31 341,262 331,082
------------------- -----------
529,375 539,468
------------------- -----------
Certificate accounts 2.00 - 2.99 246 461
3.00 - 3.99 1,872 23,288
4.00 - 4.99 133,758 446,746
5.00 - 5.99 563,213 543,980
6.00 - 6.99 385,230 62,363
7.00 - 7.99 2,229 7,580
8.00 - 8.99 106 103
9.00 - 9.99 99 99
over 10.00 -- 12
------------------- -----------
1,086,753 1,084,632
------------------- -----------
Premium on purchased deposits 123 189
------------------- -----------
$ 1,616,251 $1,624,289
=================== ===========
Weighted average interest rate 4.42% 3.96%
=================== ===========
</TABLE>
The scheduled maturities of certificate accounts outstanding at June 30,
2000 were as follows (dollars in thousands):
<TABLE>
<CAPTION>
June 30, 2000
--------------
<S> <C>
0 to 12 months $ 955,275
13 to 24 months 103,074
25 to 36 months 15,561
37 to 48 months 7,361
49 to 60 months 5,220
Over 60 months 262
--------------
$ 1,086,753
==============
</TABLE>
(6) ADVANCES FROM THE FHLB
The weighted average interest rates on advances from the FHLB at June 30,
2000 and December 31, 1999 were 6.63% and 5.72%, respectively. The scheduled
maturities and related weighted average interest rates on advances from the FHLB
at June 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 6.71% $ 870,024
2001 6.23 38,934
2002 6.47 279,451
2003 6.98 5,781
2004 5.80 5,364
2005 6.44 289
2006 6.86 3,258
2007 6.72 1,190
2008 5.61 1,874
2009 8.11 4,130
2010 6.85 862
2011 6.61 1,330
2012 5.68 217
2013 5.75 7,708
2014 5.43 2,946
2018 5.05 1,590
----------------- ----------
6.63% $1,224,948
================= ==========
</TABLE>
Advances from the FHLB are secured by certain first-lien mortgage and
multifamily 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
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.
<PAGE>
Coastal utilizes interest rate swap and interest rate cap agreements to
reduce exposure to floating interest rates by altering the interest rate
sensitivity of a portion of its variable-rate assets and borrowings. At June
30, 2000, Coastal had interest rate swap and cap agreements having notional
principal amounts totaling $40.3 million and $158.6 million, respectively.
The terms of the interest rate swap agreements outstanding at June 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 June 30, 2000:
2000. . . . . . . . . $ 4,800 Three-month 6.170% 6.191% $ (66)
2000. . . . . . . . . 2,205 Three-month 6.000 6.280 10
2003. . . . . . . . . 16,073 One-month 5.345 6.198 214
2004. . . . . . . . . 3,801 One-month 5.635 6.523 166
2005. . . . . . . . . 13,440 Three-month 6.500 6.101 272
--------- ---------------
$ 40,319 $ 596
========= ===============
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 6.24% and
the weighted average interest payment rate on all of the interest rate swap
agreements was approximately 5.93% for the six months ended June 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 $66,000 for the six months ended June 30, 2000 and the
net interest expense related to these agreements was approximately $310,000 for
the six months ended June 30, 1999. Coastal had pledged approximately $932,000
of mortgage-backed securities to secure interest rate swap agreements at June
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 $77,000 and $90,000 at June 30, 2000 and December 31, 1999,
respectively, with the estimated fair value of the agreements being $251,000 and
$750,000 at June 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 $13,000 for the six months ended June 30, 2000 and
1999. No payments were made to Coastal under the interest rate cap agreements
during the six months ended June 30, 2000 or 1999.
Interest rate cap agreements outstanding at June 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 33,697
2002 8.75 - 9.00 18,625
2003 8.00 - 9.00 103,300
---------
$ 158,622
=========
</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 six-and three-month periods ended
June 30, 2000 and 1999 (dollars in thousands, except per share data):
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------------
<S> <C> <C> <C>
2000 1999
----------- -----------
Net income $ 10,133 $ 6,119
Preferred stock dividends (1,254) (330)
----------- -----------
Net income available to common stockholders $ 8,879 $ 5,789
=========== ===========
Weighted average number of common shares
outstanding used in basic EPS calculation 6,139,175 6,650,424
Add assumed exercise of outstanding stock
options as adjusted for dilutive securities 108,624 153,238
----------- -----------
Weighted average number of common shares
outstanding used in diluted EPS calculation 6,247,799 6,803,662
=========== ===========
Basic EPS $ 1.45 $ 0.87
=========== ===========
Diluted EPS $ 1.42 $ 0.85
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
June 30,
-------------------------
<S> <C> <C> <C>
2000 1999
----------- -----------
Net income $ 5,645 $ 3,347
Preferred stock dividends (627) (330)
----------- -----------
Net income available to common stockholders $ 5,018 $ 3,017
=========== ===========
Weighted average number of common shares
outstanding used in basic EPS calculation 5,989,330 6,384,779
Add assumed exercise of outstanding stock
options as adjusted for dilutive securities 89,880 150,981
----------- -----------
Weighted average number of common shares
outstanding used in diluted EPS calculation 6,079,210 6,535,760
=========== ===========
Basic EPS $ 0.84 $ 0.47
=========== ===========
Diluted EPS $ 0.83 $ 0.46
=========== ===========
</TABLE>
The weighted average number of common shares outstanding has been reduced
by the treasury stock held by Coastal. As of June 30, 2000 and 1999, Coastal
had 2,000,000 and 1,272,679 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 June 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> <C>
Capital Requirement Amount Ratio Amount Ratio Amount Ratio
-------------------- -----------------------------------------------------------------------
Tier 1 (core) $ 177,481 5.78% $122,755 4.00% $153,444 5.00%
Tier 1 risk-based 177,481 9.89 71,761 4.00 107,641 6.00
Total risk-based 191,263 10.66 143,522 8.00 179,402 10.00
</TABLE>
As of June 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 adds to the guidance related to accounting for
derivative instruments and hedging activities. Statement 133, as amended by
Statement 138 is intended to be comprehensive guidance on accounting for
derivatives and hedging activities. Coastal is evaluating the impact, if any,
Statement 133, as amended, may have on its future consolidated financial
statements.
<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>
25
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
-------------------------------------------------------------------
RESULTS OF OPERATIONS
-------------------
Financial Condition
--------------------
Total assets increased 4.3% or $125.3 million from December 31, 1999 to
June 30, 2000. The net increase resulted primarily from an increase of $146.6
million in loans receivable, in addition to an increase of $10.6 million in
stock in the FHLB. These increases were only slightly offset by decreases of
$10.4 million, $12.6 million and $5.4 million in cash and cash equivalents,
mortgage-backed securities held-to-maturity and mortgage-backed securities
available-for-sale, 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) offset by principal payments
received and a decrease of $46.4 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 mortgaged-backed securities was due to
principal payments received.
Deposits decreased $8.0 million or 0.5% from December 31, 1999 to June 30,
2000 and advances from the FHLB increased 11.7% or $128.0 million.
Stockholders' equity decreased 3.6% or $4.8 million from December 31, 1999 to
June 30, 2000 as a result of net income, offset by additional treasury stock
acquired of $10.9 million, a $2.0 million increase in accumulated other
comprehensive loss and dividends declared.
Results of Operations for the Six Months Ended June 30, 2000 and 1999
--------------------------------------------------------------------------------
General
-------
For the six months ended June 30, 2000, net income was $10.1 million
compared to $6.1 million for the six months ended June 30, 1999. The increase
in net income for the six months ended June 30, 2000 was comprised of the
following: a $5.4 million increase in net interest income and a $2.2 million
increase in noninterest income, which was partially offset by a $984,000
increase in the provision for loan losses, a $989,000 increase in noninterest
expense and a $1.6 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 from 2.67% for the six months ended June 30, 1999 to 2.90% for
the same period in 2000, which includes 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 $308,000 increase in
compensation, payroll taxes and other benefits, which was somewhat offset by a
decrease of $317,000 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 six months ended June 30, 2000 increased $16.6
million or 16.8% from the six months ended June 30, 1999. The increase was due
to an increase in average interest-earning assets of $155.2 million and an
increase in the average yield from 7.09% for the six months ended June 30, 1999
to 7.84% (which includes the FHLB special dividend as described below) for the
six months ended June 30, 2000. Interest income on loans receivable increased
$17.3 million due to a $293.1 million increase in the average balance and an
increase in the average yield from 8.12% for the six months ended June 30, 1999
to 8.70% for the same period in 2000. Interest income on mortgage-backed
securities decreased $2.2 million, or 6.7%, due to a $145.8 million decrease in
the average balance offset by an increase in the average yield from 5.79% for
the six months ended June 30, 1999 to 6.18% for the same period in 2000.
In addition, interest income on FHLB stock, federal funds sold and other
interest-earning assets increased $1.6 million during the six months ended June
30, 2000, as compared to the same period in 1999. The majority of this increase
was due to a special dividend recorded in the second quarter of 2000. The
dividend was declared by the Federal Home Loan Bank of Dallas ("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 7.77% without
the special dividend for the six months ended June 30, 2000. Total
interest-earning assets for the six months ended June 30, 2000 averaged $2.9
billion compared to $2.8 billion for the six months ended June 30, 1999.
Interest Expense
-----------------
Interest expense on interest-bearing liabilities was $72.8 million for the
six months ended June 30, 2000, as compared to $61.6 million for the same period
in 1999, which represents an increase of $11.2 million, or 18.2%. The increase
in interest expense was due to an increase in the average rate paid on
interest-bearing liabilities from 4.75% for the six months ended June 30, 1999
to 5.35% for the six months ended June 30, 2000 and a $127.3 million increase in
the average balance of interest-bearing liabilities. The 0.60% increase in the
average rate paid on interest-bearing liabilities was primarily due to higher
wholesale funding costs. The increase in average interest-bearing liabilities
consisted primarily of a $320.6 million increase in advances from the FHLB,
which was partially offset by decreases of $153.4 million in securities sold
under agreements to repurchase, $38.5 million in interest-bearing deposits and
$1.4 million in senior notes payable due to repurchases.
Net Interest Income
---------------------
Net interest income was $42.7 million for the six months ended June 30,
2000 and $37.3 million for the same period in 1999. Net interest margin
("Margin") was 2.90% (2.83% without the special dividend) for the six months
ended June 30, 2000 compared to 2.67% for the six months ended June 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 from 2.34% for the six months ended June
30, 1999 to 2.49% (2.42% without the special dividend) for the six months ended
June 30, 2000. 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 six months ended June 30, 2000 and 1999 were 2.76%
(2.69% without the special dividend) and 2.59%, 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 0.75% (0.68% without the special dividend)
increase in the average yield on interest-earning assets. This increase in the
average yield on interest-earning assets was somewhat offset by a 0.60% increase
in the average rate on interest-bearing liabilities. Average net
interest-earning assets increased $27.9 million from the six months ended June
30, 1999 to the six months ended June 30, 2000.
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 $4.0 million for the six months ended
June 30, 2000 compared to $3.0 million for the six months ended June 30, 1999.
The increase in the provision for loan losses was primarily due Coastal's
continuing focus on more commercial type 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 June 30, 2000, Coastal had nonperforming loans totaling $19.2
million, of which $3.0 million were greater than 90 days delinquent and still
accruing interest. Of these nonperforming loans, $13.4 million, or 69.6%, were
first lien residential (single family) mortgage loans, $2.2 million were
commercial real estate loans, $2.2 million were commercial, financial and
industrial loans, with the balance in the residential construction, multifamily
mortgage and consumer and other categories. At June 30, 2000, 82% of the
nonperforming first lien residential mortgage loans were purchased and 18% were
originated, compared to 85% of the total first lien residential mortgage loan
portfolio being purchased and 15% originated. At June 30, 2000, the allowance
for loan losses as a percentage of nonperforming loans was 71.7% compared to
61.3% at December 31, 1999.
Although no assurance can be given, management believes that the allowance
for loan losses at June 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 six months ended June 30, 2000, noninterest income increased $2.2
million to $7.1 million, compared to $4.9 million for the six months ended June
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 is expected to provide net interest
income of approximately $750,000 per quarter (or $490,000 net of tax) for the
first year. This estimated positive earnings impact is expected to
substantially offset the expected ongoing negative impact on earnings of the
March 2000 servicing sale (due to the loss of the related loan servicing
income). Management expects the sale of the servicing to have an ongoing
slightly negative impact on earnings, net of tax, of approximately $150,000 per
quarter for the first year.
In addition to the nonrecurring gain, comparing the first six months of
2000 to the first six months of 1999, loan fees and service charges on deposit
accounts increased $328,000 and other noninterest income decreased $261,000.
Noninterest Expense
--------------------
For the six months ended June 30, 2000, noninterest expense increased
$989,000 from the six months ended June 30, 1999. The increase was due to a
$1.1 million increase in other noninterest expenses primarily because of the
reduction of certain accrued liabilities totaling $1.1 million during the first
quarter of 1999. Other changes included an increase in compensation, payroll
taxes and other benefits of $308,000 and a decrease of $317,000 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 six months ended June 30,
2000 was $5.0 million compared to the provision for federal income taxes for the
six months ended June 30, 1999 of $3.4 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 June 30, 2000 and 1999
--------------------------------------------------------------------------------
General
-------
For the three months ended June 30, 2000, net income was $5.6 million
compared to $3.3 million for the three months ended June 30, 1999. The increase
was due to a $3.7 million increase in net interest income, a $111,000 increase
in noninterest income and a $425,000 decrease in noninterest expense, which were
partially offset by a $915,000 increase in the provision for loan losses and a
$1.1 million increase in the provision for Federal income taxes.
Interest Income
----------------
Interest income for the three months ended June 30, 2000 increased $11.2
million or 22.8% from the three months ended June 30, 1999. The increase was
due to an increase in average interest-earning assets of $199.6 million and an
increase in the average yield of 1.03% to 8.10% (or an increase of 0.89% to
7.96% without the special dividend) for the three months ended June 30, 2000.
Interest income on loans receivable increased $9.8 million due to a $290.7
million increase in the average balance and an increase in the average yield
from 8.09% for the three months ended June 30, 1999 to 8.91% for the same period
in 2000. Interest income on mortgage-backed securities increased $72,000 due to
an increase in the average yield from 5.68% for the three months ended June 30,
1999 to 6.27% for the same period in 2000.
In addition, interest income on FHLB stock, federal funds sold and other
interest-earning assets increased $1.4 million. The majority of the increase
was due to the special dividend received from the FHLB, as described above,
during the second quarter of 2000, which amounted to $1.1 million. The
remainder of the increase was due primarily to the increase in the average
balance of other interest-earning assets of $10.3 million. Total
interest-earning assets for the three months ended June 30, 2000 averaged $3.0
billion as compared to $2.8 billion for the three months ended June 30, 1999.
Interest Expense
-----------------
Interest expense on interest-bearing liabilities was $38.0 million for the
three months ended June 30, 2000, as compared to $30.5 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 from 4.71% for the three
months ended June 30, 1999 to 5.48% for the three months ended June 30, 2000 and
a $180.9 million increase in the average balance of interest-bearing
liabilities. The 0.77% increase in the average rate paid on interest-bearing
liabilities was due primarily to higher market and wholesale funding costs. The
increase in average interest-bearing liabilities consisted primarily of a $400.6
million increase in advances from the FHLB, offset somewhat by a $193.8 million
decrease in federal funds purchased and securities sold under agreements to
repurchase, a $24.8 million decrease in interest-bearing deposits and a $1.0
million decrease in senior notes payable due to repurchases. The increase in
the average balance of advances from the FHLB was primarily due to the
additional borrowing during the first six months of 2000 to finance the loan
purchase mentioned earlier.
Net Interest Income
---------------------
Net interest income was $22.6 million for the three months ended June 30,
2000 and $18.8 million for the same period in 1999. The increase in net
interest income was primarily due to the increase in Margin from 2.70% for the
three months ended June 30, 1999 to 3.02% for the three months ended June 30,
2000. A portion of this increase in net interest income, and therefore Margin,
was due to a special dividend declared by the FHLB equal to 1.625% of each
members' FHLB stock held as of March 31, 2000, as discussed above. Without the
special dividend, Margin was 2.88% for the three months ended June 30, 2000.
Spread increased from 2.36% for the three months ended June 30, 1999 to 2.62%
(2.48% without the special dividend) for the three months ended June 30, 2000.
Management also calculates an alternative Spread which includes
noninterest-bearing deposits. Under this calculation, the alternative Spreads
for the three months ended June 30, 2000 and 1999 were 2.90% (2.76% without 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 increases in Margin and Spread were
primarily due to the 1.03% (0.89% without the special dividend) increase in the
average yield on interest-earning assets, primarily on loans receivable, which
was partially offset by a 0.77% increase in the average rate paid on
interest-bearing liabilities. Average net interest-earning assets increased
$18.7 million from the three months ended June 30, 1999 to the three months
ended June 30, 2000.
Provision for Loan Losses
----------------------------
The provision for loan losses was $1.6 million for the three months ended
June 30, 2000 compared to $675,000 for the three months ended June 30, 1999.
The increased provision was primarily due to Coastal's continuing focus on more
commercial type loans and Coastal's plan to continue to build the allowance for
loan losses to a benchmark of approximately 100% of nonperforming loans. The
allowance for loan losses as a percentage of nonperforming loans was 71.7% at
June 30, 2000 and 61.3% at December 31, 1999. 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 June 30, 2000, noninterest income increased
slightly by $111,000 to $2.5 million, compared to $2.4 million for the three
months ended June 30, 1999. The increase consisted of an $85,000 increase in
loan fees and service charges on deposit accounts and a $135,000 increase in
other noninterest income, somewhat offset by the $109,000 decrease in loan
servicing income due to the sale of the mortgage servicing portfolio in the
first quarter of 2000.
Noninterest Expense
--------------------
For the three months ended June 30, 2000, noninterest expense decreased
$425,000 from the three months ended June 30, 1999. The decrease was due
primarily to decreases of $163,000 and $190,000 in insurance premiums expense,
including deposit insurance premiums and other noninterest expense,
respectively.
Provision for Federal Income Taxes
--------------------------------------
The provision for Federal income taxes for the three months ended June 30,
2000 was $2.8 million compared to $1.8 million for the three months ended June
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 31%.
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 June 30, 2000, Coastal had binding commitments
to originate or purchase loans totaling approximately $107.0 million and had
$117.6 million of undisbursed loans in process. Scheduled maturities of
certificates of deposit during the 12 months following June 30, 2000 totaled
$955.3 million at June 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 June 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
-----------------------------------------------------------
On April 27, 2000, at the Annual Meeting of Stockholders of Coastal
Bancorp, Inc. (the Company), the stockholders voted upon and approved the
election of two directors and the ratification of the appointment of KPMG LLP as
the Company's independent auditors for the fiscal year ending December 31, 2000.
With respect to such matters, the results of the votes were as follows:
1) Election of directors:
<TABLE>
<CAPTION>
Number of Votes
---------------
In favor Withheld
--------
<S> <C> <C>
Manuel J. Mehos 4,996,619 439,427
James C. Niver 4,996,619 439,427
</TABLE>
2) Ratification of KPMG LLP as the Company's independent auditors for
the year ending December 31, 2000:
<TABLE>
<CAPTION>
<S> <C>
Number of votes in favor: 4,801,132
Number of votes against: 80,966
Number of votes abstaining: 2,020
</TABLE>
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 May 8, 2000 concerning the announcement that Coastal
completed the repurchase of an additional 500,000 shares of its common stock
under the February 25, 1999 stock repurchase plan.
Form 8K filed on June 20, 2000 concerning the announcement that Coastal
completed the repurchase of an additional 500,000 shares of its common stock
under the April 27, 2000 stock repurchase plan.
<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: 8/14/00 By /s/ Catherine N. Wylie
------- --------------------------
Catherine N. Wylie
Chief Financial Officer
Dated: 8/14/00 By /s/ Gary R. Garrett
------- --------------------------
Gary R. Garrett
Chief Lending 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 15 of the Company's Form
10-Q for the year-to-date June 30, 2000 and is qualified in its
entirety by reference to such financial statements
[/LEGEND]
<TABLE>
<CAPTION>
<S> <C>
[PERIOD-TYPE] 6-MOS
[FISCAL-YEAR-END] DEC-31-2000
[PERIOD-START] JAN-01-2000
[PERIOD-END] JUN-30-2000
[CASH] 37,742
[INT-BEARING-DEPOSITS] 0
[FED-FUNDS-SOLD] 1,900
[TRADING-ASSETS] 0
[INVESTMENTS-HELD-FOR-SALE] 94,230
[INVESTMENTS-CARRYING] 905,635
[INVESTMENTS-MARKET] 854,522
[LOANS] 1,881,644
[ALLOWANCE] 13,782
[TOTAL-ASSETS] 3,073,285
[DEPOSITS] 1,616,251
[SHORT-TERM] 903,690
[LIABILITIES-OTHER] 56,508
[LONG-TERM] 368,158
[PREFERRED-MANDATORY] 0
[PREFERRED] 27,500
[COMMON] 76
[OTHER-SE] 101,102
[TOTAL-LIABILITIES-AND-EQUITY] 3,073,285
[INTEREST-LOAN] 81,120
[INTEREST-INVEST] 31,244
[INTEREST-OTHER] 3,148
[INTEREST-TOTAL] 115,512
[INTEREST-DEPOSIT] 33,983
[INTEREST-EXPENSE] 72,818
[INTEREST-INCOME-NET] 42,694
[LOAN-LOSSES] 3,990
[SECURITIES-GAINS] 0
[EXPENSE-OTHER] 30,581
[INCOME-PRETAX] 15,173
[INCOME-PRE-EXTRAORDINARY] 10,133
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] 10,133
[EPS-BASIC] 1.45
[EPS-DILUTED] 1.42
[YIELD-ACTUAL] 0
[LOANS-NON] 0
[LOANS-PAST] 0
[LOANS-TROUBLED] 0
[LOANS-PROBLEM] 0
[ALLOWANCE-OPEN] 10,493
[CHARGE-OFFS] 1,012
[RECOVERIES] 311
[ALLOWANCE-CLOSE] 13,782
[ALLOWANCE-DOMESTIC] 13,782
[ALLOWANCE-FOREIGN] 0
[ALLOWANCE-UNALLOCATED] 0
</TABLE>
