-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, C7tVp3207KR5MARBEFYwEfD2O2trCLeqM8AOuInIUmSsMbDGeD5Hjwu37JjuEwJh 8yLX8rKsA/SSRtpV1dJZ9Q== 0000919805-98-000015.txt : 19980518 0000919805-98-000015.hdr.sgml : 19980518 ACCESSION NUMBER: 0000919805-98-000015 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980515 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: COASTAL BANCORP INC CENTRAL INDEX KEY: 0000919805 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTIONS, NOT FEDERALLY CHARTERED [6036] IRS NUMBER: 760428727 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-24526 FILM NUMBER: 98622266 BUSINESS ADDRESS: STREET 1: 5718 WESTHEIMER STREET 2: SUITE 600 CITY: HOUSTON STATE: TX ZIP: 77057 BUSINESS PHONE: 7134355000 MAIL ADDRESS: STREET 1: 5718 WESTHEIMER STREET 2: SUITE 600 CITY: HOUSTON STATE: TX ZIP: 77057 FORMER COMPANY: FORMER CONFORMED NAME: COASTAL BANC SAVINGS ASSOCIATION DATE OF NAME CHANGE: 19970110 FORMER COMPANY: FORMER CONFORMED NAME: COASTAL BANCORP INC/TX/ DATE OF NAME CHANGE: 19940718 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [ X ] Quarterly Report Under Section 13 or 15 (d) of the Securities Exchange Act of 1934 For the Quarterly Period Ended March 31, 1998 [ ] Transition Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 For the Transition Period from ________ to ________ Commission File Number: 0-24526 -------- COASTAL BANCORP, INC. --------------------- (Exact name of Registrant as specified in its charter) Texas 76-0428727 - --------------------- ------------------ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 5718 Westheimer, Suite 600 Houston, Texas 77057 ------------------------ (Address of principal executive office) (713) 435-5000 ------------------ (Registrant's telephone number) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ----- ----- Indicate the number of shares outstanding of each of the issuer's classes of Common Stock, as of the latest practicable date. COMMON STOCK ISSUED AND OUTSTANDING: 5,041,177 AS OF APRIL 30, 1998 COASTAL BANCORP, INC. AND SUBSIDIARIES Table of Contents PART I. FINANCIAL INFORMATION - -------- ----------------------
Item 1 Financial Statements Consolidated Statements of Financial Condition at March 31, 1998 (unaudited) and December 31, 1997 1 Consolidated Statements of Income for the Three-Month Periods Ended March 31, 1998 and 1997 (unaudited) 2 Consolidated Statements of Comprehensive Income (Loss) for the Three- Month Periods Ended March 31, 1998 and 1997 (unaudited) 3 Consolidated Statements of Cash Flows for the Three-Month Periods Ended March 31, 1998 and 1997 (unaudited) 4 Notes to Consolidated Financial Statements 6 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 15 Item 3 Quantitative and Qualitative Disclosures About Market Risk 19
PART II. OTHER INFORMATION - --------- ------------------
Item 1 Legal Proceedings 20 Item 2 Changes in Securities 20 Item 3 Default upon Senior Securities 20 Item 4 Submission of Matters to a Vote of Security Holders 20 Item 5 Other Information 20 Item 6 Exhibits and Reports on Form 8-K 20
SIGNATURES ITEM 1. FINANCIAL STATEMENTS - -------- ---------------------
COASTAL BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (IN THOUSANDS, EXCEPT SHARE DATA) March 31, December 31, 1998 1997 ------------ ------------ ASSETS (Unaudited) - --------------------------------------------------------- Cash and amounts due from depository institutions $ 25,026 $ 37,096 Federal funds sold 3,500 -- Loans receivable (note 4) 1,335,955 1,261,435 Mortgage-backed securities held-to-maturity (note 3) 1,325,249 1,345,090 Mortgage-backed securities available-for-sale, at market value (note 3) 169,783 169,997 Mortgage loans held for sale 7,154 -- Accrued interest receivable 15,219 14,813 Property and equipment 22,955 22,250 Stock in the Federal Home Loan Bank of Dallas (FHLB) 30,162 27,801 Goodwill 15,248 15,717 Mortgage servicing rights 5,279 5,653 Prepaid expenses and other assets 10,672 11,558 ------------ ---------- $ 2,966,202 $2,911,410 ============ ==========
LIABILITIES AND STOCKHOLDERS' EQUITY --------------------------------------- Liabilities: Savings deposits (note 5) $1,367,371 $1,375,060 Advances from the FHLB (note 6) 556,805 540,475 Securities sold under agreements to repurchase (note 6) 829,202 791,760 Senior notes payable (note 7) 50,000 50,000 Advances from borrowers for taxes and insurance 7,116 3,975 Other liabilities and accrued expenses 16,451 16,560 ----------- ----------- Total liabilities 2,826,945 2,777,830 ----------- ----------- 9.0% noncumulative preferred stock of Coastal Banc ssb 28,750 28,750 Commitments and contingencies (notes 4 and 8) Stockholders' equity (notes 3, 9, 10 and 14): Preferred stock, no par value; authorized shares 5,000,000; no shares issued -- -- Common stock, $.01 par value; authorized shares 30,000,000; 5,035,493 and 5,008,926 shares issued and outstanding in 1998 and 1997 50 50 Additional paid-in capital 33,556 33,186 Retained earnings 79,204 73,868 Accumulated other comprehensive income (loss) - unrealized loss on securities available-for-sale (2,303) (2,274) ----------- ----------- Total stockholders' equity 110,507 104,830 ----------- ----------- $2,966,202 $2,911,410 =========== ===========
See accompanying Notes to Consolidated Financial Statements COASTAL BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Ended March 31, -------------------- 1998 1997 -------- ------- (Unaudited) Interest income: Mortgage-backed securities $ 23,446 $23,192 Loans receivable 26,940 26,015 Federal funds sold, certificates of deposit and other investments. 502 397 ---------- -------- 50,888 49,604 ---------- -------- Interest expense: Savings deposits 15,507 15,166 Other borrowed money 11,229 13,780 Senior notes payable 1,250 1,250 Advances from the FHLB: Short-term 3,955 1,856 Long-term 3,947 2,904 ---------- -------- 35,888 34,956 ---------- -------- Net interest income 15,000 14,648 Provision for loan losses 1,450 450 ---------- -------- Net interest income after provision for loan losses 13,550 14,198 ---------- -------- Noninterest income: Loan fees and service charges on deposit accounts 1,324 894 Loan servicing income, net 240 407 Writedown of purchased mortgage loan premium (709) -- Other 192 168 ---------- -------- 1,047 1,469 ---------- -------- Noninterest expense: Compensation, payroll taxes and other benefits 4,940 4,625 Office occupancy 1,989 1,611 Insurance premiums 265 271 Data processing 608 513 Amortization of goodwill 469 437 Real estate owned 252 239 Other 1,812 1,861 ---------- -------- 10,335 9,557 ---------- -------- Income before provision (benefit) for Federal income taxes 4,262 6,110 Provision (benefit) for Federal income taxes (note 11) (2,326) 2,225 ---------- -------- Net income before preferred stock dividends 6,588 3,885 Preferred stock dividends of Coastal Banc ssb (Series A) 647 647 ---------- -------- Net income available to common stockholders $ 5,941 $ 3,238 ========== ======== Basic earnings per share (note 9) $ 1.18 $ 0.65 ========== ======== Diluted earnings per share (note 9) $ 1.14 $ 0.63 ========== ========
See accompanying Notes to Consolidated Financial Statements COASTAL BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (IN THOUSANDS)
Three Months Ended March 31, ------------------------- 1998 1997 ---------- -------- (Unaudited) Net income available to common stockholders $ 5,941 $3,238 Other comprehensive income (loss), net of tax: Unrealized holding gains (losses) on securities available-for-sale arising during period (29) 693 ---------- ------ Total comprehensive income $ 5,912 $3,931 ========== ======
See accompanying Notes to Consolidated Financial Statements COASTAL BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
Three Months Ended March 31, ------------------------ 1998 1997 ---------- -------- (Unaudited) Cash flows from operating activities: Net income before preferred stock dividends $ 6,588 $ 3,885 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 2,004 1,648 Net premium amortization 1,867 112 Provision for loan losses 1,450 450 Amortization of goodwill 469 437 Originations and purchases of mortgage loans held for sale (7,154) (4,162) Sales of mortgage loans held for sale -- 3,229 Decrease (increase) in: Accrued interest receivable (406) 165 Other, net 1,714 7,558 Stock dividends from the FHLB (431) (370) -------------- ------------ Net cash provided by operating activities 6,101 12,952 -------------- ------------ Cash flows from investing activities: Net increase in federal funds sold (3,500) -- Principal repayments on mortgage-backed securities held-to-maturity 19,794 6,995 Principal repayments on mortgage-backed securities available-for-sale 169 88 Purchases of loans receivable (121,593) (9,232) Net decrease in loans receivable 42,226 9,727 Net purchases of property and equipment (1,661) (746) Purchase of FHLB stock (1,930) -- Proceeds from sales of FHLB stock -- 9,000 -------------- ------------ Net cash provided (used) by investing activities (66,495) 15,832 -------------- ------------ (continued)
COASTAL BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED (IN THOUSANDS)
Three Months Ended March 31, ------------------------ 1998 1997 ---------- -------- (Unaudited) Cash flows from financing activities: Net increase (decrease) in savings deposits $ (7,707) $ 4,886 Advances from the FHLB 1,013,550 1,295,000 Principal payments on advances from the FHLB (997,220) (1,378,884) Securities sold under agreements to repurchase 1,817,924 2,588,007 Purchases of securities sold under agreements to repurchase (1,780,482) (2,543,065) Exercise of stock options for purchase of common stock, net 369 21 Net increase in advances from borrowers for taxes and insurance 3,141 2,996 Dividends paid (1,251) (1,144) ----------- ------------ Net cash provided (used) by financing activities 48,324 (32,183) ----------- ------------ Net decrease in cash and cash equivalents (12,070) (3,399) Cash and cash equivalents at beginning of period 37,096 27,735 ----------- ------------ Cash and cash equivalents at end of period $ 25,026 $ 24,336 ========== ============ Supplemental schedule of cash flows-interest paid $ 33,920 $ 32,704 ========== ============ Supplemental schedule of noncash investing and financing activities: Foreclosures of loans receivable $ 1,595 $ 2,037 ========== ============
See accompanying Notes to Consolidated Financial Statements COASTAL BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) BASIS OF PRESENTATION The accompanying unaudited Consolidated Financial Statements were prepared in accordance with the instructions for Form 10-Q and, therefore, do not include all disclosures necessary for a complete presentation of financial condition, results of operations, and cash flows in conformity with generally accepted accounting principles. All adjustments which are, in the opinion of management, of a normal recurring nature and are necessary for a fair presentation of the interim financial statements, have been included. The results of operations for the periods ended March 31, 1998 are not necessarily indicative of the results that may be expected for the entire fiscal year or any other interim period. Coastal Bancorp, Inc. and subsidiaries adopted the Financial Accounting Standards Boards Statement No. 130 ("Statement 130"), "Reporting Comprehensive Income" as of January 1, 1998. Statement 130 requires the disclosure of all components of comprehensive income, which includes net income and other comprehensive income. Other comprehensive income includes all nonowner related changes to stockholders' equity, which is the unrealized gain (loss) on securities available-for-sale. These amounts have been disclosed on the consolidated statements of comprehensive income. Statement 130 did not change the current accounting treatment for components of other comprehensive income (i.e. changes in unrealized gain (loss) on securities available-for-sale). (2) PRINCIPLES OF CONSOLIDATION The accompanying unaudited Consolidated Financial Statements include the accounts of Coastal Bancorp, Inc. and its wholly-owned subsidiary, Coastal Banc Holding Company, Inc. and its wholly-owned subsidiaries, Coastal Banc ssb and subsidiaries and Coastal Banc Capital Corp. (collectively, Coastal). Coastal Banc ssb's subsidiaries include CoastalBanc Financial Corp., CBS Mortgage Corp., and CBS Asset Corp. (collectively with Coastal Banc ssb, the Bank). All significant intercompany balances and transactions have been eliminated in consolidation. (3) MORTGAGE-BACKED SECURITIES Mortgage-backed securities at March 31, 1998 (unaudited) were as follows (dollars in thousands):
Gross Gross Amortized Unrealized Unrealized Market Cost Gains Losses Value --------- ----------- ---------- ------- Held-to-Maturity: REMICS - Agency $ 942,955 $ 6,117 $ (21,783) $ 927,289 REMICS - Non-agency 273,139 674 (6,333) 267,480 FNMA certificates 68,167 150 (398) 67,919 GNMA certificates 27,002 506 -- 27,508 Non-agency securities 13,970 243 (72) 14,141 Interest-only securities 16 -- -- 16 ----------- ------- ---------- ----------- $ 1,325,249 $ 7,690 $ (28,586) $ 1,304,353 =========== ======= ========== =========== Available-for-sale: REMICS - Agency $ 171,169 $ 390 $ (3,916) $ 167,643 REMICS - Non-agency 2,156 -- (16) 2,140 ----------- ------- ---------- ----------- $ 173,325 $ 390 $ (3,932) $ 169,783 =========== ======= ========== ===========
Mortgage-backed securities at December 31, 1997 were as follows (dollars in thousands):
Gross Gross Amortized Unrealized Unrealized Market Cost Gains Losses Value --------- ----------- ---------- ------- Held-to-maturity: REMICS - Agency $ 950,689 $ 5,022 $ (20,478) $ 935,233 REMICS - Non-agency 279,131 701 (5,610) 274,222 FNMA certificates 71,887 144 (683) 71,348 GNMA certificates 28,808 566 -- 29,374 Non-agency securities 14,555 239 (23) 14,771 Interest-only securities 20 -- -- 20 ----------- ------- ---------- ----------- $ 1,345,090 $ 6,672 $ (26,794) $ 1,324,968 =========== ======= ========== =========== Available-for-sale: REMICS - Agency $ 171,167 $ 579 $ (4,044) $ 167,702 REMICS - Non-agency 2,328 -- (33) 2,295 ----------- ------- ---------- ----------- $ 173,495 $ 579 $ (4,077) $ 169,997 =========== ======= ========== ===========
(4) LOANS RECEIVABLE Loans receivable at March 31, 1998 and December 31, 1997 were as follows (dollars in thousands):
March 31, 1998 December 31, 1997 --------------- ----------------- (Unaudited) Real estate mortgage loans: First-lien mortgage, primarily residential $ 720,623 $ 689,767 Commercial 197,797 181,315 Multifamily 132,707 131,454 Residential construction 87,041 83,359 Acquisition and development 34,005 31,619 Commercial construction 16,997 14,506 Commercial loans, secured by residential mortgage loans held for sale 137,182 98,679 Commercial loans, secured by mortgage servicing 15,880 32,685 rights Commercial, financial and industrial 27,183 30,877 Loans secured by savings deposits 7,402 8,695 Consumer and other loans 24,753 15,030 ------------ ------------ 1,401,570 1,317,986 Loans in process (55,441) (47,893) Allowance for loan losses (8,685) (7,412) Unearned interest and loan fees (2,933) (2,926) Premium to record purchased loans, net 1,444 1,680 ------------ ------------ $ 1,335,955 $ 1,261,435 ============ ============ Weighted average yield 8.27% 8.30% ============ ============
At March 31, 1998, Coastal had outstanding commitments to originate or purchase $69.9 million of real estate mortgage and other loans and had commitments under lines of credit to originate primary construction and other loans of approximately $106.9 million. In addition, at March 31, 1998, Coastal had $3.6 million of outstanding letters of credit. Management anticipates the funding of these commitments through normal operations. At March 31, 1998 and December 31, 1997, the carrying value of loans that were considered to be impaired totaled approximately $1.4 million and $2.0 million, respectively (all of which are on nonaccrual), and the related allowance for loan losses on those impaired loans totaled $1.1 million at both period ends. The average recorded investment in impaired loans during the three months ended March 31, 1998 and 1997 was $1.9 million and $722,000, respectively. An analysis of activity in the allowance for loan losses for the three months ended March 31, 1998 and 1997 is as follows (in thousands):
Three months ended March 31, ------------------------------ 1998 1997 ------------ ---------- (Unaudited) Balance, beginning of period $ 7,412 $6,880 Provision for loan losses 1,450 450 Charge-offs, net of recoveries (177) (424) ------------ ------- Balance, end of period $ 8,685 $6,906 ============ =======
Coastal services for others loans receivable which are not included in the Consolidated Financial Statements. The total amounts of such loans were $639.0 million and $675.7 million at March 31, 1998 and December 31, 1997, respectively. (5) SAVINGS DEPOSITS Savings deposits, their stated rates and the related weighted average interest rates at March 31, 1998 and December 31, 1997 are summarized as follows (dollars in thousands):
Stated Rate March 31, 1998 December 31, 1997 -------------- ---------------- ------------------- (Unaudited) Noninterest-bearing checking 0.00% $ 49,467 $ 101,782 Interest-bearing checking 1.49 - 2.00 8,373 69,972 Savings accounts 2.18 - 2.75 25,963 25,555 Money market demand accounts 0.00 - 4.51 283,632 165,986 ---------------- ------------------- 367,435 363,295 ---------------- ------------------- Certificate accounts 2.00 - 2.99 3,038 5,142 3.00 - 3.99 4,483 2,763 4.00 - 4.99 68,411 64,478 5.00 - 5.99 825,860 834,727 6.00 - 6.99 90,591 94,405 7.00 - 7.99 5,556 7,624 8.00 - 8.99 1,649 1,854 9.00 - 9.99 405 847 ---------------- ------------------- 999,993 1,011,840 ---------------- ------------------- Discount to record savings deposits at fair value, net (57) (75) ---------------- ------------------- $ 1,367,371 $ 1,375,060 ================ =================== Weighted average rate 4.63% 4.67% ================ ===================
The scheduled maturities of certificate accounts outstanding at March 31, 1998 were as follows (dollars in thousands):
March 31, 1998 ---------------- (Unaudited) 0 to 12 months $ 782,844 12 to 24 months 179,735 24 to 36 months 22,899 36 to 48 months 6,652 48 to 60 months 7,657 Over 60 months 206 ---------------- $ 999,993 ================
Effective January 1, 1998, Coastal implemented a program whereby a portion of the balances in noninterest-bearing and interest-bearing checking accounts are reclassified to money market demand accounts under Federal Reserve Regulation D. (6) SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND FHLB ADVANCES (a) The weighted average interest rates on securities sold under agreements to repurchase at March 31, 1998 and December 31, 1997 were 5.51% and 6.00%, respectively. The stated interest rates on securities sold under agreements to repurchase ranged from 4.93% to 5.67% at March 31, 1998. (b) The weighted average interest rate on advances from the FHLB at March 31, 1998 and December 31, 1997 were 5.62% and 5.95%, respectively. The scheduled maturities and related weighted average interest rates on advances from the FHLB at March 31, 1998 are summarized as follows (dollars in thousands) (unaudited):
Due during the year ended December 31, Weighted Average - -------------------------------------- ----------------- Interest Rate Amount ----------------- --------- 1998 5.59% $ 287,178 1999 5.84 120,291 2000 6.17 7,929 2001 6.22 8,604 2002 5.62 69,649 2004 6.52 2,764 2006 6.91 3,102 2007 6.78 1,057 2008 4.66 50,000 2009 8.25 4,413 2011 6.78 1,268 2018 6.00 550 --------- $ 556,805 =========
FHLB advances are secured by certain first-lien mortgage loans and mortgage-backed securities owned by Coastal. (7) SENIOR NOTES PAYABLE On June 30, 1995, Coastal issued $50.0 million of 10.0% Senior Notes due June 30, 2002. The Senior Notes are redeemable at Coastal's option, in whole or in part, on or after June 30, 2000, at par, plus accrued interest to the redemption date. Interest on the Senior Notes is payable quarterly. (8) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK Coastal is a party to financial instruments with off-balance sheet risk in the normal course of business to reduce its own exposure to fluctuations in interest rates. These financial instruments include interest rate swap agreements and interest rate cap agreements. Coastal utilizes interest rate swap and interest rate cap agreements to reduce exposure to floating interest rates by altering the interest rate sensitivity of a portion of its variable-rate assets and borrowings. At March 31, 1998, Coastal had interest rate swap and cap agreements having notional principal amounts totaling $45.8 million and $217.2 million, respectively. The terms of the interest rate swap agreements outstanding at March 31, 1998 (unaudited) and December 31, 1997 are summarized as follows (dollars in thousands):
Floating Rate Fair Value at Notional LIBOR Fixed at End of Period --------------- Maturity Amount Index Rate End of Period gain (loss) - --------------------- --------- ----------- ------ -------------- At March 31, 1998: 1998 $ 4,400 Three-month 6.709% 5.625% $ (24) 1999 14,600 Three-month 6.926 5.625 (221) 2000 4,800 Three-month 6.170 5.684 (31) 2,485 Three-month 6.000 5.688 (3) 2005 19,527 Three-month 6.500 5.676 (623) --------- $ 45,812 $ (902) ========= =============== At December 31, 1997: 1998 $ 4,400 Three-month 6.709% 5.875% $ (28) 1999 14,600 Three-month 6.926 5.875 (239) 2000 4,800 Three-month 6.170 5.906 (99) 2,520 Three-month 6.000 5.906 -- 2005 19,527 Three-month 6.500 5.879 (230) --------- --------------- $ 45,847 $ (596) ========= ===============
The interest rate swap agreements provide for Coastal to make weighted average fixed interest payments and receive payments based on a floating LIBOR index, as defined in each agreement. The weighted average interest rate of payments received on all of the interest rate swap agreements was approximately 5.80% and the weighted average interest payment rate on all of the interest rate swap agreements was approximately 6.56% for the three months ended March 31, 1998. Payments on the interest rate swap agreements are based on the notional principal amount of the agreements; no funds were actually borrowed or are to be repaid. The interest rate swap agreements are used to alter the interest rate sensitivity of a portion of Coastal's variable-rate borrowings. As such, Coastal records net interest expense or income related to these agreements on a monthly basis in "interest expense on other borrowed money" in the accompanying consolidated statements of income. The net interest expense related to these agreements was approximately $86,000 for the three months ended March 31, 1998 and approximately $137,000 for the three months ended March 31, 1997. Coastal had pledged approximately $5.8 million of mortgage-backed securities to secure interest rate swap agreements at March 31, 1998. Coastal has interest rate cap agreements with third parties. The agreements provide for the third parties to make payments to Coastal whenever a defined floating rate exceeds rates ranging from 5.0% to 12.5%, depending on the agreement. Payments on the interest rate cap agreements are based on the notional principal amount of the agreements; no funds were actually borrowed or are to be repaid. The purchase prices of the interest rate cap agreements are capitalized and included in "prepaid expenses and other assets" in the accompanying consolidated statements of financial condition and are amortized over the life of the agreements using the straight-line method. The unamortized portion of the purchase price of the interest rate cap agreements was approximately $186,000 and $286,000 at March 31, 1998 and December 31, 1997, respectively, with the estimated fair value of the agreements being $202,000 and $300,000 at March 31, 1998 and December 31, 1997, respectively. The interest rate cap agreements are used to alter the interest rate sensitivity of a portion of Coastal's mortgage-backed securities, loans receivable and their related funding sources. As such, the amortization of the purchase price and interest income from the interest rate cap agreements are recorded in "interest income on mortgage-backed securities or loans receivable," as appropriate, in the accompanying consolidated statements of income. The net decrease in interest income related to the interest rate cap agreements was approximately $24,000 and $134,000 for the three months ended March 31, 1998 and 1997 respectively. Interest rate cap agreements outstanding at March 31, 1998 (unaudited) expire as follows (dollars in thousands):
Year of Strike rate Notional expiration range amount - ---------- --------------- --------- 1998 5.00 - 12.50% $ 129,300 1999 7.25 - 11.00 63,564 2000 8.50 - 9.50 8,000 2001 7.00 9.00 16,315 --------- $ 217,179 =========
Market risk, or the risk of loss due to movement in market prices or rates, is quantified by Coastal through a risk monitoring process of marking to market the portfolio to expected market level changes in an instantaneous shock of plus and minus 200 basis points on a quarterly basis. This process discloses the effects on market values of the assets and liabilities, unrealized gains and losses, including off-balance sheet items, as well as potential changes in net interest income. The fluctuation in the market value, however, has no effect on the level of earnings of Coastal because the securities are categorized as "held-to-maturity" or "available-for-sale." Coastal is exposed to credit loss in the event of nonperformance by the counterparty to the swap or cap and controls this risk through credit monitoring procedures. The notional principal amount does not represent Coastal's exposure to credit loss. (9) EARNINGS PER SHARE The following summarizes information related to the computation of basic and diluted earnings per share ("EPS") for the three months ended March 31, 1998 and 1997 (dollars in thousands, except per share data):
Three months ended March 31, -------------------------------- 1998 1997 ---------- ---------- Net income available to common stockholders $ 5,941 $ 3,238 ========== ========== Weighted average number of common shares outstanding used in basic EPS calculation 5,027,540 4,968,126 Add assumed exercise of outstanding stock options as adjusted for dilutive securities 171,918 139,831 ---------- ---------- Weighted average number of common shares outstanding used in diluted EPS calculation 5,199,458 5,107,957 ========== ========== Basic EPS $ 1.18 $ 0.65 ========== ========== Diluted EPS $ 1.14 $ 0.63 ========== ==========
(10) STATUTORY CAPITAL REQUIREMENTS The applicable regulations require federally insured institutions, which are not the highest rated, to have a minimum regulatory tier 1 (core) capital to total assets ratio equal to a minimum of 4.0%, a tier 1 risk-based capital to risk-weighted assets ratio of 4.0% and total risk-based capital to risk-weighted assets ratio of 8.0%. At March 31, 1998, the Bank's regulatory capital (unaudited) in relation to its existing regulatory capital requirements for capital adequacy purposes were as follows (dollars in thousands):
Minimum For Capital Well-Capitalized Actual Adequacy Purposes Requirements ------------------- ------------------ ------------- Capital Requirement Amount Ratio Amount Ratio Amount Ratio - -------------------- ---------- --------- -------- ------ -------- ------ Tier 1 (core) $ 166,351 5.69% $116,933 4.00% $146,166 5.00% Tier 1 risk-based 166,351 11.24 59,214 4.00 88,822 6.00 Total risk-based 175,036 11.82 118,429 8.00 148,036 10.00
As of March 31, 1998, the most recent notification from the Federal Deposit Insurance Corporation ("FDIC") categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the institution's category. (11) FEDERAL INCOME TAXES In March 1998, Coastal announced that it had successfully resolved an outstanding tax benefit issue with the FDIC as Manager of the Federal Savings and Loan Insurance Corporation Resolution Fund. The resolution of the issue resulted in Coastal recording a $3.7 million, or 71 cents per diluted share, reversal of accrued income taxes during the three months ended March 31, 1998; therefore a one-time positive effect on net income. The resolution of the tax benefit issue also contributes an ongoing quarterly tax benefit of $226,000 or approximately 4 cents per diluted share, as of March 31, 1998. (12) RECENT ACCOUNTING STANDARDS The Financial Accounting Standards Board's Statement No. 131 ("Statement 131"), "Disclosure about Segments of an Enterprise and Related Information" requires public companies to report certain information about their operating segments in their annual financial statements and quarterly reports issued to stockholders for years after implementation. It also requires public companies to report certain information about their products and services, the geographic areas in which they operate, and their major customers. Statement 131 is effective for fiscal years beginning after December 15, 1997. Coastal anticipates implementing Statement 131 for its fiscal 1998 Annual Report on Form 10-K. Implementation of Statement 131 should have no material effect on Coastal's Consolidated Financial Statements. (13) PENDING BRANCH PURCHASE On May 4, 1998, Coastal announced the execution of a definitive agreement to purchase the Valley Branches of Pacific Southwest Bank, also known as San Benito Bank and Trust Company, a unit of Pacific Southwest Bank. Twelve branches located in Harlingen, San Benito, Mission, Pharr, Edinburg, Brownsville, McAllen and South Padre with deposits of approximately $357 million and loans of approximately $175 million, will be acquired in this transaction. The acquisition is pending regulatory approval and is expected to close in the third quarter of 1998. (14) STOCK SPLIT On April 23, 1998, the Board of Directors declared a 3:2 stock split on the common stock of Coastal payable on June 15, 1998 to the stockholders of record at the close of business on May 15, 1998. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------------------------- Financial Condition - -------------------- Total assets increased 1.9% or $54.8 million from December 31, 1997 to March 31, 1998. The net increase resulted primarily from an increase in loans receivable of $74.5 million, an increase in Federal funds sold of $3.5 million, an increase of $7.2 million in loans held for sale and a $2.4 million increase in Stock in the Federal Home Loan Bank of Dallas, offset by decreases of $19.8 million and $12.1 million in mortgage-backed securities held-to-maturity and cash and amounts due from depository institutions, respectively. The increase in loans receivable was primarily due to bulk residential mortgage loan purchases of $114.4 million and $6.4 million of consumer loan purchases from correspondent lenders, in addition to increases of $38.5 million and $16.5 million in commercial loans, secured by residential mortgage loans held for sale and commercial real estate loans, respectively, during the three months ended March 31, 1998. These increases were somewhat offset by principal payments received. The decrease in mortgage-backed securities held-to-maturity was due to principal payments received. Savings deposits decreased slightly by 0.6% or $7.7 million from December 31, 1997 to March 31, 1998. Securities sold under agreements to repurchase increased 4.7% or $37.4 million and advances from the FHLB increased 3.0% or $16.3 million from December 31, 1997 to March 31, 1998. Stockholders' equity increased 5.4% or $5.7 million from December 31, 1997 to March 31, 1998 as a result primarily of net income offset by dividends declared and a $29,000 decrease in accumulated other comprehensive income (loss). Results of Operations for the Three Months Ended March 31, 1998 and 1997 - -------------------------------------------------------------------------------- General ------- For the three months ended March 31, 1998, net income before preferred stock dividends was $6.6 million compared to $3.9 million for the three months ended March 31, 1997. The increase in net income in the first quarter of 1998 was primarily due to the resolution of an outstanding tax benefit issue with the Federal Deposit Insurance Corporation as Manager of the Federal Savings and Loan Insurance Corporation Resolution Fund. The resolution of the issue resulted in Coastal recording a $3.7 million, or 71 cents per diluted share, reversal of accrued income taxes; resulting in a one-time positive effect on net income. The resolution of the tax benefit issue will also contribute an ongoing quarterly tax benefit of $226,000 or approximately 4 cents per diluted share (as of March 31, 1998); which is expected to continue for approximately 3 to 4 years. The positive effect of the tax benefit issue resolution was somewhat offset by the recording in the first quarter of 1998 of an additional provision for loan losses of $1.0 million and a writedown of purchased mortgage loan premium of $709,000. The additional provision for loan losses of $1.0 million, or 13 cents per diluted share after tax, was recorded to increase the allowance for loan losses due to the continuing change in the composition of the loans receivable portfolio. This change is occurring as a result of management's current emphasis on business lending. The writedown of the purchased mortgage loan premium of $709,000, or 9 cents per diluted share after tax, was related to an adjustable rate whole loan package purchased in the second quarter of 1997, on which Coastal experienced high prepayments during 1997 and continuing into 1998, resulting from a comparatively lower current interest rate environment. The net benefit of recording the resolution of the tax issue after these adjustments (net of their applicable income tax effects) amounted to $2.6 million or approximately 49 cents per diluted share. Excluding the net benefit from these nonrecurring items recorded during the three months ended March 31, 1998, net income available to common stockholders from ongoing core operations was $3.4 million or 65 cents per diluted share (as of March 31, 1998). Net interest income increased $352,000 for the three months ended March 31, 1998 as compared to the three months ended March 31, 1997. Noninterest income (excluding the writedown of purchased mortgage loan premium) increased during such period by $287,000. Noninterest expense increased by $778,000 and the provision (benefit) for federal income taxes (excluding the one-time effect of the $3.7 million reversal of accrued income taxes) decreased by $872,000 from the 1997 to the 1998 three month period due to the ongoing quarterly benefit attributable to the tax benefit issue and the tax effect of the recording of the additional provision for loan losses and the writedown of the purchased mortgage loan premium during the first quarter of 1998. Interest Income ---------------- Interest income for the three months ended March 31, 1998 increased $1.3 million or 2.6% from the three months ended March 31, 1997. The increase was primarily due to an increase of $925,000 in interest earned on loans receivable over the prior comparable quarter. The increase in interest income on loans receivable was due to a $74.6 million increase in the average balance of loans receivable offset by a decrease in the average yield from 8.40% for the three months ended March 31, 1997 to 8.20% for the three months ended March 31, 1998. The decrease in the average yield on loans receivable was primarily due to $749,000 (or 9 cents per diluted share after tax) of additional amortization of purchased mortgage loan premium during the three months ended March 31, 1998. This amortization was attributable to an adjustable rate whole loan package purchased in the second quarter of 1997, on which Coastal experienced high prepayments during 1997 and through the first quarter of 1998. As discussed previously, Coastal recorded a $709,000 writedown of the purchased mortgage loan premium on this package in March 1998, which should positively impact the average yield in the future. In addition, interest income on mortgage-backed securities and federal funds sold, certificates of deposit and other investments increased $254,000 and $105,000, respectively. Total interest-earning assets for the three months ended March 31, 1998 averaged $2.9 billion as compared to $2.8 billion for the three months ended March 31, 1997. Interest Expense ----------------- Interest expense on interest-bearing liabilities was $35.9 million for the three months ended March 31, 1998, as compared to $35.0 million for the same period in 1997. The increase in interest expense was due to a $39.3 million increase in the average balance of interest-bearing liabilities during such period and an increase in the average rate paid on interest-bearing liabilities from 5.31% for the three months ended March 31, 1997 to 5.37% for the three months ended March 31, 1998. The increase in average interest-bearing liabilities consisted of a $220.5 million increase in FHLB advances, a $34.2 million increase in interest-bearing savings deposits, offset by a $215.6 million decrease in securities sold under agreements to repurchase. Net Interest Income --------------------- Net interest income was $15.0 million for the three months ended March 31, 1998 and $14.6 million for the same period in 1997. Net interest margin ("Margin") was 2.10% for both three month periods. Margin represents net interest income as a percentage of average interest-earning assets. Net interest spread ("Spread"), defined to exclude noninterest-bearing deposits, decreased from 1.79% for the three months ended March 31, 1997 to 1.74% for the three months ended March 31, 1998. Management also calculates an alternative Spread which includes noninterest-bearing deposits. Under this calculation, the alternative Spreads for the three months ended March 31, 1998 and 1997 were 1.92% and 1.94%, respectively. Margin and Spread are affected by the changes in the amount and composition of interest-earning assets and interest-bearing liabilities. The average interest rates paid on interest-bearing liabilities increased from 5.31% for the three months ended March 31, 1997 to 5.37% for the same period in 1998. This increase was slightly offset by an increase in the average yield on interest-earning assets from 7.10% for the three months ended March 31, 1997 to 7.11% for the same period in 1998. In addition, average net interest-earning assets increased $27.6 million from the three months ended March 31, 1997 to the three months ended March 31, 1998. Spread for the three months ended March 31, 1998 was negatively affected by the additional amortization of purchased mortgage loan premium as discussed previously and by the higher borrowing costs experienced by Coastal. The writedown of the purchased mortgage loan premium recorded during the three months ended March 31, 1998 should decrease the ongoing amortization effect of prepayments related to the adjustable rate whole loan package. In addition, while management believes that the higher borrowing costs are temporary, efforts are being made to replace borrowings with lower cost deposits. Management's goal is to achieve a more desirable asset/liability composition which is less vulnerable to market interest rate fluctuations, primarily through the addition of loans tied to variable rates such as LIBOR and local and regional prime rates and through the efforts to replace LIBOR based borrowings with lower cost deposits. In addition, management intends to gradually increase commercial business loans to approximately 15% of total assets and commercial business (noninterest-bearing) deposits to approximately 10% of total deposits within three to five years. Provision for Loan Losses ---------------------------- The provision for loan losses was $1,450,000 for the three months ended March 31, 1998 and $450,000 for the three months ended March 31, 1997. During the three months ended March 31, 1998, Coastal recorded an additional provision for loan losses of $1.0 million to increase the allowance for loan losses due to the continuing change in the composition of the loans receivable portfolio. This change is occurring as a result of management's current emphasis on business lending. The allowance for loan losses as a percentage of total loans was 0.65% at March 31, 1998 and 0.56% at March 31, 1997. Although no assurance can be given, management believes that the present allowance for loan losses is adequate considering historical loss experience, delinquency trends and current economic conditions. Management will continue to review its loan loss allowance policy as Coastal's loan portfolio grows and diversifies to determine if changes to the policy and resulting allowance for loan losses are necessary. Noninterest Income ------------------- For the three months ended March 31, 1998, noninterest income (excluding the writedown of purchased mortgage loan premium) increased $287,000 or 19.5% to $1.8 million, compared to $1.5 million for the three months ended March 31, 1997. The increase in noninterest income was primarily due to an increase of $430,000 in loan fees and service charges on deposit accounts and a $24,000 increase in other noninterest income. These increases were somewhat offset by a $167,000 decrease in loan servicing income. In addition, as discussed previously, during the three months ended March 31, 1998, Coastal recorded a writedown of purchased mortgage loan premium of $709,000. Noninterest Expense -------------------- For the three months ended March 31, 1998, noninterest expense increased $778,000 from the three months ended March 31, 1997. Compensation, payroll taxes and other benefits as well as office occupancy expense increased $315,000 and $378,000, respectively, from the three months ended March 31, 1997 to the three months ended March 31, 1998, primarily due to the staffing increases related to the expansion of the loan product base and the continuing development of commercial business lending programs. In addition, occupancy expenses also increased due to the acquisition of assets and other expenses related to the relocation of Coastal's corporate headquarters in the third quarter of 1997. In addition, data processing expenses and the amortization of goodwill increased $95,000 and $32,000, respectively. Other changes included a $13,000 increase in real estate owned expenses, a $6,000 decrease in insurance premiums and a $49,000 decrease in other operating expenses. Provision (Benefit) for Federal Income Taxes ------------------------------------------------- For the three months ended March 31, 1998, the provision (benefit) for federal income taxes (excluding the one-time effect of the $3.7 million reversal of accrued income taxes) was $1.4 million compared to $2.2 million for the three months ended March 31, 1997. The decrease from 1997 to 1998 was due primarily to the ongoing quarterly benefit attributable to the tax benefit issue and the tax benefit effect of the recording of the additional provision for loan losses and the writedown of the purchased mortgage loan premium during the first quarter of 1998. Liquidity and Capital Resources ---------------------------------- Coastal's primary sources of funds consist of savings deposits bearing market rates of interest, securities sold under agreements to repurchase, advances from the FHLB, federal funds purchased and principal payments on loans receivable and mortgage-backed securities. Coastal uses its funding resources principally to meet its ongoing commitments to fund maturing deposits and deposit withdrawals, repay borrowings, purchase loans receivable and mortgage-backed securities, fund existing and continuing loan commitments, maintain its liquidity, meet operating expenses and fund acquisitions of other banks and thrifts, either on a branch office or whole bank acquisition basis. At March 31, 1998, Coastal had binding commitments to originate or purchase loans totaling approximately $69.9 million and had $55.4 million of undisbursed loans in process. Scheduled maturities of certificates of deposit during the 12 months following March 31, 1998 totaled $782.8 million at March 31, 1998. Management believes that Coastal has adequate resources to fund all of its commitments. As of March 31, 1998, Coastal operated 37 retail banking offices in Texas cities, including Houston, Austin, Corpus Christi and small cities in the southeast quadrant of Texas. Management's five year goal is to have over $5 billion in assets, over $3 billion in deposits, $2.5 billion in loans and 80 branches in cities throughout central and south Texas, although there can be no assurance that this goal can be accomplished through growth or acquisitions. Forward-Looking Information ---------------------------- "Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995: The statements contained in this Quarterly Report on Form 10-Q which are not historical facts contain forward looking information with respect to plans, projections or future performance of the Company, the occurrence of which involve certain risks and uncertainties detailed in the Company's filings with the Securities and Exchange Commission. The above discussion should be read in conjunction with the information contained in the Consolidated Financial Statements and the Notes thereto. The above information contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 (the "Reform Act"), and are subject to the safe harbor created by that Reform Act. The words "estimate," "project," "anticipate," "expect," "intend," "believe," "plans," and similar expressions are intended to identify forward-looking statements. Because such forward-looking statements involve risks and uncertainties, there are important factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements. Factors, all of which are difficult to predict and many of which are beyond the control of Coastal, that could cause actual results to differ materially include, but are not limited to: risks related to Coastal's acquisition strategy, including risks of adversely changing results of operations and factors affecting Coastal's ability to consummate further acquisitions; changes in general economic and business conditions; changes in market rates of interest; changes in the laws and regulations applicable to Coastal; the risks associated with the Bank's non-traditional lending (loans other than single-family residential mortgage loans such as multifamily, real estate acquisition and development, commercial real estate, commercial business, warehouse and mortgage servicing rights loans); and changes in business strategies and other factors as discussed in Coastal's Annual Report on Form 10-K for the year ended December 31, 1997, as filed with the Securities and Exchange Commission (SEC) on March 24, 1998. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK -------------------------------------------------------------- There have been no material changes in Coastal's interest rate risk position since December 31, 1997. Coastal's principal market risk exposure is to interest rates. PART II - OTHER INFORMATION Item 1. Legal Proceedings ------------------ Coastal is involved in routine legal proceedings occurring in the ordinary course of business which, in the aggregate, are believed by management to be immaterial. Item 2. Changes in Securities ----------------------- a) Not applicable. b) Not applicable. Item 3. Default Upon Senior Securities --------------------------------- Not applicable. Item 4. Submission of Matters to a Vote of Security Holders ----------------------------------------------------------- Not applicable. Item 5. Other Information ------------------ Not applicable. Item 6. Exhibits and Reports on Form 8-K ------------------------------------- The following exhibits are filed as part of this report: Exhibit 27 - Financial Data Schedule (filed via EDGAR) Exhibit 99 - Forward-Looking Information SIGNATURES Pursuant to the requirement of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Dated: 5/15/98 By/s/ Manuel J. Mehos ------- ------------------------- Manuel J. Mehos Chairman of the Board Chief Executive Officer Dated: 5/15/98 By/s/ Catherine N. Wylie ------- ------------------------ Catherine N. Wylie Chief Financial Officer Exhibit 27 Financial Data Schedule (filed via EDGAR) Exhibit 99 Forward-Looking Information Forward-Looking Information "Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995: The statements contained in this Quarterly Report on Form 10-Q which are not historical facts contain forward looking information with respect to plans, projections or future performance of the Company, the occurrence of which involve certain risks and uncertainties detailed in the Company's filings with the Securities and Exchange Commission. The above discussion should be read in conjunction with the information contained in the Consolidated Financial Statements and the Notes thereto. The above information contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 (the "Reform Act"), and are subject to the safe harbor created by that Reform Act. The words "estimate," "project," "anticipate," "expect," "intend," "believe," "plans," and similar expressions are intended to identify forward-looking statements. Because such forward-looking statements involve risks and uncertainties, there are important factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements. Factors, all of which are difficult to predict and many of which are beyond the control of Coastal, that could cause actual results to differ materially include, but are not limited to: risks related to Coastal's acquisition strategy, including risks of adversely changing results of operations and factors affecting Coastal's ability to consummate further acquisitions; changes in general economic and business conditions; changes in market rates of interest; changes in the laws and regulations applicable to Coastal; the risks associated with the Bank's non-traditional lending (loans other than single-family residential mortgage loans such as multifamily, real estate acquisition and development, commercial real estate, commercial business, warehouse and mortgage servicing rights loans); and changes in business strategies and other factors as discussed in Coastal's Annual Report on Form 10-K for the year ended December 31, 1997, as filed with the Securities and Exchange Commission (SEC) on March 24, 1998. EX-27 2
9 This schedule contains summary financial information extracted from the consolidated statement of financial condition, the consolidated statement of income and notes thereto found on pages 1 through 14 of the Company's Form 10-Q for the year-to-date March 31, 1998 and is qualified in its entirety by reference to such financial statements 3-MOS DEC-31-1997 MAR-31-1998 25,026 0 3,500 0 169,783 1,325,249 1,304,353 1,335,955 8,685 2,966,202 1,367,371 1,116,380 52,317 319,627 0 0 50 110,457 2,966,202 26,940 23,446 502 50,888 15,507 35,888 15,000 1,450 0 10,335 3,615 5,941 0 0 5,941 1.18 1.14 0 0 0 0 0 7,412 350 173 8,685 8,685 0 0
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