10-Q 1 doc1.txt 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, 2001 [ ] 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: 5,766,747 AS OF JULY 31, 2001 COASTAL BANCORP, INC. AND SUBSIDIARIES Table of Contents PART I. FINANCIAL INFORMATION -------- ----------------------
Item 1 Financial Statements (unaudited) Consolidated Statements of Financial Condition at June 30, 2001 and December 31, 2000 1 Consolidated Statements of Income for the Six-Month Periods Ended June 30, 2001 and 2000 2 Consolidated Statements of Income for the Three-Month Periods Ended June 30, 2001 and 2000 3 Consolidated Statements of Comprehensive Income for the Six-Month and Three-Month Periods Ended June 30, 2001 and 2000 4 Consolidated Statements of Cash Flows for the Six-Month Periods Ended June 30, 2001 and 2000 5 Notes to Consolidated Financial Statements 7 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 17 Item 3 Quantitative and Qualitative Disclosures About Market Risk 23
PART II. OTHER INFORMATION --------- ------------------
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
SIGNATURES ITEM 1. FINANCIAL STATEMENTS -------- ---------------------
COASTAL BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (IN THOUSANDS, EXCEPT SHARE DATA) June 30, December 31, ASSETS 2001 2000 ------------------------------------------------------ ---------- ------------ (Unaudited) Cash and cash equivalents $ 37,485 $ 69,730 Federal funds sold 6,570 869 Loans receivable (note 4) 1,990,914 1,896,228 Mortgage-backed securities held-to-maturity (note 3) 851,649 885,565 Mortgage-backed securities available-for-sale (note 3) 90,868 94,673 U.S. Treasury securities held-to-maturity 1,399 1,497 Accrued interest receivable 17,404 18,772 Property and equipment 27,057 28,086 Stock in the Federal Home Loan Bank of Dallas (FHLB) 34,898 58,005 Goodwill 23,215 24,611 Prepaid expenses and other assets 13,554 13,575 ---------- ---------- $3,095,013 $3,091,611 ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY --------------------------------------- Liabilities: Deposits (note 5). . . . . . . . . . . . . . . . . . . . . . $1,691,496 $1,674,981 Advances from the FHLB (note 6). . . . . . . . . . . . . . . 666,158 1,150,305 Securities sold under agreements to repurchase and federal funds purchased (note 6) . . . . . . . . . . . . . . . . . 483,180 -- Senior notes payable, net (note 7) . . . . . . . . . . . . . 46,900 46,900 Advances from borrowers for taxes and insurance. . . . . . . 10,105 5,050 Other liabilities and accrued expenses . . . . . . . . . . . 18,718 47,154 ----------- ----------- Total liabilities. . . . . . . . . . . . . . . . . . . . 2,916,557 2,924,390 ---------- ---------- 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 12): 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; 7,760,199 shares issued and 5,760,199 shares outstanding at June 30, 2001; 7,677,622 shares issued and 5,677,622 shares outstanding at December 31, 2000. . . 78 77 Additional paid-in capital . . . . . . . . . . . . . . . . . 34,352 33,312 Retained earnings. . . . . . . . . . . . . . . . . . . . . . 119,445 110,794 Accumulated other comprehensive loss - unrealized loss on securities available-for-sale . . . . . (324) (1,867) Treasury stock at cost (2,000,000 shares in 2001 and 2000). . . . . . . . . . . . . . . . . . . . . . . . . (31,345) (31,345) ----------- ----------- Total stockholders' equity . . . . . . . . . . . . . . . 149,706 138,471 ----------- ----------- $3,095,013 $3,091,611 =========== ===========
See accompanying Notes to Consolidated Financial Statements. COASTAL BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE DATA)
Six Months Ended June 30, ------------------ 2001 2000 -------- -------- (Unaudited) Interest income: Loans receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 84,079 $ 81,120 Mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,987 31,244 FHLB stock, federal funds sold and other interest-earning assets . . . . . . . . . . . . . . . . 1,522 3,148 --------- -------- 116,588 115,512 ---------- -------- Interest expense: Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38,982 33,983 Advances from the FHLB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,960 36,489 Other borrowed money . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,578 1 Senior notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,345 2,345 ---------- -------- 71,865 72,818 --------- -------- Net interest income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44,723 42,694 Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,100 3,990 ---------- ------- Net interest income after provision for loan losses. . . . . . . . . . . . . . . . . . . . . . 42,623 38,704 ------- ------- Noninterest income: Service charges on deposit accounts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,621 3,453 Loan fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 600 599 Loan servicing income, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 244 Gain (loss) on derivative instruments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (443) -- Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,028 582 Gain on sale of mortgage servicing rights. . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 2,172 --------- -------- 4,806 7,050 --------- -------- Noninterest expense: Compensation, payroll taxes and other benefits . . . . . . . . . . . . . . . . . . . . . . . . . 15,206 14,713 Office occupancy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,517 5,680 Data processing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,687 1,700 Amortization of goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,397 1,514 Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,448 5,680 --------- ------- 29,255 29,287 --------- -------- Income before provision for Federal income taxes, minority interest and cumulative effect of accounting change. . . . . . . . . . . . . . . . . . . 18,174 16,467 Provision for Federal income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,606 5,040 --------- -------- Income before minority interest and cumulative effect of accounting change. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,568 11,427 Minority interest - preferred stock dividends of Coastal Banc ssb . . . . . . . . . . . . . . . . 1,294 1,294 --------- -------- Income before cumulative effect of accounting change . . . . . . . . . . . . . . . . . . . 11,274 10,133 Cumulative effect of change in accounting for derivative instruments, net of tax (note 8) (104) -- ----------- -------- Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 11,170 $ 10,133 ========== ======== Net income available to common stockholders. . . . . . . . . . . . . . . . . . . . . . . . . $ 9,916 $ 8,879 =========== ======== Basic earnings per share before cumulative effect of accounting change . . . . . . . . . . . . . $ 1.75 $ 1.45 =========== ======== Basic earnings per common share (note 9). . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.73 $ 1.45 =========== ======== Diluted earnings per share before cumulative effect of accounting change. . . . . . . . . . . . . $ 1.66 $ 1.42 =========== ======== Diluted earnings per common share (note 9). . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.64 $ 1.42 =========== ========
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 June 30, -------------------- 2001 2000 -------- ------- (Unaudited) Interest income: Loans receivable. . . . . . . . . . . . . . . . . . . . . . . . . $ 41,078 $42,614 Mortgage-backed securities. . . . . . . . . . . . . . . . . . . . 14,729 15,811 FHLB stock, federal funds sold and other interest-earning assets. 616 2,173 ------- ------- 56,423 60,598 ------- ------- Interest expense: Deposits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,061 17,450 Advances from the FHLB. . . . . . . . . . . . . . . . . . . . . . 9,197 19,394 Other borrowed money. . . . . . . . . . . . . . . . . . . . . . . 4,575 -- Senior notes payable. . . . . . . . . . . . . . . . . . . . . . . 1,172 1,172 ------- ------- 34,005 38,016 ------- ------- Net interest income . . . . . . . . . . . . . . . . . . . . . . 22,418 22,582 Provision for loan losses. . . . . . . . . . . . . . . . . . . . . 1,200 1,590 ------- ------- Net interest income after provision for loan losses . . . . . . 21,218 20,992 ------- ------- Noninterest income: Service charges on deposit accounts . . . . . . . . . . . . . . . 1,860 1,745 Loan fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . 360 250 Loan servicing income, net. . . . . . . . . . . . . . . . . . . . -- 43 Gain on derivative instruments. . . . . . . . . . . . . . . . . . 121 -- Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 643 486 ------- ------- 2,984 2,524 ------- ------- Noninterest expense: Compensation, payroll taxes and other benefits. . . . . . . . . . 7,608 7,244 Office occupancy. . . . . . . . . . . . . . . . . . . . . . . . . 2,841 2,874 Data processing . . . . . . . . . . . . . . . . . . . . . . . . . 833 841 Amortization of goodwill. . . . . . . . . . . . . . . . . . . . . 695 761 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,596 2,673 -------- ------- 14,573 14,393 -------- ------- Income before provision for Federal income taxes and minority interest . . . . . . . . . . . . . . . . . . . . 9,629 9,123 Provision for Federal income taxes . . . . . . . . . . . . . . . . 2,992 2,831 ------- ------- Income before minority interest . . . . . . . . . . . . . . . 6,637 6,292 Minority interest - preferred stock dividends of Coastal Banc ssb. 647 647 ------- ------- Net income. . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,990 $ 5,645 ======== ======= Net income available to common stockholders . . . . . . . . . $ 5,363 $ 5,018 ======== ======= Basic earnings per common share (note 9) . . . . . . . . . . . . . $ 0.93 $ 0.84 ======== ======= Diluted earnings per common share (note 9) . . . . . . . . . . . . $ 0.89 $ 0.83 ======== =======
See accompanying Notes to Consolidated Financial Statements. COASTAL BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (IN THOUSANDS)
Six Months Ended June 30, ------------------ 2001 2000 --------- -------- (Unaudited) Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 11,170 $10,133 Other comprehensive income (loss), net of tax: Unrealized holding gains (losses) on securities available-for-sale arising during period. . . . . . . . . . . . . . . . . . . . . . . 1,543 (2,006) ----------- -------- Total comprehensive income. . . . . . . . . . . . . . . . . . . . . $ 12,713 $ 8,127 =========== ========
Three Months Ended June 30, -------------------- 2001 2000 --------- -------- (Unaudited) Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,990 $5,645 Other comprehensive income (loss), net of tax: Unrealized holding gains (losses) on securities available-for-sale arising during period. . . . . . . . . . . . . . . . . . . . . . . 936 (108) --------------- ------- Total comprehensive income. . . . . . . . . . . . . . . . . . . . . $ 6,926 $5,537 =============== =======
See accompanying Notes to Consolidated Financial Statements. COASTAL BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
Six Months Ended June 30, ------------------ 2001 2000 ------------ ---------- (Unaudited) Cash flows from operating activities: Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 11,170 $ 10,133 Adjustments to reconcile net income to net cash provided (used) by operating activities: Depreciation and amortization of property and equipment, mortgage servicing rights and prepaid expenses and other assets . 4,063 4,554 Net (discount accretion) premium amortization . . . . . . . . . . . (1,332) 357 Provision for loan losses . . . . . . . . . . . . . . . . . . . . . 2,100 3,990 Amortization of goodwill. . . . . . . . . . . . . . . . . . . . . . 1,397 1,514 Originations and purchases of mortgage loans held for sale. . . . . (15,649) (2,876) Sales of mortgage loans for held for sale . . . . . . . . . . . . . 15,779 2,898 Stock dividends from the FHLB . . . . . . . . . . . . . . . . . . . (1,338) (3,011) Gain on sale of mortgage servicing rights . . . . . . . . . . . . . -- (2,172) Loss on derivative instruments. . . . . . . . . . . . . . . . . . . 603 -- Decrease (increase) in: Accrued interest receivable . . . . . . . . . . . . . . . . . . . 1,368 (1,815) Other, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . (30,009) 5,625 ------------------ ---------- Net cash provided (used) by operating activities. . . . . . . . . (11,848) 19,197 ------------------ ---------- Cash flows from investing activities: Net increase in federal funds sold. . . . . . . . . . . . . . . . . (5,701) (1,900) Purchases of mortgage-backed securities held-to-maturity. . . . . . -- (2,300) Purchase of U.S. Treasury securities held-to-maturity . . . . . . . -- (692) Principal repayments on mortgage-backed securities held-to-maturity 33,839 14,778 Principal repayments on mortgage-backed securities available-for-sale. . . . . . . . . . . . . . . . . . . . . . . . 6,158 2,333 Proceeds from maturity of U.S. Treasury securities held-to-maturity 100 -- Purchases of loans receivable . . . . . . . . . . . . . . . . . . . (163,327) (236,394) Net decrease in loans receivable. . . . . . . . . . . . . . . . . . 66,218 83,842 Purchases of property and equipment, net. . . . . . . . . . . . . . (1,294) (515) Purchases of FHLB stock . . . . . . . . . . . . . . . . . . . . . . (3,986) (7,603) Proceeds from sales of FHLB stock . . . . . . . . . . . . . . . . . 28,431 -- Proceeds from the sale of mortgage servicing rights . . . . . . . . -- 5,001 ------------------ ---------- Net cash used by investing activities . . . . . . . . . . . . . . (39,562) (143,450) ------------------ ----------
COASTAL BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED (IN THOUSANDS)
Six Months Ended June 30, ------------------ 2001 2000 ------------------ ------------ (Unaudited) Cash flows from financing activities: Net increase (decrease) in deposits. . . . . . . . . . . . . . . . . $ 16,555 $ (7,972) Advances from the FHLB . . . . . . . . . . . . . . . . . . . . . . . 6,609,380 5,467,693 Principal payments on advances from the FHLB . . . . . . . . . . . . (7,093,527) (5,339,676) Securities sold under agreements to repurchase and federal funds purchased. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,465,852 6,400 Purchases of securities sold under agreements to repurchase and federal funds purchased. . . . . . . . . . . . . . . . . . . . . . (982,672) (6,400) Net increase in advances from borrowers for taxes and insurance. . . 5,055 6,757 Exercise of stock options for purchase of common stock, net. . . . . 1,040 229 Purchase of treasury stock . . . . . . . . . . . . . . . . . . . . . -- (10,882) Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,518) (2,252) ------------------ ------------ Net cash provided by financing activities. . . . . . . . . . . . . 19,165 113,897 ------------------ ------------ Net decrease in cash and cash equivalents. . . . . . . . . . . . . (32,245) (10,356) Cash and cash equivalents at beginning of period . . . . . . . . . . 69,730 48,098 ------------------ ------------ Cash and cash equivalents at end of period . . . . . . . . . . . . . $ 37,485 $ 37,742 ================== ============ Supplemental schedule of cash flows-interest paid. . . . . . . . . . $ 71,862 $ 71,907 ================== ============ Supplemental schedule of noncash investing and financing activities: Foreclosures of loans receivable . . . . . . . . . . . . . . . . . $ 1,709 $ 1,682 ================== ============
See accompanying Notes to Consolidated Financial Statements. COASTAL BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (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 accounting principles generally accepted in the United States of America. 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, 2001 are not necessarily indicative of the results that may be expected for the entire fiscal year or any other interim period. On August 27, 1998, December 21, 1998, February 25, 1999, April 27, 2000 and July 27, 2000, the Board of Directors authorized five separate repurchase plans for up to 500,000 shares each of the outstanding shares of common stock through an open-market repurchase program and privately negotiated repurchases, if any. As of June 30, 2001, 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, with no shares from the July 27, 2000 authorization having been repurchased to date. Book value per common share at June 30, 2001 was $20.48. (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, 2001 were as follows (in thousands):
Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ----------- ---------- ------- Held-to-maturity: REMICS - Agency $ 621,713 $ 2,941 $ (2,843) $ 621,811 REMICS - Non-agency 161,711 38 (2,005) 159,744 FNMA certificates 46,767 146 (330) 46,583 GNMA certificates 15,776 319 -- 16,095 Non-agency securities 5,682 43 (136) 5,589 ----------- ------- -------- --------- $ 851,649 $ 3,487 $ (5,314) $ 849,822 =========== ======= ========= ========= Available-for-sale: REMICS - Agency $ 77,123 $ 109 $ (569) $ 76,663 GNMA certificates 14,244 2 (41) 14,205 ----------- ------- --------- --------- $ 91,367 $ 111 $ (610) $ 90,868 =========== ======= ========= =========
Mortgage-backed securities at December 31, 2000 were as follows (in thousands):
Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ----------- ---------- ------- Held-to-maturity: REMICS - Agency $ 642,588 $ 1,370 $ (18,368) $ 625,590 REMICS - Non-agency 168,886 9 (7,337) 161,558 FNMA certificates 50,128 5 (680) 49,453 GNMA certificates 17,681 104 -- 17,785 Non-agency securities 6,282 -- (151) 6,131 ----------- ------- -------- ------ $ 885,565 $ 1,488 $ (26,536) $ 860,517 =========== ======= ========== ========= Available-for-sale: REMICS - Agency $ 77,449 $ -- $ (2,838) $ 74,611 GNMA certificates 20,095 2 (35) 20,062 ----------- ------- ---------- --------- $ 97,544 $ 2 $ (2,873) $ 94,673 =========== ======= ========== =========
(4) LOANS RECEIVABLE Loans receivable at June 30, 2001 and December 31, 2000 were as follows (in thousands):
June 30, 2001 December 31, 2000 --------------- ----------------- Real estate mortgage loans: First-lien mortgage, primarily residential . . . $ 944,019 $ 908,841 Commercial . . . . . . . . . . . . . . . . . . . 346,350 347,921 Multifamily. . . . . . . . . . . . . . . . . . . 178,477 224,361 Residential construction . . . . . . . . . . . . 154,159 157,950 Acquisition and development. . . . . . . . . . . 141,292 133,005 Commercial construction. . . . . . . . . . . . . 213,421 90,256 Commercial loans, secured by residential mortgage loans held for sale. . . . . . . . . . . . . . . 8,306 8,518 Commercial, financial and industrial. . . . . . . 121,705 120,420 Loans secured by savings deposits . . . . . . . . 14,137 13,681 Consumer and other loans. . . . . . . . . . . . . 50,302 56,522 --------------- ----------- 2,172,168 2,061,475 Loans in process. . . . . . . . . . . . . . . . . (159,975) (142,451) Allowance for loan losses . . . . . . . . . . . . (14,551) (14,507) Unearned interest and loan fees . . . . . . . . . (1,308) (3,864) Discount on purchased loans, net. . . . . . . . . (5,420) (4,425) --------------- ----------- $ 1,990,914 $1,896,228 =============== =========== Weighted average yield. . . . . . . . . . . . . . 8.18% 9.38% =============== ===========
At June 30, 2001, Coastal had outstanding commitments to originate or purchase $120.9 million of real estate mortgage and other loans and had commitments under existing lines of credit to originate primary construction and other loans of approximately $104.9 million. In addition, at June 30, 2001, Coastal had $9.2 million of outstanding letters of credit. Management anticipates the funding of these commitments through normal operations. At June 30, 2001 and December 31, 2000, the carrying value of loans that were considered to be impaired totaled approximately $3.8 million and $4.4 million, respectively and the related allowance for loan losses on those impaired loans totaled $741,000 and $1.6 million at June 30, 2001 and December 31, 2000, respectively. At June 30, 2001, all loans considered to be impaired were allocated a specific portion of the allowance for loan losses. At December 31, 2000, one loan considered to be impaired with a balance of $650,000 did not have an allocated portion of the allowance for loan losses. The average recorded investment in impaired loans during the six months ended June 30, 2001 and 2000 was $4.7 million and $3.0 million, respectively. An analysis of activity in the allowance for loan losses for the six months ended June 30, 2001 and 2000 is as follows (in thousands):
Six Months Ended June 30, ------------------------- 2001 2000 -------- -------- Balance, beginning of period $14,507 $10,493 Provision for loan losses 2,100 3,990 Charge-offs (2,215) (1,012) Recoveries 159 311 -------- -------- Balance, end of period $14,551 $13,782 ======== ========
During the six months ended June 30, 2001, charge-offs include the charge-off of an $821,000 unsecured commercial overdraft loan that was determined to be uncollectible, in addition to $709,000 in smaller balance consumer loans. Effective March 31, 2000, Coastal sold its rights to service approximately $389.1 million of mortgage loans for third party investors and recorded a nonrecurring gain of $2.2 million. Coastal continues 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, 2001 and December 31, 2000, are summarized as follows (dollars in thousands):
Stated Rate June 30, 2001 December 31, 2000 -------------- ------------- ------------------ Noninterest-bearing checking . 0.00 $ 80,641 $ 80,849 Interest-bearing checking. . . 0.75 - 2.00 60,186 61,046 Savings accounts . . . . . . . 1.49 - 3.00 45,131 43,891 Money market demand accounts . 0.00 - 6.31 387,236 374,210 -------------- ----------- 573,194 559,996 -------------- ----------- Certificate accounts . . . . . 2.00 - 2.99 1,172 111 3.00 - 3.99 53,288 475 4.00 - 4.99 268,894 39,930 5.00 - 5.99 255,403 261,398 6.00 - 6.99 536,009 807,684 7.00 - 7.99 3,452 5,166 8.00 - 8.99 69 67 9.00 - 9.99 -- 99 ------------- ----------- 1,118,287 1,114,930 ------------- ----------- Premium on purchased deposits 15 55 ------------- ----------- $ 1,691,496 $1,674,981 ============= =========== Weighted average interest rate 4.38% 4.83% ============= ===========
The scheduled maturities of certificate accounts outstanding at June 30, 2001 were as follows (in thousands):
June 30, 2001 -------------- 0 through 12 months. $ 1,044,741 13 through 24 months 52,100 25 through 36 months 12,263 37 through 48 months 5,634 49 through 60 months 3,389 Over 60 months . . . 160 -------------- $ 1,118,287 ==============
(6) ADVANCES FROM THE FHLB AND SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE (A) The weighted average interest rates on advances from the FHLB at June 30, 2001 and December 31, 2000 were 4.95% and 6.48%, respectively. The scheduled maturities and related weighted average interest rates on advances from the FHLB at June 30, 2001 are summarized as follows (dollars in thousands):
Weighted Average Due during the year ending December 31, Interest Rate Amount --------------------------------------- ----------------- -------- 2001. . . . . . . . . . . . . . . . . . 4.02% $213,743 2002. . . . . . . . . . . . . . . . . . 5.32 389,492 2003. . . . . . . . . . . . . . . . . . 5.62 11,956 2004. . . . . . . . . . . . . . . . . . 5.48 11,047 2005. . . . . . . . . . . . . . . . . . 5.10 12,564 2006. . . . . . . . . . . . . . . . . . 6.81 3,366 2007. . . . . . . . . . . . . . . . . . 6.64 1,268 2008. . . . . . . . . . . . . . . . . . 5.63 2,150 2009. . . . . . . . . . . . . . . . . . 8.04 3,972 2010. . . . . . . . . . . . . . . . . . 6.73 987 2011. . . . . . . . . . . . . . . . . . 6.56 1,361 2012. . . . . . . . . . . . . . . . . . 5.76 292 2013. . . . . . . . . . . . . . . . . . 5.75 7,713 2014. . . . . . . . . . . . . . . . . . 5.44 2,977 2015. . . . . . . . . . . . . . . . . . 6.67 1,734 2018. . . . . . . . . . . . . . . . . . 5.05 1,536 -------- 4.95% $666,158 ======= ========
Advances from the FHLB are secured by certain first-lien mortgage and multifamily loans and mortgage-backed securities owned by Coastal. (B) The weighted average interest rate on securities sold under agreements to repurchase at June 30, 2001 was 3.87% with the stated interest rates ranging from 3.85% to 4.02%. (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) DERIVATIVE INSTRUMENTS Coastal is a party to derivative instruments in the normal course of business to reduce its exposure to fluctuations in interest rates. These derivative instruments have included interest rate swap agreements where Coastal makes fixed interest payments and receives payments based on a floating index and, currently, interest rate cap agreements, as described below. Effective January 1, 2001, Coastal adopted Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and for Hedging Activities" ("Statement 133"). Statement 133 requires companies to recognize all derivatives as either assets or liabilities in the statement of financial condition and measure all derivatives at fair value. The interest rate swap and cap agreements held by Coastal on December 31, 2000 were determined to not qualify for hedge accounting, therefore on implementation of Statement 133, Coastal recorded a transition adjustment to record these derivative instruments at fair value. On January 1, 2001, Coastal recorded a transition adjustment loss of $160,000, or $104,000 net of the tax effect, as the cumulative effect of the change in accounting for derivative instruments to record the fair value of Coastal's derivative instruments in the consolidated statements of income. For the six months ended June 30, 2001, Coastal recorded an additional fair value loss on these derivative instruments of $443,000. The fair value changes in the derivative instruments during 2001 were primarily attributable to Coastal's interest rate swap agreements, which were totally liquidated in June 2001. As of June 30, 2001, Coastal's interest rate cap agreements were the only derivative instruments recorded at fair value pursuant to Statement 133. 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 8.0% to 9.0%, depending on the agreement. Payments on the interest rate cap agreements are based on the notional principal amount of the agreements; no funds were actually borrowed or are to be repaid. The fair value of the interest rate cap agreements was $28,000 at June 30, 2001, which is the recorded book value of such agreements due to the implementation of Statement 133. 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, 2001 and 2000. No payments were made to Coastal under the interest rate cap agreements during the six months ended June 30, 2001 or 2000. Interest rate cap agreements outstanding at June 30, 2001 expire as follows (dollars in thousands):
Year of Strike Rate Notional Expiration Range Amount ---------- -------------- --------- 2002 . . . 8.75 - 9.00% $ 16,600 2003 . . . 8.00 - 9.00 107,676 --------- $ 124,276 =========
The terms of the interest rate swap agreements outstanding at December 31, 2000 are summarized as follows (dollars in thousands):
Fair Value at Floating Rate End of Notional LIBOR Fixed at Period Maturity Amount Index Rate End of Period (gain (loss)) --------------------- --------- ----------- ------ -------------- --------------- At December 31, 2000: 2003. . . . . . . . . $ 5,523 One-month 5.345% 6.821% $ 32 2004. . . . . . . . . 3,758 One-month 5.635 6.710 11 2005. . . . . . . . . 11,095 Three-month 6.500 6.736 (176) --------- --------------- $ 20,376 $ (133) ========= ===============
Coastal totally liquidated its interest rate swap positions in June of 2001. The interest rate swap agreements previously held by Coastal provided for Coastal to make fixed interest payments and receive payments based on a floating LIBOR index, as defined in each agreement. 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. (9) EARNINGS PER SHARE The following summarizes information related to the computation of basic and diluted earnings per common share ("EPS") for the six-and three-month periods ended June 30, 2001 and 2000 (dollars in thousands, except per share data):
Six Months Ended June 30, ---------------- 2001 2000 ----------- ----------- Net income $ 11,170 $ 10,133 Preferred stock dividends (1,254) (1,254) ----------- ----------- Net income available to common stockholders $ 9,916 $ 8,879 =========== =========== Weighted average number of common shares outstanding used in basic EPS calculation 5,732,270 6,139,175 Add assumed exercise of outstanding stock options as adjusted for dilutive securities 299,472 108,624 ----------- ----------- Weighted average number of common shares outstanding used in diluted EPS calculation 6,031,742 6,247,799 =========== =========== Basic EPS $ 1.73 $ 1.45 =========== =========== Diluted EPS $ 1.64 $ 1.42 =========== ===========
Three Months Ended June 30, ---------------- 2001 2000 ----------- ----------- Net income $ 5,990 $ 5,645 Preferred stock dividends (627) (627) ----------- ----------- Net income available to common stockholders $ 5,363 $ 5,018 =========== =========== Weighted average number of common shares outstanding used in basic EPS calculation 5,748,708 5,989,330 Add assumed exercise of outstanding stock options as adjusted for dilutive securities 310,298 89,880 ----------- ----------- Weighted average number of common shares outstanding used in diluted EPS calculation 6,059,006 6,079,210 =========== =========== Basic EPS $ 0.93 $ 0.84 =========== =========== Diluted EPS $ 0.89 $ 0.83 =========== ===========
The weighted average number of common shares outstanding has been reduced by the treasury stock held by Coastal. As of June 30, 2001 and 2000, Coastal had 2,000,000 common shares in treasury. (10) COASTAL BANC SSB PREFERRED STOCK On October 21, 1993, the Bank issued 1,150,000 shares of 9.0% Noncumulative Preferred Stock, no par value, Series A, at a price of $25 per share to the public ("Preferred Stock"). 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, 2001, the Bank's regulatory capital in relation to its existing regulatory capital requirements for capital adequacy purposes was 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) $ 196,242 6.38% $123,035 4.00% $153,794 5.00% Tier 1 risk-based 196,242 10.30 76,232 4.00 114,348 6.00 Total risk-based 210,793 11.06 152,464 8.00 190,580 10.00
As of June 30, 2001, 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) 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 Bancorp Preferred Stock is callable on May 15, 2003 at Bancorp's option. The $26.0 million net proceeds was used for repurchases in the open market of Bancorp's outstanding common stock and of Bancorp's outstanding 10% Senior Notes. Pursuant to Coastal's tax benefit agreement with the FDIC, Coastal receives a tax benefit for dividends paid on the Bancorp Preferred Stock. (13) RECENT ACCOUNTING STANDARDS In July 2001, Statement of Financial Accounting Standards No. 141, "Business Combinations" ("Statement 141") was issued. Statement 141 eliminates the pooling of interests method of accounting for business combinations and requires that the purchase method of accounting be used for all business combinations. Goodwill and certain intangible assets will remain on the consolidated statement of financial condition and not be amortized. On an annual basis, and when there is reason to suspect that their values have been diminished or impaired, these assets must be tested for impairment, and write-downs may be necessary. Statement 141 is effective for business combinations initiated after July 1, 2001. In July 2001, Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("Statement 142") was issued. Statement 142 changes the accounting for goodwill from an amortization method to an impairment-only approach. Amortization of goodwill, including goodwill recorded in past business combinations, will cease upon the adoption of Statement 142. Coastal is required to implement Statement 142 on January 1, 2002. Based on acquisitions completed as of June 30, 2001, application of the goodwill non-amortization provisions of these rules is expected to result in an increase in net income of approximately $2.0 million (or $0.33 per diluted share) for fiscal 2002. During 2002, Coastal will begin to test goodwill for impairment under the new rules, applying a fair-value-based test, and has not yet determined what the effect of this testing will be on the earnings and consolidated financial position of Coastal. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND ------------------------------------------------------------------- RESULTS OF OPERATIONS ------------------- Financial Condition -------------------- Total assets increased slightly by $3.4 million from December 31, 2000 to June 30, 2001. The net increase resulted primarily from an increase of $94.7 million in loans receivable, in addition to an increase of $5.7 million in federal funds sold. These increases were somewhat offset by decreases of $32.2 million, $33.9 million, $3.8 million and $23.1 million in cash and cash equivalents, mortgage-backed securities held-to-maturity, mortgage-backed securities available-for-sale and stock in the FHLB, respectively, and other small changes in other categories. The increase in loans receivable was primarily due to bulk residential mortgage loan purchases of $163.3 million which was partially offset by principal payments received. The decrease in mortgage-backed securities was due to principal payments received and the decrease in stock in the FHLB was due to the decreased amounts required to be maintained based on the decreased level of FHLB advances outstanding. Deposits increased $16.5 million or 1.0% from December 31, 2000 to June 30, 2001 and securities sold under agreements to repurchase and federal funds purchased increased 100.0% or $483.2 million. Advances from the FHLB decreased $484.1 million or 42.1% during the period due to a reallocation of borrowings to securities sold under agreements to repurchase with more favorable market rates. Stockholders' equity increased 8.11% or $11.2 million from December 31, 2000 to June 30, 2001 as a result of net income and a $1.5 million decrease in accumulated other comprehensive loss, offset somewhat by dividends declared. Results of Operations for the Six Months Ended June 30, 2001 and 2000 -------------------------------------------------------------------------------- General ------- For the six months ended June 30, 2001, net income was $11.2 million compared to $10.1 million for the six months ended June 30, 2000. The increase in net income for the six months ended June 30, 2001 was comprised of the following compared to the same period in 2000: a $2.0 million increase in net interest income, a $1.9 million decrease in the provision for loan losses and a slight decrease in noninterest expense, somewhat offset by a $2.2 million decrease in noninterest income (which includes a $443,000 fair value loss on derivative instruments due to the adoption of Statement 133) and a $566,000 increase in the provision for Federal income taxes. Net interest income for the six months ended June 30, 2000 includes a $1.1 million special stock dividend declared by the FHLB (the "FHLB special dividend"). The increase in net interest income was due primarily to the increase in net interest margin to 2.99% for the six months ended June 30, 2001 from 2.90% for the same period in 2000, which includes the FHLB special dividend. Net interest margin, excluding the FHLB dividend, was 2.83% for the six months ended June 30, 2000. The decrease 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, the related $244,000 decrease in loan servicing income in 2001 and the fair value loss on derivative instruments of $443,000 recorded in 2001 pursuant to Statement 133. In addition, there were increases of $168,000 and $446,000 in service charges on deposit accounts and other noninterest income, respectively. Interest Income ---------------- Interest income for the six months ended June 30, 2001 increased $1.1 million or 1.0% from the six months ended June 30, 2000. The increase was due to an increase in average interest-earning assets of $50.8 million offset by a slight decrease in the average yield to 7.78% for the six months ended June 30, 2001 from 7.84% for the six months ended June 30, 2000, which includes the FHLB special dividend. Interest income on loans receivable increased $3.0 million due to a $99.0 million increase in the average balance, partially offset by a decrease in the average yield to 8.56% for the six months ended June 30, 2001 from 8.70% for the same period in 2000. Interest income on mortgage-backed securities decreased $257,000, or 0.8%, due to a $41.4 million decrease in the average balance which was partially offset by an increase in the average yield to 6.39% for the six months ended June 30, 2001 from 6.18% for the same period in 2000. In addition, interest income on FHLB stock, federal funds sold and other interest-earning assets decreased $1.6 million during the six months ended June 30, 2001, as compared to the same period in 2000. The decrease was due to the $6.8 million decrease in the average balance and to the FHLB special dividend recorded in the second quarter of 2000. Total interest-earning assets for the six months ended June 30, 2001 averaged $3.0 billion compared to $2.9 billion for the six months ended June 30, 2000. Interest Expense ----------------- Interest expense on interest-bearing liabilities was $71.9 million for the six months ended June 30, 2001, as compared to $72.8 million for the same period in 2000, which represents a decrease of $953,000, or 1.3%. The decrease in interest expense was primarily due to the decrease in the average rate paid on interest-bearing liabilities to 5.23% for the six months ended June 30, 2001 from 5.35% for the same period in 2000. This decrease was somewhat offset by the increase of $30.1 million in the average balance of interest-bearing liabilities. The increase in average interest-bearing liabilities consisted primarily of a $207.9 million increase in average securities sold under agreements to repurchase and federal funds purchased, a $61.6 million increase in average interest-bearing deposits, offset by a $239.4 million decrease in average FHLB advances. Net Interest Income --------------------- Net interest income was $44.7 million for the six months ended June 30, 2001 and $42.7 million for the same period in 2000. Net interest margin ("margin") was 2.99% for the six months ended June 30, 2001 compared to 2.90% (2.83% excluding the effect of the FHLB special dividend) for the six months ended June 30, 2000. Margin represents net interest income as a percentage of average interest-earning assets. Net interest spread ("spread"), defined to exclude noninterest-bearing deposits, increased to 2.55% for the six months ended June 30, 2001 from 2.49% (2.42% excluding the effect of the FHLB 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, 2001 and 2000 were 2.82% and 2.76% (2.69% excluding the effect of the FHLB special dividend), 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 0.12% decrease in the average rate paid on interest-bearing liabilities during the six months ended June 30, 2001 compared to the first six months of 2000. This decrease in the average rate on interest bearing liabilities was somewhat offset by a 0.06% decrease in the average yield on interest-earning assets. Average net interest-earning assets increased $20.7 million for the six months ended June 30, 2001 from the six months ended June 30, 2000. During 2001, Coastal's net interest income has benefited from the reduction in overall market interest rates. This benefit is due to the fact that a large portion of Coastal's borrowings are short term in nature and are repricing with the changes in the market interest rates on these liabilities. Management's overall goal is to continue to improve the asset/liability composition to be 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. Provision for Loan Losses ---------------------------- The provision for loan losses was $2.1 million for the six months ended June 30, 2001 compared to $4.0 million for the six months ended June 30, 2000. At June 30, 2001, Coastal had nonperforming loans totalling $23.0 million. Nonperforming loans are those loans on nonaccrual status as well as those loans greater than ninety (90) days delinquent and still accruing. Of these nonperforming loans at June 30, 2001, $19.3 million, or 84%, were first lien residential (single family) mortgage loans, $1.5 million were commercial real estate loans, $1.1 million were commercial, financial and industrial loans, with the balance in the residential construction and consumer and other categories. At December 31, 2000, nonperforming loans totalled $21.2 million, of which $16.5 million, or 78%, were first lien residential mortgage loans. At June 30, 2001, the allowance for loan losses as a percentage of nonperforming loans was 63.3% compared to 68.3% at December 31, 2000. Although no assurance can be given, management believes that the allowance for loan losses at June 30, 2001 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, 2001, noninterest income decreased $2.2 million to $4.8 million, compared to $7.0 million for the six months ended June 30, 2000. The decrease in noninterest income was primarily due to the $2.2 million non-recurring gain recorded on the sale of Coastal's mortgage servicing rights during the first quarter of 2000 and the related loss of the servicing income and loan fees during the periods subsequent to the sale. In addition to the effect of the servicing sale, the effect of the fair value loss on derivative instruments of $443,000 recorded during the six months ended June 30, 2001 pursuant to Statement 133 was a factor in the decrease in total noninterest income. The fair value changes in the derivative instruments were primarily attributable to Coastal's interest rate swap positions, which were totally liquidated in June 2001. In addition to these items, comparing the six months ended June 30, 2001 to the same period in 2000, service charges on deposit accounts increased $168,000 and other noninterest income increased $446,000. The increase in service charges on deposit accounts was due to Coastal's continued focus on increasing transaction type deposit accounts and the related fee income. The increase in other noninterest income was due to $300,000 in insurance claim proceeds received in 2001 for reimbursement of certain deposit account losses incurred in prior years and a $108,000 increase in the gain on the sale of loans held for sale. Noninterest Expense -------------------- For the six months ended June 30, 2001, noninterest expense decreased $32,000 from the six months ended June 30, 2000. The overall decrease in noninterest expense was due to decreases of $163,000, $13,000, $117,000 and $232,000 in office occupancy, data processing, the amortization of goodwill and other noninterest expense, respectively. These decreases were offset by a $493,000 increase in compensation, payroll taxes and other benefits. Provision for Federal Income Taxes -------------------------------------- The provision for Federal income taxes for the six months ended June 30, 2001 was $5.6 million compared to the provision for Federal income taxes for the six months ended June 30, 2000 of $5.0 million. The increase was due to the increased income before provision for Federal income taxes, minority interest and cumulative effect of accounting change in 2001, with the effective tax rate for both periods being approximately 31%. Results of Operations for the Three Months Ended June 30, 2001 and 2000 -------------------------------------------------------------------------------- General ------- For the three months ended June 30, 2001, net income was $6.0 million compared to $5.6 million for the three months ended June 30, 2000. Comparing the second quarter of 2001 to the second quarter of 2000, the following were the changes in the components of net income: net interest income decreased $164,000 (but if the $1.1 million FHLB special dividend is excluded, 2001 net interest income would have increased by $897,000), the provision for loan losses decreased $390,000, noninterest income increased $460,000 (which includes a $121,000 fair value gain on derivative instruments pursuant to Statement 133), noninterest expense increased $180,000 and the provision for Federal income taxes increased $161,000. Interest Income ---------------- Interest income for the three months ended June 30, 2001 decreased $4.2 million or 6.9% from the three months ended June 30, 2000. The decrease was due to a decrease in the average yield on interest-earning assets of 0.58% to 7.52% for the three months ended June 30, 2001 from 8.10% for the three months ended June 30, 2000. Interest income on loans receivable decreased $1.5 million due to a decrease in the average yield of 0.62% during the three months ended June 30, 2001 from the same period in 2000, offset somewhat by an increase of $68.5 million in the average balances of loans receivable. Interest income on mortgage-backed securities decreased $1.1 million due to a decrease in the average yield of 0.14% for the three months ended June 30, 2001 from the same period in 2000 and a decrease in the average balance of $46.1 million due to principal payments received. In addition, interest income on FHLB stock, federal funds sold and other interest-earning assets decreased $1.6 million. The majority of the decrease was due to the $1.1 million FHLB special dividend recorded during the three months ended June 30, 2000. The remainder of the decrease was due to the decrease in the average balance of other interest-earning assets of $15.2 million. Total interest-earning assets averaged $3.0 billion for the three months ended June 30, 2001 and the three months ended June 30, 2000. Interest Expense ----------------- Interest expense on interest-bearing liabilities was $34.0 million for the three months ended June 30, 2001, as compared to $38.0 million for the same period in 2000. The decrease in interest expense was due to a decrease in the average rate paid on interest-bearing liabilities to 4.94% for the three months ended June 30, 2001 from 5.48% for the three months ended June 30, 2000 and a $16.3 million decrease in the average balance of interest-bearing liabilities. The 0.54% decrease in the average rate paid on interest-bearing liabilities was due primarily to lower market and wholesale funding costs, somewhat offset by higher deposit costs. The decrease in average interest-bearing liabilities consisted primarily of a $497.6 million decrease in average advances from the FHLB, offset by a $413.7 million increase in average securities sold under agreements to repurchase and a $67.6 million increase in average interest-bearing deposits. Net Interest Income --------------------- For the three months ended June 30, 2001, net interest income (excluding the FHLB special dividend) increased $897,000 as compared to the three months ended June 30, 2000. The increase in net interest income was primarily due to the increase in Margin to 2.99% for the three months ended June 30, 2001 from 2.88% for the three months ended June 30, 2000 (excluding the FHLB special dividend). Margin (including the FHLB special dividend) for the three months ended June 30, 2000 was 3.02%. Spread (excluding the FHLB special dividend in 2000) increased to 2.58% for the three months ended June 30, 2001 from 2.48% for the three months ended June 30, 2000. Spread including the FHLB special dividend was 2.62% 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, 2001 and 2000 were 2.84% and 2.76% (excluding the FHLB special dividend), 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 (excluding the FHLB special dividend in 2000) were primarily due to the 0.54% decrease in the average rate paid on interest-bearing liabilities, offset by the decrease in the average yield on interest-earning assets (excluding the FHLB special dividend in 2000) of 0.44%. Average net interest-earning assets increased $23.6 million for the three months ended June 30, 2001 from the three months ended June 30, 2000. Provision for Loan Losses ---------------------------- The provision for loan losses was $1.2 million for the three months ended June 30, 2001 compared to $1.6 million for the three months ended June 30, 2000. At June 30, 2001, Coastal had nonperforming loans totalling $23.0 million. Nonperforming loans are those loans on nonaccrual status as well as those loans greater than ninety (90) days delinquent and still accruing. Of these nonperforming loans at June 30, 2001, $19.3 million, or 84%, were first lien residential (single family) mortgage loans, $1.5 million were commercial real estate loans, $1.1 million were commercial, financial and industrial loans, with the balance in the residential construction and consumer and other categories. At December 31, 2000, nonperforming loans totalled $21.2 million, of which $16.5 million, or 78%, were first lien residential mortgage loans. At June 30, 2001, the allowance for loan losses as a percentage of nonperforming loans was 63.3% compared to 68.3% at December 31, 2000. Although no assurance can be given, management believes that the allowance for loan losses at June 30, 2001 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 three months ended June 30, 2001, noninterest income increased by $460,000 to $3.0 million, compared to $2.5 million for the three months ended June 30, 2000. The increase in noninterest income was comprised of the $121,000 fair value gain on derivative instruments recorded during the quarter on Coastal's interest rate swap and cap agreements, a $115,000 increase in service charges on deposit accounts, a $110,000 increase in loan fees and a $157,000 increase in other noninterest income, offset slightly by a $43,000 decrease in servicing income due to the sale of Coastal's loan servicing portfolio in 2000. The fair value changes in the derivative instruments were primarily attributable to Coastal's interest rate swap positions, which were totally liquidated in June 2001. Noninterest Expense -------------------- For the three months ended June 30, 2001, noninterest expense increased $180,000 from the three months ended June 30, 2000. This increase in noninterest expense was primarily due to the $364,000 increase in compensation, payroll taxes and other benefits, offset by smaller decreases in the other noninterest expense categories. Provision for Federal Income Taxes -------------------------------------- The provision for Federal income taxes for the three months ended June 30, 2001 was $3.0 million compared to $2.8 million for the three months ended June 30, 2000. The increase was due to the increased income before provision for Federal income taxes and minority interest in 2001, 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, 2001, Coastal had binding commitments to originate or purchase loans totaling approximately $120.9 million and had $160.0 million of undisbursed loans in process. Scheduled maturities of certificates of deposit during the 12 months following June 30, 2001 totaled $1.0 billion at June 30, 2001. Management believes that Coastal has adequate resources to fund all of its commitments. As of June 30, 2001, 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. 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. The statements contained in this Quarterly Report on Form 10-Q which are not historical facts contain forward looking information with respect to plans, projections or future performance of Coastal, the occurrence of which involve certain risks and uncertainties detailed in Coastal's filings with the Securities and Exchange Commission ("SEC"). Such discussion contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 (the "Reform Act"), and is subject to the safe harbor created by that Reform Act. The words "estimate," "project," "anticipate," "expect," "intend," "believe," "plans," and similar expressions are intended to identify forward-looking statements. Because such forward-looking statements involve risks and uncertainties, there are important factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements. Factors, all of which are difficult to predict and many of which are beyond the control of Coastal, that could cause actual results to differ materially include, but are not limited to: risks related to Coastal's acquisition strategy, including risks of adversely changing results of operations and factors affecting Coastal's ability to consummate further acquisitions; risks involved in Coastal's ability to quickly and efficiently integrate the operations of acquired entities with those of Coastal; changes in general economic and business conditions; changes in market rates of interest; changes in the laws and regulations applicable to Coastal; the risks associated with the Bank's non-traditional lending (loans other than single-family residential mortgage loans such as multifamily, real estate acquisition and development, commercial real estate, commercial business 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, 2000, as filed with the SEC on March 27, 2001. 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, 2000. Coastal's principal market risk exposure is to interest rates. See note 8 of the Notes to Consolidated Financial Statements. 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 26, 2001, at the Annual Meeting of Stockholders of Coastal Bancorp, Inc. (the Company), the stockholders voted upon and approved the election of three directors and the ratification of the appointment of KPMG LLP as the Company's independent public accountants for the fiscal year ending December 31, 2001. With respect to such matters, the results of the votes were as follows: 1) Election of Directors: Number of Votes ----------------- In Favor Withheld --------- -------- R. Edwin Allday 4,993,051 308,283 D. Fort Flowers, Jr. 5,217,677 83,657 Dennis S. Frank 4,993,051 308,283 2) Ratification of KPMG LLP as the Company's independent public accountants for the fiscal year ending December 31, 2001: Number of votes in favor: 5,254,947 Number of votes against: 44,700 Number of votes abstaining 1,687 Item 5. Other Information ------------------ Not Applicable. Item 6. Exhibits and Reports on Form 8-K ------------------------------------- Form 8K filed on May 2, 2001 concerning the announcement that the Board of Directors voted to increase the first quarter of 2001 common stock dividend to $0.12 per share. 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: 8/14/01 By /s/ Manuel J. Mehos ------- -------------------- Manuel J. Mehos Chief Executive Officer Dated: 8/14/01 By /s/ Catherine N. Wylie ------- -------------------- Catherine N. Wylie Chief Financial Officer