-----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, PmODZxJKgozBbvWHSVFloCSVLtHhQGKxIMgO1r4t4CXDuHRL9hm3P3mLhqKd6ZQW osapxHtfQRc8pwcupIrsfw== 0000919805-02-000051.txt : 20021114 0000919805-02-000051.hdr.sgml : 20021114 20021114120805 ACCESSION NUMBER: 0000919805-02-000051 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20020930 FILED AS OF DATE: 20021114 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: 1934 Act SEC FILE NUMBER: 000-24526 FILM NUMBER: 02822995 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 BANCORP INC/TX/ DATE OF NAME CHANGE: 19940718 FORMER COMPANY: FORMER CONFORMED NAME: COASTAL BANC SAVINGS ASSOCIATION DATE OF NAME CHANGE: 19970110 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 September 30, 2002 [ ] 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: 5,155,438 AS OF NOVEMBER 1, 2002 COASTAL BANCORP, INC. AND SUBSIDIARIES Table of Contents PART I. FINANCIAL INFORMATION - -------- ----------------------
Item 1 Financial Statements (unaudited) Consolidated Statements of Financial Condition at September 30, 2002 and December 31, 2001 1 Consolidated Statements of Income for the Nine-Month Periods Ended September 30, 2002 and 2001 2 Consolidated Statements of Income for the Three-Month Periods Ended September 30, 2002 and 2001 3 Consolidated Statements of Comprehensive Income for the Nine-Month and Three-Month Periods Ended September 30, 2002 and 2001 4 Consolidated Statements of Cash Flows for the Nine-Month Periods Ended September 30, 2002 and 2001 5 Notes to Consolidated Financial Statements 7 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 19 Item 3 Quantitative and Qualitative Disclosures About Market Risk 26 Item 4 Controls and Procedures 26
PART II. OTHER INFORMATION - --------- ------------------
Item 1 Legal Proceedings 27 Item 2 Changes in Securities and Use of Proceeds 27 Item 3 Default upon Senior Securities 27 Item 4 Submission of Matters to a Vote of Security Holders 27 Item 5 Other Information 27 Item 6 Exhibits and Reports on Form 8-K 28
SIGNATURES CERTIFICATIONS ITEM 1. FINANCIAL STATEMENTS - -------- ---------------------
COASTAL BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (IN THOUSANDS, EXCEPT SHARE DATA) September 30, December 31, ASSETS 2002 2001 - ------------------------------------------------------ -------------- ------------ (Unaudited) Cash and cash equivalents $ 40,822 $ 41,537 Federal funds sold 750 16,710 Loans receivable held for sale (note 4) 3,163 -- Loans receivable (note 4) 1,966,119 1,863,601 Mortgage-backed securities available-for-sale (note 3) 468,407 514,068 Other securities available-for-sale 1,758 42,827 Accrued interest receivable 11,344 13,243 Property and equipment 27,501 27,461 Stock in the Federal Home Loan Bank of Dallas (FHLB) 40,937 40,032 Goodwill (note 5) 21,811 21,811 Prepaid expenses and other assets 16,665 16,601 -------------- ---------- $ 2,599,277 $2,597,891 ============== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY - --------------------------------------- Liabilities: Deposits (note 6) $1,643,681 $1,660,386 Advances from the FHLB (note 7) 732,783 690,877 Company obligated mandatorily redeemable 9.0% trust preferred securities of Coastal Capital Trust I (note 8) 50,000 -- Senior notes payable, net (note 9) -- 43,875 Advances from borrowers for taxes and insurance 10,368 4,259 Other liabilities and accrued expenses 14,860 12,310 --------- ---------- Total liabilities 2,451,692 2,411,707 --------- ---------- Minority interest - 9.0% noncumulative preferred stock of Coastal Banc ssb (note 12) -- 28,750 Commitments and contingencies (notes 4 and 10) Stockholders' equity (notes 1, 3, 11, 13 and 14): 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; 7,852,650 shares issued and 5,145,803 shares outstanding at September 30, 2002; 7,835,178 shares issued and 5,835,178 shares outstanding at December 31, 2001 79 78 Additional paid-in capital 35,507 35,366 Retained earnings 136,924 127,425 Accumulated other comprehensive income (loss) - Unrealized gain (loss) on securities available-for-sale 36 (1,590) Treasury stock at cost (2,706,847, shares in 2002 and 2,000,000 shares in 2001) (52,461) (31,345) ----------- ----------- Total stockholders' equity 147,585 157,434 ----------- ----------- $2,599,277 $2,597,891 =========== ===========
See accompanying Notes to Consolidated Financial Statements.
COASTAL BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE DATA) Nine Months Ended September 30, ------------------- 2002 2001 ------------ ------------- (Unaudited) Interest income: Loans receivable $ 90,357 $121,828 Mortgage-backed securities 13,060 43,646 FHLB stock, federal funds sold and other interest-earning assets 1,203 1,964 --------- --------- 104,620 167,438 --------- --------- Interest expense: Deposits 30,859 56,090 Advances from the FHLB 15,303 32,710 Other borrowed money -- 8,916 Senior notes payable 378 3,490 Company obligated mandatorily redeemable 9.0% trust preferred securities of Coastal Capital Trust I 1,275 -- --------- --------- 47,815 101,206 --------- --------- Net interest income 56,805 66,232 Provision for loan losses 2,700 3,000 --------- --------- Net interest income after provision for loan losses 54,105 63,232 --------- --------- Noninterest income: Service charges on deposit accounts 6,732 5,656 Loan fees 888 940 Loss on derivative instruments (18) (450) Gain on sale of real estate owned 207 841 Other 708 1,296 --------- --------- 8,517 8,283 --------- --------- Noninterest expense: Compensation, payroll taxes and other benefits 23,821 22,925 Office occupancy 7,629 8,206 Data processing 1,235 2,531 Amortization of goodwill (note 5) -- 2,098 Advertising 1,396 1,072 Postage and delivery 1,206 1,078 Other 6,128 6,249 --------- --------- 41,415 44,159 --------- --------- Income before provision for Federal income taxes, minority interest and cumulative effect of accounting change 21,207 27,356 Provision for Federal income taxes 6,289 8,442 --------- --------- Income before minority interest and cumulative effect of accounting change 14,918 18,914 Minority interest - preferred stock dividends of Coastal Banc ssb 1,507 1,941 --------- --------- Income before cumulative effect of accounting change 13,411 16,973 Cumulative effect of change in accounting for derivative instruments, net of tax (note 10) -- (104) --------- --------- Net income $ 13,411 $ 16,869 ========= ========= Net income available to common stockholders $ 11,530 $ 14,988 ========= ========= Basic earnings per share before cumulative effect of accounting change $ 2.06 $ 2.62 ========= ========= Basic earnings per share (notes 5 and 11) $ 2.06 $ 2.60 ========= ========= Diluted earnings per share before cumulative effect of accounting change $ 1.97 $ 2.49 ========= ========= Diluted earnings per share (notes 5 and 11) $ 1.97 $ 2.47 ========= =========
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 September 30, -------------------- 2002 2001 ----------- ------------ (Unaudited) Interest income: Loans receivable $ 29,649 $37,749 Mortgage-backed securities 4,034 12,659 FHLB stock, federal funds sold and other interest-earning assets 348 442 ----------- -------- 34,031 50,850 ----------- -------- Interest expense: Deposits 9,616 17,108 Advances from the FHLB 4,944 6,750 Other borrowed money -- 4,338 Senior notes payable -- 1,145 Company obligated mandatorily redeemable 9.0% trust preferred securities of Coastal Capital Trust I 1,112 -- ----------- -------- 15,672 29,341 ----------- -------- Net interest income 18,359 21,509 Provision for loan losses 900 900 ----------- -------- Net interest income after provision for loan losses 17,459 20,609 ----------- -------- Noninterest income: Service charges on deposit accounts 2,599 2,035 Loan fees 266 340 Gain (loss) on derivative instruments 6 (7) Gain (loss) on sale of real estate owned (33) 810 Other 216 299 ----------- -------- 3,054 3,477 ----------- -------- Noninterest expense: Compensation, payroll taxes and other benefits 7,968 7,719 Office occupancy 2,408 2,689 Data processing 413 844 Amortization of goodwill (note 5) -- 701 Advertising 546 357 Postage and delivery 411 377 Other 2,134 2,217 ----------- -------- 13,880 14,904 ----------- -------- Income before provision for Federal income taxes and minority interest 6,633 9,182 Provision for Federal income taxes 2,045 2,836 ----------- -------- Income before minority interest 4,588 6,346 Minority interest - preferred stock dividends of Coastal Banc ssb 213 647 ----------- -------- Net income $ 4,375 $ 5,699 =========== ======== Net income available to common stockholders $ 3,748 $ 5,072 =========== ======== Basic earnings per share (notes 5 and 11) $ 0.72 $ 0.88 =========== ======== Diluted earnings per share (notes 5 and 11) $ 0.68 $ 0.83 =========== ========
See accompanying Notes to Consolidated Financial Statements.
COASTAL BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (IN THOUSANDS) Nine Months Ended September 30, ------------------- 2002 2001 --------- ---------- (Unaudited) Net income $ 13,411 $16,869 Other comprehensive income, net of tax: Unrealized holding gains on securities available-for-sale arising during period 1,626 1,569 ------------- ------- Total comprehensive income $ 15,037 $18,438 ============= ========
Three Months Ended September 30, -------------------- 2002 2001 ----------- --------- (Unaudited) Net income $ 4,375 $5,699 Other comprehensive income, net of tax: Unrealized holding gains on securities available-for-sale arising during period 1,562 26 ------------ -------- Total comprehensive income $ 5,937 $5,725 ============ ========
See accompanying Notes to Consolidated Financial Statements. COASTAL BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
Nine Months Ended September 30, ------------------- 2002 2001 ---------------- ---------- (Unaudited) Cash flows from operating activities: Net income $ 13,411 $ 16,869 Adjustments to reconcile net income to net cash provided (used) by operating activities: Depreciation and amortization of property and equipment and prepaid expenses and other assets 6,476 6,229 Net premium amortization (discount accretion) 3,558 (2,230) Provision for loan losses 2,700 3,000 Amortization of goodwill -- 2,098 Originations and purchases of mortgage loans held for sale (8,592) (20,550) Sales of mortgage loans for held for sale 11,758 20,723 Stock dividends from the FHLB (905) (1,658) Loss on derivative instruments 18 610 Decrease (increase) in: Accrued interest receivable 1,899 3,354 Other, net 4,025 (29,085) --------- --------- Net cash provided (used) by operating activities 34,348 (640) --------- --------- Cash flows from investing activities: Net decrease (increase) in federal funds sold 15,960 (4,111) Purchase of mortgage-backed securities available-for-sale (70,138) -- Purchase of other securities available-for-sale (243) -- Principal repayments on mortgage-backed securities held-to-maturity -- 73,725 Principal repayments on mortgage-backed securities available-for-sale 115,898 8,773 Proceeds from maturity of U.S. Treasury securities held-to-maturity -- 100 Proceeds from maturity of other securities available-for-sale 41,000 -- Purchases of loans receivable (387,843) (199,699) Sales of loans receivable 10,111 -- Net decrease in loans receivable 261,129 177,640 Purchases of property and equipment, net (2,861) (2,125) Purchases of FHLB stock -- (3,986) Proceeds from sales of FHLB stock -- 28,431 --------- --------- Net cash provided (used) by investing activities (16,987) 78,748 --------- ---------
COASTAL BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED (IN THOUSANDS)
Nine Months Ended September 30, ------------------- 2002 2001 ------------------- ------------ (Unaudited) Cash flows from financing activities: Net increase (decrease) in deposits $ (16,705) $ 2,742 Securities sold under agreements to repurchase and federal funds Purchased -- 2,514,648 Purchases of securities sold under agreements to repurchase and federal funds purchased -- (2,092,086) Advances from the FHLB 15,601,400 7,662,279 Principal payments on advances from the FHLB (15,559,494) (8,203,922) Proceeds from issuance of 9.0% trust preferred securities 48,125 -- Redemption or repurchase of senior notes payable (43,875) (3,000) Redemption of Coastal Banc ssb 9.0% noncumulative preferred Stock (28,750) -- Net increase in advances from borrowers for taxes and insurance 6,109 8,587 Exercise of stock options for purchase of common stock, net 105 1,965 Purchase of treasury stock (21,162) -- Issuance of treasury shares 83 -- Dividends paid (3,912) (3,845) ------------------- ------------ Net cash provided (used) by financing activities (18,076) (112,632) ------------------- ------------ Net decrease in cash and cash equivalents (715) (34,524) Cash and cash equivalents at beginning of period 41,537 69,730 ------------------- ------------ Cash and cash equivalents at end of period $ 40,822 $ 35,206 =================== ============ Supplemental schedule of cash flows-interest paid $ 49,801 $ 101,527 =================== ============ Supplemental schedule of noncash investing and financing activities: Transfer of loans to held for sale category $ 9,075 $ -- Foreclosures of loans receivable 4,289 3,984 Transfer of mortgage-backed securities from held-to-maturity to available-for-sale category -- 811,748 =================== ============
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 September 30, 2002 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, July 27, 2000 and April 25, 2002, the Board of Directors authorized six 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. During June 2002, Coastal repurchased 547,800 shares of common stock at an average repurchase price of $30.00 per share. Of that amount, 500,000 shares were repurchased in a privately negotiated transaction with a director of Coastal at $30.00 per share, which was less than the then current market price. During the quarter ended September 30, 2002, Coastal repurchased 161,775 shares of common stock at an average repurchase price of $29.22 per share. As of September 30, 2002, a total of 2,709,575 shares had been repurchased under all of the authorized repurchase plans. As of September 30, 2002, 2,706,847 shares were held in treasury at an average price of $19.38 per share for a total cost of $52.5 million. Book value per common share at September 30, 2002 was $22.39. (2) PRINCIPLES OF CONSOLIDATION The accompanying unaudited Consolidated Financial Statements include the accounts of Coastal Bancorp, Inc. ("Bancorp") and its wholly-owned subsidiaries, Coastal Banc Holding Company, Inc. and Coastal Capital Trust I (collectively "Coastal"). Coastal Banc Holding Company Inc.'s wholly-owned subsidiaries are Coastal Banc ssb, Coastal Banc Capital Corp. and Coastal Banc Mortgage Corp. Coastal Banc ssb's wholly-owned subsidiaries are CoastalBanc Financial Corp. and Coastal Banc Insurance Agency, Inc. (collectively, the "Bank"). All significant intercompany balances and transactions have been eliminated in consolidation. (3) MORTGAGE-BACKED SECURITIES Mortgage-backed securities at September 30, 2002 were as follows (in thousands):
Gross Gross Amortized Unrealized Unrealized Market Cost Gains Losses Value ------------ ---------- ---------- ---------- Available-for-sale: Agency securities $ 372,986 $ 1,098 $ (409) $373,675 CMOs - Non-agency 93,223 68 (725) 92,566 Non-agency securities 2,148 18 -- 2,166 ----------- ------- --------- -------- $ 468,357 $ 1,184 $(1,134) $468,407 =========== ======= ========= ========
Mortgage-backed securities at December 31, 2001 were as follows (in thousands):
Gross Gross Amortized Unrealized Unrealized Market Cost Gains Losses Value --------- ----------- ---------- ------- Available-for-sale: Agency securities $ 406,437 $ 319 $(2,455) $404,301 CMOs - Non-agency 107,488 82 (418) 107,152 Non-agency securities 2,590 34 (9) 2,615 ---------- ------ ------- -------- $ 516,515 $ 435 $(2,882) $514,068 =========== ======= ======= ========
Effective September 30, 2001, Coastal transferred all of its mortgage-backed securities held-to-maturity to the available-for-sale category. This was due to management's intent to restructure a portion of the asset base to be less vulnerable to market interest rate fluctuations. In late November 2001, Coastal entered into a transaction in which it sold $844.9 million of its mortgage-backed securities. Also in November 2001, Coastal used a portion of the proceeds of that sale to purchase approximately $512.3 million of primarily pass through mortgage-backed securities. All of the securities purchased and the remaining securities not sold were placed in the available-for-sale category. (4) LOANS RECEIVABLE Loans receivable at September 30, 2002 and December 31, 2001 were as follows (in thousands):
September 30, 2002 December 31, 2001 -------------------- ----------------- Real estate mortgage loans: First-lien mortgage, primarily residential $ 988,100 $ 880,624 Commercial 333,615 319,377 Multifamily 118,056 124,616 Residential construction 156,423 136,035 Acquisition and development 131,782 140,009 Commercial construction 252,818 222,026 Commercial loans, secured by residential mortgage loans held for sale 207 11,508 Commercial, financial and industrial 125,233 116,029 Loans secured by deposits 15,975 21,238 Consumer and other loans 35,364 43,384 -------------------- ---------- 2,157,573 2,014,846 Loans in process (174,032) (131,064) Allowance for loan losses (16,004) (15,385) Unearned interest and loan fees (2,993) (2,959) Premium (discount) on purchased loans, net 1,575 (1,837) -------------------- ----------- $ 1,966,119 $1,863,601 =================== =========== Weighted average yield 5.95% 6.90% ===== ======
At September 30, 2002, Coastal had outstanding commitments to originate or purchase $18.3 million of real estate mortgage and other loans and had commitments under existing lines of credit to originate primarily construction and other loans of approximately $113.9 million. In addition, at September 30, 2002, Coastal had $16.0 million of outstanding letters of credit. Management anticipates the funding of these commitments through normal operations. At September 30, 2002 and December 31, 2001, the carrying value of loans that were considered to be impaired totaled approximately $3.9 million and $3.8 million, respectively and the related allowance for loan losses on those impaired loans totaled $623,000 and $554,000 at September 30, 2002 and December 31, 2001, respectively. Of the impaired loans outstanding, nine loans with a balance of $873,000 at September 30, 2002 and nineteen loans with a balance of $1.3 million at December 31, 2001 did not have specific portions of the allowance for loan losses allocated to them at each respective date. The average recorded investment in impaired loans during the nine months ended September 30, 2002 and 2001 was $3.4 million and $4.4 million, respectively. An analysis of activity in the allowance for loan losses for the nine months ended September 30, 2002 and 2001 is as follows (in thousands):
Nine Months Ended September 30, ------------------------------- 2002 2001 -------- -------- Balance, beginning of period $15,385 $14,507 Provision for loan losses 2,700 3,000 Charge-offs (2,785) (2,964) Recoveries 704 811 ------- -------- Balance, end of period $16,004 $15,354 ======= ========
During the first quarter of 2002, management made the decision to liquidate a portion of its under-performing single-family mortgage loans. On March 22, 2002, Coastal sold $10.8 million of these under-performing loans to a third party investor. Prior to the sale, Coastal wrote these loans down to fair value and recorded a charge-off to the allowance for loan losses of $761,000. In addition, as of March 31, 2002, Coastal wrote down to fair value and reclassified $9.1 million of other under-performing single-family mortgage loans to the held for sale category. The loans that were reclassified to the held for sale category were written down to fair value as of March 31, 2002 through a charge-off to the allowance for loan losses of $691,000. During the second quarter of 2002, a total of $3.1 million of these under-performing loans held for sale were sold to the same third party investor. As of September 30, 2002, Coastal had a total of $3.2 million loans held for sale remaining (net of second and third quarter activity including sales, payoffs, foreclosures and monthly principal payments received). (5) GOODWILL On January 1, 2002, Coastal adopted Statement of Financial Accounting Standards No. 141, "Business Combinations" ("Statement 141") and Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("Statement 142"). Statement 141 eliminated the pooling of interests method of accounting for business combinations and requires that the purchase method of accounting be used for all business combinations. Statement 141 also required, effective January 1, 2002, that Coastal evaluate its existing intangible assets and goodwill that were acquired in prior purchase business combinations, and make any necessary reclassifications in order to conform with the new criteria in Statement 141 for recognition apart from goodwill. Statement 142 changed the accounting for goodwill from an amortization method to an impairment-only approach. Statement 141 required that Coastal reclassify amounts originally recorded as goodwill pursuant to Statement of Financial Accounting Standard No. 72, "Accounting for Certain Acquisitions of Banking or Thrift Institutions" ("Statement 72") to other intangible assets, as those amounts, under Statements 142, were not subject to the non-amortization provisions. As of January 1, 2002, Coastal had unamortized goodwill that was subject to the non-amortization provision of Statements 141 and 142 of $5.5 million. As of that same date, Coastal reclassified $16.3 million to other intangible assets and continued to amortize these amounts in 2002. On October 1, 2002, Statement of Accounting Standards No. 147, "Acquisitions of Certain Financial Institutions" ("Statement 147") was issued. Statement 147 amended Statement 72, to exclude from its scope, the acquisitions of financial institutions (other than transactions between two or more mutual enterprises) and provide certain transition provisions for existing intangible assets. Under Statement 147 transition provisions, if the transaction that gave rise to an unidentifiable other intangible asset was considered a business combination, the carrying amount of that asset amount would now be reclassified to goodwill and be subject to the non-amortization provisions as of the effective date of the implementation of Statement 142, which in Coastal's case was January 1, 2002. Based on the implementation of Statement 147, Coastal has reclassified as of January 1, 2002, the $16.3 million mentioned above to goodwill and removed the amortization expense recorded in 2002, through restatement of its 2002 financial statements as required by Statement 147. In connection with the adoption of these statements, Coastal tested for impairment in accordance with the provisions of Statement 142 during the first quarter of 2002 and did not recognize any transitional impairment losses as the cumulative effect of a change in accounting principle. Pursuant to the transition provisions of Statement 142, presented below are as adjusted net income and earnings per share amounts to exclude the amortization expense (net of any tax effect) recognized in the period prior to the implementation related to the goodwill that is no longer being amortized (in thousands, except per share data).
Nine Months Ended September 30, 2002 2001 ------- ------- Net income: As reported $13,411 $16,869 Add back: goodwill amortization, net of tax -- 1,526 ------- ------- As adjusted $13,411 $18,395 ======= ======= Basic earnings per share: As reported $ 2.06 $ 2.60 Add back: goodwill amortization, net of tax -- 0.27 ------- ------- As adjusted $ 2.06 $ 2.87 ======= ======= Diluted earnings per share: As reported $ 1.97 $ 2.47 Add back: goodwill amortization, net of tax -- 0.25 ------- ------- As adjusted $ 1.97 $ 2.72 ======= =======
Three Months Ended September 30, 2002 2001 ------ ------ Net income: As reported $4,375 $5,699 Add back: goodwill amortization, net of tax -- 511 ------- ------- As adjusted $4,375 $6,210 ======= ======= Basic earnings per share: As reported $ 0.72 $ 0.88 Add back: goodwill amortization, net of tax -- 0.09 ------- ------- As adjusted $ 0.72 $ 0.97 ======= ======= Diluted earnings per share: As reported $ 0.68 $ 0.83 Add back: goodwill amortization, net of tax -- 0.08 ------- ------- As adjusted $ 0.68 $ 0.91 ======= =======
As restated (required by Statement 147), basic earnings per share for the quarter ended June 30, 2002 were $0.76 (as compared to $0.70 previously reported) and for the quarter ended March 31, 2002 were $0.59 (as compared to $0.53 previously reported. Diluted earnings per share, as restated, for the quarter ended June 30, 2002 were $0.72 (as compared to $0.66 previously reported) and for the quarter ended March 31, 2002 were $0.57 (as compared to $0.51 previously reported). (6) DEPOSITS Deposits, their stated rates and the related weighted average interest rates, at September 30, 2002 and December 31, 2001, are summarized below (dollars in thousands). Effective January 1, 1998, Coastal implemented a program whereby a portion of the balances in noninterest-bearing and interest-bearing checking accounts is reclassified to money market demand accounts under Federal Reserve Regulation D. The amount of such reclassification, reflected in the following table, was approximately $256.9 million ($135.6 million from noninterest-bearing and $121.3 million from interest-bearing) at September 30, 2002 and $243.3 million ($113.0 million from noninterest-bearing and $130.3 million from interest-bearing) at December 31, 2001.
Stated Rate September 30, 2002 December 31, 2001 --------------- ------------------ ------------------- Noninterest-bearing checking 0.00% $ 41,624 $ 47,712 Interest-bearing checking 0.50 - 1.00 9,758 15,894 Savings accounts 0.50 - 1.24 46,974 45,234 Money market demand accounts 0.00 - 2.23 544,323 505,789 ------------- ---------- 642,679 614,629 ------------- ---------- Certificate accounts Less than 2.00 70,265 29,707 2.00 - 2.99 592,375 171,523 3.00 - 3.99 215,776 263,006 4.00 - 4.99 73,209 356,314 5.00 - 5.99 40,071 155,949 6.00 - 6.99 9,128 68,979 7.00 - 7.99 105 209 8.00 - 8.99 73 70 ------------- ---------- 1,001,002 1,045,757 ------------- ---------- $ 1,643,681 $1,660,386 ============= ========== Weighted average interest rate 2.22% 3.02% ===== ======
Prior to the reclassification as discussed above, noninterest-bearing checking accounts, interest-bearing checking accounts and money market demand accounts were as follows at September 30, 2002 and December 31, 2001:
September 30, 2002 December 31, 2001 ------------------- ----------------- Noninterest-bearing checking $ 177,204 $ 160,738 Interest-bearing checking 131,032 146,144 Money market demand accounts 287,469 262,513
The scheduled maturities of certificate accounts outstanding at September 30, 2002 were as follows (dollars in thousands):
September 30, 2002 ------------------- 0 through 12 months $ 859,339 13 through 24 months 71,718 25 through 36 months 35,538 37 through 48 months 5,284 49 through 60 months 29,069 Over 60 months 54 ------------------- $ 1,001,002 ===================
(7) ADVANCES FROM THE FHLB The weighted average interest rates on advances from the FHLB at September 30, 2002 and December 31, 2001 were 2.83% and 3.46%, respectively. The scheduled maturities and related weighted average interest rates on advances from the FHLB at September 30, 2002 are summarized as follows (dollars in thousands):
Weighted Average Due during the year ending December 31, Interest Rate Amount - --------------------------------------- ----------------- ------- 2002 2.07% $318,264 2003 3.62 132,983 2004 2.56 139,675 2005 3.47 108,967 2006 5.66 7,735 2007 6.66 1,171 2008 5.52 2,226 2009 8.01 3,584 2010 6.73 987 2011 6.54 1,268 2012 5.76 292 2013 5.75 7,585 2014 5.45 2,919 2015 6.67 1,662 2017 5.43 2,000 2018 5.05 1,465 ---- -------- 2.83% $732,783 ========
Advances from the FHLB are secured by certain first-lien mortgage and multifamily loans and mortgage-backed securities owned by Coastal. (8) COMPANY OBLIGATED MANDATORILY REDEEMABLE 9.0% TRUST PREFERRED SECURITIES On June 18, 2002, Coastal, through Coastal Capital Trust I (a consolidated trust subsidiary) (the "Trust"), issued 2,000,000 trust preferred securities ("Trust Preferred Securities") with a liquidation preference of $25 per security. The Trust Preferred Securities represent an interest in Bancorp's junior subordinated debentures, which were purchased by the Trust. The junior subordinated debentures are the only assets of the Trust and interest payments from the debentures finance the distributions paid on the Trust Preferred Securities. Distributions on the securities are payable quarterly at the annual rate of 9.0% and are included in interest expense in the consolidated statements of income. The Trust Preferred Securities are subject to mandatory redemption at the liquidation preference, in whole or in part, upon repayment of the junior subordinated debentures at maturity or their earlier redemption. The junior subordinated debentures are redeemable prior to the maturity date of June 30, 2032, at the option of Bancorp on or after June 30, 2007, in whole at any time or in part from time to time. The junior subordinated debentures are also redeemable at any time, in whole, but not in part, upon the occurrence of specific events defined within the trust indenture. Bancorp has the option to defer distributions on the junior subordinated debentures from time to time for a period not to exceed 20 consecutive quarters. A portion of the proceeds from the issuance of the Trust Preferred Securities were used to repurchase 500,000 shares of common stock for $15.0 million from a director in June 2002. In addition, $28.8 million of the proceeds were used on July 15, 2002, to redeem the Bank's 9.0% Series A Noncumulative Preferred Stock (Nasdaq:CBSAO) through a capital contribution to Coastal Banc ssb. (9) SENIOR NOTES PAYABLE On June 30, 1995, Coastal issued $50.0 million of 10.0% Senior Notes due June 30, 2002. The Senior Notes became redeemable at Coastal's option, in whole or in part, on June 30, 2000, at par, plus accrued interest to the redemption date. Interest on the Senior Notes was payable quarterly. During 2001 and 1999, Coastal repurchased in the open market $3.0 and $3.1 million, respectively, of the Senior Notes outstanding at par. On February 1, 2002, Coastal redeemed all of the remaining Senior Notes outstanding ($43.9 million) at par plus accrued interest to the redemption date. (10) 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, as well as 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 did 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 nine months ended September 30, 2002 and 2001, Coastal recorded an additional fair value loss on these derivative instruments of $18,000 and $450,000, respectively. The decrease in the fair value of derivatives during 2001 was primarily due to interest rate swap agreements, which were liquidated in June 2001. As of September 30, 2002 and December 31, 2001, interest rate cap agreements were Coastal's only derivative instruments and were recorded at fair value pursuant to Statement 133. The interest rate cap agreements provide for applicable 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 approximately zero at September 30, 2002, 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 any purchase price and interest income from the interest rate cap agreements is recorded in interest income in the accompanying consolidated statements of income, as applicable. The net decrease in interest income related to the interest rate cap agreements was approximately $19,000 for the nine months ended September 30, 2002 and 2001, respectively. No payments were made to Coastal under the interest rate cap agreements during the three months ended September 30, 2002 or 2001. Interest rate cap agreements outstanding at September 30, 2002 expire as follows (dollars in thousands):
Year of Strike Rate Notional Expiration Range Amount - ---------- -------------- --------- 2002 9.00% $ 5,100 2003 8.00 - 9.00 107,614 --------- $ 112,714 =========
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 its assets and liabilities 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, as well as potential changes in net interest income. Coastal is exposed to credit loss in the event of nonperformance by the counterparty to the cap agreements and attempts to control this risk through credit monitoring procedures. The notional principal amount does not represent Coastal's exposure to credit loss. (11) EARNINGS PER SHARE The following summarizes information related to the computation of basic and diluted earnings per common share ("EPS") for the nine-and three-month periods ended September 30, 2002 and 2001 (dollars in thousands, except per share data):
Nine Months Ended September 30, 2002 2001 ----------- ----------- Net income $ 13,411 $ 16,869 Preferred stock dividends (1,881) (1,881) ----------- ----------- Net income available to common stockholders $ 11,530 $ 14,988 =========== =========== Weighted average number of common shares outstanding used in basic EPS calculation 5,596,525 5,755,274 Add assumed exercise of outstanding stock options as adjusted for dilutive securities 262,176 313,896 ----------- ----------- Weighted average number of common shares outstanding used in diluted EPS calculation 5,858,701 6,069,170 =========== =========== Basic EPS $ 2.06 $ 2.60 =========== =========== Diluted EPS $ 1.97 $ 2.47 =========== ===========
Three Months Ended September 30, 2002 2001 ----------- ----------- Net income $ 4,375 $ 5,699 Preferred stock dividends (627) (627) ---------- ----------- Net income available to common stockholders $ 3,748 $ 5,072 =========== =========== Weighted average number of common shares outstanding used in basic EPS calculation 5,226,334 5,796,458 Add assumed exercise of outstanding stock options as adjusted for dilutive securities 248,101 325,621 ---------- ----------- Weighted average number of common shares outstanding used in diluted EPS calculation 5,474,435 6,122,079 =========== =========== Basic EPS $ 0.72 $ 0.88 =========== =========== Diluted EPS $ 0.68 $ 0.83 =========== ===========
The weighted average number of common shares outstanding has been reduced by the treasury stock held by Coastal. As of September 30, 2002 and 2001, Coastal had 2,706,847 and 2,000,000 common shares in treasury, respectively. (12) 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 were 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 could 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 (but not including) the date fixed for redemption. With a portion of the proceeds from the issuance of the Trust Preferred Securities, the Bank redeemed from the stockholders of record all of the 9.0% Series A Noncumulative Preferred Stock on July 15, 2002 (see note 8). The redemption price was $25.185 per share, which represented the stated value of the Preferred Stock, plus accrued and unpaid dividends to the date of redemption. (13) STATUTORY CAPITAL REQUIREMENTS The applicable regulations require federally insured institutions, which are not the highest rated, to have a minimum regulatory tier 1 (core) capital to total assets ratio equal to a minimum of 4.0%, a tier 1 risk-based capital to risk-weighted assets ratio of 4.0% and total risk-based capital to risk-weighted assets ratio of 8.0%. At September 30, 2002, 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) $172,969 6.82% $101,510 4.00% $126,887 5.00% Tier 1 risk-based 172,969 9.80 70,624 4.00 105,936 6.00 Total risk-based 188,973 10.70 141,248 8.00 176,560 10.00
As of September 30, 2002, 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. (14) COASTAL BANCORP, INC. PREFERRED STOCK On May 11, 1999, 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. Pursuant to Coastal's tax benefit agreement with the FDIC, Coastal receives a tax benefit for dividends paid on the Bancorp Preferred Stock. (15) RECENT ACCOUNTING STANDARDS In August 2001, Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("Statement 144") was issued. Statement 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. Statement 144 requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Statement 144 requires companies to separately report discontinued operations and extends that reporting to a component of an entity that either has been disposed of (by sale, abandonment, or in a distribution to owners) or is classified as held for sale. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. Statement 144 was adopted by Coastal on January 1, 2002, and did not have a material effect on Coastal's Consolidated Financial Statements. (16) PENDING BRANCH SALE On September 24, 2002, Coastal announced the execution of a definitive agreement to sell five of its branches in Central Texas (located in Llano, Burnet, Mason, Kingsland and Marble Falls, Texas) to First State Bank Central Texas. The sale includes deposit accounts of approximately $80 million, which are being sold at a 6.25% premium. The transaction is subject to regulatory approval and is expected to close during the fourth quarter of 2002. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND ------------------------------------------------------------------- RESULTS OF OPERATIONS ----------------------- Financial Condition - -------------------- Total assets increased slightly by $1.4 million from December 31, 2001 to September 30, 2002. The net increase resulted primarily from an increase of $102.5 million in loans receivable, offset by decreases of $45.7 million, $41.1 million and $16.0 million in mortgage-backed securities available-for-sale, other investment securities available-for-sale and federal funds sold, respectively. There were also smaller changes in other asset categories. The increase in loans receivable was due to bulk single-family mortgage loan purchases of $387.8 million, somewhat reduced by significant principal paydowns received on the single-family mortgage loan portfolio, the sale of $10.8 million of under-performing mortgage loans, the reclassification of $9.1 million of other under-performing loans to the held for sale category and decreases in other loan categories. The decrease in mortgage-backed securities available-for-sale was due to significant prepayments received (approximately 33% on an annualized basis) resulting from a continuing low interest rate environment, which is encouraging refinancings of mortgage loans. The decrease in other investment securities available-for-sale was due to the maturity of one security during the period. Deposits decreased $16.7 million or 1.0% from December 31, 2001 to September 30, 2002 and advances from the FHLB increased 6.1% or $41.9 million. In addition, during the nine months ended September 30, 2002, Coastal redeemed the remaining Senior Notes payable outstanding of $43.9 million at par plus accrued interest and issued $50.0 million in Trust Preferred Securities through a consolidated trust subsidiary (see note 8 to the Consolidated Financial Statements). Coastal used part of the proceeds from the issuance of the Trust Preferred Securities to repurchase outstanding shares of its common stock. In addition, $28.8 million of the proceeds were use to redeem the Bank's 9.0% Series A Noncumulative Preferred Stock. Stockholders' equity decreased 6.3% or $9.8 million from December 31, 2001 to September 30, 2002 primarily as a result of the market repurchase of 709,575 shares of common stock at an average repurchase price of $29.82 per share. This decrease was only partially offset by the net increase in stockholders' equity due to net income, a $1.6 million decrease in accumulated other comprehensive income (loss), offset by dividends declared. Results of Operations for the Nine Months Ended September 30, 2002 and 2001 - -------------------------------------------------------------------------------- General ------- For the nine months ended September 30, 2002, net income was $13.4 million compared to $16.9 million for the nine months ended September 30, 2001. The decrease was primarily due to a $9.4 million decrease in net interest income as a result of Coastal's smaller asset size, lower market interest rates and significant principal paydowns recevied on Coastal's mortgage-backed securities and loans receivable portfolios (approximately 33% on an annualized basis for mortgage-backed securities and 40% for single-family mortgage loans). This decrease was somewhat offset by a $300,000 decrease in the provision for loan losses, a $234,000 increase in noninterest income, a $2.7 million decrease in noninterest expense ($2.1 million of which was due to the decrease in the amortization of goodwill due to the implementation of FASB Statements 141, 142 and 147 in 2002), a $2.2 million decrease in the provision for Federal income taxes, and the $104,000 (net of tax) cumulative transition adjustment loss due to the change in accounting for derivative instruments recorded in 2001. Interest Income ---------------- Due to Coastal's smaller asset size, the lower market interest rate environment and significant principal paydowns received on mortgage-backed securities and single-family loans receivable, interest income for the nine months ended September 30, 2002 decreased $62.8 million or 37.5% from the nine months ended September 30, 2001. The decrease was comprised of a $31.5 million decrease in interest income on loans receivable, a $30.6 million decrease in interest income on mortgage-backed securities and a $761,000 decrease in interest income on FHLB stock, federal funds sold and other interest-earning assets. When comparing the two periods, average interest-earning assets decreased $482.6 million and the average yield decreased 1.80% from 7.52% in 2001 to 5.72% in 2002. The $482.6 million decrease in average interest-earning assets consisted primarily of a $488.1 million decrease in the average balance of mortgage-backed securities and a $44.0 million decrease in the average balances of loans receivable. The decrease in average mortgage-backed securities was largely due to the sale of those securities in late November 2001. To strategically restructure a portion of its asset base to make it less vulnerable to market interest rate and price fluctuations, Coastal sold $844.9 million of mortgage-backed securities and purchased $512.3 million of primarily pass through securities at a premium. This transaction had the effect of shortening the duration of the mortgage-backed securities portfolio, thereby lessening the extension risk to Coastal. In addition to the reduction in Coastal's asset size due to the restructuring, during the first nine months of 2002 as a consequence of the extraordinarily high levels of refinancings, Coastal experienced signifcant principal repayments of $115.9 million (or approximately 33% on an annualized basis) on its mortgage-backed securities portfolio and $251.6 million (or approximately 40% on an annualized basis) on its single-family mortgage loan portfolio, which resulted in greater premium amortization on those assets that were purchased at a premium. Interest Expense ----------------- Interest expense on interest-bearing liabilities was $47.8 million for the nine months ended September 30, 2002, as compared to $101.2 million for the same period in 2001. The decrease in interest expense was again due to Coastal's smaller asset size and the lower market interest rate environment. When comparing the two periods, the average rate paid on interest-bearing liabilities decreased to 2.94% for 2002 from 4.97% for 2001 and average interest-bearing liabilities decreased by $545.3 million. The 2.03% decrease in the average rate paid on interest-bearing liabilities was due to the 2.08% decrease in the average rate paid on interest-bearing deposits and a 2.13% decrease in the average rates paid on advances from the FHLB. The decrease in average interest-bearing liabilities consisted primarily of a $55.4 million decrease in average interest-bearing deposits, a $174.1 million decrease in average advances from the FHLB and a $293.5 million decrease in the average balance of other borrowings. The large decreases in the average balances in FHLB advances and other borrowings was due primarily to the reduction in these borrowings due to the restructuring mentioned previously. In addition, during the nine months ended September 30, 2002, Coastal redeemed the remaining Senior Notes payable outstanding of $43.9 million at par plus accrued interest and issued $50.0 million in Trust Preferred Securities, through a consolidated trust subsidiary (see note 8 to the Consolidated Financial Statements). Net Interest Income --------------------- Net interest income was $56.8 million for the nine months ended September 30, 2002 and $66.2 million for the same period in 2001. As discussed above, the decrease was due to Coastal's smaller asset size and the lower market interest rate environment. When comparing the two periods, average interest-earning assets decreased $482.6 million and average interest-bearing liabilities decreased $545.3 million due to the restructuring and the principal repayments discussed above. Net interest margin ("Margin") was 3.10% for the nine months ended September 30, 2002 compared to 2.97% for the nine months ended September 30, 2001. 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 2.78% for the nine months ended September 30, 2002 from 2.55% for the nine months ended September 30, 2001. Management also calculates an alternative Spread which includes noninterest-bearing deposits. Under this calculation, the alternative Spreads for the nine months ended September 30, 2002 and 2001 were 2.99% and 2.81%, respectively. Margin and Spread are affected by the changes in the amount and composition of interest-earning assets and interest-bearing 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 and the Allowance for Loan Losses - Critical --------------------------------------------------------------------------- Accounting Policy ------------------- The provision for loan losses was $2.7 million for the nine months ended September 30, 2002 and $3.0 million for the nine months ended September 30, 2001. At September 30, 2002, Coastal had nonperforming loans totaling $16.2 million, which is a decrease of $8.5 million, or 34%, when compared to December 31, 2001. Nonperforming loans are those loans on nonaccrual status as well as those loans greater than ninety days delinquent and still accruing interest. The decrease in nonperforming loans is mainly due to Coastal's decision to liquidate a portion of its under-performing single-family mortgage loans during the first quarter of 2002. On March 22, 2002, Coastal sold $10.8 million of these under-performing loans to a third party investor. Prior to the sale, Coastal wrote these loans to fair value and recorded a charge-off to the allowance for loan losses of $761,000. In addition, as of March 31, 2002, Coastal also wrote down to fair value and reclassified $9.1 million of other under-performing single-family mortgage loans to the held for sale category. The loans that were reclassified to the held for sale category were written down to fair value through a charge-off to the allowance for loan losses of $691,000. During the second quarter of 2002, a total of $3.1 million of these loans held for sale were sold. As of September 30, 2002, Coastal had $3.2 million loans held for sale remaining (net of second and third quarter activity including, sales, payoffs, foreclosures and monthly principal payments received). The ratio of nonperforming assets to total assets was 0.78% at September 30, 2002, compared to 1.13% as of December 31, 2001. At September 30, 2002, the allowance for loan losses as a percentage of nonperforming loans (excluding nonperforming loans held for sale which are recorded at the lower of cost or fair value) was 107.4% compared to 62.3% at December 31, 2001. Although no assurance can be given, management believes that the allowance for loan losses at September 30, 2002 is adequate considering the size and the changing composition of the loans receivable portfolio, historical and peer group 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 the resulting allowance for loan losses are necessary. Noninterest Income ------------------- For the nine months ended September 30, 2002, noninterest income increased $234,000 to $8.5 million, compared to $8.3 million for the nine months ended September 30, 2001. The increase in noninterest income was primarily due to the $1.1 million increase in service charges on deposits accounts and the effect of the fair value loss on derivative instruments of $450,000 recorded during the nine months ended September 30, 2001 pursuant to Statement 133 (compared to an $18,000 loss in 2002). These increases were somewhat offset by a $52,000 decrease in loan fees, a $634,000 decrease in the gain on the sale of real estate owned and a $588,000 decrease in other noninterest income (primarily due to $300,000 in insurance proceeds received in 2001 for the reimbursement of certain deposit losses incurred in prior years). The increase in service charges on deposit accounts was due to Coastal's continuing focus on increasing transaction type accounts and the related fee income, including Coastal's new Free Checking and Bounce Protection features on retail checking accounts introduced during August 2002. The fair value loss on derivative instruments recorded during the nine months ended September 30, 2001 was primarily attributable to Coastal's interest rate swap positions, which were liquidated in June 2001. As of September 30, 2002, interest rate cap agreements were Coastal's only derivative instruments and were recorded at fair value on Coastal's consolidated statement of financial condition. Noninterest Expense -------------------- For the nine months ended September 30, 2002, noninterest expense decreased $2.7 million from the nine months ended September 30, 2001. The $2.7 million decrease in noninterest expense was primarily due the $2.1 million decrease in the amortization of goodwill due to the implementation of FASB Statements 141, 142 and 147 effective January 1, 2002 (see note 5 to the Consolidated Financial Statements). In addition, Coastal experienced decreases of $577,000, $1.3 million and $121,000 in office occupancy, data processing and other noninterest expense, respectively, partially offset by a $896,000 increase in compensation, payroll taxes and other benefits, a $324,000 increase in advertising and a $128,000 increase in postage and delivery expenses. The decrease in data processing expense was due to the conversion to a new mortgage loan data processing system in the second quarter of 2001, the conversion of the Valley Region branches to Coastal's primary deposit and loan data processing system during the third quarter of 2001 and the item processing functions brought in-house during the third quarter of 2001. The decrease in office occupancy was primarily due to certain assets becoming fully depreciated during 2001 and in 2002. The increase in compensation, payroll taxes and other benefits was due to normal merit increases for existing staff, in addition to the staff increases for the item processing functions brought in-house during the third quarter of 2001 and additional personnel needed to continue Coastal's focus on commercial banking products, lending and providing other services to commercial business customers. The increase in advertising and postage and delivery expenses were primarily due to Coastal's continued focus on commercial banking products and lending. Provision for Federal Income Taxes -------------------------------------- The provision for Federal income taxes for the nine months ended September 30, 2002 was $6.3 million compared to $8.4 million for the nine months ended September 30, 2001. The decrease was due to the decreased income before provision for federal income taxes, minority interest and cumulative effect of accounting change in 2001, with the effective tax rate for the periods being approximately 30% for nine months ended September 30, 2002 and 31% for the same period in 2001. The decrease in the effective tax rate when comparing the two periods is due to the elimination of the goodwill amortization. Results of Operations for the Three Months Ended September 30, 2002 and 2001 - -------------------------------------------------------------------------------- General ------- For the three months ended September 30, 2002, net income was $4.4 million compared to $5.7 million for the three months ended September 30, 2001. The decrease was primarily due to a $3.2 million decrease in net interest income, as a result of Coastal's smaller asset size, lower market interest rates and significant principal repayments on Coastal's mortgage-backed and loans receivable portfolios (approximately 30% on an annualized basis for mortgage-backed securities and 40% for single-family mortgage loans). In addition, noninterest income decreased by $423,000. These decreases were somewhat offset by a $1.0 million decrease in noninterest expense and a $791,000 decrease in the provision for Federal income taxes. Interest Income ---------------- As noted previously, due to Coastal's smaller asset size, the lower market interest rate environment and significant principal paydowns received on mortgage-backed securities and single-family loans receivable, interest income for the three months ended September 30, 2002 decreased $16.8 million or 33.1% from the three months ended September 30, 2001. The decrease was comprised of a $8.1 million decrease in interest income on loans receivable, a $8.6 million decrease in interest income on mortgage-backed securities and a $94,000 decrease in interest income on FHLB stock, federal funds sold and other interest-earning assets. When comparing the two periods, average interest-earning assets decreased $443.9 million and the average yield decreased 1.49% from 6.98% in 2001 to 5.49% in 2002. The $443.9 million decrease in average interest-earning assets consisted primarily of a $476.6 million decrease in the average balance of mortgage-backed securities, offset somewhat by a $31.3 million increase in the average balance of loans receivable. The decrease in average mortgage-backed securities was largely due to the restructuring discussed previously. In addition to the reduction in Coastal's asset size due to the restructuring, during the three months ended September 30, 2002, as a consequence of the extraordinarily high levels of refinancings, Coastal experienced principal repayments of $31.3 million (or approximately 30% on an annualized basis) on its mortgage-backed securities portfolio and $97.1 million (or approximately 40% on an annualized basis) on its single-family mortgage loan portfolio, which resulted in greater premium amortization on those assets that were purchased at a premium. Interest Expense ----------------- Interest expense on interest-bearing liabilities was $15.7 million for the three months ended September 30, 2002, as compared to $29.3 million for the same period in 2001. As discussed previously, the decrease in interest expense was due to Coastal's smaller asset size and the lower market interest rate environment. When comparing the two periods, the average rate paid on interest-bearing liabilities decreased to 2.81% for 2002 from 4.37% for 2001 and average interest-bearing liabilities decreased $436.6 million. The 1.56% decrease in the average rate paid on interest-bearing liabilities was due to the 1.86% decrease in the average rate paid on interest-bearing deposits and a 1.45% decrease in the average rates paid on advances from the FHLB. The decrease in average interest-bearing liabilities consisted primarily of a $50.9 million decrease in average interest-bearing deposits, a $461.7 million decrease in the average balance of other borrowings and a $45.8 million decrease in the average balance of Senior Notes payable. FHLB advances increased $71.8 million when comparing the two periods. The large decrease in the average balances in other borrowings was due primarily to Coastal's repayment of such borrowings as a part of the restructuring done in late 2001. The decrease in the balance of the Senior Notes payable was due to their redemption during the first quarter of 2002. During the second quarter of 2002, Coastal issued $50.0 million in Trust Preferred Securities through a consolidated trust subsidiary (see note 8 to the Consolidated Financial Statements). Net Interest Income --------------------- Net interest income was $18.4 million for the three months ended September 30, 2002 and $21.5 million for the same period in 2001. As discussed above, the decrease was due to Coastal's smaller asset size and the lower market interest rate environment. When comparing the two periods, average interest-earning assets decreased $443.9 million and average interest-bearing liabilities decreased $436.6 million due to the restructuring and the prepayments discussed above. Net interest margin ("Margin") was 2.97% for the three months ended September 30, 2002 compared to 2.95% for the three months ended September 30, 2001. 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 2.68% for the three months ended September 30, 2002 from 2.61% for the three months ended September 30, 2001. Management also calculates an alternative Spread which includes noninterest-bearing deposits. Under this calculation, the alternative Spreads for the three months ended September 30, 2002 and 2001 were 2.88% and 2.85%, respectively. Margin and Spread are affected by the changes in the amount and composition of interest-earning assets and interest-bearing 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 and the Allowance for Loan Losses - Critical --------------------------------------------------------------------------- Accounting Policy ------------------ The provision for loan losses was $900,000 for the three months ended September 30, 2002 and the three months ended September 30, 2001. At September 30, 2002, Coastal had nonperforming loans totaling $16.2 million, which is a decrease of $8.5 million, or 34%, when compared to December 31, 2001. See previous discussion under "Results of Operations for the Nine Months Ended September 30, 2002 and 2001 - Provision for Loan Losses and the Allowance for Loan Losses." Although no assurance can be given, management believes that the allowance for loan losses at September 30, 2002 is adequate considering the size and the changing composition of the loans receivable portfolio, historical and peer group 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 the resulting allowance for loan losses are necessary. Noninterest Income ------------------- Noninterest income decreased by $423,000 for the quarter ended September 30, 2002 compared to the quarter ended September 30, 2001. This decrease was primarily due to the $843,000 decrease in the gain on the sale of real estate owned and smaller decreases of $74,000 and $83,000 in loan fees and other noninterest income. The decrease in the gain on the sale of real estate owned was primarily due to a gain of $603,000 recorded during the quarter ended September 30, 2001 on one real estate owned property. These decreases were somewhat offset by the $564,000 increase in service charges on deposit accounts. The increase in service charges on deposit accounts was due to Coastal's continuing focus on increasing transaction type accounts and the related fee income, including Coastal's new Fee Checking and Bounce Protection features on retail checking accounts introduced during August 2002. Noninterest Expense -------------------- For the three months ended September 30, 2002, noninterest expense decreased $1.0 million from the three months ended September 30, 2001. The $1.0 million decrease in noninterest expense was primarily due to decreases of $281,000, $431,000, $701,000 and $83,000 in office occupancy, data processing, the amortization of goodwill and other noninterest expense, respectively, partially offset by a $249,000 increase in compensation, payroll taxes and other benefits, a $189,000 increase in advertising and a $34,000 increase in postage and delivery expenses. The decrease in office occupancy was primarily due to certain assets becoming fully depreciated during 2001 and 2002. The decrease in data processing expense was due to the of the conversion Rio Grande Valley Region branches to Coastal's primary deposit and loan data processing system during the third quarter of 2001 and the item processing functions brought in-house during the third quarter of 2001. The decrease in the amortization of goodwill was due to the implementation of FASB Statements 141, 142 and 147 on January 1, 2002 (see note 5 to the Consolidated Financial Statements). The increase in compensation, payroll taxes and other benefits was due to normal merit increases for existing staff, in addition to the staff increases for the item processing functions brought in-house during the third quarter of 2001 and additional personnel needed to continue Coastal's focus on commercial banking products, lending and providing other services to commercial business customers. The increase in advertising and postage and delivery expenses were primarily due to Coastal's continued focus on commercial banking products and lending. Provision for Federal Income Taxes -------------------------------------- The provision for Federal income taxes for the three months ended September 30, 2002 was $2.0 million compared to $2.8 million for the three months ended September 30, 2001. The decrease was due to the decreased income before provision for Federal income taxes and minority interest in 2002, with the effective tax rate for the 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 stock purchases and acquisitions of other banks and thrifts, either on a branch office or whole bank acquisition basis. At September 30, 2002, Coastal had binding commitments to originate or purchase loans totaling approximately $18.3 million and had $174.0 million of undisbursed loans in process. Scheduled maturities of certificates of deposit during the 12 months following September 30, 2002, totaled $859.3 million at September 30, 2002. Management believes that Coastal has adequate resources to fund all of its commitments. As of September 30, 2002, Coastal operated 49 retail banking offices in Texas cities, including Houston, Austin, Corpus Christi, the Rio Grande Valley and small cities in the southeast quadrant of Texas. Five of these branches are currently subject to a definitive branch sale agreement. See note 16 to the Consolidated Financial Statements. Management's overall goal is to continue to improve the asset/liability composition of Coastal's balance sheet to be less vulnerable to market interest rate fluctuations. Forward-Looking Information - ---------------------------- The Management's Discussion and Analysis of Financial Condition and Results of Operations set forth in this 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 changes in market rates of interest, changes in our loan portfolio, including the risks associated with our 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 commercial construction), the possibility that Coastal's allowance for loan losses proves to be inadequate, Coastal's ability to attract core deposits, the concentration of Coastal's loan portfolio in Texas and California to the extent that the economies of those states experience problems, 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 business strategies, changes in general economic and business conditions and changes in the laws and regulations applicable to Coastal; and other factors as discussed in Coastal's Annual Report on Form 10-K for the year ended December 31, 2001, as filed with the SEC on March 26, 2002, and as filed in Exhibit 99.3, attached hereto. 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, 2001. Coastal's principal market risk exposure is to interest rates. See note 10 of the Notes to Consolidated Financial Statements. ITEM 4. CONTROLS AND PROCEDURES ------------------------- Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, Coastal's management has reviewed the disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) of Coastal as of a date within 90 days prior to this quarterly report (the "Evaluation Date"). Disclosure controls and procedures are the controls and other procedures of Coastal that are designed to ensure that the information required to be disclosed by Coastal in its reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by Coastal in its reports filed under the Exchange Act is accumulated and communicated to Coastal's management, including the principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. Management believes that such disclosure controls and procedures as of the Evaluation Date were adequate to ensure that material information relating to Coastal, including its consolidated subsidiaries, is made known to management by others within Coastal and its consolidated subsidiaries. To management's knowledge, there were no significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the Evaluation Date. PART II - OTHER INFORMATION Item 1. Legal Proceedings ------------------ We are, and have been involved, from time to time, in various claims, complaints, proceedings and litigation relating to activities arising from the normal course of our operations. Based on the facts currently available to us, we believe that the matters pending at September 30, 2002 are without merit, or will be covered by insurance and any other matters are of such amounts, which upon resolution, are not likely to have a material adverse effect on our consolidated financial condition, results of operations or cash flows. Item 2. Changes in Securities and Use of Proceeds ----------------------------------------------- On July 15, 2002, Coastal Banc ssb redeemed from the stockholders of record all of the 9.0% Series A Noncumulative Preferred Stock (Nasdaq:CBSAO). The redemption price was $25.185 per share, which represented the stated value of the Preferred Stock, plus accrued and unpaid dividends to the date of redemption. 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 ------------------------------------- Reports on Form 8-K. 1) Form 8-K filed with the SEC on July 17, 2002 concerning the announcement that Coastal Banc ssb redeemed all of its 1,150,000 issued and outstanding shares of 9.0% Noncumulative Preferred Stock, Series A (Nasdaq:CBSAP) on July 15, 2002. 2) Form 8-K filed with the SEC on July 17, 2002 concerning the announcement that Mr. James C. Niver had resigned from the Board of Directors for personal reasons as of June 30, 2002. In addition, the Board of Directors filled the vacancy left by Mr. Niver's resignation by electing Mr. Clayton T. Stone to the Board effective July 1, 2002. 3) Form 8-K filed with the SEC on September 26, 2002 concerning the announcement that Coastal Banc ssb had executed a definitive agreement to sell five Central Texas branches (Llano, Burnet, Mason, Kingsland and Marble Falls, Texas) to First State Bank Central Texas. Exhibits. 99.1 Certification of the Chairman of the Board and Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.2 Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.3 Statement of Factors Under Private Securities Litigation Reform Act of 1995. SIGNATURES Pursuant to the requirement of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Dated: 11/14/02 By /s/ Manuel J. Mehos -------- ---------------------- Manuel J. Mehos Chief Executive Officer Dated: 11/14/02 By /s/ Catherine N. Wylie -------- ---------------------- Catherine N. Wylie Chief Financial Officer CERTIFICATION I, Manuel J. Mehos, the Chief Executive Officer of Coastal Bancorp, Inc., certify that: 1. I have reviewed this quarterly report on Form 10-Q of Coastal Bancorp, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Dated: 11/14/02 By /s/ Manuel J. Mehos -------- ---------------------- Manuel J. Mehos Chief Executive Officer CERTIFICATION I, Catherine N. Wylie, the Chief Financial Officer of Coastal Bancorp, Inc., certify that: 1. I have reviewed this quarterly report on Form 10-Q of Coastal Bancorp, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Dated: 11/14/02 By /s/ Catherine N. Wylie -------- ---------------------- Catherine N. Wylie Chief Financial Officer EXHIBIT 99.1 CERTIFICATION PURSUANT TO 18 U.S.C SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Coastal Bancorp, Inc. (the "Company") on Form 10-Q for the period ended September 30, 2002 as filed with the Securities and Exchange Commission on November 14, 2002 (the "Report"), I, Manuel J. Mehos, Chairman of the Board and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated:11/14/02 By /s/ Manuel J. Mehos -------- ---------------------- Manuel J. Mehos Chairman of the Board and Chief Executive Officer EXHIBIT 99.2 CERTIFICATION PURSUANT TO 18 U.S.C SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Coastal Bancorp, Inc. (the "Company") on Form 10-Q for the period ended September 30, 2002 as filed with the Securities and Exchange Commission on November 14, 2002 (the "Report"), I, Catherine N. Wylie, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: 11/14/02 By /s/ Catherine N. Wylie -------- ------------------- Catherine N. Wylie Chief Financial Officer EXHIBIT 99.3 STATEMENT OF FACTORS UNDER PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 From time to time, Coastal Bancorp, Inc. ("Coastal" or "we," "us," "our" and other terms referring to Coastal Bancorp, Inc. and Coastal Banc ssb) has made and will make forward-looking statements. These statements can be identified by the fact that they do not relate strictly to historical or current facts. Forward-looking statements often use words such as "anticipate," "target," "expect," "estimate," "intend," "plan," "goal," "believe" or other words of similar meaning. Forward-looking statements give Coastal's current expectations or forecasts of future events, circumstances or results. Our disclosure in this report, including in the Section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" ("MD&A"), contains forward-looking statements. We also may make forward-looking statements in its other documents filed with the Securities and Exchange Commission (the "SEC") and in other written materials. In addition, Coastal's senior management may make forward-looking statements orally to analysts, investors, representatives of the media and others. Any forward-looking statements made by or on behalf of Coastal speak only as of the date they are made. We do not undertake to update forward-looking statements to reflect the impact of circumstances or events that arise after the date the forward-looking statement was made. The reader should, however, consult any further disclosures of a forward-looking nature we may make in our Annual Reports on Form 10-K, our Quarterly Reports on Form 10-Q and our Current Reports on Form 8-K. All forward-looking statements, by their nature, are subject to risks and uncertainties. Coastal's actual future results may differ materially from those set forth in our forward-looking statements. Factors that might cause our future financial performance to vary from that described in our forward-looking statements include the credit, market, operational, liquidity, interest rate and other risks discussed in the MD&A section of this report and in other periodic reports filed with the SEC. In addition, the following discussion sets forth certain risks and uncertainties that we believe could cause our actual future results to differ materially from expected results. However, other factors besides those listed below or discussed in Coastal's reports to the SEC also could adversely affect our results, and the reader should not consider any such list of factors to be a complete set of all potential risks or uncertainties. This discussion is provided as permitted by the Private Securities Litigation Reform Act of 1995. WE ARE VULNERABLE TO CHANGES IN INTEREST RATES. Our ability to make a profit, like that of most financial institutions, substantially depends upon our net interest income, which is the difference between the interest income we earn on our interest-earning assets, such as loans and investment securities, and the interest expense we pay on our interest-bearing liabilities, such as deposits and borrowings. Certain assets and liabilities, however, may react in different degrees to changes in market interest rates. Further, interest rates on some types of assets and liabilities may fluctuate prior to changes in broader market interest rates, while rates on other types may lag behind. Additionally, some of our assets, such as adjustable rate mortgages, have features, including payment and rate caps, which restrict changes in their interest rates. Factors such as inflation, recession, unemployment, money supply, acts of terrorism, international disorders, instability in domestic and foreign financial markets, and other factors beyond our control may affect interest rates. Changes in market interest rates will also affect the level of voluntary prepayments on our loans and the receipt of payments on our mortgage-backed securities resulting in the receipt of proceeds that may be reinvested at a lower rate than the loan or mortgage-backed security being prepaid. Although we pursue an asset-liability management strategy designed to manage our risk resulting from changes in market interest rates, changes in interest rates can still have a material adverse effect on our profitability. 99.3-1 OUR EXPOSURE TO CREDIT RISK WILL INCREASE AS WE INCREASE OUR COMMERCIAL BANKING ACTIVITIES. As we increase our focus on commercial business banking and attempt to increase our net interest margin, a gradual increase in our consolidated credit risk is likely to occur. One of our main strategies is to replace lower-yielding first lien single-family residential mortgage loans and mortgage-backed securities with commercial and consumer loans. Generally, commercial loans (including commercial and multi-family real estate loans) are considered to be riskier than first lien, single-family residential loans because they have larger balances to a single borrower or group of related borrowers and because their repayment generally relies on the success of the borrowing enterprise. In addition, consumer loans are usually secured by depreciating assets (such as cars and boats) and collections are dependent on the borrowers' continuing financial stability, which is more likely to be adversely affected by job loss, divorce, illness and personal bankruptcy. Accordingly, we expect higher loan losses on this type of lending. If we have to provide for loan losses that are higher than our historical experience, our results of operations and financial condition could be adversely affected. OUR ALLOWANCE FOR LOAN LOSSES MAY BE INADEQUATE TO COVER LOSSES ACTUALLY INCURRED, WHICH COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR RESULTS OF OPERATIONS AND FINANCIAL CONDITION. We maintain an allowance for loan losses in an amount management believe is sufficient to provide for known and inherent risks in our loan portfolio. If we incur actual losses on our loans in excess of our allowance for loan losses, our profitability may be adversely affected. THE CONCENTRATION OF OUR LOAN PORTFOLIO IN TEXAS AND CALIFORNIA SUBJECTS US TO RISK TO THE EXTENT THE CALIFORNIA AND TEXAS ECONOMIES EXPERIENCE PROBLEMS. A substantial portion of the loans we originate and purchase are secured by properties located in Texas and California or are made to businesses which operate in those states. As a result, a large number of borrowers may be affected by adverse changes in the economic conditions occurring in those states. The Texas economy has been historically sensitive to business cycles, particularly those in the oil and gas industry. Unfavorable economic conditions in Texas could significantly increase the number of borrowers which are unable to pay their loans on a timely basis and cause a decline in the value of the properties securing our loans which could have an adverse effect on our results of operations and financial condition. The California economy experienced a major slowdown in 2001. Economic conditions in California are subject to various uncertainties at this time, including the long-term impact of the electrical power crisis and the decline in the technology sector. If economic conditions in California continue to decline, we expect that our level of problem assets could increase accordingly. WE MAY FAIL TO IDENTIFY OR CONSUMMATE ADDITIONAL ACQUISITIONS. Our business strategy has historically relied, in part, upon our ability to obtain low cost deposits, expand into new markets and enhance our presence in existing markets by identifying and acquiring branches of other financial institutions or whole banks that meet our acquisition criteria. In pursuing these opportunities, we compete with other financial institutions with similar acquisition strategies, many of which are larger than we are and have greater financial and other resources than we have. We will compete for potential acquisitions based on a number of factors, including price, terms and conditions, size, access to capital and our ability to offer cash, stock or other forms of consideration. We cannot assure you that we will be able to identify suitable acquisition candidates or, once a suitable acquisition candidate is identified, that we will be able to consummate the acquisition on terms and conditions acceptable to us or at all. 99.3-2 WE MAY FAIL TO INTEGRATE OUR ACQUISITIONS SUCCESSFULLY. We have grown through the acquisition of branches of other financial institutions or of whole banks. To a certain extent, our success is tied to our ability to integrate the operations, management, products and services of the entities we acquire. After each acquisition, we must expend substantial managerial, operating, financial and other resources to integrate these entities. In particular, we must install and standardize adequate operational and control systems, deploy or modify certain equipment, implement marketing efforts in new as well as existing locations and employ and maintain qualified personnel. Our operating results may be adversely affected if we fail to properly integrate companies we acquire. COMPETITION WITH OTHER FINANCIAL INSTITUTIONS COULD ADVERSELY AFFECT OUR PROFITABILITY. We face substantial competition in purchasing and originating loans and in attracting deposits. This competition in purchasing and originating loans comes principally from banks, other savings institutions, mortgage banking companies and other lenders and purchasers of loans. Many of our competitors enjoy competitive advantages including greater financial resources, a wider geographic presence or more accessible branch office locations, the ability to offer additional services or more favorable pricing alternatives and lower origination and operating costs. This competition could result in a decrease in loans originated or purchased by us that could adversely affect our results of operations, and financial condition. In attracting deposits, we compete with insured depository institutions such as savings institutions, credit unions and banks, as well as institutions offering uninsured investment alternatives including money market funds. These competitors may offer higher interest rates than we do, which could result in either our attracting fewer deposits or in our being required to increase our rates in order to attract deposits. Increased deposit competition could increase our cost of funds and adversely affect our ability to generate the funds necessary for our lending operations, thereby adversely affecting our results of operations and financial condition. CHANGES IN STATUTES AND REGULATIONS COULD ADVERSELY AFFECT US. We are subject to extensive regulation and supervision by federal and state authorities. Such supervision and regulation establish a comprehensive framework of activities in which an institution may engage, and are intended primarily for the protection of the federal deposit insurance fund and our depositors. This regulatory structure also provides our regulators with significant discretion in the performance of their supervisory and enforcement duties. Any change in such regulation, whether by our regulators or as a result of legislation subsequently enacted by the Congress of the United States or the Texas legislature, could have a substantial impact on our operations and us. Additional legislation and regulations may be enacted or adopted in the future that could significantly affect our powers, authority and operations, which could have a material adverse effect on our operations. 99.3-3 -----END PRIVACY-ENHANCED MESSAGE-----