EX-13 3 doc2.txt 2002 ANNUAL REPORT COASTAL BANCORP, INC. AND SUBSIDIARIES FINANCIAL HIGHLIGHTS DECEMBER 31, 2002, 2001 AND 2000
December 31, -------------- (Dollars in thousands, except per share data) 2002 2001 2000 -------------- ----------- ----------- FOR THE YEAR ENDED ------------------------------------------------------------- Net interest income $ 74,847 $ 86,597 $ 84,368 Provision for loan losses 5,800 3,900 5,790 Noninterest income (1) 17,209 11,143 12,024 Noninterest expense 55,893 58,479 58,195 Net income 19,716 21,802 19,924 Diluted earnings per common share before cumulative effect of accounting change 2.99 3.19 2.87 Diluted earnings per common share - reported 2.99 3.17 2.87 Diluted earnings per common share - as adjusted (2) 2.99 3.51 3.25 AT YEAR END ------------------------------------------------------------- Total assets (3) $ 2,526,144 $2,597,891 $3,091,611 Loans receivable 1,812,785 1,863,601 1,896,228 Mortgage-backed securities held-to-maturity (3) -- -- 885,565 Mortgage-backed securities available-for-sale (3) 475,022 514,068 94,673 Deposits (1) 1,614,368 1,660,386 1,674,981 Borrowed funds (3) 696,085 690,877 1,150,305 Company obligated mandatorily redeemable 9.0% trust preferred securities of Coastal Capital Trust I (4) 50,000 -- -- Senior Notes payable (5) -- 43,875 46,900 Minority interest - preferred stock of Coastal Banc ssb (4) -- 28,750 28,750 Preferred stockholders' equity 27,500 27,500 27,500 Common stockholders' equity (6) 125,385 129,934 110,971 Book value per common share 23.47 21.54 18.89 Tangible book value per common share 19.74 18.15 15.08 SIGNIFICANT RATIOS FOR THE YEAR ENDED ------------------------------------------------------------- Return (before minority interest) on average assets 0.83% 0.81% 0.74% Return on average common equity 13.71 15.92 16.51 Net interest margin 3.04 2.97 2.87 Interest rate spread including noninterest-bearing deposits 2.94 2.81 2.71 Interest rate spread 2.74 2.56 2.42 Average common equity to average total assets 4.92 4.03 3.47 Noninterest expense to average total assets 2.19 1.94 1.91 ASSET QUALITY RATIOS AT YEAR END ------------------------------------------------------------- Nonperforming assets to total assets 0.91% 1.13% 0.82% Nonperforming loans to total loans receivable 1.00 1.33 1.12 Allowance for loan losses to nonperforming loans 97.69 62.26 68.32 Allowance for loan losses to total loans receivable 1.00 0.83 0.77
(1) In December 2002, Coastal completed the sale of five of its branches in Central Texas. The sale included deposits of $75.3 million and resulted in a gain of $4.4 million. (2) "As adjusted" excludes the amortization expense (net of any tax effect) recognized in the periods prior to the implementation of Statement of Financial Accounting Standards No. 142 related to the goodwill that is no longer being amortized. (3) In November 2001, Coastal completed the sale of approximately $845 million of its mortgage-backed securities. The transaction was undertaken to strategically restructure a portion of Coastal's asset base. Coastal used approximately $512 million of the proceeds to purchase primarily pass-thru mortgage-backed securities with an overall shorter expected duration and reduced borrowings with the remainder. All of the securities purchased and the remaining securities not sold were placed in the available-for-sale category. See further discussion in "Management's Discussion and Analysis of Financial Condition and Results of Operations - General." (4) In June 2002, Coastal issued 2,000,000 trust preferred securities with a liquidation preference of $25 per security for a total of $50.0 million. A portion of the proceeds was used to repurchase 500,000 shares of common stock for $15.0 million from a director of Coastal in June 2002. In addition, $28.8 million of the proceeds were used in July 2002 to redeem Coastal Banc ssb's 9.0% Series A Noncumulative Preferred Stock through a capital contribution to Coastal Banc ssb. (5) Coastal redeemed all of the Senior Notes payable on February 1, 2002 at par plus accrued interest. (6) During the year ended December 31, 2002, Coastal repurchased $21.8 million in common stock. See further discussion in "Management's Discussion and Analysis of Financial Condition and Results of Operations - General and - Financial Condition." CORPORATE PROFILE Coastal Bancorp, Inc., a Texas corporation, headquartered in Houston, Texas, is the holding company for Coastal Banc Holding Company, Inc. ("HoCo"), a Delaware unitary savings bank holding company. HoCo is the parent company to Coastal Banc ssb, a Texas-chartered, FDIC-insured, state savings bank. Coastal Banc ssb operates 43 branch offices in metropolitan Houston, Austin, Corpus Christi, the Rio Grande Valley and small cities in the southeast quadrant of Texas. At December 31, 2002, Coastal Banc ssb had $2.5 billion in assets and met the regulatory requirements to be a "well capitalized" institution according to FDIC guidelines. TABLE OF CONTENTS
Letter from the Chairman and Chief Executive Officer Selected Consolidated Financial and Other Data Management's Discussion and Analysis of Financial Condition and Results of Operations Directors and Officers Independent Auditors' Report Consolidated Financial Statements Notes to Consolidated Financial Statements Stock Prices and Dividends Stockholder Information
CHAIRMAN'S LETTER Ferdinand Magellan led a fleet of five ships in 1519 to circumnavigate the globe and explore uncharted waters, including the previously unexplored Pacific Ocean (named by Magellan on this trip). His armada had crude navigation instruments and primitive sailing ships that cruised at a top speed of only four knots and were unable to tack. Almost five centuries later the banking industry finds itself in interest rate territory that is equally uncharted waters. During 2002, the fed funds rate, prime rate, and deposit rates dropped to levels no current American bankers have experienced in their business lives. In contrast to Magellan's experience, today's bankers possess extremely sophisticated analytical and navigation tools. But those tools don't solve a lot in today's interest rate environment where deposit costs can't get much lower, but loan yields can. Instead of worrying about whether borrowers will pay off loans, bankers now worry about borrowers paying off loans. And balance sheet management has turned upside down as bankers tap their collective ruby slippers chanting, "There's no place like 8% prime, there's no place like 5% CD's, there's no place. . ." I have been writing to you every year since 1992, Coastal Banc's (Coastal) first year as a publicly owned company. I do not view my annual letter to the shareholders as a promotional tool; rather I view it as my personal assessment of Coastal's performance for the year and prospects for our company's future. I have as large a stake as anyone does in this company. Therefore, my annual letter to you is pretty much a summarized version of what I think about most of the day, every day. So here's what I'm thinking today: At the end of 2002, Coastal's earning assets were shrinking. It's neither what we planned nor what we want. Coastal's total earning assets as of December 31, 2002 were approximately $2.4 billion, or $68.8 million less than total earning assets at the end of 2001. The reduction in earning assets was primarily due to today's uncharted waters of low interest rates. During 2002, many of Coastal's mortgage borrowers and commercial real estate borrowers refinanced through lenders other than Coastal at lower rates than we were willing to offer. Loan payoffs reached a record payoff level during 2002 of over 40% of the average loan portfolio. It was like running on a treadmill. It seemed that for every new loan Coastal made, an existing loan would refinance somewhere else at an interest rate below our acceptable threshold. Fortunately, we exceeded our loan production goals for 2002. Thus we managed to somewhat mitigate the shrinkage as total loans only decreased by $50.8 million or 2.9% for the year. However, to further exacerbate the dilemma, Coastal, along with the rest of the banking industry, experienced net interest margin compression in the fourth quarter of 2002 as deposit costs crept closer to the 0% floor. Now here's the good news: Coastal had its best year yet for improvements in its core banking business. During 2002, we simplified the organization of Coastal's branches into three regions: Metropolitan Houston, Rio Grande Valley, and the Community Banking Region for our small market branches. We sold five branches in small markets that had limited growth potential in order to redirect those resources to existing and prospective branches in markets with higher growth potential. During 2002, Coastal achieved record growth levels in transaction accounts and deposit service charges. We improved customer penetration for most of Coastal's consumer banking products and introduced several new key products, including free checking and bounce protection. We also introduced a new Internet-based treasury management system at the end of 2002 with the primary goal of increasing the growth rate in commercial deposit customers, a key element for improving net interest margin and fee income growth. Thus during 2002, when Coastal experienced a decline in net loans, we had our best year for improving the potential of Coastal's long-term core earnings growth. The reduction in loans during 2002 coupled with the restructure and reduction of Coastal's securities portfolio in the fourth quarter of 2001 caused a 13.6% decline in net interest income for 2002. However, an increase of 26% in net service charges on deposits and a 4.4% decrease in expenses mitigated the reduction in core earnings for 2002. We also made several balance sheet improvements in 2002. Coastal's non-performing assets declined by 21.6% while the allowance for loan losses increased by 17.8%. Coastal redeemed its 10.0% senior notes and its 9.0% preferred stock, issued $50.0 million of 9% trust preferred securities, and repurchased 729,575 shares of common stock. So Coastal begins 2003 with fewer assets and a declining net interest margin, but with a stronger balance sheet and an increasing rate of fee income growth. As long as we stay on this lending treadmill and deposit costs compress near the 0% floor, growth of net interest income will be difficult. However, just as Magellan's armada eventually circled the globe, interest rates will eventually cycle back to more familiar waters. Then, the torrid pace of refinancings is expected to recede and Coastal's loan portfolio should resume the levels of growth it has experienced in recent years. Until that happens, as a major Coastal shareholder two things give me comfort. First, Coastal's core banking business appears to have as much promise as I've seen in all my years as a shareholder. Fee income growth, product penetration, and customer growth are all improving at an increasing rate, mitigating the adverse effects of the present interest rate environment. More importantly, it means Coastal is moving faster than ever towards accomplishing one of management's goals, that fee income represents a significantly larger percentage of total revenue. Second, even though I'm a banker, just like you I'm a shareholder first. So size doesn't matter to me. The value of my stock is what matters most. In this challenging loan growth environment and this uncertain economy, we will not grow the loan portfolio for the sake of growth. We will strive to improve Coastal's core banking business and make prudent loans. If the new loans aren't enough to provide net loan growth, I prefer to increase loans per share and net interest income per share by effectively investing in Coastal's existing portfolio. We do that by repurchasing Coastal's stock. At times like this, I prefer to invest equity dollars in a portfolio I know. That way when we finally circle the globe and reach smoother economic sailing, Coastal can be better positioned for healthy growth. The best part is you and I will then own a bigger piece of that growth. /s/ Manuel J. Mehos ------------------------- Manuel J. Mehos Chairman of the Board, President and Chief Executive Officer COASTAL BANCORP, INC. AND SUBSIDIARIES SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA The following selected consolidated summary financial and other data of Coastal Bancorp, Inc. and subsidiaries ("Coastal") does not purport to be complete and should be read in conjunction with, and is qualified in its entirety by, the more detailed information contained in the Consolidated Financial Statements and Notes thereto included elsewhere herein.
At December 31, (Dollars in thousands, except per share data) 2002 2001 2000 1999 1998 ---------------- ---------- ---------- ---------- ---------- Balance Sheet Data: Total assets (1) $ 2,526,144 $2,597,891 $3,091,611 $2,947,952 $2,982,161 Loans receivable (2) 1,812,785 1,863,601 1,896,228 1,735,081 1,538,149 Mortgage-backed securities held-to-maturity (1) (2) -- -- 885,565 917,212 1,154,116 Mortgage-backed securities available-for-sale (1) 475,022 514,068 94,673 99,665 96,609 Deposits (3) 1,614,368 1,660,386 1,674,981 1,624,289 1,705,004 Advances from the Federal Home Loan Bank of Dallas ("FHLB") (1) 696,085 690,877 1,150,305 1,096,931 966,720 Securities sold under agreements to repurchase -- -- -- -- 100,000 Company obligated mandatorily redeemable 9.0% trust preferred securities of Coastal Capital Trust I (4) 50,000 -- -- -- -- Senior Notes payable (5) -- 43,875 46,900 46,900 50,000 Minority interest-preferred stock of Coastal Banc ssb (4) -- 28,750 28,750 28,750 28,750 Preferred stockholders' equity 27,500 27,500 27,500 27,500 -- Common stockholders' equity (6) 125,385 129,934 110,971 105,956 112,764
For the Year Ended December 31, 2002 2001 2000 1999 1998 --------- -------- ------- -------- --------- Operating Data: Interest income $ 137,623 $210,612 $237,273 $202,943 $210,814 Interest expense 62,776 124,015 152,905 125,657 143,404 -------- ------ ----- ------ ------ Net interest income 74,847 86,597 84,368 77,286 67,410 Provision for loan losses (7) 5,800 3,900 5,790 10,575 3,100 -------- ------ ----- ------ ------ Net interest income after provision for loan loss 69,047 82,697 78,578 66,711 64,310 Gain on sale of branch offices (3) 4,395 -- -- -- -- Gain on sale of mortgage servicing rights -- -- 2,172 -- -- Writedown of purchased mortgage loan premium -- -- -- -- (709) Gain on sales of mortgage-backed securities available-for-sale, net -- 169 -- -- 1 Loss on derivative instruments (12) (422) -- -- -- Other noninterest income 12,826 11,396 9,852 10,372 7,580 Other noninterest expense (55,893) (58,479) (58,195) (57,810) (48,383) --------- ------- ------- -------- ------- Income before provision for Federal income taxes, minority interest and cumulative effect of accounting change 30,363 35,361 32,407 19,273 22,799 Provision for Federal income taxes (8) (9,140) (10,867) (9,895) (5,659) (3,543) Minority interest - preferred stock dividends of Coastal Banc ssb (1,507) (2,588) (2,588) (2,588) (2,588) Cumulative effect of change in accounting for derivative instruments, net of tax (9) -- (104) -- -- -- --------- ------- ------- ------- -------- Net income $ 19,716 $ 21,802 $ 19,924 $ 11,026 $ 16,668 ========= ======== ======== ======== ======== Net income available to common stockholders $ 17,208 $ 19,294 $ 17,416 $ 9,442 $ 16,668 ========= ======== ======== ======== ======== Basic earnings per common share before cumulative effect of accounting change (9) $ 3.13 $ 3.36 $ 2.94 $ 1.45 $ 2.24 ========= ======== ======== ======== ======== Basic earnings per common share - reported (10) (11) $ 3.13 $ 3.34 $ 2.94 $ 1.45 $ 2.24 ========= ======== ======== ======== ======== Basic earnings per share - as adjusted (11) $ 3.13 $ 3.69 $ 3.32 $ 1.80 $ 2.48 ========= ======== ======== ======== ======== Diluted earnings per common share before cumulative effect of accounting change (9) $ 2.99 $ 3.19 $ 2.87 $ 1.42 $ 2.18 ========= ======== ======== ======== ======== Diluted earnings per common share - reported (10) (11) $ 2.99 $ 3.17 $ 2.87 $ 1.42 $ 2.18 ========= ======== ======== ======== ======== Diluted earnings per share - as adjusted (11) $ 2.99 $ 3.51 $ 3.25 $ 1.76 $ 2.41 ========= ======== ======== ======== ========
(Footnotes appear on page 13) COASTAL BANCORP, INC. AND SUBSIDIARIES SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
At or For the Year Ended December 31, 2002 2001 2000 ------------- ------- ------- Selected Ratios: Performance Ratios (12): Return (before minority interest) on average assets 0.83% 0.81% 0.74% Return on average common equity 13.71 15.92 16.51 Dividend payout ratio 15.39 13.80 12.23 Average common equity to average total assets 4.92 4.03 3.47 Net interest margin (13) 3.04 2.97 2.87 Interest rate spread including noninterest-bearing deposits (13) 2.94 2.81 2.71 Interest rate spread (13) 2.74 2.56 2.42 Noninterest expense to average total assets 2.19 1.94 1.91 Average interest-earning assets to average interest-bearing liabilities 112.21 109.63 108.52 Ratio of earnings to combined fixed charges and preferred stock dividends: Excluding interest on deposits 1.94x 1.50x 1.32x Including interest on deposits 1.39 1.23 1.17 Asset Quality Ratios: Nonperforming assets to total assets (14) 0.91% 1.13% 0.82% Nonperforming loans to total loans receivable and loans receivable held for sale 1.00 1.33 1.12 Allowance for loan losses to nonperforming loans 97.69 62.26 68.32 Allowance for loan losses to total loans receivable 1.00 0.83 0.77 Bank Regulatory Capital Ratios (15): Tier 1 capital to total assets 6.88 7.27 6.22 Tier 1 risk-based capital to risk-weighted assets 10.32 11.90 9.94 Total risk-based capital to risk-weighted assets 11.38 12.79 10.72 Other Data: Full-time employee equivalents 626 681 661 Number of full service offices 43 50 50 1999 1998 ------- ------- Selected Ratios: Performance Ratios (12): Return (before minority interest) on average assets 0.47% 0.64% Return on average common equity 8.83 14.96 Dividend payout ratio 22.11 14.35 Average common equity to average total assets 3.66 3.71 Net interest margin (13) 2.75 2.31 Interest rate spread including noninterest-bearing deposits (13) 2.65 2.17 Interest rate spread (13) 2.39 1.96 Noninterest expense to average total assets 1.98 1.61 Average interest-earning assets to average interest-bearing liabilities 108.22 107.33 Ratio of earnings to combined fixed charges and preferred stock dividends: Excluding interest on deposits 1.23x 1.25x Including interest on deposits 1.11 1.14 Asset Quality Ratios: Nonperforming assets to total assets (14) 0.73% 0.99% Nonperforming loans to total loans receivable and loans receivable held for sale 0.99 1.60 Allowance for loan losses to nonperforming loans 61.30 46.28 Allowance for loan losses to total loans receivable 0.60 0.74 Bank Regulatory Capital Ratios (15): Tier 1 capital to total assets 5.76 5.25 Tier 1 risk-based capital to risk-weighted assets 9.68 9.54 Total risk-based capital to risk-weighted assets 10.29 10.23 Other Data: Full-time employee equivalents 666 653 Number of full service offices 50 49
(Footnotes appear on page 13) Footnotes for pages 10 through 12: (1) In November 2001, Coastal completed the sale of approximately $845 million of its mortgage-backed securities. The transaction was undertaken to strategically restructure a portion of Coastal's asset base. Coastal used approximately $512 million of the proceeds to purchase primarily pass-thru mortgage-backed securities with an overall shorter expected duration and reduced borrowings with the remainder. All of the securities purchased and the remaining securities not sold were placed in the available-for-sale category. See further discussion in "Management's Discussion and Analysis of Financial Condition and Results of Operations - General." (2) Loans receivable are net of loans in process, premiums, discounts, unearned interest and loan fees and the allowance for loan losses. Mortgage-backed securities held-to-maturity are net of premiums and discounts. (3) In December 2002, Coastal completed the sale of five of its branches in Central Texas. The sale included deposits of $75.3 million and resulted in a gain of $4.4 million. (4) In June 2002, Coastal issued 2,000,000 trust preferred securities with a liquidation preference of $25 per security for a total of $50.0 million. A portion of the proceeds was used to repurchase 500,000 shares of common stock for $15.0 million from a director of Coastal in June 2002. In addition, $28.8 million of the proceeds were used in July 2002 to redeem Coastal Banc ssb's 9.0% Series A Noncumulative Preferred Stock through a capital contribution to Coastal Banc ssb. (5) Coastal redeemed all of the Senior Notes payable on February 1, 2002 at par plus accrued interest. (6) During the years ended December 31, 2002, 2000, 1999 and 1998, Coastal repurchased $21.8 million, $10.9 million, $12.7 million and $7.8 million, respectively, in common stock. (7) During 1999, Coastal recorded a $6.8 million provision for loan losses specific to one loan. (8) During 1998, Coastal successfully resolved an outstanding tax benefit issue with the FDIC. The resolution of the issue resulted in a $3.7 million reversal of accrued income taxes during 1998. (9) Effective January 1, 2001, Coastal adopted Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and for Hedging Activities" ("Statement 133"). On January 1, 2001, Coastal recorded a transition adjustment loss of $160,000, or $104,000 net of the tax effect, to record its derivative instruments at fair value. (10) On April 23, 1998, Coastal declared a 3:2 stock split that was paid on June 15, 1998 to stockholders of record on May 15, 1998. All common stock share data has been adjusted to include the effect of the stock split. (11) The "as adjusted" data excludes the amortization expense (net of the tax effect) recognized in the periods prior to 2002 and the implementation of Statement of Financial Accounting Standards No. 142 related to the goodwill that is no longer being amortized. See further discussion in "Management's Discussion and Analysis of Financial Condition and Results of Operations - General." (12) Ratio, yield and rate information is based on average balances for the year. (13) Net interest margin represents net interest income as a percentage of average interest-earning assets. Interest rate spread including noninterest-bearing deposits represents the difference between the weighted average yield on interest-earning assets and the weighted average rate on interest-bearing liabilities and noninterest-bearing deposits. Interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average rate on interest-bearing liabilities. (14) Nonperforming assets consist of nonaccrual loans, loans greater than 90 days delinquent and still accruing, real estate acquired by foreclosure and repossessed assets. (15) Current capital adequacy FDIC regulations require Coastal Banc ssb to maintain Tier 1 capital equal to at least 4.0% of total assets, Tier 1 risk-based capital equal to at least 4.0% of risk-weighted assets and total risk-based capital equal to at least 8.0% of risk-weighted assets. COASTAL BANCORP, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL Coastal Bancorp, Inc. ("Bancorp") through its wholly-owned subsidiary, HoCo, owns 100 percent of the voting stock of Coastal Banc ssb (the "Bank"), a Texas-chartered, FDIC insured, state savings bank. The consolidated financial statements included herein include the accounts of Bancorp, HoCo, the Bank and subsidiaries of both HoCo and the Bank (collectively known as "Coastal"). In late November 2001, to strategically restructure a portion of its asset base to make it less vulnerable to market interest rate fluctuations, Coastal completed the sale of approximately $845 million of its mortgage-backed securities and recorded a gain of $169,000. Coastal decided to undertake the sale as the then current market environment presented an opportunity for Coastal to sell its large mortgage-backed securities portfolio. The majority of the securities sold were Collateralized Mortgage Obligations ("CMOs") tied to the FHLB 11th District Cost of Funds Index ("COFI") and, due to their relatively long maturities, contained extension risk which caused, on average, higher levels of price volatility. Also in November 2001, Coastal used a portion of the proceeds of the sale to purchase approximately $512 million of primarily pass-thru mortgage-backed securities with an overall shorter expected duration. Coastal reduced borrowings with the remainder of the proceeds from the sale. All the securities purchased and the remaining securities not sold were placed in the available-for-sale category. A consequence of this 2001 securities sale is that any securities purchased by Coastal for approximately two years are required to be placed in either the available-for-sale or trading category. 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") were issued in July 2001. Statement 141 required, effective January 1, 2002, that Coastal evaluate its existing intangible assets and goodwill and make any necessary reclassifications in order to conform with the new criteria in Statement 141 for recognition apart from goodwill. Statement 141 also required that Coastal reclassify amounts originally recorded as goodwill pursuant to Statement of Financial Accounting Standards No. 72, "Accounting for Certain Acquisitions of Banking or Thrift Institutions" ("Statement 72") to other intangible assets, as those amounts, under Statement 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 provisions 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 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. Coastal implemented these statements effective January 1, 2002. 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 during the period. On February 1, 2002, Coastal redeemed all of the remaining Senior Notes payable outstanding ($43.9 million) at par plus accrued interest to the redemption date. 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 of Coastal 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:CBSAP) through a capital contribution to Coastal Banc ssb. 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. As of December 31, 2002, a total of 2,729,575 shares had been repurchased under all of the authorized repurchase plans. As of December 31, 2002, 2,726,019 shares were held in treasury at an average repurchase price of $19.45 per share for a total cost of $53.0 million. FINANCIAL CONDITION During the fourth quarter of 2002, Coastal sold 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 included deposit accounts of $75.3 million and resulted in a gain of $4.4 million. The branches sold had limited growth potential for Coastal. Coastal continually monitors the market and performance of its branch network and opens, purchases or sells branches based on this analysis. During 2002, Coastal's management made the decision to liquidate a portion of its loan receivable portfolio through sales to third party investors. The first sale was in March 2002 when Coastal sold $10.8 million of under-performing mortgage loans. Prior to the sale, Coastal wrote those 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 December 31, 2002, Coastal had reclassified the remaining $3.0 million of these loans held for sale back to the loans receivable portfolio at their current carrying value. The second sale was in the fourth quarter of 2002 when Coastal entered into an agreement with a third party to sell approximately $77.0 million of single-family mortgage loans. As of December 31, 2002, $74.4 million of these loans had been sold, $70.1 million of which were sold servicing retained and $4.3 million (which were considered nonperforming loans) were sold servicing released. The remaining $2.6 million, which are under a contract for sale, were reclassified to the held for sale category at December 31, 2002. In connection with this sale and the reclassification of the remaining loans to the held for sale category, the loans were written down to fair value through a charge-off to the allowance for loan losses of $309,000. In addition, Coastal recorded a gain of $359,000 on the sale of these loans as a result of Coastal recording the estimated fair value of the mortgage servicing rights retained. Overall during 2002, total assets decreased $71.7 million, or 2.8%, when comparing December 31, 2001 to December 31, 2002. This decrease was primarily comprised of a $50.8 million decrease in loans receivable, a $39.0 million decrease in mortgage-backed securities available-for-sale and a $41.0 million decrease in other securities available-for-sale. A primary contributor to the decrease in both loans receivable and mortgage-backed securities available-for-sale was the continuing higher than expected principal paydowns received as a consequence of the extraordinary high levels of refinancings due to the low interest rate environment during 2002. In addition to the principal paydowns, the decrease in loans receivable was due to the loan sales totaling $85.2 million mentioned previously, offset by single-family loan purchases of $421.4 million during 2002. The decrease in other securities available-for-sale was due to the maturity of one security during the year. These decreases were somewhat offset by an increase in loans receivable held for sale of $49.9 million. This was due to one loan package purchased in November 2002 with the intent to sell the package to third party investors by the end of January 2003. There were smaller changes in other asset categories as follows: an $11.0 million increase in Federal funds sold, a $2.8 million increase in prepaid expenses and other assets and a $1.2 million increase in stock in the FHLB, offset by a $1.8 million decrease in cash and cash equivalents, a $3.5 million decrease in accrued interest receivable, a $120,000 decrease in property and equipment and a $382,000 decrease in goodwill. The decrease in goodwill was related to the sale of the five Central Texas branches mentioned previously. Deposits decreased by 2.8%, or $46.0 million, from December 31, 2001 to December 31, 2002 and advances from the FHLB increased 0.75%, or $5.2 million. The decrease in deposits was due to the branch sale in December 2002 as discussed previously, offset by deposit inflows resulting from Coastal's focus on increasing transaction accounts and other changes in deposits. Also noted previously was the redemption of the $43.9 million of Coastal's 10.0% Senior Notes payable in February 2002, the issuance of the $50.0 million Trust Preferred Securities in June 2002 and the $28.8 million redemption of the Bank's 9.0% Series A Noncumulative Preferred Stock in July 2002. Other changes in liabilities included a $1.9 million decrease in advances from borrowers for taxes and insurance and a $1.9 million decrease in other liabilities and accrued expenses. Stockholders' equity decreased 2.9%, or $4.5 million, from December 31, 2001 to December 31, 2002 as a result of $21.8 million in common stock repurchased during 2002, common stock dividends of $2.6 million and preferred stock dividends of $2.5 million, somewhat offset by 2002 net income of $19.7 million, common stock issued of $326,000 due to the exercise of stock options and a $2.2 million change in accumulated other comprehensive gain (loss). RESULTS OF OPERATIONS FOR THE THREE YEARS ENDED DECEMBER 31, 2002 The results of operations of Coastal depend primarily on its net interest income, which is the difference between interest income on interest-earning assets and interest expense on interest-bearing liabilities. Coastal's interest-earning assets consist principally of loans receivable, mortgage-backed securities and other investments. Coastal's interest-bearing liabilities have consisted primarily of deposits, advances from the FHLB, securities sold under agreements to repurchase, federal funds purchased, Trust Preferred Securities and its Senior Notes payable. Coastal's net income is also affected by the level of the provision for loan losses, noninterest income, including service charges on deposit accounts, loan fees, loan servicing income and gains on sales of assets, as well as by its noninterest expense, including compensation and benefits and occupancy costs. The following table sets forth, for the periods and at the dates indicated, information regarding Coastal's average consolidated statements of financial condition. Ratio, yield and rate information is based on average balances for the year.
At Year Ended December 31, 2002 December 31, 2002 Average Yield/ Yield/Rate Balance Interest Rate ---------------------- ------------- --------- ------- (Dollars in thousands) ASSETS Interest-earning assets: Loans receivable (1) 5.52% $ 1,931,931 $ 118,970 6.16% Mortgage-backed securities 3.37 467,744 17,114 3.66 Other securities 2.29 8,242 172 2.09 Federal funds sold 1.13 9,337 151 1.62 FHLB stock (2) 2.75 40,491 1,188 2.93 Other 1.27 1,776 28 1.58 ------ -------------- -------- ------ Total interest-earning assets 4.99 2,459,521 137,623 5.60 Noninterest-earning assets (3) ----- 90,900 -------- ------ --------- Total assets $ 2,550,421 ========= LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing liabilities: Interest-bearing deposits 2.39% $ 1,477,648 $ 39,825 2.70% Advances from the FHLB 2.71 683,454 20,173 2.95 Securities sold under agreements to repurchase and federal funds purchased -- -- -- -- Trust Preferred Securities of Coastal Capital Trust I 9.00 26,986 2,400 9.00 Senior Notes payable -- 3,726 378 10.00 ------ -------------- -------- ----- Total interest-bearing liabilities 2.64 2,191,814 62,776 2.86 Noninterest-bearing liabilities ------ 190,260 -------- ----- -------- Total liabilities 2,382,074 ----------- Minority interest - preferred stock of Coastal Banc ssb 15,359 Preferred stockholders' equity 27,500 Common stockholders' equity 125,488 -------- Total liabilities and stockholders' equity $ 2,550,421 ========= Net interest income; interest rate spread 2.35% $ 74,847 2.74% Net interest-earning assets; net interest yield on ====== ========= ===== interest-earning assets $ 267,707 3.04% Ratio of average interest-earning assets to average ========= ===== interest-bearing liabilities 1.12x =========
_______________ (1) Nonaccruing loans are included in total loans, but are immaterial. (2) In 2000, includes a $1.1 million special dividend received. See further discussion in "Management's Discussion and Analysis of Financial Condition and Results of Operations - Net Income." (3) Includes goodwill, accrued interest receivable, property and equipment, cash, prepaid expenses and other assets.
Year Ended December 31, 2001 Average Yield/ Balance Interest Rate ------------------------------ --------- ------- (Dollars in thousands) ASSETS Interest-earning assets: Loans receivable (1) $ 1,942,701 $ 155,214 7.99% Mortgage-backed securities 905,441 52,873 5.84 Other securities 6,690 176 2.63 Federal funds sold 7,776 266 3.42 FHLB stock (2) 45,700 1,960 4.29 Other 3,017 123 4.08 ------------------------------ ------- ----- Total interest-earning assets 2,911,325 210,612 7.23 Noninterest-earning assets (3) 98,487 ------- ----- ------------------------------ Total assets $ 3,009,812 ============================== LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing liabilities: Interest-bearing deposits $ 1,531,004 $ 69,828 4.56% Advances from the FHLB 795,009 38,917 4.90 Securities sold under agreements to repurchase and federal funds purchased 283,622 10,682 3.77 Trust Preferred Securities of Coastal Capital Trust I -- -- -- Senior Notes payable 45,868 4,588 10.00 ------------------------------ ------- ----- Total interest-bearing liabilities 2,655,503 124,015 4.67 Noninterest-bearing liabilities 176,861 ------- ----- ------------------------------ Total liabilities 2,832,364 Minority interest - preferred stock of Coastal Banc ssb 28,750 Preferred stockholders' equity 27,500 Common stockholders' equity 121,198 ------------------------------ Total liabilities and stockholders' equity $ 3,009,812 ============================== Net interest income; interest rate spread $ 86,597 2.56% Net interest-earning assets; net interest yield on ======== ===== interest-earning assets $ 255,822 2.97% ============================== ===== Ratio of average interest-earning assets to average interest-bearing liabilities 1.10x ==============================
_______________ (1) Nonaccruing loans are included in total loans, but are immaterial. (2) In 2000, includes a $1.1 million special dividend received. See further discussion in "Management's Discussion and Analysis of Financial Condition and Results of Operations - Net Income." (3) Includes goodwill, accrued interest receivable, property and equipment, cash, prepaid expenses and other assets.
Year Ended December 31, 2000 Average Yield/ Balance Interest Rate ------------------------------ --------- ------- (Dollars in thousands) ASSETS Interest-earning assets: Loans receivable (1) $ 1,881,124 $ 168,105 8.94% Mortgage-backed securities 1,002,055 64,246 6.41 Other securities 1,000 63 6.30 Federal funds sold 3,042 194 6.38 FHLB stock (2) 55,810 4,612 8.26 Other 895 53 5.92 ------------------------------ ------- ----- Total interest-earning assets 2,943,926 237,273 8.06 Noninterest-earning assets (3) 100,626 ------- ----- ------------------------------ Total assets $ 3,044,552 ============================== LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing liabilities: Interest-bearing deposits $ 1,489,479 $ 73,216 4.92% Advances from the FHLB 926,659 58,328 6.29 Securities sold under agreements to repurchase and federal funds purchased 249,673 16,671 6.68 Trust Preferred Securities of Coastal Capital Trust I -- -- -- Senior Notes payable 46,900 4,690 10.00 ------------------------------ ------- ----- Total interest-bearing liabilities 2,712,711 152,905 5.64 Noninterest-bearing liabilities 170,083 ------- ----- ------------------------------ Total liabilities 2,882,794 Minority interest - preferred stock of Coastal Banc ssb 28,750 Preferred stockholders' equity 27,500 Common stockholders' equity 105,508 ------------------------------ Total liabilities and stockholders' equity $ 3,044,552 ============================== Net interest income; interest rate spread $ 84,368 2.42% ======== ===== Net interest-earning assets; net interest yield on interest-earning assets $ 231,215 2.87% ============================== ===== Ratio of average interest-earning assets to average interest-bearing liabilities 1.09x ==============================
_______________ (1) Nonaccruing loans are included in total loans, but are immaterial. (2) In 2000, includes a $1.1 million special dividend received. See further discussion in "Management's Discussion and Analysis of Financial Condition and Results of Operations - Net Income." (3) Includes goodwill, accrued interest receivable, property and equipment, cash, prepaid expenses and other assets. The following table analyzes net interest income in terms of changes in the volume of interest-earning assets and interest-bearing liabilities and changes in yields and rates. The table reflects the extent to which changes in Coastal's interest income and interest expense are attributable to changes in volume (change in volume multiplied by prior year rate) and changes in rate (changes in rate multiplied by prior year volume). Changes attributable to the combined impact of volume and rate have been allocated proportionately to changes due to volume and changes due to rate.
Year Ended December 31, ------------------------------------------------------------------ 2002 vs 2001 2001 vs 2000 Increase (Decrease) Due To Increase (Decrease) Due To ------------------------------ ------------------------------- Volume Rate Net Volume Rate Net ----------- -------- --------- --------- -------- -------- (In thousands) INTEREST INCOME Loans receivable $ (857) $(35,387) $(36,244) $ 5,381 $(18,272) $(12,891) Mortgage-backed securities (20,177) (15,582) (35,759) (5,916) (5,457) (11,373) Other securities 36 (40) (4) 169 (56) 113 Federal funds sold 45 (160) (115) 194 (122) 72 FHLB stock (1) (204) (568) (772) (726) (1,926) (2,652) Other (38) (57) (95) 102 (32) 70 --------- --------- --------- -------- --------- -------- Total (21,195) (51,794) (72,989) (796) (25,865) (26,661) --------- --------- --------- -------- --------- --------- INTEREST EXPENSE Interest-bearing deposits (2,362) (27,641) (30,003) 2,024 (5,412) (3,388) Securities sold under agreements to repurchase and federal funds purchased (5,341) (5,341) (10,682) 2,032 (8,021) (5,989) Advances from the FHLB (4,886) (13,858) (18,744) (7,596) (11,815) (19,411) Trust Preferred Securities of Coastal Capital Trust I 1,200 1,200 2,400 -- -- -- Senior Notes payable (4,210) -- (4,210) (102) -- (102) --------- --------- --------- -------- --------- -------- Total (15,599) (45,640) (61,239) (3,642) (25,248) (28,890) --------- --------- --------- -------- --------- -------- Net change in net interest income $ (5,596) $ (6,154) $(11,750) $ 2,846 $ (617) $ 2,229 ========= ========= ========= ======== ========= ========
_______________ (1) In 2000, includes a $1.1 million special dividend received. See further discussion in "Management's Discussion and Analysis of Financial Condition and Results of Operations - Net Income." NET INCOME Coastal reported net income of $19.7 million for the year ended December 31, 2002, $21.8 million for the year ended December 31, 2001 and $19.9 million for the year ended December 31, 2000. When comparing net income for 2002 to 2001, the primary contributor to the decrease in net income was decreased net interest income. Net interest income decreased $11.8 million from 2001 to 2002, as a result of Coastal's smaller asset size as compared to 2001, lower market interest rates and record high principal paydowns received on Coastal's mortgage-backed securities and mortgage loan portfolios. In addition to the decreased net interest income, the provision for loan losses increased $1.9 million due to management's reevaluation of the overall allowance for loan losses given the changes that have occurred within the mix of Coastal's loan portfolio, current economic conditions and the decision in 2002 to sell loans which resulted in charge-offs totaling $1.8 million to writedown such loans to fair value, in addition to specific loans in the portfolio that have warranted greater attention and specific allocations of the allowance for loan losses. These decreases to net income were only somewhat offset by a $6.1 million increase in noninterest income, a $2.6 million decrease in noninterest expense, a $1.7 million decrease in the provision for Federal income taxes and a $1.1 million decrease in the expense for minority interest (preferred stock dividends of Coastal Banc ssb) due to the redemption of the preferred stock during 2002. The increase in noninterest income was primarily due to the $4.4 million gain on the sale of the five Central Texas branches and the $359,000 gain on the sale of the group of loans with servicing rights retained during the period. The increase is also due to a $2.1 million increase in service charges on deposit accounts and the $422,000 fair value loss on derivative instruments recorded in 2001 (compared to a $12,000 fair value loss recorded during 2002), offset by a $702,000 decrease in the gain on the sale of real estate owned and various smaller changes in other categories of noninterest income. The decrease in noninterest expense was primarily due to the $2.8 million decrease in the amortization of goodwill as discussed earlier. In addition, Coastal experienced decreases of $869,000 and $1.3 million in office occupancy and data processing, respectively. These decreases were partially offset by an increase of $1.1 million in compensation, payroll taxes and other benefits, a $519,000 increase in advertising expense, a $153,000 increase in postage and delivery expense and a $599,000 increase in other noninterest expense. The decrease in the provision for Federal income taxes was due to the decreased income before Federal income taxes, minority interest and cumulative effect of accounting change. When comparing net income for 2001 to 2000, the increase was comprised of the following: a $2.2 million increase in net interest income, a $1.9 million decrease in the provision for loan losses, somewhat offset by a $881,000 decrease in noninterest income, a $284,000 increase in noninterest expense and a $972,000 increase in the provision for Federal income taxes. The increase in net interest income was due primarily to the increase in net interest margin to 2.97% for the year ended December 31, 2001 from 2.87% for 2000, which included a FHLB special dividend of $1.1 million in 2000. Net interest margin, excluding the FHLB special dividend, was 2.83% for the year ended December 31, 2000. The decrease in the provision for loan losses when comparing 2001 to 2000 was due to management's quarterly evaluation of the allowance for loan losses throughout 2001 and a belief that the allowance at December 31, 2001 was adequate considering the composition of the loans receivable portfolio, the existing nonperforming loans, historical and peer group loss experience, delinquency trends and current economic conditions. The decrease in noninterest income was primarily due to the $2.2 million gain recorded on the sale of Coastal's mortgage servicing rights in 2000, offset by a $838,000 increase in service charges on deposit accounts, a $621,000 increase in the gain on the sale of real estate owned, in addition to smaller changes in other categories of noninterest income. The increase in noninterest expense was due to a $1.6 million increase in compensation, payroll taxes and other benefits, partially offset by a decrease of $84,000 in office occupancy, a $317,000 decrease in data processing, a $225,000 decrease in the amortization of goodwill and a decrease of $688,000 in other noninterest expense. The increase in the provision for Federal income taxes was due to the increased income before Federal income taxes, minority interest and cumulative effect of accounting change. NET INTEREST INCOME Net interest income amounted to $74.8 million in 2002, an $11.8 million, or 13.6% decrease from 2001. The decrease in net interest income was primarily due to Coastal's smaller average asset size, the loan sales mentioned previously and continuing higher than expected principal payments received on Coastal's mortgage-backed securities and mortgage loan portfolios. When comparing 2002 to 2001, average interest-earning assets decreased $451.8 million, $437.7 million of which was the decrease in mortgage-backed securities primarily due to the 2001 restructuring mentioned previously. In addition, during 2002, due to the extraordinary levels of prepayments due to refinancings of home mortgages, Coastal experienced higher principal paydowns totaling approximately $152 million on its mortgage-backed securities portfolio and $342 million on its mortgage loan portfolio during the year. Net interest margin increased to 3.04% in 2002 from 2.97% in 2001. Interest rate spread, defined to exclude noninterest-bearing deposits increased to 2.74% in 2002 from 2.56% in 2001. Management also calculates an alternative interest rate spread which includes noninterest-bearing deposits. Under this calculation, the interest rate spreads for 2002 and 2001 were 2.94% and 2.81%, respectively. Net interest margin and interest rate spread are affected by the changes in the amount and composition of interest-earning assets and interest-bearing liabilities, in addition to changes in the applicable interest rates on those assets and liabilities. Net interest income amounted to $86.6 million in 2001, a $2.2 million, or 2.6%, increase over 2000. The increase in net interest income was primarily due to the increase in net interest margin to 2.97% in 2001 from 2.87% in 2000 and an increase in interest rate spread, defined to exclude noninterest-bearing deposits, to 2.56% in 2001 from 2.42% in 2000. In addition, net interest-earning assets increased by $24.6 million in 2001 from 2000. Management also calculates an alternative interest rate spread which includes noninterest-bearing deposits. Under this calculation, the interest rate spreads for 2001 and 2000 were 2.81% and 2.71%, respectively. Net interest margin and interest rate spread are affected by the changes in the amount and composition of interest-earning assets and interest-bearing liabilities, in addition to changes in the applicable interest rates on those assets and liabilities. The overall increase in net interest margin and spread was primarily due to the 0.97% decrease in the average rate paid on interest-bearing liabilities, only partially offset by a 0.83% decrease in the average rate received on interest-earning assets. Total interest income amounted to $137.6 million during 2002, a $73.0 million, or 34.7% decrease from 2001. This decrease was due to the decrease in average interest-earning assets of $451.8 million and a decrease in the average yield on those assets of 1.63%. As discussed previously, the decrease in average interest-earning assets was due to the restructuring in 2001 and the high levels of principal paydowns received on Coastal's mortgage-backed securities and mortgage loans during the year. When comparing the two periods, the average balance of mortgage-backed securities decreased $437.7 million and the average balance of loans receivable decreased $10.8 million. The average yield on loans receivable decreased 1.83% and the average yield on mortgage-backed securities decreased 2.18%. The decrease in the overall average yield on interest-earning assets was due to continuing declining market rates throughout 2002. Total interest income amounted to $210.6 million during 2001, a $26.7 million, or 11.2%, decrease from 2000 (which includes the $1.1 million FHLB special dividend received in 2000). The decrease was due to a decrease in average interest-earning assets of $32.6 million and a decrease in the average yield of 0.83%. The decrease in average interest-earning assets was due, in part, to the decrease in Coastal's asset size as a result of the restructuring of Coastal's asset base in late November 2001 as previously described. When comparing the two periods, the average balance of mortgage-backed securities decreased $96.6 million due to the restructuring and principal payments received throughout 2001. In addition, the average balance of FHLB stock decreased $10.1 million due to the decreased amounts required to be maintained based on the decreased level of FHLB advances outstanding. These decreases were partially offset by a $61.6 million increase in the average balance of loans receivable and smaller increases in other interest-earning asset categories. The average yield on loans receivable decreased 0.95% and the average yield on mortgage-backed securities decreased 0.57% when comparing the year ended December 31, 2001 to December 31, 2000. The decrease in the overall average yield was due to the declining market rates during 2001. Total interest expense amounted to $62.8 million in 2002, a $61.2 million, or 49.4% decrease from 2001. The decrease in interest expense was due to the $463.7 million decrease in the average balance of interest-bearing liabilities and a 1.81% decrease in the average rate paid on those liabilities. When comparing 2002 to 2001, average securities sold under agreements to repurchase decreased $283.6 million, average FHLB advances decreased $111.6 million and average interest-bearing deposits decreased $53.4 million. The average balance of Senior Notes payable decreased $42.1 million due to their repurchase on February 1, 2002 and the average balance of Trust Preferred Securities increased $27.0 million due to their issuance on June 18, 2002. The overall decrease in the average rate paid on interest-bearing liabilities was due to the continued declining wholesale funding and deposit costs because of the decline in market interest rates throughout 2002. Total interest expense amounted to $124.0 million in 2001, a $28.9 million, or 18.9%, decrease from 2000. The decrease in interest expense was due primarily to a 0.97% decrease in the average rate paid on interest-bearing liabilities and a slight decrease in the average balance of those liabilities during 2001 when compared to 2000. The overall decrease in the average rate paid on interest-bearing liabilities was due to lower wholesale funding and deposit costs because of the decline in market interest rates during 2001. When comparing 2001 to 2000, average FHLB advances decreased $131.7 million with the average rate decreasing by 1.39%, average interest-bearing deposits increased $41.5 million and the average rate on those deposits decreased by 0.36% and average securities sold under agreements to repurchase and federal funds purchased increased $34.0 million with the average rate decreasing 2.91%. The decrease in interest expense on Senior Notes payable was due to the $1.0 million decrease in the average balance as a result of repurchases. PROVISION FOR LOAN LOSSES AND THE ALLOWANCE FOR LOAN LOSSES - CRITICAL ACCOUNTING POLICY Management analyzes the loan portfolio to determine the adequacy of the allowance for loan losses and the appropriate provision required to maintain an adequate allowance. Estimating the allowance for loan losses is a critical accounting policy. It is subjective in nature and requires material estimates that may be subject to revision as facts and circumstances warrant. In assessing the adequacy of the allowance, management reviews the type, size, quality and risk of loans in the portfolio and considers such factors as specific known risks, historical and peer group experience, the existing nonperforming loans and the underlying collateral value on those loans, general economic conditions, particularly as they relate to Coastal's lending areas and other factors related to the collectibility of Coastal's loan portfolio. Based on the ongoing assessment by management, provisions for loan losses are charged to earnings to bring the total allowance for loan losses to a level deemed appropriate by management based on probable losses in the loan portfolio. While management uses the best information available to recognize losses on loans, there can be no assurance that future additions to the allowance will not be necessary. For the years ended December 31, 2002, 2001 and 2000, the provision for loan losses was $5.8 million, $3.9 million and $5.8 million, respectively. The changes in the provision for loan losses, when comparing the periods, are due to management's continuing evaluation of the overall allowance for loan losses. The increase in the provision for loan losses in 2002 (in the fourth quarter of 2002) was due to management's reevaluation of the allowance for loan losses given the changes that have occurred within the mix of Coastal's loan portfolio, current economic conditions and the decision in 2002 to sell loans which resulted in charge-offs totaling $1.8 million to writedown such loans to fair value, in addition to certain specific loans in the portfolio that have warranted greater attention and specific allocations of the allowance for loan losses. While management believes that it has adequately provided for loan losses and that the allowance for loan losses is adequate at December 31, 2002, it will continue to monitor the loan portfolio and make adjustments to its allowance for loan losses as it considers necessary. Nonperforming loans are those loans on nonaccrual status as well as those loans greater than ninety (90) days delinquent and still accruing interest. At December 31, 2002, Coastal's nonperforming loans decreased, when compared to December 31, 2001, by $6.2 million or 25.0%, to $18.5 million. The decrease in nonperforming loans is mainly due to Coastal's decision to liquidate a portion of its single-family mortgage loan portfolio during 2002 through two loan sales. As discussed previously, the first loan sale was in March 2002 when Coastal sold $10.8 million of its under-performing loans (some of which were considered nonperforming) to a third party investor. The second sale was in December 2002 when Coastal sold $4.3 million of nonperforming loans. At December 31, 2002, 2001 and 2000, Coastal had nonperforming loans as follows:
December 31, --------------- 2002 2001 2000 --------------- ------- ------- (In thousands) Nonaccrual loans receivable: First lien residential $ 9,184 $21,744 $16,062 Residential construction 49 218 390 Multifamily real estate -- 82 -- Commercial real estate 1,323 1,174 1,134 Acquisition and development 5,485 6 -- Commercial, financial and industrial 1,609 499 1,152 Consumer and other 128 141 496 ---------------- ------- ------- 17,778 23,864 19,234 ---------------- ------- ------- Loans greater than 90 days delinquent and still accruing interest: First lien residential -- 62 475 Residential construction 83 755 -- Multifamily real estate 282 -- -- Commercial real estate 302 -- 736 Acquisition and development 59 -- -- Commercial, financial and industrial 43 31 634 Consumer and other -- 1 153 ---------------- ------- ------- 769 849 1,998 ---------------- ------- ------- Total nonperforming loans $ 18,547 $24,713 $21,232 ================ ======= =======
Coastal's asset quality ratios are as follows:
December 31, ------------- 2002 2001 2000 ------- ------ ------ Nonperforming loans to total loans receivable and loans receivable held for sale 1.00% 1.33% 1.12% Allowance for loan losses to nonperforming loans 97.69 62.26 68.32 Allowance for loan losses to total loans receivable 1.00 0.83 0.77
NONINTEREST INCOME Total noninterest income increased $6.1 million, or 54.4%, to $17.2 million in 2002, compared to $11.1 million for 2001. This increase was primarily due to Coastal's sale in December 2002 of five of its branches in Central Texas that resulted in a gain of $4.4 million. In addition, service charges on deposit accounts increased $2.1 million due to Coastal's continued focus on increasing transaction accounts and the related fee income, including Coastal's new Free Checking and Bounce Protection features on retail checking accounts introduced during August 2002. Other increases in noninterest income were due to a $359,000 gain on the sale of loans recorded in 2002 and the $422,000 fair value loss on derivative instruments recorded in 2001 (compared to a $12,000 fair value loss recorded during 2002). These increases were only partially offset by a $100,000 decrease in loan fees, a $702,000 decrease in the gain on the sale of real estate owned, a $169,000 decrease in the gain on the sale of mortgage-backed securities mentioned previously and a $218,000 decrease in other noninterest income. The decrease in the gain on the sale of real estate owned was primarily due to the gain of $603,000 recorded in 2001 on one commercial real estate owned property. The decrease in other noninterest income was primarily due to $300,000 in insurance proceeds received in 2001 for reimbursement of certain deposit losses in prior years. Total noninterest income decreased $881,000, or 7.3%, to $11.1 million in 2001, compared to $12.0 million for 2000. The decrease in noninterest income was primarily due to the $2.2 million gain recorded on the sale of Coastal's mortgage servicing rights during the first quarter of 2000 and the fair value loss on derivative instruments of $422,000 recorded in 2001 pursuant to the adoption of Statement 133 on January 1, 2001. The net fair value loss for the year ended December 31, 2001 was primarily attributable to Coastal's interest rate swap positions, which were liquidated in June 2001. These decreases in noninterest income, when comparing 2001 to 2000, were somewhat offset by the $169,000 gain that Coastal recorded on the sale of mortgage-backed securities mentioned previously. In addition, there were increases of $838,000 in service charges on deposit accounts, $621,000 in the gain on sale of real estate owned and $84,000 in other noninterest income, comparing 2001 to 2000. The increase in service charges on deposit accounts was due to Coastal's continuing focus on increasing transaction accounts and the related fee income. The increase in the gain on the sale of real estate owned was primarily due to a $603,000 gain on the sale of one real estate owned commercial property during the third quarter of 2001. The increase in other noninterest income was primarily due to $300,000 in insurance proceeds received in 2001 for reimbursement of certain deposit account losses incurred in prior years, offset by a $244,000 decrease in loan servicing income due to the 2000 sale of Coastal's mortgage servicing rights. NONINTEREST EXPENSE Total noninterest expense amounted to $55.9 million during 2002, a decrease of $2.6 million, or 4.4%, over 2001. The decrease in noninterest expense was primarily due to the $2.8 million decrease in the amortization of goodwill due to the implementation of Statements 142 and 147 as of January 1, 2002. In addition, Coastal experienced decreases of $869,000 and $1.3 million in office occupancy and data processing, respectively. 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 conversion of the Rio Grande Valley Region branches to Coastal's primary deposit and loan data processing system and the item processing functions brought in-house during the third quarter of 2001. These decreases were partially offset by an increase of $1.1 million in compensation, payroll taxes and other benefits, a $519,000 increase in advertising expense, a $153,000 increase in postage and delivery expense and a $599,000 increase in other noninterest expense. The increase in compensation, payroll taxes and other benefits was due to the increase in staff needed to bring the item processing functions in-house during the third quarter of 2001, normal merit increases for existing staff 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 increasing transaction deposit accounts. The increase in other noninterest expense was primarily due to the $401,000 reversal of an accrued franchise tax liability during the 2001 period and smaller changes in various other categories. Total noninterest expense amounted to $58.5 million during 2001, an increase of $284,000, or 0.5%, over 2000. The increase in noninterest expense was due to a $1.6 million, or 5.5%, increase in compensation, payroll taxes and other benefits, a $119,000 increase in advertising and a $133,000 increase in postage and delivery, partially offset by a decrease of $84,000 in office occupancy, a $317,000 decrease in data processing, a $225,000 decrease in the amortization of goodwill and a decrease of $940,000 in other noninterest expense. The increase in compensation, payroll taxes and other benefits was primarily 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 business products and lending. The increase in advertising and postage and delivery expenses were primarily due to Coastal's efforts to increase transaction deposit accounts. 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 branches in the Rio Grande Valley 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 certain goodwill amounts becoming fully amortized during 2001. The decrease in other noninterest expense was due to a $428,000 decrease of debt issuance costs relating to the Senior Notes payable becoming fully amortized in 2001 and the $401,000 reversal of an accrued franchise tax liability determined not to be payable, offset by other smaller changes in various categories. PROVISION FOR FEDERAL INCOME TAXES Coastal incurred no regular Federal income taxes in 2002, 2001 or 2000 primarily due to the utilization of the net operating loss carryovers acquired in May 1988 from the savings and loan associations obtained in connection with the Federal Savings and Loan Insurance Corporation's Southwest Plan (the "Southwest Plan Acquisition") and because payments to Coastal pursuant to the related assistance agreement in prior years were excludable from taxable income, which resulted in Coastal reporting losses each year for tax purposes. However, pursuant to the terms of the Southwest Plan Acquisition assistance agreement, the FSLIC Resolution Fund ("FRF") retained all of the future tax benefits to be derived from the Federal income tax treatment of the assistance payments received from the FRF and from the utilization of the net operating loss carryovers acquired. The amount of tax benefit to Coastal during these years (which corresponds to the amount of Federal taxes which Coastal would have paid in these years but for the tax-exempt nature of the assistance payments from the FRF and the utilization of the net operating loss carryovers) is recorded in Coastal's Consolidated Statements of Income as its provision for Federal income taxes, which also includes alternative minimum taxes paid. The alternative minimum taxes recorded during these years are available as credit carryforwards to reduce future regular Federal income taxes over an indefinite period. Beginning in 2000, these alternative minimum tax credit carryforwards were used to offset regular income taxes. The provisions for Federal income taxes were $9.1 million in 2002, $10.9 million in 2001 and $9.9 million in 2000 with the effective tax rates being 30.1%, 30.7%, and 30.5%, respectively. Although the termination of the agreement with the FRF was effective March 31, 1994, the FRF will continue to receive the future Federal income tax benefits of the net operating loss carryforwards acquired, which are expected to continue through 2003. ASSET AND LIABILITY MANAGEMENT During 2001, as previously mentioned, Coastal entered into a transaction to strategically restructure a portion of its asset base to make it less vulnerable to market interest rate fluctuations. In late November 2001, Coastal completed the sale of approximately $845 million of its mortgage-backed securities. The majority of the securities sold were CMOs tied to the COFI index and contained extension risk which caused, on average, higher levels of price volatility. Coastal replaced approximately $512 million of these securities with primarily pass-thru securities with an overall shorter expected duration. This restructuring was undertaken to decrease the price volatility of the Bank's investments and to improve the stability of future earnings. Coastal's asset and liability management process is utilized to measure and manage its interest rate risk exposure, which is Coastal's primary market risk. Interest rate risk can be defined as the exposure of Coastal's net interest income to adverse movements in interest rates. The principal determinant of the exposure of Coastal's earnings to interest rate risk is the timing difference between the repricing or maturity of Coastal's interest-earning assets and the repricing or maturity of its interest-bearing liabilities. In order to minimize interest rate risk and achieve an acceptable interest rate spread between interest-earning assets and interest-bearing liabilities, Coastal endeavors to match the timing of the repricing or maturities as well as the basis (for example, the London Interbank Offered Rate ("LIBOR") or cost of funds rate) of its interest-earning assets to its interest-bearing liabilities. Coastal also may use interest rate swap and cap agreements to aid in minimizing exposure to interest rate fluctuations. Coastal's asset and liability management strategy is formulated and monitored by the Asset/Liability Committee of the Board of Directors of the Bank (the "Board"). The Board's written policies and procedures are implemented by the Asset/Liability Subcommittee (the "Subcommittee"), a management-staffed committee composed of the Chief Executive Officer, Chief Banking Officer, the Senior Vice President of Retail Banking and the Treasury Manager, in addition to members of the Bank's Portfolio Control Center. The Subcommittee meets monthly to review, among other things, the sensitivity of Coastal's assets and liabilities to interest rate changes, including those transactions attributable to altering the interest rate risk, the purchase and sale activity and maturities of investments and borrowings. In accordance therewith, the Subcommittee reviews Coastal's liquidity, cash flow needs, maturities of investments, deposits and borrowings, interest rate matching, core deposit activity, current market conditions and interest rates on both a local and national level. To effectively measure and manage interest rate risk, the Asset/Liability Committee of the Board and the Subcommittee regularly review interest rate risk by forecasting the impact of alternative interest rate scenarios on net income, net interest income and on Coastal's economic value of equity ("EVE"), which is defined as the difference between the market value of Coastal's existing assets and liabilities, including the effects of off-balance sheet instruments, and by evaluating such impact against the guidelines established by the Board for allowable changes in net interest income and EVE. Coastal utilizes the market-value analysis to address the change in the equity value of Coastal's balance sheet arising from movements in interest rates by computing the net present value of Coastal's assets, liabilities and off-balance sheet instruments. The extent to which assets have gained or lost value in relation to the gains or losses of liabilities determines the appreciation or depreciation in equity on a market-value basis. Economic value analysis is intended to evaluate the impact of immediate and sustained changes in interest rates on the market value of the current balance sheet. From these analyses, interest rate risk is quantified and appropriate strategies are formulated and implemented on an ongoing basis. The following table presents an analysis of the sensitivity in Coastal's annual net interest income and EVE based on the indicated changes in interest rates at December 31, 2002 and 2001. The interest rate scenarios presented in the table include interest rates at December 31, 2002 and 2001 and, for the net interest income calculation, interest rates are adjusted by the indicated changes over a four-quarter period with net interest income being measured for the following calendar year, and for the EVE calculation, the interest rate adjustments consist of instantaneous and parallel changes in the yield curve. Each rate scenario reflects assumptions relating to the estimated effect of prepayments and repricing of applicable assets and liabilities.
Estimated Change In Net Interest Income EVE --------------------- -------------------- Change December 31, December 31, In Interest Rates --------------------- -------------------- (in basis points) 2002 2001 2002 2001 --------------- ------ -------- ------- ------- +200 3.78% (6.20)% 2.91% (0.74)% +100 1.87 (3.11) 3.88 0.89 0 -- -- -- -- -100 (0.33) (0.70) (3.85) (3.90) -200 (2.61) (2.51) (4.97) (6.42)
There are limitations inherent in any methodology used to estimate the exposure to changes in interest rates. It is not possible to fully model the market risk in instruments with leverage, option or prepayment risks. Therefore, this analysis is not intended to be a forecast of the actual effect of a change in interest rates on Coastal. Management of Coastal believes that all of the assumptions used in this analysis to evaluate the vulnerability of Coastal's operations to changes in interest rates take into account historical experience and considers them reasonable; however, the interest rate sensitivity of Coastal's assets and liabilities and the estimated effects of changes in interest rates on Coastal's net interest income and EVE indicated in the above analysis could vary substantially if different assumptions were used or if actual experience differs from the historical experience. The EVE is significantly impacted by the estimated effect of prepayment risk on the value of mortgage-backed securities and loans receivable as market interest rates change. Prepayment risk arises due to the possibility that the cash flow experience of an asset may change as interest rates change. When interest rates increase, mortgage-related assets will generally not be prepaid and conversely, when interest rates decrease, prepayments increase. Prepayments affect Coastal's net spread and the duration match of its assets and liabilities. Coastal has prepayment risk on its mortgage-backed securities and loans receivable held at a premium due to the fact that the amortization of the capitalized premiums on those assets will accelerate when the underlying loans are prepaid. Coastal attempts to anticipate its prepayment risk by extrapolation from past prepayment behavior after adjusting for expected interest rate levels and other economic factors and utilizes these assumptions when analyzing its risk exposure. There is also a risk of an inverted yield curve. In this situation, assuming the rates under one year would be inverted, Coastal's net interest income would be negatively affected. As assets, primarily the one-year treasury securities and whole loans, reprice at the lower one-year rate, the one-month borrowings would reprice at the higher one-month LIBOR rate causing a decline in net interest income. The magnitude of this risk depends on the steepness of the inversion, which part of the curve inverts and the duration of the inverted curve. A more conventional but limited asset and liability monitoring tool involves analyzing the extent to which assets and liabilities are "interest rate sensitive" and measuring an institution's interest rate sensitivity "gap." While this conventional gap measure may be useful, it is limited in its ability to predict trends in future earnings and to predict the effect of changing interest rates. It makes no assumptions about changes in prepayment tendencies, deposit or loan maturity preferences or repricing time lags that may occur in response to a change in the interest rate environment. An asset or liability is said to be interest rate sensitive within a specific time period if it will mature or reprice within that time period. The interest rate sensitivity "gap" is defined as the difference between interest-earning assets and interest-bearing liabilities maturing or repricing within a given time period. A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities. A gap is considered negative when the amount of interest rate sensitive liabilities exceeds interest rate sensitive assets. During a period of rising interest rates, a negative gap would tend to adversely affect net interest income, while a positive gap would tend to result in an increase in net interest income. During a period of falling interest rates, a negative gap would tend to increase net interest income, while a positive gap would tend to adversely affect net interest income. Given Coastal's current position based on this "gap" analysis, however, Coastal's net interest spread would benefit over time from a gradual increase in interest rates, in which its assets may be redeployed at higher yields. If interest rates were to fall, yields earned on interest rate sensitive investments would be reduced, while longer term fixed liability costs, such as Coastal's certificates of deposit, would not immediately change. While this analysis takes into account repricing and maturities of assets and liabilities, it fails to consider all the interest rate sensitivities of those asset and liability accounts. The following table summarizes the contractual maturities or repricing characteristics of Coastal's interest-earning assets and interest-bearing liabilities at December 31, 2002. The principal balance of adjustable rate assets is included in the period in which they are first scheduled to adjust or could be adjusted rather than in the period in which they mature. Coastal's one-year cumulative gap position at December 31, 2002 was positive $199.3 million or 7.89% of total assets. This is a snapshot of the position as of such date. The position changes frequently and may not be indicative of Coastal's position at any other time. Other material assumptions are set forth in the footnotes to the table.
As of December 31, 2002 More than More than More than Three months three months one year to three years to or less to one year three years five years ----------------------- -------------- ------------- ---------------- (Dollars in thousands) INTEREST-SENSITIVE ASSETS Loans, net (1)(2): First lien mortgage-single family fixed rate $ 2,455 $ 5,553 $ 30,927 $ 25,394 First lien mortgage-single family adjustable rate 58,799 528,248 118,101 3,366 First lien mortgage-multifamily fixed rate -- 178 1,310 1,388 First lien mortgage-multifamily variable rate 110,502 121 -- -- Construction and acquisition and development, net of loans in process 342,471 4,532 518 374 Commercial real estate 264,826 3,563 14,265 6,687 Commercial 111,385 3,545 17,236 3,471 Consumer and other 5,073 5,464 10,958 8,400 Mortgage-backed securities available-for-sale(1)(2) 420,488 41,172 -- -- Other securities available-for-sale -- -- 1,543 -- Other interest-earning assets (3) 69,987 -- -- -- ----------------------- -------------- ------------- ---------------- Total interest-sensitive assets 1,385,986 592,376 194,858 49,080 ----------------------- -------------- ------------- ---------------- Noninterest-sensitive assets Total assets INTEREST-SENSITIVE LIABILITIES: Interest-bearing deposits (4): Interest-bearing checking accounts $ 14,353 $ -- $ -- $ -- Savings accounts 44,603 -- -- -- Money market demand accounts 399,398 -- -- -- Certificate accounts 233,773 534,634 167,477 37,815 Advances from the FHLB 456,573 95,742 107,976 11,131 Trust Preferred Securities -- -- -- -- ----------------------- -------------- ------------- ---------------- Total interest-sensitive liabilities 1,148,700 630,376 275,453 48,946 ----------------------- -------------- ------------- ---------------- Noninterest-sensitive liabilities Total liabilities Stockholders' equity Total liabilities and stockholders' equity Gap during the period $ 237,286 $ (38,000) $ (80,595) $ 134 Cumulative gap $ 237,286 $ 199,286 $ 118,691 $ 118,825 Interest-sensitive assets as a % of interest-sensitive liabilities (cumulative) 120.66% 111.20% 105.78% 105.65% Interest-sensitive assets as a % of total assets (cumulative) 54.87 78.32 86.03 87.97 Ratio of gap to total assets 9.39 (1.50) (3.19) 0.01 Ratio of cumulative gap to total assets 9.39 7.89 4.70 4.70 More than More than five years to ten years to Over ten years twenty years twenty years Totals --------------- -------------- -------------- ---------- INTEREST-SENSITIVE ASSETS Loans, net (1)(2): First lien mortgage-single family fixed rate $ 20,826 $ 57,911 $ 48,483 $ 191,549 First lien mortgage-single family adjustable Rate 4,639 -- -- 713,153 First lien mortgage-multifamily fixed rate -- 1,899 -- 4,775 First lien mortgage-multifamily variable rate -- -- -- 110,623 Construction and acquisition and development, net of loans in process 1,278 1,394 -- 350,567 Commercial real estate 13,321 10,042 -- 312,704 Commercial 818 -- -- 136,455 Consumer and other 5,992 6,884 74 42,845 Mortgage-backed securities available-for-sale(1)(2) -- 12,484 878 475,022 Other securities available-for-sale -- -- 245 1,788 Other interest-earning assets (3) -- -- -- 69,987 --------------- -------------- -------------- ---------- Total interest-sensitive assets 46,874 90,614 49,680 2,409,468 --------------- -------------- -------------- Noninterest-sensitive assets 116,676 ---------- Total assets $2,526,144 ========== INTEREST-SENSITIVE LIABILITIES: Interest-bearing deposits (4): Interest-bearing checking accounts $ -- $ -- $ -- $ 14,353 Savings accounts -- -- -- 44,603 Money market demand accounts -- -- -- 399,398 Certificate accounts 25 -- -- 973,724 Advances from the FHLB 8,407 16,256 -- 696,085 Trust Preferred Securities -- -- 50,000 50,000 --------------- -------------- -------------- ---------- Total interest-sensitive liabilities 8,432 16,256 50,000 2,178,163 --------------- -------------- -------------- ---------- Noninterest-sensitive liabilities 195,096 ---------- Total liabilities 2,373,259 Stockholders' equity 152,885 ---------- Total liabilities and stockholders' equity $2,526,144 ========== Gap during the period $ 38,442 $ 74,358 $ (320) Cumulative gap $ 157,267 $ 231,625 $ 231,305 Interest-sensitive assets as a % of interest-sensitive liabilities (cumulative) 107.45% 110.88% 110.62% Interest-sensitive assets as a % of total assets (cumulative) 89.83 93.41 95.38 Ratio of gap to total assets 1.52 2.94 (0.01) Ratio of cumulative gap to total assets 6.23 9.17 9.16
(1) Fixed-rate mortgage loans, consumer loans and fixed-rate securities are based on contractual maturities (assuming no periodic amortization). (2) Variable and adjustable rate mortgage loans and adjustable rate mortgage-backed securities are included in the period in which they first reprice (assuming no periodic amortization). (3) Includes FHLB stock, federal funds sold and other interest-earning investments. (4) Includes checking accounts, savings accounts and money market accounts that are interest-bearing. 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. Fixed-rate certificate accounts are based on contractual maturities. DERIVATIVE INSTRUMENTS Coastal is a party to derivative instruments in the normal course of business to reduce its exposure to fluctuations in interest rates. These derivative instruments have included interest rate swap agreements where Coastal makes fixed interest payments and receives payments based on a floating index and, currently, interest rate cap agreements, as described below. Effective January 1, 2001, Coastal adopted Statement 133, which requires companies to recognize all derivatives as either assets or liabilities in the consolidated statement of financial condition and measure all derivatives at fair value. The interest rate swap and cap agreements held by Coastal on December 31, 2000 were determined to not qualify for hedge accounting, therefore on implementation of Statement 133, Coastal recorded a transition adjustment to record these derivative instruments at fair value. On January 1, 2001, Coastal recorded a transition adjustment loss of $160,000, or $104,000 net of the tax effect, as the cumulative effect of the change in accounting for derivative instruments to record the fair value of Coastal's derivative instruments in the consolidated statements of income. For the year ended December 31, 2001, Coastal recorded an additional fair value loss on these derivative instruments of $422,000. The fair value changes in the derivative instruments during 2001 were primarily attributable to Coastal's interest rate swap agreements, which were totally liquidated in June 2001. As of December 31, 2002 and 2001, interest rate cap agreements were Coastal's only derivative instruments. Coastal totally liquidated its interest rate swap positions in June of 2001. The interest rate swap agreements previously held by Coastal provided for Coastal to make fixed interest payments and receive payments based on a floating LIBOR index, as defined in each agreement. The net effect of the interest rate swaps to Coastal was to increase interest expense by $35,000 for the year ended December 31, 2001 and decrease interest expense by $212,000 for the year ended December 31, 2000. See Note 16 of the Notes to Consolidated Financial Statements. Coastal has interest rate cap agreements with third parties, primarily sophisticated investment banking firms. The agreements provide for the third parties to make payments to Coastal whenever a defined floating rate exceeds rates ranging from 8.0% to 9.0%, depending on the agreement. Payments on the interest rate cap agreements are based on the notional principal amount of the agreements; no funds were actually borrowed or are to be repaid. The fair value of the interest rate cap agreements was zero at December 31, 2002 and $37,000 at December 31, 2001, which are the recorded book values of such agreements at such dates due to the implementation of Statement 133. The interest rate cap agreements are used to alter the interest rate sensitivity of a portion of Coastal's mortgage-backed securities and loans receivable. As such, the amortization of the purchase price and interest income from the interest rate cap agreements are recorded in "interest income on mortgage-backed securities or loans receivable," as appropriate, in the accompanying consolidated statements of income. The net decrease in interest income related to the interest rate cap agreements was approximately $25,000 for each of the years ended December 31, 2002, 2001, and 2000. No payments were made to Coastal under the interest rate cap agreements during the years ended December 31, 2002, 2001 or 2000. LIQUIDITY AND CAPITAL RESOURCES Coastal's total assets were $2.5 billion at December 31, 2002 and $2.6 billion at December 31, 2001. Preferred stockholders' equity amounted to $27.5 million and common stockholders' equity was $125.4 million at December 31, 2002. The regulatory capital of Coastal Banc ssb exceeded all three of the Bank's regulatory capital adequacy requirements at December 31, 2002. At December 31, 2002, the Bank's core capital amounted to 6.88% of adjusted total assets, compared to the requirement of 4.0%, its Tier 1 risk-based capital amounted to 10.32% of risk-adjusted assets as compared to the requirement of 4.0% and its total risk-based capital amounted to 11.38% of risk-adjusted assets, compared to a requirement of 8.0%. Coastal's primary sources of funds consist of deposits bearing market rates of interest, advances from the FHLB, securities sold under agreements to repurchase and principal and interest 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 December 31, 2002, Coastal had binding commitments to originate or purchase loans totaling approximately $26.5 million and had $147.8 million of undisbursed loans in process. In addition, at December 31, 2002, Coastal had commitments under lines of credit to originate loans, primarily construction and other, of approximately $146.1 million and letters of credit outstanding of $14.2 million. Scheduled maturities of certificates of deposit during the twelve months following December 31, 2002 totaled $768.4 million. Management believes that Coastal has adequate resources to fund all its commitments. INFLATION AND CHANGING PRICES The Consolidated Financial Statements and related data presented herein have been prepared in accordance with accounting principles generally accepted in the United States of America, which require the measurement of financial position and operating results, without considering changes in the relative purchasing power of money over time due to inflation. Unlike most commercial companies, substantially all of the assets and liabilities of Coastal are monetary in nature. As a result, interest rates have a more significant impact on Coastal's performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or with the same magnitude as the prices of goods and services. RECENT ACCOUNTING STANDARDS Statement of Financial Accounting Standards ("SFAS") No. 140 ("Statement 140"), "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," replaced SFAS No. 125 ("Statement 125"), "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," but carried over most of Statement 125's provisions without change. Statement 140 elaborates on the qualifications necessary for a special-purpose entity, clarifies sales accounting criteria in certain circumstances, refines accounting for collateral and adds disclosures for collateral, securitizations and retained interests in securitized assets. Statement 140 was effective for transactions occurring after March 31, 2001. The adoption of Statement 140 did not have a material impact on Coastal. In August 2001, SFAS 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 as of January 1, 2002, and did not have a material effect on Coastal's Consolidated Financial Statements. SFAS Statement No. 148 ("Statement 148") "Accounting for Stock-Based Compensation - Transition and Disclosure" was issued in December 2002. Statement 148 amends SFAS Statement No. 123 to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, Statement 148 amends the disclosure requirements to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. Coastal has adopted the disclosure provisions included in Statement 148 in the notes to Coastal's Consolidated Financial Statements for the years ended December 31, 2002, 2001 and 2000. In January 2003, the Financial Accounting Standards Board directed its staff to prepare a ballot draft of Statement No. 149, "Accounting for Certain Financial Instruments with Characteristics of Liabilities and Equity" ("Statement 149"). When issued, Statement 149 will establish standards for issuers' classification as liabilities in the statement of financial condition certain financial instruments that have characteristics of both liabilities and equity. The final Statement 149 is expected to be issued in the first quarter of 2003 and will be effective upon issuance for all contracts created or modified after the date the statement is issued and otherwise effective at the beginning of the first interim period beginning after June 15, 2003. Statement 149 will be effected by reporting the cumulative effect of a change in accounting principle for contracts created before the issuance date and still existing at the beginning of that interim period. The adoption of Statement 149 when issued is not expected to have a material effect on Coastal's Consolidated Financial Statements. FORWARD-LOOKING INFORMATION "Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995: The statements contained in this Annual Report to stockholders 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"). The above discussion should be read in conjunction with the information contained in the Consolidated Financial Statements and the Notes thereto. The above information contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 (the "Reform Act"), and are subject to the safe harbor created by the 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 loans), 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 market rates of interest and in economic and business conditions, and changes in the laws and regulations applicable to Coastal; and other factors as discussed herein. Coastal Bancorp, Inc. and Subsidiaries DIRECTORS AND OFFICERS BOARD OF DIRECTORS OF COASTAL BANCORP, INC., COASTAL BANC SSB AND SUBSIDIARIES (AS NOTED) MANUEL J. MEHOS Chairman of the Board, President and Chief Executive Officer of Coastal Bancorp, Inc.; Chairman of the Board, President and Chief Executive Officer of Coastal Banc Holding Company, Inc.; Chairman of the Board of Coastal Banc Capital Corp., a wholly-owned subsidiary of Coastal Banc Holding Company, Inc.; Chairman of the Board, President and Chief Executive Officer of the Bank, a wholly-owned subsidiary of Coastal Banc Holding Company, Inc.; Chairman of the Board and Chief Executive Officer of Coastal Banc Mortgage Corp., a wholly-owned subsidiary of Coastal Banc Holding Company, Inc.; and Chief Executive Officer of CoastalBanc Financial Corp., a wholly-owned subsidiary of the Bank, Houston, Texas R. EDWIN ALLDAY Self employed consultant who provides management consulting services to non-profit organizations, Houston, Texas D. FORT FLOWERS, JR. President of Sentinel Trust Company, a Texas Limited Banking Association, providing fiduciary and investment management services to affluent families, their closely held corporations and foundations, Houston, Texas, and Director and Vice Chairman of the Board of New Covenant Trust Company, a National Trust Company DENNIS S. FRANK Chief Executive Officer and President of Silvergate Capital Corporation, a financial institution holding company controlling Silvergate Bank, La Jolla, California and President and Chief Executive Officer of DSF Management Corp., a private investment company, Houston, Texas ROBERT E. JOHNSON, JR. Partner, law firm of Johnson & Johnson, Austin, Texas CLAYTON T. STONE Executive Vice President of Hines Interests Limited Partnership, a real estate developer, Houston, Texas CORPORATE OFFICERS OF COASTAL BANCORP, INC. MANUEL J. MEHOS Chairman of the Board, President and Chief Executive Officer CATHERINE N. WYLIE Senior Executive Vice President, Chief Financial Officer, Chief Operations Officer and Treasurer LINDA B. FRAZIER Senior Vice President, Secretary and General Counsel CORPORATE OFFICERS OF COASTAL BANC HOLDING COMPANY, INC. MANUEL J. MEHOS Chairman of the Board, President and Chief Executive Officer CATHERINE N. WYLIE Director, Senior Executive Vice President, Chief Financial Officer, Chief Operations Officer and Treasurer LINDA B. FRAZIER Director, Senior Vice President and Secretary LINDA S. BUBACZ Director, Assistant Treasurer and Assistant Secretary CORPORATE OFFICERS OF COASTAL BANC SSB MANUEL J. MEHOS President and Chief Executive Officer CATHERINE N. WYLIE Senior Executive Vice President - Chief Financial Officer and Chief Operations Officer ROBERT V. NEW Executive Vice President - Chief Banking Officer DAVID R. GRAHAM Executive Vice President - Commercial Real Estate Lending WALTER A. PAWKETT Executive Vice President - Commercial Lending - Rio Grande Valley H. EDWARD SELKE, JR. Executive Vice President - Chief Credit Officer MICHAEL TURNER Executive Vice President - Commercial Lending COASTAL A HISTORICAL PERSPECTIVE Coastal was acquired by an investor group in 1986 as a vehicle to take advantage of the failures and consolidation in the Texas banking and thrift industries. At February 28, 1986 (the date of the change in ownership), Coastal had one full service office and total assets of approximately $10.7 million. In May 1988, Coastal became the first acquirer of failed or failing savings institutions under the Federal government's "Southwest Plan." In this transaction, Coastal acquired from the Federal Savings and Loan Insurance Corporation, as receiver for four insolvent savings associations, 14 additional branch offices and approximately $543.4 million of assets and assumed $543.4 million in deposits and other liabilities. Since completion of the Southwest Plan acquisition and through 2002, Coastal entered into seven branch acquisitions and one whole bank acquisition: two with an instrumentality of the Federal government and six with private institutions. In each transaction, Coastal agreed to acquire certain assets in consideration of the assumption of certain deposit liabilities. In 1996, Coastal also exchanged three branches for one resulting in a net deposit increase of $26.0 million and sold one branch in separate transactions. In 2002, Coastal sold five branches with $75.3 million in deposits. All of these transactions resulted in the net assumption of $1.8 billion of deposits and the net acquisition of 53 branch offices. Coastal has also opened seven de novo branches since inception. Coastal has been able to achieve operating economies and improve efficiency by closing an aggregate of 18 branch offices and transferring the deposits to other offices located in the same market area. At December 31, 2002, Coastal had total assets of approximately $2.5 billion and total deposits of approximately $1.6 billion with 43 branch offices in metropolitan Houston, Austin, Corpus Christi, the Rio Grande Valley and small cities in the southeast quadrant of Texas. Independent Auditors' Report ---------------------------- The Board of Directors Coastal Bancorp, Inc.: We have audited the accompanying consolidated statements of financial condition of Coastal Bancorp, Inc. and subsidiaries as of December 31, 2002 and 2001 and the related consolidated statements of income, comprehensive income, stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 2002. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial condition of Coastal Bancorp, Inc. and subsidiaries at December 31, 2002 and 2001 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2002 in conformity with accounting principles generally accepted in the United States of America. As discussed in notes 2 and 8 to the consolidated financial statements, the Company changed its method of accounting for goodwill and other intangibles in 2002. /s/ KPMG LLP -------------- January 24, 2003 Houston, Texas
COASTAL BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION DECEMBER 31, 2002 AND 2001 (IN THOUSANDS, EXCEPT SHARE DATA) ASSETS 2002 2001 ------------------------------------------------------------- ---------- ---------- Cash and cash equivalents $ 39,766 $ 41,537 Federal funds sold (Note 4) 27,755 16,710 Loans receivable held for sale (Note 6) 49,886 -- Loans receivable, net (Notes 6 and 12) 1,812,785 1,863,601 Mortgage-backed securities available-for-sale, at fair value (Notes 5, 12, 13, and 16) 475,022 514,068 Other securities available-for-sale, at fair value 1,788 42,827 Accrued interest receivable (Note 7) 9,781 13,243 Property and equipment (net of accumulated depreciation and amortization of $26,050 in 2002 and $23,779 in 2001) 27,341 27,461 Stock in the Federal Home Loan Bank of Dallas ("FHLB") 41,221 40,032 Goodwill (Note 8) 21,429 21,811 Prepaid expenses and other assets (Notes 9, 10, 16 and 18) 19,370 16,601 ---------- ---------- Total assets $2,526,144 $2,597,891 ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY --------------------------------------- Liabilities: Deposits (Note 11) $1,614,368 $1,660,386 Advances from the FHLB (Note 12) 696,085 690,877 Company obligated mandatorily redeemable 9.0% trust preferred securities of Coastal Capital Trust I (Note 14) 50,000 -- Senior Notes payable (Note 15) -- 43,875 Advances from borrowers for taxes and insurance 2,407 4,259 Other liabilities and accrued expenses 10,399 12,310 --------- ---------- Total liabilities 2,373,259 2,411,707 --------- ---------- Minority interest - 9.0% noncumulative preferred stock of Coastal Banc ssb (Note 21) -- 28,750 Commitments and contingencies (Notes 6, 16, 19 and 24) Stockholders' equity (Notes 5, 21, 22 and 23): 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; 7,867,029 shares issued and 5,141,010 shares outstanding at December 31, 2002; 7,835,178 shares issued and 5,835,178 shares outstanding at December 31, 2001 79 78 Additional paid-in capital 35,736 35,366 Retained earnings 141,986 127,425 Accumulated other comprehensive income (loss) - net unrealized gain (loss) on securities available-for-sale 619 (1,590) Treasury stock at cost (2,726,019 shares in 2002 and 2,000,000 shares in 2001) (53,035) (31,345) ----------- ----------- Total stockholders' equity 152,885 157,434 ----------- ----------- Total liabilities and stockholders' equity $2,526,144 $2,597,891 ========== ==========
See accompanying notes to Consolidated Financial Statements.
COASTAL BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 (IN THOUSANDS, EXCEPT PER SHARE DATA) 2002 2001 2000 --------- --------- -------- Interest income: Loans receivable $118,970 $155,214 $168,105 Mortgage-backed securities 17,114 52,873 64,246 FHLB stock, federal funds sold and other interest-earning assets 1,539 2,525 4,922 --------- --------- -------- 137,623 210,612 237,273 --------- --------- -------- Interest expense: Deposits 39,825 69,828 73,216 Advances from the FHLB 20,173 38,917 58,328 Other borrowed money -- 10,682 16,671 Company obligated mandatorily redeemable 9.0% trust preferred securities of Coastal Capital Trust I 2,400 -- -- Senior Notes payable 378 4,588 4,690 --------- --------- -------- 62,776 124,015 152,905 --------- --------- -------- Net interest income 74,847 86,597 84,368 Provision for loan losses (Note 6) 5,800 3,900 5,790 --------- --------- -------- Net interest income after provision for loan losses 69,047 82,697 78,578 --------- --------- -------- Noninterest income: Service charges on deposit accounts 9,894 7,803 6,965 Loan fees 1,148 1,248 1,247 Gain on sale of branch offices (Note 3) 4,395 -- -- Gain on sale of loans receivable 359 -- -- Gain on sale of mortgage servicing rights -- -- 2,172 Gain on sale of mortgage-backed securities available-for-sale -- 169 -- Loss on derivative instruments (12) (422) -- Gain on sale of real estate owned, net 117 819 198 Other 1,308 1,526 1,442 --------- --------- -------- 17,209 11,143 12,024 --------- --------- -------- Noninterest expense: Compensation, payroll taxes and other benefits 31,914 30,785 29,187 Office occupancy 10,044 10,913 10,997 Data processing 1,691 3,008 3,325 Amortization of goodwill (Note 8) -- 2,800 3,025 Advertising 1,953 1,434 1,315 Postage and delivery 1,654 1,501 1,368 Other 8,637 8,038 8,978 --------- --------- -------- 55,893 58,479 58,195 --------- --------- -------- Income before provision for Federal income taxes, minority interest and cumulative effect of accounting change 30,363 35,361 32,407 Provision for Federal income taxes (Note 18) 9,140 10,867 9,895 --------- --------- -------- Income before minority interest and cumulative effect of accounting change 21,223 24,494 22,512 Minority interest - preferred stock dividends of Coastal Banc ssb (Note 21) 1,507 2,588 2,588 --------- --------- -------- Income before cumulative effect of accounting change 19,716 21,906 19,924 Cumulative effect of accounting for derivative instruments (Note 16) -- (104) -- --------- --------- -------- Net income $ 19,716 $ 21,802 $ 19,924 ========= ========= ======== Net income available to common stockholders $ 17,208 $ 19,294 $ 17,416 ========= ========= ======== Basic earnings per common share before cumulative effect of accounting change $ 3.13 $ 3.36 $ 2.94 ========= ========= ======== Basic earnings per common share (Notes 8 and 23) $ 3.13 $ 3.34 $ 2.94 ========= ========= ======== Diluted earnings per common share before cumulative effect of accounting change $ 2.99 $ 3.19 $ 2.87 ========= ========= ======== Diluted earnings per common share (Notes 8 and 23) $ 2.99 $ 3.17 $ 2.87 ========= ========= ========
See accompanying notes to Consolidated Financial Statements. COASTAL BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 (IN THOUSANDS)
2002 2001 2000 ------- ------- -------- Net income $19,716 $21,802 $19,924 Other comprehensive income (loss), net of tax: Change in net unrealized gains (losses) on securities available-for- sale, net of reclassification adjustment and tax effects (Note 5) 2,209 277 (19) ------- ------- -------- Comprehensive income $21,925 $22,079 $19,905 ======= ======= ========
See accompanying notes to Consolidated Financial Statements.
COASTAL BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 (IN THOUSANDS) Accumulated Additional other Preferred Common paid-in Retained comprehensive Treasury Stock Stock capital earnings income (loss) stock Total ---------- ------- ----------- ---------- --------------- ---------- --------- Balance - December 31, 1999 $ 27,500 $ 76 $ 32,683 $ 95,508 $ (1,848) $ (20,463) $133,456 Dividends on Preferred Stock (Note 22) -- -- -- (2,508) -- -- (2,508) Dividends on Common Stock (Note 22) -- -- -- (2,130) -- -- (2,130) Exercise of stock options (Note 19) -- 1 629 -- -- -- 630 Purchase of treasury stock at cost (Note 22) -- -- -- -- -- (10,882) (10,882) Change in net unrealized gain (loss) on securities available-for-sale (Note 5) -- -- -- -- (19) -- (19) Net income for 2000 -- -- -- 19,924 -- -- 19,924 ------ ---- ------ ------- ------- ------- -------- Balance - December 31, 2000 27,500 77 33,312 110,794 (1,867) (31,345) 138,471 Dividends on Preferred Stock (Note 22) -- -- -- (2,508) -- -- (2,508) Dividends on Common Stock (Note 22) -- -- -- (2,663) -- -- (2,663) Exercise of stock options (Note 19) -- 1 2,054 -- -- -- 2,055 Change in net unrealized gain (loss) on securities available-for-sale, net of reclassification adjustment and tax effects (Note 5) -- -- -- -- 277 -- 277 Net income for 2001 -- -- -- 21,802 -- -- 21,802 ------ ---- ------ ------- ------- ------- -------- Balance - December 31, 2001 27,500 78 35,366 127,425 (1,590) (31,345) 157,434 Dividends on Preferred Stock (Note 22) -- -- -- (2,508) -- -- (2,508) Dividends on Common Stock (Note 22) -- -- -- (2,647) -- -- (2,647) Exercise of stock options (Note 19) -- 1 325 -- -- -- 326 Purchase of treasury stock at cost (Note 22) -- -- -- -- -- (21,753) (21,753) Issuance of treasury shares -- -- 45 -- -- 63 108 Change in net unrealized gain (loss on securities available-for-sale (Note 5) -- -- -- -- 2,209 -- 2,209 Net income for 2002 -- -- -- 19,716 -- -- 19,716 ------ ---- ------ ------- ------- ------- -------- Balance - December 31, 2002 $ 27,500 $ 79 $ 35,736 $ 141,986 $ 619 $ (53,035) $152,885 ======= ==== ======= ======= ======= ======== ======== See accompanying notes to Consolidated Financial Statements. COASTAL BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 (IN THOUSANDS) 2002 2001 2000 ---------- ---------- ---------- Cash flows from operating activities: Net income $ 19,716 $ 21,802 $ 19,924 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of property and equipment, mortgage servicing rights and prepaid expenses and other assets 8,714 8,325 9,601 Net premium amortization (discount accretion) 4,583 (3,115) 349 Provision for loan losses 5,800 3,900 5,790 Amortization of goodwill -- 2,800 3,025 Originations and purchases of loans receivable held for sale (67,300) (20,550) (25,461) Sales of loans receivable held for sale 22,858 20,723 25,618 Gain on sale of branch offices (4,395) -- -- Gain on sale of loans receivable (359) -- -- Gain on sale of mortgage servicing rights -- -- (2,172) Loss on derivative instruments 12 582 -- Gain on sale of mortgage-backed securities available-for-sale -- (169) -- Decrease (increase) in: Accrued interest receivable 3,462 5,529 (2,622) Other, net (1,088) (37,242) 32,212 Stock dividends from the FHLB (1,189) (1,973) (4,603) ---------- --------- --------- Net cash provided by (used in) operating activities (9,186) 612 61,661 ---------- --------- --------- Cash flows from investing activities: Net change in federal funds sold (11,045) (15,841) (869) Purchases of mortgage-backed securities held-to-maturity -- -- (4,815) Purchase of mortgage-backed securities available-for-sale (112,579) (512,267) -- Purchase of U.S. Treasury securities held-to-maturity -- -- (1,493) Purchase of other securities available-for-sale (1,786) (43,064) -- Principal repayments on mortgage-backed securities held-to-maturity -- 73,725 36,326 Principal repayments on mortgage-backed securities available-for-sale 151,880 59,986 4,940 Proceeds from maturity of U.S. Treasury securities held-to-maturity -- 1,500 300 Proceeds from maturity of other securities available-for-sale 42,500 -- -- Proceeds from sales of mortgage-backed securities available-for-sale -- 844,918 -- Purchases of loans receivable (421,371) (250,945) (236,970) Sale of loans receivable 84,241 -- -- Other changes in loans receivable 367,971 277,918 66,032 Purchases of property and equipment, net (3,908) (3,781) (2,340) Purchase of FHLB stock -- (28,485) (35,649) Proceeds from sales of FHLB stock -- 48,431 39,000 Proceeds from sale of mortgage servicing rights -- -- 5,001 Sale of branch offices (70,127) -- -- ---------- --------- --------- Net cash provided by (used in) investing activities 25,776 452,095 (130,537) ---------- --------- ---------
COASTAL BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED (IN THOUSANDS) 2002 2001 2000 ------------- ------------ ------------ Cash flows from financing activities: Net change in deposits $ 29,257 $ (14,540) $ 50,826 Advances from the FHLB 22,097,904 8,031,619 9,567,857 Principal payments on advances from the FHLB (22,092,696) (8,491,047) (9,514,483) Proceeds from securities sold under agreements to repurchase and federal funds purchased -- 3,591,744 2,418,869 Repayments of securities sold under agreements to repurchase and federal funds purchased -- (3,591,744) (2,418,869) Proceeds from issuance of 9.0% Trust Preferred Securities 48,125 -- -- Redemption or repurchase of Senior Notes payable (43,875) (3,025) -- Redemption of Coastal Banc ssb 9.0% Noncumulative Preferred Stock (28,750) -- -- Net increase (decrease) in advances from borrowers for taxes and insurance (1,852) (791) 1,198 Exercise of stock options for purchase of Common Stock 326 2,055 630 Purchase of treasury stock (21,753) -- (10,882) Issuance of treasury shares 108 -- -- Dividends paid (5,155) (5,171) (4,638) ---------- --------- --------- Net cash provided by (used in) financing activities (18,361) (480,900) 90,508 ---------- --------- --------- Net increase (decrease) in cash and cash equivalents (1,771) (28,193) 21,632 Cash and cash equivalents at beginning of year 41,537 69,730 48,098 ---------- --------- --------- Cash and cash equivalents at end of year $ 39,766 $ 41,537 $ 69,730 =========== ========== =========== Supplemental schedule of cash flows: Interest paid $ 64,400 $ 126,730 $ 153,413 Income taxes paid 12,977 13,113 5,392 Supplemental schedule of noncash investing and financing activities: Net transfer of loans to held for sale category $ 8,749 $ -- $ -- Real estate owned acquired through foreclosure of loans receivable 6,260 5,450 3,672 Net transfer of mortgage-backed securities to available-for-sale category -- 811,748 --
See accompanying notes to Consolidated Financial Statements. COASTAL BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2002 and 2001 (1) ORGANIZATION AND BACKGROUND Coastal Banc Savings Association (the "Association") was acquired by an investor group in 1986 as a vehicle to take advantage of the failures and consolidation in the Texas banking and thrift industries. The Association acquired deposits in transactions with the federal government and other private institutions as a base for developing an ongoing thrift and banking business. The Association's first acquisition was in 1988 under the Federal Savings and Loan Insurance Corporation's ("FSLIC") Southwest Plan, whereby the FSLIC provided financial and other forms of assistance in connection with the acquisition of insolvent FSLIC-insured institutions (the "Acquired Associations"). Coastal Bancorp, Inc. ("Bancorp") was incorporated on March 8, 1994 as a first-tier subsidiary of the Association in connection with the proposed reorganization of the Association into the holding company form of organization. The reorganization of the Association into the holding company form of organization occurred on July 29, 1994. In addition, effective July 29, 1994, the Association converted to a Texas-chartered savings bank known as Coastal Banc ssb. On November 30, 1996, Coastal Banc Holding Company, Inc. ("HoCo") was created as a Delaware unitary savings bank holding company in accordance with the terms of an agreement and plan of reorganization dated August 19, 1996 (the "Agreement"). Pursuant to the terms of the Agreement, Coastal Banc ssb became a subsidiary of HoCo and HoCo became a wholly-owned subsidiary of Bancorp. The reorganizations were accounted for in a manner similar to that in pooling-of-interests accounting and all financial statements issued after consummation of the reorganization reflect the consolidated operations as if the reorganization had taken place prior to the periods covered by such consolidated financial statements. Coastal Banc ssb is a financial services provider to consumers and businesses. At December 31, 2002, Coastal Banc ssb operated 43 branch offices in metropolitan Houston, Austin, Corpus Christi, the Rio Grande Valley and small cities in the southeast quadrant of Texas. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION The following significant accounting policies, together with those disclosed elsewhere in the Consolidated Financial Statements or notes thereto, are followed by Coastal Bancorp, Inc. and subsidiaries in preparing and presenting the consol-idated financial statements. BASIS OF CONSOLIDATED FINANCIAL STATEMENTS The consolidated financial statements include the accounts of Coastal Bancorp, Inc., its wholly-owned subsidiaries, HoCo, its wholly-owned subsidiaries, and Coastal Capital Trust I (collectively, "Coastal"). HoCo'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. Certain amounts within the accompanying consolidated financial statements and the related notes have been reclassified to conform to the current year presentation. Such reclassifications had no effect on net income or total stockholders' equity as previously reported. USE OF ESTIMATES The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of income and expenses during the reporting period. Actual results may differ from those estimates. CASH AND CASH EQUIVALENTS Cash and cash equivalents are comprised primarily of cash on hand and interest-earning and noninterest-earning deposits in other banks with original maturities of three months or less. LOANS RECEIVABLE Loans receivable are stated at the principal balance outstanding adjusted for loans in process, the allowance for loan losses, unearned interest and loan fees and the premium on purchased loans. Interest on loans receivable is primarily computed on the outstanding principal balance at appropriate rates of interest. The net premium or discount on purchased loans is being amortized or accreted using the level yield method, adjusted for prepayments. Periodically, loans receivable may be transferred to the held for sale category. When moved, the loan is recorded in the held for sale category at the lower of cost or market with any writedowns to market value recorded as a charge-off to the allowance for loan losses. If a loan is moved from the held for sale category to the loans receivable portfolio, the loan is moved at the current carrying value of the loan. It is the general policy of Coastal to stop accruing interest income and place the recognition of interest on a cash basis when any loan is past due more than 90 days as to principal and interest. However, other factors may cause management to continue to accrue interest on such loans. When a loan is placed on nonaccrual, any interest previously accrued but not collected is reversed against current interest income. Coastal considers a loan to be impaired when, based upon current information and events, it is probable that Coastal will be unable to collect all amounts due according to the contractual terms of the loan agreement. In determining impairment, Coastal considers, among other things, large non-homogeneous loans which may include nonaccrual loans or troubled debt restructurings, and performing loans which exhibit, among other characteristics, high loan-to-value ratios, low debt coverage ratios, or indications that the borrowers are experiencing increased levels of financial difficulty. Coastal bases the measurements of collateral-dependent impaired loans on the fair value of that collateral. The amount by which the recorded investment in the loan exceeds the measure of the fair value of the collateral securing the loan is recognized by recording a valuation allowance. Larger groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, Coastal does not separately identify individual consumer and residential loans for impairment disclosures. ALLOWANCE FOR LOAN LOSSES The allowance for loan losses is maintained at a level determined to be adequate by management to absorb probable losses on loans receivable. The adequacy of the allowance is based on management's evaluation of the type, size, quality and risks of the loans in the loans receivable portfolio and its consideration of such factors as historical and peer group loss experience, identification of adverse situations which may affect the ability of borrowers to repay, assessment of current and future economic conditions and the estimated net realizable value of the underlying collateral. This evaluation is inherently subjective, as it requires material estimates that are susceptible to significant change. While management uses available information to estimate losses on loans receivable, future additions to the allowance may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review Coastal's allowance for loan losses. Such agencies may require Coastal to recognize additions to the allowance based on their judgments about information available to them at the time of their examination. SALES OF LOANS RECEIVABLE Loans are sold periodically to institutional and private investors. When Coastal sells whole mortgage loans, it may retain the right to service the loans. Gains or losses on such sales are recognized at the time of sale and depend, in part, on the previous carrying amount of the assets involved in the sale, allocated between the assets sold and the retained interests based on their relative fair value at the date of transfer. LOANS RECEIVABLE HELD FOR SALE Loans receivable held for sale are carried at the lower of cost or market as determined by outstanding commitments from investors or current investor market yield requirements calculated on the aggregate loan basis. LOAN FEES Loan origination and commitment fees, as well as certain direct loan origination and commitment costs, are deferred and amortized into income over the lives of the related loans using a method that approximates the level yield method. When the loans receivable are paid off or sold, the remaining loan fees are recognized as income in that period. MORTGAGE-BACKED AND OTHER SECURITIES Coastal classifies securities as held-to-maturity, available-for-sale or trading. Securities are classified as held-to-maturity when Coastal has the positive intent and ability to hold such securities to maturity. Securities held-to-maturity are recorded at amortized cost. Securities available-for-sale are securities other than those held-to-maturity or trading and are recorded at fair value, with unrealized gains and losses excluded from earnings and recorded net of tax as other comprehensive income (loss) in stockholders' equity until realized. Realized gains and losses on securities classified as available-for-sale are recorded in earnings in the year of sale based on the specific identification of each individual security sold. Trading securities are carried at fair value with any realized or unrealized gains or losses recognized in current earnings. Coastal held no trading account securities at December 31, 2002 or 2001. Coastal records mortgage-backed and other securities transactions as of the settlement date. There were no pending transactions as of December 31, 2002 or 2001. Premiums and discounts on mortgage-backed and other securities are amortized or accreted as a yield adjustment over the life of the securities using the interest method, with the amortization or accretion being adjusted when the prepayments are received. PROPERTY AND EQUIPMENT Property and equipment are recorded at cost less accumulated depreciation and amortization. Coastal computes depreciation and amortization on a straight-line basis over the estimated useful lives (15-30 years for buildings and 2-10 years for furniture and equipment) of the respective assets. Leasehold improvements are amortized on a straight-line basis over the lesser of the terms of the respective lease or the estimated useful lives of the related assets. STOCK IN THE FEDERAL HOME LOAN BANK OF DALLAS As a member of the FHLB System, Coastal is required to purchase and maintain stock in the FHLB in an amount equal to the greater of 1% of the aggregate unpaid balance of loans and securities secured by single family and multi-family properties, 0.3% of total assets, or 5% of total FHLB advances. FHLB stock is redeemable at par value at the discretion of the FHLB. 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 Statement 142, were not subject to non-amortization provisions. 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 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. 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. In years 2001 and prior, goodwill resulting from acquisitions was amortized on a straight-line basis over the estimated period of benefit, not to exceed fifteen years. During these years, Coastal evaluated the recorded goodwill amounts for impairment to determine whether events and circumstances had developed to warrant revision of the estimated benefit periods. MORTGAGE SERVICING RIGHTS The amount capitalized as mortgage servicing rights is amortized in proportion to, and over the period of, estimated net servicing revenues. Coastal periodically evaluates the carrying value of the mortgage servicing rights for impairment based on the fair value of those rights. The fair value of mortgage servicing rights is determined by discounting the present value of the estimated future net servicing revenues using a discount rate commensurate with the risks involved based on management's best estimate of remaining loan lives. This method of valuation incorporates assumptions that market participants would use in their estimate of future servicing income and expense, including assumptions about prepayments, defaults and interest rates. For purposes of measuring impairment, the loans underlying the mortgage servicing rights are stratified on the basis of interest rate and type (fixed or adjustable). The amount of impairment is the amount by which the mortgage servicing rights, net of accumulated amortization, exceed their fair value by strata. Impairment, if any, is recognized through a valuation allowance and a charge to current operations. REAL ESTATE OWNED Real estate owned represents real estate acquired through foreclosure and is initially recorded at the lower of unpaid principal balance adjusted for any acquisition premiums or discounts remaining less any applicable valuation allowance or estimated fair value less estimated selling costs. Subsequent to foreclosure, real estate owned is carried at the lower of the new cost basis or fair value, with any further declines in fair value charged to operations. FEDERAL INCOME TAXES Coastal files a consolidated federal income tax return with all of its subsidiaries. Federal income taxes are allocated on the basis of each entity's contribution to consolidated taxable income. Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. DERIVATIVE INSTRUMENTS USED FOR INTEREST RATE RISK MANAGEMENT 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 and interest rate cap agreements. Effective January 1, 2001, Coastal adopted Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and for Hedging Activities" ("Statement 133"). Statement 133 requires companies to recognize all derivatives as either assets or liabilities in the statement of financial condition and measure all derivatives at fair value. The interest rate swap and cap agreements held by Coastal on December 31, 2000 were determined to not qualify for hedge accounting, therefore on implementation of Statement 133, Coastal recorded a transition adjustment to record these derivative instruments at fair value. See Note 16. Prior to the adoption of Statement 133 (in years 2000 and prior), the fair values of any derivative instruments were not recognized in the consolidated financial statements. STOCK OPTIONS Statement of Financial Accounting Standards No. 148 ("Statement 148") "Accounting for Stock-Based Compensation - Transition and Disclosure" was issued in December 2002. Statement 148 amends Financial Accounting Standards Board Statement No. 123 "Accounting for Stock-Based Compensation" ("Statement 123") to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, Statement 148 amends the disclosure requirements of Statement 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. Coastal has adopted the disclosure provisions included in Statement 148 in the notes to the consolidated financial statements for the years ended December 31, 2002, 2001 and 2000 contained herein. As provided by Statement 123, Coastal accounts for its stock compensation programs in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. Under this method, no stock-based compensation expense is reflected in net income, as all options granted had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share as if Coastal had applied the fair value recognition provisions of Statement 123 as amended by Statement 148.
Year Ended December 31, 2002 2001 2000 ---------- ------- -------- (In thousands, except per share data) Net income available to common stockholders, as reported $ 17,208 $19,294 $17,416 Deduct: Total stock-based compensation expense determined under the fair value based method for all awards, net of related tax effects (425) (463) (626) ---------- -------- -------- Proforma net income available to common stockholders $ 16,783 $18,831 $16,790 ========== ======== ======== Earnings per common share: Basic - as reported $ 3.13 $ 3.34 $ 2.94 ========== ======== ======== Basic - proforma $ 3.06 $ 3.26 $ 2.84 ========== ======== ======== Diluted - as reported $ 2.99 $ 3.17 $ 2.87 ========== ======== ======== Diluted - proforma $ 2.92 $ 3.10 $ 2.77 ========== ======== ========
EARNINGS PER COMMON SHARE Basic earnings per common share ("EPS") is calculated by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period. The computation of diluted EPS assumes the issuance of common shares for all dilutive-potential common shares outstanding during the reporting period. The dilutive effect of stock options is considered in earnings per common share calculations, if dilutive, using the treasury stock method. CONSOLIDATED STATEMENTS OF CASH FLOWS For purposes of reporting cash flows, cash and cash equivalents include cash and amounts due from depository institutions with original maturities of three months or less. RECENT ACCOUNTING PRONOUNCEMENTS Statement of Financial Accounting Standards No. 140 ("Statement 140"), "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," replaced Statement of Financial Accounting Standards No. 125 ("Statement 125"), "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," but carried over most of Statement 125's provisions without change. Statement 140 elaborates on the qualifications necessary for a special-purpose entity, clarifies sales accounting criteria in certain circumstances, refines accounting for collateral and adds disclosures for collateral, securitizations and retained interests in securitized assets. Statement 140 was effective for transactions occurring after March 31, 2001. The adoption of Statement 140 did not have a material impact on Coastal. 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 t hat 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 as of January 1, 2002, and did not have a material effect on Coastal's Consolidated Financial Statements. Coastal adopted Statements 141, 142 and 147 effective January 1, 2002. See Note 8. Statement 148 "Accounting for Stock-Based Compensation - Transition and Disclosure" was issued in December 2002. Statement 148 amends Statement 123 to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, Statement 148 amends the disclosure requirements of Statement 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. Coastal has adopted the disclosure provisions included in Statement 148 in the notes to the consolidated financial statements for the years ended December 31, 2002, 2001 and 2000 contained herein. In January 2003, the Financial Accounting Standards Board directed its staff to prepare a ballot draft of Statement No. 149, "Accounting for Certain Financial Instruments with Characteristics of Liabilities and Equity" ("Statement 149"). When issued, Statement 149 will establish standards for issuers' classification as liabilities in the statement of financial condition certain financial instruments that have characteristics of both liabilities and equity. The final Statement 149 is expected to be issued in the first quarter of 2003 and will be effective upon issuance for all contracts created or modified after the date the statement is issued and otherwise effective at the beginning of the first interim period beginning after June 15, 2003. Statement 149 will be effected by reporting the cumulative effect of a change in accounting principle for contracts created before the issuance date and still existing at the beginning of that interim period. The adoption of Statement 149 when issued is not expected to have a material effect on Coastal's Consolidated Financial Statements. (3) SALE OF BRANCH OFFICES On December 12, 2002, Coastal consummated the sale of five of its branches in Central Texas (located in Llano, Burnet, Mason, Kingsland and Marble Falls, Texas) to First State Bank Central Texas. As a result of this sale, Coastal recorded a $4.4 million gain before applicable income taxes. Coastal acquired these locations in the 1994 acquisition of Texas Trust Savings Bank, FSB. In connection with the sale of these branch offices, Coastal recorded the following reductions of assets and liabilities (in thousands): Deposits sold $75,275 Accrued interest payable sold 128 Property and equipment sold 443 Reduction of goodwill 382 Other assets sold 368 (4) FEDERAL FUNDS SOLD An analysis of federal funds sold for the years ended December 31, 2002, 2001 and 2000 is as follows (dollars in thousands):
2002 2001 2000 -------- -------- -------- Federal funds sold: Balance outstanding at December 31, $27,755 $16,710 $ 869 Maximum outstanding at any month-end 38,980 17,011 10,000 Average balance outstanding 9,337 7,776 3,042 Average interest rate 1.62% 3.42% 6.38%
(5) MORTGAGE-BACKED SECURITIES AVAILABLE-FOR-SALE Mortgage-backed securities available-for-sale at December 31, 2002 are as follows (dollars in thousands):
Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ---------- ----------- ------------ -------- Agency securities $ 387,636 $ 1,983 $ (470) $389,149 CMOs - Non-agency 84,376 67 (644) 83,799 Non-agency securities 2,060 14 -- 2,074 ---------- ----------- ------------ -------- $ 474,072 $ 2,064 $ (1,114) $475,022 ========== =========== ============ ========
Mortgage-backed securities available-for-sale at December 31, 2001 are as follows (in thousands):
Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ---------- ----------- ------------ -------- 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 and sold $845 million of its mortgage-backed securities. Also in November, Coastal used a portion of the proceeds of the sale to purchase approximately $512 million of primarily pass-thru mortgage-backed securities. All of the securities purchased and the remaining securities not sold were placed in the available-for-sale category. Proceeds from sales of mortgage-backed securities available-for-sale during 2001 were $844.9 million. Gross gains of $2.5 million and gross losses of $2.3 million were realized on those sales in 2001. There were no sales of mortgage-backed securities available-for-sale during 2002 or 2000. A portion of Coastal's mortgage-backed securities portfolio is pledged as collateral to secure advances from the FHLB. See Note 12. (6) LOANS RECEIVABLE Loans receivable at December 31, 2002 and 2001 are as follows (dollars in thousands):
2002 2001 ----------- ----------- Real estate mortgage loans: First lien mortgage, primarily residential $ 855,633 $ 880,624 Commercial 317,692 319,377 Multifamily 116,020 124,616 Residential construction 123,085 136,035 Acquisition and development 143,463 140,009 Commercial construction 241,128 222,026 Commercial loans, secured by residential mortgage loans held for sale -- 11,508 Commercial, financial and industrial 135,209 116,029 Loans secured by deposits 14,465 21,238 Consumer and other loans 33,430 43,384 ----------- ----------- 1,980,125 2,014,846 ----------- ----------- Loans in process (147,769) (131,064) Allowance for loan losses (18,118) (15,385) Unearned interest and loan fees (2,910) (2,959) Premium (discount) on purchased loans, net 1,457 (1,837) ----------- ----------- $1,812,785 $1,863,601 ========== =========== Weighted average yield 5.52% 6.90% ========== ===========
In the normal course of business, Coastal enters into various transactions which, in accordance with accounting principles generally accepted in the United States of America, are not included on the balance sheets. These transactions are referred to as "off-balance sheet commitments." Coastal enters into these transactions to meet the financing needs of its customers. These transactions include commitments to extend credit which involve elements of credit risk in excess of the amounts recognized in the balance sheets. Coastal minimizes its exposure to loss under these commitments by subjecting them to credit approval and monitoring procedures. Coastal enters into contractual commitments to extend credit, normally with fixed expiration dates or termination clauses, at specified rates and for specific purposes. Customers use credit commitments to ensure that funds will be available for working capital purposes, for capital expenditures and to ensure access to funds under specified terms and conditions. Substantially all of Coastal's commitments to extend credit are contingent upon customers maintaining specific credit standards at the time of loan funding. Management assesses the credit risk associated with certain commitments to extend credit in determining the level of the allowance for loan losses. At December 31, 2002, Coastal had outstanding commitments to originate or purchase approximately $26.5 million of first lien mortgage and other loans and had commitments under lines of credit to originate primarily construction and other loans of approximately $146.1 million. In addition, at December 31, 2002, Coastal had letters of credit of approximately $14.2 million outstanding. A portion of Coastal's first lien and multifamily mortgage loan portfolio is pledged as collateral to secure advances from the FHLB. See Note 12. Included in loans receivable at December 31, 2002 and 2001 are loans totaling approximately $17.8 million and $23.9 million, respectively, which are on nonaccrual (loans which are 90 days or more delinquent or on which the collection of interest is considered doubtful). During the years ended December 31, 2002, 2001 and 2000, Coastal recognized interest income on these nonaccrual loans (outstanding as of the period end) of approximately $632,000, $811,000 and $706,000, respectively, whereas approximately $745,000, $1.4 million and $1.2 million, respectively, in additional interest income would have been recorded if such loans had been performing in accordance with their original terms. At December 31, 2002 and 2001, the carrying value of impaired loans was approximately $8.5 million and $3.8 million, respectively, and the related allowance for loan losses on those impaired loans totaled $2.4 million and $554,000, respectively. Of the impaired loans outstanding, eight loans with a balance of $551,000 at December 31, 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 years ended December 31, 2002, 2001 and 2000 was approximately $3.8 million, $4.4 million and $3.5 million, respectively. For the years ended December 31, 2002, 2001 and 2000, Coastal did not recognize interest income on loans considered impaired. An analysis of activity in the allowance for loan losses is as follows (in thousands):
Years ended December 31, ---------------------------- 2002 2001 2000 -------- -------- -------- Balance, beginning of year $15,385 $14,507 $10,493 Provision for loan losses 5,800 3,900 5,790 Charge-offs (3,878) (4,073) (2,174) Recoveries 811 1,051 398 ------- ------- ------- Balance, end of year $18,118 $15,385 $14,507 ======= ======= =======
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 December 31, 2002, Coastal had reclassified the remaining $3.0 million of these loans held for sale back to the loans receivable portfolio at their current carrying value. During the fourth quarter of 2002, management decided to liquidate a group of loans that were acquired in three separate transactions. In December 2002, Coastal sold $74.4 million of these loans to a third party investor (some of these loans were sold servicing retained). Prior to the sale, Coastal wrote these loans down to fair value and recorded a charge-off to the allowance for loan losses of $277,000. In connection with this sale, Coastal recorded a gain of $359,000 on the sale of these loans as a result of Coastal recognizing the estimated fair value of the mortgage servicing rights retained. In addition, as of December 31, 2002, Coastal wrote down to fair value and reclassified $2.6 million of additional loans, which are under a contract for sale, 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 December 31, 2002 through a charge-off to the allowance for loan losses of $32,000. (7) ACCRUED INTEREST RECEIVABLE Accrued interest receivable at December 31, 2002 and 2001 is as follows (in thousands):
2002 2001 ------ ------- Loans receivable $7,946 $ 9,894 Mortgage-backed securities 1,807 2,474 FHLB stock, federal funds sold and other interest-earning assets 28 875 ------ ------- $9,781 $13,243 ====== =======
(8) GOODWILL On January 1, 2002, Coastal adopted Statement 141. 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 72 to other intangible assets, as those amounts, under Statement 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 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 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 periods prior to the implementation related to the goodwill that is no longer being amortized (in thousands, except per share data).
Years Ended December 31, ------------------------------- 2002 2001 2000 ------------- ------- ------- Net income: As reported $ 19,716 $21,802 $19,924 Add back: goodwill amortization, net of tax -- 2,036 2,248 ------------- ------- ------- As adjusted $ 19,716 $23,838 $22,172 ============= ======= ======= Basic earnings per share: As reported $ 3.13 $ 3.34 $ 2.94 Add back: goodwill amortization, net of tax -- 0.35 0.38 ------------- ------- ------- As adjusted $ 3.13 $ 3.69 $ 3.32 ============= ======= ======= Diluted earnings per share: As reported $ 2.99 $ 3.17 $ 2.87 Add back: goodwill amortization, net of tax -- 0.34 0.37 ------------- ------- ------- As adjusted $ 2.99 $ 3.51 $ 3.25 ============= ======= =======
(9) MORTGAGE SERVICING RIGHTS Effective March 31, 2000, Coastal sold its mortgage servicing rights portfolio and recorded a nonrecurring gain of $2.2 million. Pursuant to a purchase and sale agreement, Coastal sold its rights to service approximately $389.1 million of mortgage loans for third party investors. In December 2002, Coastal sold $70.1 million of mortgage loans with servicing retained and recognized the estimated fair value of those servicing rights retained of $359,000, which is included in prepaid expenses and other assets. As of December 31, 2002, Coastal services for others approximately $68.8 million of such loans which are not included in the consolidated financial statements. An analysis of the activity of mortgage servicing rights for the years ended December 31, 2002 and 2000 is as follows (in thousands):
2002 2000 ----- -------- Balance, beginning of year $ -- $ 3,035 Additions 359 -- Amortization -- (167) Sales of servicing rights -- (2,868) ----- -------- Balance, end of year $ 359 $ -- ===== ========
(10) REAL ESTATE OWNED Included in prepaid expenses and other assets is real estate owned at December 31, 2002 and 2001 of approximately $4.1 million and $4.4 million, respectively. (11) DEPOSITS Deposits, their stated rates and the related weighted average interest rates at December 31, 2002 and 2001 are summarized below (dollars in thousands). Effective January 1, 1998, Coastal implemented a program whereby a portion of the balance of 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 $250.9 million ($131.3 million from noninterest-bearing and $119.6 million from interest-bearing) at December 31, 2002 and $243.3 million ($113.0 million from noninterest-bearing and $130.3 million from interest-bearing) at December 31, 2001.
2002 2001 -------------------------- ---------------------------- Stated Rate Amount Stated Rate Amount -------------- ---------- ------------ ------------ Noninterest-bearing checking 0.00% $ 51,029 0.00% $ 47,712 Interest-bearing checking 0.50 - 1.00 14,353 0.50 - 1.00 15,894 Savings accounts 0.50 - 1.24 44,603 0.50 - 1.24 45,234 Money market demand accounts (including amounts reclassified from noninterest and interest-bearing checking) 0.00 - 2.13 530,659 0.00 - 2.23 505,789 ----------- ----------- 640,644 614,629 ----------- ----------- Certificate accounts Less than 2.00 104,358 Less than 2.00 29,707 2.00 - 2.99 558,337 2.00 - 2.99 171,523 3.00 - 3.99 206,645 3.00 - 3.99 263,006 4.00 - 4.99 63,234 4.00 - 4.99 356,314 5.00 - 5.99 34,447 5.00 - 5.99 155,949 6.00 - 6.99 6,524 6.00 - 6.99 68,979 7.00 - 7.99 106 7.00 - 7.99 209 8.00 - 8.99 73 8.00 - 8.99 70 ----------- ----------- 973,724 1,045,757 ----------- ----------- $1,614,368 $1,660,386 =========== =========== Weighted average rate 2.12% 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 December 31, 2002 and 2001 (in thousands):
December 31, 2002 December 31, 2001 ------------------ ------------------ Noninterest-bearing checking $ 182,290 $ 160,738 Interest-bearing checking 134,034 146,144 Money market demand accounts 279,717 262,513
The scheduled maturities of certificate accounts outstanding at December 31, 2002 were as follows (in thousands):
Year Ending December 31, ------------------------ 2003 $768,407 2004 131,792 2005 35,685 2006 4,513 2007 33,302 Subsequent years 25 -------- $973,724 ========
The aggregate amount of certificate accounts with balances of $100,000 or more was approximately $237.0 million and $248.0 million at December 31, 2002 and 2001, respectively. (12) ADVANCES FROM THE FEDERAL HOME LOAN BANK OF DALLAS Advances from the FHLB for the years ended December 31, 2002, 2001 and 2000 are summarized as follows (dollars in thousands):
2002 2001 2000 --------- ----------- ----------- Balance outstanding at end of year $696,085 $ 690,877 $1,150,305 Average balance outstanding 683,454 795,009 926,659 Maximum outstanding at any month-end 760,139 1,218,145 1,275,541 Average interest rate during the year 2.95% 4.90% 6.29% Average interest rate at end of year 2.71% 3.46% 6.48%
The scheduled maturities and related weighted average interest rates on advances from the FHLB at December 31, 2002 are summarized as follows (dollars in thousands):
Due during the year Weighted Average ending December 31, Interest Rate Amount ------------------- ----------------- -------- 2003 2.49% $302,315 2004 2.56 139,608 2005 2.62 218,368 2006 4.95 9,980 2007 6.67 1,151 2008 5.35 2,378 2009 8.01 3,502 2010 6.73 987 2011 6.54 1,248 2012 5.76 292 2013 5.64 8,259 2014 5.45 2,907 2015 6.66 1,647 2017 5.43 1,993 2018 5.05 1,450 -------- 2.71% $696,085 ================= ========
The FHLB advances are secured by certain first lien and multifamily mortgage loans and mortgage-backed securities with an aggregate carrying value of approximately $700.0 million at December 31, 2002. (13) SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND FEDERAL FUNDS PURCHASED Coastal enters into sales of securities under agreements to repurchase ("reverse repurchase agreements"). Fixed coupon reverse repurchase agreements are treated as financing arrangements, and the obligations to repurchase securities sold are reflected as a liability in the consolidated statements of financial condition. The dollar amounts of securities underlying the agreements are recorded in the respective asset accounts. Coastal did not have any securities sold under agreements to repurchase at December 31, 2002 or 2001. However, securities sold under agreements to repurchase averaged approximately $283.6 million and $249.7 million during 2001 and 2000, respectively, and the maximum outstanding amounts at any month-end during 2001 and 2000 were approximately $493.0 million and $605.2 million, respectively. Federal funds purchased averaged approximately $18,000 during the year ended December 31, 2000. There were no Federal funds purchased outstanding at any time during 2002 or 2001. (14) 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. Distribution 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 distribution 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 of Bancorp 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:CBSAP) through a capital contribution to Coastal Banc ssb. (15) SENIOR NOTES PAYABLE On June 30, 1995, Coastal issued $50.0 million of 10.0% Senior Notes due June 30, 2002. The Senior Notes were redeemable at Coastal's option, in whole or in part, on or after June 30, 2000, at par, plus accrued interest to the redemption date. Interest on the Senior Notes was payable quarterly. On January 28, 1999, the Board of Directors authorized the repurchase, on an unsolicited basis, of the Senior Notes in an amount and on such terms considered appropriate by management. During 2001 and 1999, Coastal repurchased $3.0 and $3.1 million, respectively, of the Senior Notes outstanding at par. On February 1, 2002, (the "Redemption Date"), Coastal redeemed all of its 10.0% Senior Notes outstanding ($43.9 million). The redemption price was par plus accrued interest to the Redemption Date. (16) DERIVATIVE INSTRUMENTS Coastal is a party to derivative instruments in the normal course of business to reduce its exposure to fluctuations in interest rates. These derivative instruments have included interest rate swap agreements where Coastal makes fixed interest payments and receives payments based on a floating index and interest rate cap agreements, as described below. Effective January 1, 2001, Coastal adopted Statement 133 as discussed in Note 2. Statement 133 requires companies to recognize all derivatives as either assets or liabilities in the consolidated statement of financial condition and measure all derivatives at fair value. The interest rate swap and cap agreements held by Coastal on December 31, 2000 were determined to not qualify for hedge accounting, therefore on implementation of Statement 133, Coastal recorded a transition adjustment to record these derivative instruments at fair value. On January 1, 2001, Coastal recorded a transition adjustment loss of $160,000, or $104,000 net of the tax effect, as the cumulative effect of the change in accounting for derivative instruments to record the fair value of Coastal's derivative instruments in the consolidated statements of income. For the year ended December 31, 2001, Coastal recorded an additional fair value loss on these derivative instruments of $422,000. The fair value changes in the derivative instruments during 2001 were primarily attributable to Coastal's interest rate swap agreements, which were totally liquidated in June 2001. As of December 31, 2002, interest rate cap agreements were Coastal's only derivative instruments and were recorded at fair value pursuant to Statement 133. As of December 31, 2002, Coastal has interest rate cap agreements with third parties with notional amounts totaling $107.6 million. The current agreements provide for the third parties to make payments to Coastal whenever a defined floating rate exceeds rates ranging from 8.0% to 9.0%, depending on the agreement. All of Coastal's current agreements expire in 2003. 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 zero at December 31, 2002 and $37,000 at December 31, 2001, which is the recorded book value of the agreements at such dates due to the implementation of Statement 133. The interest rate cap agreements are used to alter the interest rate sensitivity of a portion of Coastal's mortgage-backed securities and loans receivable. As such, the amortization of the purchase price and interest income from the interest rate cap agreements are recorded in "interest income on mortgage-backed securities or loans receivable" as appropriate. The net decrease in interest income related to interest rate cap agreements was approximately $25,000 for each of the years ended December 31, 2002, 2001 and 2000. No payments were made to Coastal under the interest rate cap agreements during the years ended December 31, 2002, 2001 or 2000. Coastal totally liquidated its interest rate swap positions in June of 2001. The interest rate swap agreements previously held by Coastal provided for Coastal to make fixed interest payments and receive payments based on a floating LIBOR index, as defined in each agreement. The weighted average interest rate of payments received on all of the interest rate swap agreements was approximately 4.84% in 2001 and 6.50% in 2000. The weighted average interest rate of payments made on all of the interest rate swap agreements was approximately 5.21% in 2001 and 5.94% in 2000. Payments on the interest rate swap agreements were based on the notional principal amount of the agreements; no funds were actually borrowed or are to be repaid. Coastal recorded net interest expense or income related to these agreements on a monthly basis in interest expense in the accompanying consolidated statements of income. The net interest income increase or (decrease) related to these agreements was approximately ($35,000) and $212,000 for the years ended December 31, 2001 and 2000, respectively. Market risk, or the risk of loss due to movement in market prices or rates is quantified by Coastal through a risk monitoring process of marking to market the portfolio to expected market level changes in an instantaneous shock of plus and minus 200 basis points on a quarterly basis. This process discloses the effects on market values of the assets and liabilities, unrealized gains and losses, including off-balance sheet items, as well as potential changes in net interest income. Coastal is exposed to credit loss in the event of nonperformance by the counterparty to the swap or cap and controls this risk through credit monitoring procedures. The notional principal amount does not represent Coastal's exposure to credit loss. (17) FAIR VALUE OF FINANCIAL INSTRUMENTS Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments," requires that Coastal disclose estimated fair values for its financial instruments. The fair value estimates presented herein are based on relevant information available to management as of December 31, 2002 and 2001. Because the reporting requirements exclude certain financial instruments and all nonfinancial instruments, the aggregate fair value amounts presented herein do not represent management's estimate of the underlying value of Coastal. The fair value estimates, methods and assumptions used are set forth below for Coastal's financial instruments (in thousands):
At At December 31, 2002 December 31, 2001 ------------------------------------- ------------------------------- Carrying Fair Carrying Fair Value Value Value Value ------------------ ------------------ ---------- ------------------- Financial assets: Cash and cash equivalents $ 39,766 $ 39,766 $ 41,537 $ 41,537 Federal funds sold 27,755 27,755 16,710 16,710 Loans receivable held for sale 49,886 49,886 -- -- Loans receivable 1,812,785 1,837,157 1,863,601 1,892,609 Mortgage-backed securities available-for-sale 475,022 475,022 514,068 514,068 Other securities available-for-sale 1,788 1,788 42,827 42,827 Stock in the FHLB 41,221 41,221 40,032 40,032 Interest rate cap agreements -- -- 37 37 Accrued interest receivable 9,781 9,781 13,243 13,243 Financial liabilities: Deposits 1,614,368 1,625,659 1,660,386 1,671,265 Advances from the FHLB 696,085 702,067 690,877 693,654 Company obligated mandatorily redeemable 9.0% trust preferred securities of Coastal Capital Trust I 50,000 51,300 -- -- Senior Notes payable -- -- 43,875 43,875 Accrued interest payable 4,298 4,298 6,050 6,050 Off-balance sheet instruments: Commitments to extend credit -- 320,379 -- 255,301
CASH AND CASH EQUIVALENTS Carrying value approximates fair value because of the short maturity of these instruments and absence of any anticipated credit concerns. FEDERAL FUNDS SOLD Carrying value approximates fair value because of the short maturity of these instruments and absence of any anticipated credit concerns. LOANS RECEIVABLE HELD FOR SALE AND LOANS RECEIVABLE The fair values of loans receivable are estimated for segregated groupings of loans with similar financial characteristics. Loans are segregated by type, such as residential mortgage, commercial and consumer. Residential mortgage loans are further subdivided into fixed and adjustable rate loans including single family, multifamily and construction. The fair value of single family residential loans is estimated based on current investor market prices and yields for mortgage-backed securities with similar maturities, interest rate indexes and prepayment characteristics. The fair value of multifamily residential, construction, commercial and consumer loans are estimated using factors that reflect the credit and interest rate risk in these loans. SECURITIES AVAILABLE-FOR-SALE The fair values of mortgage-backed and other securities are estimated based on published market prices or market prices from investment dealers and companies. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. STOCK IN THE FHLB The carrying amount of the stock in the FHLB approximates fair value because it is redeemable at its par value. INTEREST RATE CAP AGREEMENTS The fair values of interest rate cap agreements are based on the discounted value of the differences between contractual interest rates and current market rates for similar agreements. ACCRUED INTEREST RECEIVABLE Carrying value approximates fair value. DEPOSITS The fair value of deposits with short-term or no stated maturity, such as noninterest-bearing checking, interest-bearing checking, savings accounts and money market demand accounts is equal to the amounts payable as of December 31, 2002 and 2001. The fair value of certificate accounts is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities. ADVANCES FROM THE FHLB The fair value of advances from the FHLB is estimated based on quoted market prices for similar agreements or current rates offered to Coastal for borrowings with similar remaining maturities. TRUST PREFERRED SECURITIES OF COASTAL CAPITAL TRUST I AND SENIOR NOTES PAYABLE The fair values of the Trust Preferred Securities and of the Senior Notes payable are based on quoted market prices for similar securities. ACCRUED INTEREST PAYABLE Carrying value approximates fair value. COMMITMENTS TO EXTEND CREDIT The fair value of commitments to extend credit is estimated using current interest rates and committed interest rates. (18) FEDERAL INCOME TAXES The acquisition of the Acquired Associations under the FSLIC's Southwest Plan on May 13, 1988 qualified for tax-free reorganization status under Section 368(a)(3)(D) of the Internal Revenue Code of 1986 as amended ("IRC"). Accordingly, the tax bases of assets of the Acquired Associations carried over to Coastal. In connection with this acquisition, the FSLIC Resolution Fund ("FRF") retained all of the future federal income tax benefits derived from the federal income tax treatment of certain items, in addition to net operating loss carryforwards related to the acquisition for which Coastal agreed to pay the FRF when actually realized. The provisions for federal income taxes recorded for the years ended December 31, 2002, 2001 and 2000, represent the gross tax liability computed under these tax sharing provisions before reduction for actual federal taxes paid to the Internal Revenue Service. Alternative minimum taxes paid with the federal return in 2002, 2001 and 2000 are available as credit carryforwards to reduce regular federal tax liabilities in future years, over an indefinite period and were partially utilized beginning in 2000. To the extent these credits were generated due to the utilization of other tax benefits retained by the FRF, they will also be treated as tax benefit items. Although the termination of the agreement with the FRF was effective March 31, 1994, the FRF will continue to receive the future federal income tax benefits from the net operating loss carryforwards acquired from the Acquired Associations. The components of the provision for federal income tax expense (benefit) for the years ended December 31, 2002, 2001 and 2000 are as follows (in thousands):
2002 2001 2000 ------- -------- -------- Current $9,349 $13,153 $13,141 Deferred (209) (2,286) (3,246) ------ ------- -------- $9,140 $10,867 $ 9,895 ====== ======= ========
A reconciliation of the expected federal income taxes using a corporate tax rate of 35% for the years ended December 31, 2002, 2001 and 2000 is as follows (in thousands):
2002 2001 2000 -------- -------- -------- Computed expected tax provision $10,627 $12,376 $11,343 FDIC tax benefit of preferred stock dividends (1,405) (1,784) (1,784) Net purchase accounting adjustments -- 222 282 Other, net (82) 53 54 ------- ------- -------- $ 9,140 $10,867 $ 9,895 ======= ======= ========
Significant temporary differences that give rise to the deferred tax assets and liabilities as of December 31, 2002 and 2001 are as follows (in thousands):
2002 2001 ------ ------ Deferred tax assets: Loans receivable, principally due to allowance for loan losses $6,002 $4,811 Unrealized loss on securities available-for-sale -- 855 Intangible assets 122 841 Property and equipment 2,014 1,683 Other 106 130 ------ ------ 8,244 8,320 ------ ------ Deferred tax liabilities: Unrealized gain on securities available-for-sale $ 333 $ -- FHLB stock 1,147 703 Other 126 -- ------ ------ 1,606 703 ------ ------ Net deferred tax asset $6,638 $7,617 ====== ======
No valuation allowance on deferred tax assets has been established as management believes that it is more likely than not that the existing deductible temporary differences will reverse during periods in which Coastal generates net taxable income. In years prior to 1996, Coastal was permitted under the IRC to deduct an annual addition to a reserve for bad debts in determining taxable income. This addition differs from the provision for loan losses for financial reporting purposes. Due to enacted legislation, Coastal is no longer able to utilize a reserve method for determining the bad debt deduction but is allowed to deduct actual charge-offs. Further, Coastal's post-1987 tax bad debt reserve will be recaptured into income. The reserve is being recaptured over a six-year period. At December 31, 2002, Coastal had approximately $664,000 post-1987 tax bad debt reserves, for which deferred taxes have been provided. Coastal is not required to provide deferred taxes on its pre-1988 (base year) tax bad debt reserve of $928,000. This reserve may be included in taxable income in future years if the Bank pays dividends in excess of its accumulated earnings and profits (as defined in the IRC) or in the event of a distribution in partial or complete liquidation of the Bank. (19) STOCK COMPENSATION PROGRAMS In December 1991, the Board of Directors adopted the 1991 Stock Compensation Program (the "1991 Program") for the benefit of officers and other selected key employees of Coastal. The 1991 Program was approved by stockholders in December 1991. Four kinds of rights, evidenced by four plans, are contained in the 1991 Program and are available for grant: incentive stock options, compensatory stock options, stock appreciation rights and performance share awards. The maximum aggregate number of shares of Common Stock available pursuant to the 1991 Program was equal to 10% of Coastal's issued and outstanding shares of Common Stock at the date of adoption of the 1991 Program. Coastal reserved the shares for future issuance under the 1991 Program. The stock options were granted at a price not less than the fair market value on the date of the grant, are exercisable ratably over a four-year period and may be outstanding for a period up to ten years from the date of grant. Generally, no stock option may be exercised until the employee has remained in the continuous employment of Coastal for six months after the option was granted. On March 23, 1995 and March 25, 1999, the Board of Directors adopted the 1995 and 1999 Stock Compensation Programs, respectively, (the "New Programs"). The New Programs are substantially similar to the 1991 Program and were approved by stockholders in April 1995 and April 1999, respectively. The Board of Directors reserved 382,891 and 340,000, respectively, shares of Common Stock for issuance under the New Programs. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants in 2002, 2001 and 2000:
2002 2001 2000 ------------ ------------ ------------ Assumptions: Expected annual dividends $0.48/share $0.48/share $0.36/share Expected volatility 26.99% 37.20% 37.21% Risk-free interest rate 1.61% 4.30% 6.40% Expected life in years 10 10 10
A summary of the status of the stock options as of December 31, 2002, 2001 and 2000 and changes during the years then ended is as follows:
2002 2001 2000 --------------------- ---------------------- -------------------------- Weighted- Weighted- Weighted Number Average Number Average Number Average of Exercise Of Exercise of Exercise Shares Price Shares Price Shares Price --------- ---------- ---------- ---------- --------- --------------- Outstanding at beginning of year 604,899 $ 14.516 766,979 $ 14.047 722,412 $ 13.726 Granted 36,031 30.863 10,000 28.900 132,000 14.750 Exercised (34,776) 11.915 (157,556) 13.048 (61,395) 10.253 Forfeited/cancelled (1,500) 14.854 (14,524) 15.579 (26,038) 17.653 -------- --------- --------- Outstanding at end of year 604,654 $ 15.639 604,899 $ 14.516 766,979 $ 14.047 ======== ========= ======== Options exercisable at end of year 543,631 502,337 578,340 ========= ========== ========= Weighted-average fair value of options granted during the year (per share) $ 8.771 $ 12.622 $ 6.356 ========= ========== =========
The following table summarizes information about stock options outstanding at December 31, 2002:
Options outstanding Options exercisable ----------------------------------------------------------- ------------------------------ Weighted-Average Number Remaining Weighted-Average Number Weighted-Average Range of Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price ------------------------- ------------------- ------------------- ----------------- ----------- ----------------- $8.583 to $12.500 201,208 2.3 years $ 10.679 201,208 $ 10.679 $14.750 to $20.333 325,165 6.1 years $ 15.673 298,665 $ 15.755 $25.125 to $30.960 78,281 7.8 years $ 28.248 43,758 $ 26.522 ------------------ ---------- 604,654 5.1 years $ 15.639 543,631 $ 14.742 ================== ===========
(20) EMPLOYEE BENEFITS Coastal maintains a 401(k) profit sharing plan. Coastal's contributions to this plan were approximately $563,000, $566,000 and $518,000 for the years ended December 31, 2002, 2001 and 2000, respectively. Pursuant to this plan, employees can contribute up to 15% of their qualifying compensation into the plan. Beginning January 1, 1990, Coastal matched 25% of the employee contributions up to 15% of their qualifying compensation. Beginning July 1, 1998, Coastal has matched 50% of the employee contributions up to 6% of their qualifying compensation and 25% of the employee contributions from 7% to 15% of their qualifying compensation. (21) COASTAL BANC SSB PREFERRED STOCK On October 21, 1993, the Bank issued 1,150,000 shares of 9.0% Noncumulative Preferred Stock, no par Series A, at a price of $25 per share to the public. Dividends on this 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, this 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 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 outstanding 9.0% Series A Noncumulative Preferred Stock on July 15, 2002 (see note 14). 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. (22) STOCKHOLDERS' EQUITY 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, to the public at a price of $25 per share ("Bancorp Preferred Stock"). Dividends on the preferred stock are payable quarterly at the annual rate of $2.28 per share. The preferred stock is callable on May 15, 2003 at Bancorp's option. Pursuant to Coastal's tax benefit agreement with the FRF, Coastal receives a tax benefit for dividends on this preferred stock. The ongoing quarterly benefit will be approximately $219,000, or 4 cents per diluted share (as of December 31, 2002), and is expected to continue through 2003. COMMON STOCK DIVIDENDS On January 24, April 25, July 25 and October 24, 2002, Coastal declared a dividend of $0.12 per share of Common Stock outstanding for the stockholders of record as of February 15, May 15, August 15, and November 15, 2002, respectively. On January 25, 2001, Coastal declared a dividend of $0.10 per share of Common Stock outstanding for the stockholders of record as of February 15, 2001. On April 26, July 26 and October 25, 2001, Coastal declared a dividend of $0.12 per share on Common Stock outstanding for the stockholders of record as of May 15, August 15 and November 15, 2001, respectively. On January 28 and April 28, 2000, Coastal declared a dividend of $0.08 per share of Common Stock outstanding for the stockholders of record as of February 15 and May 15, 2000, respectively. On July 28 and October 27, 2000, Coastal declared a dividend of $0.10 per share on Common Stock outstanding for the stockholders of record as of August 15 and November 15, 2000, respectively. TREASURY STOCK 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. As of December 31, 2002 and 2001, 2,729,575 and 2,000,000 shares, respectively, had been repurchased under all authorized repurchase plans. As of December 31, 2002, 2,726,019 shares were held in treasury at an average repurchase price of $19.46 per share for a total cost of $53.0 million. (23) EARNINGS PER COMMON SHARE The following summarizes information related to the computation of basic and diluted EPS for the years ended December 31, 2002, 2001 and 2000 (dollars in thousands, except per share data):
2002 2001 2000 ----------- ----------- ----------- Net income $ 19,716 $ 21,802 $ 19,924 Preferred stock dividends (2,508) (2,508) (2,508) ----------- ----------- ----------- Net income available to common stockholders $ 17,208 $ 19,294 $ 17,416 ========== ========== =========== Weighted average number of common shares outstanding used in basic EPS calculation 5,491,615 5,773,313 5,917,845 Add assumed exercise of outstanding stock options as adjustments for dilutive securities 258,916 305,021 140,316 ----------- ----------- ----------- Weighted average number of common shares outstanding used in diluted EPS calculation 5,750,531 6,078,334 6,058,161 ========== ========== =========== Basic EPS before cumulative effect of accounting change $ 3.13 $ 3.36 $ 2.94 ========== ========== =========== Basic EPS $ 3.13 $ 3.34 $ 2.94 ========== ========== =========== Diluted EPS before cumulative effect of accounting change $ 2.99 $ 3.19 $ 2.87 ========== ========== =========== Diluted EPS $ 2.99 $ 3.17 $ 2.87 ========== ========== ===========
(24) COMMITMENTS AND CONTINGENCIES Coastal is involved in various litigation arising from acquired entities as well as in the normal course of business. In the opinion of management, the ultimate liability, if any, from these actions should not be material to the consolidated financial statements. At December 31, 2002, the minimum rental commitments under all noncancelable operating leases with initial or remaining terms of more than one year were as follows (in thousands):
Year ending December 31, Amount ------------------- ------- 2003 $ 2,846 2004 2,505 2005 2,463 2006 2,367 2007 2,100 2008 and thereafter 8,094
Rent expense for the years ended December 31, 2002, 2001 and 2000 amounted to approximately $3.4 million, $3.2 million and $3.0 million, respectively. (25) REGULATORY MATTERS The Bank is subject to various regulatory capital requirements administered by the FDIC. Failure to meet minimum capital requirements can initiate certain mandatory--and possibly additional discretionary--actions by regulators that, if undertaken, could have a direct material effect on the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (as defined in the applicable regulations) of Tier 1 (core) capital to total assets, Tier 1 risk-based capital to risk weighted assets and total risk-based capital to risk-weighted assets. Management believes, as of December 31, 2002, that the Bank met the capital adequacy requirements to which it is subject. As of December 31, 2002, the most recent notification from the 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 below. There are no conditions or events since that notification that management believes have changed the institution's category. The Bank's regulatory capital amounts and ratios, as of December 31, 2002 and 2001, in relation to its existing regulatory capital requirements for capital adequacy purposes as of such dates are as follows (dollars in thousands):
Minimum For Capital Well-Capitalized Actual Adequacy Purposes Requirements --------------------- ----------------------- ---------------------- Amount Ratio Amount Ratio Amount Ratio ------- ------- --------- -------- ------- --------- As of December 31, 2002: Tier 1 (core) $177,593 6.88% $ 103,315 4.00% $129,144 5.00% Tier 1 risk-based 177,593 10.32 68,816 4.00 103,224 6.00 Total risk-based 195,711 11.38 137,632 8.00 172,040 10.00 As of December 31, 2001: Tier 1 (core) $205,021 7.27% $ 112,834 4.00% $141,043 5.00% Tier 1 risk-based 205,021 11.90 68,921 4.00 103,381 6.00 Total risk-based 220,406 12.79 137,841 8.00 172,302 10.00
(26) PARENT COMPANY FINANCIAL INFORMATION Condensed financial information for Coastal Bancorp, Inc. is as follows (in thousands): Coastal Bancorp, Inc. Condensed Statements of Financial Condition -------------------------------------------
December 31, ------------- 2002 2001 ------------- -------- Assets: Cash and cash equivalents $ 139 $ 2,751 Investment in subsidiaries 200,835 196,156 Mortgage-backed securities available-for-sale 344 445 Other assets 3,189 2,524 ------------- -------- $ 204,507 $201,876 ============== ======== Liabilities and stockholders' equity: Junior subordinated debentures $ 51,546 $ -- Senior Notes payable -- 43,875 Payable to the Bank 5 447 Other liabilities 71 120 ------------- -------- Total liabilities 51,622 44,442 Total stockholders' equity 152,885 157,434 ------------- -------- $ 204,507 $201,876 ============= ========
Coastal Bancorp, Inc. Condensed Statements of Income ------------------------------
Years ended December 31, 2002 2001 2000 ------- ------- ------- Income: Dividends from subsidiaries $ 7,749 $ 7,664 $ 7,132 Equity in undistributed earnings of subsidiaries, net of income tax 13,158 16,128 15,200 Interest and other income 17 184 507 ------- ------- ------- 20,924 23,976 22,839 ------- ------- ------- Expense: Interest expense 2,873 4,590 4,690 Noninterest expense 286 6 872 ------- ------- ------- 3,159 4,596 5,562 ------- ------- ------- Federal income tax benefit 1,951 2,422 2,647 ------- ------- ------- Net income $ 19,716 $21,802 $19,924 ======= ======= =======
Coastal Bancorp, Inc. Condensed Statements of Cash Flows ----------------------------------
Years ended December 31, 2002 2001 2000 ---------- -------- ---------- Cash flows from operating activities: Net income $ 19,716 $ 21,802 $ 19,924 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Equity in undistributed earnings of subsidiaries (13,158) (16,128) (15,200) Net decrease in other assets and other liabilities 15,150 2,843 9,547 ---------- -------- ---------- Net cash provided by operating activities 21,708 8,517 14,271 ---------- -------- ---------- Cash flows from investing activities: Net decrease in mortgage-backed securities 101 346 195 ---------- -------- ---------- Net cash provided by investing activities 101 346 195 ---------- -------- ---------- Cash flows from financing activities: Redemption or repurchase of Senior Notes payable (43,875) (3,025) -- Proceeds from issuance of junior subordinated debentures 45,928 -- -- Exercise of stock options for purchase of Common Stock 326 2,055 630 Purchase of treasury stock (21,753) -- (10,882) Issuance of treasury shares 108 Dividends paid (5,155) (5,171) (4,638) ---------- -------- ---------- Net cash used in financing activities (24,421) (6,141) (14,890) ---------- -------- ---------- Net increase (decrease) in cash and cash equivalents (2,612) 2,722 (424) Cash and cash equivalents at beginning of year 2,751 29 453 ---------- -------- ---------- Cash and cash equivalents at end of year $ 139 $ 2,751 $ 29 ========= ======== =========
(27) SELECTED QUARTERLY FINANCIAL DATA Selected quarterly financial data is presented in the following tables for the years ended December 31, 2002 and 2001 (in thousands, except per share data):
2002 Quarter Ended (unaudited) ------------------------------------------------------- March 31, June 30, September 30, December 31, ------------- --------- -------------- ------------- Interest income $ 35,406 $ 35,183 $ 34,031 $ 33,003 Interest expense 16,687 15,456 15,672 14,961 ------------- --------- -------------- ------------- Net interest income 18,719 19,727 18,359 18,042 Provision for loan losses 900 900 900 3,100 Noninterest income 2,509 2,954 3,054 8,692 Noninterest expense 13,716 13,819 13,880 14,478 ------------- --------- -------------- ------------- Income before provision for Federal income taxes and minority interest 6,612 7,962 6,633 9,156 Provision for Federal income taxes 1,884 2,360 2,045 2,851 Minority interest - preferred stock dividends of Coastal Banc ssb 647 647 213 -- ------------- --------- -------------- ------------- Net income $ 4,081 $ 4,955 $ 4,375 $ 6,305 ============= ========= ============== ============= Basic earnings per common share $ 0.59 $ 0.76 $ 0.72 $ 1.10 ============= ========= ============== ============= Diluted earnings per common share $ 0.57 $ 0.72 $ 0.68 $ 1.05 ============= ========= ============== =============
The financial data above for the quarters ended March 31, and June 30, 2002 have been restated from those amounts previously reported as required by Statement 147 which was adopted by Coastal effective January 1, 2002.
2001 Quarter Ended (unaudited) -------------------------------------------------------- March 31, June 30, September 30, December 31, -------------- --------- -------------- ------------- Interest income $ 60,165 $ 56,423 $ 50,850 $ 43,174 Interest expense 37,860 34,005 29,341 22,809 -------------- --------- -------------- ------------- Net interest income 22,305 22,418 21,509 20,365 Provision for loan losses 900 1,200 900 900 Noninterest income. 1,822 2,984 3,477 2,860 Noninterest expense 14,682 14,573 14,904 14,320 -------------- --------- -------------- ------------- Income before provision for Federal income taxes, minority interest and cumulative effect of accounting change 8,545 9,629 9,182 8,005 Provision for Federal income taxes 2,614 2,992 2,836 2,425 Minority interest - preferred stock dividends of Coastal Banc ssb 647 647 647 647 Cumulative effect of change in accounting for derivative instruments (104) -- -- -- -------------- --------- -------------- ------------- Net income $ 5,180 $ 5,990 $ 5,699 $ 4,933 ============== ========= ============== ============= Basic earnings per common share $ 0.80 $ 0.93 $ 0.88 $ 0.74 ============== ========= ============== ============= Diluted earnings per common share $ 0.76 $ 0.89 $ 0.83 $ 0.70 ============== ========= ============== =============
COASTAL BANCORP, INC. AND SUBSIDIARIES STOCK PRICES AND DIVIDENDS The following table sets forth the high and low price range and dividends by quarter for the two years ended December 31, 2002 of the Common Stock of Bancorp (Nasdaq: CBSA), Preferred Stock of Bancorp (Nasdaq: CBSAO), Trust Preferred Securities of the Trust (Nasdaq: CBSAN) and the Series A Preferred Stock of the Bank (Nasdaq: CBSAP) as listed and quoted on The Nasdaq Stock Market(R): COASTAL BANCORP, INC. COMMON STOCK ("CBSA"):
2002 2001 --------------------------- --------------------------- High Low Dividends High Low Dividends ------- ------ ---------- ------- ------- ---------- First Quarter $34.600 $28.950 $ 0.120 $28.063 $23.000 $ 0.100 Second Quarter 34.520 29.780 0.120 32.150 26.000 0.120 Third Quarter 32.010 27.550 0.120 39.410 31.890 0.120 Fourth Quarter 32.350 27.269 0.120 37.000 26.600 0.120
COASTAL BANCORP, INC. CUMULATIVE PREFERRED STOCK, SERIES A ("CBSAO"):
2002 2001 -------------------------- ---------------------------- High Low Dividends High Low Dividends ------- ------- ---------- ------- ------- ---------- First Quarter $25.350 $24.600 $ 0.570 $25.125 $21.625 $ 0.570 Second Quarter 25.600 25.050 0.570 25.220 24.100 0.570 Third Quarter 25.500 25.000 0.570 25.250 24.850 0.570 Fourth Quarter 25.700 25.060 0.570 25.150 24.400 0.570
COASTAL CAPITAL TRUST I TRUST PREFERRED SECURITIES ("CBSAN"):
2002 ------------------------------ High Low Distributions ------- ------ ------------- First Quarter (1) $ -- $ -- $ -- Second Quarter 25.280 25.000 -- Third Quarter 25.730 25.000 0.638 Fourth Quarter 25.690 24.900 0.563
COASTAL BANC SSB NONCUMULATIVE PREFERRED STOCK, SERIES A ("CBSAP"):
2002 2001 ---------------------------- ---------------------------- High Low Dividends High Low Dividends ------- ---------- ------- ------- ---------- First Quarter $25.350 $24.580 $ 0.563 $25.000 $22.000 $ 0.563 Second Quarter 25.650 24.900 0.563 25.000 23.850 0.563 Third Quarter 25.200 25.000 0.185 25.250 24.530 0.563 Fourth Quarter (2) -- -- -- 25.150 24.380 0.563
(1) These securities were issued on June 18, 2002. (2) These securities were redeemed on July 15, 2002. Coastal Bancorp, Inc. STOCKHOLDER INFORMATION ANNUAL MEETING The Annual Meeting of Stockholders of Coastal Bancorp, Inc. will be held at the corporate offices of Coastal Bancorp, Inc. at 5718 Westheimer, Houston, Texas in the Coastal Banc auditorium, Suite 1101, on April 24, 2003 at 12:00 noon. TRANSFER AGENT AND REGISTRAR Mellon Investor Services LLC Overpeck Centre 85 Challenger Road Ridgefield Park, New Jersey 07660-2104 (800) 851-9677 www.melloninvestor.com INDEPENDENT PUBLIC ACCOUNTANTS KPMG LLP 700 Louisiana Street Houston, Texas 77002 SPECIAL COUNSEL Elias, Matz, Tiernan & Herrick L.L.P. 734 15th Street, N.W. Washington, D.C. 20005 INQUIRIES, PUBLICATIONS AND FINANCIAL INFORMATION (INCLUDING COPIES OF THE ANNUAL REPORT AND FORM 10-K AT NO CHARGE UPON WRITTEN REQUEST) Manuel J. Mehos Chairman of the Board and Chief Executive Officer or Catherine N. Wylie Senior Executive Vice President and Chief Financial Officer Coastal Bancorp, Inc. Coastal Banc Plaza 5718 Westheimer, Suite 600 Houston, Texas 77057 (713) 435-5000 www.coastalbanc.com STOCK LISTING AND OTHER INFORMATION The common stock of Coastal Bancorp, Inc. ("Bancorp") is quoted on The Nasdaq Stock Market(R) under the symbol "CBSA." As of February 25, 2003, there were 5,146,130 shares of Common Stock of Bancorp issued and outstanding and the approximate number of registered stockholders was 169, representing approximately 1,500 beneficial stockholders at such record date. On March 25, 1992, Coastal Banc Savings Association (the "Association") issued 3,092,076 shares of Common Stock at $8.33 per share in its initial public offering. As of such date, the Common Stock of the Association was registered under the Securities Exchange Act of 1934 (the "Exchange Act") and also became listed for quotation on The Nasdaq Stock Market(R). The Common Stock issued by the Association became the Common Stock of Bancorp on July 29, 1994, as a result of the holding company reorganization of the Association. On May 11, 1999, Bancorp issued 1,100,000 shares of 9.12% Series A Cumulative Preferred Stock, no par value, at $25 per share. As of such date, the Preferred Stock of Bancorp was registered under the Exchange Act. The preferred stock is callable on May 15, 2003 at Bancorp's option. The Bancorp Preferred Stock is listed and quoted on The Nasdaq Stock Market(R) under the symbol "CBSAO". As of February 25, 2003, there were 1,100,000 shares of Preferred Stock issued and outstanding and held by approximately 58 registered stockholders, representing approximately 1,400 beneficial stockholders at such record date. On June 18, 2002, the Trust issued 2,000,000 trust preferred securities with a liquidation preference of $25 per security. As of such date, the Trust Preferred Securities were registered under the Exchange Act. 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 by Bancorp at maturity on June 30, 2032 or their earlier redemption. The Trust Preferred Securities are listed and quoted on The Nasdaq Stock Market under the symbol "CBSAN." As of February 25, 2003, there were 2,000,000 Trust Preferred Securities issued and outstanding. Bancorp declared dividends on the Common Stock payable during 2002. A quarterly dividend in the amount of $0.12 per share was paid on March 15, June 15, September 15 and December 15, 2002. On March 15, 2003, Bancorp paid a quarterly dividend in the amount of $0.12 per share on its Common Stock. Bancorp will continue to review its dividend policy in view of the operating performance of the Bank, and may declare dividends on the Common Stock in the future if such payments are deemed appropriate and in compliance with applicable law and regulations. Prior to the declaration of dividends, Bancorp must notify the Office of Thrift Supervision, the holding company's primary federal regulator, which may object to the dividends on the basis of safety and soundness.