-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JQKaYb/E0o1pNwRYmo9nfMFsAWaOUXtWD7SQ05Bv++/cbyOG8FOQuMtknT2ddlXz +sfLTGCsevzg7jIyFeGKRA== 0000919805-98-000025.txt : 19981118 0000919805-98-000025.hdr.sgml : 19981118 ACCESSION NUMBER: 0000919805-98-000025 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981116 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COASTAL BANCORP INC CENTRAL INDEX KEY: 0000919805 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTIONS, NOT FEDERALLY CHARTERED [6036] IRS NUMBER: 760428727 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-24526 FILM NUMBER: 98749730 BUSINESS ADDRESS: STREET 1: 5718 WESTHEIMER STREET 2: SUITE 600 CITY: HOUSTON STATE: TX ZIP: 77057 BUSINESS PHONE: 7134355000 MAIL ADDRESS: STREET 1: 5718 WESTHEIMER STREET 2: SUITE 600 CITY: HOUSTON STATE: TX ZIP: 77057 FORMER COMPANY: FORMER CONFORMED NAME: COASTAL BANC SAVINGS ASSOCIATION DATE OF NAME CHANGE: 19970110 FORMER COMPANY: FORMER CONFORMED NAME: COASTAL BANCORP INC/TX/ DATE OF NAME CHANGE: 19940718 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [ X ] Quarterly Report Under Section 13 or 15 (d) of the Securities Exchange Act of 1934 For the Quarterly Period Ended September 30, 1998 [ ] Transition Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 For the Transition Period from _________ to _________ Commission File Number: 0-24526 -------- COASTAL BANCORP, INC. --------------------- (Exact name of Registrant as specified in its charter) Texas 76-0428727 ----- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 5718 Westheimer, Suite 600 Houston, Texas 77057 --------------------------- (Address of principal executive office) (713) 435-5000 --------------- (Registrant's telephone number) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ---- ---- Indicate the number of shares outstanding of each of the issuer's classes of Common Stock, as of the latest practicable date. COMMON STOCK OUTSTANDING: 7,107,319 AS OF OCTOBER 31, 1998 COASTAL BANCORP, INC. AND SUBSIDIARIES Table of Contents PART I. FINANCIAL INFORMATION - -------- ----------------------
Item 1 Financial Statements Consolidated Statements of Financial Condition at September 30, 1998 (unaudited) and December 31, 1997 1 Consolidated Statements of Income for the Nine-Month Periods Ended September 30, 1998 and 1997 (unaudited) 2 Consolidated Statements of Income for the Three-Month Periods Ended September 30, 1998 and 1997 (unaudited) 3 Consolidated Statements of Comprehensive Income (Loss) for the Nine-Month Periods Ended September 30, 1998 and 1997 (unaudited) 4 Consolidated Statements of Cash Flows for the Nine-Month Periods Ended September 30, 1998 and 1997 (unaudited) 5 Notes to Consolidated Financial Statements 7 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 18 Item 3 Quantitative and Qualitative Disclosures About Market Risk 25
PART II. OTHER INFORMATION - --------- ------------------
Item 1 Legal Proceedings 26 Item 2 Changes in Securities 26 Item 3 Default upon Senior Securities 26 Item 4 Submission of Matters to a Vote of Security Holders 26 Item 5 Other Information 26 Item 6 Exhibits and Reports on Form 8-K 27
SIGNATURES ITEM 1. FINANCIAL STATEMENTS - -------- ---------------------
COASTAL BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (IN THOUSANDS, EXCEPT SHARE DATA) September 30, December 31, 1998 1997 --------------- ------------ ASSETS (Unaudited) - ----------------------------------------------------------- Cash and cash equivalents $ 56,200 $ 37,096 Federal funds sold 4,300 -- Loans receivable (note 4) 1,545,507 1,261,435 Mortgage-backed securities held-to-maturity (note 3) 1,234,840 1,345,090 Mortgage-backed securities available-for-sale, at market value (note 3) 125,787 169,997 U.S. Treasury security available-for-sale, at market value 2,008 -- Accrued interest receivable 17,075 14,813 Property and equipment 33,452 22,250 Stock in the Federal Home Loan Bank of Dallas (FHLB) 49,107 27,801 Goodwill 31,455 15,717 Mortgage servicing rights 4,490 5,653 Prepaid expenses and other assets 22,065 11,558 ------------- ---------- $ 3,126,286 $2,911,410 ============= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY --------------------------------------- Liabilities: Savings deposits (note 5) $1,704,571 $1,375,060 Advances from the FHLB (note 6) 952,247 540,475 Securities sold under agreements to repurchase (note 6) 244,712 791,760 Senior notes payable (note 7) 50,000 50,000 Advances from borrowers for taxes and insurance 11,192 3,975 Other liabilities and accrued expenses 19,401 16,560 Total liabilities 2,982,123 2,777,830 ----------- ----------- 9.0% noncumulative preferred stock of Coastal Banc ssb (note 10) 28,750 28,750 Commitments and contingencies (notes 4 and 8) Stockholders' equity (notes 1, 3, 9 and 11): Preferred stock, no par value; authorized shares 5,000,000; no shares issued -- -- Common stock, $.00667 par value; authorized shares 45,000,000; 7,566,757 and 7,513,389 shares issued in 1998 and 1997, respectively 50 50 Additional paid-in capital 33,703 33,186 Retained earnings 85,714 73,868 Accumulated other comprehensive income (loss) - unrealized loss on securities available-for-sale (783) (2,274) Treasury stock at cost (205,000 shares in 1998) (3,271) -- --------- ----------- Total stockholders' equity 115,413 104,830 --------- ----------- $3,126,286 $2,911,410 =========== ===========
See accompanying Notes to Consolidated Financial Statements COASTAL BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE DATA)
Nine Months Ended September 30, ------------------- 1998 1997 ---------- -------- (Unaudited) Interest income: Loans receivable $ 87,495 $ 80,249 Mortgage-backed securities 67,938 69,395 Federal funds sold, certificates of deposit and other investments 2,007 1,109 157,440 150,753 ------------ -------- Interest expense: Savings deposits 48,166 46,659 Other borrowed money 29,807 41,985 Senior notes payable 3,750 3,750 Advances from the FHLB: Short-term 11,567 5,798 Long-term 15,613 9,450 ------------- -------- 108,903 107,642 ------------- -------- Net interest income 48,537 43,111 Provision for loan losses 2,350 1,350 Net interest income after provision for loan losses 46,187 41,761 ------------- -------- Noninterest income: Loan fees and service charges on deposit accounts 3,894 2,913 Loan servicing income, net 571 1,097 Gain on sale of mortgage-backed securities available-for-sale -- 237 Writedown of purchased mortgage loan premium (709) -- Other 996 515 4,752 4,762 ------------- -------- Noninterest expense: Compensation, payroll taxes and other benefits 16,156 14,024 Office occupancy 6,437 5,288 Data processing 1,806 1,676 Amortization of goodwill 1,517 1,361 Insurance premiums 912 819 Real estate owned 693 628 Other 5,872 5,830 33,393 29,626 ------------- -------- Income before provision for Federal income taxes 17,546 16,897 Provision for Federal income taxes (note 12) 1,944 6,182 ------------- -------- Net income before preferred stock dividends 15,602 10,715 Preferred stock dividends of Coastal Banc ssb (Series A) (note 10) 1,941 1,941 ------------- -------- Net income available to common stockholders $ 13,661 $ 8,774 ============= ======== Basic earnings per share (note 9) $ 1.81 $ 1.18 ============= ======== Diluted earnings per share (note 9) $ 1.75 $ 1.14 ============= ========
See accompanying Notes to Consolidated Financial Statements COASTAL BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Ended September 30, 1998 1997 ------ ------- (Unaudited) Interest income: Loans receivable $ 31,468 $27,819 Mortgage-backed securities 21,740 22,994 Federal funds sold, certificates of deposit and other investments 971 438 54,179 51,251 ---------- ------- Interest expense: Savings deposits 17,167 16,114 Other borrowed money 6,766 14,209 Senior notes payable 1,250 1,250 Advances from the FHLB: Short-term 3,988 2,086 Long-term 7,753 3,393 ---------- ------- 36,924 37,052 ---------- ------- Net interest income 17,255 14,199 Provision for loan losses 450 450 Net interest income after provision for loan losses 16,805 13,749 ---------- ------- Noninterest income: Loan fees and service charges on deposit accounts 1,428 1,038 Loan servicing income, net 171 333 Gain on sale of mortgage-backed securities available-for-sale -- 237 Other 453 135 2,052 1,743 ---------- ------- Noninterest expense: Compensation, payroll taxes and other benefits 6,059 4,706 Office occupancy 2,406 2,024 Data processing 625 566 Amortization of goodwill 574 479 Insurance premiums 387 274 Real estate owned 270 146 Other 2,154 1,980 12,475 10,175 ---------- ------- Income before provision for Federal income taxes 6,382 5,317 Provision for Federal income taxes (note 12) 1,994 1,953 ---------- ------- Net income before preferred stock dividends 4,388 3,364 Preferred stock dividends of Coastal Banc ssb (Series A) (note 10) 647 647 ---------- ------- Net income available to common stockholders $ 3,741 $ 2,717 ========== ======= Basic earnings per share (note 9) $ 0.50 $ 0.36 ========== ======= Diluted earnings per share (note 9) $ 0.48 $ 0.35 ========== =======
See accompanying Notes to Consolidated Financial Statements COASTAL BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (IN THOUSANDS)
Nine Months Ended September 30, 1998 1997 ----------- --------- (Unaudited) Net income available to common stockholders $ 13,661 $8,774 Other comprehensive income (loss), net of tax: Unrealized holding gains (losses) on securities available-for-sale arising during period 1,491 52 ----------- ------ Total comprehensive income $ 15,152 $8,826 =========== ======
See accompanying Notes to Consolidated Financial Statements COASTAL BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
Nine Months Ended September 30, 1998 1997 ------------ ---------- (Unaudited) Cash flows from operating activities: Net income before preferred stock dividends $ 15,602 $ 10,715 Adjustments to reconcile net income before preferred stock dividends to net cash provided by operating activities: Depreciation and amortization of property and equipment, mortgage servicing rights and prepaid expenses and other assets 6,381 5,334 Net premium amortization 2,352 1,458 Provision for loan losses 2,350 1,350 Amortization of goodwill 1,517 1,361 Originations and purchases of mortgage loans held for sale (26,536) (8,063) Sales of mortgage loans held for sale 26,287 8,361 Gain on sales of mortgage-backed securities available-for-sale -- (237) Stock dividends from the FHLB (1,536) (951) Decrease (increase) in: Accrued interest receivable 306 (698) Other, net (6,056) 7,133 ---------- ---------- Net cash provided by operating activities 20,667 25,763 ---------- ---------- Cash flows from investing activities: Net increase in federal funds sold (4,300) (5,000) Purchase of mortgage-backed securities held-to-maturity (8,203) (20,257) Principal repayments on mortgage-backed securities held-to-maturity 118,427 39,140 Principal repayments on mortgage-backed securities available-for-sale 20,249 452 Proceeds from maturity of U.S. Treasury securities available-for-sale 25,000 11 Proceeds from sales of mortgage-backed securities available-for-sale 26,250 11,545 Purchases of loans receivable (319,630) (120,024) Net decrease in loans receivable 204,384 44,400 Net purchases of property and equipment (3,477) (9,224) Purchase of FHLB stock (19,770) (2,556) Proceeds from sales of FHLB stock -- 9,000 Cash and cash equivalents received in business combination transaction 120,085 52,098 ----------- ---------- Net cash provided (used) by investing activities 159,015 (415) ----------- ----------
COASTAL BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED (IN THOUSANDS)
Nine Months Ended September 30, 1998 1997 ----------- ----------- (Unaudited) Cash flows from financing activities: Net increase (decrease) in savings deposits $ (26,009) $ 26,744 Advances from the FHLB 3,435,277 2,539,800 Principal payments on advances from the FHLB (3,023,505) (2,566,518) Securities sold under agreements to repurchase 3,948,611 7,722,507 Purchases of securities sold under agreements to repurchase (4,495,659) (7,741,112) Net increase in advances from borrowers for taxes and insurance 7,217 7,641 Exercise of stock options for purchase of common stock, net 517 373 Purchase of Treasury Stock (3,271) -- Dividends paid (3,756) (3,632) ------------ ------------ Net cash used by financing activities (160,578) (14,197) ------------ ------------ Net increase in cash and cash equivalents 19,104 11,151 Cash and cash equivalents at beginning of period 37,096 27,735 ------------ ------------ Cash and cash equivalents at end of period $ 56,200 $ 38,886 ============ ============ Supplemental schedule of cash flows-interest paid $ 105,971 $ 105,216 ============ ============ Supplemental schedule of noncash investing and financing activities: Foreclosures of loans receivable $ 2,937 $ 3,883 ============ ============ In connection with the branch office purchases in 1998 and 1997, Coastal recorded the following assets and liabilities: Loans receivable $ 176,157 $ -- U.S. Treasury securities 26,942 -- Goodwill 17,255 1,956 Property and equipment 10,743 693 Accrued interest receivable and other assets 5,437 -- Savings deposits 355,425 54,563 Accrued interest payable and other liabilities 1,194 184
See accompanying Notes to Consolidated Financial Statements COASTAL BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) BASIS OF PRESENTATION The accompanying unaudited Consolidated Financial Statements were prepared in accordance with the instructions for Form 10-Q and, therefore, do not include all disclosures necessary for a complete presentation of financial condition, results of operations, and cash flows in conformity with generally accepted accounting principles. All adjustments which are, in the opinion of management, of a normal recurring nature and are necessary for a fair presentation of the interim financial statements, have been included. The results of operations for the periods ended September 30, 1998 are not necessarily indicative of the results that may be expected for the entire fiscal year or any other interim period. COASTAL BANCORP, INC. AND SUBSIDIARIES ADOPTED THE FINANCIAL ACCOUNTING STANDARDS BOARDS STATEMENT NO. 130 ("STATEMENT 130"), "REPORTING COMPREHENSIVE INCOME" AS OF JANUARY 1, 1998. STATEMENT 130 REQUIRES THE DISCLOSURE OF ALL COMPONENTS OF COMPREHENSIVE INCOME, WHICH INCLUDES NET INCOME AND OTHER COMPREHENSIVE INCOME. OTHER COMPREHENSIVE INCOME INCLUDES ALL NONOWNER RELATED CHANGES TO STOCKHOLDERS' EQUITY, WHICH IS THE UNREALIZED GAIN (LOSS) ON SECURITIES AVAILABLE-FOR-SALE. THESE AMOUNTS HAVE BEEN DISCLOSED ON THE CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME. STATEMENT 130 DID NOT CHANGE THE CURRENT ACCOUNTING TREATMENT FOR COMPONENTS OF OTHER COMPREHENSIVE INCOME (I.E. CHANGES IN UNREALIZED GAIN (LOSS) ON SECURITIES AVAILABLE-FOR-SALE). On April 23, 1998, the Board of Directors declared a 3:2 stock split on the common stock of Coastal Bancorp, Inc. payable on June 15, 1998 to the stockholders of record at the close of business on May 15, 1998. Accordingly, all common stock share data have been adjusted to include the effect of the stock split for all periods presented. On September 1, 1998, Coastal announced that the Board of Directors had authorized the repurchase of up to 6.6% (approximately 500,000 shares) of the outstanding shares of common stock. As of September 30, 1998, 205,000 shares had been repurchased at a cost of $3.3 million and as of this date 460,600 shares have been repurchased at a total cost of $7.2 million. (2) PRINCIPLES OF CONSOLIDATION The accompanying unaudited Consolidated Financial Statements include the accounts of Coastal Bancorp, Inc. and its wholly-owned subsidiary, Coastal Banc Holding Company, Inc. and its wholly-owned subsidiaries, Coastal Banc ssb and subsidiaries and Coastal Banc Capital Corp. (collectively, "Coastal"). Coastal Banc ssb's subsidiaries include CoastalBanc Financial Corp., CBS Mortgage Corp., and CBS Asset Corp. (collectively with Coastal Banc ssb, the "Bank"). All significant intercompany balances and transactions have been eliminated in consolidation. (3) MORTGAGE-BACKED SECURITIES Mortgage-backed securities at September 30, 1998 (unaudited) were as follows (dollars in thousands):
Gross Gross Amortized Unrealized Unrealized Market Cost Gains Losses Value --------- ----------- ---------- ------- Held-to-Maturity: REMICS - Agency $ 882,871 $ 4,759 $ (5,584) $ 882,046 REMICS - Non-agency 249,567 1,193 (2,392) 248,368 FNMA certificates 66,978 261 (604) 66,635 GNMA certificates 23,301 335 -- 23,636 Non-agency securities 12,117 170 (64) 12,223 Interest-only securities 6 -- -- 6 $ 1,234,840 $ 6,718 $ (8,644) $ 1,232,914 =========== ======= ========= =========== Available-for-sale: REMICS - Agency $ 125,408 $ 16 $ (1,213) $ 124,211 REMICS - Non-agency 1,584 -- (8) 1,576 ----------- ------- --------- ----------- $ 126,992 $ 16 $ (1,221) $ 125,787 =========== ======= ========= ===========
Proceeds from sales of mortgage-backed securities available-for-sale for the nine months ended September 30, 1998 were approximately $26.3 million. These securities were sold at amortized cost, therefore no gain or loss was recorded. Mortgage-backed securities at December 31, 1997 were as follows (dollars in thousands):
Gross Gross Amortized Unrealized Unrealized Market Cost Gains Losses Value --------- ----------- ---------- ------- Held-to-maturity: REMICS - Agency $ 950,689 $ 5,022 $ (20,478) $ 935,233 REMICS - Non-agency 279,131 701 (5,610) 274,222 FNMA certificates 71,887 144 (683) 71,348 GNMA certificates 28,808 566 -- 29,374 Non-agency securities 14,555 239 (23) 14,771 Interest-only securities 20 -- -- 20 $ 1,345,090 $ 6,672 $ (26,794) $ 1,324,968 =========== ======= ========== =========== Available-for-sale: REMICS - Agency $ 171,167 $ 579 $ (4,044) $ 167,702 REMICS - Non-agency 2,328 -- (33) 2,295 $ 173,495 $ 579 $ (4,077) $ 169,997 =========== ======= ========== ===========
(4) LOANS RECEIVABLE Loans receivable at September 30, 1998 and December 31, 1997 were as follows (dollars in thousands):
September 30, 1998 December 31, 1997 -------------------- ----------------- (Unaudited) Real estate mortgage loans: First-lien mortgage, primarily residential $ 765,109 $ 689,767 Commercial 242,170 181,315 Multifamily 127,477 131,454 Residential construction 113,341 83,359 Acquisition and development 59,447 31,619 Commercial construction 27,079 14,506 Commercial loans, secured by residential mortgage loans held for sale 122,799 98,679 Commercial loans, secured by mortgage servicing rights 19,263 32,685 Commercial, financial and industrial 89,235 30,877 Loans secured by savings deposits 14,865 8,695 Consumer and other loans 59,502 15,030 --------------- ----------- 1,640,287 1,317,986 Loans in process (84,795) (47,893) Allowance for loan losses (11,043) (7,412) Unearned interest and loan fees (3,398) (2,926) Premium to record purchased loans, net 4,456 1,680 --------------- ----------- $ 1,545,507 $1,261,435 =============== =========== Weighted average yield 8.35% 8.30% =============== ===========
At September 30, 1998, Coastal had outstanding commitments to originate or purchase $124.1 million of real estate mortgage and other loans and had commitments under lines of credit to originate primary construction and other loans of approximately $132.8 million. In addition, at September 30, 1998, Coastal had $3.9 million of outstanding letters of credit. Management anticipates the funding of these commitments through normal operations. At September 30, 1998 and December 31, 1997, the carrying value of loans that were considered to be impaired totaled approximately $2.0 million and the related allowance for loan losses on those impaired loans totaled $950,000 and $1.1 million at September 30, 1998 and December 31, 1997, respectively. The average recorded investment in impaired loans during the nine months ended September 30, 1998 and 1997 was $1.8 million and $770,000, respectively. Coastal services for others loans receivable which are not included in the Consolidated Financial Statements. The total amounts of such loans were $567.2 million and $675.7 million at September 30, 1998 and December 31, 1997, respectively. An analysis of activity in the allowance for loan losses for the nine months ended September 30, 1998 and 1997 is as follows (in thousands):
Nine Months Ended September 30, ------------------------------- 1998 1997 ------------ -------- (Unaudited) Balance, beginning of period $ 7,412 $ 6,880 Acquisition allowance adjustment 2,257 -- Provision for loan losses 2,350 1,350 Charge-offs, net of recoveries (976) (1,148) ------------ -------- Balance, end of period $ 11,043 $ 7,082 ============ ========
The acquisition allowance adjustment of $2.3 million was recorded during the nine months ended September 30, 1998 in connection with the recording of the loans receivable acquired in the branch purchase on August 14, 1998 (see note 14). (5) SAVINGS DEPOSITS Savings deposits, their stated rates and the related weighted average interest rates at September 30, 1998 and December 31, 1997 are summarized as follows (dollars in thousands):
Stated Rate September 30, 1998 December 31, 1997 -------------- ------------------- ------------------- (Unaudited) Noninterest-bearing checking 0.00% $ 86,537 $ 101,782 Interest-bearing checking 1.49 - 2.00 51,266 69,972 Savings accounts 2.18 - 2.75 48,904 25,555 Money market demand accounts 0.00 - 4.60 335,016 165,986 --------- ----------- 521,723 363,295 --------- ----------- Certificate accounts 2.00 - 2.99 7,407 5,142 3.00 - 3.99 5,526 2,763 4.00 - 4.99 118,971 64,478 5.00 - 5.99 949,210 834,727 6.00 - 6.99 90,871 94,405 7.00 - 7.99 8,903 7,624 8.00 - 8.99 1,063 1,854 9.00 - 9.99 305 847 over 10.00 16 -- ---------- ----------- 1,182,272 1,011,840 ---------- ----------- Premium (discount) to record purchased savings deposits, net 576 (75) ---------- ----------- $ 1,704,571 $1,375,060 ========== =========== Weighted average rate 4.35% 4.67% ========== ===========
Effective January 1, 1998, Coastal implemented a program whereby a portion of the balances in noninterest-bearing and interest-bearing checking accounts are reclassified to money market demand accounts under Federal Reserve Regulation D. The scheduled maturities of certificate accounts outstanding at September 30, 1998 were as follows (dollars in thousands):
September 30, 1998 -------------------- (Unaudited) 0 to 12 months $ 993,744 12 to 24 months 139,592 24 to 36 months 26,219 36 to 48 months 9,860 48 to 60 months 12,575 Over 60 months 282 -------------------- $ 1,182,272 ====================
(6) SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND ADVANCES FROM THE FHLB The weighted average interest rates on securities sold under agreements to repurchase at September 30, 1998 and December 31, 1997 were 5.28% and 6.00%, respectively. The stated interest rates on securities sold under agreements to repurchase ranged from 4.93% to 5.63% at September 30, 1998. The weighted average interest rates on advances from the FHLB at September 30, 1998 and December 31, 1997 were 5.44% and 5.95%, respectively. The scheduled maturities and related weighted average interest rates on advances from the FHLB at September 30, 1998 are summarized as follows (dollars in thousands) (unaudited):
Due during the year Weighted Average ended December 31, Interest Rate Amount - ------------------- ---------------- ----------------- 1998 5.30% $378,100 1999 5.57 416,638 2000 5.93 6,845 2001 6.21 8,595 2002 5.52 69,673 2003 5.52 111 2004 6.48 2,699 2005 5.57 129 2006 6.85 3,213 2007 6.64 1,176 2008 4.70 51,336 2009 8.15 4,472 2010 5.66 187 2011 6.63 1,441 2012 5.68 217 2013 5.71 6,871 2018 6.00 544 -------- $952,247 ========
Advances from the FHLB are secured by certain first-lien mortgage loans and mortgage-backed securities owned by Coastal. (7) SENIOR NOTES PAYABLE On June 30, 1995, Coastal issued $50.0 million of 10.0% Senior Notes due June 30, 2002. The Senior Notes are redeemable at Coastal's option, in whole or in part, on or after June 30, 2000, at par, plus accrued interest to the redemption date. Interest on the Senior Notes is payable quarterly. (8) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK Coastal is a party to financial instruments with off-balance sheet risk in the normal course of business to reduce its own exposure to fluctuations in interest rates. These financial instruments include interest rate swap agreements and interest rate cap agreements. Coastal utilizes interest rate swap and interest rate cap agreements to reduce exposure to floating interest rates by altering the interest rate sensitivity of a portion of its variable-rate assets and borrowings. At September 30, 1998, Coastal had interest rate swap and cap agreements having notional principal amounts totaling $45.7 million and $255.3 million, respectively. The terms of the interest rate swap agreements outstanding at September 30, 1998 (unaudited) and December 31, 1997 are summarized as follows (dollars in thousands):
Floating Rate Fair Value at Notional LIBOR Fixed at End of Period Maturity Amount Index Rate End of Period (gain (loss)) - ---------------------- --------- ----------- ------ -------------- -------------- At September 30, 1998: 1998 $ 4,400 Three-month 6.709% 5.688% $ (5) 1999 14,600 Three-month 6.926 5.688 (302) 2000 4,800 Three-month 6.170 5.500 (126) 2000 2,415 Three-month 6.000 5.313 (57) 2005 19,527 Three-month 6.500 5.688 (1,212) --------- $ 45,742 $(1,702) ========= ======== At December 31, 1997: 1998 $ 4,400 Three-month 6.709% 5.875% $ (28) 1999 14,600 Three-month 6.926 5.875 (239) 2000 4,800 Three-month 6.170 5.906 (99) 2000 2,520 Three-month 6.000 5.906 -- 2005 19,527 Three-month 6.500 5.879 (230) --------- ------- $ 45,847 $ (596) ========= =======
The interest rate swap agreements provide for Coastal to make weighted average fixed interest payments and receive payments based on a floating LIBOR index, as defined in each agreement. The weighted average interest rate of payments received on all of the interest rate swap agreements was approximately 5.80% and the weighted average interest payment rate on all of the interest rate swap agreements was approximately 6.61% for the nine months ended September 30, 1998. Payments on the interest rate swap agreements are based on the notional principal amount of the agreements; no funds were actually borrowed or are to be repaid. The interest rate swap agreements are used to alter the interest rate sensitivity of a portion of Coastal's variable-rate borrowings. As such, Coastal records net interest expense or income related to these agreements on a monthly basis in "interest expense on other borrowed money" in the accompanying consolidated statements of income. The net interest expense related to these agreements was approximately $278,000 for the nine months ended September 30, 1998 and approximately $338,000 for the nine months ended September 30, 1997. Coastal had pledged approximately $6.8 million of mortgage-backed securities to secure interest rate swap agreements at September 30, 1998. Coastal has interest rate cap agreements with third parties. The agreements provide for the third parties to make payments to Coastal whenever a defined floating rate exceeds rates ranging from 5.0% to 11.0%, 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 purchase prices of the interest rate cap agreements are capitalized and included in "prepaid expenses and other assets" in the accompanying consolidated statements of financial condition and are amortized over the life of the agreements using the straight-line method. The unamortized portion of the purchase price of the interest rate cap agreements was approximately $165,000 and $286,000 at September 30, 1998 and December 31, 1997, respectively, with the estimated fair value of the agreements being $88,000 and $300,000 at September 30, 1998 and December 31, 1997, respectively. The interest rate cap agreements are used to alter the interest rate sensitivity of a portion of Coastal's mortgage-backed securities, loans receivable and their related funding sources. As such, the amortization of the purchase price and interest income from the interest rate cap agreements are recorded in "interest income on mortgage-backed securities or loans receivable," as appropriate, in the accompanying consolidated statements of income. The net decrease in interest income related to the interest rate cap agreements was approximately $38,000 and $202,000 for the nine months ended September 30, 1998 and 1997, respectively. Interest rate cap agreements outstanding at September 30, 1998 (unaudited) expire as follows (dollars in thousands):
Year of Strike rate Notional expiration Range amount - ---------- --------------- --------- 1998 5.00 - 11.00% $ 54,300 1999 7.25 - 11.00 63,564 2000 8.50 - 9.50 11,620 2001 7.00 - 9.00 26,792 2003 8.00 - 8.50 99,000 --------- $ 255,276 =========
Market risk, or the risk of loss due to movement in market prices or rates, is quantified by Coastal through a risk monitoring process of marking to market the portfolio to expected market level changes in an instantaneous shock of plus and minus 200 basis points on a quarterly basis. This process discloses the effects on market values of the assets and liabilities, unrealized gains and losses, including off-balance sheet items, as well as potential changes in net interest income. The fluctuation in the market value, however, has no effect on the level of earnings of Coastal because the securities are categorized as "held-to-maturity" or "available-for-sale." Coastal is exposed to credit loss in the event of nonperformance by the counterparty to the swap or cap and controls this risk through credit monitoring procedures. The notional principal amount does not represent Coastal's exposure to credit loss. (9) EARNINGS PER SHARE The following summarizes information related to the computation of basic and diluted earnings per share ("EPS") for the nine- and three- month periods ended September 30, 1998 and 1997 (dollars in thousands, except per share data) (unaudited):
Nine Months Ended September 30, ----------------- 1998 1997 ---------- ---------- Net income available to common stockholders $ 13,661 $ 8,774 ========== ========== Weighted average number of common shares outstanding used in basic EPS calculation 7,534,947 7,463,546 Add assumed exercise of outstanding stock options as adjusted for dilutive securities 252,887 242,664 ---------- ---------- Weighted average number of common shares outstanding used in diluted EPS calculation 7,787,834 7,706,210 ========== ========== Basic EPS $ 1.81 $ 1.18 ========== ========== Diluted EPS $ 1.75 $ 1.14 ========== ==========
Three Months Ended September 30, ------------------ 1998 1997 ---------- ---------- Net income available to common stockholders $ 3,741 $ 2,717 ========== ========== Weighted average number of common shares outstanding used in basic EPS calculation 7,499,625 7,482,030 Add assumed exercise of outstanding stock options as adjusted for dilutive securities 226,704 284,675 ---------- ---------- Weighted average number of common shares outstanding used in diluted EPS calculation 7,726,329 7,766,705 ========== ========== Basic EPS $ 0.50 $ 0.36 ========== ========== Diluted EPS $ 0.48 $ 0.35 ========== ==========
(10) COASTAL BANC SSB PREFERRED STOCK On October 21, 1993, the Bank issued 1,150,000 shares of 9.0% Noncumulative Preferred Stock, no par Series A, at a price of $25 per share to the public. Dividends on the Preferred Stock are payable quarterly at the annual rate of $2.25 per share, when, as and if declared by the Board of Directors of the Bank. At any time on or after December 15, 1998, the Preferred Stock may be redeemed in whole or in part only at the Bank's option at $25 per share plus unpaid dividends (whether or not earned or declared) for the then current dividend period to the date fixed for redemption. (11) STATUTORY CAPITAL REQUIREMENTS The applicable regulations require federally insured institutions, which are not the highest rated, to have a minimum regulatory tier 1 (core) capital to total assets ratio equal to a minimum of 4.0%, a tier 1 risk-based capital to risk-weighted assets ratio of 4.0% and total risk-based capital to risk-weighted assets ratio of 8.0%. At September 30, 1998, the Bank's regulatory capital (unaudited) in relation to its existing regulatory capital requirements for capital adequacy purposes were as follows (dollars in thousands):
Minimum For Capital Well-Capitalized Actual Adequacy Purposes Requirements Capital Requirement Amount Ratio Amount Ratio Amount Ratio - ------------------- ----------- --------- -------- ------ -------- ------ Tier 1 (core) $ 155,777 5.10% $122,066 4.00% $152,583 5.00% Tier 1 risk-based 155,777 9.29 67,049 4.00 100,574 6.00 Total risk-based 166,820 9.95 134,098 8.00 167,623 10.00
As of September 30, 1998, the most recent notification from the Federal Deposit Insurance Corporation ("FDIC") categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. Due to the acquisition completed during the third quarter of 1998, the Bank's total risk-based capital as of September 30, 1998, as reported, has fallen below the Well-Capitalized Requirement. Management believes that this is a temporary situation and anticipates meeting the total risk-based Well-Capitalized Requirement as of December 31, 1998. (12) FEDERAL INCOME TAXES In March 1998, Coastal announced that it had successfully resolved an outstanding tax benefit issue with the FDIC as Manager of the Federal Savings and Loan Insurance Corporation Resolution Fund. The resolution of the issue resulted in Coastal recording a $3.7 million, or 47 cents per diluted share, reversal of accrued income taxes during the nine months ended September 30, 1998; resulting in a one-time positive effect on net income. The resolution of the tax benefit issue also contributes an ongoing quarterly tax benefit of $226,000 or approximately 3 cents per diluted share, as of September 30, 1998. This tax benefit is expected to continue for approximately 3 years. (13) RECENT ACCOUNTING STANDARDS The Financial Accounting Standards Board's Statement No. 131 ("Statement 131"), "Disclosure about Segments of an Enterprise and Related Information," requires public companies to report certain information about their operating segments in their annual financial statements and quarterly reports issued to stockholders for years after implementation. It also requires public companies to report certain information about their products and services, the geographic areas in which they operate, and their major customers. Statement 131 is effective for fiscal years beginning after December 15, 1997. Coastal anticipates implementing Statement 131 for its fiscal 1998 Annual Report on Form 10-K. Implementation of Statement 131 should have no material effect on Coastal's Consolidated Financial Statements. The Financial Accounting Standards Board's Statement No. 133 ("Statement 133"), "Accounting for Derivative Instruments and for Hedging Activities," was issued in June 1998. Statement 133 requires companies to recognize all derivatives as either assets or liabilities in the statement of financial condition and measure those instruments at fair value. Statement 133 requires that changes in fair value of a derivative be recognized currently in earnings unless specific hedge accounting criteria are met. Statement 133 is effective for fiscal years beginning after June 15, 1999. Coastal is evaluating the impact, if any, Statement 133 may have on its future consolidated financial statements. (14) BRANCH PURCHASE On August 14, 1998, Coastal completed the acquisition of the Valley branches of Pacific Southwest Bank, also known as San Benito Bank and Trust Company, a unit of Pacific Southwest Bank ("Valley Branches"). Twelve branches located in Harlingen, San Benito, Mission, Pharr, Edinburg, Brownsville, McAllen and South Padre Island were acquired in this transaction. Summarized below are the assets and liabilities recorded at fair value at the date of acquisition (in thousands):
Assets: Cash $120,085 Loans receivable 176,157 U.S. Treasury securities 26,942 Goodwill 17,255 Property and equipment 10,743 Other assets 5,437 -------- Total assets $356,619 ======== Liabilities: Deposits $355,425 Other liabilities 1,194 -------- Total liabilities $356,619 ========
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------------------------- Financial Condition - -------------------- On August 14, 1998, Coastal completed the acquisition of the Valley branches of Pacific Southwest Bank, also known as San Benito Bank and Trust Company, a unit of Pacific Southwest Bank (the "Valley Acquisition"). This acquisition added twelve branches, approximately $176.2 million in loans receivable and $355.4 in deposits to Coastal's existing organization. Total assets increased 7.4% or $214.9 million from December 31, 1997 to September 30, 1998. The net increase resulted primarily from an increase in loans receivable of $284.1 million, a $21.3 million increase in stock in the Federal Home Loan Bank of Dallas ("FHLB"), a $19.1 million increase in cash and cash equivalents, a $15.7 million increase in goodwill and an $11.2 million increase in property and equipment, offset by decreases of $110.3 million and $44.2 million in mortgage-backed securities held-to-maturity and mortgage-backed securities available-for-sale, respectively. The increase in loans receivable was primarily due to bulk residential mortgage loan purchases of $294.0 million, $176.2 million loans acquired in the Valley Acquisition (net of the $2.3 million allowance for loan losses recorded at acquisition) and $25.6 million of consumer loan purchases from correspondent lenders, in addition to an increase of $24.1 million in commercial loans, secured by residential mortgage loans held for sale, during the nine months ended September 30, 1998. These increases were somewhat offset by principal payments received. The increase in stock in the FHLB was due to the increased amounts required to be maintained based on the level of FHLB advances outstanding. The increase in goodwill was due to $17.3 million of goodwill recorded due to the Valley Acquisition offset by current year amortization. The increase in property and equipment was also primarily due to the Valley Acquisition. The decrease in mortgage-backed securities was due to principal payments received and the sale of $26.3 million of mortgage-backed securities available-for-sale. Savings deposits increased $329.5 million or 24.0% from December 31, 1997 to September 30, 1998 due to the $355.4 million of deposits acquired in the Valley Acquisition offset by decreases in existing deposits. Securities sold under agreements to repurchase decreased 69.1% or $547.0 million and advances from the FHLB increased 76.2% or $411.8 million from December 31, 1997 to September 30, 1998 due to a reallocation of borrowings to take advantage of more favorable interest rates. Stockholders' equity increased 10.1% or $10.6 million from December 31, 1997 to September 30, 1998 as a result primarily of net income and a $1.5 million decrease in accumulated other comprehensive income (loss) offset by dividends declared and treasury stock acquired of $3.3 million. Results of Operations for the Nine Months Ended September 30, 1998 and 1997 - -------------------------------------------------------------------------------- General ------- For the nine months ended September 30, 1998, net income before preferred stock dividends was $15.6 million compared to $10.7 million for the nine months ended September 30, 1997. The increase in net income in the first nine months of 1998 was primarily due to the resolution of an outstanding tax benefit issue with the Federal Deposit Insurance Corporation as Manager of the Federal Savings and Loan Insurance Corporation Resolution Fund. The resolution of the issue resulted in Coastal recording a $3.7 million, or 47 cents per diluted share, reversal of accrued income taxes; resulting in a one-time positive effect on net income. The resolution of the tax benefit issue will also contribute an ongoing quarterly tax benefit of $226,000 or approximately 3 cents per diluted share (as of September 30, 1998). This tax benefit is expected to continue for approximately 3 years. Net income for the first three months of 1998 also included an additional provision for loan losses of $1.0 million (above the current quarterly provision of $450,000) and a writedown of purchased mortgage loan premium of $709,000. The additional provision for loan losses of $1.0 million, or 8 cents per diluted share after tax, was recorded to increase the allowance for loan losses due to the continuing change in the composition of the loans receivable portfolio as a result of management's emphasis on business lending. The writedown of the purchased mortgage loan premium of $709,000, or 6 cents per diluted share after tax, was related to an adjustable rate whole loan package purchased in the second quarter of 1997, on which Coastal experienced high prepayments during 1997 and through the first quarter of 1998, resulting from a comparatively lower current interest rate environment. Net interest income increased $5.4 million for the nine months ended September 30, 1998 as compared to the nine months ended September 30, 1997. Noninterest income (excluding the writedown of purchased mortgage loan premium) increased during such period by $699,000. Noninterest expense increased by $3.8 million and the provision for federal income taxes (excluding the one-time effect of the $3.7 million reversal of accrued income taxes) decreased by $559,000 from the 1997 to the 1998 nine month period due to the ongoing quarterly benefit attributable to the tax benefit issue and the tax effect of the recording of the additional provision for loan losses and the writedown of the purchased mortgage loan premium during the first nine months of 1998. Interest Income ---------------- Interest income for the nine months ended September 30, 1998 increased $6.7 million or 4.4% from the nine months ended September 30, 1997. The increase was primarily due to an increase of $7.2 million in interest earned on loans receivable over the prior comparable period. The increase in interest income on loans receivable was due to a $158.0 million increase in the average balance of loans receivable offset by a decrease in the average yield from 8.68% for the nine months ended September 30, 1997 to 8.39% for the nine months ended September 30, 1998. The decrease in the average yield on loans receivable was due in part to $749,000 (or 6 cents per diluted share after tax) of additional amortization of purchased mortgage loan premium during the nine months ended September 30, 1998. This amortization was attributable to an adjustable rate whole loan package purchased in the second quarter of 1997, on which Coastal experienced high prepayments during 1997 and through the first quarter of 1998. As discussed previously, Coastal recorded a $709,000 writedown of the purchased mortgage loan premium on this package in March 1998, which has positively impacted the average yield since March 31, 1998. Interest income on federal funds sold, certificates of deposit and other investments increased $898,000 which was offset by a $1.5 million decrease in interest income on mortgage-backed securities. Total interest-earning assets for the nine months ended September 30, 1998 averaged $2.9 billion as compared to $2.8 billion for the nine months ended September 30, 1997. Interest Expense ----------------- Interest expense on interest-bearing liabilities was $108.9 million for the nine months ended September 30, 1998, as compared to $107.6 million for the same period in 1997. The increase in interest expense was due to a $58.6 million increase in the average balance of interest-bearing liabilities during such period offset by a decrease in the average rate paid on interest-bearing liabilities from 5.42% for the nine months ended September 30, 1997 to 5.36% for the nine months ended September 30, 1998. The increase in average interest-bearing liabilities consisted of a $288.8 million increase in FHLB advances, a $63.5 million increase in interest-bearing savings deposits, offset by a $293.7 million decrease in securities sold under agreements to repurchase and federal funds purchased. The reallocation of the borrowings outstanding during the nine month periods was directly attributable to Coastal's change in funding sources to take advantage of more favorable interest rates. Net Interest Income --------------------- Net interest income was $48.5 million for the nine months ended Setpember 30, 1998 and $43.1 million for the same period in 1997. Net interest margin ("Margin") was 2.23% for the nine months ended September 30, 1998 compared to 2.07% for the same period in 1997. Margin represents net interest income as a percentage of average interest-earning assets. Net interest spread ("Spread"), defined to exclude noninterest-bearing deposits, increased from 1.83% for the nine months ended September 30, 1997 to 1.86% for the nine months ended September 30, 1998. Management also calculates an alternative spread which includes noninterest-bearing deposits. Under this calculation, the alternative spreads for the nine months ended September 30, 1998 and 1997 were 2.05% and 2.00%, respectively. Margin and spread are affected by the changes in the amount and composition of interest-earning assets and interest-bearing liabilities. The overall increase in net interest spread was primarily due to the decrease in the average rate paid on interest-bearing liabilities of 6 basis points. The decrease in the average rate paid on interest-bearing liabilities was due primarily to the overall decrease in wholesale funding costs. In addition, the average balance of loans receivable increased $158.0 million from the nine months ended September 30, 1997 to the nine months ended September 30, 1998, while the average yield decreased from 8.68% to 8.39% and the average balance of mortgage-backed securities decreased $46.3 million from the nine months ended September 30, 1997 to the nine months ended September 30, 1998, while the average yield increased from 6.10% to 6.16%. Average net interest-earning assets increased $73.7 million from the nine months ended September 30, 1997 to the nine months ended September 30, 1998. Spread for the nine months ended September 30, 1998 was also negatively affected by the additional amortization of purchased mortgage loan premium as discussed previously. The writedown of the purchased mortgage loan premium recorded in March 1998 has decreased the ongoing amortization effect of prepayments related to the adjustable rate whole loan package. Management's goal is to achieve a more desirable asset/liability composition which is less vulnerable to market interest rate fluctuations, primarily through the addition of loans tied to variable rates such as LIBOR and local and regional prime rates and through the efforts to replace LIBOR based borrowings with lower cost deposits. In addition, management intends to gradually increase commercial business loans to approximately 15% of total assets and commercial business (noninterest-bearing) deposits to approximately 10% of total deposits within three to five years. Provision for Loan Losses ---------------------------- The provision for loan losses was $2.4 million for the nine months ended September 30, 1998 and $1.4 million for the nine months ended September 30, 1997. During the nine months ended September 30, 1998, the increased provision, above the current quarterly provision of $450,000, was recorded to increase the allowance for loan losses due to the continuing change in the composition of the loans receivable portfolio. This change is occurring as a result of management's emphasis on business lending. The allowance for loan losses as a percentage of total loans was 0.71% at September 30, 1998 and 0.55% at September 30, 1997. At September 30, 1998, the allowance for loan losses included the $2.3 million acquisition allowance adjustment as a result of the loans acquired in the Valley Acquisition, of which approximately 58% were commercial real estate and commercial, financial and industrial loans. Although no assurance can be given, management believes that the present allowance for loan losses is adequate considering the changing composition of the loans receivable portfolio, historical loss experience, delinquency trends and current economic conditions. Management will continue to review its loan loss allowance policy as Coastal's loan portfolio grows and diversifies to determine if changes to the policy and resulting allowance for loan losses are necessary. Noninterest Income ------------------- For the nine months ended September 30, 1998, noninterest income (excluding the writedown of purchased mortgage loan premium) increased $699,000 or 14.7% to $5.5 million, compared to $4.8 million for the nine months ended September 30, 1997. The increase in noninterest income was primarily due to an increase of $981,000 in loan fees and service charges on deposit accounts and a $481,000 increase in other noninterest income. The increase in loan fees and service charges on deposit accounts consisted of a $250,000 increase in loan fees and a $731,000 increase in service charges on deposit accounts due to the increase in transaction type deposit accounts, including the transaction type deposit accounts acquired in the Valley Acquisition. These increases were somewhat offset by a $526,000 decrease in loan servicing income due to the reducing servicing portfolio. In addition, as discussed previously, during the nine months ended September 30, 1998, Coastal recorded a writedown of purchased mortgage loan premium of $709,000. Noninterest Expense -------------------- For the nine months ended September 30, 1998, noninterest expense increased $3.8 million from the nine months ended September 30, 1997. Compensation, payroll taxes and other benefits as well as office occupancy expense increased $2.1 million and $1.1 million, respectively, from the nine months ended September 30, 1997 to the nine months ended September 30, 1998, primarily due to the staffing increases related to the expansion of the loan product base and the continuing development of commercial business lending programs, in addition to the staffing expenses related to the Valley Acquisition. Occupancy expenses also increased due to the acquisition of assets and other expenses related to the relocation of Coastal's corporate headquarters in the third quarter of 1997 and the acquisition of the twelve branches in the Valley Acquisition. In addition, data processing expenses and the amortization of goodwill increased $130,000 and $156,000, respectively, primarily due to the Valley Acquisition. Other changes included a $65,000 increase in real estate owned expenses, a $93,000 increase in insurance premiums (which includes deposit insurance premiums) and a $42,000 increase in other operating expenses. During the nine months ended September 30, 1998, noninterest expense included approximately $120,000 in nonrecurring expenses incurred due to the Valley Acquisition. Provision for Federal Income Taxes -------------------------------------- For the nine months ended September 30, 1998, the provision for federal income taxes (excluding the one-time effect of the $3.7 million reversal of accrued income taxes) was $5.6 million compared to $6.2 million for the nine months ended September 30, 1997. The decrease from 1997 to 1998 was due primarily to the ongoing quarterly benefit attributable to the tax benefit issue (a benefit of approximately $226,000 per quarter) and the tax benefit effect of the recording of the additional provision for loan losses and the writedown of the purchased mortgage loan premium during the first nine months of 1998. Results of Operations for the Three Months Ended September 30, 1998 and 1997 - -------------------------------------------------------------------------------- General ------- For the three months ended September 30, 1998, net income before preferred stock dividends was $4.4 million compared to $3.4 million for the three months ended September 30, 1997. The increase was primarily due to a $3.1 million increase in net interest income for the three months ended September 30, 1998 as compared to the three months ended September 30, 1997. Noninterest income increased during such period by $309,000. Noninterest expense increased by $2.3 million and the provision for federal income taxes increased by $41,000 from the 1997 to the 1998 three month period. Interest Income ---------------- Interest income for the three months ended September 30, 1998 increased $2.9 million or 5.7% from the three months ended September 30, 1997. The increase was primarily due to an increase of $3.6 million in interest earned on loans receivable over the prior comparable quarter. The increase in interest income on loans receivable was due to a $142.5 million increase in the average balance of loans receivable and an increase in the average yield from 8.28% for the three months ended September 30, 1997 to 8.47% for the three months ended September 30, 1998. In addition, interest income on federal funds sold, certificates of deposit and other investments increased $533,000 while interest income on mortgage-backed securities decreased $1.3 million due to a lower average balance. Total interest-earning assets for the three months ended September 30, 1998 averaged $3.0 billion as compared to $2.9 billion for the three months ended September 30, 1997. Interest Expense ----------------- Interest expense on interest-bearing liabilities was $36.9 million for the three months ended September 30, 1998, as compared to $37.1 million for the same period in 1997. The decrease in interest expense was due to a decrease in the average rate paid on interest-bearing liabilities from 5.47% for the three months ended September 30, 1997 to 5.33% for the three months ended September 30, 1998 offset somewhat by a $74.8 million increase in the average balance of interest-bearing liabilities. The increase in average interest-bearing liabilities consisted of a $454.2 million increase in FHLB advances, a $133.9 million increase in interest-bearing savings deposits, offset by a $513.3 million decrease in securities sold under agreements to repurchase. The reallocation of the borrowings outstanding during the three month periods was directly attributable to Coastal's change in funding sources to take advantage of more favorable interest rates. Net Interest Income --------------------- Net interest income was $17.3 million for the three months ended September 30, 1998 and $14.2 million for the same period in 1997. Net interest margin ("Margin") was 2.32% for the three months ended September 30, 1998 compared to 1.98% for the three months ended September 30, 1997. Margin represents net interest income as a percentage of average interest-earning assets. Net interest spread ("Spread"), defined to exclude noninterest-bearing deposits, increased from 1.66% for the three months ended September 30, 1997 to 1.95% for the three months ended September 30, 1998. Management also calculates an alternative spread which includes noninterest-bearing deposits. Under this calculation, the alternative spreads for the three months ended September 30, 1998 and 1997 were 2.16% and 1.86%, respectively. Margin and spread are affected by the changes in the amount and composition of interest-earning assets and interest-bearing liabilities. The overall increase in net interest spread was primarily due to an increase in the average yield on interest-earning assets of 15 basis points and a decrease in the average rate paid on interest-bearing liabilities of 14 basis points. The average balance of loans receivable increased $142.5 million from the three months ended September 30, 1997 to the three months ended September 30, 1998, while the average yield increased from 8.28% to 8.47%. The average balance of mortgage-backed securities decreased $80.3 million from the three months ended September 30, 1997 to the three months ended September 30, 1998, while the average yield remained at 6.12%. The decrease in the average rate paid on interest-bearing liabilities was due primarily to the overall decrease in wholesale funding costs. Average net interest-earning assets increased $24.6 million from the three months ended September 30, 1997 to the three months ended September 30, 1998. Management's goal is to achieve a more desirable asset/liability composition which is less vulnerable to market interest rate fluctuations, primarily through the addition of loans tied to variable rates such as LIBOR and local and regional prime rates and through the efforts to replace LIBOR based borrowings with lower cost deposits. In addition, management intends to gradually increase commercial business loans to approximately 15% of total assets and commercial business (noninterest-bearing) deposits to approximately 10% of total deposits within three to five years. Provision for Loan Losses ---------------------------- The provision for loan losses was $450,000 for both the three months ended September 30, 1998 and the three months ended September 30, 1997. The allowance for loan losses as a percentage of total loans was 0.71% at September 30, 1998 and 0.55% at September 30, 1997. At September 30, 1998, the allowance for loan losses included the $2.3 million acquisition allowance adjustment as a result of the loans acquired in the Valley Acquisition, of which approximately 58% were commercial real estate and commercial, financial and industrial loans. Although no assurance can be given, management believes that the present allowance for loan losses is adequate considering the changing composition of the loans receivable portfolio, historical loss experience, delinquency trends and current economic conditions. Management will continue to review its loan loss allowance policy as Coastal's loan portfolio grows and diversifies to determine if changes to the policy and resulting allowance for loan losses are necessary. Noninterest Income ------------------- For the three months ended September 30, 1998, noninterest income increased $309,000 or 17.7% to $2.1 million, compared to $1.7 million for the three months ended September 30, 1997. The increase in noninterest income was primarily due to an increase of $390,000 in loan fees and service charges on deposit accounts and a $318,000 increase in other noninterest income. The increase in loan fees and service charges on deposit accounts consisted of a $330,000 increase in service charges on deposit accounts and a $60,000 increase in loan fees. These increases were somewhat offset by a $162,000 decrease in loan servicing income and a $237,000 decrease in the gain on sales of mortgage-backed securities available-for-sale. Noninterest Expense -------------------- For the three months ended September 30, 1998, noninterest expense increased $2.3 million from the three months ended September 30, 1997. Compensation, payroll taxes and other benefits as well as office occupancy expense increased $1.4 million and $382,000, respectively, from the three months ended September 30, 1997 to the three months ended September 30, 1998, primarily due to the staffing increases related to the expansion of the loan product base and the continuing development of commercial business lending programs, in addition to the staffing expenses related to the Valley Acquisition. Occupancy expenses also increased due to the acquisition of assets and other expenses related to the relocation of Coastal's corporate headquarters in the third quarter of 1997 and the acquisition of the twelve branches in the Valley Acquisition. In addition, the amortization of goodwill increased $95,000 and insurance premiums increased $113,000 primarily due to the Valley Acquisition. Other changes included a $124,000 increase in real estate owned expenses, a $59,000 increase in data processing expense and a $174,000 increase in other operating expenses. During the three months ended September 30, 1998, noninterest expense included approximately $120,000 in nonrecurring expenses incurred due to the Valley Acquisition. Provision for Federal Income Taxes -------------------------------------- For the three months ended September 30, 1998 and 1997, the provision for federal income taxes was $2.0 million. The provision in 1998 includes the ongoing quarterly benefit attributable to the tax benefit issue resolved in the first quarter of the year (a benefit of approximately $226,000 per quarter). Liquidity and Capital Resources ---------------------------------- Coastal's primary sources of funds consist of savings deposits bearing market rates of interest, securities sold under agreements to repurchase, advances from the FHLB, federal funds purchased and principal payments on loans receivable and mortgage-backed securities. Coastal uses its funding resources principally to meet its ongoing commitments to fund maturing deposits and deposit withdrawals, repay borrowings, purchase loans receivable and mortgage-backed securities, fund existing and continuing loan commitments, maintain its liquidity, meet operating expenses and fund acquisitions of other banks and thrifts, either on a branch office or whole bank acquisition basis. At September 30, 1998, Coastal had binding commitments to originate or purchase loans totaling approximately $124.1 million and had $84.8 million of undisbursed loans in process. Scheduled maturities of certificates of deposit during the 12 months following September 30, 1998 totaled $993.7 million at September 30, 1998. Management believes that Coastal has adequate resources to fund all of its commitments. In addition, Coastal has historically experienced a retention rate of maturing certificates of deposit of $5,000 or greater of approximately 80%. As of September 30, 1998, Coastal operated 49 retail banking offices in Texas cities, including Houston, Austin, Corpus Christi, the Rio Grande Valley and small cities in the southeast quadrant of Texas. Management's five year goal is to have over $5 billion in assets, over $3 billion in deposits, $2.5 billion in loans and 80 branches in cities throughout central and south Texas, although there can be no assurance that this goal can be accomplished through growth or acquisitions. The Year 2000 --------------- Many existing computer programs, including many utilized by Coastal, use only two digits to identify a year in the date field. These programs were designed and developed without considering the impact of the upcoming change in the century. Because of the year 2000 implications, Coastal formally initiated a project during the first quarter of 1997 to ensure that its operational and financial systems will not be adversely affected by year 2000 software problems. The year 2000 project team, which includes all levels of management, is identifying its computer applications which could fail or create erroneous results because of the year 2000, and is developing alternate ("contingent") operating systems for these applications. An inventory of all core systems and products that could be affected by the year 2000 date change has been developed by Coastal. The software for Coastal's systems is primarily provided through third party service bureaus and software vendors. Coastal is requiring its third party service bureaus, software providers and vendors to demonstrate and represent that the products provided are or will be year 2000 compliant. Coastal has an internal compliance testing program in place for testing with the external service bureaus and other software providers, as well as testing other internally used systems. Coastal expects to complete its testing and remediation by June 1999. The costs associated with the year 2000 issues are estimated not to exceed $300,000 in the aggregate. Such costs will be capitalized and amortized over an estimated three to five year period. Planning and testing will not ensure that any organization will be able to conduct business around and after the year 2000. Testing does not ensure that our customers and other business partners will be able to conduct business. Coastal is performing due diligence on our customers and other business partners by the implementation of processes for evaluating our customers' and business partners' readiness for the year 2000 which will be continuously monitored. Coastal has implemented procedures and continues to refine its processes for evaluating its business readiness in addition to developing contingency plans to ensure that alternate operating systems are available in the event of unforeseen problems. The effect of many business disruptions at the same time may impact Coastal. Coastal will continue to review its contingency plans to reasonably address these incidents. Forward-Looking Information ---------------------------- "Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995: The statements contained in this Quarterly Report on Form 10-Q which are not historical facts contain forward looking information with respect to plans, projections or future performance of the Company, the occurrence of which involve certain risks and uncertainties detailed in the Company's filings with the Securities and Exchange Commission ("SEC"). The Management's Discussion and Analysis of Financial Condition and Results of Operations set forth in the Form 10-Q should be read in conjunction with the information contained in the Consolidated Financial Statements and the Notes thereto. Such discussion contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 (the "Reform Act"), and is subject to the safe harbor created by that Reform Act. The words "estimate," "project," "anticipate," "expect," "intend," "believe," "plans," and similar expressions are intended to identify forward-looking statements. Because such forward-looking statements involve risks and uncertainties, there are important factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements. Factors, all of which are difficult to predict and many of which are beyond the control of Coastal, that could cause actual results to differ materially include, but are not limited to: risks related to Coastal's acquisition strategy, including risks of adversely changing results of operations and factors affecting Coastal's ability to consummate further acquisitions; risks involved in Coastal's ability to quickly and efficiently integrate the operations of acquired entities with those of Coastal; changes in general economic and business conditions; changes in market rates of interest; changes in the laws and regulations applicable to Coastal; the risks associated with the Bank's non-traditional lending (loans other than single-family residential mortgage loans such as multifamily, real estate acquisition and development, commercial real estate, commercial business, warehouse and mortgage servicing rights loans); and changes in business strategies and other factors as discussed in Coastal's Annual Report on Form 10-K for the year ended December 31, 1997, as filed with the SEC on March 24, 1998. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK -------------------------------------------------------------- There have been no material changes in Coastal's interest rate risk position since December 31, 1997. Coastal's principal market risk exposure is to interest rates. See note 8 of the Notes to Consolidated Financial Statements. PART II - OTHER INFORMATION Item 1. Legal Proceedings ------------------ Coastal is involved in routine legal proceedings occurring in the ordinary course of business which, in the aggregate, are believed by management to be immaterial. Item 2. Changes in Securities ----------------------- a) Not applicable. b) Not applicable. Item 3. Default Upon Senior Securities --------------------------------- Not applicable. Item 4. Submission of Matters to a Vote of Security Holders ----------------------------------------------------------- Not applicable. Item 5. Other Information ------------------ Important Dates Relating to Stockholder Proposals for the 1999 Annual Meeting of Shareholders. --------------------------------------------------------------------------- As noted in the Company's definitive Proxy Statement for the Annual Meeting of Stockholders to be held April 23, 1998 under the caption "Stockholder Proposals," any proposal which a stockholder of the Company wishes to have included in the Company's proxy solicitation materials to be used in connection with the Company's 1999 Annual Meeting of Shareholders, must be received at the principal executive offices of the Company, Coastal Banc Plaza, 5718 Westheimer, Suite 600, Houston, Texas 77057, Attention: Secretary, no later than November 24, 1998. If the notice of such proposal is received after November 24, 1998, it will not be considered timely pursuant to Proxy Rule 14a-8 and such proposal will not be included in the Company's proxy soliciting materials. STOCKHOLDER PROPOSALS WHICH ARE NOT SUBMITTED FOR INCLUSION IN THE COMPANY'S PROXY MATERIALS PURSUANT TO RULE 14A-8 UNDER THE SECURITIES EXCHANGE ACT OF 1934 MAY BE BROUGHT BEFORE AN ANNUAL MEETING PURSUANT TO THE COMPANY'S ARTICLES OF INCORPORATION, WHICH PROVIDE THAT BUSINESS MUST BE PROPERLY BROUGHT BEFORE THE MEETING BY OR AT THE DIRECTION OF THE BOARD OF DIRECTORS, OR OTHERWISE PROPERLY BROUGHT BEFORE THE MEETING BY A STOCKHOLDER. FOR BUSINESS TO BE PROPERLY BROUGHT BEFORE AN ANNUAL MEETING BY A STOCKHOLDER, THE STOCKHOLDER MUST HAVE GIVEN TIMELY NOTICE THEREOF IN WRITING TO THE SECRETARY OF THE COMPANY. TO BE TIMELY, A STOCKHOLDER'S NOTICE MUST BE DELIVERED TO, OR MAILED AND RECEIVED AT, THE PRINCIPAL EXECUTIVE OFFICES OF THE COMPANY ON OR BEFORE JANUARY 23, 1999.* A STOCKHOLDER'S NOTICE SHALL SET FORTH AS TO EACH MATTER THE STOCKHOLDER PROPOSES TO BRING BEFORE AN ANNUAL MEETING FOR SUCH INFORMATION REQUIRED BY THE COMPANY'S ARTICLES OF INCORPORATION. IF THE PROPOSAL IS NOT MADE IN ACCORDANCE WITH THE TERMS OF THE ARTICLES OF INCORPORATION, SUCH PROPOSAL WILL NOT BE ACTED UPON AT THE 1999 ANNUAL MEETING. ______________ *[WHICH IS THE DATE WHICH IS NOT LESS THAN 60 DAYS PRIOR TO THE ANNIVERSARY DATE OF THE MAILING OF PROXY MATERIALS BY THE COMPANY IN CONNECTION WITH THE IMMEDIATELY PRECEDING ANNUAL MEETING OF STOCKHOLDERS.] Item 6. Exhibits and Reports on Form 8-K ------------------------------------- (a) The following exhibits are filed as part of this report: Exhibit 27 - Financial Data Schedule Exhibit 99 - Forward-Looking Information (b) Form 8-K filed on August 25, 1998 concerning the announcement that Coastal had completed the acquisition of the Valley Branches of Pacific Southwest Bank also known as San Benito Bank and Trust, a Unit of Pacific Southwest Bank. (c) Form 8-K filed on September 14, 1998 concerning the announcement that the Board of Directors had authorized the repurchase of up to 6.6% (approximately 500,000 shares) of the outstanding shares of common stock. SIGNATURES Pursuant to the requirement of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Dated: 11/13/98 By/s/ Manuel J. Mehos -------- ---------------------- Manuel J. Mehos Chairman of the Board Chief Executive Officer Dated: 11/13/98 By/s/ Catherine N. Wylie -------- ----------------------- Catherine N. Wylie Chief Financial Officer Exhibit 27 Financial Data Schedule Exhibit 99 Forward-Looking Information EXHIBIT 99 Forward-Looking Information "Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995: The statements contained in this Quarterly Report on Form 10-Q which are not historical facts contain forward looking information with respect to plans, projections or future performance of the Company, the occurrence of which involve certain risks and uncertainties detailed in the Company's filings with the Securities and Exchange Commission ("SEC"). The Management's Discussion and Analysis of Financial Condition and Results of Operations set forth in the Form 10-Q should be read in conjunction with the information contained in the Consolidated Financial Statements and the Notes thereto. Such discussion contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 (the "Reform Act"), and is subject to the safe harbor created by that Reform Act. The words "estimate," "project," "anticipate," "expect," "intend," "believe," "plans," and similar expressions are intended to identify forward-looking statements. Because such forward-looking statements involve risks and uncertainties, there are important factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements. Factors, all of which are difficult to predict and many of which are beyond the control of Coastal, that could cause actual results to differ materially include, but are not limited to: risks related to Coastal's acquisition strategy, including risks of adversely changing results of operations and factors affecting Coastal's ability to consummate further acquisitions; risks involved in Coastal's ability to quickly and efficiently integrate the operations of acquired entities with those of Coastal; changes in general economic and business conditions; changes in market rates of interest; changes in the laws and regulations applicable to Coastal; the risks associated with the Bank's non-traditional lending (loans other than single-family residential mortgage loans such as multifamily, real estate acquisition and development, commercial real estate, commercial business, warehouse and mortgage servicing rights loans); and changes in business strategies and other factors as discussed in Coastal's Annual Report on Form 10-K for the year ended December 31, 1997, as filed with the SEC on March 24, 1998. template1 EX-27 2
9 This schedule contains summary financial information extracted from the consolidated statement of financial condition, the consolidated statement of income and notes thereto found on pages 1 through 17 of the Company's Form 10-Q for the year-to-date September 30, 1998 and is qualified in its entirety by reference to such financial statements 9-MOS DEC-31-1998 SEP-30-1998 56,200 0 4,300 0 127,795 1,234,840 1,232,914 1,545,507 11,043 3,126,286 1,704,571 938,309 59,343 308,650 0 0 50 114,580 3,126,286 87,495 67,938 2,007 157,440 48,166 108,903 48,537 2,350 0 35,334 15,605 13,661 0 0 13,661 1.81 1.75 0 0 0 0 0 7,412 1,235 259 11,043 11,043 0 0
-----END PRIVACY-ENHANCED MESSAGE-----