-----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, QgBCwPU82+atw6FoxeyBRciqdrVmpqE153fb2SgUAYYR6cwG/VGeNzT+Cyl7Imq1 S7PCG2ZoTNs239T9N5JI+A== 0000919805-99-000016.txt : 19990517 0000919805-99-000016.hdr.sgml : 19990517 ACCESSION NUMBER: 0000919805-99-000016 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990514 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: 99623137 BUSINESS ADDRESS: STREET 1: 5718 WESTHEIMER STREET 2: SUITE 600 CITY: HOUSTON STATE: TX ZIP: 77057 BUSINESS PHONE: 7134355000 MAIL ADDRESS: STREET 1: 5718 WESTHEIMER STREET 2: SUITE 600 CITY: HOUSTON STATE: TX ZIP: 77057 FORMER COMPANY: FORMER CONFORMED NAME: COASTAL BANC SAVINGS ASSOCIATION DATE OF NAME CHANGE: 19970110 FORMER COMPANY: FORMER CONFORMED NAME: COASTAL BANCORP INC/TX/ DATE OF NAME CHANGE: 19940718 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [ X ] Quarterly Report Under Section 13 or 15 (d) of the Securities Exchange Act of 1934 For the Quarterly Period Ended March 31, 1999 [ ] 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: 6,412,774 AS OF APRIL 30, 1999 COASTAL BANCORP, INC. AND SUBSIDIARIES Table of Contents PART I. FINANCIAL INFORMATION - -------- ----------------------
Item 1 Financial Statements Consolidated Statements of Financial Condition at March 31, 1999 (unaudited) and December 31, 1998 1 Consolidated Statements of Income for the Three-Month Periods Ended March 31, 1999 and 1998 (unaudited) 2 Consolidated Statements of Comprehensive Income for the Three-Month Periods Ended March 31, 1999 and 1998 (unaudited) 3 Consolidated Statements of Cash Flows for the Three-Month Periods Ended March 31, 1999 and 1998 (unaudited) 4 Notes to Consolidated Financial Statements 6 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 16 Item 3 Quantitative and Qualitative Disclosures About Market Risk 21
PART II. OTHER INFORMATION - --------- ------------------
Item 1 Legal Proceedings 22 Item 2 Changes in Securities 22 Item 3 Default upon Senior Securities 22 Item 4 Submission of Matters to a Vote of Security Holders 22 Item 5 Other Information 22 Item 6 Exhibits and Reports on Form 8-K 22
SIGNATURES ITEM 1. FINANCIAL STATEMENTS - -------- ---------------------
COASTAL BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (IN THOUSANDS, EXCEPT SHARE DATA) March 31, December 31, 1999 1998 ------------ ------------- ASSETS (Unaudited) - --------------------------------------------------------------------- Cash and cash equivalents $ 47,801 $ 45,453 Federal funds sold 18,000 -- Loans receivable (note 4) 1,603,898 1,538,149 Mortgage-backed securities held-to-maturity (note 3) 1,062,264 1,154,116 Mortgage-backed securities available-for-sale, at fair value (note 3) 85,878 96,609 U.S. Treasury security available-for-sale, at fair value 2,009 2,016 Mortgage loans held for sale 2,381 -- Accrued interest receivable 15,186 15,518 Property and equipment 32,618 33,116 Stock in the Federal Home Loan Bank of Dallas (FHLB) 50,505 49,819 Goodwill 29,934 30,687 Mortgage servicing rights 3,721 4,049 Prepaid expenses and other assets 10,720 12,629 ------------ ------------- $ 2,964,915 $ 2,982,161 ============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY --------------------------------------- Liabilities: Deposits (note 5) $1,665,176 $1,705,004 Advances from the FHLB (note 6) 996,576 966,720 Securities sold under agreements to repurchase (note 6) 100,000 100,000 Senior notes payable, net (note 7) 47,900 50,000 Advances from borrowers for taxes and insurance 5,546 3,340 Other liabilities and accrued expenses 16,312 15,583 ----------- ----------- Total liabilities 2,831,510 2,840,647 ----------- ----------- 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, $.01 par value; authorized shares 30,000,000; 7,570,043 and 7,568,255 shares issued in 1999 and 1998, respectively 76 76 Additional paid-in capital 33,714 33,696 Retained earnings 90,360 88,144 Accumulated other comprehensive income (loss) - unrealized loss on securities available-for-sale (1,058) (1,374) Treasury stock at cost (1,160,679 and 499,600 shares in 1999 and 1998) (18,437) (7,778) ----------- ----------- Total stockholders' equity 104,655 112,764 ----------- ----------- $2,964,915 $2,982,161 =========== ===========
See accompanying Notes to Consolidated Financial Statements COASTAL BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Ended March 31, ------------------- 1999 1998 ------------------- -------- (Unaudited) Interest income: Loans receivable $ 31,004 $26,940 Mortgage-backed securities 17,750 23,446 FHLB stock, federal funds sold and other interest-earning assets 772 502 ------------------- -------- 49,526 50,888 ------------------- -------- Interest expense: Deposits 16,810 15,507 Advances from the FHLB: Short-term 4,006 3,955 Long-term 7,559 3,947 Other borrowed money 1,518 11,229 Senior notes payable 1,217 1,250 ------------------- -------- 31,110 35,888 ------------------- -------- Net interest income 18,416 15,000 Provision for loan losses 2,331 1,450 ------------------- -------- Net interest income after provision for loan losses 16,085 13,550 ------------------- -------- Noninterest income: Loan fees and service charges on deposit accounts 1,814 1,324 Loan servicing income, net 134 240 Writedown of purchased mortgage loan premium -- (709) Other 492 192 ------------------- -------- 2,440 1,047 ------------------- -------- Noninterest expense: Compensation, payroll taxes and other benefits 7,115 4,940 Office occupancy 2,802 1,989 Data processing 899 608 Amortization of goodwill 753 469 Insurance premiums 303 265 Real estate owned 154 252 Other 1,454 1,812 ------------------- -------- 13,480 10,335 ------------------- -------- Income before provision (benefit) for Federal income taxes 5,045 4,262 Provision (benefit) for Federal income taxes (note 12) 1,626 (2,326) ------------------- -------- Net income before preferred stock dividends 3,419 6,588 Preferred stock dividends of Coastal Banc ssb (Series A) (note 10) 647 647 ------------------- -------- Net income available to common stockholders $ 2,772 $ 5,941 =================== ======== Basic earnings per share (note 9) $ 0.40 $ 0.79 =================== ======== Diluted earnings per share (note 9) $ 0.40 $ 0.76 =================== ========
See accompanying Notes to Consolidated Financial Statements COASTAL BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (IN THOUSANDS)
Three Months Ended March 31, ------------------- 1999 1998 ------------------- ------- (Unaudited) Net income available to common stockholders $ 2,772 $5,941 Other comprehensive income, net of tax: Unrealized holding gains (losses) on securities available-for-sale arising during period 316 (29) ------------------- ------- Total comprehensive income $ 3,088 $5,912 =================== =======
See accompanying Notes to Consolidated Financial Statements COASTAL BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
Three Months Ended March 31, -------------------- 1999 1998 -------------------- ---------- (Unaudited) Cash flows from operating activities: Net income available to common stockholders $ 2,772 $ 5,941 Adjustments to reconcile net income to common stockholders to net cash provided by operating activities: Depreciation and amortization of property and equipment, mortgage servicing rights and prepaid expenses and other assets 2,437 2,004 Net premium amortization 140 1,867 Provision for loan losses 2,331 1,450 Amortization of goodwill 753 469 Originations and purchases of mortgage loans held for sale (2,381) (7,154) Stock dividends from the FHLB (676) (431) Decrease (increase) in: Accrued interest receivable 332 (406) Other, net 2,159 1,714 -------------------- ---------- Net cash provided by operating activities 7,867 5,454 -------------------- ---------- Cash flows from investing activities: Net increase in federal funds sold (18,000) (3,500) Purchases of mortgage-backed securities held-to-maturity (3,080) -- Principal repayments on mortgage-backed securities held-to-maturity 95,269 19,794 Principal repayments on mortgage-backed securities available-for-sale 11,219 169 Purchases of loans receivable (143,690) (121,593) Net decrease in loans receivable 74,556 42,226 Net purchases of property and equipment (772) (1,661) Purchases of FHLB stock (10) (1,930) -------------------- ---------- Net cash provided (used) by investing activities 15,492 (66,495) -------------------- ----------
COASTAL BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED (IN THOUSANDS)
Three Months Ended March 31, -------------------- 1999 1998 -------------------- ------------ (Unaudited) Cash flows from financing activities: Net decrease in deposits $ (39,776) $ (7,707) Advances from the FHLB 1,602,772 1,013,550 Principal payments on advances from the FHLB (1,572,916) (997,220) Securities sold under agreements to repurchase and federal funds purchased 37,783 1,817,924 Purchases of securities sold under agreements to repurchase and federal funds purchased (37,783) (1,780,482) Net increase in advances from borrowers for taxes and insurance 2,206 3,141 Exercise of stock options for purchase of common stock, net 18 369 Purchase of Treasury Stock (10,659) -- Repurchase of Senior Notes (2,100) -- Dividends paid (556) (604) -------------------- ------------ Net cash provided (used) by financing activities (21,011) 48,971 -------------------- ------------ Net increase (decrease) in cash and cash equivalents 2,348 (12,070) Cash and cash equivalents at beginning of period 45,453 37,096 -------------------- ------------ Cash and cash equivalents at end of period $ 47,801 $ 25,026 ==================== ============ Supplemental schedule of cash flows-interest paid $ 31,463 $ 33,920 ==================== ============ Supplemental schedule of noncash investing and financing activities: Foreclosures of loans receivable $ 528 $ 1,595 ==================== ============
See accompanying Notes to Consolidated Financial Statements COASTAL BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) BASIS OF PRESENTATION The accompanying unaudited Consolidated Financial Statements were prepared in accordance with the instructions for Form 10-Q and, therefore, do not include all disclosures necessary for a complete presentation of financial condition, results of operations, and cash flows in conformity with generally accepted accounting principles. All adjustments which are, in the opinion of management, of a normal recurring nature and are necessary for a fair presentation of the interim financial statements, have been included. The results of operations for the periods ended March 31, 1999 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 in the consolidated statements of comprehensive income. 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 applicable common stock share data have been adjusted to include the effect of the stock split for all periods presented. On August 27, 1998, December 21, 1998 and February 25, 1999, the Board of Directors authorized three 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 March 31, 1999, 1,160,679 shares had been repurchased in the open market at an average repurchase price of $15.88 per share for a total cost of $18.4 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 its subsidiary, CoastalBanc Financial Corp. (collectively, the "Bank"), and Coastal Banc Capital Corp. (collectively with Coastal Bancorp, Inc. and the Bank, "Coastal"). All significant intercompany balances and transactions have been eliminated in consolidation. (3) MORTGAGE-BACKED SECURITIES Mortgage-backed securities at March 31, 1999 (unaudited) were as follows (dollars in thousands):
Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ----------- ----------- ------------ ----------- Held-to-Maturity: REMICS - Agency $ 769,561 $ 4,381 $ (7,252) $ 766,690 REMICS - Non-agency 199,569 403 (1,360) 198,612 FNMA certificates 62,882 171 (847) 62,206 GNMA certificates 19,523 17 (19) 19,521 Non-agency securities 10,729 86 (23) 10,792 ----------- ----------- ------------ ----------- $ 1,062,264 $ 5,058 $ (9,501) $ 1,057,821 =========== =========== ============ =========== Available-for-sale: REMICS - Agency $ 86,715 $ 3 $ (1,630) $ 85,088 REMICS - Non-agency 797 -- (7) 790 ----------- ----------- ------------ ----------- $ 87,512 $ 3 $ (1,637) $ 85,878 =========== =========== ============ ===========
Mortgage-backed securities at December 31, 1998 were as follows (dollars in thousands):
Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ----------- ----------- ------------ ----------- Held-to-maturity: REMICS - Agency $ 839,593 $ 3,770 $ (10,349) $ 833,014 REMICS - Non-agency 218,500 598 (2,186) 216,912 FNMA certificates 63,199 147 (810) 62,536 GNMA certificates 21,311 16 (23) 21,304 Non-agency securities 11,512 113 (23) 11,602 Interest-only securities 1 -- -- 1 ----------- ----------- ------------ ----------- $ 1,154,116 $ 4,644 $ (13,391) $ 1,145,369 =========== =========== ============ =========== Available-for-sale: REMICS - Agency $ 97,695 $ -- $ (2,115) $ 95,580 REMICS - Non-agency 1,037 -- (8) 1,029 ----------- ----------- ------------ ----------- $ 98,732 $ -- $ (2,123) $ 96,609 =========== =========== ============ ===========
(4) LOANS RECEIVABLE Loans receivable at March 31, 1999 and December 31, 1998 were as follows (dollars in thousands):
March 31, 1999 December 31, 1998 ---------------- ------------------- (Unaudited) Real estate mortgage loans: First-lien mortgage, primarily residential $ 763,904 $ 690,510 Commercial 277,608 257,723 Multifamily 115,914 119,447 Residential construction 133,222 115,714 Acquisition and development 71,541 75,932 Commercial construction 42,790 40,344 Commercial loans, secured by residential mortgage loans held for sale 104,278 173,124 Commercial loans, secured by mortgage servicing rights 8,054 3,867 Commercial, financial and industrial 112,048 92,218 Loans secured by savings deposits 12,717 13,164 Consumer and other loans 71,606 66,989 ---------------- ------------------- 1,713,682 1,649,032 Loans in process (97,239) (99,790) Allowance for loan losses (13,157) (11,358) Unearned interest and loan fees (2,907) (3,493) Premium to record purchased loans, net 3,519 3,758 ---------------- ------------------- $ 1,603,898 $ 1,538,149 ================ =================== Weighted average yield 8.27% 8.55% ================ ===================
At March 31, 1999, Coastal had outstanding commitments to originate or purchase $123.1 million of real estate mortgage and other loans and had commitments under lines of credit to originate primary construction and other loans of approximately $189.3 million. In addition, at March 31, 1999, Coastal had $7.2 million of outstanding letters of credit. Management anticipates the funding of these commitments through normal operations. At March 31, 1999 and December 31, 1998, the carrying value of loans that were considered to be impaired totaled approximately $12.1 million and $1.7 million, respectively and the related allowance for loan losses on those impaired loans totaled $3.1 million and $880,000 at March 31, 1999 and December 31, 1998, respectively. The average recorded investment in impaired loans during the three months ended March 31, 1999 and 1998 was $9.4 million and $1.9 million, respectively. An analysis of activity in the allowance for loan losses for the three months ended March 31, 1999 and 1998 is as follows (in thousands):
Three Months Ended March 31, ------------------------------ 1999 1998 ------------------------------ ------- (Unaudited) Balance, beginning of period $ 11,358 $7,412 Provision for loan losses 2,331 1,450 Charge-offs (553) (350) Recoveries 21 173 ------------------------------ ------- Balance, end of period $ 13,157 $8,685 ============================== =======
On August 11, 1998, Coastal approved the purchase of a $10.0 million participation in a warehouse loan aggregating $25.0 million to MCA Financial Corp., and certain of its affiliates, of Southfield, Michigan (collectively the "Mortgage Banker"). The lead lender ("Lead Lender") in this facility is a major commercial bank and the loan is secured by subprime residential loans. In late January 1999, due to a lack of liquidity, the Mortgage Banker ceased operations and shortly thereafter was seized by the Michigan Bureau of Financial Institutions. A conservator was appointed to take control of the Mortgage Banker's books and records, marshal that company's assets and continue its loan servicing operations. A voluntary petition under Chapter 11 of the U.S. Bankruptcy Code was filed in the U.S. Bankruptcy Court for the Eastern District of Michigan for the Mortgage Banker on or about February 11, 1999, by the conservator, who has been appointed the "debtor-in-possession", to allow the conservator time to develop a plan of reorganization while protecting the assets of the Mortgage Banker. Coastal has hired special bankruptcy counsel to represent it in this situation and has been involved in discussions with the Lead Lender regarding the status of the loan. Although Coastal has been informed by the Lead Lender that Coastal's loan is collateralized by residential loans, Coastal, as of the date hereof, has been unable to verify the extent to which the collateral, if any, is sufficient to prevent Coastal from incurring a loss or the amount of any loss, should one occur. Effective December 31, 1998, Coastal placed this loan on nonaccrual. At this time, Coastal is unable to determine the timing, probability, or the amount of any loss which might result from the default by the Mortgage Banker. Coastal is continuing to monitor this situation and will make additions to the overall allowance for loan losses as considered necessary based on its existing policy. Coastal services for others loans receivable which are not included in the Consolidated Financial Statements. The total amounts of such loans were $483.5 million and $519.2 million at March 31, 1999 and December 31, 1998, respectively. (5) DEPOSITS Deposits, their stated rates and the related weighted average interest rates, at March 31, 1999 and December 31, 1998 are summarized as follows (dollars in thousands):
Stated Rate March 31, 1999 December 31, 1998 --------------- ---------------- ------------------ (Unaudited) Noninterest-bearing checking 0.00% $ 83,166 $ 95,398 Interest-bearing checking 1.00 - 2.00 51,262 63,067 Savings accounts 1.98 - 2.75 49,810 48,571 Money market demand accounts 0.00 - 4.51 347,170 339,481 ---------------- ------------------ 531,408 546,517 ------------------ ---------------- Certificate accounts 2.00 - 2.99 2,694 6,538 3.00 - 3.99 80,377 38,614 4.00 - 4.99 411,456 272,325 5.00 - 5.99 552,305 747,585 6.00 - 6.99 77,325 83,277 7.00 - 7.99 8,463 8,727 8.00 - 8.99 478 699 9.00 - 9.99 305 305 over 10.00 18 18 --------------- ---------------- 1,133,421 1,158,088 --------------- ---------------- Premium (discount) to record purchased deposits, net 347 399 --------------- ---------------- $ 1,665,176 $ 1,705,004 =============== ================ Weighted average rate 4.03% 4.11% =============== ================
The scheduled maturities of certificate accounts outstanding at March 31, 1999 were as follows (dollars in thousands):
March 31, 1999 ---------------- (Unaudited) 0 to 12 months $ 976,636 13 to 24 months 117,099 25 to 36 months 18,365 37 to 48 months 12,533 49 to 60 months 8,527 Over 60 months 261 ---------------- $ 1,133,421 ================
(6) SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND ADVANCES FROM THE FHLB The weighted average and stated interest rates on securities sold under agreements to repurchase at March 31, 1999 and December 31, 1998 was 4.93%. The weighted average interest rates on advances from the FHLB at March 31, 1999 and December 31, 1998 were 5.02% and 5.24%, respectively. The scheduled maturities and related weighted average interest rates on advances from the FHLB at March 31, 1999 are summarized as follows (dollars in thousands) (unaudited):
Weighted Average Due during the year ended December 31, Interest Rate Amount - --------------------------------------- ----------------- ------------ 1999 4.98% $818,914 2000 5.53 12,237 2001 5.89 12,847 2002 4.91 73,815 2003 5.22 794 2004 6.47 2,508 2005 5.57 129 2006 6.85 3,184 2007 6.65 1,144 2008 4.72 52,801 2009 8.15 4,352 2010 5.66 187 2011 6.62 1,410 2012 5.68 217 2013 5.71 6,850 2014 5.43 2,997 2018 5.28 2,190 -------- $996,576 ========
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. During the first quarter of 1999, Coastal, after receipt of an unsolicited offer, repurchased $2.1 million of the Senior Notes outstanding at par. (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 exposure to fluctuations in interest rates. These financial instruments include interest rate swap agreements and interest rate cap agreements. Coastal utilizes interest rate swap and interest rate cap agreements to reduce exposure to floating interest rates by altering the interest rate sensitivity of a portion of its variable-rate assets and borrowings. At March 31, 1999, Coastal had interest rate swap and cap agreements having notional principal amounts totaling $41.9 million and $195.0 million, respectively. The terms of the interest rate swap agreements outstanding at March 31, 1999 (unaudited) and December 31, 1998 are summarized as follows (dollars in thousands):
Fair Value at Floating Rate End of Notional LIBOR Fixed at Period Maturity Amount Index Rate End of Period (gain (loss)) - ------------------- --------------- --------------------- ------ -------------- -------------- At March 31, 1999: 1999 $ 14,600 Three-month 6.926% 5.000% $ (155) 2000 4,800 Three-month 6.170 5.000 (63) 2000 2,345 Three-month 6.000 5.000 (24) 2004 3,900 One-month 5.635 4.939 15 2005 16,225 Three-month 6.500 5.020 (691) --------------- -------------- 41,870 $ (918) =============== ============== At December 31, 1998: 1999 $ 14,600 Three-month 6.926% 5.399% $ (218) 2000 4,800 Three-month 6.170 5.226 (164) 2000 2,380 Three-month 6.000 5.281 (38) 2005 16,225 Three-month 6.500 5.261 (707) --------------- -------------- 38,005 $ (1,127) =============== ==============
The interest rate swap agreements provide 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 5.23% and the weighted average interest payment rate on all of the interest rate swap agreements was approximately 6.63% for the three months ended March 31, 1999. 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 $134,000 for the three months ended March 31, 1999 and approximately $86,000 for the three months ended March 31, 1998. Coastal had pledged approximately $6.6 million of mortgage-backed securities to secure interest rate swap agreements at March 31, 1999. 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 7.0% 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 $109,000 and $115,000 at March 31, 1999 and December 31, 1998, respectively, with the estimated fair value of the agreements being $480,000 and $888,000 at March 31, 1999 and December 31, 1998, 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 $6,000 and $24,000 for the three months ended March 31, 1999 and 1998, respectively. Interest rate cap agreements outstanding at March 31, 1999 (unaudited) expire as follows (dollars in thousands):
Year of Strike Rate Notional Expiration Range Amount - ----------- --------------- --------- 1999 7.25 - 11.00% $ 49,339 2000 8.50 - 9.50 11,620 2001 7.00 - 9.00 35,051 2003 8.00 - 8.50 99,000 --------- 195,010 =========
Market risk, or the risk of loss due to movement in market prices or rates, is quantified by Coastal through a risk monitoring process of marking to market the portfolio to expected market level changes in an instantaneous shock of plus and minus 200 basis points on a quarterly basis. This process discloses the effects on market values of the assets and liabilities, unrealized gains and losses, including off-balance sheet items, as well as potential changes in net interest income. The fluctuation in the market value, however, has no effect on the level of earnings of Coastal because the securities are categorized as "held-to-maturity" or "available-for-sale." Coastal is exposed to credit loss in the event of nonperformance by the counterparty to the swap or cap and attempts to control this risk through credit monitoring procedures. The notional principal amount does not represent Coastal's exposure to credit loss. (9) EARNINGS PER SHARE The following summarizes information related to the computation of basic and diluted earnings per share ("EPS") for the three- month periods ended March 31, 1999 and 1998 (dollars in thousands, except per share data) (unaudited):
Three Months Ended March 31, ------------------- 1999 1998 ------------------- ---------- Net income available to common stockholders $ 2,772 $ 5,941 =================== ========== Weighted average number of common shares outstanding used in basic EPS calculation 6,856,505 7,541,310 Add assumed exercise of outstanding stock options as adjusted for dilutive securities 155,166 257,877 ------------------- ---------- Weighted average number of common shares outstanding used in diluted EPS calculation 7,011,671 7,799,187 =================== ========== Basic EPS $ 0.40 $ 0.79 =================== ========== Diluted EPS $ 0.40 $ 0.76 =================== ==========
The weighted average number of common shares outstanding has been reduced in 1999 by the treasury stock held by Coastal. As of March 31, 1999, Coastal had 1,160,679 common shares in treasury. (10) COASTAL BANC SSB PREFERRED STOCK On October 21, 1993, the Bank issued 1,150,000 shares of 9.0% Noncumulative Preferred Stock, no par value, Series A, at a price of $25 per share to the public. 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 March 31, 1999, 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) $ 161,145 5.59% $ 115,238 4.00% $144,047 5.00% Tier 1 risk-based 161,145 9.39 68,666 4.00 102,999 6.00 Total risk-based 174,302 10.15 137,331 8.00 171,664 10.00
As of March 31, 1999, the most recent notification from the Federal Deposit Insurance Corporation ("FDIC") categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum Tier 1 (core), Tier 1 risk-based and total risk-based ratios as set forth in the table above. There are no conditions or events since that notification that management believes have changed the institution's category. (12) 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 three months ended March 31, 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 March 31, 1999. This tax benefit is expected to continue until the second quarter of 2001. (13) RECENT ACCOUNTING STANDARDS 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) Coastal Bancorp, Inc. Preferred Stock The week of May 10, 1999, Coastal Bancorp, Inc. ("Bancorp") issued 1,100,000 shares of 9.12% Series A Cumulative Preferred Stock, no par value, at a price of $25 per share to the public. 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, 203 at Bancorp's option. The estimated $26.4 million net proceeds may be used for acquisitions, although there are presently no agreements or understandings with respect to any such acquisition; repurchases in the open market of Bancorp's outstanding common stock; repurchases in the open market of the outstanding 10% Senior Notes Due 2002; and capital contributions to the Bank to support growth and to provide working capital. The proceeds may be invested temporarily in short-term investments. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND ------------------------------------------------------------------- RESULTS OF OPERATIONS ------------------- Financial Condition - -------------------- Total assets decreased 0.6% or $17.2 million from December 31, 1998 to March 31, 1999. The net decrease resulted primarily from decreases of $91.9 million and $10.7 million in mortgage-backed securities held-to-maturity and mortgage-backed securities available-for-sale, respectively, offset by an increase in loans receivable of $65.7 million and an increase in federal funds sold of $18.0 million. The decrease in mortgage-backed securities was due to principal payments received. The increase in loans receivable was primarily due to bulk residential mortgage loan purchases of $135.6 million and $8.1 million of consumer loan purchases from correspondent lenders, offset by principal payments received and a decrease of $68.8 million in commercial loans, secured by residential mortgage loans held for sale, because of the decreased activity during the period by these types of customers. Deposits decreased $39.8 million or 2.34% from December 31, 1998 to March 31, 1999 and advances from the FHLB increased 3.09% or $29.9 million from December 31, 1998 to March 31, 1999. Stockholders' equity decreased 7.2% or $8.1 million from December 31, 1998 to March 31, 1999 as a result of additional treasury stock acquired of $10.7 million and dividends declared, offset somewhat by net income and a $316,000 decrease in accumulated other comprehensive income. Results of Operations for the Three Months Ended March 31, 1999 and 1998 - -------------------------------------------------------------------------------- General ------- For the three months ended March 31, 1999, net income available to common stockholders was $2.8 million compared to $5.9 million for the three months ended March 31, 1998. During the first quarter of 1999, net income was reduced by a $1.7 million additional provision for loan losses (above the planned quarterly provision of $675,000). The additional provision for loan losses was due in part to a $10.0 million participation in a warehouse loan to MCA Financial Corp., and certain of its affiliates, of Southfield, Michigan (collectively the "Mortgage Banker"), that, during January 1999, was placed on nonaccrual effective December 31, 1998, due to the fact that the Mortgage Banker ceased operations in late January 1999 and shortly thereafter was seized by the Michigan Bureau of Financial Institutions. Coastal, as of the date hereof, has been unable to verify the extent to which the collateral, if any, is sufficient to prevent Coastal from incurring a loss or the amount of any loss, should one occur. At this time, Coastal is unable to determine the timing, probability, or the amount of any loss which might result from the default by the Mortgage Banker. Coastal is continuing to monitor this situation and will make additions to the overall allowance for loan losses as it deems necessary based on its existing policy. The additional provision for loan losses is also attributable to other changes and growth in Coastal's loan portfolio, including the loans acquired in the 1998 acquisition of 12 branch offices from Pacific Southwest Bank (the "Valley Acquisition"). Net income in the first quarter of 1998 was affected by a one-time income benefit of $2.6 million (net) or 33 cents per diluted share. This benefit was the result of 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 $3.7 million one-time tax benefit was offset by the recording of an additional provision for loan losses of $1.0 million and a writedown of purchased mortgage loan premium of $709,000. The resolution of the one-time tax benefit issue is also contributing an ongoing quarterly tax benefit of $226,000 or approximately 3 cents per diluted share which is estimated to continue until the second quarter of 2001. Excluding the net benefit from these nonrecurring items, net income available to common stockholders from ongoing core operations was $3.4 million or $0.43 per diluted share for the three months ended March 31, 1998. Net interest income increased $3.4 million and noninterest income (excluding the writedown of purchased mortgage loan premium in 1998) increased $684,000 from the three months ended March 31, 1998 to the three months ended March 31, 1999. These increases were offset by the increase in the provision for loan losses of $881,000 and the increase in noninterest expense of $3.1 million. The provision (benefit) for federal income taxes (excluding the one-time effect of the $3.7 million reversal of accrued income taxes in 1998) increased $273,000 due to the increased income before provision for federal income taxes. Interest Income ---------------- Interest income for the three months ended March 31, 1999 decreased $1.4 million or 2.7% from the three months ended March 31, 1998. The decrease is due to a decrease in average interest-earning assets of $74.7 million, while the average yield remained constant at 7.11%. Interest income on loans receivable increased $4.1 million due to a $208.0 million increase in the average balance, offset slightly by a decrease in the average yield from 8.20% for the three months ended March 31, 1998 to 8.15% for the same period in 1999. Interest income on mortgage-backed securities decreased $5.7 million due to a $304.6 million decrease in the average balance and a decrease in the average yield from 6.21% for the three months ended March 31, 1998 to 5.89% for the same period in 1999. In addition, interest income on FHLB stock, federal funds sold and other interest-earning assets increased $270,000. Total interest-earning assets for the three months ended March 31, 1999 averaged $2.8 billion as compared to $2.9 billion for the three months ended March 31, 1998. Interest Expense ----------------- Interest expense on interest-bearing liabilities was $31.1 million for the three months ended March 31, 1999, as compared to $35.9 million for the same period in 1998. The decrease in interest expense was due to a decrease in the average rate paid on interest-bearing liabilities from 5.37% for the three months ended March 31, 1998 to 4.81% for the three months ended March 31, 1999 and a $68.3 million decrease in the average balance of interest-bearing liabilities. The 56 basis point decrease in the average rate paid on interest-bearing liabilities was due to the lower cost deposits acquired in the 1998 Valley Acquisition, the new pricing strategies for certificates of deposit that reduced Coastal's cost of retail deposits and lower wholesale funding costs. The decrease in average interest-bearing liabilities consisted primarily of a $683.8 million decrease in securities sold under agreements to repurchase offset somewhat by a $353.2 million increase in advances from the FHLB and a $263.8 million increase in interest-bearing deposits. Net Interest Income --------------------- Net interest income was $18.4 million for the three months ended March 31, 1999 and $15.0 million for the same period in 1998. Net interest margin ("Margin") was 2.64% for the three months ended March 31, 1999 compared to 2.10% for the three months ended March 31, 1998. 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 1.74% for the three months ended March 31, 1998 to 2.30% for the three months ended March 31, 1999. Management also calculates an alternative Spread which includes noninterest-bearing deposits. Under this calculation, the alternative Spreads for the three months ended March 31, 1999 and 1998 were 2.55% and 1.92%, respectively. Margin and Spread are affected by the changes in the amount and composition of interest-earning assets and interest-bearing liabilities. The overall increase in Margin and Spread was primarily due to the decrease in the average rate paid on interest-bearing liabilities of 56 basis points. Average net interest-earning assets decreased $6.4 million from the three months ended March 31, 1998 to the three months ended March 31, 1999. 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 retail deposits. In addition, management intends to gradually increase commercial business loans to approximately 15% of total assets and noninterest-bearing deposits to approximately 10% of total deposits within three to five years. Provision for Loan Losses ---------------------------- The provision for loan losses was $2.3 million for the three months ended March 31, 1999 compared to $1.5 million for the three months ended March 31, 1998. The increase in the provision for loan losses (over the planned quarterly provision of $675,000) was in part due to the $10.0 million warehouse loan participation placed on nonaccrual effective December 31, 1998, as discussed previously, as well as other changes and growth in Coastal's loan portfolio, including the loans acquired in the 1998 Valley Acquisition. During the three months ended March 31, 1998, an additional provision for loan losses of $1.0 million (over the planned quarterly provision of $450,000) was recorded due to the changes in the composition of the loan portfolio and Coastal's emphasis on business lending during that period. The allowance for loan losses as a percentage of total loans was 0.82% at March 31, 1999 and 0.65% at March 31, 1998. 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 March 31, 1999, noninterest income (excluding the writedown of purchased mortgage loan premium in 1998) increased $684,000 to $2.4 million, compared to $1.8 million for the three months ended March 31, 1998. The increase in noninterest income was primarily due to an increase of $490,000 in loan fees and service charges on deposit accounts and a $300,000 increase in other noninterest income. The increase in loan fees and service charges on deposit accounts consisted of a $650,000 increase in service charges on deposit accounts due to the increase in transaction type deposit accounts, including those acquired in the Valley Acquisition, offset somewhat by a $160,000 decrease in loan fees. These increases were somewhat offset by a $106,000 decrease in loan servicing income due to the declining loan servicing portfolio. Noninterest Expense -------------------- For the three months ended March 31, 1999, noninterest expense increased $3.1 million from the three months ended March 31, 1998. Compensation, payroll taxes and other benefits as well as office occupancy expense increased $2.2 million and $813,000, respectively, from the three months ended March 31, 1998 to the three months ended March 31, 1999, 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 and occupancy expenses related to the Valley Acquisition. In addition, the amortization of goodwill increased $284,000 and data processing expense increased $291,000 primarily due to the Valley Acquisition. Other changes included a $38,000 increase in insurance premiums, a $98,000 decrease in real estate owned expense and a $358,000 decrease in other operating expenses. Provision (benefit) for Federal Income Taxes ------------------------------------------------- The provision for federal income taxes for the three months ended March 31, 1999 was $1.6 million compared to the provision for federal income taxes (excluding the one-time effect of the $3.7 million reversal of accrued income taxes) for the three months ended March 31, 1998 of $1.4 million. The slight increase was due to the increased income before provision (benefit) for federal income taxes in 1999. Liquidity and Capital Resources ---------------------------------- Coastal's primary sources of funds consist of deposits bearing market rates of interest, advances from the FHLB, securities sold under agreements to repurchase, federal funds purchased and principal payments on loans receivable and mortgage-backed securities. Coastal uses its funding resources principally to meet its ongoing commitments to fund maturing deposits and deposit withdrawals, repay borrowings, purchase loans receivable and mortgage-backed securities, fund existing and continuing loan commitments, maintain its liquidity, meet operating expenses and fund acquisitions of other banks and thrifts, either on a branch office or whole bank acquisition basis. At March 31, 1999, Coastal had binding commitments to originate or purchase loans totaling approximately $123.1 million and had $97.2 million of undisbursed loans in process. Scheduled maturities of certificates of deposit during the 12 months following March 31, 1999 totaled $976.6 million at March 31, 1999. 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 March 31, 1999, Coastal operated 50 retail banking offices in Texas cities, including Houston, Austin, Corpus Christi, the Rio Grande Valley and small cities in the southeast quadrant of Texas. Management's five year goal is to have over $5 billion in assets, over $3 billion in deposits, $2.5 billion in loans and 80 branches in cities throughout central and south Texas, although there can be no assurance that this goal can be accomplished through growth or acquisitions. 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 the computer applications which could fail or create erroneous results because of the Year 2000, and is developing alternate ("contingent") operating systems for these applications. Coastal has included in its Year 2000 project the following phases: - - inventory and assessment; - - renovation, which includes the repair or replacement; - - validation, which includes the testing of computer systems and Coastal's connections with other computer systems and service bureaus; - - due diligence of third-party servicers; - - development of contingency plans. Regular Year 2000 progress reports have been and will continue to be made to Coastal's Board of Directors. 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 by June 30, 1999. Coastal is performing due diligence on its customers and other business partners by the implementation and continuous monitoring of processes for evaluating its customers' and business partners' readiness for the Year 2000. 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 anticipates that mission critical systems will be Year 2000 compliant by June 30, 1999. While Coastal does not believe that the process of making its computer systems Year 2000 ready will result in an adverse material impact on its operations or liquidity, a substantial amount of management and staff time has been and will continue to be devoted to the Year 2000 project. The direct costs associated with the Year 2000 issues are estimated not to exceed $300,000 in the aggregate. A portion of such costs representing hardware and software purchases 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. The failure of Coastal, its customers and its other business partners to address the Year 2000 software problems could have a material adverse effect on Coastal's financial condition, results of operations or liquidity. 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. While Coastal will have contingency plans in place to address a temporary disruption in services, there can be no assurance that any disruption or failure will be only temporary, that Coastal's contingency plans will function as anticipated, or that the results of operations, financial condition, or liquidity of Coastal will not be adversely affected in the event of a prolonged disruption or failure. 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 Coastal, the occurrence of which involve certain risks and uncertainties detailed in Coastal'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, 1998, as filed with the SEC on March 23, 1999. 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, 1998. 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 ------------------ Not applicable. 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 8K filed on February 1, 1999 concerning the announcement that a member of the Board of Directors had resigned effective November 24, 1998. (c) Form 8K filed on February 8, 1999 concerning the election of Paul W. Hobby to the Board of Directors effective February 1, 1999. (d) Form 8K filed on March 15, 1999 concerning the announcement that Coastal completed the repurchase of an additional 500,000 shares of its common stock under the December 21, 1998 stock repurchase plan. In addition to the announcement that on February 25, 1999, the Board of Directors authorized the extension of the repurchase plan for up to an additional 500,000 shares. (e) Form 8K filed on March 31, 1999 concerning the status of a nonaccrual loan and the related allowance for loan losses. SIGNATURES Pursuant to the requirement of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Dated: 5/14/99 By /s/ Manuel J. Mehos ------- -------------------- Manuel J. Mehos Chairman of the Board Chief Executive Officer Dated: 5/14/99 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 Coastal, the occurrence of which involve certain risks and uncertainties detailed in Coastal'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, 1998, as filed with the SEC on March 23, 1999. \\enterprise\data\acctexe\watkins\word\form-10q\33199edg.rtf 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 15 of the Company's Form 10-Q for the year-to-date March 31, 1999 and is qualified in its entirety by reference to such financial statements 3-MOS DEC-31-1999 MAR-31-1999 47,801 0 18,000 0 87,887 1,062,264 1,057,821 1,603,898 13,157 2,964,915 1,665,176 823,035 50,608 321,441 0 0 76 104,579 2,964,915 31,004 17,750 772 49,526 16,810 31,110 18,416 2,331 0 14,127 4,398 2,772 0 0 2,772 0.40 0.40 0 0 0 0 0 11,358 553 21 13,157 13,157 0 0
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