UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] Quarterly Report Under Section 13 or 15 (d) of
the Securities Exchange Act of 1934
For the Quarterly Period Ended September 30, 2002
[ ] Transition Report Pursuant to Section 13 or 15 (d) of
the Securities Exchange Act of 1934
For the Transition Period from _________ to _________
Commission File Number: 0-24526
--------
COASTAL BANCORP, INC.
---------------------
(Exact name of Registrant as specified in its charter)
Texas 76-0428727
--------------------- --------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5718 Westheimer, Suite 600
Houston, Texas 77057
------------------------
(Address of principal executive office)
(713) 435-5000
------------------
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
------ -------
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.
COMMON STOCK OUTSTANDING: 5,155,438 AS OF NOVEMBER 1, 2002
COASTAL BANCORP, INC. AND SUBSIDIARIES
Table of Contents
PART I. FINANCIAL INFORMATION
- -------- ----------------------
Item 1 Financial Statements (unaudited)
Consolidated Statements of Financial Condition at September 30, 2002
and December 31, 2001 1
Consolidated Statements of Income for the Nine-Month Periods Ended
September 30, 2002 and 2001 2
Consolidated Statements of Income for the Three-Month Periods Ended
September 30, 2002 and 2001 3
Consolidated Statements of Comprehensive Income for the Nine-Month and
Three-Month Periods Ended September 30, 2002 and 2001 4
Consolidated Statements of Cash Flows for the Nine-Month Periods
Ended September 30, 2002 and 2001 5
Notes to Consolidated Financial Statements 7
Item 2 Management's Discussion and Analysis of Financial Condition and Results
of Operations 19
Item 3 Quantitative and Qualitative Disclosures About Market Risk 26
Item 4 Controls and Procedures 26
PART II. OTHER INFORMATION
- --------- ------------------
Item 1 Legal Proceedings 27
Item 2 Changes in Securities and Use of Proceeds 27
Item 3 Default upon Senior Securities 27
Item 4 Submission of Matters to a Vote of Security Holders 27
Item 5 Other Information 27
Item 6 Exhibits and Reports on Form 8-K 28
SIGNATURES
CERTIFICATIONS
ITEM 1. FINANCIAL STATEMENTS
- -------- ---------------------
COASTAL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(IN THOUSANDS, EXCEPT SHARE DATA)
September 30, December 31,
ASSETS 2002 2001
- ------------------------------------------------------ -------------- ------------
(Unaudited)
Cash and cash equivalents $ 40,822 $ 41,537
Federal funds sold 750 16,710
Loans receivable held for sale (note 4) 3,163 --
Loans receivable (note 4) 1,966,119 1,863,601
Mortgage-backed securities available-for-sale (note 3) 468,407 514,068
Other securities available-for-sale 1,758 42,827
Accrued interest receivable 11,344 13,243
Property and equipment 27,501 27,461
Stock in the Federal Home Loan Bank of Dallas (FHLB) 40,937 40,032
Goodwill (note 5) 21,811 21,811
Prepaid expenses and other assets 16,665 16,601
-------------- ----------
$ 2,599,277 $2,597,891
============== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ---------------------------------------
Liabilities:
Deposits (note 6) $1,643,681 $1,660,386
Advances from the FHLB (note 7) 732,783 690,877
Company obligated mandatorily redeemable 9.0% trust preferred
securities of Coastal Capital Trust I (note 8) 50,000 --
Senior notes payable, net (note 9) -- 43,875
Advances from borrowers for taxes and insurance 10,368 4,259
Other liabilities and accrued expenses 14,860 12,310
--------- ----------
Total liabilities 2,451,692 2,411,707
--------- ----------
Minority interest - 9.0% noncumulative preferred stock of
Coastal Banc ssb (note 12) -- 28,750
Commitments and contingencies (notes 4 and 10)
Stockholders' equity (notes 1, 3, 11, 13 and 14):
Preferred stock, no par value; authorized shares 5,000,000;
9.12% Cumulative, Series A, 1,100,000 shares issued and
outstanding 27,500 27,500
Common stock, $.01 par value; authorized shares
30,000,000; 7,852,650 shares issued and 5,145,803 shares
outstanding at September 30, 2002; 7,835,178 shares issued
and 5,835,178 shares outstanding at December 31, 2001 79 78
Additional paid-in capital 35,507 35,366
Retained earnings 136,924 127,425
Accumulated other comprehensive income (loss) -
Unrealized gain (loss) on securities available-for-sale 36 (1,590)
Treasury stock at cost (2,706,847, shares in 2002 and 2,000,000
shares in 2001) (52,461) (31,345)
----------- -----------
Total stockholders' equity 147,585 157,434
----------- -----------
$2,599,277 $2,597,891
=========== ===========
See accompanying Notes to Consolidated Financial Statements.
COASTAL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Nine Months Ended
September 30,
-------------------
2002 2001
------------ -------------
(Unaudited)
Interest income:
Loans receivable $ 90,357 $121,828
Mortgage-backed securities 13,060 43,646
FHLB stock, federal funds sold and other interest-earning assets 1,203 1,964
--------- ---------
104,620 167,438
--------- ---------
Interest expense:
Deposits 30,859 56,090
Advances from the FHLB 15,303 32,710
Other borrowed money -- 8,916
Senior notes payable 378 3,490
Company obligated mandatorily redeemable 9.0% trust preferred
securities of Coastal Capital Trust I 1,275 --
--------- ---------
47,815 101,206
--------- ---------
Net interest income 56,805 66,232
Provision for loan losses 2,700 3,000
--------- ---------
Net interest income after provision for loan losses 54,105 63,232
--------- ---------
Noninterest income:
Service charges on deposit accounts 6,732 5,656
Loan fees 888 940
Loss on derivative instruments (18) (450)
Gain on sale of real estate owned 207 841
Other 708 1,296
--------- ---------
8,517 8,283
--------- ---------
Noninterest expense:
Compensation, payroll taxes and other benefits 23,821 22,925
Office occupancy 7,629 8,206
Data processing 1,235 2,531
Amortization of goodwill (note 5) -- 2,098
Advertising 1,396 1,072
Postage and delivery 1,206 1,078
Other 6,128 6,249
--------- ---------
41,415 44,159
--------- ---------
Income before provision for Federal income taxes, minority
interest and cumulative effect of accounting change 21,207 27,356
Provision for Federal income taxes 6,289 8,442
--------- ---------
Income before minority interest and cumulative effect of
accounting change 14,918 18,914
Minority interest - preferred stock dividends of Coastal Banc ssb 1,507 1,941
--------- ---------
Income before cumulative effect of accounting change 13,411 16,973
Cumulative effect of change in accounting for derivative instruments, net of tax (note 10) -- (104)
--------- ---------
Net income $ 13,411 $ 16,869
========= =========
Net income available to common stockholders $ 11,530 $ 14,988
========= =========
Basic earnings per share before cumulative effect of accounting change $ 2.06 $ 2.62
========= =========
Basic earnings per share (notes 5 and 11) $ 2.06 $ 2.60
========= =========
Diluted earnings per share before cumulative effect of accounting change $ 1.97 $ 2.49
========= =========
Diluted earnings per share (notes 5 and 11) $ 1.97 $ 2.47
========= =========
See accompanying Notes to Consolidated Financial Statements.
COASTAL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Ended
September 30,
--------------------
2002 2001
----------- ------------
(Unaudited)
Interest income:
Loans receivable $ 29,649 $37,749
Mortgage-backed securities 4,034 12,659
FHLB stock, federal funds sold and other interest-earning assets 348 442
----------- --------
34,031 50,850
----------- --------
Interest expense:
Deposits 9,616 17,108
Advances from the FHLB 4,944 6,750
Other borrowed money -- 4,338
Senior notes payable -- 1,145
Company obligated mandatorily redeemable 9.0% trust preferred
securities of Coastal Capital Trust I 1,112 --
----------- --------
15,672 29,341
----------- --------
Net interest income 18,359 21,509
Provision for loan losses 900 900
----------- --------
Net interest income after provision for loan losses 17,459 20,609
----------- --------
Noninterest income:
Service charges on deposit accounts 2,599 2,035
Loan fees 266 340
Gain (loss) on derivative instruments 6 (7)
Gain (loss) on sale of real estate owned (33) 810
Other 216 299
----------- --------
3,054 3,477
----------- --------
Noninterest expense:
Compensation, payroll taxes and other benefits 7,968 7,719
Office occupancy 2,408 2,689
Data processing 413 844
Amortization of goodwill (note 5) -- 701
Advertising 546 357
Postage and delivery 411 377
Other 2,134 2,217
----------- --------
13,880 14,904
----------- --------
Income before provision for Federal income taxes and
minority interest 6,633 9,182
Provision for Federal income taxes 2,045 2,836
----------- --------
Income before minority interest 4,588 6,346
Minority interest - preferred stock dividends of Coastal Banc ssb 213 647
----------- --------
Net income $ 4,375 $ 5,699
=========== ========
Net income available to common stockholders $ 3,748 $ 5,072
=========== ========
Basic earnings per share (notes 5 and 11) $ 0.72 $ 0.88
=========== ========
Diluted earnings per share (notes 5 and 11) $ 0.68 $ 0.83
=========== ========
See accompanying Notes to Consolidated Financial Statements.
COASTAL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
Nine Months Ended
September 30,
-------------------
2002 2001
--------- ----------
(Unaudited)
Net income $ 13,411 $16,869
Other comprehensive income, net of tax:
Unrealized holding gains on securities available-for-sale
arising during period 1,626 1,569
------------- -------
Total comprehensive income $ 15,037 $18,438
============= ========
Three Months Ended
September 30,
--------------------
2002 2001
----------- ---------
(Unaudited)
Net income $ 4,375 $5,699
Other comprehensive income, net of tax:
Unrealized holding gains on securities available-for-sale
arising during period 1,562 26
------------ --------
Total comprehensive income $ 5,937 $5,725
============ ========
See accompanying Notes to Consolidated Financial Statements.
COASTAL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Nine Months Ended
September 30,
-------------------
2002 2001
---------------- ----------
(Unaudited)
Cash flows from operating activities:
Net income $ 13,411 $ 16,869
Adjustments to reconcile net income
to net cash provided (used) by operating activities:
Depreciation and amortization of property and equipment
and prepaid expenses and other assets 6,476 6,229
Net premium amortization (discount accretion) 3,558 (2,230)
Provision for loan losses 2,700 3,000
Amortization of goodwill -- 2,098
Originations and purchases of mortgage loans held for sale (8,592) (20,550)
Sales of mortgage loans for held for sale 11,758 20,723
Stock dividends from the FHLB (905) (1,658)
Loss on derivative instruments 18 610
Decrease (increase) in:
Accrued interest receivable 1,899 3,354
Other, net 4,025 (29,085)
--------- ---------
Net cash provided (used) by operating activities 34,348 (640)
--------- ---------
Cash flows from investing activities:
Net decrease (increase) in federal funds sold 15,960 (4,111)
Purchase of mortgage-backed securities available-for-sale (70,138) --
Purchase of other securities available-for-sale (243) --
Principal repayments on mortgage-backed securities held-to-maturity -- 73,725
Principal repayments on mortgage-backed securities
available-for-sale 115,898 8,773
Proceeds from maturity of U.S. Treasury securities held-to-maturity -- 100
Proceeds from maturity of other securities available-for-sale 41,000 --
Purchases of loans receivable (387,843) (199,699)
Sales of loans receivable 10,111 --
Net decrease in loans receivable 261,129 177,640
Purchases of property and equipment, net (2,861) (2,125)
Purchases of FHLB stock -- (3,986)
Proceeds from sales of FHLB stock -- 28,431
--------- ---------
Net cash provided (used) by investing activities (16,987) 78,748
--------- ---------
COASTAL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(IN THOUSANDS)
Nine Months Ended
September 30,
-------------------
2002 2001
------------------- ------------
(Unaudited)
Cash flows from financing activities:
Net increase (decrease) in deposits $ (16,705) $ 2,742
Securities sold under agreements to repurchase and federal funds
Purchased -- 2,514,648
Purchases of securities sold under agreements to repurchase and
federal funds purchased -- (2,092,086)
Advances from the FHLB 15,601,400 7,662,279
Principal payments on advances from the FHLB (15,559,494) (8,203,922)
Proceeds from issuance of 9.0% trust preferred securities 48,125 --
Redemption or repurchase of senior notes payable (43,875) (3,000)
Redemption of Coastal Banc ssb 9.0% noncumulative preferred
Stock (28,750) --
Net increase in advances from borrowers for taxes and insurance 6,109 8,587
Exercise of stock options for purchase of common stock, net 105 1,965
Purchase of treasury stock (21,162) --
Issuance of treasury shares 83 --
Dividends paid (3,912) (3,845)
------------------- ------------
Net cash provided (used) by financing activities (18,076) (112,632)
------------------- ------------
Net decrease in cash and cash equivalents (715) (34,524)
Cash and cash equivalents at beginning of period 41,537 69,730
------------------- ------------
Cash and cash equivalents at end of period $ 40,822 $ 35,206
=================== ============
Supplemental schedule of cash flows-interest paid $ 49,801 $ 101,527
=================== ============
Supplemental schedule of noncash investing and financing activities:
Transfer of loans to held for sale category $ 9,075 $ --
Foreclosures of loans receivable 4,289 3,984
Transfer of mortgage-backed securities from held-to-maturity
to available-for-sale category -- 811,748
=================== ============
See accompanying Notes to Consolidated Financial Statements.
COASTAL BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) BASIS OF PRESENTATION
The accompanying unaudited Consolidated Financial Statements were prepared
in accordance with the instructions for Form 10-Q and, therefore, do not include
all disclosures necessary for a complete presentation of financial condition,
results of operations, and cash flows in conformity with accounting principles
generally accepted in the United States of America. All adjustments which are,
in the opinion of management, of a normal recurring nature and are necessary for
a fair presentation of the interim financial statements, have been included.
The results of operations for the period ended September 30, 2002 are not
necessarily indicative of the results that may be expected for the entire fiscal
year or any other interim period.
On August 27, 1998, December 21, 1998, February 25, 1999, April 27, 2000,
July 27, 2000 and April 25, 2002, the Board of Directors authorized six separate
repurchase plans for up to 500,000 shares each of the outstanding shares of
common stock through an open-market repurchase program and privately negotiated
repurchases, if any. During June 2002, Coastal repurchased 547,800 shares of
common stock at an average repurchase price of $30.00 per share. Of that
amount, 500,000 shares were repurchased in a privately negotiated transaction
with a director of Coastal at $30.00 per share, which was less than the then
current market price. During the quarter ended September 30, 2002, Coastal
repurchased 161,775 shares of common stock at an average repurchase price of
$29.22 per share. As of September 30, 2002, a total of 2,709,575 shares had
been repurchased under all of the authorized repurchase plans.
As of September 30, 2002, 2,706,847 shares were held in treasury at an
average price of $19.38 per share for a total cost of $52.5 million. Book value
per common share at September 30, 2002 was $22.39.
(2) PRINCIPLES OF CONSOLIDATION
The accompanying unaudited Consolidated Financial Statements include the
accounts of Coastal Bancorp, Inc. ("Bancorp") and its wholly-owned subsidiaries,
Coastal Banc Holding Company, Inc. and Coastal Capital Trust I (collectively
"Coastal"). Coastal Banc Holding Company Inc.'s wholly-owned subsidiaries are
Coastal Banc ssb, Coastal Banc Capital Corp. and Coastal Banc Mortgage Corp.
Coastal Banc ssb's wholly-owned subsidiaries are CoastalBanc Financial Corp. and
Coastal Banc Insurance Agency, Inc. (collectively, the "Bank"). All significant
intercompany balances and transactions have been eliminated in consolidation.
(3) MORTGAGE-BACKED SECURITIES
Mortgage-backed securities at September 30, 2002 were as follows (in
thousands):
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------ ---------- ---------- ----------
Available-for-sale:
Agency securities $ 372,986 $ 1,098 $ (409) $373,675
CMOs - Non-agency 93,223 68 (725) 92,566
Non-agency securities 2,148 18 -- 2,166
----------- ------- --------- --------
$ 468,357 $ 1,184 $(1,134) $468,407
=========== ======= ========= ========
Mortgage-backed securities at December 31, 2001 were as follows (in
thousands):
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ----------- ---------- -------
Available-for-sale:
Agency securities $ 406,437 $ 319 $(2,455) $404,301
CMOs - Non-agency 107,488 82 (418) 107,152
Non-agency securities 2,590 34 (9) 2,615
---------- ------ ------- --------
$ 516,515 $ 435 $(2,882) $514,068
=========== ======= ======= ========
Effective September 30, 2001, Coastal transferred all of its mortgage-backed
securities held-to-maturity to the available-for-sale category. This was due to
management's intent to restructure a portion of the asset base to be less
vulnerable to market interest rate fluctuations. In late November 2001, Coastal
entered into a transaction in which it sold $844.9 million of its
mortgage-backed securities. Also in November 2001, Coastal used a portion of
the proceeds of that sale to purchase approximately $512.3 million of primarily
pass through mortgage-backed securities. All of the securities purchased and
the remaining securities not sold were placed in the available-for-sale
category.
(4) LOANS RECEIVABLE
Loans receivable at September 30, 2002 and December 31, 2001 were as
follows (in thousands):
September 30, 2002 December 31, 2001
-------------------- -----------------
Real estate mortgage loans:
First-lien mortgage, primarily residential $ 988,100 $ 880,624
Commercial 333,615 319,377
Multifamily 118,056 124,616
Residential construction 156,423 136,035
Acquisition and development 131,782 140,009
Commercial construction 252,818 222,026
Commercial loans, secured by residential mortgage
loans held for sale 207 11,508
Commercial, financial and industrial 125,233 116,029
Loans secured by deposits 15,975 21,238
Consumer and other loans 35,364 43,384
-------------------- ----------
2,157,573 2,014,846
Loans in process (174,032) (131,064)
Allowance for loan losses (16,004) (15,385)
Unearned interest and loan fees (2,993) (2,959)
Premium (discount) on purchased loans, net 1,575 (1,837)
-------------------- -----------
$ 1,966,119 $1,863,601
=================== ===========
Weighted average yield 5.95% 6.90%
===== ======
At September 30, 2002, Coastal had outstanding commitments to originate or
purchase $18.3 million of real estate mortgage and other loans and had
commitments under existing lines of credit to originate primarily construction
and other loans of approximately $113.9 million. In addition, at September 30,
2002, Coastal had $16.0 million of outstanding letters of credit. Management
anticipates the funding of these commitments through normal operations.
At September 30, 2002 and December 31, 2001, the carrying value of loans
that were considered to be impaired totaled approximately $3.9 million and $3.8
million, respectively and the related allowance for loan losses on those
impaired loans totaled $623,000 and $554,000 at September 30, 2002 and December
31, 2001, respectively. Of the impaired loans outstanding, nine loans with a
balance of $873,000 at September 30, 2002 and nineteen loans with a balance of
$1.3 million at December 31, 2001 did not have specific portions of the
allowance for loan losses allocated to them at each respective date. The
average recorded investment in impaired loans during the nine months ended
September 30, 2002 and 2001 was $3.4 million and $4.4 million, respectively.
An analysis of activity in the allowance for loan losses for the nine
months ended September 30, 2002 and 2001 is as follows (in thousands):
Nine Months Ended September 30,
-------------------------------
2002 2001
-------- --------
Balance, beginning of period $15,385 $14,507
Provision for loan losses 2,700 3,000
Charge-offs (2,785) (2,964)
Recoveries 704 811
------- --------
Balance, end of period $16,004 $15,354
======= ========
During the first quarter of 2002, management made the decision to liquidate
a portion of its under-performing single-family mortgage loans. On March 22,
2002, Coastal sold $10.8 million of these under-performing loans to a third
party investor. Prior to the sale, Coastal wrote these loans down to fair value
and recorded a charge-off to the allowance for loan losses of $761,000. In
addition, as of March 31, 2002, Coastal wrote down to fair value and
reclassified $9.1 million of other under-performing single-family mortgage loans
to the held for sale category. The loans that were reclassified to the held for
sale category were written down to fair value as of March 31, 2002 through a
charge-off to the allowance for loan losses of $691,000. During the second
quarter of 2002, a total of $3.1 million of these under-performing loans held
for sale were sold to the same third party investor. As of September 30, 2002,
Coastal had a total of $3.2 million loans held for sale remaining (net of second
and third quarter activity including sales, payoffs, foreclosures and monthly
principal payments received).
(5) GOODWILL
On January 1, 2002, Coastal adopted Statement of Financial Accounting
Standards No. 141, "Business Combinations" ("Statement 141") and Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets"
("Statement 142"). Statement 141 eliminated the pooling of interests method of
accounting for business combinations and requires that the purchase method of
accounting be used for all business combinations. Statement 141 also required,
effective January 1, 2002, that Coastal evaluate its existing intangible assets
and goodwill that were acquired in prior purchase business combinations, and
make any necessary reclassifications in order to conform with the new criteria
in Statement 141 for recognition apart from goodwill. Statement 142 changed the
accounting for goodwill from an amortization method to an impairment-only
approach.
Statement 141 required that Coastal reclassify amounts originally
recorded as goodwill pursuant to Statement of Financial Accounting Standard No.
72, "Accounting for Certain Acquisitions of Banking or Thrift Institutions"
("Statement 72") to other intangible assets, as those amounts, under Statements
142, were not subject to the non-amortization provisions. As of January 1,
2002, Coastal had unamortized goodwill that was subject to the non-amortization
provision of Statements 141 and 142 of $5.5 million. As of that same date,
Coastal reclassified $16.3 million to other intangible assets and continued to
amortize these amounts in 2002.
On October 1, 2002, Statement of Accounting Standards No. 147, "Acquisitions of
Certain Financial Institutions" ("Statement 147") was issued. Statement 147
amended Statement 72, to exclude from its scope, the acquisitions of financial
institutions (other than transactions between two or more mutual enterprises)
and provide certain transition provisions for existing intangible assets. Under
Statement 147 transition provisions, if the transaction that gave rise to an
unidentifiable other intangible asset was considered a business combination, the
carrying amount of that asset amount would now be reclassified to goodwill and
be subject to the non-amortization provisions as of the effective date of the
implementation of Statement 142, which in Coastal's case was January 1, 2002.
Based on the implementation of Statement 147, Coastal has reclassified as of
January 1, 2002, the $16.3 million mentioned above to goodwill and removed the
amortization expense recorded in 2002, through restatement of its 2002 financial
statements as required by Statement 147.
In connection with the adoption of these statements, Coastal tested for
impairment in accordance with the provisions of Statement 142 during the first
quarter of 2002 and did not recognize any transitional impairment losses as the
cumulative effect of a change in accounting principle. Pursuant to the
transition provisions of Statement 142, presented below are as adjusted net
income and earnings per share amounts to exclude the amortization expense (net
of any tax effect) recognized in the period prior to the implementation related
to the goodwill that is no longer being amortized (in thousands, except per
share data).
Nine Months Ended
September 30,
2002 2001
------- -------
Net income:
As reported $13,411 $16,869
Add back: goodwill amortization, net of tax -- 1,526
------- -------
As adjusted $13,411 $18,395
======= =======
Basic earnings per share:
As reported $ 2.06 $ 2.60
Add back: goodwill amortization, net of tax -- 0.27
------- -------
As adjusted $ 2.06 $ 2.87
======= =======
Diluted earnings per share:
As reported $ 1.97 $ 2.47
Add back: goodwill amortization, net of tax -- 0.25
------- -------
As adjusted $ 1.97 $ 2.72
======= =======
Three Months Ended
September 30,
2002 2001
------ ------
Net income:
As reported $4,375 $5,699
Add back: goodwill amortization, net of tax -- 511
------- -------
As adjusted $4,375 $6,210
======= =======
Basic earnings per share:
As reported $ 0.72 $ 0.88
Add back: goodwill amortization, net of tax -- 0.09
------- -------
As adjusted $ 0.72 $ 0.97
======= =======
Diluted earnings per share:
As reported $ 0.68 $ 0.83
Add back: goodwill amortization, net of tax -- 0.08
------- -------
As adjusted $ 0.68 $ 0.91
======= =======
As restated (required by Statement 147), basic earnings per share for the
quarter ended June 30, 2002 were $0.76 (as compared to $0.70 previously
reported) and for the quarter ended March 31, 2002 were $0.59 (as compared to
$0.53 previously reported. Diluted earnings per share, as restated, for the
quarter ended June 30, 2002 were $0.72 (as compared to $0.66 previously
reported) and for the quarter ended March 31, 2002 were $0.57 (as compared to
$0.51 previously reported).
(6) DEPOSITS
Deposits, their stated rates and the related weighted average interest
rates, at September 30, 2002 and December 31, 2001, are summarized below
(dollars in thousands). Effective January 1, 1998, Coastal implemented a
program whereby a portion of the balances in noninterest-bearing and
interest-bearing checking accounts is reclassified to money market demand
accounts under Federal Reserve Regulation D. The amount of such
reclassification, reflected in the following table, was approximately $256.9
million ($135.6 million from noninterest-bearing and $121.3 million from
interest-bearing) at September 30, 2002 and $243.3 million ($113.0 million from
noninterest-bearing and $130.3 million from interest-bearing) at December 31,
2001.
Stated Rate September 30, 2002 December 31, 2001
--------------- ------------------ -------------------
Noninterest-bearing checking 0.00% $ 41,624 $ 47,712
Interest-bearing checking 0.50 - 1.00 9,758 15,894
Savings accounts 0.50 - 1.24 46,974 45,234
Money market demand accounts 0.00 - 2.23 544,323 505,789
------------- ----------
642,679 614,629
------------- ----------
Certificate accounts Less than 2.00 70,265 29,707
2.00 - 2.99 592,375 171,523
3.00 - 3.99 215,776 263,006
4.00 - 4.99 73,209 356,314
5.00 - 5.99 40,071 155,949
6.00 - 6.99 9,128 68,979
7.00 - 7.99 105 209
8.00 - 8.99 73 70
------------- ----------
1,001,002 1,045,757
------------- ----------
$ 1,643,681 $1,660,386
============= ==========
Weighted average interest rate 2.22% 3.02%
===== ======
Prior to the reclassification as discussed above, noninterest-bearing
checking accounts, interest-bearing checking accounts and money market demand
accounts were as follows at September 30, 2002 and December 31, 2001:
September 30, 2002 December 31, 2001
------------------- -----------------
Noninterest-bearing checking $ 177,204 $ 160,738
Interest-bearing checking 131,032 146,144
Money market demand accounts 287,469 262,513
The scheduled maturities of certificate accounts outstanding at September
30, 2002 were as follows (dollars in thousands):
September 30, 2002
-------------------
0 through 12 months $ 859,339
13 through 24 months 71,718
25 through 36 months 35,538
37 through 48 months 5,284
49 through 60 months 29,069
Over 60 months 54
-------------------
$ 1,001,002
===================
(7) ADVANCES FROM THE FHLB
The weighted average interest rates on advances from the FHLB at September
30, 2002 and December 31, 2001 were 2.83% and 3.46%, respectively. The
scheduled maturities and related weighted average interest rates on advances
from the FHLB at September 30, 2002 are summarized as follows (dollars in
thousands):
Weighted Average
Due during the year ending December 31, Interest Rate Amount
- --------------------------------------- ----------------- -------
2002 2.07% $318,264
2003 3.62 132,983
2004 2.56 139,675
2005 3.47 108,967
2006 5.66 7,735
2007 6.66 1,171
2008 5.52 2,226
2009 8.01 3,584
2010 6.73 987
2011 6.54 1,268
2012 5.76 292
2013 5.75 7,585
2014 5.45 2,919
2015 6.67 1,662
2017 5.43 2,000
2018 5.05 1,465
---- --------
2.83% $732,783
========
Advances from the FHLB are secured by certain first-lien mortgage and
multifamily loans and mortgage-backed securities owned by Coastal.
(8) COMPANY OBLIGATED MANDATORILY REDEEMABLE 9.0% TRUST PREFERRED SECURITIES
On June 18, 2002, Coastal, through Coastal Capital Trust I (a consolidated
trust subsidiary) (the "Trust"), issued 2,000,000 trust preferred securities
("Trust Preferred Securities") with a liquidation preference of $25 per
security. The Trust Preferred Securities represent an interest in Bancorp's
junior subordinated debentures, which were purchased by the Trust. The junior
subordinated debentures are the only assets of the Trust and interest payments
from the debentures finance the distributions paid on the Trust Preferred
Securities. Distributions on the securities are payable quarterly at the annual
rate of 9.0% and are included in interest expense in the consolidated statements
of income.
The Trust Preferred Securities are subject to mandatory redemption at the
liquidation preference, in whole or in part, upon repayment of the junior
subordinated debentures at maturity or their earlier redemption. The junior
subordinated debentures are redeemable prior to the maturity date of June 30,
2032, at the option of Bancorp on or after June 30, 2007, in whole at any time
or in part from time to time. The junior subordinated debentures are also
redeemable at any time, in whole, but not in part, upon the occurrence of
specific events defined within the trust indenture. Bancorp has the option to
defer distributions on the junior subordinated debentures from time to time for
a period not to exceed 20 consecutive quarters.
A portion of the proceeds from the issuance of the Trust Preferred
Securities were used to repurchase 500,000 shares of common stock for $15.0
million from a director in June 2002. In addition, $28.8 million of the
proceeds were used on July 15, 2002, to redeem the Bank's 9.0% Series A
Noncumulative Preferred Stock (Nasdaq:CBSAO) through a capital contribution to
Coastal Banc ssb.
(9) SENIOR NOTES PAYABLE
On June 30, 1995, Coastal issued $50.0 million of 10.0% Senior Notes due
June 30, 2002. The Senior Notes became redeemable at Coastal's option, in whole
or in part, on June 30, 2000, at par, plus accrued interest to the redemption
date. Interest on the Senior Notes was payable quarterly. During 2001 and
1999, Coastal repurchased in the open market $3.0 and $3.1 million,
respectively, of the Senior Notes outstanding at par. On February 1, 2002,
Coastal redeemed all of the remaining Senior Notes outstanding ($43.9 million)
at par plus accrued interest to the redemption date.
(10) DERIVATIVE INSTRUMENTS
Coastal is a party to derivative instruments in the normal course of
business to reduce its exposure to fluctuations in interest rates. These
derivative instruments have included interest rate swap agreements where Coastal
makes fixed interest payments and receives payments based on a floating index,
as well as interest rate cap agreements, as described below. Effective January
1, 2001, Coastal adopted Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and for Hedging Activities" ("Statement
133.") Statement 133 requires companies to recognize all derivatives as either
assets or liabilities in the statement of financial condition and measure all
derivatives at fair value. The interest rate swap and cap agreements held by
Coastal on December 31, 2000 did not qualify for hedge accounting, therefore on
implementation of Statement 133, Coastal recorded a transition adjustment to
record these derivative instruments at fair value. On January 1, 2001, Coastal
recorded a transition adjustment loss of $160,000, or $104,000 net of the tax
effect, as the cumulative effect of the change in accounting for derivative
instruments to record the fair value of Coastal's derivative instruments in the
consolidated statements of income. For the nine months ended September 30, 2002
and 2001, Coastal recorded an additional fair value loss on these derivative
instruments of $18,000 and $450,000, respectively. The decrease in the fair
value of derivatives during 2001 was primarily due to interest rate swap
agreements, which were liquidated in June 2001. As of September 30, 2002 and
December 31, 2001, interest rate cap agreements were Coastal's only derivative
instruments and were recorded at fair value pursuant to Statement 133.
The interest rate cap agreements provide for applicable third parties to
make payments to Coastal whenever a defined floating rate exceeds rates ranging
from 8.0% to 9.0%, depending on the agreement. Payments on the interest rate
cap agreements are based on the notional principal amount of the agreements; no
funds were actually borrowed or are to be repaid. The fair value of the
interest rate cap agreements was approximately zero at September 30, 2002, which
is the recorded book value of such agreements due to the implementation of
Statement 133. The interest rate cap agreements are used to alter the interest
rate sensitivity of a portion of Coastal's mortgage-backed securities and loans
receivable. As such, the amortization of any purchase price and interest income
from the interest rate cap agreements is recorded in interest income in the
accompanying consolidated statements of income, as applicable. The net decrease
in interest income related to the interest rate cap agreements was approximately
$19,000 for the nine months ended September 30, 2002 and 2001, respectively. No
payments were made to Coastal under the interest rate cap agreements during the
three months ended September 30, 2002 or 2001.
Interest rate cap agreements outstanding at September 30, 2002 expire as
follows (dollars in thousands):
Year of Strike Rate Notional
Expiration Range Amount
- ---------- -------------- ---------
2002 9.00% $ 5,100
2003 8.00 - 9.00 107,614
---------
$ 112,714
=========
Market risk, or the risk of loss due to movement in market prices or rates,
is quantified by Coastal through a risk monitoring process of marking to market
its assets and liabilities to expected market level changes in an instantaneous
shock of plus and minus 200 basis points on a quarterly basis. This process
discloses the effects on market values of the assets and liabilities, unrealized
gains and losses, as well as potential changes in net interest income.
Coastal is exposed to credit loss in the event of nonperformance by the
counterparty to the cap agreements and attempts to control this risk through
credit monitoring procedures. The notional principal amount does not represent
Coastal's exposure to credit loss.
(11) EARNINGS PER SHARE
The following summarizes information related to the computation of basic
and diluted earnings per common share ("EPS") for the nine-and three-month
periods ended September 30, 2002 and 2001 (dollars in thousands, except per
share data):
Nine Months Ended
September 30,
2002 2001
----------- -----------
Net income $ 13,411 $ 16,869
Preferred stock dividends (1,881) (1,881)
----------- -----------
Net income available to common stockholders $ 11,530 $ 14,988
=========== ===========
Weighted average number of common shares
outstanding used in basic EPS calculation 5,596,525 5,755,274
Add assumed exercise of outstanding stock
options as adjusted for dilutive securities 262,176 313,896
----------- -----------
Weighted average number of common shares
outstanding used in diluted EPS calculation 5,858,701 6,069,170
=========== ===========
Basic EPS $ 2.06 $ 2.60
=========== ===========
Diluted EPS $ 1.97 $ 2.47
=========== ===========
Three Months Ended
September 30,
2002 2001
----------- -----------
Net income $ 4,375 $ 5,699
Preferred stock dividends (627) (627)
---------- -----------
Net income available to common stockholders $ 3,748 $ 5,072
=========== ===========
Weighted average number of common shares
outstanding used in basic EPS calculation 5,226,334 5,796,458
Add assumed exercise of outstanding stock
options as adjusted for dilutive securities 248,101 325,621
---------- -----------
Weighted average number of common shares
outstanding used in diluted EPS calculation 5,474,435 6,122,079
=========== ===========
Basic EPS $ 0.72 $ 0.88
=========== ===========
Diluted EPS $ 0.68 $ 0.83
=========== ===========
The weighted average number of common shares outstanding has been reduced
by the treasury stock held by Coastal. As of September 30, 2002 and 2001,
Coastal had 2,706,847 and 2,000,000 common shares in treasury, respectively.
(12) COASTAL BANC SSB PREFERRED STOCK
On October 21, 1993, the Bank issued 1,150,000 shares of 9.0% Noncumulative
Preferred Stock, no par value, Series A, at a price of $25 per share to the
public ("Preferred Stock"). Dividends on the Preferred Stock were payable
quarterly at the annual rate of $2.25 per share, when, as and if declared by the
Board of Directors of the Bank. At any time on or after December 15, 1998, the
Preferred Stock could be redeemed in whole or in part only at the Bank's option
at $25 per share plus unpaid dividends (whether or not earned or declared) for
the then current dividend period to (but not including) the date fixed for
redemption.
With a portion of the proceeds from the issuance of the Trust Preferred
Securities, the Bank redeemed from the stockholders of record all of the 9.0%
Series A Noncumulative Preferred Stock on July 15, 2002 (see note 8). The
redemption price was $25.185 per share, which represented the stated value of
the Preferred Stock, plus accrued and unpaid dividends to the date of
redemption.
(13) STATUTORY CAPITAL REQUIREMENTS
The applicable regulations require federally insured institutions, which
are not the highest rated, to have a minimum regulatory tier 1 (core) capital to
total assets ratio equal to a minimum of 4.0%, a tier 1 risk-based capital to
risk-weighted assets ratio of 4.0% and total risk-based capital to risk-weighted
assets ratio of 8.0%.
At September 30, 2002, the Bank's regulatory capital in relation to its
existing regulatory capital requirements for capital adequacy purposes was as
follows (dollars in thousands):
Minimum For Capital Well Capitalized
Actual Adequacy Purposes Requirements
------------------- ------------------ ----------------
Capital Requirement Amount Ratio Amount Ratio Amount Ratio
- -------------------- --------- ------- ------- ------ -------- -------
Tier 1 (core) $172,969 6.82% $101,510 4.00% $126,887 5.00%
Tier 1 risk-based 172,969 9.80 70,624 4.00 105,936 6.00
Total risk-based 188,973 10.70 141,248 8.00 176,560 10.00
As of September 30, 2002, the most recent notification from the Federal
Deposit Insurance Corporation ("FDIC") categorized the Bank as "well
capitalized" under the regulatory framework for prompt corrective action. To be
categorized as well capitalized, the Bank must maintain minimum Tier 1 (core),
Tier 1 risk-based and total risk-based ratios as set forth in the table above.
There are no conditions or events since that notification that management
believes have changed the institution's category.
(14) COASTAL BANCORP, INC. PREFERRED STOCK
On May 11, 1999, Bancorp issued 1,100,000 shares of 9.12% Series A
Cumulative Preferred Stock, no par value, at a price of $25 per share to the
public ("Bancorp Preferred Stock"). Dividends on the Bancorp Preferred Stock
are payable quarterly at the annual rate of $2.28 per share. The Bancorp
Preferred Stock is callable on May 15, 2003 at Bancorp's option. Pursuant to
Coastal's tax benefit agreement with the FDIC, Coastal receives a tax benefit
for dividends paid on the Bancorp Preferred Stock.
(15) RECENT ACCOUNTING STANDARDS
In August 2001, Statement of Financial Accounting Standards No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets" ("Statement
144") was issued. Statement 144 addresses financial accounting and reporting
for the impairment or disposal of long-lived assets. Statement 144 requires
that long-lived assets be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If the carrying amount of an asset exceeds its
estimated future cash flows, an impairment charge is recognized by the amount by
which the carrying amount of the asset exceeds the fair value of the asset.
Statement 144 requires companies to separately report discontinued operations
and extends that reporting to a component of an entity that either has been
disposed of (by sale, abandonment, or in a distribution to owners) or is
classified as held for sale. Assets to be disposed of are reported at the lower
of the carrying amount or fair value less costs to sell. Statement 144 was
adopted by Coastal on January 1, 2002, and did not have a material effect on
Coastal's Consolidated Financial Statements.
(16) PENDING BRANCH SALE
On September 24, 2002, Coastal announced the execution of a definitive
agreement to sell five of its branches in Central Texas (located in Llano,
Burnet, Mason, Kingsland and Marble Falls, Texas) to First State Bank Central
Texas. The sale includes deposit accounts of approximately $80 million, which
are being sold at a 6.25% premium. The transaction is subject to regulatory
approval and is expected to close during the fourth quarter of 2002.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
-------------------------------------------------------------------
RESULTS OF OPERATIONS
-----------------------
Financial Condition
- --------------------
Total assets increased slightly by $1.4 million from December 31, 2001 to
September 30, 2002. The net increase resulted primarily from an increase of
$102.5 million in loans receivable, offset by decreases of $45.7 million, $41.1
million and $16.0 million in mortgage-backed securities available-for-sale,
other investment securities available-for-sale and federal funds sold,
respectively. There were also smaller changes in other asset categories. The
increase in loans receivable was due to bulk single-family mortgage loan
purchases of $387.8 million, somewhat reduced by significant principal paydowns
received on the single-family mortgage loan portfolio, the sale of $10.8 million
of under-performing mortgage loans, the reclassification of $9.1 million of
other under-performing loans to the held for sale category and decreases in
other loan categories. The decrease in mortgage-backed securities
available-for-sale was due to significant prepayments received (approximately
33% on an annualized basis) resulting from a continuing low interest rate
environment, which is encouraging refinancings of mortgage loans. The decrease
in other investment securities available-for-sale was due to the maturity of one
security during the period.
Deposits decreased $16.7 million or 1.0% from December 31, 2001 to
September 30, 2002 and advances from the FHLB increased 6.1% or $41.9 million.
In addition, during the nine months ended September 30, 2002, Coastal redeemed
the remaining Senior Notes payable outstanding of $43.9 million at par plus
accrued interest and issued $50.0 million in Trust Preferred Securities through
a consolidated trust subsidiary (see note 8 to the Consolidated Financial
Statements). Coastal used part of the proceeds from the issuance of the Trust
Preferred Securities to repurchase outstanding shares of its common stock. In
addition, $28.8 million of the proceeds were use to redeem the Bank's 9.0%
Series A Noncumulative Preferred Stock. Stockholders' equity decreased 6.3% or
$9.8 million from December 31, 2001 to September 30, 2002 primarily as a result
of the market repurchase of 709,575 shares of common stock at an average
repurchase price of $29.82 per share. This decrease was only partially offset
by the net increase in stockholders' equity due to net income, a $1.6 million
decrease in accumulated other comprehensive income (loss), offset by dividends
declared.
Results of Operations for the Nine Months Ended September 30, 2002 and 2001
- --------------------------------------------------------------------------------
General
-------
For the nine months ended September 30, 2002, net income was $13.4 million
compared to $16.9 million for the nine months ended September 30, 2001. The
decrease was primarily due to a $9.4 million decrease in net interest income as
a result of Coastal's smaller asset size, lower market interest rates and
significant principal paydowns recevied on Coastal's mortgage-backed securities
and loans receivable portfolios (approximately 33% on an annualized basis for
mortgage-backed securities and 40% for single-family mortgage loans). This
decrease was somewhat offset by a $300,000 decrease in the provision for loan
losses, a $234,000 increase in noninterest income, a $2.7 million decrease in
noninterest expense ($2.1 million of which was due to the decrease in the
amortization of goodwill due to the implementation of FASB Statements 141, 142
and 147 in 2002), a $2.2 million decrease in the provision for Federal income
taxes, and the $104,000 (net of tax) cumulative transition adjustment loss due
to the change in accounting for derivative instruments recorded in 2001.
Interest Income
----------------
Due to Coastal's smaller asset size, the lower market interest rate
environment and significant principal paydowns received on mortgage-backed
securities and single-family loans receivable, interest income for the nine
months ended September 30, 2002 decreased $62.8 million or 37.5% from the nine
months ended September 30, 2001. The decrease was comprised of a $31.5 million
decrease in interest income on loans receivable, a $30.6 million decrease in
interest income on mortgage-backed securities and a $761,000 decrease in
interest income on FHLB stock, federal funds sold and other interest-earning
assets.
When comparing the two periods, average interest-earning assets decreased
$482.6 million and the average yield decreased 1.80% from 7.52% in 2001 to 5.72%
in 2002. The $482.6 million decrease in average interest-earning assets
consisted primarily of a $488.1 million decrease in the average balance of
mortgage-backed securities and a $44.0 million decrease in the average balances
of loans receivable. The decrease in average mortgage-backed securities was
largely due to the sale of those securities in late November 2001. To
strategically restructure a portion of its asset base to make it less vulnerable
to market interest rate and price fluctuations, Coastal sold $844.9 million of
mortgage-backed securities and purchased $512.3 million of primarily pass
through securities at a premium. This transaction had the effect of shortening
the duration of the mortgage-backed securities portfolio, thereby lessening the
extension risk to Coastal.
In addition to the reduction in Coastal's asset size due to the
restructuring, during the first nine months of 2002 as a consequence of the
extraordinarily high levels of refinancings, Coastal experienced signifcant
principal repayments of $115.9 million (or approximately 33% on an annualized
basis) on its mortgage-backed securities portfolio and $251.6 million (or
approximately 40% on an annualized basis) on its single-family mortgage loan
portfolio, which resulted in greater premium amortization on those assets that
were purchased at a premium.
Interest Expense
-----------------
Interest expense on interest-bearing liabilities was $47.8 million for the
nine months ended September 30, 2002, as compared to $101.2 million for the same
period in 2001. The decrease in interest expense was again due to Coastal's
smaller asset size and the lower market interest rate environment. When
comparing the two periods, the average rate paid on interest-bearing liabilities
decreased to 2.94% for 2002 from 4.97% for 2001 and average interest-bearing
liabilities decreased by $545.3 million. The 2.03% decrease in the average rate
paid on interest-bearing liabilities was due to the 2.08% decrease in the
average rate paid on interest-bearing deposits and a 2.13% decrease in the
average rates paid on advances from the FHLB. The decrease in average
interest-bearing liabilities consisted primarily of a $55.4 million decrease in
average interest-bearing deposits, a $174.1 million decrease in average advances
from the FHLB and a $293.5 million decrease in the average balance of other
borrowings. The large decreases in the average balances in FHLB advances and
other borrowings was due primarily to the reduction in these borrowings due to
the restructuring mentioned previously. In addition, during the nine months
ended September 30, 2002, Coastal redeemed the remaining Senior Notes payable
outstanding of $43.9 million at par plus accrued interest and issued $50.0
million in Trust Preferred Securities, through a consolidated trust subsidiary
(see note 8 to the Consolidated Financial Statements).
Net Interest Income
---------------------
Net interest income was $56.8 million for the nine months ended September
30, 2002 and $66.2 million for the same period in 2001. As discussed above, the
decrease was due to Coastal's smaller asset size and the lower market interest
rate environment. When comparing the two periods, average interest-earning
assets decreased $482.6 million and average interest-bearing liabilities
decreased $545.3 million due to the restructuring and the principal repayments
discussed above. Net interest margin ("Margin") was 3.10% for the nine months
ended September 30, 2002 compared to 2.97% for the nine months ended September
30, 2001. Margin represents net interest income as a percentage of average
interest-earning assets. Net interest spread ("Spread"), defined to exclude
noninterest-bearing deposits, increased to 2.78% for the nine months ended
September 30, 2002 from 2.55% for the nine months ended September 30, 2001.
Management also calculates an alternative Spread which includes
noninterest-bearing deposits. Under this calculation, the alternative Spreads
for the nine months ended September 30, 2002 and 2001 were 2.99% and 2.81%,
respectively. Margin and Spread are affected by the changes in the amount and
composition of interest-earning assets and interest-bearing liabilities.
Management's overall goal is to continue to improve the asset/liability
composition to be less vulnerable to market interest rate fluctuations,
primarily through the addition of loans tied to variable rates such as LIBOR and
local and regional prime rates and through the efforts to replace LIBOR based
borrowings with lower cost retail deposits.
Provision for Loan Losses and the Allowance for Loan Losses - Critical
---------------------------------------------------------------------------
Accounting Policy
-------------------
The provision for loan losses was $2.7 million for the nine months ended
September 30, 2002 and $3.0 million for the nine months ended September 30,
2001. At September 30, 2002, Coastal had nonperforming loans totaling $16.2
million, which is a decrease of $8.5 million, or 34%, when compared to December
31, 2001. Nonperforming loans are those loans on nonaccrual status as well as
those loans greater than ninety days delinquent and still accruing interest.
The decrease in nonperforming loans is mainly due to Coastal's decision to
liquidate a portion of its under-performing single-family mortgage loans during
the first quarter of 2002. On March 22, 2002, Coastal sold $10.8 million of
these under-performing loans to a third party investor. Prior to the sale,
Coastal wrote these loans to fair value and recorded a charge-off to the
allowance for loan losses of $761,000.
In addition, as of March 31, 2002, Coastal also wrote down to fair value
and reclassified $9.1 million of other under-performing single-family mortgage
loans to the held for sale category. The loans that were reclassified to the
held for sale category were written down to fair value through a charge-off to
the allowance for loan losses of $691,000. During the second quarter of 2002, a
total of $3.1 million of these loans held for sale were sold. As of September
30, 2002, Coastal had $3.2 million loans held for sale remaining (net of second
and third quarter activity including, sales, payoffs, foreclosures and monthly
principal payments received).
The ratio of nonperforming assets to total assets was 0.78% at September
30, 2002, compared to 1.13% as of December 31, 2001. At September 30, 2002, the
allowance for loan losses as a percentage of nonperforming loans (excluding
nonperforming loans held for sale which are recorded at the lower of cost or
fair value) was 107.4% compared to 62.3% at December 31, 2001.
Although no assurance can be given, management believes that the allowance
for loan losses at September 30, 2002 is adequate considering the size and the
changing composition of the loans receivable portfolio, historical and peer
group loss experience, delinquency trends and current economic conditions.
Management will continue to review its loan loss allowance policy as Coastal's
loan portfolio diversifies to determine if changes to the policy and the
resulting allowance for loan losses are necessary.
Noninterest Income
-------------------
For the nine months ended September 30, 2002, noninterest income increased
$234,000 to $8.5 million, compared to $8.3 million for the nine months ended
September 30, 2001. The increase in noninterest income was primarily due to the
$1.1 million increase in service charges on deposits accounts and the effect of
the fair value loss on derivative instruments of $450,000 recorded during the
nine months ended September 30, 2001 pursuant to Statement 133 (compared to an
$18,000 loss in 2002). These increases were somewhat offset by a $52,000
decrease in loan fees, a $634,000 decrease in the gain on the sale of real
estate owned and a $588,000 decrease in other noninterest income (primarily due
to $300,000 in insurance proceeds received in 2001 for the reimbursement of
certain deposit losses incurred in prior years). The increase in service
charges on deposit accounts was due to Coastal's continuing focus on increasing
transaction type accounts and the related fee income, including Coastal's new
Free Checking and Bounce Protection features on retail checking accounts
introduced during August 2002. The fair value loss on derivative instruments
recorded during the nine months ended September 30, 2001 was primarily
attributable to Coastal's interest rate swap positions, which were liquidated in
June 2001. As of September 30, 2002, interest rate cap agreements were
Coastal's only derivative instruments and were recorded at fair value on
Coastal's consolidated statement of financial condition.
Noninterest Expense
--------------------
For the nine months ended September 30, 2002, noninterest expense decreased
$2.7 million from the nine months ended September 30, 2001. The $2.7 million
decrease in noninterest expense was primarily due the $2.1 million decrease in
the amortization of goodwill due to the implementation of FASB Statements 141,
142 and 147 effective January 1, 2002 (see note 5 to the Consolidated Financial
Statements). In addition, Coastal experienced decreases of $577,000, $1.3
million and $121,000 in office occupancy, data processing and other noninterest
expense, respectively, partially offset by a $896,000 increase in compensation,
payroll taxes and other benefits, a $324,000 increase in advertising and a
$128,000 increase in postage and delivery expenses. The decrease in data
processing expense was due to the conversion to a new mortgage loan data
processing system in the second quarter of 2001, the conversion of the Valley
Region branches to Coastal's primary deposit and loan data processing system
during the third quarter of 2001 and the item processing functions brought
in-house during the third quarter of 2001. The decrease in office occupancy was
primarily due to certain assets becoming fully depreciated during 2001 and in
2002. The increase in compensation, payroll taxes and other benefits was due to
normal merit increases for existing staff, in addition to the staff increases
for the item processing functions brought in-house during the third quarter of
2001 and additional personnel needed to continue Coastal's focus on commercial
banking products, lending and providing other services to commercial business
customers. The increase in advertising and postage and delivery expenses were
primarily due to Coastal's continued focus on commercial banking products and
lending.
Provision for Federal Income Taxes
--------------------------------------
The provision for Federal income taxes for the nine months ended September
30, 2002 was $6.3 million compared to $8.4 million for the nine months ended
September 30, 2001. The decrease was due to the decreased income before
provision for federal income taxes, minority interest and cumulative effect of
accounting change in 2001, with the effective tax rate for the periods being
approximately 30% for nine months ended September 30, 2002 and 31% for the same
period in 2001. The decrease in the effective tax rate when comparing the two
periods is due to the elimination of the goodwill amortization.
Results of Operations for the Three Months Ended September 30, 2002 and 2001
- --------------------------------------------------------------------------------
General
-------
For the three months ended September 30, 2002, net income was $4.4 million
compared to $5.7 million for the three months ended September 30, 2001. The
decrease was primarily due to a $3.2 million decrease in net interest income, as
a result of Coastal's smaller asset size, lower market interest rates and
significant principal repayments on Coastal's mortgage-backed and loans
receivable portfolios (approximately 30% on an annualized basis for
mortgage-backed securities and 40% for single-family mortgage loans). In
addition, noninterest income decreased by $423,000. These decreases were
somewhat offset by a $1.0 million decrease in noninterest expense and a $791,000
decrease in the provision for Federal income taxes.
Interest Income
----------------
As noted previously, due to Coastal's smaller asset size, the lower market
interest rate environment and significant principal paydowns received on
mortgage-backed securities and single-family loans receivable, interest income
for the three months ended September 30, 2002 decreased $16.8 million or 33.1%
from the three months ended September 30, 2001. The decrease was comprised of a
$8.1 million decrease in interest income on loans receivable, a $8.6 million
decrease in interest income on mortgage-backed securities and a $94,000 decrease
in interest income on FHLB stock, federal funds sold and other interest-earning
assets.
When comparing the two periods, average interest-earning assets decreased
$443.9 million and the average yield decreased 1.49% from 6.98% in 2001 to 5.49%
in 2002. The $443.9 million decrease in average interest-earning assets
consisted primarily of a $476.6 million decrease in the average balance of
mortgage-backed securities, offset somewhat by a $31.3 million increase in the
average balance of loans receivable. The decrease in average mortgage-backed
securities was largely due to the restructuring discussed previously.
In addition to the reduction in Coastal's asset size due to the
restructuring, during the three months ended September 30, 2002, as a
consequence of the extraordinarily high levels of refinancings, Coastal
experienced principal repayments of $31.3 million (or approximately 30% on an
annualized basis) on its mortgage-backed securities portfolio and $97.1 million
(or approximately 40% on an annualized basis) on its single-family mortgage loan
portfolio, which resulted in greater premium amortization on those assets that
were purchased at a premium.
Interest Expense
-----------------
Interest expense on interest-bearing liabilities was $15.7 million for the
three months ended September 30, 2002, as compared to $29.3 million for the same
period in 2001. As discussed previously, the decrease in interest expense was
due to Coastal's smaller asset size and the lower market interest rate
environment. When comparing the two periods, the average rate paid on
interest-bearing liabilities decreased to 2.81% for 2002 from 4.37% for 2001 and
average interest-bearing liabilities decreased $436.6 million. The 1.56%
decrease in the average rate paid on interest-bearing liabilities was due to the
1.86% decrease in the average rate paid on interest-bearing deposits and a 1.45%
decrease in the average rates paid on advances from the FHLB. The decrease in
average interest-bearing liabilities consisted primarily of a $50.9 million
decrease in average interest-bearing deposits, a $461.7 million decrease in the
average balance of other borrowings and a $45.8 million decrease in the average
balance of Senior Notes payable. FHLB advances increased $71.8 million when
comparing the two periods. The large decrease in the average balances in other
borrowings was due primarily to Coastal's repayment of such borrowings as a part
of the restructuring done in late 2001. The decrease in the balance of the
Senior Notes payable was due to their redemption during the first quarter of
2002. During the second quarter of 2002, Coastal issued $50.0 million in Trust
Preferred Securities through a consolidated trust subsidiary (see note 8 to the
Consolidated Financial Statements).
Net Interest Income
---------------------
Net interest income was $18.4 million for the three months ended September
30, 2002 and $21.5 million for the same period in 2001. As discussed above, the
decrease was due to Coastal's smaller asset size and the lower market interest
rate environment. When comparing the two periods, average interest-earning
assets decreased $443.9 million and average interest-bearing liabilities
decreased $436.6 million due to the restructuring and the prepayments discussed
above. Net interest margin ("Margin") was 2.97% for the three months ended
September 30, 2002 compared to 2.95% for the three months ended September 30,
2001. Margin represents net interest income as a percentage of average
interest-earning assets. Net interest spread ("Spread"), defined to exclude
noninterest-bearing deposits, increased to 2.68% for the three months ended
September 30, 2002 from 2.61% for the three months ended September 30, 2001.
Management also calculates an alternative Spread which includes
noninterest-bearing deposits. Under this calculation, the alternative Spreads
for the three months ended September 30, 2002 and 2001 were 2.88% and 2.85%,
respectively. Margin and Spread are affected by the changes in the amount and
composition of interest-earning assets and interest-bearing liabilities.
Management's overall goal is to continue to improve the asset/liability
composition to be less vulnerable to market interest rate fluctuations,
primarily through the addition of loans tied to variable rates such as LIBOR and
local and regional prime rates and through the efforts to replace LIBOR based
borrowings with lower cost retail deposits.
Provision for Loan Losses and the Allowance for Loan Losses - Critical
---------------------------------------------------------------------------
Accounting Policy
------------------
The provision for loan losses was $900,000 for the three months ended
September 30, 2002 and the three months ended September 30, 2001. At September
30, 2002, Coastal had nonperforming loans totaling $16.2 million, which is a
decrease of $8.5 million, or 34%, when compared to December 31, 2001. See
previous discussion under "Results of Operations for the Nine Months Ended
September 30, 2002 and 2001 - Provision for Loan Losses and the Allowance for
Loan Losses."
Although no assurance can be given, management believes that the allowance
for loan losses at September 30, 2002 is adequate considering the size and the
changing composition of the loans receivable portfolio, historical and peer
group loss experience, delinquency trends and current economic conditions.
Management will continue to review its loan loss allowance policy as Coastal's
loan portfolio diversifies to determine if changes to the policy and the
resulting allowance for loan losses are necessary.
Noninterest Income
-------------------
Noninterest income decreased by $423,000 for the quarter ended September
30, 2002 compared to the quarter ended September 30, 2001. This decrease was
primarily due to the $843,000 decrease in the gain on the sale of real estate
owned and smaller decreases of $74,000 and $83,000 in loan fees and other
noninterest income. The decrease in the gain on the sale of real estate owned
was primarily due to a gain of $603,000 recorded during the quarter ended
September 30, 2001 on one real estate owned property. These decreases were
somewhat offset by the $564,000 increase in service charges on deposit accounts.
The increase in service charges on deposit accounts was due to Coastal's
continuing focus on increasing transaction type accounts and the related fee
income, including Coastal's new Fee Checking and Bounce Protection features on
retail checking accounts introduced during August 2002.
Noninterest Expense
--------------------
For the three months ended September 30, 2002, noninterest expense
decreased $1.0 million from the three months ended September 30, 2001. The $1.0
million decrease in noninterest expense was primarily due to decreases of
$281,000, $431,000, $701,000 and $83,000 in office occupancy, data processing,
the amortization of goodwill and other noninterest expense, respectively,
partially offset by a $249,000 increase in compensation, payroll taxes and other
benefits, a $189,000 increase in advertising and a $34,000 increase in postage
and delivery expenses. The decrease in office occupancy was primarily due to
certain assets becoming fully depreciated during 2001 and 2002. The decrease in
data processing expense was due to the of the conversion Rio Grande Valley
Region branches to Coastal's primary deposit and loan data processing system
during the third quarter of 2001 and the item processing functions brought
in-house during the third quarter of 2001. The decrease in the amortization of
goodwill was due to the implementation of FASB Statements 141, 142 and 147 on
January 1, 2002 (see note 5 to the Consolidated Financial Statements). The
increase in compensation, payroll taxes and other benefits was due to normal
merit increases for existing staff, in addition to the staff increases for the
item processing functions brought in-house during the third quarter of 2001 and
additional personnel needed to continue Coastal's focus on commercial banking
products, lending and providing other services to commercial business customers.
The increase in advertising and postage and delivery expenses were primarily due
to Coastal's continued focus on commercial banking products and lending.
Provision for Federal Income Taxes
--------------------------------------
The provision for Federal income taxes for the three months ended September
30, 2002 was $2.0 million compared to $2.8 million for the three months ended
September 30, 2001. The decrease was due to the decreased income before
provision for Federal income taxes and minority interest in 2002, with the
effective tax rate for the both periods being approximately 31%.
Liquidity and Capital Resources
----------------------------------
Coastal's primary sources of funds consist of deposits bearing market rates of
interest, advances from the FHLB, securities sold under agreements to
repurchase, federal funds purchased and principal payments on loans receivable
and mortgage-backed securities. Coastal uses its funding resources principally
to meet its ongoing commitments to fund maturing deposits and deposit
withdrawals, repay borrowings, purchase loans receivable and mortgage-backed
securities, fund existing and continuing loan commitments, maintain its
liquidity, meet operating expenses and fund stock purchases and acquisitions of
other banks and thrifts, either on a branch office or whole bank acquisition
basis. At September 30, 2002, Coastal had binding commitments to originate or
purchase loans totaling approximately $18.3 million and had $174.0 million of
undisbursed loans in process. Scheduled maturities of certificates of deposit
during the 12 months following September 30, 2002, totaled $859.3 million at
September 30, 2002. Management believes that Coastal has adequate resources to
fund all of its commitments.
As of September 30, 2002, Coastal operated 49 retail banking offices in
Texas cities, including Houston, Austin, Corpus Christi, the Rio Grande Valley
and small cities in the southeast quadrant of Texas. Five of these branches are
currently subject to a definitive branch sale agreement. See note 16 to the
Consolidated Financial Statements. Management's overall goal is to continue to
improve the asset/liability composition of Coastal's balance sheet to be less
vulnerable to market interest rate fluctuations.
Forward-Looking Information
- ----------------------------
The Management's Discussion and Analysis of Financial Condition and Results
of Operations set forth in this Form 10-Q should be read in conjunction with the
information contained in the Consolidated Financial Statements and the Notes
thereto.
The statements contained in this Quarterly Report on Form 10-Q which are not
historical facts contain forward looking information with respect to plans,
projections or future performance of Coastal, the occurrence of which involve
certain risks and uncertainties detailed in Coastal's filings with the
Securities and Exchange Commission ("SEC"). Such discussion contains
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995 (the "Reform Act"), and is subject to the safe
harbor created by that Reform Act. The words "estimate," "project,"
"anticipate," "expect," "intend," "believe," "plans," and similar expressions
are intended to identify forward-looking statements. Because such
forward-looking statements involve risks and uncertainties, there are important
factors that could cause actual results to differ materially from those
expressed or implied by such forward-looking statements. Factors, all of which
are difficult to predict and many of which are beyond the control of Coastal,
that could cause actual results to differ materially include, but are not
limited to: risks related to changes in market rates of interest, changes in
our loan portfolio, including the risks associated with our non-traditional
lending (loans other than single-family residential mortgage loans such as
multifamily, real estate acquisition and development, commercial real estate,
commercial business and commercial construction), the possibility that Coastal's
allowance for loan losses proves to be inadequate, Coastal's ability to attract
core deposits, the concentration of Coastal's loan portfolio in Texas and
California to the extent that the economies of those states experience problems,
Coastal's acquisition strategy, including risks of adversely changing results of
operations and factors affecting Coastal's ability to consummate further
acquisitions; risks involved in Coastal's ability to quickly and efficiently
integrate the operations of acquired entities with those of Coastal; changes in
business strategies, changes in general economic and business conditions and
changes in the laws and regulations applicable to Coastal; and other factors as
discussed in Coastal's Annual Report on Form 10-K for the year ended December
31, 2001, as filed with the SEC on March 26, 2002, and as filed in Exhibit 99.3,
attached hereto.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------------
There have been no material changes in Coastal's interest rate risk
position since December 31, 2001. Coastal's principal market risk exposure is to
interest rates. See note 10 of the Notes to Consolidated Financial Statements.
ITEM 4. CONTROLS AND PROCEDURES
-------------------------
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, Coastal's
management has reviewed the disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) of Coastal as of a date within 90 days
prior to this quarterly report (the "Evaluation Date"). Disclosure controls and
procedures are the controls and other procedures of Coastal that are designed to
ensure that the information required to be disclosed by Coastal in its reports
filed or submitted under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the SEC's rules and forms.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed by
Coastal in its reports filed under the Exchange Act is accumulated and
communicated to Coastal's management, including the principal executive officer
and principal financial officer, as appropriate to allow timely decisions
regarding required disclosure. Management believes that such disclosure
controls and procedures as of the Evaluation Date were adequate to ensure that
material information relating to Coastal, including its consolidated
subsidiaries, is made known to management by others within Coastal and its
consolidated subsidiaries. To management's knowledge, there were no significant
changes in internal controls or in other factors that could significantly affect
internal controls subsequent to the Evaluation Date.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
------------------
We are, and have been involved, from time to time, in various claims,
complaints, proceedings and litigation relating to activities arising from the
normal course of our operations. Based on the facts currently available to us,
we believe that the matters pending at September 30, 2002 are without merit, or
will be covered by insurance and any other matters are of such amounts, which
upon resolution, are not likely to have a material adverse effect on our
consolidated financial condition, results of operations or cash flows.
Item 2. Changes in Securities and Use of Proceeds
-----------------------------------------------
On July 15, 2002, Coastal Banc ssb redeemed from the stockholders of record
all of the 9.0% Series A Noncumulative Preferred Stock (Nasdaq:CBSAO). The
redemption price was $25.185 per share, which represented the stated value of
the Preferred Stock, plus accrued and unpaid dividends to the date of
redemption.
Item 3. Default Upon Senior Securities
---------------------------------
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
-----------------------------------------------------------
Not applicable.
Item 5. Other Information
------------------
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
-------------------------------------
Reports on Form 8-K.
1) Form 8-K filed with the SEC on July 17, 2002 concerning the announcement
that Coastal Banc ssb redeemed all of its 1,150,000 issued and outstanding
shares of 9.0% Noncumulative Preferred Stock, Series A (Nasdaq:CBSAP) on July
15, 2002.
2) Form 8-K filed with the SEC on July 17, 2002 concerning the announcement
that Mr. James C. Niver had resigned from the Board of Directors for personal
reasons as of June 30, 2002. In addition, the Board of Directors filled the
vacancy left by Mr. Niver's resignation by electing Mr. Clayton T. Stone to the
Board effective July 1, 2002.
3) Form 8-K filed with the SEC on September 26, 2002 concerning the
announcement that Coastal Banc ssb had executed a definitive agreement to sell
five Central Texas branches (Llano, Burnet, Mason, Kingsland and Marble Falls,
Texas) to First State Bank Central Texas.
Exhibits.
99.1 Certification of the Chairman of the Board and Chief Executive Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 Certification of the Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
99.3 Statement of Factors Under Private Securities Litigation Reform Act of
1995.
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: 11/14/02 By /s/ Manuel J. Mehos
-------- ----------------------
Manuel J. Mehos
Chief Executive Officer
Dated: 11/14/02 By /s/ Catherine N. Wylie
-------- ----------------------
Catherine N. Wylie
Chief Financial Officer
CERTIFICATION
I, Manuel J. Mehos, the Chief Executive Officer of Coastal Bancorp, Inc.,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of Coastal Bancorp,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Dated: 11/14/02 By /s/ Manuel J. Mehos
-------- ----------------------
Manuel J. Mehos
Chief Executive Officer
CERTIFICATION
I, Catherine N. Wylie, the Chief Financial Officer of Coastal Bancorp, Inc.,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of Coastal Bancorp,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Dated: 11/14/02 By /s/ Catherine N. Wylie
-------- ----------------------
Catherine N. Wylie
Chief Financial Officer
EXHIBIT 99.1
CERTIFICATION PURSUANT TO
18 U.S.C SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Coastal Bancorp, Inc. (the
"Company") on Form 10-Q for the period ended September 30, 2002 as filed with
the Securities and Exchange Commission on November 14, 2002 (the "Report"), I,
Manuel J. Mehos, Chairman of the Board and Chief Executive Officer of the
Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) of
the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
Dated:11/14/02 By /s/ Manuel J. Mehos
-------- ----------------------
Manuel J. Mehos
Chairman of the Board
and Chief Executive Officer
EXHIBIT 99.2
CERTIFICATION PURSUANT TO
18 U.S.C SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Coastal Bancorp, Inc. (the
"Company") on Form 10-Q for the period ended September 30, 2002 as filed with
the Securities and Exchange Commission on November 14, 2002 (the "Report"), I,
Catherine N. Wylie, Chief Financial Officer of the Company, certify, pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) of
the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
Dated: 11/14/02 By /s/ Catherine N. Wylie
-------- -------------------
Catherine N. Wylie
Chief Financial Officer
EXHIBIT 99.3
STATEMENT OF FACTORS UNDER PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
From time to time, Coastal Bancorp, Inc. ("Coastal" or "we," "us," "our"
and other terms referring to Coastal Bancorp, Inc. and Coastal Banc ssb) has
made and will make forward-looking statements. These statements can be
identified by the fact that they do not relate strictly to historical or current
facts. Forward-looking statements often use words such as "anticipate,"
"target," "expect," "estimate," "intend," "plan," "goal," "believe" or other
words of similar meaning. Forward-looking statements give Coastal's current
expectations or forecasts of future events, circumstances or results. Our
disclosure in this report, including in the Section entitled "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
("MD&A"), contains forward-looking statements. We also may make forward-looking
statements in its other documents filed with the Securities and Exchange
Commission (the "SEC") and in other written materials. In addition, Coastal's
senior management may make forward-looking statements orally to analysts,
investors, representatives of the media and others. Any forward-looking
statements made by or on behalf of Coastal speak only as of the date they are
made. We do not undertake to update forward-looking statements to reflect the
impact of circumstances or events that arise after the date the forward-looking
statement was made. The reader should, however, consult any further disclosures
of a forward-looking nature we may make in our Annual Reports on Form 10-K, our
Quarterly Reports on Form 10-Q and our Current Reports on Form 8-K. All
forward-looking statements, by their nature, are subject to risks and
uncertainties. Coastal's actual future results may differ materially from those
set forth in our forward-looking statements. Factors that might cause our future
financial performance to vary from that described in our forward-looking
statements include the credit, market, operational, liquidity, interest rate and
other risks discussed in the MD&A section of this report and in other periodic
reports filed with the SEC. In addition, the following discussion sets forth
certain risks and uncertainties that we believe could cause our actual future
results to differ materially from expected results. However, other factors
besides those listed below or discussed in Coastal's reports to the SEC also
could adversely affect our results, and the reader should not consider any such
list of factors to be a complete set of all potential risks or uncertainties.
This discussion is provided as permitted by the Private Securities Litigation
Reform Act of 1995.
WE ARE VULNERABLE TO CHANGES IN INTEREST RATES.
Our ability to make a profit, like that of most financial institutions,
substantially depends upon our net interest income, which is the difference
between the interest income we earn on our interest-earning assets, such as
loans and investment securities, and the interest expense we pay on our
interest-bearing liabilities, such as deposits and borrowings. Certain assets
and liabilities, however, may react in different degrees to changes in market
interest rates. Further, interest rates on some types of assets and liabilities
may fluctuate prior to changes in broader market interest rates, while rates on
other types may lag behind. Additionally, some of our assets, such as
adjustable rate mortgages, have features, including payment and rate caps, which
restrict changes in their interest rates.
Factors such as inflation, recession, unemployment, money supply, acts of
terrorism, international disorders, instability in domestic and foreign
financial markets, and other factors beyond our control may affect interest
rates. Changes in market interest rates will also affect the level of voluntary
prepayments on our loans and the receipt of payments on our mortgage-backed
securities resulting in the receipt of proceeds that may be reinvested at a
lower rate than the loan or mortgage-backed security being prepaid. Although we
pursue an asset-liability management strategy designed to manage our risk
resulting from changes in market interest rates, changes in interest rates can
still have a material adverse effect on our profitability.
99.3-1
OUR EXPOSURE TO CREDIT RISK WILL INCREASE AS WE INCREASE OUR COMMERCIAL BANKING
ACTIVITIES.
As we increase our focus on commercial business banking and attempt to
increase our net interest margin, a gradual increase in our consolidated credit
risk is likely to occur. One of our main strategies is to replace
lower-yielding first lien single-family residential mortgage loans and
mortgage-backed securities with commercial and consumer loans. Generally,
commercial loans (including commercial and multi-family real estate loans) are
considered to be riskier than first lien, single-family residential loans
because they have larger balances to a single borrower or group of related
borrowers and because their repayment generally relies on the success of the
borrowing enterprise. In addition, consumer loans are usually secured by
depreciating assets (such as cars and boats) and collections are dependent on
the borrowers' continuing financial stability, which is more likely to be
adversely affected by job loss, divorce, illness and personal bankruptcy.
Accordingly, we expect higher loan losses on this type of lending. If we have
to provide for loan losses that are higher than our historical experience, our
results of operations and financial condition could be adversely affected.
OUR ALLOWANCE FOR LOAN LOSSES MAY BE INADEQUATE TO COVER LOSSES ACTUALLY
INCURRED, WHICH COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR RESULTS OF
OPERATIONS AND FINANCIAL CONDITION.
We maintain an allowance for loan losses in an amount management believe is
sufficient to provide for known and inherent risks in our loan portfolio. If we
incur actual losses on our loans in excess of our allowance for loan losses, our
profitability may be adversely affected.
THE CONCENTRATION OF OUR LOAN PORTFOLIO IN TEXAS AND CALIFORNIA SUBJECTS US TO
RISK TO THE EXTENT THE CALIFORNIA AND TEXAS ECONOMIES EXPERIENCE PROBLEMS.
A substantial portion of the loans we originate and purchase are secured by
properties located in Texas and California or are made to businesses which
operate in those states. As a result, a large number of borrowers may be
affected by adverse changes in the economic conditions occurring in those
states.
The Texas economy has been historically sensitive to business cycles,
particularly those in the oil and gas industry. Unfavorable economic conditions
in Texas could significantly increase the number of borrowers which are unable
to pay their loans on a timely basis and cause a decline in the value of the
properties securing our loans which could have an adverse effect on our results
of operations and financial condition.
The California economy experienced a major slowdown in 2001. Economic
conditions in California are subject to various uncertainties at this time,
including the long-term impact of the electrical power crisis and the decline in
the technology sector. If economic conditions in California continue to
decline, we expect that our level of problem assets could increase accordingly.
WE MAY FAIL TO IDENTIFY OR CONSUMMATE ADDITIONAL ACQUISITIONS.
Our business strategy has historically relied, in part, upon our ability to
obtain low cost deposits, expand into new markets and enhance our presence in
existing markets by identifying and acquiring branches of other financial
institutions or whole banks that meet our acquisition criteria. In pursuing
these opportunities, we compete with other financial institutions with similar
acquisition strategies, many of which are larger than we are and have greater
financial and other resources than we have. We will compete for potential
acquisitions based on a number of factors, including price, terms and
conditions, size, access to capital and our ability to offer cash, stock or
other forms of consideration. We cannot assure you that we will be able to
identify suitable acquisition candidates or, once a suitable acquisition
candidate is identified, that we will be able to consummate the acquisition on
terms and conditions acceptable to us or at all.
99.3-2
WE MAY FAIL TO INTEGRATE OUR ACQUISITIONS SUCCESSFULLY.
We have grown through the acquisition of branches of other financial
institutions or of whole banks. To a certain extent, our success is tied to our
ability to integrate the operations, management, products and services of the
entities we acquire. After each acquisition, we must expend substantial
managerial, operating, financial and other resources to integrate these
entities. In particular, we must install and standardize adequate operational
and control systems, deploy or modify certain equipment, implement marketing
efforts in new as well as existing locations and employ and maintain qualified
personnel. Our operating results may be adversely affected if we fail to
properly integrate companies we acquire.
COMPETITION WITH OTHER FINANCIAL INSTITUTIONS COULD ADVERSELY AFFECT OUR
PROFITABILITY.
We face substantial competition in purchasing and originating loans and in
attracting deposits. This competition in purchasing and originating loans comes
principally from banks, other savings institutions, mortgage banking companies
and other lenders and purchasers of loans. Many of our competitors enjoy
competitive advantages including greater financial resources, a wider geographic
presence or more accessible branch office locations, the ability to offer
additional services or more favorable pricing alternatives and lower origination
and operating costs. This competition could result in a decrease in loans
originated or purchased by us that could adversely affect our results of
operations, and financial condition.
In attracting deposits, we compete with insured depository institutions
such as savings institutions, credit unions and banks, as well as institutions
offering uninsured investment alternatives including money market funds. These
competitors may offer higher interest rates than we do, which could result in
either our attracting fewer deposits or in our being required to increase our
rates in order to attract deposits. Increased deposit competition could increase
our cost of funds and adversely affect our ability to generate the funds
necessary for our lending operations, thereby adversely affecting our results of
operations and financial condition.
CHANGES IN STATUTES AND REGULATIONS COULD ADVERSELY AFFECT US.
We are subject to extensive regulation and supervision by federal and state
authorities. Such supervision and regulation establish a comprehensive
framework of activities in which an institution may engage, and are intended
primarily for the protection of the federal deposit insurance fund and our
depositors. This regulatory structure also provides our regulators with
significant discretion in the performance of their supervisory and enforcement
duties. Any change in such regulation, whether by our regulators or as a result
of legislation subsequently enacted by the Congress of the United States or the
Texas legislature, could have a substantial impact on our operations and us.
Additional legislation and regulations may be enacted or adopted in the future
that could significantly affect our powers, authority and operations, which
could have a material adverse effect on our operations.
99.3-3