UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] Quarterly Report Under Section 13 or 15 (d) of
the Securities Exchange Act of 1934
For the Quarterly Period Ended March 31, 2003
[ ] 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
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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 by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). [ X ]
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: 5,176,383 AS OF APRIL 30, 2003
COASTAL BANCORP, INC. AND SUBSIDIARIES
Table of Contents
PART I. FINANCIAL INFORMATION
- -------- ----------------------
Item 1 Financial Statements (unaudited)
Consolidated Statements of Financial Condition at March 31, 2003
and December 31, 2002 1
Consolidated Statements of Income for the Three-Month Periods Ended
March 31, 2003 and 2002 2
Consolidated Statements of Comprehensive Income for the Three-Month
Periods Ended March 31, 2003 and 2002 3
Consolidated Statements of Cash Flows for the Three-Month Periods
Ended March 31, 2003 and 2002 4
Notes to Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis of Financial Condition and Results
of Operations 14
Item 3 Quantitative and Qualitative Disclosures About Market Risk 19
Item 4 Controls and Procedures 19
PART II. OTHER INFORMATION
- --------- ------------------
Item 1 Legal Proceedings 20
Item 2 Changes in Securities and Use of Proceeds 20
Item 3 Defaults upon Senior Securities 20
Item 4 Submission of Matters to a Vote of Security Holders 20
Item 5 Other Information 20
Item 6 Exhibits and Reports on Form 8-K 20
SIGNATURES
CERTIFICATIONS
ITEM 1. FINANCIAL STATEMENTS
- -------- ---------------------
COASTAL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(IN THOUSANDS, EXCEPT SHARE DATA)
March 31, December 31,
ASSETS 2003 2002
- ------ ---------- ----------
(Unaudited)
Cash and cash equivalents $ 38,120 $ 39,766
Federal funds sold 8,400 27,755
Loans receivable held for sale 3,723 49,886
Loans receivable, net (note 4) 1,893,351 1,812,785
Mortgage-backed securities available-for-sale at fair value (note 3) 466,841 475,022
Other securities available-for-sale at fair value 1,781 1,788
Accrued interest receivable 9,742 9,781
Property and equipment 27,986 27,341
Stock in the Federal Home Loan Bank of Dallas ("FHLB") 41,475 41,221
Goodwill 21,429 21,429
Prepaid expenses and other assets 16,989 19,370
---------- ----------
$2,529,837 $2,526,144
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ---------------------------------------
Liabilities:
Deposits (note 5) $1,621,087 $1,614,368
Advances from the FHLB (note 6) 687,659 696,085
Company obligated mandatorily redeemable 9.0% trust preferred
securities of Coastal Capital Trust I (note 7) 50,000 50,000
Advances from borrowers for taxes and insurance 4,246 2,407
Other liabilities and accrued expenses 11,627 10,399
---------- ----------
Total liabilities 2,374,619 2,373,259
---------- ----------
Commitments and contingencies (notes 4 and 9)
Stockholders' equity (notes 1, 3, 10, 12 and 13):
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; 7,872,206 shares issued and 5,147,120 shares
outstanding at March 31, 2003; 7,867,029 shares issued
and 5,141,010 shares outstanding at December 31, 2002 79 79
Additional paid-in capital 35,796 35,736
Retained earnings 144,426 141,986
Accumulated other comprehensive income -
net unrealized gain on securities available-for-sale 434 619
Treasury stock at cost (2,725,086 shares in 2003 and 2,726,019
shares in 2002) (53,017) (53,035)
---------- ----------
Total stockholders' equity 155,218 152,885
---------- ----------
$2,529,837 $2,526,144
========== ==========
See accompanying Notes to Consolidated Financial Statements
COASTAL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Ended
March 31,
--------------------
2003 2002
---------- -----------
(Unaudited)
Interest income:
Loans receivable $25,612 $29,967
Mortgage-backed securities 3,667 4,964
FHLB stock, federal funds sold and other interest-earning assets 290 475
------- -------
29,569 35,406
------- -------
Interest expense:
Deposits 8,048 11,041
Advances from the FHLB 4,225 5,268
Senior Notes payable (note 8) -- 378
Company obligated mandatorily redeemable 9.0% trust preferred
securities of Coastal Capital Trust I 1,125 --
------- -------
13,398 16,687
------- -------
Net interest income 16,171 18,719
Provision for loan losses (note 4) 900 900
------- -------
Net interest income after provision for loan losses 15,271 17,819
------- -------
Noninterest income:
Service charges on deposit accounts 2,902 1,995
Loan fees 219 307
Gain on sale of loans receivable held for sale 734 --
Gain (loss) on derivative instruments (note 9) 6 (24)
Gain (loss) on real estate owned (130) 22
Other 262 209
------- -------
3,993 2,509
------- -------
Noninterest expense:
Compensation, payroll taxes and other benefits 8,008 7,861
Office occupancy 2,317 2,580
Data processing 433 423
Advertising 275 429
Postage and delivery 379 428
Other 2,508 1,995
------- -------
13,920 13,716
------- -------
Income before provision for Federal income taxes and
minority interest 5,344 6,612
Provision for Federal income taxes 1,659 1,884
------- -------
Income before minority interest 3,685 4,728
Minority interest - preferred stock dividends of Coastal Banc ssb -- 647
------- -------
Net income $3,685 $4,081
======= =======
Net income available to common stockholders $3,058 $3,454
======= =======
Basic earnings per common share (note 10) $0.59 $0.59
======= =======
Diluted earnings per common share (note 10) $0.57 $0.57
======= =======
See accompanying Notes to Consolidated Financial Statements
COASTAL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
Three Months Ended
March 31,
--------------------
2003 2002
---------- ----------
(Unaudited)
Net income $ 3,685 $4,081
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on securities available-for-sale
arising during period (185) (5)
-------- -------
Total comprehensive income $ 3,500 $4,076
======== =======
See accompanying Notes to Consolidated Financial Statements
COASTAL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Three Months Ended
March 31,
-----------------------
2003 2002
----------- ---------
(Unaudited)
Cash flows from operating activities:
Net income $ 3,685 $ 4,081
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization of property and equipment,
and prepaid expenses and other assets 2,302 2,165
Net amortization (accretion) of premiums, discounts and loan fees 592 1,243
Provision for loan losses 900 900
Originations and purchases of mortgage loans held for sale (92,166) (10,233)
Sales of mortgage loans held for sale 132,425 --
Gain on sale of mortgage loans held for sale (734) --
Stock dividends from the FHLB (254) (296)
(Gain) loss on derivative instruments (6) 24
Decrease (increase) in:
Accrued interest receivable 39 1,787
Other, net 3,476 2,352
---------- ---------
Net cash provided by operating activities 50,259 2,023
---------- ---------
Cash flows from investing activities:
Net decrease in federal funds sold 19,355 13,200
Purchase of mortgage-backed securities available-for-sale (38,840) --
Principal repayments on mortgage-backed securities
available-for-sale 46,910 44,648
Principal repayments on other securities available-for-sale -- 41,000
Purchases of loans receivable (160,898) (81,333)
Sales of loans receivable -- 10,111
Net decrease in loans receivable 84,036 91,642
Net purchases of property and equipment (1,433) (588)
---------- ---------
Net cash provided (used) by investing activities (50,870) 118,680
---------- ---------
(Table continued on next page)
COASTAL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(IN THOUSANDS)
Three Months Ended
March 31,
-------------------
2003 2002
----------- ------------
(Unaudited)
Cash flows from financing activities:
Net increase (decrease) in deposits $ 6,719 $ (20,829)
Advances from the FHLB 4,485,991 1,490,900
Principal payments on advances from the FHLB (4,494,417) (1,555,841)
Net increase in advances from borrowers for taxes and insurance 1,839 1,222
Exercise of stock options for purchase of common stock, net 50 40
Issuance of treasury shares 27 35
Redemption of Senior Notes payable -- (43,875)
Dividends paid (1,244) (1,328)
-------------- ----------
Net cash used by financing activities (1,035) (129,676)
-------------- ----------
Net decrease in cash and cash equivalents (1,646) (8,973)
Cash and cash equivalents at beginning of period 39,766 41,537
-------------- ----------
Cash and cash equivalents at end of period $ 38,120 $ 32,564
============== ==========
Supplemental schedule of cash flows-interest paid $ 13,835 $ 17,932
============== ==========
Supplemental schedule of noncash investing and financing
activities:
Transfer of loans to the held for sale category $ -- $ 9,075
Transfer of loans from held for sale to loans receivable 6,175 --
Foreclosures of loans receivable 811 1,924
============== ==========
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, comprehensive income 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
March 31, 2003 are not necessarily indicative of the results that may be
expected for the entire fiscal year or any other interim period.
Recent Accounting Pronouncements
----------------------------------
In November 2002, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 45 "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness to Others, an
interpretation of FASB Statements No. 5, 57 and 107 and a rescission of FASB
Interpretation No. 34". This Interpretation elaborates on the disclosures to be
made by a guarantor in its interim and annual financial statements about its
obligations under guarantees issued. The Interpretation also clarifies that a
guarantor is required to recognize, at inception of a guarantee, a liability for
the fair value of the obligation undertaken. The initial recognition and
measurement provisions of the Interpretation are applicable to guarantees issued
or modified after December 31, 2002 and did not have a material effect on the
Coastal's consolidated financial statements for the three months ended March 31,
2003.
Treasury Stock
---------------
On August 27, 1998, December 21, 1998, February 25, 1999, April 27, 2000,
July 27, 2000 and April 25, 2002, the Board of Directors authorized six separate
repurchase plans for up to 500,000 shares each of the outstanding shares of
common stock through an open-market repurchase program and privately negotiated
repurchases, if any. As of March 31, 2003, a total of 2,729,575 shares had been
repurchased under all of the authorized repurchase plans.
As of March 31, 2003, 2,725,086 shares of common stock were held in
treasury at an average price of $19.46 per share for a total cost of $53.0
million. Book value per common share at March 31, 2003 was $23.86.
Stock Options
--------------
Statement of Financial Accounting Standards No. 148 ("Statement 148")
"Accounting for Stock-Based Compensation - Transition and Disclosure" was issued
in December 2002. Statement 148 amends FASB Statement No. 123 "Accounting for
Stock-Based Compensation" ("Statement 123") to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, Statement 148 amends the
disclosure requirements of Statement 123 to require prominent disclosures in
both annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. Coastal has adopted the disclosure provisions included in Statement
148 in the notes to the consolidated financial statements for the three months
ended March 31, 2003 and 2002 contained herein.
As provided by Statement 123, Coastal accounts for its stock compensation
programs in accordance with the provisions of Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. Under this method, no stock-based compensation expense is
reflected in net income, as all options granted had an exercise price equal to
the market value of the underlying common stock on the date of grant. The
following table illustrates the effect on net income and earnings per share as
if Coastal had applied the fair value recognition provisions of Statement 123 as
amended by Statement 148.
Three Months Ended March 31,
2003 2002
------------------------------------
(In thousands, except per share data)
Net income available to common stockholders, as reported $ 3,058 $3,454
Deduct: Total stock-based compensation expense determined
under the fair value based method for all awards, net of
related tax effects (49) (106)
--------- ---------
Proforma net income available to common stockholders $ 3,009 $3,348
========== =========
Earnings per common share:
Basic - as reported $ 0.59 $ 0.59
Basic - proforma $ 0.58 $ 0.57
Diluted - as reported $ 0.57 $ 0.57
Diluted - proforma $ 0.56 $ 0.55
(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 March 31, 2003 were as follows (dollars in
thousands):
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ----------- ---------- ----------
Available-for-sale:
Agency securities $ 394,249 $ 1,685 $ (650) $395,284
CMOs - Non-agency 69,948 66 (456) 69,558
Non-agency securities 1,981 18 -- 1,999
----------- -------- --------- --------
$ 466,178 $ 1,769 $(1,106) $466,841
=========== ======== ========= ========
Mortgage-backed securities at December 31, 2002 were as follows (dollars in
thousands):
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ---------- ----------- ----------
Available-for-sale:
Agency securities $ 387,636 $ 1,983 $ (470) $389,149
CMOs - Non-agency 84,376 67 (644) 83,799
Non-agency securities 2,060 14 -- 2,074
----------- ------- ------- --------
$ 474,072 $ 2,064 $(1,114) $475,022
=========== ======= ======= ========
(4) LOANS RECEIVABLE
Loans receivable at March 31, 2003 and December 31, 2002 were as follows
(dollars in thousands):
March 31, 2003 December 31, 2002
---------------- -----------------
Real estate mortgage loans:
First-lien mortgage, primarily residential $ 929,512 $ 855,633
Commercial 311,981 317,692
Multifamily 117,213 116,020
Residential construction 121,224 123,085
Acquisition and development 136,855 143,463
Commercial construction 248,997 241,128
Commercial, financial and industrial 144,893 135,209
Loans secured by deposits 13,668 14,465
Consumer and other loans 31,455 33,430
---------------- -----------
2,055,798 1,980,125
---------------- -----------
Loans in process (146,090) (147,769)
Allowance for loan losses (18,301) (18,118)
Unearned interest and loan fees (3,061) (2,910)
Premium on purchased loans, net 5,005 1,457
---------------- -----------
$ 1,893,351 $1,812,785
================ ===========
Weighted average yield 5.46% 5.52%
================ ===========
At March 31, 2003, Coastal had outstanding commitments to originate or
purchase $23.0 million of real estate mortgage and other loans and had
commitments under lines of credit to originate primarily construction and other
loans of approximately $117.0 million. In addition, at March 31, 2003, Coastal
had $13.6 million of outstanding letters of credit. Management anticipates the
funding of these commitments through normal operations.
Letters of credit are written for conditional commitments issued by the
Bank to guarantee the performance of a customer to a third party. The Bank's
policies generally require that letters of credit arrangements contain security
and debt covenants similar to those contained in loan agreements. Under the
standby letters of credit, the Bank is required to make payments to the
beneficiary of the letters of credit upon request by the beneficiary so long as
all performance criteria have been met. At March 31, 2003, the maximum
potential amount of future payments under standby letters of credit is $13.6
million. As of March 31, 2003, the fair value of these guarantees, which is the
liability recorded when fees are collected, was immaterial to the consolidated
financial statements.
At March 31, 2003 and December 31, 2002, the carrying value of loans that
were considered to be impaired totaled approximately $7.9 million and $8.5
million, respectively, and the related allowance for loan losses on those
impaired loans totaled $2.1 million and $2.4 million at March 31, 2003 and
December 31, 2002, respectively. Of the impaired loans outstanding, three loans
with a balance of $453,000 at March 31, 2003 and eight loans with a balance of
$551,000 at December 31, 2002 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 three months ended March 31, 2003 and
2002 was $8.2 million and $3.5 million, respectively.
An analysis of activity in the allowance for loan losses for the three
months ended March 31, 2003 and 2002 is as follows (in thousands):
Three Months Ended March 31,
----------------------------
2003 2002
-------- --------
Balance, beginning of period $18,118 $15,385
Provision for loan losses 900 900
Charge-offs (908) (1,890)
Recoveries 191 90
------- --------
Balance, end of period $18,301 $14,485
======= ========
Coastal services for others loans receivable which are not included in the
Consolidated Financial Statements. The total amounts of such loans were $64.9
million and $68.8 million at March 31, 2003 and December 31, 2002, respectively.
(5) DEPOSITS
Deposits, their stated rates and the related weighted average interest
rates, at March 31, 2003 and December 31, 2002, 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 $245.8 million ($127.2 million from noninterest-bearing
and $118.6 million from interest-bearing) at March 31, 2003 and $250.9 million
($131.3 million from noninterest-bearing and $119.6 million from
interest-bearing) at December 31, 2002.
Stated Rate March 31, 2003 December 31, 2002
--------------- -------------- -------------------
Noninterest-bearing checking 0.00% $ 59,732 $ 51,029
Interest-bearing checking 0.50 - 1.00 12,931 14,353
Savings accounts 0.50 - 1.24 46,268 44,603
Money market demand accounts 0.00 - 2.13 542,375 530,659
--------- ----------
661,306 640,644
--------- ----------
Certificate accounts Less than 2.00 175,680 104,358
2.00 - 2.99 491,870 558,337
3.00 - 3.99 203,816 206,645
4.00 - 4.99 53,997 63,234
5.00 - 5.99 29,730 34,447
6.00 - 6.99 4,595 6,524
7.00 - 7.99 19 106
8.00 - 8.99 74 73
--------- ---------
959,781 973,724
--------- ---------
$1,621,087 $1,614,368
========== ==========
Weighted average interest rate 2.00% 2.12%
========== ==========
Prior to the reclassification as discussed above, noninterest-bearing
checking accounts, interest-bearing checking accounts and money market demand
accounts were as follows at March 31, 2003 and December 31, 2002:
March 31, 2003 December 31, 2002
--------------- -----------------
Noninterest-bearing checking $ 186,925 $182,290
Interest-bearing checking 131,494 134,034
Money market demand accounts 296,619 279,717
The scheduled maturities of certificate accounts outstanding at March 31,
2003 were as follows (dollars in thousands):
March 31, 2003
---------------
0 through 12 months $ 726,515
13 through 24 months 155,793
25 through 36 months 34,407
37 through 48 months 8,568
49 through 60 months 34,402
Over 60 months 96
---------------
$ 959,781
===============
(6) ADVANCES FROM THE FHLB
The weighted average interest rates on advances from the FHLB at March 31,
2003 and December 31, 2002 were 2.48% and 2.71%, respectively. The scheduled
maturities and related weighted average interest rates on advances from the FHLB
at March 31, 2003 are summarized as follows (dollars in thousands):
Weighted Average
Due during the year ending December 31, Interest Rate Amount
- --------------------------------------- ----------------- --------
2003 2.71% $205,072
2004 2.10 153,539
2005 2.26 239,761
2006 1.91 59,782
2007 6.67 1,130
2008 4.48 5,480
2009 8.00 3,418
2010 5.72 1,786
2011 6.53 1,228
2012 5.76 292
2013 5.64 8,222
2014 5.45 2,894
2015 6.66 1,632
2017 5.43 1,987
2018 5.05 1,436
--------
2.48% $687,659
========
Advances from the FHLB are secured by certain first-lien mortgage and
multifamily loans and mortgage-backed securities owned by Coastal.
(7) 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.
(8) 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.
(9) DERIVATIVE INSTRUMENTS
Coastal is a party to derivative instruments in the normal course of
business to reduce its exposure to fluctuations in interest rates. These
derivative instruments have included interest rate swap agreements where Coastal
makes fixed interest payments and receives payments based on a floating index
and interest rate cap agreements, as described below. For the quarters ended
March 31, 2003 and 2002, Coastal recorded a fair value gain (loss) on these
derivative instruments of $6,000 and ($24,000), respectively. As of March 31,
2003 and December 31, 2002, interest rate cap agreements were Coastal's only
derivative instruments and were recorded at fair value.
As of March 31, 2003, Coastal has interest rate cap agreements with third
parties with notional amounts totaling $107.6 million. The current agreements
provide for the third parties to make payments to Coastal whenever a defined
floating rate exceeds rates ranging from 8.0% to 9.0%, depending on the
agreement. All of Coastal's current agreements expire in 2003. Payments on the
interest rate cap agreements are based on the notional principal amount of the
agreements; no funds were actually borrowed or are to be repaid. The fair value
of the interest rate cap agreements was zero at March 31, 2003 and December 31,
2002, which is the recorded book value of the agreements at such dates. 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 $6,000 for
each of the three months ended March 31, 2003 and 2002. No payments were made
to Coastal under the interest rate cap agreements during the three months ended
March 31, 2003 or 2002.
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, including off-balance sheet items, as well as potential
changes in net interest income.
Coastal is exposed to credit loss in the event of nonperformance by the
counterparty to the 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.
(10) EARNINGS PER SHARE
The following summarizes information related to the computation of basic
and diluted earnings per share ("EPS") for the three-month periods ended March
31, 2003 and 2002 (dollars in thousands, except per share data):
Three Months Ended
March 31,
2003 2002
---------- ----------
Net income $ 3,685 $ 4,081
Preferred stock dividends 627 627
---------- ----------
Net income available to common stockholders $ 3,058 $ 3,454
========== ==========
Weighted average number of common shares
outstanding used in basic EPS calculation 5,144,407 5,841,945
Add assumed exercise of outstanding stock
options as adjusted for dilutive securities 242,159 268,877
---------- ----------
Weighted average number of common shares
outstanding used in diluted EPS calculation 5,386,566 6,110,822
========== ==========
Basic EPS $ 0.59 $ 0.59
========== ==========
Diluted EPS $ 0.57 $ 0.57
========== ==========
(11) COASTAL BANC SSB PREFERRED STOCK
On October 21, 1993, the Bank issued 1,150,000 shares of 9.0% Noncumulative
Preferred Stock, no par value, Series A, at a price of $25 per share to the
public. Dividends on the Preferred Stock are payable quarterly at the annual
rate of $2.25 per share, when, as and if declared by the Board of Directors of
the Bank. At any time on or after December 15, 1998, the Preferred Stock may be
redeemed in whole or in part only at the Bank's option at $25 per share plus
unpaid dividends (whether or not earned or declared) for the then current
dividend period to the date fixed for redemption.
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 7). 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.
(12) COASTAL BANCORP, INC. PREFERRED STOCK
On May 11, 1999, Coastal Bancorp, Inc. ("Bancorp") issued 1,100,000 shares
of 9.12% Series A Cumulative Preferred Stock, no par value, at a price of $25
per share to the public ("Bancorp Preferred Stock"). Dividends on the Bancorp
Preferred Stock are payable quarterly at the annual rate of $2.28 per share.
The preferred stock is callable on May 15, 2003 at Bancorp's option. Pursuant
to Coastal's tax benefit agreement with the FDIC, Coastal receives a tax benefit
for dividends paid on the Bancorp Preferred Stock.
(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 March 31, 2003, 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) $179,319 7.30% $ 98,254 4.00% $122,817 5.00%
Tier 1 risk-based 179,319 10.49 68,345 4.00 102,517 6.00
Total risk-based 197,620 11.57 136,670 8.00 170,862 10.00
As of March 31, 2003, 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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
--------------------------------------------------------------------
Financial Condition
- --------------------
Total assets increased slightly by $3.7 million from December 31, 2002 to
March 31, 2003. The net increase was primarily comprised of the following
changes: an $80.6 million increase in loans receivable, a $46.2 million
decrease in loans receivable held for sale, a $19.4 million decrease in federal
funds sold and a $8.2 million decrease in mortgage-backed securities
available-for-sale. There were also small changes in other asset categories.
The increase in loans receivable was primarily due to the purchase of $160.9
million in single-family mortgage loans, offset by principal payments received
on mortgage and other types of loans. The decrease in loans receivable held for
sale was due primarily to the loan package purchased in November of 2002 with
the intention of selling the majority of the package to third party investors.
The sales to the third party investors were completed in January of 2003. The
decrease in mortgage-backed securities was due to principal payments received
offset by purchases of $38.8 million during the first quarter of 2003.
Deposits increased $6.7 million or 0.4% from December 31, 2002 to March 31,
2003 and advances from the FHLB decreased 1.2% or $8.4 million. Stockholders'
equity increased 1.5% or $2.3 million from December 31, 2002 to March 31, 2003
primarily as a result of net income, offset by a $185,000 decrease in
accumulated other comprehensive income and dividends declared.
Results of Operations for the Three Months Ended March 31, 2003 and 2002
- --------------------------------------------------------------------------------
General
-------
For the three months ended March 31, 2003, net income was $3.7 million
compared to $4.1 million for the three months ended March 31, 2002. The
decrease was primarily due to a $2.5 million decrease in net interest income, as
a result of a 0.39% decrease in net interest margin (due to the overall lower
interest rate environment) and a $14.0 million decrease in average net
interest-earning assets when comparing the first quarter of 2003 to the same
period in 2002. In addition, noninterest expense increased $204,000. These
decreases in net income were partially mitigated by a $1.5 million increase in
noninterest income, a $225,000 decrease in the provision for Federal income
taxes and a $647,000 decrease in the expense for minority interest (related to
preferred stock of Coastal Banc ssb which was redeemed on July 15, 2002).
Interest Income
----------------
Due to the overall lower interest rate environment and significant
principal payments received on Coastal's mortgage-backed securities and
single-family mortgage loan portfolios, interest income decreased $5.8 million
to $29.6 million for the three months ended March 31, 2003 from $35.4 million
for the three months ended March 31, 2002. The decrease was comprised of a $4.4
million decrease in interest income on loans receivable, a $1.3 million decrease
in interest income on mortgage-backed securities and a $185,000 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
$21.7 million and the average yield decreased 0.93% from 5.90% in 2002 to 4.97%
in 2003. The $21.7 million decrease in average interest-earning assets
consisted primarily of a $30.2 million decrease in the average balance of
mortgage-backed securities, a $26.6 million decrease in the average balance of
other securities available-for-sale, offset somewhat by a $36.5 million increase
in the average balance of loans receivable.
As in 2002, during 2003 Coastal has continued to experience significant
principal paydowns on its mortgage-backed securities and single family mortgage
loans receivable portfolios (on an annualized basis, approximately 40% on
mortgage-backed securities and 40% on single family mortgage loans) due to the
continuing low market rates of interest and the resulting refinancings of
mortgage assets. These paydowns resulted in greater premium amortization on
those mortgage assets originally purchased at a premium. In addition, due to
the lower interest rate environment, Coastal is replacing these paid down assets
with lower yielding assets, many being purchased at a premium.
Interest Expense
-----------------
Interest expense on interest-bearing liabilities was $13.4 million for the
three months ended March 31, 2003, as compared to $16.7 million for the same
period in 2002. The decrease in interest expense was again primarily due to the
lower overall market rates of interest that declined throughout 2002 and have
continued to decline in 2003. When comparing the two periods, the average rate
paid on interest-bearing liabilities decreased to 2.53% for 2003 from 3.15% for
2002 and average interest-bearing liabilities decreased $7.7 million. The 0.62%
decrease in the average rate paid on interest-bearing liabilities was due
primarily to the 0.73% decrease in the rate paid on interest-bearing deposits
and a 0.72% decrease in the rates paid on advances from the FHLB. The decrease
in average interest-bearing liabilities consisted primarily of a $61.2 million
decrease in average interest-bearing deposits, a $15.1 million decrease in the
average balance of Senior Notes due to their redemption on February 1, 2003,
offset somewhat by a $50.0 million increase in the average balance of Trust
Preferred Securities due to their issuance on June 18, 2002 and an increase of
$18.7 million in advances from the FHLB.
Net Interest Income
---------------------
Net interest income was $16.2 million for the three months ended March 31,
2003 and $18.7 million for the same period in 2002. As discussed above, the
decrease was due primarily to the overall lower market interest rate
environment. Net interest margin ("Margin") was 2.71% for the three months
ended March 31, 2003 compared to 3.10% for the three months ended March 31,
2002. Margin represents net interest income as a percentage of average
interest-earning assets. Net interest spread ("Spread"), defined to exclude
noninterest-bearing deposits, decreased to 2.44% for the three months ended
March 31, 2003 from 2.75% for the three months ended March 31, 2002. Management
also calculates an alternative Spread which includes noninterest-bearing
deposits. Under this calculation, the alternative Spreads for the three months
ended March 31, 2003 and 2002 were 2.63% and 2.97%, respectively. Margin and
Spread are affected by the changes in the amount and composition of
interest-earning assets and interest-bearing liabilities. When comparing the
two periods, average interest-earning assets decreased $21.7 million and average
interest-bearing liabilities decreased $7.7 million.
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 March
31, 2003 and for the three months ended March 31, 2002. At March 31, 2003,
Coastal had nonperforming loans totaling $15.5 million, which is a decrease of
$3.0 million, or 16.3%, when compared to December 31, 2002. Nonperforming loans
are those loans on nonaccrual status as well as those loans greater than ninety
days delinquent and still accruing interest. The ratio of nonperforming assets
to total assets was 0.77% at March 31, 2003. At March 31, 2003 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
118.0% compared to 97.7% at December 31, 2002.
Management analyzes the loan portfolio to determine the adequacy of the
allowance for loan losses and the appropriate provision required to maintain an
adequate allowance. Estimating the allowance for loan losses is a critical
accounting policy. It is subjective in nature and requires material estimates
that may be subject to revision as facts and circumstances warrant. In
assessing the adequacy of the allowance, management reviews the type, size,
quality and risk of loans in the portfolio and considers such factors as
specific known risks, historical and peer group experience, the existing
nonperforming loans and the underlying collateral value on those loans, general
economic conditions, particularly as they relate to Coastal's lending areas and
other factors related to the collectibility of Coastal's loan portfolio. Based
on the ongoing assessment by management, provisions for loan losses are charged
to earnings to bring the total allowance for loan losses to a level deemed
appropriate by management based on probable losses in the loan portfolio. While
management uses the best information available to recognize losses on loans,
there can be no assurance that future additions to the allowance will not be
necessary.
Noninterest Income
-------------------
For the three months ended March 31, 2003, noninterest income increased
$1.5 million to $4.0 million, compared to $2.5 million for the three months
ended March 31, 2002. The $1.5 million increase in noninterest income was
primarily due to the $907,000 increase in service charges on deposit accounts
and a $734,000 gain on the sale of loans receivable held for sale. The
increased income from service charges on deposit accounts is due to Coastal's
continued focus on increasing transaction-type accounts and the related fee
income, including Coastal's Free Checking and Bounce Protection features on
retail checking accounts introduced during August 2002. The gain on the sale of
mortgage loans held for sale was due to routine sales transactions by Coastal
Banc ssb (the "Bank"), which were facilitated by Coastal Banc Mortgage Corp.
("CBMC"), an affiliate of the Bank. The loans sold were purchased by the Bank
in packages with the intention to resell all or part of the loans in the
packages to third party investors. CBMC was formed during the third quarter of
2002 for the purpose of facilitating the purchase and sale of whole loans and
participations to third parties. There were also small changes in other
categories of noninterest income.
Noninterest Expense
--------------------
For the three months ended March 31, 2003, noninterest expense increased
$204,000 from the three months ended March 31, 2002. When comparing the first
quarter of 2003 to the same period in 2002, the $204,000 net increase in
noninterest expense was comprised primarily of an increase in compensation,
payroll taxes and benefits of $147,000 and an increase in other noninterest
expense of $513,000, offset by decreases of $263,000, $154,000 and $49,000 in
office occupancy, advertising and postage and delivery expenses, respectively.
The increase in compensation related expenses was due primarily to compensation
paid to CBMC employees for brokerage commissions related to the loan sales
mentioned previously, offset by a decrease due to the internal audit department
being outsourced during 2002. The $513,000 increase in other noninterest
expense was comprised of a $120,000 increase in audit and accounting fees
related to the outsourcing of the internal audit department, a $120,000 increase
in legal fees and insurance premiums, and a $201,000 increase in expenses
related to loans and real estate owned. The decrease in office occupancy was
primarily due to certain assets becoming fully depreciated in 2002 and 2003.
The decrease in advertising expense was due to management's continued work to
monitor and reduce this type of expense, when possible.
Provision for Federal Income Taxes
--------------------------------------
The provision for Federal income taxes for the three months ended March 31,
2003 was $1.7 million compared to $1.9 million for the three months ended March
31, 2002. The $225,000 decrease was due to the lower amount of income before
provision for Federal income taxes and minority interest, with the effective tax
rate for the periods being approximately 31% for quarter ended March 31, 2003
and 32% for the same period in 2002 (when taking into account the tax benefit
for the minority interest expense in 2002). As discussed in the notes to the
Consolidated Financial Statements, Coastal receives a tax benefit for the
dividends paid on the Bancorp Preferred Stock pursuant to an agreement with the
FDIC. The effective tax rate for the three months ended March 31, 2003 would
have been 35% without this tax benefit related to the Bancorp Preferred Stock.
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 March 31, 2003, Coastal had binding commitments to originate or
purchase loans totaling approximately $23.0 million and had $146.1 million of
undisbursed loans in process. Scheduled maturities of certificates of deposit
during the 12 months following March 31, 2003, totaled $726.5 million at March
31, 2003. Management believes that Coastal has adequate resources to fund all
of its commitments.
During the quarter ended March 31, 2003, Coastal opened a new branch in the
City of Rosenberg, Texas. As of March 31, 2003, Coastal operated 44 retail
banking offices in Texas cities, including Houston, Austin, Corpus Christi, the
Rio Grande Valley and small cities in the southeast quadrant of Texas (including
this new branch in Rosenberg). 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 the 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, commercial construction and warehouse loans), the
possibility that Coastal's allowance for loan losses proves to be inadequate,
Coastal's ability to attract core deposits, the concentration of Coastal's loan
portfolio in Texas and California to the extent that the economies of those
states experience problems, Coastal's acquisition strategy, including risks of
adversely changing results of operations and factors affecting Coastal's ability
to consummate further acquisitions; risks involved in Coastal's ability to
quickly and efficiently integrate the operations of acquired entities with those
of Coastal; changes in business strategies, changes in general 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, 2002, as filed with the SEC on March 25, 2003.
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, 2002. Coastal's principal market risk exposure is to
interest rates. See note 9 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.
Coastal intends to continually review and evaluate the design and
effectiveness of its disclosure controls and procedures and to improve its
controls and procedures over time and to correct any deficiencies that it may
discover in the future. The goal is to ensure that senior management has timely
access to all material financial and non-financial information concerning
Coastal's business. While Coastal believes that the present design of its
disclosure controls and procedures is effective to achieve this goal, further
events affecting its business may cause Coastal to modify its disclosure
controls and procedures.
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 March 31, 2003 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
-----------------------------------------------
Not applicable.
Item 3. Defaults 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.
None.
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: 5/15/03 By /s/ Manuel J. Mehos
------- --------------------
Manuel J. Mehos
Chairman of the Board
Chief Executive Officer
Dated: 5/15/03 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.
COASTAL BANCORP, INC.
Dated: 5/15/03 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.
COASTAL BANCORP, INC.
Dated: 5/15/03 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 March 31, 2003 as filed with the
Securities and Exchange Commission on May 15, 2003 (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: 5/15/03 By /s/ Manuel J. Mehos
------- --------------------
Manuel J. Mehos
Chairman of the Board and Chief
Executive Officer
(A signed original of this written statement required by Section 906 has been
provided to Coastal Bancorp, Inc. and will be retained by Coastal Bancorp, Inc.
and furnished to the Securities and Exchange Commission or its staff upon
request.)
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 March 31, 2003 as filed with the
Securities and Exchange Commission on May 15, 2003 (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: 5/15/03 By /s/ Catherine N. Wylie
------- -------------------
Catherine N. Wylie
Chief Financial Officer
(A signed original of this written statement required by Section 906 has been
provided to Coastal Bancorp, Inc. and will be retained by Coastal Bancorp, Inc.
and furnished to the Securities and Exchange Commission or its staff upon
request.)
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.
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 believes
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 TEXAS AND CALIFORNIA 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 historically tended to outperform the national economy in
terms of employment and population growth. While Texas has diversified
substantially in recent years, it continues to be particularly affected by the
overall health of the oil and gas industry. The Texas economy is also dependent
upon trade (particularly with Mexico) and the high technology industry.
Unfavorable economic conditions in these areas 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. While economic
conditions stabilized in 2002, the state economy remains weak and employment
growth is sluggish. Economic conditions in California are also subject to
various uncertainties at this time, including the impact of state budget
shortfalls and the continued weakness in the technology industry. If economic
conditions in California remain weak or deteriorate further, 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.
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.