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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2000
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OR
[ ] 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.
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(Exact name of Registrant as specified in its charter)
Texas 76-0428727
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
5718 Westheimer, Suite 600
Houston, Texas 77057
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(Address of principal executive office)
(713) 435-5000
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(Registrant's telephone number)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
N/A N/A
Securities registered pursuant to section 12(g) of the Act:
Common Stock, $0.01 par value per share
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(Title of Class)
9.12% Series A Cumulative Preferred Stock
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(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months and (2) has been subject to such filing requirements for the
past 90 days. Yes X No
---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of March 16, 2001, the aggregate market value of the 5,737,376 shares of
Common Stock of the Registrant issued and outstanding on such date, excluding
1,675,183 shares held by all directors and executive officers of the Registrant
as a group, was $108,663,663. This figure is based on the closing sale price of
$26.75 per share of the Registrant's Common Stock on March 16, 2001, as reported
in The Wall Street Journal on March 19, 2001.
Number of shares of Common Stock outstanding as of March 16, 2001: 5,737,376
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents incorporated by reference and the
Part of Form 10-K into which the document is incorporated:
(1) Portions of the Registrant's Annual Report to Stockholders for the
fiscal year ended December 31, 2000, are incorporated into Part II, Items 5-8 of
this Form 10-K.
(2) Portions of the Registrant's definitive proxy statement for its 2001
Annual Meeting of Stockholders ("Proxy Statement") are incorporated into Part
III, Items 10-13 of this Form 10-K.
PART I.
ITEM 1. BUSINESS
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COASTAL BANCORP, INC.
In addition to historical information, this Annual Report on Form 10-K
includes certain "forward-looking statements," as defined in the Securities Act
of 1933, as amended (the "Securities Act"), and the Securities Exchange Act of
1934, as amended (the "Exchange Act"), based on current management expectations.
Coastal Bancorp, Inc.'s (the "Company") actual results could differ materially
from those management expectations. Such forward-looking statements include
statements regarding the Company's intentions, beliefs or current expectations
as well as the assumptions on which such statements are based. Stockholders and
potential stockholders are cautioned that any such forward-looking statements
are not guarantees of future performance and involve risks and uncertainties,
and that actual results may differ materially from those contemplated by such
forward-looking statements. Factors that could cause future results to vary
from current management expectations include, but are not limited to, general
economic conditions, legislative and regulatory changes, monetary and fiscal
policies of the federal government, changes in tax policies, rates and
regulations of federal, state and local tax authorities, changes in interest
rates, deposit flows, the cost of funds, demand for loan products, demand for
financial services, competition, changes in the quality or composition of the
Company's loan and investment portfolios, changes in accounting principles,
policies or guidelines, and other economic, competitive, governmental and
technological factors affecting the Company's operations, markets, products,
services and fees. The Company undertakes no obligation to update or revise any
forward-looking statements to reflect changed assumptions, the occurrence of
unanticipated events or changes to future operating results over time.
Coastal Bancorp, Inc. is engaged primarily in the business of serving as
the parent holding company for Coastal Banc ssb (the "Bank"). The Company was
incorporated in March 1994 in connection with the reorganization of Coastal Banc
Savings Association, a Texas-chartered thrift institution (the "Association")
into the holding company form of organization. In connection with the
reorganization, which was completed in July 1994, the Association concurrently
converted into a Texas-chartered savings bank and took its present name. In
November 1996, in order to minimize state taxes, the Company's corporate
structure was again reorganized by forming Coastal Banc Holding Company, Inc.
("HoCo") as a Delaware holding company. HoCo became a wholly-owned subsidiary
of the Company and the Bank became a subsidiary of HoCo. Each of these
reorganizations was treated for accounting purposes as combinations similar to a
pooling-of-interests. The financial information and references presented herein
have been restated to give effect where appropriate to the reorganizations as if
they had occurred at the earliest date presented. In October 1997, the Company
formed Coastal Banc Capital Corp. ("CBCC") as a wholly-owned subsidiary of HoCo.
CBCC is a registered broker-dealer and was formed to trade packages of whole
loan assets, primarily for the Bank and for other institutional investors. In
June 2000, the Company acquired Coastal Banc Insurance Agency, Inc. ("CBIA") as
a wholly-owned subsidiary of the Bank. CBIA was a former affiliate of the Bank
and receives fees related to insurance and investment product sales to the
Bank's deposit and loan customers.
At December 31, 2000, the Company had total consolidated assets of $3.1
billion, total deposits of $1.7 billion, $28.8 million in Series A Preferred
Stock of the Bank, 9.12% Series A Cumulative Preferred Stock of $27.5 million
and common stockholders' equity of $111.0 million.
The Company is subject to examination and regulation by the Office of
Thrift Supervision (the "OTS") and the Company and the Bank are subject to
examination and regulation by the Texas Savings and Loan Department (the
"Department"). The Company is also subject to various reporting and other
requirements of the Securities and Exchange Commission (the "SEC"). See
"Regulation - The Company."
The Company's executive offices are located at Coastal Banc Plaza, 5718
Westheimer, Suite 600, Houston, Texas 77057-5745, and its telephone number is
(713) 435-5000.
COASTAL BANC ssb
The Bank is a Texas-chartered, Federally insured state savings bank. It is
headquartered in Houston, Texas and operates through 50 branch offices in
metropolitan Houston, Austin, Corpus Christi, the Rio Grande Valley and small
cities in the southeast quadrant of Texas.
The Bank, which was originally organized in 1954, was acquired in 1986 by
an investor group (which includes a majority of the current members of the Board
of Directors and the present Chairman of the Board, President and Chief
Executive Officer of the Company) as a vehicle to take advantage of the failures
and consolidation in the Texas banking and thrift industries. At February 28,
1986 (the date of change in ownership), the Bank had one full service office and
total assets of approximately $10.7 million. Since then, the Bank has acquired
deposits and branch offices in transactions with the Federal government and
other private institutions, and, in 1995, acquired an independent national bank.
By December 31, 2000, the Bank's total assets had increased to $3.1 billion,
total deposits were $1.7 billion and stockholders' equity totaled $209.0
million.
The Bank attempts to maximize profitability through the generation of net
interest income and fee income. To meet this objective, the Bank has
implemented a strategy of building its core deposit base while deploying its
funds in assets which provide an attractive return with acceptable credit risk.
In carrying out this strategy, and to ultimately provide an attractive rate of
return to the Company's shareholders, the Bank adheres to four operating
principles: (i) continuing to expand its low cost core deposit base; (ii)
minimizing interest rate risk; (iii) controlling credit risk, while increasing
the emphasis on commercial business lending; and (iv) maintaining a low level of
general overhead expense relative to its peers. These operating principles are
briefly discussed below.
The Bank operates a website on the Internet for business and marketing
purposes at www.coastalbanc.com. (The website is not a part of this Form 10-K.)
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CORE DEPOSITS. The Bank began to implement the first operating principle,
developing and expanding a core deposit base, in 1988 through a series of
transactions with the Federal government and competitively priced transactions
with private sector financial institutions. In 1988, the Bank became the first
acquiror of failed or failing savings institutions under the Federal
government's "Southwest Plan." In this transaction (the "Southwest Plan
Acquisition"), the Bank acquired from the Federal Savings and Loan Insurance
Corporation ("FSLIC"), as receiver for four insolvent savings associations (the
"Acquired Associations"), approximately $543.4 million of assets and assumed
approximately $543.4 million of deposits and other liabilities. The Bank
acquired an aggregate of 14 branch offices from the Acquired Associations in new
and existing markets in southwest Houston, west of Houston along the Houston-San
Antonio corridor and in the Rio Grande Valley.
Since completion of the Southwest Plan Acquisition, the Bank has entered
into a series of branch office transactions (including two disposition
transactions) and one whole bank acquisition. All of these transactions
resulted in the net assumption of $1.9 billion of primarily retail deposits and
58 branch offices (16 of which were subsequently closed or sold). The Bank has
also opened seven de novo branches since its inception, six in the Houston
metropolitan area and one in Austin. The Bank will continue to pursue
acquisitions in Texas as a vehicle for growth, although there can be no
assurance that the Bank will be able to continue to do so on an accretive basis
in the future, or at all.
INTEREST RATE RISK. The Bank has implemented its second operating
principle, minimizing interest rate risk, by matching, to the extent possible,
the repricing or maturity of its interest-earning assets to the repricing or
expected terms of its interest-bearing liabilities. The Bank also tries to
match the basis or index (for example, the London Interbank Offered Rate
("LIBOR") or the 11th District Federal Home Loan Bank cost of funds index upon
which these assets and liabilities reprice. Generally this is achieved through
management of the composition of the Bank's assets and liabilities. The Bank
also attempts to reduce its exposure to fluctuations in interest rates by using
interest rate swap and cap agreements. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Asset and Liability
Management" set forth in Item 7 hereof.
CREDIT RISK. The Bank has implemented the third operating principle,
controlling credit risk, while increasing the emphasis on its commercial
business lending, by (i) holding a substantial portion of its assets in
primarily adjustable rate mortgage-backed securities and first lien (single
family) residential mortgage loans, and (ii) taking a cautious approach to its
direct lending operations, including the development of commercial business
lending. At December 31, 2000, of the Company's $3.1 billion in total assets,
$980.2 million or 31.7% of total assets consisted of mortgage-backed securities.
At December 31, 2000, the Company's total loans receivable portfolio amounted to
$1.9 billion or 61.3% of total assets, $908.8 million of which were comprised of
first lien single family residential mortgage loans.
NONINTEREST EXPENSE. The Bank has implemented the fourth operating
principle, maintaining a low level of general overhead expense relative to its
peers, by operating an efficiently staffed operations and branch office system
which is able to administer and deliver its products and services in an
economical manner. Currently, the Bank believes that it has the infrastructure
in place to handle additional commercial customers, and that continued
incremental growth in its customer base will not cause its overhead expenses to
increase by a corresponding amount. The Company's ratio of noninterest expense
to average total assets on a consolidated basis was 1.91% for the year ended
December 31, 2000.
The Bank is subject to regulation by the Department, as its chartering
authority, and by the Federal Deposit Insurance Corporation ("FDIC"), which
regulates the Bank and insures its deposits to the fullest extent provided by
law. The Bank also is subject to certain regulation by the Board of Governors
of the Federal Reserve System (the "Federal Reserve Board") and is a member of
the Federal Home Loan Bank of Dallas (the "FHLB"), one of the 12 regional banks
which comprise the Federal Home Loan Bank System. See "Regulation - Regulation
of the Bank."
LENDING ACTIVITIES
GENERAL. Since 1995, the Bank has attempted to re-align its lending
products to compete with commercial banks in an effort to increase its net
interest margin while at the same time controlling credit risk. In order to
avoid incurring undue credit risk, the Bank historically invested a significant
percentage of its assets in alternative financial instruments, particularly
mortgage-backed securities, most of which have certain repayments guaranteed by
the United States government or government sponsored enterprises. See
"Mortgage-Backed Securities." In addition, the Bank has originated and
purchased for retention in its portfolio only those loans determined by
management to have an acceptable credit risk and which provide a positive
interest rate spread over funding liabilities matched with similar maturities
and other characteristics. This strategy is designed to achieve an acceptable
risk adjusted rate of return, as determined and continuously evaluated by the
Board of Directors and management.
The Bank has taken a cautious approach to the development and growth of its
direct lending operations in its efforts to control credit risk. In November
1995, the Bank acquired its first commercial bank, Texas Capital Bancshares,
Inc. ("Texas Capital"). The $103.3 million in loans acquired from Texas Capital
included first lien residential, multifamily and commercial real estate,
residential construction, real estate acquisition and development, commercial,
financial and industrial and consumer loans. In 1998, the Bank acquired twelve
commercial bank branches (the "1998 Branch Acquisition") and designated them as
the foundation for the Bank's Business Banking Centers, which focus on the
Bank's commercial banking customers. In an effort to enhance its ability to
service its commercial customers, during the fourth quarter of 1997, the Bank
implemented a new process for originating, underwriting and approving all loans
over $1.0 million. The staff of the Portfolio Control Center ("PCC") manages
this process and applies Internet and network computer technology to take a loan
from application to closing in less time than before by incorporating more
comprehensive credit information than previously reviewed by the Bank. The PCC,
as part of the Bank's Asset/Liability Subcommittee, is also responsible for
monitoring and managing the Bank's assets and liabilities and their sensitivity
to interest rate changes.
The following table sets forth information concerning the composition of
the Company's net loans receivable portfolio by type of loan at the dates
indicated.
At December 31,
2000 1999 1998 1997 1996
--------------- ----------- ----------- ----------- -----------
(In thousands)
Real estate mortgage loans:
First lien residential $ 908,841 $ 836,005 $ 690,510 $ 689,767 $ 791,337
Multifamily 224,361 163,059 119,447 131,454 139,486
Residential construction 157,950 136,675 115,714 83,359 77,146
Acquisition and development 133,005 103,357 75,932 31,619 26,132
Commercial 347,921 314,292 257,723 181,315 119,004
Commercial construction 90,256 65,934 40,344 14,506 3,963
Commercial secured by residential
mortgage loans held for sale
("Warehouse") 8,518 60,372 173,124 98,679 53,573
Commercial secured by mortgage
servicing rights ("MSR") -- -- 3,867 32,685 21,380
Commercial, financial and industrial 120,420 100,195 92,218 30,877 21,965
Loans secured by deposits 13,681 13,094 13,164 8,695 8,849
Consumer and other 56,522 63,383 66,989 15,030 14,400
--------------- ----------- ----------- ----------- -----------
Total loans 2,061,475 1,856,366 1,649,032 1,317,986 1,277,235
--------------- ----------- ----------- ----------- -----------
Loans in process (142,451) (108,561) (99,790) (47,893) (38,742)
Allowance for loan losses (14,507) (10,493) (11,358) (7,412) (6,880)
Unearned interest and loan fees (3,864) (2,947) (3,493) (2,926) (2,344)
Net (discount) premium on
purchased loans (4,425) 716 3,758 1,680 479
--------------- ----------- ----------- ----------- -----------
Total loans receivable, net $ 1,896,228 $1,735,081 $1,538,149 $1,261,435 $1,229,748
=============== =========== =========== =========== ===========
SCHEDULED MATURITIES. The following table sets forth certain
information at December 31, 2000 regarding the principal amount of loans
maturing in the Company's net loans receivable portfolio based on their
contractual terms to maturity assuming no periodic amortization of principal.
Demand loans, loans having no stated schedule of repayments and no stated
maturity are reported as due in one year or less.
AT DECEMBER 31, 2000
(In thousands)
More than More than More than More than Over
One year one year to three years five years to ten years to twenty
or less three years to five years ten years twenty years years Total
--------- ------------ -------------- -------------- ------------- -------- ----------
First lien residential mortgage $ 12,663 $ 31,293 $ 48,711 $ 55,779 $ 409,702 $343,151 $ 901,299
Multifamily mortgage 78,536 122,319 12,067 8,173 1,829 -- 222,924
Residential construction 91,943 1,371 284 533 -- -- 94,131
Real estate acquisition
and development 36,329 45,854 3,280 -- -- -- 85,463
Commercial real estate 98,233 96,870 74,636 32,110 42,244 -- 344,093
Commercial construction 17,819 22,578 8,793 778 4,096 -- 54,064
Commercial, other 65,607 37,774 22,170 3,017 89 -- 128,657
Consumer and other 18,037 21,324 16,061 5,479 4,696 -- 65,597
--------- ------------ -------------- -------------- ------------- -------- ----------
Total loans $ 419,167 $ 379,383 $ 186,002 $ 105,869 $ 462,656 $343,151 $1,896,228
========= ============ ============== ============== ============= ======== ==========
The average maturity of loans is generally substantially less than their
average contractual terms because of prepayments and, in the case of
conventional mortgage loans, due-on-sale clauses, which generally give the Bank
the right to declare a loan immediately due and payable in the event, among
other things, that the borrower sells the real property subject to the mortgage
and the loan is not repaid. The average life of mortgage loans tends to
increase when current mortgage loan rates are substantially higher than rates on
existing mortgage loans and, conversely, decrease when rates on current
mortgages are substantially lower than existing mortgage loan rates (due to
refinancings of adjustable-rate and fixed-rate loans at lower rates). Under the
latter circumstances, the weighted average yield on loans decreases as higher
yielding loans are repaid or refinanced at lower rates.
The following table sets forth the amount of loans due after one year from
December 31, 2000 by category and which have fixed or adjustable interest rates.
Interest Rate
--------------
Fixed Adjustable Total
----------- ------------- ----------
(In thousands)
First lien residential mortgage $ 324,374 $ 564,262 $ 888,636
Multifamily mortgage 7,359 137,029 144,388
Residential construction 1,267 921 2,188
Real estate acquisition and development 445 48,689 49,134
Commercial real estate 75,627 170,233 245,860
Commercial construction 6,706 29,539 36,245
Commercial, other 31,987 31,063 63,050
Consumer and other 47,351 209 47,560
----------- ----------- -----------
Total $ 495,116 $ 981,945 $ 1,477,061
=========== =========== ===========
ORIGINATION, PURCHASE AND SALE OF LOANS. The following table sets forth
the loan origination, purchase and sale activity of the Bank during the periods
indicated. The table does not reflect the activity of mortgage loans serviced
for third party investors during the periods presented. See "Mortgage Loan
Servicing."
Year Ended December 31,
2000 1999 1998
---------- ----------- -----------
(In thousands)
Loan Originations:
First lien residential mortgage $ 40,957 $ 26,042 $ 16,195
First lien residential mortgage by correspondent
lenders -- -- 1,426
Home equity 6,406 4,520 7,022
Residential construction and acquisition
and development 302,839 255,732 189,686
Warehouse 359,270 1,366,880 1,642,445
MSR -- 5,134 7,554
Multifamily mortgage 86,404 103,718 228,553
Commercial real estate 130,581 179,196 126,916
Commercial construction 39,724 52,718 15,543
Commercial, financial and industrial 138,959 161,776 107,890
Consumer 46,057 43,298 38,002
------------ ----------- -----------
Total loan originations 1,151,197 2,199,014 2,381,232
Purchase of residential mortgage loans
(net of repurchases by investors) 236,362 365,951 293,024
Loans acquired in the 1998 Branch Acquisition -- -- 176,157
Purchase of residential construction loans 608 11,077 --
Purchase of automobile loans -- 10,176 34,609
------------ ----------- -----------
Total loan originations and purchases 1,388,167 2,586,218 2,885,022
------------ ----------- -----------
Foreclosures 3,672 4,398 4,178
Principal repayments and reductions to
principal balance 1,217,229 2,372,243 2,587,252
Residential loans sold -- -- 10,663
Total foreclosures, repayments and sales
of loans 1,220,901 2,376,641 2,602,093
------------ ----------- -----------
Amortization of premiums, discounts and fees on
loans (329) (2,070) (3,115)
Provision for loan losses (5,790) (10,575) (3,100)
------------ ----------- -----------
Net increase in loans receivable $ 161,147 $ 196,932 $ 276,714
============ =========== ===========
FIRST LIEN RESIDENTIAL MORTGAGE LOAN ORIGINATIONS, PURCHASES AND SALES.
The Bank originates and purchases for its own portfolio loans secured by first
lien mortgages on completed single family residences. The Bank originates these
loans primarily in the Houston metropolitan area and in other geographic areas
surrounding the Bank's branch locations. During 2000, 1999 and 1998, the Bank
originated residential mortgage loans for portfolio totaling $41.0 million,
$26.0 million and $16.2 million, respectively. The majority of the Bank's
residential mortgage loans have been acquired through bulk purchases in the
traditional secondary market and are secured by real estate located throughout
the United States. During 2000, 1999 and 1998, the Bank purchased $236.4
million, $366.0 million and $293.6 million of such loans, respectively.
The Bank offers, but does not actively solicit, a variety of mortgage
products designed to respond to consumer needs and competitive factors.
Conventional conforming loans that are secured by first liens on completed
residential real estate are generally originated for amounts up to 95% of the
appraised value or selling price of the mortgaged property, whichever is less.
All loans with loan-to-value ratios in excess of 80% generally require the
borrower to purchase private mortgage insurance from approved third party
insurers. The Bank also originates conventional non-conforming mortgage loans
(i.e., loans for single family homes with an original balance in excess of the
maximum loan balance amount set by the Federal National Mortgage Association
("FNMA") or the Federal Home Loan Mortgage Corporation ("FHLMC"), which is
presently $275,000, or loans that do not otherwise meet the criteria established
by FNMA or FHLMC).
In addition to 15-year and 30-year conventional mortgages, the Bank offers
special products designed to provide to its customers lower rates of interest or
lower principal and interest payments. Borrowers may choose from a wide variety
of combinations of interest rates and points on many products so that they may
elect to pay higher points at closing and lower interest over the life of the
loan, or pay a higher interest rate and reduce the points payable at closing.
In addition, from time to time mortgages are offered in the following
categories: those which allow the borrower to make lower monthly payments for
the first one, two or three years of the loan; fixed rate mortgages; and
adjustable rate mortgages having interest rate adjustments every one, five or
seven years based upon a specified independent index.
Borrower demand for adjustable rate mortgage loans compared to fixed rate
mortgage loans is a function of interest rate levels, consumer expectations for
changes in interest rate levels and the difference between interest rates and
loan fees offered for fixed rate mortgage loans and for adjustable rate mortgage
loans. The Bank's loan origination volume has been subject to some minor
seasonal variations, with the heaviest demand in the late spring and summer
months. Loan demand is also affected by the general interest rate environment
and, to a large measure, by the general state of the local economy.
During times of relatively lower market interest rates, demand by previous
borrowers for refinancings increases. Refinancings are not solicited by the
Bank. However, if a request for a refinancing is received, borrowers are
offered current mortgage loan products. Refinancings are generally processed in
a manner identical to original originations and charged the same fees.
The Bank also acquires first lien residential mortgage loans for its
portfolio through bulk purchases when the prices of these purchases are
considered to be favorable. The acquisition of first lien residential mortgage
loans has been accomplished primarily through bulk purchases in the traditional
secondary market (from mortgage companies, financial institutions, investment
banks and, beginning in 1997, from CBCC). Bulk purchases allow the Bank to
obtain these residential mortgage loans without the cost of origination
activities. Personnel from the Bank generally analyze loan bid packages, as
they become available from CBCC and from third parties, and the members of the
Bank's Asset/Liability Subcommittee review the information in the loan packages
to determine whether to bid (or make an offer) on a package and the price of
such bid (or offer). The bid price with respect to such loan packages is based
on a number of factors, including the ability to create spread income with a
funding source of comparable maturity, the pricing of alternative investments,
particularly mortgage-backed securities, which offer little or no credit risk,
assumed prepayment speeds and the credit risk profile of the portfolio offered.
The Bank analyzes credit risk in a whole loan package through its due diligence
investigation, which is designed to provide management with basic underwriting
information on each loan or group of loans, including loan-to-value, payment
history, insurance and other documentation. Because the Bank is purchasing loans
in bulk, the Bank prices the loan packages to take into consideration, among
other things, delinquency and foreclosure assumptions based on the risk
characteristics of the loan packages. The Bank intends to continue to make
competitive bids on loan portfolios that meet the Bank's purchase criteria.
The Bank has sold mortgage loans from time to time in order to replace the
loans with instruments which have higher credit quality and less interest rate
risk. During 2000, 1999 or 1998, the Bank did not originate or purchase any
loans with the intent to sell them to third party investors. During 1998, the
Bank sold $10.7 million of loans to third party investors. No loans were sold
in 2000 or 1999.
While the Bank has the general authority to originate and purchase loans
secured by real estate located anywhere in the United States, the largest
concentration of its first lien residential mortgage and residential
construction loan portfolios is secured by realty located in Texas.
RESIDENTIAL CONSTRUCTION LENDING. The Bank initiated a construction
lending program with local builders in the latter part of 1989 which has grown
considerably since its inception. At the initiation of the program, management
of the Bank surveyed the members of the residential construction industry in the
Bank's Houston market area and targeted those companies, and, in the ensuing
years, others that management believed, based upon its market research, to be
financially strong and reputable. Loans are made primarily to fund residential
construction. Construction loans are made on pre-sold and speculative
residential homes considered by management to be in well located, viable
subdivisions and planned unit developments.
Most of the builders with whom the Bank does business generally apply for
either a non-binding short-term line of credit or for an annual line of credit
(subject to covenants) from the Bank for a maximum amount of borrowing to be
outstanding at any one time. Upon approval of the line of credit, the Bank
issues a letter which indicates to the builder the maximum amount which will be
available under the line, the term of the line of credit (which is generally 90
days to one year), the interest rate of the loans to be offered under the line
(which is generally set at a rate above The Wall Street Journal prime rate or
LIBOR on the outstanding monthly loan balance) and the loan fees payable. When
the builder desires to draw upon a short-term line of credit, a separate loan
application must be made under the line for a specific loan amount. Each loan
commitment under a short-term line of credit is separately underwritten and
approved after the builder's master file is updated and reviewed.
The terms of the Bank's construction loans are generally for nine months or
less, unless extended by the Bank. If a construction loan is extended, the
borrower is generally charged a loan fee for each 90 day extension period. The
Bank reserves the right to extend any loan term, but generally does not permit
the original term and all extensions to exceed 24 months without amortization of
principal either in monthly increments or a lump sum.
The loan-to-value ratio (applied to the underlying property that
collateralizes the loan) of any residential construction loan may not exceed the
lesser of 85% of appraised value or 100% of the actual cost. All individual
loans are limited in dollar amount based upon the project proposed by the
builder. Draws for lot purchases are generally limited to the contracted sales
price of the lot (to include escalations) not to exceed 100% of the lot's
appraised value. Other special conditions which the Bank attaches to its
construction loans include a requirement that limits the number and dollar
amount of loans which may be made based upon unsold inventory. The Bank may
also, in its sole discretion, discontinue making any further loans if the
builder's unsold inventory exceeds a certain level from all lending sources or
if the builder fails to pay its suppliers or subcontractors in a timely manner.
The Bank provides construction financing for homes that generally are
priced below $450,000, with most homes priced between $125,000 and $300,000. In
this price range, the Bank has experienced the shortest duration of term, the
highest annualized yield and the least likelihood of defaults because of the
generally high number of pre-completion sales. The Bank will also make
individual construction loans to builders or individuals on single homes or
groups of homes on substantially the same terms and conditions as loans granted
under the Bank's line of credit program.
At December 31, 2000, the Bank had $95.1 million in outstanding residential
construction loans (net of loans in process of $62.8 million) of which $390,000
were on nonaccrual status. At the present time, the Bank has approved builders
primarily domiciled in the Houston, Dallas, and Austin metropolitan areas and is
selectively soliciting new builders for its residential construction lending
program. In addition, the Bank participates in the funding of residential
construction loans with other institutions. Four of the Bank's approved
builders are authorized for the funding of loans on properties located outside
the state of Texas. At December 31, 2000, there were loans totaling $15.1
million for these builders in the states of Arizona, Illinois, New Mexico, North
Carolina and Ohio. The Bank intends to continue to do business with the
companies involved in its line of credit program and believes that it will
continue to have construction loan demand from the builders with whom it
currently has an established lending relationship.
Construction financing is generally considered to involve a higher degree
of risk than long-term financing on improved, occupied residential real estate,
due to the lender's reliance on the borrower to add to the estimated value of
the property through construction within the budget set forth in the loan
application. The Bank attempts to limit its risk exposure by, among other
things: limiting the number of borrowers to whom it lends and establishing
specific qualification requirements for borrowers generally; continually
monitoring the general economic conditions in the market, recent housing starts
and sales; continually monitoring the financial position of its borrowers
throughout the term of the loan; continually monitoring the progress of the
development through site inspections prior to loan disbursements; utilizing only
qualified, approved appraisers; and requiring that the builder maintain a
pre-approved ratio (generally not greater than 50%) of speculative to pre-sold
homes in the development.
COMMERCIAL REAL ESTATE AND MULTIFAMILY MORTGAGE LENDING. The Bank
initiated a program in 1993 to actively seek loans secured by commercial or
multifamily properties. Commercial real estate and multifamily mortgage loans
typically involve higher principal amounts and repayment of the loans generally
depends, in large part, on sufficient cash flow being generated by the
underlying properties to cover operating expenses and loan repayments. Market
values may vary as a result of economic events or governmental regulations which
are outside the control of the borrower or lender and which can affect the
future cash flow of the properties. The loans are for a short to medium term of
between one to seven years, and have floating rates or fixed rates based on a
spread over similarly fixed borrowings from the FHLB. The properties securing
the loans originated by the Bank are primarily located in Texas. The Bank
attempts to limit its risk exposure by, among other things: lending to proven
developers/owners, only considering properties with existing operating
performance which can be analyzed, requiring conservative debt coverage ratios,
and continually monitoring the operation and physical condition of the
collateral. At December 31, 2000, commercial real estate loans totaling $347.9
million and multifamily mortgage loans of $224.4 million were outstanding. At
December 31, 2000, the Bank had commercial real estate loans totaling
approximately $1.1 million that were on nonaccrual status and no multifamily
mortgage loans on nonaccrual status.
The Bank began originating commercial real estate and multifamily
construction loans in 1996. The Bank generally underwrites these loans in the
same way it underwrites its multifamily mortgage loans and attempts to manage
the risk of such loans by requiring that each builder maintain a specified
amount of equity in the project and by monitoring other financial strength
requirements. At December 31, 2000, commercial and multifamily construction
loans totaling $56.2 million (net of loans in process of $34.1 million) were
outstanding, none of which were on nonaccrual status.
WAREHOUSE LENDING. Since 1992, the Bank has provided or participated in
lines of credit to mortgage companies generally for their origination of single
family residential loans which are typically sold no more than 90 days from
origination to FNMA, FHLMC, the Government National Mortgage Association
("GNMA") or to private investors. The lines of credit are generally renewable
annually. Borrowers pay interest on funds drawn at a floating rate. In
addition, the Bank usually receives a fee for each loan file processed. The
Bank (or the lead lender in a participation) holds the original mortgage loan
notes and other documentation as collateral until repayment of the related lines
of credit, except when a third party lender is acting as the lead lender in the
lending relationship.
Warehouse loans are underwritten in accordance with Bank policies and
procedures. Interested loan originators who contact or are contacted by the
Bank are asked to prepare a loan application which seeks detailed information on
the originator's business. After evaluating the application and independently
verifying the applicant's credit history, if the originator appears to be a
likely candidate for approval, Bank personnel will visit the originator and
review, among other things, its business organization, management, quality
control, funding sources, risk management, loan volume and historical
delinquency rate, financial condition, contingent obligations and regulatory
compliance. The originator pays a fee for this review to offset a portion of
the Bank's expense; this amount is deducted from the origination fee if the line
of credit is approved. If the originator meets the established criteria, its
application is submitted for approval. It is the policy of the Bank to apply
substantially the same underwriting standards to loan participations as are
applied to loans with similar characteristics originated directly by the Bank.
Bank personnel attempt to minimize the risk of making Warehouse loans
(excluding participations in loans where a third party bank is acting as the
lead bank) by, among other things, (i) taking physical possession of the
originator's collateral, (ii) directly receiving payment from secondary market
investors when the loans are sold and remitting any balance to the borrower
after deducting the amount borrowed for that particular loan, (iii) visiting the
originator's office from time to time to review its financial and other records
and (iv) monitoring each originator by periodically reviewing their financial
statements, loan production delinquency and commitment reports and, on an annual
basis, by reviewing their audited financial statements and auditor's letter to
its board of directors. In loan participations where a third party bank is
acting as the lead bank, the Bank relies on the lead bank to perform
substantially the same procedures as noted above.
During 1999, the Bank experienced significant loan losses in Warehouse and
MSR loans due to the default of two borrowers. The first loss was connected to
the $10.0 million participation purchased in 1998 in a Warehouse loan
aggregating $25.0 million to MCA Financial Corp., and certain of its affiliates,
of Southfield, Michigan (collectively "MCA"). In late January 1999, due to a
lack of liquidity, MCA ceased operations and shortly thereafter was seized by
the Michigan Bureau of Financial Institutions. A conservator was appointed to
take control of MCA's books and records, marshal its assets and continue its
loan servicing operations. A voluntary petition under Chapter 11 of the U.S.
Bankruptcy Code was filed in the U.S. Bankruptcy Court for the Eastern District
of Michigan for MCA on or about February 10, 1999, by the conservator.
Throughout 1999, the Bank worked with the lead lender and the bankruptcy
trustee to determine the value of, and sell, the underlying collateral. As of
December 31, 1999, the Bank had received only $1.1 million in proceeds from the
MCA loan. In addition, on January 12, 2000, the Bank filed a lawsuit against
the lead lender in the participation seeking to recover losses incurred as a
result of actions or omissions of the lead lender related to the loan to MCA.
Due to the uncertainty of the value of the remaining collateral, its
marketability and the timing of recovery, if any, from the lawsuit, the Bank
charged-off the remaining $8.9 million balance of this loan in 1999 resulting in
the additional provision for loan losses of $6.8 million during the year. The
Bank will continue to work with the bankruptcy trustee to recover any funds, if
possible, from the collateral or MCA. During the year ended December 31, 2000,
Coastal received $180,000 in proceeds from the MCA loan which was recorded as a
recovery in the allowance for loan losses during the period. In addition, the
lawsuit filed against the lead lender is currently scheduled for trial in late
June of 2001, or as soon thereafter as the court's docket will permit. See Item
3, "Legal Proceedings."
In the second situation, during 1999, the Bank purchased approximately
$10.1 million of the underlying loans securing a $13.2 million Warehouse and
servicing rights line of credit due to default by the borrower. The remaining
outstanding balance on this Warehouse and servicing rights line of $990,000 was
charged-off during 1999.
In 1999, the Bank began to decrease its emphasis on Warehouse lending.
During the year ended December 31, 1999, the Bank originated $1.4 billion of
Warehouse loans and had Warehouse loans outstanding of $60.4 million at December
31, 1999. During the year ended December 31, 2000, the Bank originated $359.3
million of Warehouse loans and had Warehouse loans outstanding to three
customers of $8.5 million at December 31, 2000. At December 31, 2000, there
were no Warehouse loans on nonaccrual status.
MSR LENDING. Beginning in 1992 and discontinued in 1999, the Bank loaned
funds to mortgage companies for their purchase of mortgage servicing rights or
to finance the mortgage companies' ongoing operations to originate and retain
mortgage servicing. Loans of this nature generally had terms of one to five
years, and were generally limited to 70.0% of the price paid by the mortgage
company for servicing rights, or of the value of the originated servicing rights
(subject to the regulatory maximum for loans to one borrower). MSR loans were
made at adjustable rates of interest tied to LIBOR or the Bank's borrowing rate
plus a spread and a commitment fee. MSR loans were collateralized by purchased
or originated mortgage servicing rights to the remaining cash flows after
remittance of payments to FNMA, FHLMC or other investors on the servicing
portfolio. MSR loans were underwritten in substantially the same manner as
Warehouse loans, where Bank personnel closely monitored MSR borrowers by, among
other things, reviewing the borrower's financial condition and operations in the
same manner as they did for Warehouse loans and by examining the value of the
borrower's MSR portfolio (through evaluation of the estimated future net cash
flows from the servicing rights) in order to ensure that the loan-to-value ratio
did not exceed 75.0% during the life of the loan. During 1999, the Bank
incurred a loss on a Warehouse and servicing rights line of credit due to
default of the borrower as discussed previously. The Bank did not have any MSR
loans outstanding at December 31, 2000 or 1999.
REAL ESTATE ACQUISITION AND DEVELOPMENT LENDING. The Bank originates loans
to residential real estate builders and developers for the acquisition and/or
development of vacant land. The proceeds of the loans are generally used to
acquire the land and make the site improvements necessary to develop the land
into saleable lots. The Bank generally lends only to developers with good track
records and strong financial capacity and on property where a substantial number
of the lots to be developed are pre-sold. The term of the loans have generally
been from 18 to 36 months at a spread over the prime rate, plus an origination
fee. Repayment on the loans is generally made as the lots are sold to builders.
Land acquisition and development loans involve additional risks when compared to
loans on existing residential properties. These loans typically involve
relatively large loan balances to single borrowers, and the repayment experience
is dependent upon the successful development of the land and the resale of the
lots. These risks can be significantly impacted by supply and demand conditions
and the general economic conditions in the local market area. At December 31,
2000, the Bank had $87.5 million (net of loans in process of $45.5 million) of
real estate acquisition and development loans outstanding. At December 31,
2000, there were no real estate acquisition and development loans on nonaccrual
status.
COMMERCIAL BUSINESS LENDING. Development of a commercial business lending
program continues to be a strategic goal of Bank management. The Texas Capital
acquisition provided the Bank with an established commercial business lending
program to small and medium sized companies primarily in the Houston and Austin
metropolitan areas. Over the past three years, management continued to develop
the infrastructure for commercial business lending in most of the Bank's major
markets by developing the PCC and adding business banking loan officers. In
1998, the Bank acquired twelve commercial bank branches in the 1998 Branch
Acquisition and significantly increased the Bank's commercial business loan
origination capacity. The commercial, financial and industrial loans
("Commercial Business loans") are generally made to provide working capital
financing or asset acquisition financing to businesses and are generally secured
by the borrower's working capital assets (i.e., accounts receivable, inventory,
etc.) or assets purchased by the borrower (i.e., operating assets, equipment,
etc.). Commercial Business loans generally have shorter terms (one to five
years) at a spread over prime rate or LIBOR and are of greater risk than real
estate secured loans because of the type and nature of the collateral. In
addition, Commercial Business loan collections are more dependent on the
continuing financial stability of the borrower. The Bank intends to continue to
expand the acquired commercial business lending programs, while managing the
associated credit risk by continually monitoring borrowers' financial position
and underlying collateral securing the loans. At December 31, 2000, Commercial
Business loans outstanding totaled $120.4 million, with $1.2 million of such
loans on nonaccrual status.
CONSUMER LENDING. The Bank makes available traditional consumer loans,
such as home improvement, home equity, new and used car financing, new and used
boat and recreational vehicle financing and loans secured by savings deposits to
consumers in the markets served by its retail branches and business banking
centers. The interest rate on loans secured by savings deposits is typically
set at a rate above that paid on the underlying account and adjusts if the rate
on the account changes. At December 31, 2000, the Bank had $56.5 million in
consumer and other loans outstanding and $13.7 million in loans secured by
deposits.
Consumer loans (other than savings deposit secured loans) generally have
shorter terms and higher interest rates than mortgage loans but usually involve
greater credit risk than mortgage loans because of the type and nature of the
collateral. In addition, consumer lending collections are dependent on the
borrower's continuing financial stability, and are thus likely to be adversely
affected by job loss, changes in marital status, illness and personal
bankruptcy. In many cases, repossessed collateral for a defaulted consumer loan
will not provide an adequate source of repayment of the outstanding loan balance
because of depreciation of the underlying collateral. The Bank believes that
the generally higher yields earned on consumer loans compensate for the
increased credit risk associated with such loans and that consumer loans are
important to its efforts to serve the credit needs of the communities that it
serves.
Through May 1999, the Bank had a lending agreement to purchase loans
through a correspondent to refinance new and used automobiles. During 1999, the
Bank purchased $10.2 million in automobile loans under this agreement. During
2000, no loans were purchased under this agreement. As of December 31, 2000, a
total of $16.0 million of these automobile loans were included in total consumer
and other loans, of which $447,000 were on nonaccrual status.
ASSET QUALITY. The Bank, like all financial institutions, is exposed to
certain credit risks related to the value of the collateral which secures loans
held in its portfolio and the ability of borrowers to repay their loans during
the term thereof. Management of the Bank monitors the loan portfolio and the
Bank's real estate acquired as a result of foreclosure ("REO") for potential
problems on a weekly basis and reports to the Board of Directors on a monthly
basis. When a borrower fails to make a required loan payment or other weaknesses
are detected in a borrower's financial condition, the Bank attempts to determine
an appropriate course of action by contacting the borrower. Delinquencies are
cured promptly in most cases. If the delinquency on a mortgage loan exceeds 90
days and is not cured through the Bank's normal collection procedures, or an
acceptable arrangement is not worked out with the borrower, the Bank will
institute measures to remedy the default, including commencing a foreclosure
action. As a matter of policy, the Bank generally does not accept from the
mortgagor a voluntary deed of the secured property in lieu of foreclosure. If
foreclosure is effected, the property is sold at a public auction in which the
Bank may participate as a bidder. If the Bank is the successful bidder, the
foreclosed real estate is then included in the Bank's REO portfolio until it is
sold.
Upon acquisition, REO is recorded at the lower of unpaid principal balance
adjusted for any remaining acquisition premiums or discounts less any applicable
valuation allowance or estimated fair value, based on an appraisal, less
estimated selling costs. Subsequent to foreclosure, real estate owned is
carried at the lower of the new cost basis or fair value, with any further
declines in fair value charged to operations. All costs incurred from the date
of acquisition forward relating to maintaining the property are recorded as a
current period expense.
It is the Bank's general policy not to recognize interest income on loans
past due 90 days or more. When a loan is placed on nonaccrual status,
previously accrued but unpaid interest is generally reversed against current
interest income. On a loan-by-loan basis, Bank management may continue to
accrue interest on loans that are past due more than 90 days, particularly if
management believes that the individual loan is in the process of collection or
renewal and the interest is fully collectible.
The following table sets forth information regarding the Bank's
nonperforming assets as of the dates shown.
At December 31,
2000 1999 1998
------- -------- --------
(Dollars in thousands)
Nonaccrual loans:
First lien residential mortgage $16,062 $13,344 $11,883
Residential construction 390 184 192
Commercial real estate 1,134 104 149
Commercial, Warehouse -- -- 10,042
Commercial, financial and industrial 1,152 694 496
Consumer and other 496 340 75
------- -------- --------
Total nonaccrual loans 19,234 14,666 22,837
------- -------- --------
Loans greater than 90 days delinquent
and still accruing:
First lien residential mortgage 475 1,137 189
Multifamily mortgage -- -- 190
Commercial real estate 736 690 293
Commercial, financial and industrial 634 531 808
Consumer and other 153 94 224
Total loans greater than 90 days
delinquent and still accruing
interest 1,998 2,452 1,704
------- -------- --------
Total nonperforming loans 21,232 17,118 24,541
------- -------- --------
Total REO and repossessed assets 4,095 4,531 4,927
------- -------- --------
Total nonperforming assets $25,327 $21,649 $29,468
======== ======== ========
Ratio of nonaccrual loans to total
loans receivable 1.01% 0.85% 1.48%
======== ======== ========
Ratio of nonperforming loans to total
loans receivable 1.12% 0.99% 1.60%
======== ======== ========
Ratio of nonperforming
assets to total assets 0.82% 0.73% 0.99%
======== ======== ========
For the year ended December 31, 2000, approximately $1.2 million in
additional interest income would have been recorded on the above loans accounted
for on a nonaccrual basis if such loans had been current in accordance with
their original terms and had been outstanding throughout the period or since
origination if held for part of the period. Net income for 2000 included
$706,000 in interest income for these same loans prior to the time they were
placed on nonaccrual status.
At December 31, 2000, the Bank had 198 first lien residential mortgage
loans on nonaccrual status, aggregating $16.1 million, with an average balance
of approximately $81,000. A total of 159 of these loans, with an aggregate
balance of $13.4 million, were acquired through loan purchases. Of the 159
nonaccrual residential mortgage loans acquired through loan purchases, at
December 31, 2000, 53 of such loans totaling $6.7 million were being serviced by
other institutions, which constituted 2.4% of the $277.3 million of aggregate
loans serviced by others.
At December 31, 2000, nonperforming assets included REO with an aggregate
book value of $4.0 million and repossessed assets of $49,000. At such date, the
Bank's REO consisted of 26 single family residential properties totaling $2.2
million, 6 commercial properties totaling $1.6 million, 1 residential
construction property totaling $72,000 and 1 multi-family property with a book
value of $188,000.
The Bank considers a loan to be impaired when, based upon current
information and events, it is probable that the Bank will be unable to collect
all amounts due according to the contractual terms of the loan agreement. In
determining impairment, the Bank considers, among other things, large
non-homogeneous loans which may include nonaccrual loans or troubled debt
restructurings, and performing loans which exhibit, among other characteristics,
high loan-to-value ratios, low debt coverage ratios, or indications that the
borrowers are experiencing increased levels of financial difficulty. The Bank
bases the measurements of collateral-dependent impaired loans on the fair value
of their collateral. The amount by which the recorded investment in the loan
exceeds the measure of the fair value of the collateral securing the loan is
recognized by recording a valuation allowance. At December 31, 2000, the
carrying value of impaired loans totaled approximately $4.4 million and the
related allowance for loan losses on those impaired loans totaled $1.6 million.
Of the impaired loans outstanding at December 31, 2000, one loan with a balance
of $650,000 did not have a specific portion of the allowance for loan losses
allocated to it at such date. The average balance of impaired loans during the
year ended December 31, 2000 was approximately $3.5 million. For the year ended
December 31, 2000, the Bank did not recognize interest income on loans
considered impaired.
The Bank had loaned $158.0 million at December 31, 2000, under its
residential construction lending program to multiple borrowers who are engaged
in similar activities. Certain of these borrowers could be similarly impacted
by economic conditions in the Houston metropolitan area. See "Residential
Construction Lending." The Bank had no other loan concentrations.
ALLOWANCE FOR LOAN LOSSES. The Bank maintains loan loss allowances to
absorb future losses that may be realized on its loans receivable portfolio.
The following table summarizes activity in the Bank's allowance for loan losses
during the periods indicated.
Year Ended December 31,
2000 1999 1998 1997 1996
--------- --------- -------- -------- -------
(Dollars in thousands)
Balance at beginning of year $ 10,493 $ 11,358 $ 7,412 $ 6,880 $5,703
Charge-offs (2,174) (11,830) (1,693) (1,416) (851)
Recoveries 398 390 282 148 103
Provision for loan losses 5,790 10,575 3,100 1,800 1,925
Allowance of acquired entities(1) -- -- 2,257 -- --
--------- --------- -------- -------- -------
Balance at end of year $ 14,507 $ 10,493 $11,358 $ 7,412 $6,880
========= ========= ======== ======== =======
Ratio of net charge-offs during the
period to average net loans
outstanding during the period 0.09% 0.69% 0.10% 0.10% 0.06%
========= ========= ======== ======== =======
________________________
(1)The allowance of acquired entities in 1998 represents the allowance for loan
losses recorded in connection with the loans acquired in the 1998 Branch
Acquisition.
The following table sets forth the charge-offs by type of loan during the
periods indicated.
Year Ended December 31,
2000 1999 1998 1997 1996
------- -------- ------- ------- ------
(In thousands)
First lien residential mortgage $ 735 $ 331 $ 544 $ 591 $ 651
Residential construction -- 26 -- -- --
Commercial real estate 55 10 24 4 --
Commercial, Warehouse and MSR -- 9,924 -- -- --
Commercial, financial and industrial 763 829 648 472 58
Consumer and other 621 710 477 349 142
------- -------- ------- ------- ------
Total charge-offs $2,174 $11,830 $1,693 $1,416 $ 851
======= ======== ======= ======= ======
The following table sets forth the allocation of the allowance for loan
losses by type of loan outstanding at the dates indicated.
At December 31,
2000 1999 1998 1997 1996
-------- -------- -------- ------- -------
(In thousands)
First lien residential mortgage $ 2,408 $ 2,529 $ 3,238 $ 2,566 $ 2,217
Multifamily mortgage 608 442 383 511 369
Residential construction 622 384 343 251 223
Real estate acquisition and development 1,330 1,034 759 316 261
Commercial real estate 2,574 2,221 2,112 1,468 1,151
Commercial construction 1,480 972 225 203 20
Commercial, Warehouse and MSR 45 256 1,722 494 361
Commercial, financial and industrial 2,611 1,650 1,750 1,008 985
Consumer and other 1,119 992 826 233 374
Unallocated 1,710 13 -- 362 919
-------- -------- -------- ------- -------
$ 14,507 $ 10,493 $ 11,358 $ 7,412 $ 6,880
======== ======== ======== ======= =======
The following table sets forth the allocation of the provision or the
reduction of allowance for loan losses by loan type during the periods
indicated.
Year Ended December 31,
2000 1999 1998 1997 1996
-------- --------- -------- -------- --------
(In thousands)
First lien residential mortgage $ 573 $ (446) $ 1,142 $ 908 $ (180)
Multifamily mortgage 166 59 (184) 142 120
Residential construction 238 67 55 28 (84)
Real estate acquisition and development 296 275 443 55 131
Commercial real estate 406 119 82 321 79
Commercial construction 508 747 (36) 183 20
Commercial, Warehouse and MSR (397) 8,456 1,228 133 131
Commercial, financial and industrial 1,616 561 240 416 618
Consumer and other 687 724 846 171 322
Unallocated 1,697 13 (716) (557) 768
-------- --------- -------- -------- --------
$ 5,790 $ 10,575 $ 3,100 $ 1,800 $ 1,925
======== ========= ======== ======== ========
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
such factors as historical loss experience, the volume and type of lending
conducted by the Bank, identification of adverse situations which may affect the
ability of borrowers to repay, the existing nonperforming assets, industry
standards, regulatory policies, accounting principles generally accepted in the
United States of America, general economic conditions, particularly as they
relate to the Bank's lending area, and other factors related to the
collectibility of the Bank's loan portfolio. During 2000, Coastal's lending
continued to focus on increasing the size of Coastal's commercial loan
portfolio. As such, Coastal continued to execute on its plan to eventually
build the allowance for loan losses to a benchmark of approximately 100% of
nonperforming loans. As discussed above, during the year ended December 31,
1999, $6.8 million of the increase in the provision for loan losses was specific
to the MCA loan. The remainder of the increase was due to the charge-off of
$990,000 on another Warehouse borrower due to bankruptcy, as well as other
changes in the composition of and growth in the Bank's loan portfolio, including
the commercial type loans acquired in the 1998 Branch Acquisition. At December
31, 2000, the Bank's ratio of the allowance for loan losses to nonperforming
loans was 68.32% and the ratio of the allowance for loan losses to total loans
receivable was 0.77%.
The Board of Directors of the Bank reviews its Asset Classification and
Allowance Policy ("ACAP") at least annually. The policy provides that the Bank
will annually establish a monthly provision amount to be added to the allowance
for loan losses and the resultant allowance will be "tested" monthly for
adequacy based on policy guidelines. Management maintains the allowance for
loan losses at levels considered adequate to cover probable losses on loans.
This allowance covers all loans, including loans deemed to be impaired, loans
not impaired, and loans excluded from the impairment test. The adequacy of the
allowance is based on management's periodic evaluation of the loan portfolio,
which considers the volume and type of lending conducted by Coastal,
identification of adverse situations which may affect the ability of borrowers
to repay, assessment of current and future economic conditions, regulatory
policies and the estimated value of the underlying collateral, if any.
The Bank's management believes that its present allowance for loan losses
is adequate based upon, among other considerations, the factors discussed above,
its current level of nonperforming loans and its historical loss experience.
Management continues to review its loan portfolio to determine whether its ACAP
should be altered in light of current conditions and to make any additional
provisions which may be deemed necessary. While management uses the best
information available to make such determinations, additional provisions for
loan losses may be required to be established in the future should economic or
other conditions change substantially. In addition, the FDIC and the
Department, as an integral part of their examination processes, periodically
review the Bank's allowance for loan losses. These agencies may require the
Bank to increase the allowance for loan losses, based on their respective
judgments of the information available at the time of the examinations.
MORTGAGE LOAN SERVICING. Prior to the sale of its entire mortgage
servicing rights portfolio effective March 31, 2000, the Bank serviced
residential real estate loans for others, including FNMA, FHLMC and other
private investors. Loan servicing for others included collecting and remitting
loan payments, accounting for principal and interest, making advances to cover
delinquent payments, making inspections as required of mortgaged premises,
contacting delinquent mortgagors, supervising foreclosures and property
dispositions in the event of unremedied defaults and generally administering the
loans.
Due to the Bank's declining servicing for others portfolio (with an average
remaining loan life of approximately seven years), management decided to sell
its entire servicing rights portfolio based on the current market conditions for
loan servicing rights and the expected declining income benefits of that
servicing portfolio on an ongoing basis. Effective March 31, 2000, the Bank
sold its rights to service approximately $389.1 million of mortgage loans for
third party investors, primarily FNMA and FHLMC, pursuant to a purchase and sale
agreement. The Bank subserviced those mortgage loans until the transfer to the
purchaser was completed in the second quarter of the year. The Bank recorded a
$2.2 million gain on the sale of the above mentioned mortgage servicing rights.
The Bank received fees for servicing mortgage loans for others, which
generally ranged from 0.250% to 0.375% per annum on the declining principal
balance of fixed rate mortgage loans and from 0.375% to 0.500% per annum on the
declining principal balance of adjustable rate mortgage loans. Such fees served
to compensate the Bank for the costs of performing the servicing function.
Other sources of loan servicing revenues include late charges and other
ancillary fees. For the years ended 2000, 1999 and 1998, the Bank earned
servicing fees of $244,000, $680,000 and $642,000, respectively, in conjunction
with its loan servicing. Servicing fees were collected out of the monthly
mortgage payments made by borrowers and were recorded net of the amortization of
mortgage servicing rights.
The Bank's servicing portfolio was subject to reduction by normal principal
amortization, by prepayment or by foreclosure of outstanding loans. The
following table sets forth certain information regarding the Bank's mortgage
loan servicing for others portfolio for the periods indicated.
Year Ended December 31,
2000 1999 1998
---------- ---------- ----------
(In thousands)
Beginning servicing portfolio $ 407,938 $ 519,237 $ 675,737
Servicing sold or transferred (382,658) -- --
Amortization and payoffs (25,005) (110,578) (155,059)
Foreclosures (275) (721) (1,441)
---------- ---------- ----------
Ending servicing portfolio $ -- $ 407,938 $ 519,237
========== ========== ==========
MORTGAGE-BACKED SECURITIES
The Bank maintains a significant portfolio of mortgage-backed securities as
a means of investing in housing-related mortgage instruments without the costs
associated with originating mortgage loans for portfolio retention. At December
31, 2000, the Company's mortgage-backed securities portfolio (including $94.7
million of mortgage-backed securities available-for-sale), net of unamortized
premiums and unearned discounts, amounted to $980.2 million, or 31.7%, of total
assets. When investing in mortgage-backed securities, management seeks to
achieve a positive spread over the cost of funds used to purchase these
securities. At December 31, 2000, the Company's net mortgage-backed securities
had an aggregate market value of $955.2 million.
The following table sets forth the composition of the Company's
mortgage-backed securities portfolio at the dates indicated.
At December 31,
2000 1999 1998
--------- -------- ----------------------- ----------------------
Amount Percent Amount Percent Amount Percent
--------- -------- ---------- --------- ---------- ----------
(Dollars in thousands)
Held-to-maturity:
REMICS $812,460 91.77% $ 838,499 91.45% $1,059,924 91.82%
FNMA certificates 49,013 5.54 54,749 5.97 61,590 5.34
GNMA certificates 17,582 1.99 16,074 1.75 21,235 1.84
Non-agency certificates 6,273 0.70 7,537 0.83 11,530 1.00
Interest-only securities -- -- -- -- 1 --
--------- -------- --------- -------- ----------- --------
885,328 100.00% 916,859 100.00% 1,154,280 100.00%
======== ======== ========
Unamortized premium 1,503 1,703 2,100
Unearned discount (1,266) (1,350) (2,264)
--------- --------- -----------
Total held-to-maturity $885,565 $ 917,212 $1,154,116
========= =========== ===========
Available-for-sale:
REMICS $ 77,590 $ 77,861 $ 98,892
GNMA certificates 19,946 24,615 --
--------- --------- -----------
97,536 102,476 98,892
Unamortized premium 149 180 8
Unearned discount (141) (149) (168)
Net unrealized loss (2,871) (2,842) (2,123)
--------- --------- -----------
Total available-for-sale $ 94,673 $ 99,665 $ 96,609
========= =========== ===========
Total mortgage-backed
securities $980,238 $1,016,877 $1,250,725
========= =========== ===========
The mortgage-backed securities which the Company purchases and maintains in
portfolio can include FNMA, FHLMC and GNMA certificates, certain privately
issued, credit-enhanced mortgage-backed securities which are rated "A" or better
by the national securities rating agencies and certain types of collateralized
mortgage obligations ("CMOs"). The FNMA, FHLMC and GNMA certificates are
modified pass-through mortgage-backed securities, which represent undivided
interests in underlying pools of fixed-rate, or certain types of adjustable
rate, single family residential mortgages issued by these quasi-governmental
(GNMA) and private (FNMA and FHLMC) corporations. FNMA and GNMA provide to the
certificate holder a guarantee (which is backed by the full faith and credit of
the U.S. government in the case of GNMA certificates) of timely payments of
interest and scheduled principal payments, whether or not they have been
collected. FHLMC guarantees the timely payment of interest and the full (though
not necessarily timely) payment of principal. The guarantees of FNMA and FHLMC
are not backed by the full faith and credit of the U.S. government. The
mortgage-backed securities acquired by the Company that have been pooled and
sold by private issuers, generally large investment banking firms, provide for
the timely payments of principal and interest either through insurance issued by
a reputable insurer or the right to receive certain payments thereunder is
subordinated in a manner which is sufficient to have such mortgage-backed
securities generally earn a credit rating of "A" or better from one or more of
the national securities rating agencies.
A CMO is a special type of pay-through debt obligation in which the stream
of principal and interest payments on the underlying mortgages or
mortgage-backed securities is used to create classes with different maturities
and, in some cases, amortization schedules and a residual class of the CMO
security being sold, with each such class possessing different risk
characteristics. The residual interest sold represents any residual cash flows
which result from the excess of the monthly receipts generated by principal and
interest payments on the underlying mortgage collateral and any reinvestment
earnings thereon, less the cash payments to the CMO holders and any
administrative expenses. As a matter of policy, due to the risk associated with
residual interests, the Bank has never invested in, and does not intend to
invest in, residual interests in CMOs.
Mortgage-backed securities generally yield less than the loans which
underlie such securities because of their payment guarantees or credit
enhancements which reduce credit risk. In addition, mortgage-backed securities
are more liquid than individual mortgage loans and may be used to collateralize
obligations of the Bank. Mortgage-backed securities issued or guaranteed by
FNMA or FHLMC (except interest-only securities or the residual interests in
CMOs) are weighted at no more than 20% for risk-based capital purposes, compared
to a weight of 50% to 100% for residential loans. See "Regulation - Regulatory
Capital Requirements."
The FDIC has issued a statement of policy which states, among other things,
that mortgage derivative products (including CMOs and CMO residuals and stripped
mortgage-backed securities) which possess average life or price volatility in
excess of a benchmark fixed rate 30 year mortgage-backed pass-through security
are "high-risk mortgage securities," are not suitable investments for depository
institutions, and if considered "high risk" at purchase must be carried in the
institution's trading account or as assets held for sale, and must be marked to
market on a regular basis. In addition, if a security was not considered "high
risk" at purchase but was later found to be "high risk" based on the tests, the
security may remain in the held-to-maturity portfolio as long as the institution
has the positive intent to hold the security to maturity and has a documented
plan in place to manage the higher risk. At December 31, 2000, the Bank had
mortgage-backed securities considered "high risk" with a recorded book value of
approximately $3.6 million. These securities were not considered "high risk" at
purchase, but were later found to be "high risk" based on the results of the
required tests. The Bank has the positive intent to hold these securities to
maturity and has documented the Bank's plan to manage the higher risk of these
securities. If the Bank should elect to consider a new type of security for its
portfolio, the Bank intends to ascertain in advance that the security does not
fail any of the tests that will qualify it as a "high risk mortgage security."
The Bank will not purchase any security that fails such tests unless it has in
place a documented plan to manage the higher risk of that security and has
approval from the Board of Directors.
The following table sets forth the Company's activities with respect to
mortgage-backed securities (including held-to-maturity and available-for-sale)
during the periods indicated.
Year Ended December 31,
2000 1999 1998
--------- ---------- ----------
(In thousands)
Mortgage-backed securities
held-to-maturity purchased $ 4,815 $ 3,080 $ 8,203
Mortgage-backed securities
available-for-sale purchased -- 26,489 --
Mortgage-backed securities
available-for-sale sold -- -- (48,550)
Discount accretion (premium
amortization), net (159) 430 (132)
Change in unrealized loss on
mortgage-backed securities
available-for-sale (29) (719) 1,375
Principal repayments on
mortgage-backed securities (41,266) (263,128) (225,258)
--------- ---------- ----------
Net decrease in
mortgage-backed securities $(36,639) $(233,848) $(264,362)
========= ========== ==========
The Company classifies securities as either held-to-maturity or
available-for-sale. Securities are classified as held-to-maturity when the
Company has the positive intent and ability to hold such securities to maturity.
Securities held-to-maturity are recorded at amortized cost. Permanent declines
in the value of held-to-maturity securities are charged to earnings in the
periods in which the declines are determined. Securities available-for-sale are
securities other than those held-to-maturity or for trading purposes and are
recorded at fair value, with unrealized gains and losses excluded from earnings
and recorded net of tax as other comprehensive income (loss) in stockholders'
equity until realized. Realized gains and losses on securities are recorded in
earnings in the year of sale based on the specific identification of each
individual security sold. Premiums and discounts on mortgage-backed securities
are amortized or accreted as a yield adjustment over the life of the securities
using the interest method, with the amortization or accretion being adjusted
when the prepayments are received.
INVESTMENT ACTIVITIES
Under the Texas Savings Bank Act (the "Act"), the Bank is permitted to
invest in obligations of, or guaranteed as to principal and interest by, the
United States or the State of Texas, in the stock or in any obligations or
consolidated obligations of the FHLB, and in various other specified
instruments. The Bank holds investment securities from time to time to help
meet its liquidity requirements and as temporary investments until funds can be
utilized to purchase residential mortgage loans, mortgage-backed securities or
to originate other loans for the Bank's portfolio. See Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of
Operations-Liquidity and Capital Resources."
SOURCES OF FUNDS
GENERAL. Advances from the FHLB, deposits, sales of securities under
agreements to repurchase, as well as maturities of and principal repayments on
loans and mortgage-backed securities have been the major sources of funds for
use in the Bank's lending and investments, and for other general business
purposes. Management of the Bank closely monitors rates and terms of competing
sources of funds on at least a weekly basis and utilizes the source which is the
most cost effective.
DEPOSITS. The Bank attracts a majority of its deposits through its 50
branch offices in metropolitan Houston, Austin, Corpus Christi, the Rio Grande
Valley and small cities in the southeast quadrant of Texas. The Bank also
obtains deposits through acquisitions. In 1998, the Bank assumed approximately
$355.4 million in deposits in an acquisition of twelve commercial bank branches.
The Bank offers a variety of traditional retail deposit products which currently
includes interest-bearing checking, noninterest-bearing checking, savings, money
market demand accounts and certificates of deposit which generally range in
terms from three to 60 months. Included among these deposit products are
individual retirement account certificates. Beginning in 1995 with the
acquisition of Texas Capital, the Bank's management has pursued a commercial
banking strategy related to deposits designed to increase the level of lower
cost transaction and commercial deposit accounts. The Bank offers a range of
products for commercial businesses including Small Business Checking, Business
Interest Checking, Analysis Checking and Commercial Money Market Accounts. The
acquisitions and marketing efforts have resulted in the outstanding balances of
demand deposit accounts increasing to 33.4% of total deposits at December 31,
2000 from 26.4% at December 31, 1997.
The following table shows the distribution of and certain other information
relating to the Company's deposits by type at the dates indicated.
At December 31,
-----------------
2000 1999 1998(1)
Percent Percent Percent
of of of
Amount Deposits Amount Deposits Amount Deposits
----------- --------- ---------- --------- ---------- ---------
(Dollars in thousands)
Demand deposit accounts:
Noninterest-bearing checking(2) $ 80,849 4.83% $ 97,146 5.98% $ 95,398 5.60%
Interest-bearing checking(2) 61,046 3.64 65,229 4.02 63,067 3.70
Savings 43,891 2.62 46,011 2.83 48,571 2.85
Money market demand(2) 374,210 22.34 331,082 20.39 339,481 19.91
Total demand deposit accounts 559,996 33.43 539,468 33.22 546,517 32.06
----------- --------- ---------- --------- ---------- ---------
Certificate accounts:
Maturing within 1 year 1,038,522 62.00 968,838 59.66 965,443 56.64
1-2 years 53,378 3.19 82,705 5.09 148,049 8.69
2-3 years 13,678 0.82 17,020 1.05 22,347 1.31
3-4 years 4,284 0.26 10,772 0.66 11,833 0.69
4-5 years 4,745 0.28 4,917 0.30 10,176 0.60
Over 5 years 323 0.02 380 0.02 240 0.01
Total certificate accounts 1,114,930 66.57 1,084,632 66.78 1,158,088 67.94
----------- --------- ---------- --------- ----------
1,674,926 100.00% 1,624,100 100.00% 1,704,605 100.00%
========= ======== =======
Premium on purchased
deposits, net 55 189 399
----------- ---------- ----------
Total $1,674,981 $1,624,289 $1,705,004
=========== ========== ==========
________________________
(1)In 1998, the Bank assumed approximately $355.4 million in deposits in
connection with the acquisition of twelve branches of another financial
institution.
(2)The Bank reclassifies a portion of the balances in noninterest-bearing and
interest-bearing checking accounts to money market demand accounts pursuant to
deposit types under Federal Reserve Regulation D. At December 31, 2000, the
amount of such reclassification was approximately $136.6 million ($68.1 million
from noninterest-bearing checking and $68.5 million from interest-bearing
checking). The amount of such reclassification was approximately $117.7 million
($56.3 million from noninterest-bearing checking and $61.4 million from
interest-bearing checking) at December 31, 1999. The amount of such
reclassification was approximately $126.0 million ($55.8 million from
noninterest-bearing checking and $70.2 million from interest-bearing checking)
at December 31, 1998.
The following table sets forth the average balance of each deposit type and
the average rate paid on each deposit type for the periods indicated.
Year Ended December 31,
2000 1999 1998
------- ------ ------
(Dollars in thousands)
Average Average Average Average Average Average
Balance Rate Paid Balance Rate Paid Balance Rate Paid
----------- --------- ----------- ----------- ---------- -----------
Demand deposit accounts:
Noninterest-bearing checking $ 74,575 --% $ 80,367 --% $ 51,612 --%
Interest-bearing checking 50,622 2.00 49,588 1.96 20,628 2.18
Savings 47,950 2.15 50,805 1.99 35,162 2.20
Money market demand(1) 366,200 2.56 356,860 2.27 315,141 2.37
Certificate accounts 1,095,760 5.62 1,104,378 4.95 1,063,277 5.40
----------- --------- ----------- ---------- ----------- ----------
Total deposits $ 1,635,107 4.47% $ 1,641,998 3.94% $ 1,485,820 4.45%
=========== ========= =========== ========== =========== ==========
________________________
(1)Includes amounts reclassified from noninterest-bearing and interest-bearing
checking accounts pursuant to the Bank's program under Federal Reserve
Regulation D as follows:
2000 1999 1998
-------- -------- --------
(In thousands)
Noninterest-bearing checking $ 71,053 $ 70,780 $ 63,130
Interest-bearing checking 69,523 68,486 67,778
-------- -------- --------
$140,576 $139,266 $130,908
======== ======== ========
The following table presents by various interest rate categories the
amounts of certificate accounts at the dates indicated and the amounts of
certificate accounts at December 31, 2000 which mature during the periods
indicated.
Amounts at December 31, 2000 Maturing In
(In thousands)
One Year Greater than
Amounts at December 31, or Less Two Years Three Years Three Years
----------------------- ---------- --------- ------------ ------------
2000 1999
----------- ---------
Certificate accounts:
2.00% to 3.99% $ 586 $ 23,749 $ 504 $ 30 $ -- $ 52
4.00% to 5.99% 301,328 990,726 258,509 25,229 10,858 6,732
6.00 to 7.99% 812,850 69,943 779,410 28,119 2,753 2,568
8.00 to 9.99% 166 202 99 -- 67 --
over 10.00% -- 12 -- -- -- --
---------- ---------- ----------- -------- ------- ------
Total $1,114,930 $1,084,632 $1,038,522 $ 53,378 $13,678 $9,352
========== ========== ========== ======== ======= ======
Certificates maturing within one year consist primarily of six month and
one year certificates. Historically, a majority of such certificate holders roll
over their balances into new certificates with similar terms at the Bank's then
current interest rates. The Bank believes that it can continue to attract these
levels of deposits on a continuing basis through competitive pricing.
The following table sets forth the net deposit flows of the Bank during the
periods indicated.
Year Ended December 31,
2000 1999 1998
--------- --------- ---------
(In thousands)
Net increase (decrease) before interest credited(1) $ (20,970) $(145,219) $ 264,148
Interest credited 71,662 64,504 65,796
--------- --------- ---------
Net deposit increase (decrease) $ 50,692 $ (80,715) $ 329,944
========== ========== =========
________________________
(1)For the year ended December 31, 1998, reflects the effect of the assumption
of $355.4 million of net deposit liabilities acquired in connection with the
1998 Branch Acquisition. The net deposit outflow in each year (net of acquired
deposits) was primarily due to financial disintermediation as described below.
The following table sets forth the amount of the Bank's certificates of
deposits at December 31, 2000 which are $100,000 or more by time remaining until
maturity.
At December 31, 2000
Number of accounts Deposit Amount
------------------ ---------------
(In thousands)
Three months or less 474 $ 66,653
Over three through six months 456 50,456
Over six through twelve months 954 107,674
Over twelve months 133 14,459
------------------ ---------------
Total 2,017 $ 239,242
================== ===============
The Bank's deposits are obtained primarily from businesses and residents of
Houston, Austin, Corpus Christi, the Rio Grande Valley and small cities in the
southeast quadrant of Texas. Currently, the principal methods used by the Bank
to attract and retain deposit accounts include competitive interest rates,
having branch locations in under-served markets and offering a variety of
services for the Bank's commercial business and retail customers. The Bank uses
traditional marketing methods to attract new customers and deposits, including
newspaper and radio advertising. Through 2000, except as noted below, the Bank
has not solicited brokered deposit accounts and generally has not negotiated
rates on larger denomination (i.e., jumbo) certificates of deposit. In early
1997, the Bank began the solicitation of deposit accounts through a "money
desk." Money desk rates are only offered to institutions (primarily credit
unions and municipal utility districts) and are generally up to 50 basis points
higher than on regular certificate of deposit accounts.
The Bank also provides its customers with the opportunity to invest in
noninsured mutual funds, including government bond funds, tax-free municipal
bond funds, growth funds, income growth funds, and sector funds specific to an
industry, which are provided through a third party arrangement with another
company, which maintains representatives at the Bank's branch offices. The Bank
earns a fee after the payment of all expenses, which was not material to the
Bank's results of operations for the years ended December 31, 2000, 1999 or
1998. See "Subsidiaries of the Bank - CoastalBanc Financial Corp", and
"Subsidiaries of the Bank - Coastal Banc Insurance Agency, Inc."
BORROWINGS. The following table sets forth certain information regarding
the borrowings of the Bank at or for the dates indicated.
At or For the Year
Ended December 31,
2000 1999 1998
---------- ----------- ---------
(Dollars in thousands)
FHLB advances:
Average balance outstanding $ 926,659 $ 951,953 $713,197
Maximum amount outstanding at any
month-end during the period 1,275,541 1,115,713 969,036
Balance outstanding at end of period 1,150,305 1,096,931 966,720
Average interest rate during the period 6.29% 5.31% 5.55%
Average interest rate at end of period 6.48% 5.72% 5.24%
Securities sold under agreements
to repurchase:
Average balance outstanding $ 249,655 $ 103,211 $579,561
Maximum amount outstanding at any
month-end during the period 605,214 271,103 874,784
Balance outstanding at end of period -- -- 100,000
Average interest rate during the period 6.68% 5.44% 5.49%
Average interest rate at end of period -- -- 4.93%
The Bank obtains long term, fixed rate and short term, variable rate
advances from the FHLB upon the security of certain of its first lien
residential and multifamily mortgage loans and mortgage-backed securities,
provided certain standards related to creditworthiness of the Bank have been
met. FHLB advances are generally available for general business purposes to
expand lending and investing activities. Borrowings have generally been used to
fund the purchase of loans receivable and mortgage-backed securities.
Advances from the FHLB are made pursuant to several different credit
programs, each of which has its own interest rate and range of maturities. The
programs of the FHLB currently utilized by the Bank include a $50.0 million
variable rate line of credit, various short-term, fixed rate advances and long
term, fixed and variable-rate advances. At December 31, 2000, the Bank had
total FHLB advances of $1.2 billion at a weighted average interest rate of
6.48%. Of the advances outstanding at December 31, 2000, $792.3 million were
short-term advances with an original maturity of less than 60 days.
The Bank also obtains funds from the sales of securities to investment
dealers under agreements to repurchase ("reverse repurchase agreements"). In a
reverse repurchase agreement transaction, the Bank will generally sell a
mortgage-backed security agreeing to repurchase the same security on a specified
later date at an agreed upon price. The mortgage-backed securities underlying
the agreements are delivered to the dealers who arrange the transactions. The
dealers may lend the Bank's securities to others in the normal course of their
operations; however, such dealers or third party custodians safe-keep the
securities which are to be specifically repurchased by the Bank. Reverse
repurchase agreements represent a competitive cost funding source for the Bank;
however, the Bank is subject to the risk that the lender may default at maturity
and not return the collateral. In order to minimize this potential risk, the
Bank only deals with large, established investment brokerage firms when entering
into these transactions. At December 31, 2000, the Bank did not have any
borrowings under reverse repurchase agreements.
To a lesser extent, beginning in 1997, the Bank has utilized federal funds
purchased from a correspondent bank for overnight borrowing purposes. Federal
funds purchased averaged approximately $18,000, $19,000 and $149,000 during the
years ended December 31, 2000, 1999 and 1998, respectively with an average
interest rate during the periods of 5.56%, 5.26% and 5.33%, respectively. There
were no federal funds purchased outstanding at any month-end during 2000, 1999
or 1998.
The Asset/Liability Subcommittee of the Bank attempts to match the maturity
of its borrowings with particular repricing dates of certain assets in order to
maintain a pre-determined interest rate spread. The Bank's objective is to
minimize the increase or decrease in the interest rate spread during periods of
fluctuating interest rates from that which was contemplated at the time the
assets and liabilities were first put on the Bank's books. The Bank also
attempts to alter the interest rate risk associated with its borrowings through
the use of interest rate swaps and interest rate caps purchased from selected
securities brokers/dealers. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Asset and Liability Management"
in Item 7 hereof.
SUBSIDIARIES OF THE BANK
GENERAL. The Bank is permitted to invest in the capital stock, obligations
and other securities of its service corporations in an aggregate amount not to
exceed 10% of the Bank's assets. In addition, the Bank may make conforming
loans in an amount not exceeding 50% of the Bank's regulatory capital to service
corporations of which the Bank owns more than 10% of the stock. At December 31,
2000, the Bank was authorized to have a maximum investment of approximately
$309.2 million in its subsidiaries.
At December 31, 2000, the Bank had two active wholly-owned subsidiaries,
the activities of which are described below. At December 31, 2000, the Bank's
aggregate equity investment in its subsidiaries was $144,000.
On December 30, 1998, CBS Mortgage Corp., a former subsidiary of the Bank,
was merged into the Bank.
COASTALBANC FINANCIAL CORP. CoastalBanc Financial Corp. ("Financial
Corp.") was formed in 1986 to act as an investment advisor to other insured
financial institutions. The Bank is the sole stockholder of Financial Corp.
Over the past five years, Financial Corp. has been inactive in its investment
advisory capacity. Financial Corp. became active during the last quarter of
1992 in connection with the sale of mutual funds through third party
intermediaries. Fees generated, net of expenses, resulted in a net income of
$37,000, $51,000 and $49,000 for the years ended December 31, 2000, 1999 and
1998, respectively.
COASTAL BANC INSURANCE AGENCY, INC. In 1987, the Bank entered into an
Administrative Services Agreement with CBIA, a Texas business corporation
licensed under Texas law to act as a life insurance agent. Until June 22, 2000,
CBIA was wholly-owned by a former executive officer of the Bank. On June 22,
2000, CBIA became a subsidiary of the Bank. CBIA receives fees related to
insurance and investment product sales through third party intermediaries to the
Bank's deposit and loan customers. Fees generated, net of expenses, resulted in
net income of $74,000 for the period from June 22 to December 31, 2000.
AFFILIATE OF THE BANK
COASTAL BANC CAPITAL CORP. CBCC is a direct subsidiary of HoCo and an
affiliate of the Bank. CBCC is engaged in the business of purchasing and
reselling packages of whole loan assets on behalf of the Bank and institutional
investors. The loan packages acquired by CBCC are offered to the Bank on the
same terms and at the same time that they are offered to other prospective
purchasers. During 2000, CBCC purchased whole loan assets totaling $264.7
million and sold whole loans (including purchase premium) totalling $239.5
million to the Bank and $25.6 million to third party investors. During the year
ended December 31, 2000, CBCC recorded gains on the sale of loans to the Bank of
$309,000 and gains on the sale of loans to third party investors of $157,000.
The $309,000 gain on the sale of loans to the Bank was recorded on the Bank's
financial statements as a premium on purchased loans and is being amortized over
the life of those loans. All significant intercompany balances and transactions
have been eliminated in consolidation. At December 31, 2000, HoCo's
unconsolidated equity investment in CBCC was $423,000. CBCC had net income
(loss) (before eliminations) of $(21,000), $592,000 and $275,000 for the years
ended December 31, 2000, 1999 and 1998, respectively.
Commissions received by CBCC from the Bank are calculated at a market rate
and are not greater than those paid to non-affiliates in similar transactions.
The Bank and CBCC have entered into a mortgage warehouse revolving loan
agreement pursuant to which the Bank has established a $17.0 million revolving
line of credit to be drawn upon from time to time by CBCC to finance the
acquisition of whole loan assets and the holding of such assets until they are
sold. The advances drawn by CBCC are collateralized by such assets purchased
and held by CBCC. There were no amounts outstanding on this line of credit at
December 31, 2000. All transactions between the Bank and CBCC are within
regulatory guidelines.
REGULATION
Set forth below is a brief description of certain laws and regulations
which relate to the regulation of the Company and the Bank. The description
does not purport to be complete and is qualified in its entirety by reference to
applicable laws and regulations. Certain federal banking laws have been
recently amended. See "Regulation - The Company-Financial Modernization."
THE COMPANY
REGULATIONS. The Company and HoCo are registered unitary savings and loan
holding companies and are subject to OTS and Department regulation, examination,
supervision and reporting requirements. In addition, because the capital stock
of the Company is registered under Section 12(g) of the Securities Exchange Act
of 1934, the Company is also subject to various reporting and other requirements
of the SEC. As a subsidiary of a savings and loan holding company, the Bank is
also subject to certain Federal and state restrictions in its dealings with the
Company and affiliates thereof.
FEDERAL ACTIVITIES RESTRICTIONS. There are generally no restrictions on
the activities of a savings and loan holding company which holds only one
subsidiary savings bank provided that they meet the grandfather requirement
described below. See "The Company - Financial Modernization." However, if the
Director of the OTS determines that there is reasonable cause to believe that
the continuation by a savings and loan holding company of an activity
constitutes a serious risk to the financial safety, soundness or stability of
its subsidiary savings institution (i.e., a savings association or savings
bank), the Director may impose such restrictions as deemed necessary to address
such risk, including limiting (i) payment of dividends by the savings
institution; (ii) transactions between the savings institution and its
affiliates; and (iii) any activities of the savings institution that might
create a serious risk that the liabilities of the holding company and its
affiliates may be imposed on the savings institution. Notwithstanding the
foregoing, if the savings institution subsidiary of such a holding company fails
to meet the Qualified Thrift Lender ("QTL") test, then such unitary holding
company also shall become subject to the activities restrictions applicable to
multiple savings and loan holding companies and, unless the savings institution
requalifies as a QTL within one year thereafter, shall register as, and become
subject to the restrictions applicable to, a bank holding company. See
"Regulation of The Bank - Qualified Thrift Lender Test."
If the Company were to acquire control of another savings institution,
other than through merger or other business combination with the Bank, the
Company would thereupon become a multiple savings and loan holding company.
Except where such acquisition is pursuant to the authority to approve emergency
thrift acquisitions and where each subsidiary savings institution meets the QTL
test, as set forth below, the activities of the Company and any of its
subsidiaries (other than the Bank or other subsidiary savings institutions)
would thereafter be subject to further restrictions. No multiple savings and
loan holding company or subsidiary thereof which is not a savings institution
shall commence or continue beyond a limited period of time after becoming a
multiple savings and loan holding company or subsidiary thereof any business
activity, other than: (i) furnishing or performing management services for a
subsidiary savings institution; (ii) conducting an insurance agency or escrow
business; (iii) holding, managing, or liquidating assets owned by or acquired
from a subsidiary savings institution; (iv) holding or managing properties used
or occupied by a subsidiary savings institution; (v) acting as trustee under
deeds of trust; (vi) those activities authorized by regulation as of March 5,
1987 to be engaged in by multiple savings and loan holding companies; or (vii)
unless the Director of the OTS by regulation prohibits or limits such activities
for savings and loan holding companies, those activities authorized by the
Federal Reserve Board as permissible for bank holding companies or financial
holding companies. The activities described in (i) through (vi) above may be
engaged in only after giving the OTS prior notice and being informed that the
OTS does not object to such activities. In addition, the activities described in
(vii) above also must be approved by the Director of the OTS prior to being
engaged in by a multiple savings and loan holding company.
RESTRICTIONS ON ACQUISITIONS. Except under limited circumstances, savings
and loan holding companies are prohibited from acquiring, without prior approval
of the Director of the OTS, (i) control of any other savings institution or
savings and loan holding company or substantially all the assets thereof or (ii)
more than 5% of the voting shares of a savings institution or holding company
thereof which is not a subsidiary. Except with the prior approval of the
Director of the OTS, no director or officer of a savings and loan holding
company or person owning or controlling by proxy or otherwise more than 25% of
such company's stock, may acquire control of any savings institution, other than
a subsidiary savings institution, or of any other savings and loan holding
company.
The Director of the OTS may approve acquisitions resulting in the formation
of a multiple savings and loan holding company which controls savings
institutions in more than one state only if (i) the multiple savings and loan
holding company involved controls a savings institution which operated a home or
branch office located in the state of the association to be acquired as of March
5, 1987; (ii) the acquiror is authorized to acquire control of the savings
institution pursuant to the emergency acquisition provisions of the Federal
Deposit Insurance Act ("FDIA"), or (iii) the statutes of the state in which the
institution to be acquired is located specifically permit institutions to be
acquired by the state-chartered institutions or savings and loan holding
companies located in the state where the acquiring entity is located (or by a
holding company that controls such state-chartered savings institutions).
FINANCIAL MODERNIZATION. Under the Gramm-Leach-Bliley Act enacted into law
on November 12, 1999, no company may acquire control of a savings and loan
holding company after May 4, 1999, unless the company is engaged only in
activities traditionally permitted to a multiple savings and loan holding
company or newly permitted to a financial holding company under Section 4(k) of
the Bank Holding Company Act. With limited exceptions, existing savings and
loan holding companies and those formed pursuant to an application filed with
the OTS before May 4, 1999, may engage in any activity including non-financial
or commercial activities provided such companies control only one savings
association and that savings association meets the Qualified Thrift Lender test.
Corporate reorganizations are permitted, but the transfer of grandfathered
unitary thrift holding company status through acquisition is not permitted. The
Company and HoCo qualify to engage in that broader range of activities.
TEXAS REGULATIONS. Under the Texas Savings Bank Act ("TSBA"), each
registered holding company, such as the Company, is required to file reports
with the Department as required by the Texas Savings and Loan Commissioner
("Commissioner") and is subject to such examination as the Commissioner may
prescribe.
REGULATION OF THE BANK
The Bank is required to file reports with the Department and the FDIC
concerning its activities and financial condition, in addition to obtaining
regulatory approvals prior to entering into certain transactions, such as any
merger or acquisition with another institution. The regulatory system to which
the Bank is subject is intended primarily for the protection of the deposit
insurance fund and depositors, not stockholders. The regulatory structure also
provides the Department and the FDIC with substantial discretion in connection
with their supervisory and enforcement functions. The Department and the FDIC
conduct periodic examinations of the Bank in order to assess its compliance with
federal and state regulatory requirements. As a result of such examinations,
the Department and the FDIC may require various corrective actions.
Virtually every aspect of the Bank's business is subject to numerous
federal and/or state regulatory requirements and restrictions with respect to
such matters as, for example, the nature and amounts of loans and investments
that may be made, the issuance of securities, the amount of reserves that must
be established against deposits, the establishment of branches, mergers,
non-banking activities and other operations. Numerous laws and regulations also
set forth special restrictions and procedural requirements with respect to the
extension of credit, credit practices, the disclosure of credit terms and
discrimination in credit transactions.
LIMITATIONS ON TRANSACTIONS WITH AFFILIATES. Transactions between savings
institutions and any affiliate are governed by Sections 23A and 23B of the
Federal Reserve Act. An affiliate of a savings institution is any company or
entity which controls, is controlled by or is under common control with the
savings institution. In a holding company context, the parent holding company
of a savings institution (such as the Company) and any companies which are
controlled by such parent holding company are affiliates of the savings
institution. Generally, Section 23A limits the extent to which the savings
institution or its subsidiaries may engage in "covered transactions" with any
one affiliate to an amount equal to 10% of such institution's capital stock and
surplus, and contain an aggregate limit on all such transactions with all
affiliates to an amount equal to 20% of such capital stock and surplus. Section
23B applies to "covered transactions" as well as certain other transactions and
requires that all such transactions be on terms substantially the same, or at
least as favorable to the institution or subsidiary, as those provided to a
non-affiliate. The term "covered transaction" includes the making of loans to,
purchase of assets from and, issuance of a guarantee to an affiliate and similar
transactions. Section 23B transactions also apply to the provision of services
and the sale of assets by a savings association to an affiliate. In addition to
the restrictions imposed by Sections 23A and 23B, no savings institution may (i)
loan or otherwise extend credit to an affiliate, except for any affiliate which
engages only in activities which are permissible for bank holding companies, or
(ii) purchase or invest in any stocks, bonds, debentures, notes or similar
obligations of any affiliate, except for affiliates which are subsidiaries of
the savings institution.
In addition, Sections 22(h) and (g) of the Federal Reserve Act place
restrictions on loans to executive officers, directors and principal
stockholders. Under Section 22(h), loans to a director, an executive officer
and to a greater than 10% stockholder of a savings institution (a "principal
stockholder"), and certain affiliated interests of each of them, may not exceed,
together with all other outstanding loans to such person and affiliated
interests, the savings institution's loans to one borrower limit (generally
equal to 15% of the institution's unimpaired capital and surplus). Section 22(h)
also requires that loans to directors, executive officers and principal
stockholders be made on terms substantially the same as offered in comparable
transactions to other persons and also requires prior Board approval for certain
loans. In addition, the aggregate amount of extensions of credit by a savings
institution to all insiders cannot exceed the institution's unimpaired capital
and surplus. Furthermore, Section 22(g) places additional restrictions on loans
to executive officers. At December 31, 2000, the Bank was in compliance with
the above restrictions.
REGULATORY CAPITAL REQUIREMENTS. Federally-insured state-chartered banks
are required to maintain minimum levels of regulatory capital. These standards
generally must be as stringent as the comparable capital requirements imposed on
national banks. The FDIC also is authorized to impose capital requirements in
excess of these standards on individual banks on a case-by-case basis.
Under current FDIC regulations, the Bank is required to comply with three
separate minimum capital adequacy requirements: a "Tier 1 capital ratio" and
two "risk-based" capital requirements. "Tier 1 capital" generally includes
common stockholders' equity (including retained earnings), qualifying
noncumulative perpetual preferred stock and any related surplus, and minority
interests in the equity accounts of fully consolidated subsidiaries, minus
intangible assets, other than properly valued mortgage servicing assets,
nonmortgage servicing assets and purchased credit card relationships up to
certain specified limits and minus net deferred tax assets in excess of certain
specified limits. At December 31, 2000, the Bank did not have any net deferred
tax assets in excess of the specified limits.
TIER 1 CAPITAL RATIO. FDIC regulations establish a minimum 3.0% ratio of
Tier 1 capital to total assets for the most highly-rated state-chartered,
FDIC-supervised banks and for all other state-chartered, FDIC-supervised banks,
the minimum Tier 1 capital ratio shall not be less than 4.0%. Under FDIC
regulations, highly-rated banks are those that the FDIC determines are not
anticipating or experiencing significant growth and have well diversified risk,
including no undue interest rate risk exposure, excellent asset quality, high
liquidity and good earnings. At December 31, 2000, the minimum Tier 1 capital
ratio for capital adequacy purposes for the Bank was 4.0% and its actual Tier 1
capital ratio was 6.22%.
RISK-BASED CAPITAL REQUIREMENTS. The risk-based capital requirements
contained in FDIC regulations generally require the Bank to maintain a minimum
ratio of Tier 1 capital to risk-weighted assets of at least 4.00% and a ratio of
total risk-based capital to risk-weighted assets of at least 8.00%. To
calculate the amount of capital required, assets are placed in one of four
categories and given a percentage weight (0%, 20%, 50% or 100%) based on the
relative risk of the category. For example, U.S. Treasury Bills and GNMA
securities are placed in the 0% risk category. FNMA and FHLMC securities are
placed in the 20% risk category, loans secured by one-to-four family residential
properties and certain privately-issued mortgage-backed securities are generally
placed in the 50% risk category and commercial and consumer loans and other
assets are generally placed in the 100% risk category. In addition, certain
off-balance sheet items are converted to balance sheet credit equivalent amounts
and each amount is then assigned to one of the four categories.
For purposes of the risk-based capital requirements, "total capital" means
Tier 1 capital plus supplementary or Tier 2 capital, so long as the amount of
supplementary or Tier 2 capital that is used to satisfy the requirement does not
exceed the amount of Tier 1 capital. Supplementary or Tier 2 capital includes,
among other things, so-called permanent capital instruments (cumulative or other
perpetual preferred stock, mandatory convertible subordinated debt and perpetual
subordinated debt), so-called maturing capital instruments (mandatorily
redeemable preferred stock, intermediate-term preferred stock, mandatory
convertible subordinated debt and subordinated debt), and a certain portion of
the allowance for loan losses up to a maximum of 1.25% of risk-weighted assets.
At December 31, 2000, the Bank's Tier 1 capital to risk-weighted assets
ratio was 9.94% and its total risk-based capital to risk weighted assets ratio
was 10.72%.
The following table sets forth information with respect to each of the
Bank's minimum capital adequacy requirements at the dates shown.
At December 31,
2000 1999 1998
------- ------- -------
Actual Required(1) Actual Required(1) Actual Required(1)
------- ----------- ------- ----------- ------- -----------
Tier 1 capital to total assets 6.22% 4.00% 5.76% 4.00% 5.25% 4.00%
Tier 1 risk-based capital
to risk weighted assets 9.94 4.00 9.68 4.00 9.54 4.00
Total risk-based capital
risk to risk weighted assets 10.72 8.00 10.29 8.00 10.23 8.00
(1)Minimum required ratio for capital adequacy purposes.
The following table sets forth a reconciliation between the Bank's
stockholders' equity and each of its three minimum regulatory capital
requirements at December 31, 2000.
Tier 1 Total
Tier 1 Risk-based Risk-based
Capital Capital Capital
----------- ------------ ------------
(Dollars in thousands)
Total stockholders' equity $ 209,034 $ 209,034 $ 209,034
Unrealized loss on securities
available-for-sale 1,867 1,867 1,867
Less nonallowable goodwill (24,611) (24,611) (24,611)
Plus allowance for loan losses -- -- 14,507
------------ ------------ ------------
Total regulatory capital 186,290 186,290 200,797
Minimum required capital 119,862 74,957 149,913
------------ ------------ ------------
Excess regulatory capital $ 66,428 $ 111,333 $ 50,884
============ ============ ============
Bank's regulatory capital percentage (1) 6.22% 9.94% 10.72%
Minimum regulatory capital
adequacy required percentage 4.00% 4.00% 8.00%
------------ ------------ ------------
Bank's regulatory capital percentage in
excess of minimum requirement 2.22% 5.94% 2.72%
============ ============ ============
________________________
(1)Tier 1 capital is computed as a percentage of adjusted average total assets
of $3.0 billion. Risk-based capital is computed as a percentage of adjusted
risk-weighted assets of $1.9 billion.
FDIC INSURANCE PREMIUMS. The deposits of the Bank are insured to the
maximum extent permitted by the SAIF and the Bank Insurance Fund (the "BIF"),
both of which are administered by the FDIC, and are backed by the full faith and
credit of the U.S. government. As the insurer, the FDIC is authorized to
conduct examinations of, and to require reporting by, FDIC-insured institutions.
It also may prohibit any FDIC-insured institution from engaging in any activity
the FDIC determines by regulation or order to pose a serious threat to the FDIC.
The FDIC also has the authority to initiate enforcement actions against savings
institutions.
The Bank currently pays deposit insurance premiums to the FDIC based on a
risk-based assessment system established by the FDIC for all bank and thrift
institutions. Under applicable regulations, institutions are assigned to one of
three capital groups based solely on the level of an institution's capital -
"well capitalized," "adequately capitalized" and "undercapitalized" - which are
defined in the same manner as the regulations establishing the prompt corrective
action system under Section 38 of the FDIA. These three groups are then divided
into three subgroups which reflect varying levels of supervisory concern, from
those which are considered to be healthy to those which are considered to be of
substantial supervisory concern. The matrix so created results in nine
assessment risk classifications.
On September 30, 1996, amendments to the FDIA were signed into law. The
FDIA and implementing regulations provided that all SAIF-member institutions
would pay a special one time assessment of 65.7 basis points on the SAIF
assessment base as of March 31, 1995 to recapitalize the SAIF, which in the
aggregate, would be sufficient to bring the reserve ratio in the SAIF to 1.25%
of insured deposits. The Bank's special assessment amounted to $7.5 million
($4.8 million after applicable income taxes) pursuant to the FDIA. In addition
to the recapitalization provisions, the FDIA equalized the rate schedule for
SAIF and BIF institutions with the rates ranging from zero to 27 basis points
beginning October 1, 1996. At December 31, 2000, the Bank was categorized as
well capitalized.
The FDIA provided for Financing Corporation ("FICO") debt sharing by banks
and thrifts with proration sharing in the year 2000. Prior to the year 2000,
SAIF insured institutions paid approximately 6.5 basis points for FICO, while
BIF insured institutions paid approximately 1.3 basis points. The FICO
provisions of the FDIA also prohibit deposit migration strategies to avoid SAIF
premiums. Starting in the year 2000, BIF and SAIF institutions began sharing
the FICO burden on a pro rata basis until termination of the FICO obligation in
2017.
SAFETY AND SOUNDNESS STANDARDS. Each Federal banking agency is required to
prescribe, for all insured depository institutions and their holding companies,
standards relating to internal controls, information systems and internal audit
systems, loan documentation, credit underwriting, interest rate exposure, asset
growth, compensation, fees and benefits and such other operational and
managerial standards as the agency deems appropriate. The compensation
standards would prohibit employment contracts or other compensatory arrangements
that provide excess compensation, fees or benefits or could lead to material
financial loss to the institution. In addition, each Federal banking agency
also is required to adopt for all insured depository institutions and their
holding companies standards that specify (i) a maximum ratio of classified
assets to capital, (ii) minimum earnings sufficient to absorb losses without
impairing capital, (iii) to the extent feasible, a minimum ratio of market value
to book value for publicly-traded shares of the institution or holding company,
and (iv) such other standards relating to asset quality, earnings and valuation
as the agency deems appropriate. On July 10, 1995, the Federal banking
agencies, including the FDIC, adopted final rules and proposed guidelines
concerning safety and soundness required to be prescribed by regulations
pursuant to Section 39 of the FDIA. In general, the standards relate to
operational and managerial matters, asset quality and earnings and compensation.
The operational and managerial standards cover internal controls and information
systems, internal audit systems, loan documentation, credit underwriting,
interest rate exposure, asset growth, and compensation, fees and benefits.
Under the asset quality and earnings standards, which were adopted by the
Federal banking agencies in October 1996, the Bank is required to establish and
maintain systems to identify problem assets and prevent deterioration in those
assets and evaluate and monitor earnings to ensure that earnings are sufficient
to maintain adequate capital reserves. If an insured institution fails to meet
any of the standards promulgated by the regulators, then such institution will
be required to submit a plan within 30 days to the FDIC specifying the steps
that it will take to correct the deficiency. In the event that an insured
institution fails to submit or fails in any material respect to implement a
compliance plan within the time allowed by the FDIC, Section 39 of the FDIA
provides that the FDIC must order the institution to correct the deficiency and
may restrict asset growth, require the savings institution to increase its ratio
of tangible equity to assets, restrict the rates of interest that the
institution may pay or take any other action that would better carry out the
purpose of prompt corrective action. The Bank believes that it has been and at
December 31, 2000 was in compliance with each of the standards as they have been
adopted by the FDIC.
Finally, in connection with standards for employment contracts and
compensation, in February 1996, the FDIC adopted final regulations regarding the
payment of severance and indemnification to management officials and other
affiliates of insured institutions (institution affiliated parties or "IAPs").
The limitations on severance or "golden parachute" payments apply to "troubled"
institutions which seek to enter into contracts with IAPs. A golden parachute
payment is generally considered to be any payment to an IAP which is contingent
on the termination of that person's employment and is received when the insured
institution is in a troubled condition. The definition of golden parachute
payment does not include payment pursuant to qualified retirement plans,
non-qualified bona fide deferred compensation plans, nondiscriminatory severance
pay plans, other types of common benefit plans, state statutes and death
benefits. Certain limited exceptions to the golden parachute payment
prohibition are provided in cases involving the hiring of an outside executive,
unassisted changes of control and where the FDIC gives written permission to
make such payment. The limitations on indemnification payments apply to all
insured institutions, their subsidiaries and affiliated holding companies.
Generally, this provision prohibits such entities from indemnifying an IAP for
that portion of the costs sustained with regard to a civil or administrative
enforcement action commenced by any Federal banking agency which results in a
final order or settlement pursuant to which the IAP is assessed a civil monetary
penalty, removed from office, prohibited from participating in the affairs of an
insured institution or required to cease and desist from taking certain
affirmative actions. Nevertheless, institutions or holding companies may
purchase commercial insurance to cover such expenses (except for judgments or
penalties) and the institutions or holding company may advance legal expenses to
the IAP if its board of directors makes certain specific findings and the IAP
agrees in writing to reimburse the institution if it is ultimately determined
that the IAP violated a law, regulation or other fiduciary duty.
ACTIVITIES AND INVESTMENTS OF INSURED STATE-CHARTERED BANKS. The activities
and equity investments of FDIC-insured, state-chartered banks are limited by
Federal law to those that are permissible for national banks. An insured state
bank generally may not acquire or retain any equity investment of a type, or in
an amount, that is not permissible for a national bank. An insured state bank
is not prohibited from, among other things, (i) acquiring or retaining a
majority interest in a subsidiary, (ii) investing as a limited partner in a
partnership the sole purpose of which is direct or indirect investment in the
acquisition, rehabilitation or new construction of a qualified housing project,
provided that such limited partnership investments may not exceed 2% of the
bank's assets, (iii) acquiring up to 10% of the voting stock of a company that
solely provides or reinsures directors' and officers' liability insurance, and
(iv) acquiring or retaining the voting shares of a depository institution if
certain requirements are met.
COMMUNITY REINVESTMENT ACT. Under the Community Reinvestment Act ("CRA"),
as implemented by FDIC regulations, a financial institution has a continuing and
affirmative obligation consistent with its safe and sound operation to help meet
the credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the CRA. The CRA
requires the FDIC, in connection with its examination of a financial
institution, to assess the institution's record of meeting the credit needs of
its community and to take such record into account in its evaluation of certain
applications by such institution. As of the date of its most recent regulatory
examination, the Bank was rated "satisfactory" with respect to its CRA
compliance.
In May 1995, the FDIC and other Federal banking agencies promulgated final
revisions to their regulations concerning the CRA. The revised regulations
generally are intended to provide clearer guidance to financial institutions on
the nature and extent of their obligations under the CRA and the methods by
which the obligations will be assessed and enforced. Among other things, the
revised regulations substitute for the current process-based assessment factors
a new evaluation system that rates institutions based on their actual
performance in meeting community credit needs. In particular, the revised
system evaluates the degree to which an institution is performing under tests
and standards judged in the context of information about the institution, its
community, its competitors and its peers with respect to (i) lending, (ii)
service delivery systems and (iii) community development. The revised
regulations also specify that an institution's CRA performance will be
considered in an institution's expansion (e.g., branching) proposals and may be
the basis for approving, denying or conditioning the approval of an application.
Management of the Bank is unable to predict the effects of the current CRA
regulations.
QUALIFIED THRIFT LENDER TEST. All savings institutions, including the
Bank, are required to meet a QTL test set forth under Section 10(m) of the Home
Owners' Loan Act, as amended, ("HOLA") to avoid certain restrictions on their
operations and those of their holding company. Under Section 2303 of the
Economic Growth and Regulatory Paperwork Reduction Act of 1996, a savings
institution has the option of complying with the QTL test set forth in the HOLA
and implementing regulations or by qualifying as a domestic building and loan
association as defined in Section 7701(a)(19) of the Code. The QTL test set
forth in HOLA requires that a depository institution must have at least 65% of
its portfolio assets (which consist of total assets less intangibles, properties
used to conduct the savings institution's business and liquid assets not
exceeding 20% of total assets) in qualified thrift investments on a monthly
average basis in nine of every 12 months. Loans and mortgage-backed securities
secured by domestic residential housing, as well as certain obligations of the
FDIC and certain other related entities may be included in qualifying thrift
investments without limit. Certain other housing-related and non-residential
real estate loans and investments, including loans to develop churches, nursing
homes, hospitals and schools, and consumer loans and investments in subsidiaries
engaged in housing-related activities may also be included. Qualifying assets
for the QTL test include investments related to domestic residential real estate
or manufactured housing, the book value of property used by an institution or
its subsidiaries for the conduct of its business, an amount of residential
mortgage loans that the institution or its subsidiaries sold within 90 days of
origination, shares of stock issued by any FHLB and shares of stock issued by
the FHLMC or the FNMA. The Bank was in compliance with the QTL test as of
December 31, 2000, with 81.5% of its assets invested in qualified thrift
investments.
RESTRICTIONS ON CAPITAL DISTRIBUTIONS. The Bank is required to provide to
the OTS not less than 30 days' advance notice of the proposed declaration by its
board of directors of any dividend on its capital stock. The OTS may object to
the payment of the dividend on safety and soundness grounds. The FDIA prohibits
an insured depository institution from paying dividends on its capital stock or
interest on its capital notes or debentures (if such interest is required to be
paid only out of net profits) or distribute any of its capital assets while it
remains in default in the payment of any assessment due the FDIC. Texas law
permits the Bank to pay dividends out of current or retained income in cash or
additional stock.
LEGISLATIVE AND REGULATORY PROPOSALS. Proposals to change the laws and
regulations governing the operations and taxation of, and federal insurance
premiums paid by, savings banks and other financial institutions and companies
that control such institutions are frequently raised in Congress, state
legislatures and before the FDIC and other bank regulatory authorities. The
likelihood of any major changes in the future and the impact such changes might
have on the Bank are impossible to determine. Similarly, proposals to change
the accounting treatment applicable to savings banks and other depository
institutions are frequently raised by the SEC, the FDIC, the IRS and other
appropriate authorities, including, among others, proposals relating to fair
market value accounting for certain classes of assets and liabilities. The
likelihood and impact of any additional future accounting rule changes and the
impact such changes might have on the Bank are impossible to determine.
FEDERAL HOME LOAN BANK SYSTEM. The Bank is a member of the FHLB of Dallas,
which is one of 12 regional FHLBs that administer the home financing credit
function of savings institutions and commercial banks. Each FHLB serves as a
source of liquidity for its members within its assigned region. It is funded
primarily from proceeds derived from the sale of consolidated obligations of the
FHLB System. It makes loans to members (i.e., advances) in accordance with
policies and procedures established by its Board of Directors. As of December
31, 2000, the Bank's advances from the FHLB of Dallas amounted to $1.2 billion
or 37.2% of its total assets.
As a member, the Bank is required to purchase and maintain stock in the
FHLB of Dallas in an amount equal to the greater of 1% of its aggregate unpaid
residential mortgage loans, home purchase contracts or similar obligations at
the beginning of each year or 5% of total advances. At December 31, 2000, the
Bank had $58.0 million in FHLB stock, which was in compliance with this
requirement.
The FHLBs are required to provide funds for the resolution of troubled
savings associations and to contribute to affordable housing programs through
direct loans or interest subsidies on advances targeted for community investment
and low- and moderate-income housing projects. These contributions have
adversely affected the level of FHLB dividends paid and could continue to do so
in the future. These contributions also could have an adverse effect on the
value of FHLB stock in the future. For the year ended December 31, 2000,
dividends paid by the FHLB of Dallas to the Bank totaled $4.6 million. Such
dividends included a $1.1 million special dividend declared by the FHLB equal to
1.625% of each members' FHLB stock held as of March 31, 2000.
FEDERAL RESERVE SYSTEM. The Federal Reserve Board requires all depository
institutions to maintain reserves against their transaction accounts (primarily
checking accounts) and non-personal time deposits. At December 31, 2000, the
Bank was in compliance with such requirements.
The balances maintained to meet the reserve requirements imposed by the
Federal Reserve Board may be used to satisfy applicable liquidity requirements.
Because required reserves must be maintained in the form of vault cash or a
noninterest-bearing account at a Federal Reserve Bank, the effect of this
reserve requirement is to reduce a bank's earning assets. The amount of funds
necessary to satisfy this requirement has not had a material affect on the
Bank's operations.
TEXAS SAVINGS BANK LAW. As a Texas chartered savings bank, the Bank is
subject to regulation and supervision by the Department under the TSBA. The
TSBA contains provisions governing the incorporation and organization, location
of offices, rights and responsibilities of directors and officers as well as the
corporate powers, savings, lending, capital and investment requirements and
other aspects of the Bank and its affairs. In addition, the Department is given
extensive rulemaking power and administrative discretion under the TSBA,
including authority to enact and enforce rules and regulations.
The Bank is required under the TSBA to comply with certain capital
requirements established by the Department. The TSBA also restricts the amount
the Bank can lend to one borrower to that permitted to national banks, which is
generally not more than 15% of the Bank's unimpaired capital and unimpaired
surplus and, if such loans are fully secured by readily marketable collateral,
an additional 10% of unimpaired capital and unimpaired surplus. The Department
generally examines the Bank once every year and the current practice is for the
Department to conduct a joint examination with the FDIC. The Department
monitors the extraordinary activities of the Bank by requiring that the Bank
seek the Department's approval for certain transactions such as the
establishment of additional offices, a reorganization, merger or purchase and
assumption transaction, changes of control, or the issuance of capital
obligations. The Department may intervene in the affairs of a savings bank if
the savings bank, or its director, officer or agent has: engaged in an unsafe
and unsound practice, violated the savings bank's articles of incorporation,
violated a statute or regulation, filed materially false or misleading
information, committed a criminal act or a breach of fiduciary duty, or if the
savings bank is, or is in imminent danger of becoming, insolvent.
TAXATION
FEDERAL TAXATION. The Company and its subsidiaries, which includes the
Bank, file a consolidated Federal income tax return on a calendar year basis
using the accrual method. Savings banks are subject to provisions of the Code
in the same general manner as other corporations. However, prior to 1996,
institutions such as the Bank which met certain definitional tests and other
conditions prescribed by the Code, benefited from certain favorable provisions
regarding their deductions from taxable income for annual additions to their bad
debt reserve. In years prior to 1996, the Bank was permitted under the Code to
deduct an annual addition to the reserve for bad debts in determining taxable
income based on the experience method or the percentage of taxable income
method. Due to 1996 legislation, the Bank no longer is able to utilize a
reserve method for determining the bad debt deduction, but is allowed to deduct
actual net charge-offs. Further, the Bank's post-1987 tax bad debt reserve is
being recaptured into income over a six year period. At December 31, 2000, the
Bank had approximately $1.9 million of post-1987 tax bad debt reserves, for
which deferred taxes have been provided.
The Bank is not required to provide deferred taxes on its pre-1988 (base
year) tax bad debt reserve of approximately $900,000. This reserve may be
included in taxable income in future years if the Bank makes distributions to
stockholders (including distributions in redemption, dissolution or liquidation)
that are considered to result in withdrawals from that excess bad debt reserve,
then the amounts considered withdrawn will be included in the savings bank's
taxable income. The amount that would be deemed withdrawn from such reserves
upon such distribution and which would be subject to taxation at the savings
bank level at the normal corporate tax rate would be an amount that, after taxes
on such amount, would equal the amount actually distributed plus the amount
necessary to pay the tax with respect to the withdrawal. Dividends paid out of
a savings bank's current or accumulated earnings and profits as calculated for
Federal income tax purposes, however, will not be considered to result in
withdrawals from its bad debt reserves to the extent of such earnings and
profits, but shall be regarded as taken from such reserves only upon exhaustion
of the earnings and profits accounts; however, distributions in redemption of
stock, and distributions in partial or complete liquidation of a savings bank
will be considered to come first from its loss reserve. The Bank has not
conducted a study to determine with certainty the amount of its accumulated
earnings and profits for Federal income tax purposes.
In addition to regular income taxes, corporations are subject to an
alternative minimum tax which is generally equal to 20% of alternative minimum
taxable income (taxable income, increased by tax preference items and adjusted
for certain regular tax items). Payment of alternative minimum tax gives rise
to alternative minimum tax credit carryovers which may be carried forward
indefinitely. These credits may be used to offset future regular tax liability
to the extent the regular tax liability exceeds future alternative minimum tax.
In connection with the Southwest Plan Acquisition, the FSLIC Resolution
Fund ("FRF") retained all of the future federal income tax benefits (as defined)
derived from the federal income tax treatment of certain items, in addition to
net operating loss carryforwards, related to the Southwest Plan Acquisition for
which the Bank agreed to pay the FRF when actually realized. The provisions for
federal income taxes recorded for the years ended December 31, 2000, 1999 and
1998, represent the gross tax liability computed under these tax sharing
provisions before reduction for actual federal taxes paid to the Internal
Revenue Service. Alternative minimum taxes paid with the federal return in
2000, 1999 and 1998 are available as credit carryforwards to reduce regular
federal tax liabilities in future years, over an indefinite period and were
partially utilized in 2000. To the extent these credits were generated due to
the utilization of other tax benefits retained by the FRF, they will also be
treated as tax benefit items. Although the termination of the assistance
agreement related to the Southwest Plan Acquisition was effective March 31,
1994, the FRF will continue to receive the related future net tax benefits as
defined.
The Company's Federal income tax returns have not yet been audited by the
United States Internal Revenue Service. Generally, the tax returns of the
Company since 1997 are subject to review by the Internal Revenue Service.
STATE TAXATION
The Company, the Bank, CBCC, Financial Corp and CBIA each pay an annual
franchise tax equal to the greater of $2.50 per $1,000 of taxable capital
apportioned to Texas, or $4.50 per $100 of net taxable earned surplus
apportioned to Texas. Taxable earned surplus is the applicable entities' Federal
taxable income with certain modifications, such as the exclusion of interest
earned on Federal obligations.
ITEM 2. PROPERTIES
----------
The Company's business is conducted from 50 offices in Texas. The
following table sets forth the location of the offices of the Company, as well
as certain additional information relating to these offices as of December 31,
2000.
Net Book
Value of
Owned/Leased Property
(with Lease or Percent of
Expiration Leasehold Total
Location Date) Improvements Deposits Deposits
- --------------------------------- ------------------- ----------------------- --------- -----------
(Dollars in thousands)
BRANCH OFFICES:
- ---------------------------------
1329 North Virginia
Port Lavaca, Texas 77979 Owned $ 135 $ 24,695 1.47%
- ---------------------------------
3207 Westpark Drive
Houston, Texas 77005 Owned 2,412 31,159 1.86
- ---------------------------------
8 Braeswood Square Leased;
Houston, Texas 77096 December 31, 2006 330 66,021 3.94
- ---------------------------------
408 Walnut
Columbus, Texas 78934 Owned 201 52,677 3.14
- ---------------------------------
870 S. Mason, #100 Leased;
Katy, Texas 77450 August 31, 2003 17 27,965 1.67
- ---------------------------------
602 Lyons
Schulenburg, Texas 78956 Owned 72 29,237 1.75
- ---------------------------------
325 Meyer Street
Sealy, Texas 77474 Owned 480 44,141 2.64
- ---------------------------------
116 E. Post Office
Weimar, Texas 78962 Owned 38 24,758 1.48
- ---------------------------------
323 Boling Road
Wharton, Texas 77488 Owned 105 41,565 2.48
- ---------------------------------
1621 Pine Drive Leased;
Dickinson, Texas 77539 September 30, 2000 -- 38,545 2.30
- ---------------------------------
300 S. Cage
Pharr, Texas 78577 Owned 169 14,385 0.86
- ---------------------------------
295 West Highway 77
San Benito, Texas 78586 Owned 237 19,157 1.14
- ---------------------------------
1260 Blalock, Suite 100 Leased;
Houston, Texas 77055 January 20, 2004 -- 55,293 3.30
- ---------------------------------
14011 Park Drive, Suite 115 Leased;
Tomball, Texas 77375 March 14, 2004 7 25,492 1.52
- ---------------------------------
915-H North Shepherd Leased;
Houston, Texas 77008 October 31, 2001 40 37,407 2.23
- ---------------------------------
16000 Stuebner Airline Road, Suite 100 Leased;
Spring, Texas 77379 September 30, 2005 9 30,213 1.80
- ---------------------------------
7602 N. Navarro
Victoria, Texas 77904 Owned 618 69,212 4.13
- ---------------------------------
1410 Ed Carey
Harlingen, Texas 78550 Owned 1,438 11,694 0.70
- ---------------------------------
4900 N. 10th St., G-1 Leased;
McAllen, Texas 78504 August 14, 2001 30 16,026 0.96
- ---------------------------------
10838 Leopard Street, Suite A Leased;
Corpus Christi, Texas 78410 December 31, 2002 7 34,463 2.06
- ---------------------------------
(continued)
(continued from previous page)
Net Book
Value of
Owned/Leased Property
(with Lease or Percent of
Expiration Leasehold Total
Location Date) Improvements Deposits Deposits
- ---------------------------------- ------------------ ----------------------- --------- -----------
(Dollars in thousands)
- ---------------------------------
4060 Weber Road Leased;
Corpus Christi, Texas 78411 April 30, 2004 $ 1 $ 50,675 3.03%
- ----------------------------------
301 E. Main Street
Brenham, Texas 77833 Owned 132 62,904 3.76
- ---------------------------------
1192 W. Dallas Leased;
Conroe, Texas 77301 December 31, 2003 -- 37,292 2.23
- ----------------------------------
2353 Town Center Dr. Owned
Sugar Land, Texas 77478 1,050 29,874 1.78
- ---------------------------------
1629 S. Voss Owned
Houston, Texas 77057 1,407 24,142 1.44
- ---------------------------------
531-A Highway 1431 Leased;
Kingsland, Texas 78639 December 31, 2003 -- 18,945 1.13
- ---------------------------------
204 Westmoreland Owned
Mason, Texas 76856 57 20,485 1.22
- ---------------------------------
904 Highway 281 North
Marble Falls, Texas 78654 Owned 160 10,465 0.62
- ---------------------------------
101 East Polk
Burnet, Texas 78611 Owned 93 20,960 1.25
- ---------------------------------
907 Ford
Llano, Texas 78643 Owned 164 17,853 1.07
- ---------------------------------
708 East Austin
Giddings, Texas 78942 Owned 273 28,299 1.69
- ---------------------------------
5718 Westheimer, Suite 100 Leased;
Houston, Texas 77057 July 31, 2012 65 66,893 3.99
- ---------------------------------
8080 Parkwood Circle Drive Owned
Houston, Texas 77036 249 10,070 0.60
- ---------------------------------
1250 Pin Oak Road
Katy, Texas 77494 Owned 1,183 16,012 0.96
- ---------------------------------
2120 Thompson Highway
Richmond, Texas 77469 Owned 482 58,999 3.52
- ---------------------------------
7200 North Mopac Leased;
Austin, Texas 78731 December 31, 2002 8 51,362 3.07
- ---------------------------------
1112 Seventh Street Leased;
Bay City, Texas 77414 April 30, 2002 -- 60,257 3.60
- ---------------------------------
441 Austin Avenue
Port Arthur, Texas 77640 Owned 494 33,444 2.00
- ---------------------------------
1114 Lost Creek Blvd., Suite 100 Leased;
Austin, Texas 78746 December 31, 2003 19 6,024 0.36
- ---------------------------------
3302 Boca Chica Leased;
Brownsville, Texas 78521 December 31, 2004 -- 10,046 0.60
- ---------------------------------
744 S. East Elizabeth Leased;
Brownsville, Texas 78520 March 31, 2003 156 18,644 1.11
- ---------------------------------
1603 Price Road Owned
Brownsville, Texas 78521 277 17,732 1.06
- ---------------------------------
700 Padre Blvd., Suite A Leased;
South Padre Island, Texas 78597 May 31, 2002 -- 7,147 0.43
- ---------------------------------
2000 N. Conway
Mission, Texas 78572 Owned 1,106 21,049 1.26
- ---------------------------------
(continued)
(continued from previous page)
Net Book
Value of
Owned/Leased Property
(with Lease or Percent of
Expiration Leasehold Total
Location Date) Improvements Deposits Deposits
- --------------------------------- ------------------- ----------------------- ---------- -----------
(Dollars in thousands)
- ---------------------------------
509 South Main Leased;
McAllen, Texas 78501 December 22, 2002 $ 4 $ 38,736 2.31%
- ---------------------------------
198 South Sam Houston
San Benito, Texas 78586 Owned 1,017 74,859 4.47
- ---------------------------------
502 S. Dixieland Road
Harlingen, Texas 78552 Owned 318 16,304 0.97
- ---------------------------------
200 Sugar Road
Edinburg, Texas 78539 Owned 152 7,554 0.45
- ---------------------------------
300 S. Closner
Edinburg, Texas 78539 Owned 790 35,581 2.12
- ---------------------------------
221 East Van Buren
Harlingen, Texas 78550 Owned 3,591 77,530 4.63
- ---------------------------------
Corner of Highway 36 and Walenta Owned -
Rosenberg, Texas Under Construction 380 -- --
- ---------------------------------
1075 Paredes Line Road Owned -
Brownsville, Texas 78521 Under Construction 531 -- --
ADMINISTRATIVE OFFICE(1)
- ---------------------------------
Coastal Banc Plaza
5718 Westheimer, Suite 600 Leased;
Houston, Texas 77057 July 31, 2012 2,539 30,739 1.84
- ---------------------------------
STORAGE SITE:
- ---------------------------------
227 Meyer St.
Sealy, Texas 77474 Owned 58 -- --
------------- ---------- -----------
Total $ 23,101 $1,674,981 100.00%
============== ========== ===========
______________________
(1)Includes location of administrative, primary lending and mortgage servicing
offices.
The net book value of the Company's investment in premises and equipment totaled
$28.1 million at December 31, 2000. At December 31, 2000, the net book value of
the Company's electronic data processing equipment, which includes its in-house
computer system, local area network and twenty-eight automatic teller machines,
was $1.8 million.
ITEM 3. LEGAL PROCEEDINGS
------------------
In January 2000, the Company, through its subsidiary, the Bank, filed a
lawsuit against the lead lender on a $25.0 million loan in which the Bank
purchased a 40% participation interest. Such lawsuit is described more fully in
the Company's Current Report on Form 8-K (No. 000-24526) filed with the SEC on
January 12, 2000, which is incorporated herein by reference. The lawsuit is
currently scheduled for trial in late June of 2001, or as soon thereafter as the
court's docket will permit.
In addition to the above, the Company is involved from time to time in
routine legal proceedings occurring in the ordinary course of business which, in
the aggregate, are believed by management to be immaterial to the financial
condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
-----------------------------------------------------------
Not applicable.
PART II
- --------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
-------------------------------------------------------------------
MATTERS
--------
The information required herein is incorporated by reference from page 54
of the Company's printed Annual Report to Stockholders for fiscal 2000 ("Annual
Report"), which is included herein as Exhibit 13.
ITEM 6. SELECTED FINANCIAL DATA
-------------------------
The information required herein is incorporated by reference from pages 6
through 8 of the Annual Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
-------------------------------------------------------------------
RESULTS OF OPERATIONS
-------------------
The information required herein is incorporated by reference on pages 9
through 23 of the Annual Report.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------------
The information required herein is incorporated by reference from pages 17
through 22 of the Annual Report. The Company's principal market risk exposure
is to interest rates.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-----------------------------------------------
The financial statements and supplementary data required herein are
incorporated by reference from pages 25 through 53 of the Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
-------------------------------------------------------------------
FINANCIAL DISCLOSURE
-----------------
Not applicable.
PART III
- ---------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------------
The information required herein is incorporated by reference from the
definitive Proxy Statement filed with the SEC. Otherwise, the requirements of
this Item 10 are not applicable.
ITEM 11. EXECUTIVE COMPENSATION
-----------------------
The information required herein is incorporated by reference from the
definitive Proxy Statement filed with the SEC.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
------------------------------------------------------------------
The information required herein is incorporated by reference from the
definitive Proxy Statement filed with the SEC.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
--------------------------------------------------
The information required herein is incorporated by reference from the
definitive Proxy Statement filed with the SEC.
PART IV
- --------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
------------------------------------------------------------------
(a)(1) The following financial statements are incorporated herein by
reference from pages 23 through 53 of the Annual Report.
Report of Independent Certified Public Accountants.
Consolidated Statements of Financial Condition as of December 31,
2000 and 1999.
Consolidated Statements of Operations for each of the years
in the three-year period ended December 31, 2000.
Consolidated Statements of Comprehensive Income for each of the
years in the three-year period ended December 31, 2000.
Consolidated Statements of Stockholders' Equity for each of the
years in the three-year period ended December 31, 2000.
Consolidated Statements of Cash Flows for each of the years
in the three-year period ended December 31, 2000.
Notes to Consolidated Financial Statements.
(a)(2) There are no financial statement schedules filed herewith.
(a)(3) The following exhibits are filed as part of this report.
Exhibit No.
- ------------
3.1 Articles of Incorporation of the Company (Incorporated by reference
to the Company's Registration Statement on Form S-4 (No. 33-
75952) filed on March 2, 1994).
3.2 Bylaws of Company (Incorporated by reference to the Company's
Registration Statement on Form S-4 (No. 33-75952) filed on
March 2, 1994).
4 Form of Company common stock certificate (Incorporated by reference
to the Company's Registration Statement on Form S-4 (No. 33-
75952) filed on March 2, 1994).
4.1 Form of Indenture dated as of June 30, 1995, with respect to the
Company's 10% Notes, due 2002 (Incorporated by reference to
the Company's Registration Statement on Amendment No. 6 to Form
S-1 (No. 33-91206) filed on June 16, 1995).
4.2 Certificate of Designations, 9.12% Series A Cumulative Preferred
Stock (Incorporated by reference to the Company's Registration
Statement on Form S-3 (No. 333-75983) filed on April 9, 1999).
10.1 1991 Stock Compensation Program (Incorporated by reference to the
Company's Registration Statement on Form S-4 (No. 33-75952) filed
on March 2, 1994).
10.2 1995 Stock Compensation Program (Incorporated by reference to the
Company's Registration Statement Form S-1 (No. 33-91206) filed
on April 14, 1995).
10.3 1999 Stock Compensation Program (Incorporated by reference to the
Company's Registration Statement on Form S-8 (No. 333-80877) filed
on June 17, 1999).
10.4 Change-In-Control Severance Agreements (Incorporated by reference
to the Company's 1998 Annual Report on Form 10-K (No. 000-24526)
filed on March 23, 1999).
10.5 Form of Amendment No. 1 to Change-In-Control Severance Agreements
(Incorporated by reference to the Company's 1999 Annual Report on
Form 10-K (No. 000-24526) filed on March 28, 2000).
10.6 Change-In-Control Severance Agreement
12 Ratio of earnings to combined fixed charges and preferred stock
dividends (See Exhibit 13)
13 Annual Report to Stockholders
28 Form of proxy mailed to stockholders of the Company
99 Forward-Looking Information
__________________
(b) The Company filed no reports on Form 8-K during the last
quarter of fiscal 2000.
(c) See (a)(3) above for all exhibits filed herewith and Exhibit
Index.
(d) All schedules are omitted as the required information is not
applicable or the information is presented in the
consolidated financial statements or related notes.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
COASTAL BANCORP, INC.
Date: March 27, 2001 By: /s/ Manuel J. Mehos
----------------------
Manuel J. Mehos,
Chairman of the Board and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report is signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
/s/ Manuel J. Mehos Date: March 27, 2001
- ----------------------
Manuel J. Mehos, Chairman of the
Board and Chief Executive Officer
/s/ R. Edwin Allday Date: March 27, 2001
- ----------------------
R. Edwin Allday, Director
/s/ D. Fort Flowers, Jr. Date: March 27, 2001
- -------------------------
D. Fort Flowers, Jr., Director
/s/ Dennis S. Frank Date: March 27, 2001
- ----------------------
Dennis S. Frank, Director
/s/ Paul W. Hobby Date: March 27, 2001
- --------------------
Paul W. Hobby, Director
/s/ Robert E. Johnson, Jr. Date: March 27, 2001
- -----------------------------
Robert E. Johnson, Jr., Director
/s/ James C. Niver Date: March 27, 2001
- ---------------------
James C. Niver, Director
/s/ Catherine N. Wylie Date: March 27, 2001
- -------------------------
Catherine N. Wylie, Chief Financial
Officer (principal financial and
accounting officer)