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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, 2002
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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. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). [ X ]
As of March 12, 2003, the aggregate market value of the 5,146,878 shares of
Common Stock of the Registrant issued and outstanding on such date, excluding
777,034 shares held by all directors and executive officers of the Registrant as
a group, was $127,774,239. This figure is based on the closing sale price of
$29.24 per share of the Registrant's Common Stock on March 12, 2003, as reported
in The Wall Street Journal on March 13, 2003.
Number of shares of Common Stock outstanding as of March 12, 2003: 5,146,878
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated by reference into the noted Parts of
this Form 10-K:
(1) Portions of the Registrant's Annual Report to Stockholders for the
fiscal year ended December 31, 2002, are incorporated into Part II, Items 5-8 of
this Form 10-K.
(2) Portions of the Registrant's definitive proxy statement for its 2003
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. For a more detailed discussion of these risk factors, see
Exhibit 99.3. 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
originally formed to trade packages of whole loan assets, primarily for the Bank
and for other institutional investors and did so until September 2002.
Beginning in 2002, a corporate finance group was formed within CBCC to act as an
intermediary in raising capital for business customers and to provide merger and
acquisition advisory services to buyers and sellers of small to mid-sized
companies. In 2003, management of the Company made the decision to discontinue
the operations of CBCC effective March 31, 2003 due to the current economic
climate. In July 2002, the Company formed Coastal Banc Mortgage Corp. ("CBMC")
as a wholly-owned subsidiary of HoCo. CBMC was formed to continue the function
of trading whole loan assets for the Bank and for other institutional investors
that had been previously performed by CBCC.
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.
On June 18, 2002, Coastal Bancorp, Inc. ("Bancorp"), through Coastal
Capital Trust I (a consolidated trust subsidiary) (the "Trust"), issued
2,000,000 trust preferred securities ("Trust Preferred Securities") with a
liquidation preference of $25 per security. The Trust Preferred Securities
represent an interest in Bancorp's junior subordinated debentures, which were
purchased by the Trust. The junior subordinated debentures are the only assets
of the Trust and interest payments from the debentures finance the distributions
paid on the Trust Preferred Securities. Distributions on the securities are
payable quarterly at the annual rate of 9.0% and are included in interest
expense in the consolidated statements of income. The Trust Preferred
Securities are subject to mandatory redemption at the liquidation preference, in
whole or in part, upon repayment of the junior subordinated debentures at
maturity or their earlier redemption. The junior subordinated debentures are
redeemable prior to the maturity date of June 30, 2032, at the option of Bancorp
on or after June 30, 2007, in whole at any time or in part from time to time.
The junior subordinated debentures are also redeemable at any time, in whole,
but not in part, upon the occurrence of specific events defined with the trust
indenture. Bancorp has the option to defer distributions on the junior
subordinated debentures from time to time for a period not to exceed 20
consecutive quarters.
A portion of the proceeds from the issuance of the Trust Preferred
Securities were used to repurchase 500,000 shares of common stock for $15.0
million from a director of the Company in June 2002. In addition, $28.8 million
of the proceeds were used on July 15, 2002, to redeem the Bank's 9.0% Series A
Noncumulative Preferred Stock (Nasdaq:CBSAP) through a capital contribution.
On August 27, 1998, December 21, 1998, February 25, 1999, April 27, 2000,
July 27, 2000 and April 25, 2002, the Board of Directors authorized six separate
repurchase plans for up to 500,000 shares each of the outstanding shares of
common stock of the Company through an open market repurchase program and
privately negotiated repurchases, if any. As of December 31, 2002, a total of
2,729,575 shares had been repurchased under all of the authorized repurchase
plans. The Company will continue its practice of taking the opportunity to
repurchase common stock with excess capital during times of share price
weakness.
At December 31, 2002, the Company had total consolidated assets of $2.5
billion, total deposits of $1.6 billion, 9.12% Series A Cumulative Preferred
Stock of $27.5 million and common stockholders' equity of $125.4 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 Bank is subject to examination and regulation by the Federal
Deposit Insurance Corporation ("FDIC") and by the Board of Governors of the
Federal Reserve System (the "Federal Reserve Board"). The Bank 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." 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. 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.)
COASTAL BANC SSB
The Bank is a Texas-chartered, Federally insured state savings bank. It is
headquartered in Houston, Texas and operates through 43 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, 2002, the Bank had total assets of $2.5 billion, total deposits
of $1.6 billion and stockholders' equity of $199.7 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.
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 three disposition
transactions) and one whole bank acquisition. All of these transactions
resulted in the net assumption of $1.8 billion of primarily retail deposits and
58 branch offices (23 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
("COFI") upon which these assets and liabilities reprice. Generally this
matching is achieved through management of the composition of the Bank's assets
and liabilities. The Bank may also use interest rate swap and cap agreements to
aid in minimizing exposure to interest rate and price fluctuations. In November
2001, to strategically restructure a portion of its asset base to make it less
vulnerable to market interest rate and price fluctuations, the Company completed
the sale of approximately $845 million of its mortgage-backed securities. The
majority of the securities sold were Collateralized Mortgage Obligations
("CMOs") tied to COFI and contained extension risk which caused, on average,
high levels of price volatility. Also in November, the Company used a portion
of the proceeds of the sale to purchase approximately $512 million of primarily
pass thru mortgage-backed securities with an overall shorter expected duration.
Coastal reduced borrowings with the remainder of the proceeds from the sale.
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) taking a cautious approach to its direct lending operations,
including the development of commercial business lending, and (ii) holding a
substantial portion of its assets in primarily adjustable rate first lien
(single family) residential mortgage loans and mortgage-backed securities. At
December 31, 2002, the Company's total loans receivable portfolio (excluding
loans held for sale) amounted to $1.8 billion or 71.8% of total assets, $855.6
million, or 47.2%, of which were comprised of first lien single family
residential mortgage loans. At December 31, 2002, of the Company's $2.5 billion
in total assets, $475.0 million or 18.8% of total assets consisted of
mortgage-backed securities.
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 economically administer and deliver its products and services.
The Company's ratio of noninterest expense to average total assets on a
consolidated basis was 2.19% for the year ended December 31, 2002.
LENDING ACTIVITIES
GENERAL. Coastal is continuing to expand and diversify its loan portfolio
in a manner consistent with the operating principles discussed above by
emphasizing the origination or purchase for retention in its portfolio of 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.
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.
In doing so, the Bank continues to take 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 with $103.3
million in loans including 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")
is able to incorporate more comprehensive credit information than previously
reviewed by the Bank by applying Internet and network computer technology to
take a loan from application to closing in less time than before. The PCC
staff, 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,
2002 2001 2000 1999 1998
--------------- ----------- ----------- ----------- -----------
(In thousands)
Real estate mortgage loans:
First lien residential $855,633 $880,624 $908,841 $836,005 $690,510
Multifamily 116,020 124,616 224,361 163,059 119,447
Residential construction 123,085 136,035 157,950 136,675 115,714
Acquisition and development 143,463 140,009 133,005 103,357 75,932
Commercial 317,692 319,377 347,921 314,292 257,723
Commercial and multifamily
construction 241,128 222,026 90,256 65,934 40,344
Commercial secured by residential
mortgage loans held for sale
("Warehouse") -- 11,508 8,518 60,372 173,124
Commercial secured by mortgage
servicing rights ("MSR") -- -- -- -- 3,867
Commercial, financial and industrial 135,209 116,029 120,420 100,195 92,218
Loans secured by deposits 14,465 21,238 13,681 13,094 13,164
Consumer and other 33,430 43,384 56,522 63,383 66,989
------------- ----------- ----------- ----------- -----------
Total loans 1,980,125 2,014,846 2,061,475 1,856,366 1,649,032
------------- ----------- ----------- ----------- -----------
Loans in process (147,769) (131,064) (142,451) (108,561) (99,790)
Allowance for loan losses (18,118) (15,385) (14,507) (10,493) (11,358)
Unearned interest and loan fees (2,910) (2,959) (3,864) (2,947) (3,493)
Net premium (discount) on
purchased loans 1,457 (1,837) (4,425) 716 3,758
------------- ----------- ----------- ----------- ----------
Total loans receivable, net $1,812,785 $1,863,601 $1,896,228 $1,735,081 $1,538,149
============= =========== =========== =========== ===========
SCHEDULED MATURITIES. The following table sets forth certain
information at December 31, 2002 regarding the principal amount of loans
maturing in the Company's loans receivable portfolio (excluding loans held for
sale) 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, 2002
More than More than More than More than Over
One year one year to three years five years ten years to twenty
or less three years to five years to ten years twenty years years Total
--------- ------------ --------------- ------------ ------------- -------- ----------
(In thousands)
First lien residential mortgage $ 6,116 $ 13,045 $ 20,662 $ 64,229 $ 477,754 $273,010 $ 854,816
Multifamily mortgage 75,685 35,044 2,869 117 1,683 -- 115,398
Residential construction 72,369 2,624 219 367 -- -- 75,579
Real estate acquisition
and development 33,092 51,582 3,417 297 -- -- 88,388
Commercial real estate 102,259 89,940 52,220 28,751 39,534 -- 312,704
Commercial and multifamily
construction 43,377 107,966 16,200 4,749 14,308 -- 186,600
Commercial, other 66,512 48,143 12,245 9,394 161 -- 136,455
Consumer and other 10,151 11,025 8,630 6,030 6,935 74 42,845
--------- ------------ --------------- ------------ ------------- -------- ----------
Total loans $ 409,561 $ 359,369 $ 116,462 $ 113,934 $ 540,375 $273,084 $1,812,785
========= ============ =============== ============ ============= ======== ==========
The average life 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, 2002 by category and which have fixed or adjustable interest rates.
Interest Rate
------------------------------
Fixed Adjustable Total
--------------- ------------ ----------
(In thousands)
First lien residential mortgage $ 189,117 $ 659,583 $ 848,700
Multifamily mortgage 3,056 36,657 39,713
Residential construction 535 2,675 3,210
Real estate acquisition and development 317 54,979 55,296
Commercial real estate 44,310 166,135 210,445
Commercial and multifamily construction 2,713 140,510 143,223
Commercial, other 21,525 48,418 69,943
Consumer and other 32,275 419 32,694
--------------- ------------ ----------
Total $ 293,848 $ 1,109,376 $1,403,224
=============== ============ ==========
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 loans held for sale or of
mortgage loans serviced for third party investors during the periods presented.
See "Mortgage Loan Servicing."
Year Ended December 31,
2002 2001 2000
--------------- ----------- -----------
(In thousands)
Loan Originations:
First lien residential mortgage $ 22,185 $ 49,452 $ 40,957
Home equity 14,691 8,799 6,406
Residential construction and acquisition
and development 245,658 281,253 302,839
Warehouse 65,409 159,595 359,270
Multifamily mortgage 7,319 47,779 86,404
Commercial real estate 99,208 151,016 130,581
Commercial and multifamily construction 118,100 70,891 39,724
Commercial, financial and industrial 246,359 141,600 138,959
Consumer and other 38,569 44,641 46,057
--------------- ----------- -----------
Total loan originations 857,498 955,026 1,151,197
Purchase of residential mortgage loans 421,371 250,945 236,362
Purchase of residential construction loans -- -- 608
--------------- ----------- -----------
Total loan originations and purchases 1,278,869 1,205,971 1,388,167
--------------- ----------- -----------
Sale of residential mortgage loans 84,241 -- --
Loans reclassified to held for sale category, net 8,749 -- --
Foreclosures 6,260 5,450 3,672
Principal repayments and reductions to
principal balance 1,223,520 1,232,944 1,217,229
--------------- ----------- -----------
Total foreclosures, repayments and
reductions to principal balance 1,322,770 1,238,394 1,220,901
--------------- ----------- -----------
Amortization of premiums, discounts and fees on
loans (1,115) 3,696 (329)
Provision for loan losses (5,800) (3,900) (5,790)
--------------- ----------- -----------
Net increase (decrease) in loans receivable $ (50,816) $ (32,627) $ 161,147
=============== =========== ===========
FIRST LIEN RESIDENTIAL MORTGAGE LOAN PURCHASES, SALES AND ORIGINATIONS.
The Bank primarily purchases, and also originates, loans secured by first lien
mortgages on completed single family residences for its own portfolio. The
majority of the Bank's residential mortgage loan portfolio has been acquired
through bulk purchases in the traditional secondary market and is secured by
real estate located throughout the United States. During 2002, 2001 and 2000,
the Bank purchased $421.4 million, $250.9 million and $236.4 million of such
loans, respectively. The Bank also originates these types of loans primarily in
the geographic areas surrounding the Bank's branch locations. During 2002, 2001
and 2000, the Bank originated residential mortgage loans for portfolio totaling
$22.2 million, $49.5 million and $41.0 million, respectively.
From time to time, the Bank also sells residential mortgage loans. During
2002, the Bank's management made the decision to liquidate a portion of its
mortgage loan portfolio through sales to third party investors. The first sale
was in March 2002 when the Bank sold $10.8 million of under-performing mortgage
loans. Prior to the sale, the Bank wrote those loans down to fair value and
recorded a charge-off to the allowance for loan losses of $761,000. In
addition, as of March 31, 2002, the Bank wrote down to fair value and
reclassified $9.1 million of other under-performing single-family mortgage loans
to the held for sale category. The loans that were reclassified to the held for
sale category were written down to fair value as of March 31, 2002 through a
charge-off to the allowance for loan losses of $691,000. During the second
quarter of 2002, a total of $3.1 million of these under-performing loans held
for sale were sold to the same third party investor. As of December 31, 2002,
the Bank had reclassified the remaining $3.0 million of these loans held for
sale back to the loans receivable portfolio.
The second sale was in the fourth quarter of 2002 when the Bank entered
into an agreement with a third party to sell approximately $77.0 million of
single-family mortgage loans. As of December 31, 2002, $74.4 million of these
loans had been sold, $70.1 million of which were sold servicing retained and
$4.3 million (which were considered nonperforming loans) were sold servicing
released. The remaining $2.6 million, which are under a contract for sale, were
reclassified to the held for sale category at December 31, 2002. In connection
with this sale and the reclassification of the remaining loans to the held for
sale category, the loans were written down to fair value through a charge-off to
the allowance for loan losses of $309,000. In addition, the Company recorded a
gain of $359,000 on the sale of these loans receivable as a result of the Bank
recording the estimated fair value of the mortgage servicing rights retained.
See "Mortgage Loan Servicing."
The Bank 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, CBCC
and beginning in 2002, from CBMC). Bulk purchases allow the Bank to obtain
these residential mortgage loans without the direct cost of origination
activities. Personnel from the Bank generally analyze loan bid packages, as
they become available from CBMC, CBCC (through September 2002) and from third
parties, and the members of the PCC, along with the Bank's Chief Executive
Officer, 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 packages that meet the Bank's purchase criteria.
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 $322,700, 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.
While the Bank has the general authority to originate and purchase loans
secured by real estate located anywhere in the United States, the largest
concentrations of its first lien residential mortgage and residential
construction loan portfolios are secured by real estate located in California
and 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 initially surveyed the members of the residential construction
industry in the Bank's Houston market area and targeted those companies. The
Bank now has expanded its residential construction lending into the Dallas,
Austin and Rio Grande Valley markets. 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 indexed to 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 generally must be made under the line for a specific loan
amount. Each loan commitment under a short-term line of credit is separately
verified to be in compliance with the terms previously approved with the line of
credit.
The terms of the Bank's construction loans are typically for one year 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, at 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, 2002, the Bank had $76.7 million in outstanding residential
construction loans (net of loans in process of $46.4 million) of which $49,000
were on nonaccrual status. At the present time, the Bank has approved builders
primarily domiciled in the Houston, Dallas, and Austin metropolitan areas, as
well as the Rio Grande Valley area, 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. Two of the Bank's approved builders are authorized for the
funding of loans on properties located outside the state of Texas. At December
31, 2002, there were loans totaling $9.6 million for these builders in the
states of Arizona, Florida, New Mexico 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 60%) 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 generally for a short to
medium term of between one to five years, and have floating rates indexed to
prime rate or LIBOR 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 of the collateral. At December 31, 2002, commercial
real estate loans totaling $317.7 million and multifamily mortgage loans of
$116.0 million were outstanding. At December 31, 2002, the Bank had commercial
real estate loans totaling approximately $1.3 million that were on nonaccrual
status and no multifamily mortgage loans that were on nonaccrual status.
The Bank began originating commercial real estate and multifamily
construction loans in 1996 primarily for the construction or renovation of
income generating facilities. 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 lending to proven developers/owners, requiring that
each builder maintain a specified amount of equity in the project, continually
monitoring the progress of the development through site inspections prior to
loan disbursement and by monitoring other financial strength requirements. At
December 31, 2002, commercial and multifamily construction loans totaling $191.5
million (net of loans in process of $49.6 million) were outstanding, none of
which were on nonaccrual status.
WAREHOUSE LENDING. Beginning in 1992 and through 2002, the Bank 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 were generally
renewable annually. Borrowers paid interest on funds drawn at a floating rate.
In addition, the Bank usually received a fee for each loan file processed under
these lines of credit, the Bank (or the lead lender in a participation) held the
original mortgage loan notes and other documentation as collateral until
repayment of the related lines of credit, except when a third party lender was
acting as the lead lender in the lending relationship.
Warehouse loans were underwritten in accordance with Bank policies and
procedures. Bank personnel attempted 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 was
acting as the lead bank, the Bank relied 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 related 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. Due to the uncertainty of the value of the remaining collateral, 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
1999. The Bank will continue to work with the bankruptcy trustee to recover any
funds, if possible, from the collateral or MCA. During the years ended December
31, 2002, 2001 and 2000, Coastal received $288,000, $267,000 and $180,000,
respectively, in proceeds from the MCA loan which was recorded as a recovery in
the allowance for loan losses in the period received.
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 of $990,000 on this Warehouse and servicing rights line of
credit was charged-off during 1999.
In 1999, the Bank began to decrease its emphasis on Warehouse lending and
as of December 31, 2002 had no warehouse borrowers or loans outstanding. During
the year ended December 31, 2002, the Bank originated $65.4 million of Warehouse
loans. At December 31, 2002, there were no Warehouse loans outstanding.
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, 2002 or 2001.
REAL ESTATE ACQUISITION AND DEVELOPMENT LENDING. The Bank originates loans
to residential real estate builders and developers as well as to major
homebuilders 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 residential lots to be sold to
third parties or used by the homebuilders. 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 or used by homebuilders. Land acquisition and development loans
involve additional risks when compared to loans on existing residential
properties, however, when lending directly to a major homebuilder the risk is
mitigated by the strength of the borrower. 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,
2002, the Bank had $91.7 million (net of loans in process of $51.8 million) of
real estate acquisition and development loans outstanding. At December 31,
2002, there were two real estate acquisition and development loans to one
borrower totaling $5.5 million on nonaccrual status.
COMMERCIAL BUSINESS LENDING. Development of a commercial business lending
program continues to be a strategic goal of Bank management. The commercial
bank acquisition in 1995 provided the Bank with an established commercial
business lending program directed to small and medium sized companies primarily
in the Houston and Austin metropolitan areas. Since that acquisition,
management has continued to develop the infrastructure for commercial business
lending in most of the Bank's major markets. In addition, 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
typically 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) which are indexed to
prime rate, LIBOR or are fixed 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 its
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, 2002, Commercial Business loans
outstanding totaled $135.2 million, with $1.6 million of such loans on
nonaccrual status.
CONSUMER AND OTHER 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, 2002, the Bank had $33.4
million in consumer and other loans outstanding, with $128,000 of such loans on
nonaccrual status, and $14.5 million in loans secured by deposits.
Consumer loans (other than 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. See "Regulation of the Bank - Community Reinvestment Act."
LOANS RECEIVABLE HELD FOR SALE. From time to time, the Bank has loans
classified as held for sale. These loans are generally single-family loans
purchased with the original intent to resell them or loans that have been
reclassified from the loans receivable portfolio to held for sale due to the
intent to sell. Loans receivable held for sale are carried at the lower of
cost or market value. At December 31, 2002, the Bank had $49.9 million in loans
receivable held for sale, $47.3 million of which was due to a loan package
purchased in November 2002 with the intent to sell the package to third party
investors by the end of January 2003. The remaining $2.6 million were loans
reclassified to the held for sale category and are under a contract for sale
which is expected to close during the first quarter of 2003.
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 determines an
appropriate course of action including 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, usually 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 well secured, in the process of
collection or renewal and the interest is fully collectible.
[THIS SPACE INTENTIONALLY LEFT BLANK]
The following table sets forth information regarding the Bank's
nonperforming assets as of the dates shown.
At December 31,
2002 2001 2000
-------- -------- --------
(Dollars in thousands)
Nonaccrual loans:
First lien residential mortgage $ 9,184 $21,744 $16,062
Multifamily real estate -- 82 --
Residential construction 49 218 390
Commercial real estate 1,323 1,174 1,134
Acquisition and development 5,485 6 --
Commercial, financial and industrial 1,609 499 1,152
Consumer and other 128 141 496
--------- -------- --------
Total nonaccrual loans 17,778 23,864 19,234
--------- -------- --------
Loans greater than 90 days delinquent
and still accruing interest:
First lien residential mortgage -- 62 475
Multifamily real estate 282 -- --
Residential construction 83 755 --
Commercial real estate 302 -- 736
Acquisition and development 59 -- --
Commercial, financial and industrial 43 31 634
Consumer and other -- 1 153
--------- -------- --------
Total loans greater than 90 days
delinquent and still accruing
interest 769 849 1,998
--------- -------- --------
Total nonperforming loans 18,547 24,713 21,232
--------- -------- --------
Total REO and repossessed assets 4,433 4,607 4,095
--------- -------- --------
Total nonperforming assets $22,980 $29,320 $25,327
========= ======== ========
Ratio of nonaccrual loans to total loans
receivable and loans held for sale 0.95% 1.28% 1.01%
========= ======= =======
Ratio of nonperforming loans to total
loans receivable and loans held for
sale 1.00% 1.33% 1.12%
========= ======= =======
Ratio of nonperforming
assets to total assets 0.91% 1.13% 0.82%
========= ======= =======
Nonperforming loans are those loans on nonaccrual status as well as those
loans greater than ninety (90) days delinquent and still accruing interest. At
December 31, 2002, the Bank's nonperforming loans decreased, when compared to
December 31, 2001, by $6.2 million or 25.0%, to $18.5 million. The decrease in
nonperforming loans is mainly due to the Bank's decision to liquidate a portion
of its single-family mortgage loan portfolio during 2002 through two loan sales.
As discussed previously, the first loan sale was in March 2002 when the Bank
sold $10.8 million of its under-performing loans (some of which were considered
nonperforming) to a third party investor. The second sale was in December 2002
when the Bank sold $4.3 million of nonperforming loans.
At December 31, 2002, nonperforming assets included REO with an aggregate
book value of $4.1 million and repossessed assets of $288,000. At such date, the
Bank's REO consisted of 49 single family residential properties totaling $2.4
million, 8 commercial properties totaling $1.6 million and 4 residential
construction properties totaling $145,000. The Bank actively markets the REO
properties held. The Bank has historically incurred minimal losses on the sale
of single family REO properties.
For the year ended December 31, 2002, approximately $745,000 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 2002 included
$632,000 in interest income for these same loans prior to the time they were
placed on nonaccrual status.
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, 2002, the
carrying value of impaired loans totaled approximately $8.5 million and the
related allowance for loan losses on those impaired loans totaled $2.4 million.
Of the impaired loans outstanding at December 31, 2002, eight loans with a total
balance of $551,000 did not have a specific portion of the allowance for loan
losses allocated to them at such date. The average balance of impaired loans
during the year ended December 31, 2002 was approximately $3.8 million. For the
year ended December 31, 2002, the Bank did not recognize interest income on
loans considered impaired.
The Bank had loaned $123.1 million at December 31, 2002, 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. Management analyzes the loan portfolio to
determine the adequacy of the allowance for loan losses in the appropriate
provision required to maintain an adequate allowance to absorb probable losses
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,
2002 2001 2000 1999 1998
------- -------- ------ -------- ------
(Dollars in thousands)
Balance at beginning of year $15,385 $14,507 $10,493 $ 11,358 $ 7,412
Charge-offs (3,878) (4,073) (2,174) (11,830) (1,693)
Recoveries 811 1,051 398 390 282
Provision for loan losses 5,800 3,900 5,790 10,575 3,100
Allowance of acquired entities(1) -- -- -- -- 2,257
------- ------- ------- -------- --------
Balance at end of year $18,118 $15,385 $14,507 $ 10,493 $11,358
======= ======= ======= ======== ========
Ratio of net charge-offs during the
period to average net loans
outstanding during the period 0.16% 0.16% 0.09% 0.69% 0.10%
====== ======= ======= ======== ========
________________________
(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,
---------------------------------------
2002 2001 2000 1999 1998
------ ------ ----- ------- ------
(In thousands)
First lien residential mortgage(1) $2,120 $ 648 $ 735 $ 331 $ 544
Residential construction 15 80 -- 26 --
Commercial real estate 118 339 55 10 24
Commercial, Warehouse and MSR -- -- -- 9,924 --
Commercial, financial and industrial 812 782 763 829 648
Consumer and other(2) 813 2,224 621 710 477
----- ------ ------ ------- ------
Total charge-offs $3,878 $4,073 $2,174 $11,830 $1,693
===== ====== ====== ======= ======
________________________
(1) In 2002, includes charge-offs totaling $1.8 million related to the Bank's
decision to liquidate a portion of the mortgage loan portfolio. See "First Lien
Residential Mortgage Loan Purchase, Sales and Originations."
(2) In 2001, includes the charge-off of an $818,000 commercial overdraft loan
($450,000 of which was subsequently recovered through insurance proceeds) and
$754,000 of charged-off purchased automobile loans, in addition to the
charge-offs of other consumer type loans.
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,
2002 2001 2000 1999 1998
------- ------- --------- --------- ---------
(In thousands)
First lien residential mortgage $ 1,774 $ 2,556 $ 2,408 $ 2,529 $ 3,238
Multifamily mortgage 298 330 608 442 383
Residential construction 369 411 622 384 343
Real estate acquisition and development 2,834 1,407 1,330 1,034 759
Commercial real estate 3,416 2,701 2,574 2,221 2,112
Commercial construction 3,332 2,177 1,480 972 225
Commercial, Warehouse and MSR -- 53 45 256 1,722
Commercial, financial and industrial 2,633 1,891 2,611 1,650 1,750
Consumer and other 485 606 1,119 992 826
Unallocated 2,977 3,253 1,710 13 --
------ ------- --------- --------- ---------
$18,118 $15,385 $ 14,507 $ 10,493 $ 11,358
======= ======= ========= ========= =========
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,
2002 2001 2000 1999 1998
------- ------- --------- ---------- ---------
(In thousands)
First lien residential mortgage $1,262 $ 746 $ 573 $ (446) $ 1,142
Multifamily mortgage (32) (278) 166 59 (184)
Residential construction (27) (131) 238 67 55
Real estate acquisition and development 1,427 77 296 275 443
Commercial real estate 825 464 406 119 82
Commercial construction 1,155 697 508 747 (36)
Commercial, Warehouse and MSR (341) (259) (397) 8,456 1,228
Commercial, financial and industrial 1,503 (20) 1,616 561 240
Consumer and other 304 1,061 687 724 846
Unallocated (276) 1,543 1,697 13 (716)
------ ------ -------- --------- ---------
$5,800 $ 3,900 $ 5,790 $ 10,575 $ 3,100
====== ====== ======== ========= ========
Estimating the allowance for loan losses is a critical accounting policy.
It is subjective in nature and requires material estimates that may be subject
to revision as facts and circumstances warrant. In assessing the adequacy of
the allowance, management reviews the size, quality and risk of loans in the
portfolio and considers such factors as specific known risks, historical and
peer group experience, the existing nonperforming loans and the underlying
collateral value on those loans, general economic conditions, particularly as
they relate to Coastal's lending areas, industry standards, regulatory policies
and other factors related to the collectibility of Coastal's loan portfolio.
Based on the ongoing assessment by management, provisions for loan losses are
charged to earnings to bring the total allowance for loan losses to a level
deemed appropriate by management based on probable losses in the loan portfolio.
While management uses the best information available to recognize losses on
loans, there can be no assurance that future additions to the allowance will not
be necessary. When comparing 2002 and 2001, the changes in the provision for
loan losses are due to management's continuing evaluation of the overall
allowance for loan losses. The increase in the provision for loan losses in
2002 (in the fourth quarter of 2002) was due to management's reevaluation of the
allowance for loan losses given the current economic conditions, the decision in
2002 to sell loans which resulted in charge-offs totaling $1.8 million to
writedown such loans to fair value, and the changes that have occurred within
the mix of Coastal's loan portfolio, in addition to certain specific loans in
the portfolio that have warranted greater attention and specific allocations of
the allowance for loan losses. While management believes that it has adequately
provided for loan losses and that the allowance for loan losses is adequate at
December 31, 2002, it will continue to monitor the loan portfolio and make
adjustments to its allowance for loan losses as it considers necessary. At
December 31, 2002, the Bank's ratio of the allowance for loan losses to
nonperforming loans was 97.69% and the ratio of the allowance for loan losses to
total loans receivable was 1.00%.
The Board of Directors of the Bank reviews its Asset Classification and
Allowance Policy ("ACAP") at least annually. The policy provides that the Bank
at least annually will 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 a level considered adequate to cover probable losses on the loans
receivable portfolio. 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, among other things, the size, quality and
risk of loans in the portfolio, identification of any 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 existing nonperforming loans and the underlying collateral value on those
loans and its historical and peer group 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 then 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, to a third party, 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
2000. The Bank recorded a $2.2 million gain on the sale of the above mentioned
mortgage servicing rights in 2000.
In December 2002, Coastal sold $70.1 million of mortgage loans with
servicing retained to a third party investor and recognized the estimated fair
value of those servicing rights retained of $359,000, which is recorded in
prepaid expenses and other assets in the Company's Consolidated Statement of
Financial Condition at December 31, 2002. As of December 31, 2002, Coastal's
serviced for others approximately $68.8 million of such loans. See "First Lien
Residential Mortgage Loan Purchases, Sales and Originations."
The Bank receives fees for servicing mortgage loans for others, which
generally range from 0.25% to 0.50% per annum on the declining principal balance
of mortgage loans. Such fees serve 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. Servicing fees are collected out
of the monthly mortgage payments made by borrowers and were recorded net of the
amortization of mortgage servicing rights.
MORTGAGE-BACKED SECURITIES
The Bank maintains a large 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, 2002, the Company's mortgage-backed securities available-for-sale portfolio
amounted to $475.0 million, or 18.8%, of total assets. Effective September 30,
2001, Coastal transferred all of its mortgage-backed securities to the
available-for-sale category. This was due to management's intent to restructure
a portion of the asset base to make it less vulnerable to market interest rate
fluctuations. In late November 2001, Coastal completed the sale of
approximately $845 million of its mortgage-backed securities and recorded a gain
of $169,000. The majority of the securities sold were CMOs tied to COFI and
contained extension risk which caused, on average, higher levels of price
volatility. Also in November 2001, Coastal used a portion of the proceeds of
the sale to purchase approximately $512 million of primarily pass-thru
mortgage-backed securities. A consequence of this 2001 securities sale is that
any securities purchased by Coastal for approximately two years thereafter are
required to be placed in either the available-for-sale or trading category.
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.
The following table sets forth the composition of the Company's
mortgage-backed securities portfolio at the dates indicated.
At December 31,
2002 2001 2000
----------- ----------- ------------
(In thousands)
Held-to-maturity:
CMOs $ -- $ -- $812,460
Agency securities -- -- 66,595
Non-agency securities -- -- 6,273
---------- --------- ---------
-- -- 885,328
Unamortized premium -- -- 1,503
Unearned discount -- -- (1,266)
---------- -------- ---------
Total held-to-maturity $ -- $ -- $885,565
========== ======== =========
Available-for-sale:
CMOs $ 83,794 $106,657 $ 77,590
Agency securities 379,569 397,413 19,946
Non-agency securities 2,047 2,572 --
---------- -------- ---------
465,410 506,642 97,536
---------- -------- ---------
Unamortized premium 8,662 9,873 149
Unearned discount -- -- (141)
Net unrealized gain (loss) 950 (2,447) (2,871)
---------- -------- ---------
Total available-for-sale $ 475,022 $514,068 $ 94,673
========== ======== =========
Total mortgage-backed
securities $ 475,022 $514,068 $980,238
========== ======== =========
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 "AAA" or
better by the national securities rating agencies and certain types of CMOs.
The FNMA, FHLMC and GNMA certificates ("Agency Securities") 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 "AAA" 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 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 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,
2002 2001 2000
---------- ---------- ---------
(In thousands)
Mortgage-backed securities
held-to-maturity purchased $ -- $ -- $ 4,815
Mortgage-backed securities
available-for-sale purchased 112,579 512,267 --
Mortgage-backed securities
available-for-sale sold -- (844,749) --
Discount accretion (premium
amortization), net (3,142) (401) (159)
Change in unrealized gain (loss) on
mortgage-backed securities
available-for-sale 3,397 424 (29)
Principal repayments on
mortgage-backed securities (151,880) (133,711) (41,266)
---------- --------- --------
Net decrease in
mortgage-backed securities $ (39,046) $(466,170) $(36,639)
========== ========== =========
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 43
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. 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 39.7% of total deposits at December 31, 2002 from 32.1% at December 31, 1998.
[THIS SPACE INTENTIONALLY LEFT BLANK]
Effective January 1, 1998, the Company implemented a program whereby a
portion of the balance in noninterest-bearing and interest-bearing checking
accounts is reclassified to money market demand accounts under Federal Reserve
Regulation D. The amount of such reclassification, reflected in the following
table, was approximately $250.9 million ($131.3 million from noninterest bearing
and $119.6 million from interest-bearing) at December 31, 2002, $243.3 million
($113.0 million from noninterest-bearing and $130.3 million from
interest-bearing) at December 31, 2001, and $136.6 million ($68.1 million from
noninterest-bearing and $68.5 million from interest-bearing) at December 31,
2000. 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,
----------------------------------------------------------------------
2002 2001 2000
------------------- -------------------- --------------------
Percent Percent Percent
of of of
Amount Deposits Amount Deposits Amount Deposits
--------- --------- ---------- --------- ---------- ---------
(Dollars in thousands)
Demand deposit accounts:
Noninterest-bearing checking $ 51,029 3.16% $ 47,712 2.87% $ 80,849 4.83%
Interest-bearing checking 14,353 0.89 15,894 0.96 61,046 3.64
Savings 44,603 2.76 45,234 2.72 43,891 2.62
Money market demand
(including amounts
reclassified from noninterest
and interest-bearing checking) 530,659 32.87 505,789 30.47 374,210 22.34
----------- ------- ---------- -------- --------- ------
Total demand deposit accounts 640,644 39.68 614,629 37.02 559,996 33.43
----------- ------- ---------- -------- --------- ------
Certificate accounts:
Maturing within 1 year 768,407 47.61 950,827 57.26 1,038,522 62.00
1-2 years 131,792 8.16 61,933 3.73 53,378 3.19
2-3 years 35,685 2.21 23,707 1.43 13,678 0.82
3-4 years 4,513 0.28 5,830 0.35 4,284 0.26
4-5 years 33,302 2.06 3,409 0.21 4,745 0.28
Over 5 years 25 -- 51 0.00 323 0.02
----------- ------- ---------- -------- --------- ------
Total certificate accounts 973,724 60.32 1,045,757 62.98 1,114,930 66.57
----------- ------- ---------- -------- --------- -------
1,614,368 100.00% 1,660,386 100.00% 1,674,926 100.00%
======== ======= =======
Premium on purchased
deposits, net -- -- 55
----------- ---------- ----------
Total $ 1,614,368 $1,660,386 $1,674,981
=========== ========== ==========
Prior to the reclassification as discussed above, noninterest-bearing
checking accounts, interest-bearing checking accounts and money market demand
accounts were as follows at December 31, 2002, 2001 and 2000:
2002 2001 2000
-------- -------- --------
(In thousands)
Noninterest-bearing checking $182,290 $160,738 $148,953
Interest-bearing checking 134,034 146,144 129,497
Money market demand accounts 279,717 262,513 237,655
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,
2002 2001 2000
------------------------- ---------------------- --------------------
Average Average Average Average Average Average
Balance Rate Paid Balance Rate Paid Balance Rate Paid
-------------- ---------- ----------- ---------- ---------- ----------
(Dollars in thousands)
Demand deposit accounts:
Noninterest-bearing
checking $ 30,533 --% $ 54,695 --% $ 74,575 --%
Interest-bearing checking 8,662 0.64 36,785 2.03 50,622 2.00
Savings 46,935 1.01 46,266 1.76 47,950 2.15
Money market demand(1) 543,206 1.49 439,894 2.00 366,200 2.56
Certificate accounts 1,018,159 3.27 1,103,792 5.39 1,095,760 5.62
------------ ----------- ----------
Total deposits $ 1,647,495 2.42 $ 1,681,432 4.15 $1,635,107 4.47
============ =========== ==========
________________________
(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:
2002 2001 2000
---------- -------- --------
(In thousands)
Noninterest-bearing checking $ 139,314 $ 95,733 $ 71,053
Interest-bearing checking 126,532 92,200 69,523
---------- -------- --------
$ 265,846 $187,933 $140,576
========== ======== ========
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, 2002 which mature during the periods
indicated.
Amounts at December 31, Amounts at December 31, 2002 Maturing In
------------------------ ------------------------------------------------------
One Year Greater than
2002 2001 or Less Two Years Three Years Three Years
--------- --------- ----------- ----------- ----------- -----------
(In thousands)
Certificate accounts:
Less than 2.00% $ 104,358 $ 29,707 $ 101,478 $ 2,874 $ -- $ 6
2.00% to 3.99% 764,982 434,529 635,394 102,619 16,582 10,387
4.00% to 5.99% 97,681 512,263 27,760 25,145 17,420 27,356
6.00 to 7.99% 6,630 69,188 3,702 1,154 1,683 91
8.00 to 9.99% 73 70 73 -- -- --
---------- ---------- ----------- --------- ------- -------
Total $ 973,724 $1,045,757 $ 768,407 $ 131,792 $35,685 $37,840
========== ========== ============ ========= ======= =======
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 following table sets forth the net deposit flows of the Company during
the periods indicated.
Year Ended December 31,
2002 2001 2000
---------- ---------- ---------
(In thousands)
Decrease due to sale of branches (1) $ (75,275) $ -- $ --
Net increase (decrease) before interest credited (11,848) (86,688) (20,970)
Interest credited 41,105 72,093 71,662
----------- --------- ---------
Net deposit increase (decrease) $ (46,018) $(14,595) $ 50,692
=========== ========= =========
(1) For the year ended December 31, 2002, the $75.3 million decrease is due
to the sale of five branch offices and the related deposit accounts.
The following table sets forth the amount of the Bank's certificates of
deposits at December 31, 2002 which are $100,000 or more by time remaining until
maturity.
At December 31, 2002
-----------------------------------------------
Number of accounts Deposit Amount
------------------ ---------------
(In thousands)
Three months or less 550 $ 72,245
Over three through six months 341 37,274
Over six through twelve months 649 79,989
Over twelve months 418 47,523
------ -------
Total 1,958 $ 237,031
====== ========
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 2002, 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. From early
1997 through mid year 2002, the Bank solicitated deposit accounts through a
"money desk." Money desk rates were only offered to institutions (primarily
credit unions and municipal utility districts) and were generally up to 50 basis
points higher than on regular certificate of deposit accounts. The offering of
deposits through the "money desk" was discontinued during 2002.
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, 2002, 2001 or
2000. 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,
--------------------------------------
2002 2001 2000
------------- ---------- ---------
(Dollars in thousands)
FHLB advances:
Average balance outstanding $ 683,454 $ 795,009 $ 926,659
Maximum amount outstanding at any
month-end during the period 760,139 1,218,145 1,275,541
Balance outstanding at end of period 696,085 690,877 1,150,305
Average interest rate during the period 2.95% 4.90% 6.29%
Average interest rate at end of period 2.71% 3.46% 6.48%
Securities sold under agreements
to repurchase:
Average balance outstanding $ -- $ 283,622 $ 249,655
Maximum amount outstanding at any
month-end during the period 493,003 605,214
Balance outstanding at end of period -- -- --
Average interest rate during the period -- 3.77% 6.68%
Average interest rate at end of period -- -- --
As noted previously, as a result of the asset base restructuring that
occurred in November 2001, the Company's total assets decreased during that
year. As part of the restructuring, the Company sold mortgage-backed securities
of $845 million, purchased $512 million of mortgage-backed securities to replace
the assets sold and reduced borrowings with the remainder of the sales proceeds.
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 various short-term,
fixed rate advances and long term, fixed and variable-rate advances. At
December 31, 2002, the Bank had total FHLB advances of $696.1 million at a
weighted average interest rate of 2.71%. Of the advances outstanding at
December 31, 2002, $170.0 million were short-term advances with an original
maturity of less than 90 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, 2002, 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 during the year ended December
31, 2000, with an average interest rate during the period of 5.56%. There were
no federal funds purchased outstanding at any time during 2002 or 2001 or at any
month-end during 2000.
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,
2002, the Bank was authorized to have a maximum investment of approximately
$252.5 million in its subsidiaries.
At December 31, 2002, the Bank had two active wholly-owned subsidiaries,
the activities of which are described below. At December 31, 2002, the Bank's
aggregate equity investment in its subsidiaries was $423,000.
COASTALBANC FINANCIAL CORP. CoastalBanc Financial Corp. ("CBFC") was
formed in 1986 to act as an investment advisor to other insured financial
institutions. The Bank is the sole stockholder of CBFC. Over the past five
years, CBFC has been inactive in its investment advisory capacity. CBFC 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 $5,000, $27,000 and $37,000 for the years ended
December 31, 2002, 2001 and 2000, 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 affiliated with the Bank as a result of being 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 $14,000 for the year
ended December 31, 2002, $13,000 for the year ended December 31, 2001 and
$74,000 for the period from June 22 to December 31, 2000. Expenses of CBIA
include administrative fees paid to the Bank of $575,000 for the year ended
December 31, 2002, $510,000 for the year ended December 31, 2001 and $215,000
for the period from June 22 to December 31, 2000.
AFFILIATES OF THE BANK
COASTAL BANC CAPITAL CORP. CBCC is a direct subsidiary of HoCo and an
affiliate of the Bank. CBCC, through its Mortgage Asset Trading Group, has been
engaged in the business of purchasing and reselling packages of whole loan
assets on behalf of the Bank and institutional investors. These activities
continued until September 2002, when the operations of the Mortgage Asset
Trading Group were moved to CBMC. Effective January 1, 2002, CBCC formed two
new groups in an effort to increase its fee income within its existing business
of asset trading and by providing additional services for commercial business
customers. The Specialty Finance Group will focus on developing a network of
buyers of mortgage loans and to develop the capability of trading in other types
of debt instruments. The operations of the Specialty Finance Group were also
moved to CBMC in September 2002. The Corporate Finance Group, as an
intermediary, will focus on raising capital for its business customers and
providing merger and acquisition advisory services to buyers and sellers of
companies.
The loan packages acquired by CBCC were offered to the Bank on the same
terms and at the same time that they were offered to other prospective
purchasers. During 2002, CBCC purchased whole loan assets totaling $347.8
million and sold whole loans (including purchase premium) totaling $340.0
million to the Bank and $8.6 million to third party investors. During the year
ended December 31, 2002, CBCC recorded gains on the sale of loans to the Bank of
$810,000 and gains on the sale of loans to third party investors of $40,000.
The $810,000 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
are eliminated in consolidation. At December 31, 2002, HoCo's unconsolidated
equity investment in CBCC was $430,000. CBCC had net income (loss) (before
intercompany eliminations) of $(29,000), $437,000 and $(21,000) for the years
ended December 31, 2002, 2001 and 2000, 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, 2002. All transactions between the Bank and CBCC are within
regulatory guidelines. In 2003, management of the Company made the decision to
discontinue the operations of CBCC effective March 31, 2003 due to the current
economic climate.
COASTAL BANC MORTGAGE CORP. CBMC is a direct subsidiary of HoCo and an
affiliate of the Bank. Effective September 2002, CBMC began performing the
functions previously performed by the Mortgage Asset Trading Group and the
Specialty Finance Group of CBCC, which were moved from CBCC to CBMC. In
addition, CBMC entered into a marketing service agreement with a third party to
enhance the opportunities for both parties related to the business of buying and
selling whole loan related assets. The agreement calls for shared revenues for
referring business between the parties.
During 2002, CBMC purchased whole loan assets totaling $33.5 million and
sold whole loans (including purchase premium) totaling $33.6 million to the
Bank. During the period ended December 31, 2002, CBMC recorded gains on the
sale of loans to the Bank of $86,000. The gain on the sale of the 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. In addition, during
2002, CBMC received $41,000 in brokerage fees from the Bank related to other
loan packages sold by the Bank. All significant intercompany balances and
transactions are eliminated in consolidation. At December 31, 2002, HoCo's
unconsolidated equity investment in CBMC was $34,000. CBMC had net loss (before
intercompany eliminations) of $67,000 for the period from CBMC's inception in
July 2002 through December 31, 2002.
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 it meets 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 he deems 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 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 QTL 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.
SARBANES-OXLEY ACT OF 2002.
On July 30, 2002, President George W. Bush signed into law the
Sarbanes-Oxley Act of 2002, which generally establishes a comprehensive
framework to modernize and reform the oversight of public company auditing,
improve the quality and transparency of financial reporting by those companies
and strengthen the independence of auditors. Certain of the new legislation's
more significant reforms are noted below.
- - The new legislation creates a public company accounting oversight board
which is empowered to set auditing, quality control and ethics standards, to
inspect registered public accounting firms, to conduct investigations and to
take disciplinary actions, subject to SEC oversight and review. The new board
will be funded by mandatory fees paid by all public companies. The new
legislation also improves the Financial Accounting Standards Board, giving it
full financial independence from the accounting industry.
- - The new legislation strengthens auditor independence from corporate
management by, among other things, limiting the scope of consulting services
that auditors can offer their public company audit clients.
- - The new legislation heightens the responsibility of public company
directors and senior managers for the quality of the financial reporting and
disclosure made by their companies. Among other things, the new legislation
provides for a strong public company audit committee that will be directly
responsible for the appointment, compensation and oversight of the work of the
public company auditors.
- - The new legislation contains a number of provisions to deter wrongdoing.
CEOs and CFOs will have to certify that company financial statements fairly
present the company's financial condition. If a misleading financial statement
later resulted in a restatement, the CEO and CFO must forfeit and return to the
company any bonus, stock or stock option compensation received in the twelve
months following the misleading financial report. The new legislation also
prohibits any company officer or director from attempting to mislead or coerce
an auditor. Among other reforms, the new legislation empowers the SEC to bar
certain persons from serving as officers or directors of a public company;
prohibits insider trades during pension fund "blackout periods;" directs the SEC
to adopt rules requiring attorneys to report securities law violations; and
requires that civil penalties imposed by the SEC go into a disgorgement fund to
benefit harmed investors.
- - The new legislation imposes a range of new corporate disclosure
requirements. Among other things, the new legislation requires public companies
to report all off-balance-sheet transactions and conflicts, as well as to
present any pro forma disclosures in a way that is not misleading and in
accordance with requirements to be established by the SEC. The new legislation
also accelerated the required reporting of insider transactions, which now
generally must be reported by the end of the second business day following a
covered transaction; requires that annual reports filed with the SEC include a
statement by management asserting that it is responsible for creating and
maintaining adequate internal controls and assessing the effectiveness of those
controls; and requires companies to disclose whether or not they have adopted an
ethics code for senior financial officers, and, if not, why not, and whether the
audit committee includes at least one "financial expert," a term which is to be
defined by the SEC in accordance with specified requirements. The new
legislation also requires the SEC, based on certain enumerated factors, to
regularly and systematically review corporate filings.
- - The new legislation contains provisions which generally seek to limit and
expose to public view possible conflicts of interest affecting securities
analysts.
- - Finally, the new legislation imposes a range of new criminal penalties for
fraud and other wrongful acts, as well as extends the period during which
certain types of lawsuits can be brought against a company or its insiders.
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, 2002, 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, 2002, 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, 2002, the minimum Tier 1 capital
ratio for capital adequacy purposes for the Bank was 4.0% and its actual Tier 1
capital ratio was 6.88%.
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, 2002, the Bank's Tier 1 capital to risk-weighted assets ratio
was 10.32% and its total risk-based capital to risk weighted assets ratio was
11.38%.
[THIS SPACE INTENTIONALLY LEFT BLANK]
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,
----------------------------------------------------------------
2002 2001 2000
------------------- -------------------- ---------------------
Actual Required(1) Actual Required(1) Actual Required(1)
------- ----------- ------- ----------- ------- -----------
Tier 1 capital to total assets 6.88% 4.00% 7.27% 4.00% 6.22% 4.00%
Tier 1 risk-based capital
to risk weighted assets 10.32 4.00 11.90 4.00 9.94 4.00
Total risk-based capital
risk to risk weighted
assets 11.38 8.00 12.79 8.00 10.72 8.00
_____________________________________________
(1)Minimum required ratio for regulatory 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, 2002.
Tier 1 Total
Tier 1 Risk-based Risk-based
Capital Capital Capital
-------------- ------------- -------------
(Dollars in thousands)
Total stockholders' equity $ 199,674 $ 199,674 $ 199,674
Unrealized gain on securities
available-for-sale (616) (616) (616)
Less nonallowable assets:
Goodwill (21,429) (21,429) (21,429)
Mortgage servicing rights (36) (36) (36)
Plus allowance for loan losses -- -- 18,118
-------------- ----------- ----------
Total regulatory capital 177,593 177,593 195,711
Minimum required capital 103,315 68,816 137,632
-------------- ----------- ----------
Excess regulatory capital $ 74,278 $ 108,777 $ 58,079
============== =========== ==========
Bank's regulatory capital percentage (1) 6.88% 10.32% 11.38%
============== =========== ==========
Minimum regulatory capital
adequacy required percentage 4.00% 4.00% 8.00%
============== =========== ==========
Bank's regulatory capital percentage in
excess of minimum requirement 2.88% 6.32% 3.38%
============== =========== ==========
________________________
(1)Tier 1 capital is computed as a percentage of adjusted average total assets
of $2.6 billion. Risk-based capital is computed as a percentage of adjusted
risk-weighted assets of $1.7 billion.
FDIC INSURANCE PREMIUMS. The deposits of the Bank are insured to the
maximum extent permitted by the Savings Association Insurance Fund (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, with rates during the last six months of 2002
ranging from zero for well capitalized, healthy institutions, such as the Bank,
to 27 basis points for undercapitalized institutions with substantial
supervisory concerns.
In addition, all institutions with deposits insured by the FDIC are
required to pay assessments to fund interest payments on bonds issued by the
Financing Corporation, a mixed-ownership government corporation established to
recapitalize the predecessor to the SAIF. The current assessment rate is .0168%
of insured deposits and is adjusted quarterly. These assessments will continue
until the Financing Corporation bonds mature in 2019.
SAFETY AND SOUNDNESS STANDARDS. The FDIC and the other federal bank
regulatory agencies have established guidelines for safety and soundness,
addressing operational and managerial standards, as well as compensation matters
for insured financial institutions. Institutions failing to meet these
standards are required to submit compliance plans to their appropriate federal
regulators. The FDIC and the other agencies have also established guidelines
regarding asset quality and earnings standards for insured institutions. The
Bank believes that it is in compliance with these guidelines and standards.
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.
Under revisions to the CRA regulations promulgated in 1995, a new
evaluation system became effective that rates institutions based on their actual
performance in meeting community credit needs. The 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. It also specifies 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.
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. 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, 2002, with 75.8% 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 distributing 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, 2002, the Bank's advances from the FHLB of Dallas amounted to $696.1 million
or 27.6% 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, 2002, the
Bank had $41.2 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, 2002,
dividends paid by the FHLB of Dallas to the Bank totaled $1.2 million.
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, 2002, 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 include 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, 2002, the
Bank had approximately $664,000 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, 2002, 2001 and
2000, 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
2002, 2001 and 2000 are available as credit carryforwards to reduce regular
federal tax liabilities in future years, over an indefinite period and were
partially utilized beginning 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 been audited by the
United States Internal Revenue Service. Generally, the tax returns of the
Company since 1999 are subject to review by the Internal Revenue Service.
STATE TAXATION
The Company, the Bank, CBCC, CBMC, CBFC 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 43 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,
2002.
Owned/Leased Net Book
(with Lease Value of Property Percent of
Expiration Or Leasehold Total
Location Date) Improvements Deposits Deposits
- -------------------------------------- ------------------- ----------------------- --------- -----------
(Dollars in thousands)
BRANCH OFFICES:
- --------------------------------------
1329 North Virginia
Port Lavaca, Texas 77979 Owned $ 108 $ 22,894 1.42%
3207 Westpark Drive
Houston, Texas 77005 Owned 2,344 32,454 2.01
8 Braeswood Square Leased;
Houston, Texas 77096 December 31, 2006 219 70,162 4.35
408 Walnut
Columbus, Texas 78934 Owned 198 47,829 2.96
870 S. Mason, Suite 100 Leased;
Katy, Texas 77450 August 31, 2003 13 30,818 1.91
602 Lyons
Schulenburg, Texas 78956 Owned 70 26,784 1.66
325 Meyer Street
Sealy, Texas 77474 Owned 403 43,042 2.67
116 E. Post Office
Weimar, Texas 78962 Owned 28 23,279 1.44
323 Boling Road
Wharton, Texas 77488 Owned 95 38,674 2.40
1621 B FM 517 Rd. E. Leased;
Dickinson, Texas 77539. September 30, 2003 26 30,714 1.90
300 S. Cage
Pharr, Texas 78577 Owned 163 12,540 0.78
295 West Highway 77
San Benito, Texas 78586 Owned 202 20,199 1.25
1260 Blalock, Suite 100 Leased;
Houston, Texas 77055 January 20, 2004 1 56,475 3.50
14011 Park Drive, Suite 115 Leased;
Tomball, Texas 77375 March 14, 2004 3 25,959 1.61
915-H North Shepherd Leased;
Houston, Texas 77008 October 31, 2006 7 40,604 2.52
16000 Stuebner Airline Road, Suite 100 Leased;
Spring, Texas 77379 September 30, 2005 5 33,938 2.10
7602 N. Navarro
Victoria, Texas 77904 Owned 430 60,586 3.75
(continued)
(continued from previous page)
Net Book
Owned/Leased Value of
(with Lease Property or Percent of
Expiration Leasehold Total
Location Date) Improvements Deposits Deposits
- ---------------------------------- ------------------------- ----------------------- --------- -----------
(Dollars in thousands)
1410 Ed Carey
Harlingen, Texas 78550 Owned $ 1,378 $ 10,209 0.63%
4900 N. 10th St., G-1 Leased;
McAllen, Texas 78504 August 14, 2006 -- 14,250 0.88
10838 Leopard Street, Suite A Leased;
Corpus Christi, Texas 78410 December 31, 2005 1 29,751 1.84
4060 Weber Road Leased;
Corpus Christi, Texas 78411 April 30, 2004 6 45,653 2.83
301 E. Main Street
Brenham, Texas 77833 Owned 141 57,861 3.58
1192 W. Dallas Leased;
Conroe, Texas 77301 December 31, 2003 11 36,321 2.25
2353 Town Center Dr Owned
Sugar Land, Texas 77478 999 37,330 2.31
1629 S. Voss Owned
Houston, Texas 77057 1,366 27,116 1.68
708 East Austin
Giddings, Texas 78942 Owned 205 25,212 1.56
5718 Westheimer, Suite 100 Leased;
Houston, Texas 77057 July 31, 2012 22 27,873 1.73
Leased;
2600 S. Gessner, Suite 100 October 31, 2012
Houston, Texas 77063 37 7,879 0.49
1250 Pin Oak Road
Katy, Texas 77494 Owned 1,145 17,217 1.07
2120 Thompson Highway
Richmond, Texas 77469 Owned 430 30,916 1.92
7200 North Mopac Leased;
Austin, Texas 78731 December 31, 2007 3 29,764 1.84
1112 Seventh Street. Leased;
Bay City, Texas 77414 April 30, 2007 -- 51,310 3.18
441 Austin Avenue, Suite A Leased;
Port Arthur, Texas 77640 June 30, 2004 318 29,189 1.81
ATM Site Owned
1114 Lost Creek Blvd., Suite 100 Leased;
Austin, Texas 78746 December 31, 2003 6 5,495 0.34
3302 Boca Chica Leased;
Brownsville, Texas 78521 December 31, 2004 22 10,522 0.65
1075 Parades Line Road
Brownsville, Texas 78521 Owned 2,633 38,115 2.36
(continued)
(continued from previous page)
Owned/Leased Net Book
(with Lease Value of Property Percent of
Expiration or Leasehold Total
Location Date) Improvements Deposits Deposits
- ------------------------------ ------------------- ----------------------- ---------- -----------
(Dollars in thousands)
2000 N. Conway
Mission, Texas 78572 Owned 957 18,320 1.13
509 South Main Leased;
McAllen, Texas 78501 December 31, 2005 -- 36,125 2.24
198 South Sam Houston
San Benito, Texas 78586 Owned 961 44,652 2.77
502 S. Dixieland Road
Harlingen, Texas 78552 Owned 296 8,509 0.53
200 Sugar Road
Edinburg, Texas 78539 Owned 156 8,915 0.55
300 S. Closner
Edinburg, Texas 78539 Owned 760 24,193 1.50
221 East Van Buren
Harlingen, Texas 78550 Owned 3,285 63,540 3.94
2810 1st Street Owned -
Rosenberg, Texas 77471 Under Construction 1,021 -- --
2402 Research Forest Drive Owned -
The Woodlands, Texas 77381 Under Construction 953 -- --
ADMINISTRATIVE OFFICE(1)
- ------------------------------
Coastal Banc Plaza
5718 Westheimer, Suite 600 Leased;
Houston, Texas 77057 July 31, 2012 2,312 261,180 16.16
RECORDS AND RETENTION OFFICE
- ------------------------------
2199 N. Jefferson Leased;
La Grange, TX 78945 December 17, 2006 -- -- --
-------- ---------- -------
Total $23,739 $1,614,368 100.00%
======== ========== =======
______________________
(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
$27.3 million at December 31, 2002. At December 31, 2002, the net book value of
the Company's electronic data processing equipment, which includes its in-house
computer system, local area network and twenty-seven automatic teller machines,
was $908,000.
ITEM 3. LEGAL PROCEEDINGS
------------------
We are, and have been involved, from time to time, in various claims,
complaints, proceedings and litigation relating to activities from the normal
course of our operations. Based on the facts currently available to us, we
believe that the matters pending at December 31, 2002, are without merit, or
will be covered by insurance and any other matters are of such amounts, which
upon resolution, are not likely to have a material adverse effect on our
consolidated financial condition, results of operations or cash flows.
ITEM 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 59 of the
Company's printed Annual Report to Stockholders for fiscal 2002 ("Annual
Report"), which is included herein as Exhibit 13.
ITEM 6. SELECTED FINANCIAL DATA
-------------------------
The information required herein is incorporated by reference from pages 10
through 12 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 13 through
30 of the Annual Report.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------------
The information required herein is incorporated by reference from pages 23
through 28 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 33 through 58 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.
ITEM 14. CONTROLS AND PROCEDURES
-------------------------
Pursuant to Section 202 of the Sarbanes-Oxley Act of 2002, the Company's
management has reviewed the disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) of the Company as of a date within 90 days
prior to this annual report (the "Evaluation Date"). Disclosure controls and
procedures are the controls and other procedures of the Company that are
designed to ensure that the information required to be disclosed by the Company
in its reports filed or submitted under the Exchange Act is recorded, processed,
summarized and reported, within the time period specified in the SEC's rules and
forms. Disclosure controls and procedures include, without limitation, controls
and procedures designed to ensure that information required to be disclosed by
the Company in its reports filed under the Exchange Act is accumulated and
communicated to the Company's management, including the principal executive
officer and principal financial officer, as appropriate to allow timely
decisions regarding required disclosure. Management believes that such
disclosure controls and procedures as of the Evaluation Date were adequate to
ensure the material information relating to the Company, including its
consolidated subsidiaries, is made known to management by others within the
Company and its consolidated subsidiaries. To management's knowledge, there were
no significant changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the Evaluation Date.
- ------
PART IV
- --------
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
---------------------------------------------------------------------
(a)(1) The following financial statements are incorporated herein by
reference from pages 33 through 58 of the Annual Report.
Report of Independent Certified Public Accountants.
Consolidated Statements of Financial Condition as of December 31,
2002 and 2001.
Consolidated Statements of Operations for each of the years in the
three-year period ended December 31, 2002.
Consolidated Statements of Comprehensive Income for each of the
years in the three-year period ended December 31, 2002.
Consolidated Statements of Stockholders' Equity for each of the years
in the three-year period ended December 31, 2002.
Consolidated Statements of Cash Flows for each of the years in the
three-year period ended December 31, 2002.
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).
4.3 Form of Indenture of the Corporation relating to the Junior Subordinated
Debentures and Amended and Restated Declaration of Trust of Coastal Capital
Trust I (Incorporated by reference to the Company's Registration Statement
on Form S-3 (No. 333-87370) filed on May 1, 2002).
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 (Incorporated by reference to the
Company's 2000 Annual Report on Form 10-K (No. 000-24526) filed on March
27, 2001).
10.7 2002 Non-employee Director Stock Purchase Plan (Incorporated by reference
to the Company's Registration Statement on Form S-8 (No. 333-83966) filed
on March 7, 2002).
10.8 Stock Purchase Agreement between the Company and James C. Niver dated April
23, 2002 (Incorporated by reference to the Company's Registration Statement
on Form S-3 (No. 333-87370) filed on May 1, 2002).
10.9 Change-In-Control Severance Agreement dated August 22, 2002.
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.
99.1 Certification of the Chairman of the Board and Chief Executive Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanese-Oxley Act of 2002.
99.2 Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanese-Oxley Act of
2002.
99.3 Statement of Factors Under Private Securities Litigation Reform Act of
1995.
__________________
(b) Form 8-K filed on December 18, 2002, concerning the announcement that the
Company completed the sale of its five central Texas branches.
(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 25, 2003 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 25, 2003
- ----------------------
Manuel J. Mehos, Chairman of the
Board and Chief Executive Officer
/s/ R. Edwin Allday Date: March 25, 2003
- ----------------------
R. Edwin Allday, Director
/s/ D. Fort Flowers, Jr. Date: March 25, 2003
- -------------------------
D. Fort Flowers, Jr., Director
/s/ Dennis S. Frank Date: March 25, 2003
- ----------------------
Dennis S. Frank, Director
/s/ Robert E. Johnson, Jr. Date: March 25, 2003
- ------------------------------
Robert E. Johnson, Jr., Director
/s/ Clayton T. Stone Date: March 25, 2003
- -----------------------
Clayton T. Stone, Director
/s/ Catherine N. Wylie Date: March 25, 2003
- -------------------------
Catherine N. Wylie, Chief Financial
Officer (principal financial and
accounting officer)
CERTIFICATION
-------------
I, Manuel J. Mehos, the Chief Executive Officer of Coastal Bancorp, Inc.,
certify that:
1. I have reviewed this annual report on Form 10-K of Coastal Bancorp, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Dated: March 25, 2003 By /s/ Manuel J. Mehos
-------------------
Manuel J. Mehos
Chief Executive Officer
CERTIFICATION
-------------
I, Catherine N. Wylie, the Chief Financial Officer of Coastal Bancorp, Inc.,
certify that:
1. I have reviewed this annual report on Form 10-K of Coastal Bancorp, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Dated: March 25, 2003 By /s/ Catherine N. Wylie
------------------
Catherine N. Wylie
Chief Financial Officer