Back to GetFilings.com
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, 1996
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
COASTAL BANCORP, INC.
(Exact name of Registrant as specified in its charter)
Texas 76-0428727
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8 Greenway Plaza, Suite 1500
Houston, Texas 77046
(Address of principal executive office)
(713) 623-2600
(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
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements
for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ ]
As of March 14, 1997, the aggregate market value of the 3,959,759 shares of
Common Stock of the Registrant issued and outstanding on such date, excluding
1,008,832 shares held by all directors and executive officers of the
Registrant as a group, was $108,893,372. This figure is based on the closing
sale price of $27.50 per share of the Company's Common Stock on March 14,
1997, as reported in The Wall Street Journal on March 17, 1997.
Number of shares of Common Stock outstanding as of March 14, 1997: 4,968,591
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents incorporated by reference and the
Part of Form 10-K into which the document is incorporated:
(1) Portions of the Registrant's Annual Report to Stockholders for the
fiscal year ended December 31, 1996, are incorporated into Part II, Items 5-8
of this Form 10-K.
(2) Portions of the Registrant's definitive proxy statement for its 1997
Annual Meeting of Stockholders are incorporated into Part III, Items 10-13 of
this Form 10-K.
48
PART I.
ITEM 1. BUSINESS
COASTAL BANCORP, INC.
Coastal Bancorp, Inc. (the "Company") is engaged primarily in the
business of serving as the ultimate 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 (the "Association") into
the holding company form of organization. The reorganization occurred in July
1994. In addition, in July 1994, the Association converted to a
Texas-chartered savings bank operating under the name Coastal Banc ssb. On
November 30, 1996, Coastal Banc Holding Company, Inc. ("HoCo") was created as
a Delaware unitary savings bank holding company in accordance with the terms
of an agreement and plan of reorganization dated August 19, 1996 (the
"Agreement"). Pursuant to the terms of the Agreement, the Bank became a
wholly-owned subsidiary of HoCo and HoCo became a wholly-owned subsidiary of
the Company. The reorganizations were treated as combinations similar to a
pooling of interests. Accordingly, the financial information and references
presented herein have been restated to give effect where appropriate, as if
the reorganizations had occurred at the earliest date presented.
On June 30, 1995, the Company issued $50.0 million of 10.0% Senior Notes
due June 30, 2002 (the "Senior Notes"). The Senior Notes are redeemable at
the Company's option, in whole or in part, on or after June 30, 2000, at par,
plus accrued interest to the redemption date. Of the proceeds received from
the issuance of the Senior Notes, $44.9 million was used to purchase 11.13%
Noncumulative Preferred Stock, Series B, of the Bank (the "Series B Preferred
Stock") which is now owned by HoCo.
At December 31, 1996, the Company had total consolidated assets of $2.9
billion, total deposits of $1.3 billion, $28.8 million in Series A Preferred
Stock and stockholders' equity of $94.1 million.
The Company is subject to examination and regulation by the Office of
Thrift Supervision (the "OTS") and the Company and the Bank are subject to
examination and regulation by the Texas Savings and Loan Department (the
"Department"). The Company is also subject to various reporting and other
requirements of the Securities and Exchange Commission (the "SEC").
The Company's executive offices are located at Coastal Banc Tower, 8
Greenway Plaza, Suite 1500, Houston, Texas 77046, and its telephone number is
(713) 623-2600.
COASTAL BANC SSB
The Bank is a Texas-chartered, Federally insured state savings bank. It
is headquartered in Houston, Texas and operates through 37 branch offices in
metropolitan Houston, Corpus Christi, Austin and small cities in central and
south Texas.
The Bank was originally acquired by an investor group (which includes a
majority of the Board of Directors and the present Chairman of the Board,
President and Chief Executive Officer of the Company) in 1986 as a vehicle to
take advantage of the failures and consolidation in the Texas banking and
thrift industries. The Bank has acquired deposits and branch offices in
transactions with the Federal government and other private institutions, in
addition to acquiring an independent national bank in 1995, as a base for
developing an ongoing savings bank business. 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. Accordingly, although originally organized in
1954, the Bank in its current form effectively commenced operations with the
1986 change in control. By December 31, 1996, the Bank's total assets had
increased to $2.9 billion, total deposits were $1.3 billion and stockholders'
equity totaled $165.4 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 relatively low credit
risk. In carrying out this strategy and to ultimately provide a respectable
return to the Company's shareholders, the Bank adheres to four operating
principles: (i) continuing to expand its low cost core deposit base through
acquisitions; (ii) minimizing interest rate risk; (iii) minimizing credit
risk; 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 has implemented the first operating principle,
developing and expanding a core deposit base, beginning in 1988 through a
series of transactions with the Federal government and private sector
financial institutions, gaining in the process entry into additional markets
in Houston, Corpus Christi, Austin, San Antonio and south Texas.
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. See "The Southwest Plan Acquisition."
Since completion of the Southwest Plan Acquisition, the Bank has entered
into five branch office acquisitions and one whole bank acquisition: two with
an instrumentality of the Federal government (acting as the receiver of
insolvent financial institutions) and four with other private institutions.
In each, the Bank generally agreed to acquire certain assets in consideration
of the assumption of certain deposit and other liabilities with respect to
each institution. In addition, in 1996 the Bank chose to exit two Texas
cities, San Antonio and San Angelo. The Bank sold its San Angelo branch and
swapped its three San Antonio branches for one branch in Bay City, Texas.
In the first branch acquisition, completed in 1990, the Bank assumed
deposits of $151.1 million in connection with the acquisition of nine branch
offices, which are primarily located in the northwestern Houston metropolitan
area. The acquisition provided the Bank with further penetration in the
Houston market. In the second branch acquisition, completed in 1991, the Bank
assumed deposits of $71.4 million in connection with the acquisition of an
office located in Victoria, Texas. The acquisition of that office expanded
the Bank's presence in the small cities market southwest of Houston toward
Port Lavaca. In the third branch acquisition, completed in 1993, the Bank
assumed deposits of $386.4 million in connection with the acquisition of nine
branches located in Corpus Christi, San Antonio, Conroe, Brenham and Sealy.
The Corpus Christi and San Antonio branch acquisitions allowed the Bank to
enter new markets. In the fourth branch acquisition, also completed in 1993,
the Bank assumed deposits of $45.7 million and acquired two branches located
in Harlingen and McAllen, two small cities southwest of Houston in the Rio
Grande Valley (the "Valley"). As a result of this acquisition, the Bank
increased its presence in the Valley. In the fifth branch acquisition, which
was completed in December 1994, the Bank assumed deposits of $150.2 million
and acquired eight branches located in San Angelo, Marble Falls, Kingsland,
Llano, Giddings, Buchanan Dam, Mason and Burnet, which allowed the Bank to
enter new markets in central Texas.
In 1995, the Bank continued to expand its market presence by opening two
de novo branches in the Houston metropolitan area and by completing its first
whole bank acquisition. On November 1, 1995, the Bank consummated the
acquisition of all of the outstanding capital stock of Texas Capital
Bancshares, Inc. ("Texas Capital"). As a result of the acquisition of Texas
Capital, Texas Capital Bank, N.A., a national banking association, with five
branch offices, located in Houston, Katy, Richmond and Austin and total assets
of $170.7 million, was merged with and into the Bank.
In 1996, the Bank consummated the sale of its San Angelo location which
had $14.9 million in deposits and was acquired in the Bank's December 1994
branch acquisition. In connection with this sale, the Bank recorded a
$521,000 gain before applicable income taxes. On September 5, 1996, the Bank
consummated the exchange of its three San Antonio branches having deposits of
$53.8 million for a branch in Bay City, Texas having deposits of $79.8
million.
All of these transactions resulted in the net assumption of $1.5 billion
of deposits and the acquisition of 45 branch offices (after the San Angelo
branch sale and the swap of the San Antonio branches). The Bank has also
opened six de novo branches since inception. Since its first acquisition, the
Bank has been able to achieve operating economies and improve efficiency by
closing an aggregate of 15 branch offices and transferring the deposits to
other offices located in the same market areas.
The Bank will continue to pursue acquisitions as vehicles for growth,
although there can be no assurance that the Bank will be able to continue to
grow through acquisitions in the future. In the absence of any available,
cost-effective acquisitions, management will continue to focus on internally
generated earnings growth including further development of the Bank's
commercial lending and commercial business deposits.
INTEREST RATE RISK. The Bank has implemented the second operating
principle, minimizing interest rate risk, by matching, to the extent possible,
the repricing or maturity of its interest-earning assets to its
interest-earning liabilities as well as 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 is achieved through management of the composition of
its assets and liabilities. The Bank also undertakes to lock in an acceptable
interest rate spread between interest-earning assets and interest-bearing
liabilities by altering the Bank's cost of funds, or, at times, the yield on
certain assets in its portfolio. To accomplish this, the Bank has purchased
interest rate swaps and caps. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Asset and Liability
Management" set forth in Item 7 hereof.
The Bank will originate and purchase for retention in its portfolio only
those loans and investments which provide a positive interest rate spread over
funding liabilities matched with similar maturities. Consistent with this
philosophy, a significant portion of the Bank's assets have been invested in
adjustable-rate high quality mortgage-backed securities. At December 31,
1996, of the Bank's $1.5 billion of mortgage-backed securities, $1.3 billion
or 84.2%, were invested in adjustable rate mortgage-backed securities. To a
lesser extent, the Bank has purchased first lien mortgages on single-family
residences, the majority of which are adjustable rate mortgages. At December
31, 1996, $591.3 million, or 48.1% of the Bank's loans receivable portfolio,
net was comprised of such adjustable rate single-family residential mortgage
loans.
The Bank also originates and purchases fixed and adjustable rate
long-term, single-family residential loans primarily for sale into the
secondary market. Prior to 1996, this and certain other lending functions
were performed for the Bank by its wholly-owned mortgage banking subsidiary,
CBS Mortgage Corp. ("CBS Mortgage"). Beginning in 1996, the origination
function was performed by the Bank. By originating such loans for sale and
generally obtaining a commitment for the purchase of such loans at the time
that the loan applications are approved, the Bank avoids a significant portion
of the interest rate risk associated with holding fixed-rate mortgage loans.
CREDIT RISK. The Bank has implemented the third operating principle,
minimizing credit risk, by (i) investing a substantial portion of its assets
in cash and mortgage-backed securities, and (ii) taking a cautious approach to
the development of its direct lending operations. At December 31, 1996, of
the Company's $2.9 billion in total assets, $1.5 billion or 53.0% of total
assets consisted of mortgage-backed securities and $27.7 million or 1.0% of
total assets consisted of cash and cash equivalents. At December 31, 1996,
the Company's total net loans receivable portfolio amounted to $1.2 billion or
42.8% of total assets comprised primarily of $788.9 million of first lien
residential mortgage loans and $138.4 million of multifamily mortgage loans,
which constituted 64.2% and 11.3%, respectively, of the net loans receivable
portfolio. The balance of the net loans receivable portfolio, by dollar
amount and percent of the portfolio, was comprised of the following: $116.8
million (or 9.5%) of commercial real estate loans, $53.4 million (or 4.4%) of
warehouse loans to residential mortgage originators ("Warehouse loans"), $44.6
million (or 3.6%) of residential construction loans, $22.6 million (or 1.8%)
of consumer and other loans, $21.6 million (or 1.8%) of real estate
acquisition and development loans, $21.2 million (or 1.7%) of loans secured by
purchased mortgage servicing rights ("PMSR loans") and $20.7 million (or 1.7%)
of commercial, financial and industrial loans. The Company's non-accrual
loans as of such date were $12.8 million or 1.04% of total loans receivable,
and the Company's total nonperforming assets were $16.0 million, or 0.56% of
total assets.
The Bank will develop and seek to market loan products actively only when
and as management concludes that the Texas economy supports such steps without
the incidence of undue credit risk. This is consistent with the Bank's
approach in its lending activities. See "Lending Activities-General."
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 branch office system which is able
to administer and deliver its products and services in an economical manner.
The Bank believes that it has significant operating leverage, and that
continued incremental growth will not cause its overhead expenses to increase
by a corresponding amount. The growth achieved from the Bank's acquisitions
has facilitated reduced overhead levels as a proportion of assets and a lower
cost of funds from a more meaningful market share of core deposits. The
Company's ratio of noninterest expense to average total assets on a
consolidated basis has decreased, from 2.71% for the year ended December 31,
1988 to 1.40% for the year ended December 31, 1996, before the 1996 Savings
Association Insurance Fund ("SAIF") insurance special assessment. The Bank's
unconsolidated ratio of noninterest expense to average total assets was 1.36%
for the year ended December 31, 1996, before the 1996 SAIF insurance
assessment.
On September 30, 1996, the Bank recorded the one-time SAIF insurance
special assessment (the "Special Assessment") of $7.5 million ($4.8 million
after applicable income taxes) as a result of the Federal Deposit Insurance
Act, as amended (the "FDIA") being signed into law. The Special Assessment
pursuant to the FDIA was equal to 65.7 basis points on the SAIF assessment
base of deposits existing as of March 31, 1995.
The Bank is subject to regulation by the Department, as its chartering
authority and by the FDIC, which regulates the Bank and insures its deposits
to the fullest extent provided by law. The Bank also is subject to certain
regulation by the Board of Governors of the Federal Reserve System (the
"Federal Reserve Board") and is a member of the Federal Home Loan Bank of
Dallas (the "FHLB"), one of the 12 regional banks which comprise the Federal
Home Loan Bank System.
LENDING ACTIVITIES
GENERAL. The Bank has taken a cautious approach to the development and
growth of its direct lending operations to minimize credit risk. In order to
avoid incurring undue credit risk, the Bank historically invested a
significant percentage of its assets in alternative financial instruments,
particularly mortgage-backed securities, most of which have certain repayments
guaranteed by the government or Government Sponsored Enterprises ("GSEs").
See "Mortgage-Backed Securities." The Bank will originate and purchase for
retention in its portfolio only those loans determined by management to have
an acceptable credit risk and which provide a positive interest rate spread
over funding liabilities matched with similar maturities. This strategy is
designed to achieve an acceptable risk adjusted rate of return, as determined
and continuously evaluated by the Board of Directors.
Consistent with the Bank's lending strategy, the Bank originates and
purchases single-family residential loans for sale into the secondary market
and to retain in its portfolio. Through 1995, this and certain other lending
functions described herein were performed for the Bank by CBS Mortgage, its
wholly-owned mortgage banking subsidiary. Beginning in 1996, the Bank
performed these functions. By originating and purchasing such loans for sale
and generally obtaining a commitment for the purchase of such loans at the
time that the loan applications are approved or the purchase is approved, the
Bank believes that it avoids a significant amount of the interest rate risk
associated with holding fixed rate mortgage loans. Although the Bank and CBS
Mortgage have from time to time originated adjustable rate and short-term
fixed residential mortgage loans for the Bank's portfolio, the number of such
loans has been relatively small compared to the bulk loan purchases described
below.
In 1995, the Bank completed the acquisition of Texas Capital and its
$103.3 million in loans. The loans acquired from Texas Capital included first
lien residential, multifamily, commercial real estate, residential
construction, real estate acquisition and development, commercial, financial
and industrial and consumer loans. Utilizing this acquisition as a
springboard, the Bank implemented its strategic shift towards building a
commercial banking business.
The following table sets forth information concerning the composition of
the Bank's net loans receivable portfolio by type of loan at the dates
indicated. The table does not include loans which were subject to special
coverage by the Federal government in connection with the Southwest Plan
Acquisition.
At December 31,
-----------------------
1996 1995 1994
---------- ---------- ------
Amount Percent Amount Percent Amount
------------------ ---------- ------ -------- ----
(Dollars in thousands)
Real-estate mortgage loans:
First lien residential $ 791,337 61.96% $ 742,880 66.38% $428,237
Multifamily 139,486 10.92 95,297 8.52 75,142
Residential construction 77,146 6.04 33,935 3.03 27,777
Acquisition and development 26,132 2.05 15,517 1.39 14,119
Commercial 119,004 9.32 122,622 10.96 30,405
Commercial construction 3,963 0.31 -- -- --
Commercial, warehouse 53,573 4.19 48,822 4.36 15,724
Commercial, PMSR 21,380 1.67 21,548 1.93 11,625
Commercial, financial and industrial 21,965 1.72 19,860 1.77 --
Loans secured by savings deposits 8,849 0.69 8,292 0.74 5,141
Consumer and other 14,400 1.13 10,316 0.92 4,179
---------------------------------------------------------
Total loans 1,277,235 100.00% 1,119,089 100.00% 612,349
---------------==========--------------------------------
Loans in process (38,742) (11,526) (12,970)
Premium (discount) to record
purchased loans, net 479 (1,366) (8,925)
Unearned interest and loan fees (2,344) (1,939) (1,264)
Allowance for loan losses (6,880) (5,703) (2,158)
---------------------------------------------------------
Total loans receivable, net $ 1,229,748 $ 1,098,555 $587,032
=========================================================
At December 31,
---------------
1994
------
Percent
-------
Real-estate mortgage loans:
First lien residential 69.93%
Multifamily 12.27
Residential construction 4.54
Acquisition and development 2.30
Commercial 4.97
Commercial construction --
Commercial, warehouse 2.57
Commercial, PMSR 1.90
Commercial, financial and industrial --
Loans secured by savings deposits 0.84
Consumer and other 0.68
-------
Total loans 100.00%
-------
Loans in process
Premium (discount) to record
purchased loans, net
Unearned interest and loan fees
Allowance for loan losses
Total loans receivable, net
SCHEDULED MATURITIES. The following table sets forth certain
information at December 31, 1996 regarding the principal amount of loans
maturing in the Bank's loans receivable portfolio based on their contractual
terms to maturity. Demand loans, loans having no stated schedule of
repayments and no stated maturity are reported as due in one year or less.
First lien residential mortgage, multifamily mortgage and commercial real
estate loans are based on their contractual terms to maturity assuming no
periodic amortization of principal.
AT DECEMBER 31. 1996
----------------------
More than More than More than More than Over
One year one year to three years five years to ten years to twenty
or less three years to five years ten years twenty years years
- --------------------------------------------------------------------------------------------
(In thousands)
First lien residential mortgage $5,512 $6,755 $8,406 $33,918 $168,019 $568,727
Multifamily mortgage 31,207 88,450 16,864 508 2,457 --
Residential construction 35,957 9,028 -- -- -- --
Real estate acquisition and
development 5,184 16,919 -- -- -- --
Commercial real estate 15,301 39,837 23,700 14,275 25,891 --
Commercial construction 805 71 135 -- 400 --
Commercial, other 69,807 16,199 9,937 975 -- --
Consumer and other 11,343 5,923 4,279 906 798 --
-----------------------------------------------------------
Total loans $ 175,116 $ 183,182 $ 63,321 $50,582 $197,565 $568,727
===========================================================
Total
----------
First lien residential mortgage $ 791,337
Multifamily mortgage 139,486
Residential construction 44,985
Real estate acquisition and
development 22,103
Commercial real estate 119,004
Commercial construction 1,411
Commercial, other 96,918
Consumer and other 23,249
----------
Total loans $1,238,493
==========
The average maturity of loans is generally substantially less than their
average contractual terms because of prepayments and, in the case of
conventional mortgage loans, due-on-sale clauses, which generally give the
Bank the right to declare a loan immediately due and payable in the event,
among other things, that the borrower sells the real property subject to the
mortgage and the loan is not repaid. The average life of mortgage loans tends
to increase when current mortgage loan rates are substantially higher than
rates on existing mortgage loans and, conversely, decrease when rates on
existing mortgages are substantially lower than current mortgage loan rates
(due to refinancings or 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 amounts of loans due after one year
from December 31, 1996 by category and which have fixed or adjustable rates.
Interest-Rate
--------------
Fixed Adjustable Total
-------------- ---------- ----------
(In thousands)
First lien residential mortgage $ 195,298 $ 590,527 $ 785,825
Multifamily mortgage 20,545 87,734 108,279
Residential construction 8,628 400 9,028
Real estate acquisition and development -- 16,919 16,919
Commercial real estate 53,568 50,135 103,703
Commercial construction 400 206 606
Commercial, other 4,182 22,929 27,111
Consumer and other 11,344 562 11,906
-----------------------------------------
Total $ 293,965 $ 769,412 $1,063,377
=========================================
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 CBS Mortgage
for other institutions, GSEs or entities during the periods presented. See
"Mortgage Banking Activities."
Year Ended December 31,
-------------------------
1996 1995 1994
-----------------------------
(In thousands)
First lien mortgage loan originations:
Adjustable rate $3,542 $985 $ 12,760
Fixed rate 5,471 746 5,269
Adjustable rate by correspondent lenders 67,461 92,911 4,842
Fixed rate by correspondent lenders 4,058 -- --
Residential construction and
acquisition and development loan originations 154,182 61,713 83,804
Warehouse loan originations 887,252 549,628 388,303
PMSR loan originations 69,172 67,578 41,084
Multifamily loan originations 67,657 42,366 26,013
Commercial real estate loan originations 41,170 29,595 26,756
Commercial construction originations 3,806 -- --
Commercial, financial and industrial loan originations 30,080 5,100 --
Consumer loan originations 22,256 12,429 7,236
-----------------------------------
Total loan originations 1,356,107 863,051 596,067
Purchase of residential mortgage loans 115,928 298,613 144,290
Loans acquired (net) in connection with
acquisition and disposition transactions 1,018 103,319 2,428
Purchase of multifamily and commercial real estate loans 4,604 25,045 --
Multifamily and commercial real estate
loans transferred from Covered Assets -- -- 6,671
----------------------------------
Total loan originations and purchases 1,477,657 1,290,028 749,456
------------------------------------
Foreclosures 4,363 3,394 2,386
Principal repayments and reductions to
principal balance 1,339,691 776,084 609,995
Residential loans sold -- 679 732
Total foreclosures, repayments and sales of loans 1,344,054 780,157 613,113
-------------------------------------
Amortization of premiums and discounts and
fees on loans (485) 3,316 1,519
Provision for loan losses (1,925) (1,664) (934)
-------------------------------------
Net increase in loans receivable $ 131,193 $ 511,523 $136,928
=====================================
The following table sets forth the number of bulk loan purchases and the
amount of first lien residential mortgage loans acquired by the Bank through
bulk purchases for the periods indicated.
Year Ended December 31,
-------------------------
1996 1995 1994
--------- -------- --------
(Dollars in thousands)
Amount purchased $ 112,395 $296,452 $141,775
Number of bulk
loan purchases 9 24 22
Personnel from the Bank generally analyze loan bid packages, as they
become available, and the Securities Investment Subcommittee of the Bank
reviews 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 pricing
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, 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 that it bids on to take into consideration, among other things,
delinquency and foreclosure assumptions based on the risk characteristics of
the loan packages. The Bank intends to continue to make competitive bids on
loan portfolios that meet the Bank's purchase criteria.
Beginning in 1994, the Bank has been originating adjustable rate
residential mortgage loans through approximately 18 correspondent lenders.
The correspondents originate and immediately sell such loans to the Bank. All
such loans are underwritten in accordance with the Bank's policies and
procedures. During 1996, loans purchased from the correspondent lenders
totaled $74.3 million.
The Bank will directly sell mortgage loans and mortgage loan servicing
from time to time in order to replace the loans and servicing with instruments
which have higher credit quality and which generate less interest rate risk.
While the Bank has the general authority to originate and purchase loans
secured by real estate located anywhere in the United States, the largest
concentration of its residential first lien mortgage and construction loan
portfolios is secured by realty located in Texas. Other than in Texas, there
are no other concentrations of ten percent or more.
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 time of initiation of the program,
management of the Bank surveyed the members of the residential construction
industry in the Bank's Houston market area and targeted those companies which
management believed, based upon its market research, to be financially strong
and reputable. Loans are made primarily to fund residential construction.
Construction loans are made on pre-sold and speculative residential homes only
in well located, viable subdivisions and planned unit developments.
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. The line of credit applications are processed by
the loan administration and credit departments and are underwritten by the
Lending Subcommittee. Loans to any one builder are limited to $5.0 million
for new lines and $12.0 million for increases or renewals of existing lines if
approved by this Committee, or up to the regulatory loans to one borrower
limit if approved by the Board of Directors' Loan Committee. 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 set at a rate above the local
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,
it must make a separate loan application under the line for a specific loan
amount. Each loan commitment under a short-term line of credit is separately
underwritten and approved by at least two members of the Lending Subcommittee
after the builder's master file is updated and reviewed. The Bank also funds
construction loans outstanding to builders or individuals under individual
construction loans.
The terms of the Bank's construction loans are generally for nine months
or less, unless extended by the Bank. If a construction loan is extended, the
borrower is generally charged a loan fee for each 90 day extension period.
The Bank reserves the right to extend any loan term, but generally does not
permit the original term and all extensions to exceed 24 months without
amortization of principal either in monthly increments or a lump sum.
The Bank generally requires that construction loans be personally
guaranteed by the borrower and its principals. The maximum loan-to-value
ratio of any construction loan may not exceed the lesser of 80% of the
appraised value of the collateral property, 80% of the proposed sale or
contract price or 100% of the actual cost. All individual loans are limited
in dollar amount based upon the project proposed by the builder. Draws for
lot purchases are generally limited to the contracted sales price of the lot
(to include escalations) not to exceed 100% of the lot's appraised value.
Other special conditions which the Bank attaches to its construction loans
include a requirement that limits the number and dollar amount of loans which
may be made based upon unsold inventory. The Bank may also, in its sole
discretion, discontinue making any further loans if the builder's unsold
inventory exceeds a certain level from all lending sources or if the builder
fails to pay its suppliers or subcontractors in a timely manner.
The Bank provides construction financing for homes that generally are
priced below $450,000, with most homes priced between $70,000 and $175,000.
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 a
panel of homes on substantially the same terms and conditions as loans granted
under the Bank's line of credit program.
At December 31, 1996, the Bank had $45.0 million in outstanding
residential construction loans (net of loans in process). Of the construction
loans outstanding at December 31, 1996, $35.6 million were to 16 builders
originated under the Bank's line of credit program and $9.4 million were to
builders or individuals under individual construction loans. At the present
time, the Bank has approved builders in the Houston, Dallas, and Austin
metropolitan areas and is selectively soliciting new builders for its
residential construction lending program. 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. The
Bank does not otherwise actively solicit construction loans directly or
through the mass media.
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 through periodic builder reports and
inquiries to the builder's suppliers and subcontractors; continually
monitoring the progress of the development through site inspections prior to
loan disbursements; utilizing only qualified, approved appraisers; and
requiring that the builder maintain a pre-approved ratio (generally not
greater than 50%) of speculative to pre-sold homes in the development.
MULTIFAMILY MORTGAGE AND COMMERCIAL REAL ESTATE LENDING. Beginning in
1993, the Bank initiated a program to actively seek loans secured by
multifamily or commercial properties (primarily retail shopping centers).
Multifamily mortgage and commercial real estate loans typically involve higher
principal amounts and repayment of the loans generally is dependent, in large
part, on sufficient cash flow being generated by the underlying properties to
cover operating expenses and loan repayments. Market values may vary as a
result of economic events or governmental regulations which are outside the
control of the borrower or lender and which can affect the future cash flow of
the properties. The loans are for a short to medium term of between one to
seven years, and have floating rates or fixed rates based on a spread over
similarly fixed borrowings from the FHLB. The properties securing the loans
originated by the Bank are generally located in Texas. The Bank attempts to
limit its risk exposure by, among other things: lending to proven
developers/owners, only considering properties with existing operating
performance which can be analyzed, requiring conservative debt coverage
ratios, and continually monitoring the operation and physical condition of the
collateral. At December 31, 1996, multifamily mortgage loans totaling $139.5
million and commercial real estate loans of $119.0 million were outstanding.
The decision to increase commercial real estate lending resulted primarily
from the improvement in the local economies throughout Texas, which was caused
by improved occupancy in retail centers together with an improvement in the
quality of the borrowers seeking such loans. At December 31, 1996, the Bank
had outstanding commercial real estate loans (acquired from Texas Capital)
totaling approximately $32,000 that were on non-accrual status.
The Bank began seeking multifamily mortgage and commercial real estate
construction loans in 1996. The Bank will generally underwrite these loans,
with principal balances up to $5.0 million, in the same way it currently
underwrites its multifamily mortgage lending and will attempt to manage the
risk of such loans by requiring that the builders provide more equity in the
project than is required in refinancings, lending to those builders with
strong financial statements and requiring that borrowers purchase, if required
by the movement of general market interest rates, interest rate caps for their
loans. At December 31, 1996, commercial construction loans totaling $4.0
million were outstanding.
WAREHOUSE LENDING. Since 1992, the Bank has provided lines of credit to
mortgage companies generally for their origination of single family
residential loans which are normally sold no more than 90 days from
origination to the Federal National Mortgage Association (the "FNMA"), Federal
Home Loan Mortgage Corporation ("FHLMC"), Government National Mortgage
Association ("GNMA") or to private investors. The lines of credit are
generally renewable annually. Borrowers pay the Bank a commitment and/or
non-usage fee and pay interest on funds drawn at a floating rate. In
addition, the Bank receives a fee for each loan file processed. The Bank
holds the original mortgage loan notes and other documentation as collateral
until repayment of the related lines of credit. The lines of credit may be
drawn to the extent of 98.0% of the principal balance of the mortgages being
financed or to the lesser of 100% of the sale commitment amount or the note
amount of each mortgage being financed depending on the agreement. The Bank
generally will not accept any loan older than 60 days as collateral and
generally requires the originator to pay down the line for any loan held as
collateral which is 90 days or older from the date of its origination. Thus,
the overall security for the lines of credit is easily valued, highly liquid
and turns over rapidly.
Warehouse loans are underwritten in accordance with Bank policies and
procedures. Interested loan originators who contact or are contacted by the
Bank are asked to prepare a loan application which seeks detailed information
on the originator's business. After evaluating the application and
independently verifying the applicant's credit history, if the originator
appears to be a likely candidate for approval, Bank personnel will visit the
originator and review, among other things, its business organization,
management, quality control, funding sources, risk management, loan volume and
historical delinquency rate, financial condition, contingent obligations and
regulatory compliance. The originator pays a fee for this review to offset a
portion of the Bank's expense, which amount is deducted from the origination
fee if the line of credit is approved. If the originator meets the
established criteria, its application is submitted to the Lending Subcommittee
for review and if required, is thereafter referred to the Board of Directors'
Loan Committee.
Bank personnel attempt to minimize the risk of making Warehouse loans 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: (a) by periodically reviewing
each originator's financial statements, loan production delinquency and
commitment reports; and, (b) on an annual basis, by reviewing the originator's
audited financial statements and the auditor's letter to the originator's
board of directors.
During 1996, the Bank originated $887.3 million of Warehouse loans and
had such loans outstanding of $53.6 million at December 31, 1996.
PMSR LENDING. Since 1992, the Bank has 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. The mortgage companies receive fees for servicing mortgage loans
which include collecting and remitting loan payments to FNMA, FHLMC and other
investors. Loans of this nature generally have terms of one to five years, and
are generally limited to the lesser of 65.0% of the price paid by the mortgage
company for servicing rights, or the value of the originated servicing rights
(subject to the regulatory maximum for loans to one borrower). PMSR loans are
made at adjustable rates of interest tied to LIBOR or the Bank's borrowing
rate plus a spread and a commitment or non-usage fee. PMSR loans are
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. PMSR loans are underwritten in
substantially the same manner as Warehouse loans. Bank personnel closely
monitor PMSR borrowers on a semi-annual basis by, among other things,
reviewing the borrower's financial condition and operations in the same manner
as they do for Warehouse loans and by examining the value of the borrower's
PMSR portfolio (through evaluation of the estimated future net cash flows from
the servicing rights) in order to ensure that the loan-to-value ratio does not
exceed 70.0% during the life of the loan. If the continuing loan-to-value
ratio exceeds that amount, the borrower is asked to repay a portion of the
principal balance to maintain the ratio limit. At December 31, 1996, the Bank
had $21.4 million in outstanding PMSR loans.
REAL ESTATE ACQUISITION AND DEVELOPMENT LENDING. The Bank has increased
the number of loans originated to residential real estate builders and
developers for the acquisition and/or development of vacant land. The proceeds
of the loans are generally used to acquire the land and make the site
improvements necessary to develop the land into saleable lots. The Bank lends
only to the major developers in Houston with good track records and strong
financial capacity and on property where substantially all of the lots to be
developed are pre-sold. The term of the loans have generally been from 18 to
24 months at a spread over the prime rate, plus an origination fee. Repayment
on the loans is generally made as the lots are sold to builders. Land
acquisition and development loans involve additional risks when compared to
loans on existing residential properties. These loans typically involve
relatively large loan balances to single borrowers, and the repayment
experience is dependent upon the successful development of the land and the
resale of the lots. These risks can be significantly impacted by supply and
demand conditions and the general economic conditions in the local market
area. At December 31, 1996, the Bank had $26.1 million of real estate
acquisition and development loans outstanding.
COMMERCIAL BUSINESS LENDING. Development of a commercial business
lending program is a strategic goal of Bank management. The Texas Capital
acquisition provided the Bank with an established commercial business lending
program to small and medium sized companies primarily in the Houston and
Austin metropolitan areas. In 1996, management continued to develop the
infrastructure for commercial business lending in most of the Bank's major
markets. The commercial, financial and industrial loans ("Commercial Business
loans") are generally made to provide working capital financing or purchase
financing to businesses and are generally secured by the borrower's working
capital assets (i.e. accounts receivable, inventory, etc.) or assets purchased
by the borrower (i.e. operating assets, equipment, etc.). Commercial Business
loans generally have shorter terms (one to five years) at a spread over prime
rate 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 expand the acquired commercial business lending
program, while managing the associated credit risk by monitoring borrowers'
financial position and underlying collateral securing the loans. At December
31, 1996, Commercial Business loans outstanding totaled $22.0 million, of
which $496,000 (acquired from Texas Capital) was on non-accrual status.
CONSUMER LENDING. The Bank makes available traditional consumer loans,
such as home improvement, new and used car financing, new and used boat and
recreational vehicle financing and loans secured by savings deposits. 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, 1996, the Bank had $23.2 million in consumer
loans outstanding, of which $8.8 million were savings deposit secured loans.
Consumer loans (other than savings deposit secured loans) generally have
shorter terms and higher interest rates than mortgage loans but usually
involve greater credit risk than mortgage loans because of the type and nature
of the collateral. In addition, consumer lending collections are dependent on
the borrower's continuing financial stability, and are thus likely to be
adversely affected by job loss, 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.
The Bank's consumer loan lending territory approximates the markets
served by its retail branches. Persons desiring consumer loans are typically
individuals who have a pre-existing banking relationship with the Bank.
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 closely monitors the loan
portfolio and the Bank's real estate acquired as a result of foreclosure
("REO") for potential problems on a weekly basis and reports to the Board of
Directors on a monthly basis. When a borrower fails to make a required loan
payment or other weaknesses are detected in a borrower's financial condition,
the Bank attempts to determine an appropriate course of action by contacting
the borrower. Delinquencies are cured promptly in most cases. If the
delinquency on a mortgage loan exceeds 90 days and is not cured through the
Bank's normal collection procedures, or an acceptable arrangement is not
worked out with the borrower, the Bank will institute measures to remedy the
default, including commencing a foreclosure action. As a matter of policy,
the Bank generally does not accept from the mortgagor a voluntary deed of the
secured property in lieu of foreclosure. If foreclosure is effected, the
property is sold at a public auction in which the Bank may participate as a
bidder. If the Bank is the successful bidder, the foreclosed real estate is
then included in the Bank's REO portfolio until it is sold.
Upon acquisition, REO is recorded at the lower of unpaid principal
balance adjusted for any remaining acquisition premiums or discounts less any
applicable valuation allowance or estimated fair value, based on an appraisal,
less estimated selling costs. All costs incurred from the date of acquisition
forward relating to maintaining the property are recorded as a current
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 non-accrual status,
previously accrued but unpaid interest is 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, primarily if management
believes that the individual loan is in the process of collection and the
interest is fully collectible. At December 31, 1996, 1995 and 1994, the Bank
had the following loans which were 90 days or more delinquent and were on
accrual status:
At December 31,
-----------------------
1996 1995 1994
-------------------------------------
(Dollars in thousands)
First lien single family mortgage $ 106 $ -- $ --
Residential construction 52 -- --
Commercial real estate 881 -- --
Commercial, financial and industrial 14 231 --
Consumer 142 -- --
=========================================
Total $ 1,195 $ 231 $ --
=========================================
The following table sets forth information regarding the Bank's non-accrual
loans and REO as of the dates shown.
At December 31,
----------------
1996 1995 1994
----------------------------------------------------
(Dollars in thousands)
Non-accrual loans:
First lien single family $ 12,238 $ 12,925 $ 6,077
mortgage
Residential construction -- 353 --
Commercial real estate 32 965 --
Commercial, financial and
industrial 496 337 --
Consumer 73 42 25
--------------------------------------------------
Total non-accrual loans 12,839 14,622 6,102
Total REO 3,161 4,216 781
-------------------------------------------------
Total nonperforming assets $ 16,000 $ 18,838 $ 6,883
=================================================
Ratio of nonperforming
assets to total assets 0.56% 0.68% 0.30%
Ratio of non-accrual loans to total
loans receivable 1.04% 1.33% 1.04%
==================================================
At December 31, 1996, approximately $816,000 in additional interest
income would have been recorded in the year then ended on the above loans
accounted for on a non-accrual 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. For the year
ended December 31, 1996, $507,000 in interest income was included in net
income for these same loans prior to the time they were placed on non-accrual
status.
The increase in total nonperforming assets between 1994 and 1996 is
largely attributable to the growth in the Bank's single family residential
mortgage loan portfolio, which occurred primarily as a result of whole loan
acquisitions through bulk purchases, and due to the loans acquired in the
Texas Capital acquisition. At December 31, 1996, the Bank had 200 first lien
residential mortgage loans in non-accrual status, aggregating $12.2 million,
with an average balance of approximately $61,000. A total of 181 of these
loans, with an aggregate balance of $10.3 million, were acquired through bulk
loan purchases, 3 of these loans, with an aggregate balance of $26,000, were
acquired through the Southwest Plan Acquisition and 2 of these loans, with an
aggregate balance of $197,000, were acquired in the Texas Capital acquisition.
Of the 181 residential mortgage loans acquired through bulk purchases, at
December 31, 1996, 39 of such loans totaling $1.8 million were being serviced
by other institutions, which constituted 4.6% of the $38.2 million of
aggregate loans serviced by others.
The commercial real estate and commercial, financial and industrial loans
on non-accrual status at December 31, 1996 were acquired in the Texas Capital
acquisition.
At December 31, 1996, nonperforming assets included REO with an aggregate
book value of $3.2 million. At such date, the Bank's REO consisted of 36
single family residential properties and six commercial properties (also
acquired from Texas Capital).
At December 31, 1996, in addition to the loans in non-accrual status, the
Bank had $8.0 million in loans classified as substandard, $126,000 classified
as loss and $10.0 million of loans designated as "special mention" for
regulatory purposes. Of these loans, $2.5 million of the substandard loans
and $1.3 million of the "special mention" loans were acquired from Texas
Capital. The loans classified as loss at December 31, 1996 were consumer
loans specifically provided for in the allowance for loan losses allocation at
that date. Loans designated as "special mention" are not currently required
to be classified for regulatory purposes but have potential weaknesses or risk
characteristics that could result in future problems.
On January 1, 1995, the Bank adopted the Financial Accounting Standards
Board's (the "FASB") Statement of Financial Accounting Standards No. 114
(Statement 114), "Accounting by Creditors for Impairment of a Loan," as
amended by Statement 118. Under Statement 114, a loan is impaired when it is
"probable" that a creditor will be unable to collect all amounts due (i.e.,
both principal and interest) according to the contractual terms of the loan
agreement. Statement 114 requires that the measurement of impaired loans be
based on (i) the present value of the expected future cash flows discounted at
the loan's effective interest rate, (ii) the loan's observable market price,
or (iii) the fair value of the loan's collateral. Statement 114 does not
apply to large groups of smaller balance homogeneous loans that are
collectively evaluated for impairment. The Bank collectively reviews all
first-lien residential loans under $500,000 as a group and all consumer and
other loans as a group for impairment, excluding loans in which foreclosure is
probable. The adoption of Statement 114, as amended by Statement 118, had no
material impact on the Bank's consolidated financial statements as the Bank's
existing policy of measuring loan impairment was generally consistent with
methods prescribed in these standards.
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, 1996, the carrying value of loans that are considered to be
impaired under Statement 114 totaled approximately $725,000 (all of which were
on non-accrual) and the related allowance for loan losses on those impaired
loans totaled $524,000. The average balance of impaired loans during the year
ended December 31, 1996 was approximately $846,000. For the year ended
December 31, 1996, the Bank did not recognize interest income on loans
considered impaired.
The Bank had loaned $77.1 million at December 31, 1996, under its
residential construction lending program to multiple borrowers who are engaged
in similar activities. These borrowers could be similarly impacted by
economic conditions in the Houston metropolitan area. See "Residential
Construction Lending." Except for concentrations in its Warehouse lending
lines, the Bank had no other loan concentrations. At December 31, 1996, the
Bank had $53.6 million of Warehouse loans outstanding. See "Warehouse
Lending."
ALLOWANCE FOR LOAN LOSSES. The Bank maintains loan loss allowances to absorb
future and known losses that may be realized on its loans receivable
portfolio. The following table summarizes activity in the Bank's allowance
for loan losses during the periods indicated.
Year Ended December 31,
-------------------------
1996 1995 1994
----------------------------------------
(Dollars in thousands)
Balance at beginning of year $ 5,703 $ 2,158 $ 1,527
Total charge-offs, net(1) (748) (387) (303)
Provisions for loan losses 1,925 1,664 934
Acquisition allowance adjustment(2) -- 2,268 --
------------------------------------
Balance at end of the year $ 6,880 $ 5,703 $ 2,158
====================================
Ratio of net charge-offs during the
period to average net loans
outstanding during the period 0.06% 0.05% 0.06%
====================================
1Net charge-offs in all years are fully attributable to single family
residential loans, except for $154,000 in 1996 and $45,000 in 1995, which are
attributable to consumer and other loans. Net charge-offs also include
recoveries of $103,000 in 1996, $17,000 in 1995 and $26,000 in 1994.
2The acquisition allowance adjustment in 1995 represents the amount allocated
to the allowance for loan losses during the year in connection with (i) a bulk
loan package acquired and (ii) the loans acquired in the Texas Capital
acquisition.
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,
----------------
1996 1995 1994
------- ----- -----
(In thousands)
First lien residential mortgage $ 2,217 $ 2,992 $ 1,191
Multifamily mortgage 369 249 188
Residential construction 223 307 278
Real estate acquisition and development 261 130 142
Commercial real estate 1,151 1,072 152
Commercial construction 20 -- --
Commercial, Warehouse and PMSR 361 230 98
Commercial, financial and industrial 985 395 --
Consumer and other 374 177 109
Unallocated 919 151 --
--------------------------------
$ 6,880 $ 5,703 $ 2,158
================================
The following table sets forth the allocation of the provision
(reduction of allowance)for loan losses by loan type during
the periods indicated.
At December 31,
----------------
1996 1995 1994
-------- ----- ------
(In thousands)
First lien residential mortgage $ (180) $ 1,032 $ 743
Multifamily mortgage 120 23 60
Residential construction (84) (67) (174)
Real estate acquisition and development 131 (25) 106
Commercial real estate 79 479 128
Commercial construction 20 -- --
Commercial, Warehouse and PMSR 131 132 (49)
Commercial, financial and industrial 618 -- --
Consumer and other 322 90 120
Unallocated 768 -- --
-------------------------------------
$ 1,925 $ 1,664 $ 934
=====================================
Provisions for loan losses, currently $450,000 per quarter, are charged
to earnings to bring the total allowance to a level deemed appropriate by
management based on such factors as historical experience, the volume and type
of lending conducted by the Bank, the amount of nonperforming assets, industry
standards, regulatory policies, generally accepted accounting principles,
general economic conditions, particularly as they relate to the Bank's lending
area, and other factors related to the collectibility of the Bank's loan
portfolio.
The Bank periodically reviews its loan loss allowance policy, at a
minimum, annually. As a result of a comprehensive revision of such policy in
1996, the Bank changed its method of assessing the adequacy of the allowance
for loan losses. The revised policy provides that the Bank will annually
establish a monthly provision amount to be added to the allowance for loan
losses and the resultant allowance will be "tested" monthly for adequacy based
on the allocation methodology described below. The policy provides that any
"excess" based on this calculation will be maintained in the allowance for
loan losses as "unallocated". The minimum allowance allocation to first lien
residential mortgage loans greater than 90 days delinquent is a general
allocation of 5% of the aggregate net book value. All other first lien
residential mortgage loans are allocated a general allowance of 0.10% of the
aggregate net book value. The Bank generally allocates the allowance to
multifamily, residential construction, commercial construction, real estate
acquisition and development, commercial real estate, Warehouse, PMSR,
Commercial Business and consumer and other loans in the following percentages
of outstanding principal amounts: 0.25%, 0.25%, 0.50%, 1.0%, 0.50%, 0.25%,
0.50%, 1.0-2.0% and 1.0%. In addition, a general allowance allocation is
calculated on unfunded commitments and letters of credit using the general
allowance percentages described above for the applicable loan type. Specific
allowances are established by management on specific loans as considered
necessary.
The Bank's management believes that its present allowance for loan losses
is adequate based upon, among other considerations, the factors discussed
above, its low level of nonperforming loans and its nominal loss experience.
Management continues to review its loan portfolio to determine whether its
loan loss allowance policy 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 loan loss allowances. These
agencies may require the Bank to establish additional loan loss allowances,
based on their respective judgments of the information available at the time
of the examinations.
MORTGAGE BANKING ACTIVITIES
LOAN ORIGINATIONS AND SALES. Through 1995, the Bank's wholly-owned
subsidiary, CBS Mortgage, originated loans for the Bank and for others secured
by first lien mortgages on completed single family residences located
principally in the Houston metropolitan area and in geographic areas
surrounding the Bank's branch locations. Beginning on January 1, 1996, the
origination function was performed by the Bank, with CBS Mortgage's activities
then limited to primarily loan servicing. The Bank's present policy is to
originate and sell to third party investors residential mortgage loans
principally to generate fee income, while avoiding the interest rate and
credit risk associated with holding fixed rate mortgage loans in portfolio.
During the years ended 1996, 1995 and 1994, the Bank (in 1996) and CBS
Mortgage (in 1995 and 1994) originated or purchased with the intent to sell
$11.2 million, $8.8 million and $25.0 million, respectively, of single family
residential mortgage loans and sold $11.7 million, $8.3 million and $10.2
million, respectively, of such loans to secondary market investors ("SMI").
During 1996, 1995 and 1994, the Bank (in 1996) and CBS Mortgage (in 1995 and
1994) originated residential real estate loans for portfolio totaling $9.0
million, $1.7 million, and $18.0 million, respectively.
"Pipeline risk," which is inherent in mortgage lending operations, arises
when the originator of a loan makes an uncovered commitment to lend funds to a
borrower at a locked-in rate of interest over the period of time which is
required for the lender to close and/or sell the loan. The risk is that
market rates of interest will move higher in the period between the time of
commitment and the time of funding the loan, and the lender will thereafter
have difficulty finding a buyer for such loan at a break-even or better price.
Management of the Bank and of CBS Mortgage believes that its loan origination
strategy eliminates to a large extent any "pipeline risk." The majority of
applications taken are accepted on the basis that rates will be set
immediately prior to closing. Applications that carry a locked in rate are
covered for interest rate risk by the use of the forward sales of
mortgage-backed securities or by registering each loan with an investor that
offers loan-by-loan protection until closing and delivery to the investor.
Through 1995, CBS Mortgage made available a variety of mortgage products
designed to respond to consumer needs and competitive factors. Beginning on
January 1, 1996, with the transfer of the origination function, these mortgage
products were being made available from the Bank. Conventional conforming
loans that are secured by first liens on completed residential real estate are
originated for 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% require the borrower to purchase private mortgage insurance from
approved third party insurers. 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 FNMA or FHLMC, which is presently $203,150,
or loans that do not otherwise meet the criteria established by FNMA or FHLMC)
are also originated. Such loans are originated based on underwriting
guidelines or standards required by the SMI to whom such loans are intended to
be sold. During 1996, fewer than 10% of the mortgage loans originated by the
Bank were non-conforming mortgage loans.
In addition to 15-year and 30-year conventional mortgages, CBS Mortgage
offered, and now the Bank offers special products designed to provide lower
rates of interest or lower principal and interest payments to its customers.
Borrowers may choose from a wide variety of combinations of interest rates and
points on many of its products so that its customers 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 and CBS Mortgage'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 CBS Mortgage or the Bank. However, if a request for a refinancing is
received, borrowers are offered current mortgage loan products. Refinancings
are processed in a manner identical to original originations and are charged
the same fees as charged for original originations.
LOAN SERVICING. CBS Mortgage services residential real estate loans
owned by the Bank as well as for others, including FNMA, FHLMC and other
private mortgage investors. Loan servicing includes 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. Funds that have been escrowed by borrowers for the payment of
mortgage related expenses, such as property taxes and hazard and mortgage
insurance premiums, are maintained in non-interest-bearing accounts at the
Bank. At December 31, 1996, the Bank had $5.5 million deposited in such escrow
accounts.
CBS Mortgage receives fees for servicing mortgage loans, which generally
range from 0.250% to 0.375% per annum on the declining principal balance of
fixed rate mortgage loans and from 0.375% to 0.500% per annum on the declining
principal balance of adjustable rate mortgage loans. Such fees serve to
compensate CBS Mortgage for the costs of performing the servicing function.
Other sources of loan servicing revenues include late charges and other
ancillary fees. For the years ended 1996, 1995 and 1994, the Bank earned $3.0
million, $3.5 million and $3.7 million, respectively, in conjunction with CBS
Mortgage's loan servicing. Servicing fees are collected by CBS Mortgage out of
the monthly mortgage payments made by borrowers.
CBS Mortgage's servicing portfolio is subject to reduction by normal
amortization, by prepayment or by foreclosure of outstanding loans. At
December 31, 1996, 1995 and 1994, CBS Mortgage had an aggregate loan servicing
portfolio of $1.7 billion, $1.7 billion and $1.5 billion, respectively. Of
these amounts at such respective dates, CBS Mortgage serviced loans for the
Bank aggregating $958.2 million, $824.6 million and $481.8 million and loans
for others aggregating $776.7 million, $900.7 million and $1.0 billion. At
December 31, 1996, 55.2% of the dollar value of loans being serviced by CBS
Mortgage was for the Bank, 16.1% was being serviced for FHLMC, 26.6% was being
serviced for FNMA and 2.1% was being serviced for others. At December 31,
1996, $33.4 million of the loans serviced for private mortgage investors were
being subserviced for CBS Mortgage by a third party mortgage company.
Beginning in 1990, in order to increase the size of its loan servicing
portfolio, CBS Mortgage began to purchase bulk packages of mortgage servicing
rights from the Federal government and other institutions on a competitive bid
basis. The PMSRs, which were acquired in 1990 and 1991, were primarily
conventional loans secured by real property. The bulk purchase market for
loan servicing was attractive to purchasers in the early 1990s due to the
relatively large amounts of such servicing rights that were being sold by
banks and thrift institutions due to the introduction of new regulatory
capital standards, and by the Resolution Trust Corporation as part of its
liquidation function. Prices bid on these bulk offerings ranged from 0.35% to
1.25% of the principal balance of the underlying mortgages. Between 1992 and
1994, CBS Mortgage pursued the purchase of PMSRs from private institutions.
The packages of servicing rights purchased from the private institutions
during this period were purchased at prices which have generally ranged
between 0.82% to 1.47% on the principal balances of the underlying mortgages.
No servicing rights were purchased by CBS Mortgage in 1996 or 1995. As of
December 31, 1996, an aggregate of $776.7 million of CBS Mortgage's $1.7
billion servicing portfolio, or 44.8%, was loans serviced for others. At
December 31, 1996, CBS Mortgage had no commitments for further purchases of
PMSRs.
The amount, if any, by which PMSRs exceed the lower of 90% of
determinable fair market value, 90% of origination cost or current amortized
book value must be deducted from capital in calculating regulatory capital.
See "Regulation - Regulatory Capital Requirements." At December 31, 1996,
there were no deductions from capital for PMSR valuation adjustments.
The following table sets forth certain information regarding CBS
Mortgage's servicing portfolio of mortgage loans for the periods indicated.
Year Ended December 31,
-------------------------
1996 1995 1994
---------------------------------------------
(In thousands)
Beginning servicing portfolio $ 1,725,400 $ 1,511,263 $ 1,239,756
----------------------------------------
Loans originated(1) -- 8,810 24,965
Bulk servicing acquired -- -- 323,149
Bank loan originations 104,023 68,960 52,769
Bank whole loans acquired 185,176 390,230 139,621
----------------------------------------
Total servicing originated
and acquired 289,199 468,000 540,504
----------------------------------------
Loans sold servicing
released 47 2,602 210
Amortization and payoffs 273,219 246,223 263,903
Foreclosures 6,244 5,038 4,884
----------------------------------------
Total servicing reductions 279,510 253,863 268,997
----------------------------------------
Ending servicing portfolio $ 1,735,089 $ 1,725,400 $ 1,511,263
========================================
________________________
1Includes loans originated for the Bank in 1995 and 1994.
MORTGAGE-BACKED SECURITIES
The Bank maintains a significant portfolio of mortgage-backed securities
as a means of investing in housing-related mortgage instruments without the
costs associated with originating mortgage loans for portfolio retention. At
December 31, 1996, the Company's mortgage-backed securities portfolio
(including $180.7 million of mortgage-backed securities available-for-sale),
net of unamortized premiums and unearned discounts, amounted to $1.5 billion,
or 53.0%, of total assets. By investing in mortgage-backed securities,
management seeks to achieve a positive spread over the cost of funds used to
purchase these securities. At December 31, 1996, the Company's net
mortgage-backed securities had an aggregate market value of $1.5 billion.
The following table sets forth the composition of the Company's
mortgage-backed securities portfolio at the dates indicated.
At December 31,
1996 1995 1994
---------- -------- ------
Amount Percent Amount Percent Amount Percent
-----------------------------------------------------------------
(Dollars in thousands)
Held-to-maturity:
REMICS $ 1,213,849 90.25% $1,241,999 89.00% $1,426,757 88.90%
FNMA certificates 77,324 5.75 90,061 6.45 101,633 6.33
GNMA certificates 33,900 2.52 39,363 2.82 44,843 2.79
Non-agency certificates 19,826 1.48 24,091 1.73 30,431 1.90
FHLMC certificates -- -- -- -- 1,239 0.08
Interest-only securities 38 -- 55 -- 81 --
------------------------------------------------------------------
1,344,937 100.00% 1,395,569 100.00% 1,604,984 100.00%
======== ======= =======
Unamortized premium 3,153 3,841 4,550
Unearned discount (3,503) (3,657) (3,695)
------------------------------------------------------------------
Total held-to-maturity $1,344,587 $1,395,753 $1,605,839
===================================================================
Available-for-sale:
REMICS $ 185,651 100.00% $ 186,505 99.52% $ 32,978 100.00%
Non-agency certificates -- 0.00 908 0.48 -- --
-------------------------------------------------------------------
185,651 100.00% 187,413 100.00% 32,978 100.00%
======== ======= =======
Unamortized premium 33 44 6
Unearned discount (255) (284) --
Net unrealized loss (4,773) (759) (735)
-------------------------------------------------------------------
Total available-for-sale $ 180,656 $ 186,414 $ 32,249
===================================================================
Total mortgage-backed
securities $1,525,243 $1,582,167 $1,638,088
===================================================================
The mortgage-backed securities which the Bank purchases and maintains in
portfolio can include FNMA, FHLMC and GNMA certificates, certain privately
issued, credit-enhanced mortgage-backed securities which are rated "A" or
better by the national securities rating agencies, certain types of
collateralized mortgage obligations ("CMOs") and interest-only ("IO")
certificates. The FNMA, FHLMC and GNMA certificates are modified pass-through
mortgage-backed securities, which represent undivided interests in underlying
pools of fixed-rate, or certain types of adjustable rate, single family
residential mortgages issued by these quasi-governmental (GNMA) and private
(FNMA and FHLMC) corporations. FNMA and GNMA provide to the certificate
holder a guarantee (which is backed by the full faith and credit of the U.S.
government in the case of GNMA certificates) of timely payments of interest
and scheduled principal payments, whether or not they have been collected.
FHLMC guarantees the timely payment of interest and the full (though not
necessarily timely) payment of principal. The guarantees of FNMA and FHLMC
are not backed by the full faith and credit of the U.S. government. The
mortgage-backed securities acquired by the Bank 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 earn a credit rating of "A" or better from one or more of the
national securities rating agencies.
A CMO is a special type of pay-through debt obligation in which the
stream of principal and interest payments on the underlying mortgages or
mortgage-backed securities is used to create classes with different maturities
and, in some cases, amortization schedules and a residual class of the CMO
security being sold, with each such class possessing different risk
characteristics. The residual interest sold represents any residual cash flows
which result from the excess of the monthly receipts generated by principal
and interest payments on the underlying mortgage collateral and any
reinvestment earnings thereon, less the cash payments to the CMO holders and
any administrative expenses. As a matter of policy, due to the risk
associated with residual interests, the Bank has never invested in, and does
not intend to invest in, residual interests in CMOs. CMOs and other
mortgage-backed securities may be structured as Real Estate Mortgage
Investment Conduits ("REMICs") for U.S. Federal income tax purposes.
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 IO securities or the residual interests in
CMOs) are weighted at no more than 20% for risk-based capital purposes,
compared to a weight of 50% to 100% for residential loans. See "Regulation -
Regulatory Capital Requirements."
The FDIC has issued a statement of policy which states, among other
things, that mortgage derivative products (including CMOs and CMO residuals
and stripped mortgage-backed securities such as IOs) which possess average
life or price volatility in excess of a benchmark fixed rate 30 year
mortgage-backed pass-through security are "high-risk mortgage securities," are
not suitable investments for depository institutions, and if considered "high
risk" at purchase must be carried in the institution's trading account or as
assets held for sale, and must be marked to market on a regular basis. In
addition, if a security was not considered "high risk" at purchase but was
later found to be "high risk" based on the tests, the security may remain in
the held-to-maturity portfolio as long as the institution has the positive
intent to hold the security to maturity and has a documented plan in place to
manage the higher risk. At December 31, 1996, the Bank had mortgage-backed
securities considered "high risk" with a recorded booked value of
approximately $114.3 million. These securities were not considered "high
risk" at purchase, but were later found to be "high risk" based on the results
of the required tests. The Bank has the positive intent to hold these
securities to maturity and has documented the Bank's plan to manage the higher
risk of these securities. If the Bank should elect to consider a new type of
security for its portfolio, the Bank intends to ascertain in advance that the
security does not fail any of the tests that will qualify it as a "high risk
mortgage security." The Bank will not purchase any security that fails such
tests unless it has in place a documented plan to manage the higher risk of
that security and has approval from the Board of Directors.
The following table sets forth the Company's activities with respect to
mortgage-backed securities (including held-to-maturity and available-for-sale)
during the periods indicated.
Year Ended December 31,
1996 1995 1994
----------------------------------------
(In thousands)
Mortgage-backed securities
held-to-maturity purchased $ --- $ 52,741 $511,847
--------------------------------------
Available-for-sale securities sold(1) 864 72,298 794
Amortization of premiums, net of discount
accretion 552 495 1,589
Change in unrealized loss on mortgage-backed
securities available-for-sale 4,013 24 735
Principal repayments on mortgage-backed
securities 51,495 35,845 195,545
----------------------------------------
Total decrease 56,924 108,662 198,663
----------------------------------------
Net increase (decrease) in mortgage-backed
securities $ (56,924) $(55,921) $313,184
======================================
1Securities sold in 1995 after reclassification from held-to-maturity
portfolio pursuant to the FASB's Special Report, "A Guide to Implementation of
Statement 115 on Accounting for Certain Investments in Debt and Equity
Securities."
On January 1, 1994, the Company adopted the FASB Statement of Financial
Accounting Standards No. 115 (Statement 115), "Accounting for Certain
Investments in Debt and Equity Securities." In accordance with Statement 115,
the Company classifies securities as either held-to-maturity or
available-for-sale. Securities are classified as held-to-maturity when the
Company has the positive intent and ability to hold such securities to
maturity. Securities held-to-maturity are recorded at amortized cost.
Permanent declines in the value of held-to-maturity securities are charged to
earnings in the periods in which the declines are determined. Securities
available-for-sale are securities other than those held-to-maturity or for
trading purposes and are recorded at fair value, with unrealized gains and
losses excluded from earnings and recorded as a separate component of
stockholders' equity. In connection with the adoption of Statement 115, in
1994 the Company transferred approximately $50.8 million of mortgage-backed
securities to the available-for-sale category. 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.
In November 1995, the FASB issued the Special Report, "A Guide to
Implementation of Statement 115 on Accounting for Certain Investments in Debt
and Equity Securities." Provisions in this Special Report granted all
entities a one-time opportunity, until no later than December 31, 1995, to
reassess the appropriateness of the classifications of all securities held and
to account for any resulting reclassifications at fair value in accordance
with Statement 115. The provisions of the Special Report also directed that
any reclassifications as a result of this one-time reassessment would not call
into question the intent to hold other debt securities to maturity in the
future. In accordance with this Special Report, on November 20, 1995, the
Company reclassified approximately $226.6 million of mortgage-backed
securities to the available-for-sale category. These mortgage-backed
securities reclassified to the available-for-sale category were primarily COFI
securities and gave the Company the opportunity to somewhat change the
composition of the portfolio by selling certain securities if that was
considered necessary. In 1996 and 1995, the Company sold $864,000 and $72.3
million, respectively, of these mortgage-backed securities available-for-sale.
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 mortgage-backed securities, residential mortgage loans
or to originate construction 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 and maturities 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 more
cost effective.
DEPOSITS. The Bank's market for deposits is competitive, which has
necessitated the Bank's emphasis on primarily short term certificate accounts
that are more responsive to market interest rates than savings accounts. The
Bank offers a traditional line of deposit products which currently includes
savings, interest-bearing checking (NOW), noninterest-bearing checking, 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. During 1996 and early in 1997,
the Bank began to offer a range of products for commercial businesses
including Small Business Checking, Business Interest Checking, Analysis
Checking and Commercial Money Market Accounts, the amounts of which, in 1996,
are not material for separate presentation.
The following table shows the distribution of and certain other
information relating to the Bank's deposits by type as of the dates indicated.
At December 31,
----------------
1996(1) 1995(2)
Percent Percent
of of
Amount Deposits Amount Deposits
--------------------------------------------------------
(Dollars in Thousands)
Demand deposit accounts:
Noninterest-bearing checking $ 85,259 6.50% $ 81,207 6.31%
NOW 56,862 4.34 47,476 3.69
Savings 22,135 1.69 22,374 1.74
Money market demand 151,046 11.52 165,214 12.83
-------------------------------------------------
Total demand deposit accounts 315,302 24.05 316,271 24.57
-------------------------------------------------
Certificate accounts:
Within 1 year 772,690 58.94 704,966 54.76
1-2 years 158,583 12.10 188,400 14.63
2-3 years 40,961 3.12 32,556 2.53
3-4 years 18,268 1.39 29,717 2.31
4-5 years 5,064 0.39 15,210 1.18
Over 5 years 165 0.01 319 0.02
Total certificate accounts 995,731 75.95 971,168 75.43
------------------------------------------------------
1,311,033 100.00% 1,287,439 100.00%
========= =========
Discount to record
savings deposits at fair value, net (198) (355)
------------------------------------------------
Total $ 1,310,835 $ 1,287,084
=========== ==========
At December 31,
1994(3)
Percent
of
Amount Deposit
(Dollars in thousands)
Demand deposit accounts:
Noninterest-bearing checking $ 39,656 3.48%
NOW 25,477 2.23
Savings 22,146 1.94
Money market demand 204,188 17.90
--------------------
Total demand deposit accounts 291,467 25.55
--------------------
Certificate accounts:
Within 1 year 640,021 56.11
1-2 years 125,578 11.01
2-3 years 24,901 2.18
3-4 years 28,610 2.51
4-5 years 29,673 2.60
Over 5 years 407 0.04
--------------------
Total certificate accounts 849,190 74.45
--------------------
1,140,657 100.00%
===================
Discount to record
savings deposits at fair value, net (1,035)
-----------
Total $1,139,622
===========
_______________
1In 1996, the Bank assumed approximately $11.1 million in net deposits in
connection with the exchange of three branch offices for one and the sale of
another branch office.
2In 1995, the Bank assumed approximately $157.2 million in deposits in
connection with the acquisition of five branch offices of another financial
institution.
3In 1994, the Bank assumed approximately $150.2 million in deposits in
connection with the acquisition of eight branch offices of another financial
institution.
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,
-------------------------
1996 1995 1994
--------------------------------------
(Dollars in Thousands)
Average Average Average Average Average Average
Balance Rate Paid Balance Rate Paid Balance Rate Paid
-----------------------------------------------------------
Demand deposit accounts:
Noninterest-bearing checking $85,469 --% $ 62,164 --% $ 54,831 --%
NOW 49,181 2.07 29,904 2.06 22,041 1.79
Savings 22,104 2.32 20,162 2.52 21,754 2.49
Money market demand 157,933 3.64 156,730 3.61 214,092 3.11
Certificate accounts 970,433 5.42 909,992 5.49 707,324 4.34
--------------------------------------------------------------
Total deposits $1,285,120 4.66% $1,178,952 4.81% $1,020,042 3.75%
===============================================================
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, 1996, which mature during the periods
indicated.
Amounts at December 31, 1996 Maturing
(In thousands)
---------------------------------------
One Year
Amounts at December 31, or Less
---------------------------------------
1996 1995
---------- ---------
(In thousands)
Certificate accounts:
2.00% to 3.99% $14,835 $14,387 $14,223
4.00% to 5.99% 871,852 721,943 715,884
6.00 to 7.99% 104,092 223,310 40,363
8.00 to 9.99% 4,686 6,513 2,053
10.00% to 11.99% 266 5,015 167
-----------------------------------------
Total $995,731 $971,168 $772,690
=========================================
Greater than
Two Years Three Years Three Years
----------------------------------------
Certificate accounts:
2.00% to 3.99% 376 $ 95 $ 141
4.00% to 5.99% 136,942 11,565 7,461
6.00 to 7.99% 19,495 28,438 15,796
8.00 to 9.99% 1,766 768 99
10.00% to 11.99% 4 95 --
-----------------------------------
Total 158,583 $40,961 $23,497
===================================
Certificates maturing within one year consist primarily of six month and
one year certificates. Historically, a majority of such certificate holders
roll over their balances into new certificates with similar terms at the
Bank's then current interest rates. The Bank believes that its pricing
strategy will help the Bank to achieve balance levels deemed appropriate by
management on a continuing basis.
The following table sets forth the net deposit flows of the Bank during
the periods indicated.
Year Ended December 31,
-------------------------
1996 1995 1994
-------- ------- -------
(In thousands)
Net increase (decrease) before
interest credited(1) $ (34,707) $ 91,052 $ 77,893
Interest credited 58,458 56,410 38,624
Net deposit increase $ 23,751 $ 147,462 $ 116,517
======== ======= =======
1For the years ended December 31, 1996, 1995 and 1994, reflects the effect of
the assumption of $11.1 million, $157.2 million and $150.2 million of net
deposit liabilities in connection with branch office transactions in each
respective year. The net deposit outflow in 1996 was primarily due to
financial disintermediation as described below.
The following table sets forth the amount of the Bank's certificates of
deposits which are $100,000 or more by time remaining until maturity as of
December 31, 1996.
At December 31, 1996
----------------------
Number of Deposit
accounts Amount
---------------------- -------
(Dollars in thousands)
Three months or less 277 $ 29,242
Over three through six
months 265 29,599
Over six through twelve
months 280 29,397
Over twelve months 190 21,133
Total 1,012 $ 109,371
========== =============
The Bank's deposits are obtained primarily from residents of central and
south 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 customers. The Bank uses traditional marketing methods to attract new
customers and savings deposits, including newspaper advertising. Through
1996, the Bank has not solicited brokered deposit accounts and generally has
not negotiated rates on larger denomination (i.e., jumbo) certificates of
deposit. The Bank did, however, acquire deposits, classified on the books and
records of a prior entity as brokered, through the branch acquisition in 1994.
In addition, in early 1997, the Bank has begun the solicitation of deposit
accounts through a "money desk." Money desk rates are only offered to
institutions (primarily credit unions and municipal utility districts) and are
generally up to 50 basis points higher than on regular certificate of deposit
accounts.
Management of the Bank intensified its deposit product marketing
beginning in 1993 in order to increase its share of core deposits in the
markets in which it operates. Management believes that the combination of the
new packaged deposit products (which generally have higher minimum balance
requirements and which provide value-added incentives to the customer, such
as, for example, free traveler's checks, reduced or waived monthly service
charges and free money orders) plus increased advertising, sales training,
branch promotion and cross-selling of products will help maintain the volume
of the Bank's deposits and strengthen customer relationships without requiring
the Bank to alter its deposit pricing strategy. The Bank's management also
believes that such efforts will assist the Bank in maintaining deposits,
particularly during periods of relatively low deposit rates, which might
otherwise flow out of the institution due to disintermediation (the movement
of funds away from savings institutions and into direct investment vehicles
such as government and corporate securities and mutual funds). Notwithstanding
this plan, the ability of the Bank to attract and maintain deposits and the
Bank's cost of funds have been, and will continue to be, significantly
affected by general money market conditions.
The Bank also provides its customers with the opportunity to invest in
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
financial condition.
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,
-----------------------
1996 1995 1994
---------- -------- --------
(Dollars in thousands)
FHLB advances:
Average balance outstanding $ 387,296 $ 367,895 $ 511,407
Maximum amount outstanding
at any month-end during the
period 491,930 405,016 914,279
Balance outstanding at end of
period 409,720 312,186 386,036
Average interest rate during the
period 5.62% 6.01% 4.46%
Average interest rate at end of
period 5.61% 5.88% 5.99%
Securities sold under agreements
to repurchase:
Average balance outstanding $ 930,706 $ 752,427 $ 593,054
Maximum amount outstanding
at any month-end during the
period 1,022,085 993,832 763,952
Balance outstanding at end of
period 966,987 993,832 645,379
Average interest rate during the
period 5.52% 5.98% 4.65%
Average interest rate at end of
period 5.55% 5.78% 6.16%
The Bank obtains long term, fixed rate and short term, variable rate
advances from the FHLB upon the security of certain of its residential first
mortgage loans, mortgage-backed securities and other assets, provided certain
standards related to creditworthiness of the Bank have been met. FHLB advances
are generally available for general business purposes to expand lending and
investing activities. Borrowings have generally been used to fund the
purchase of loans receivable and mortgage-backed securities.
Advances from the FHLB are made pursuant to several different credit
programs, each of which has its own interest rate and range of maturities.
The programs of the FHLB currently utilized by the Bank include a variable
rate line of credit, various short-term, variable rate advances and long term,
fixed and variable-rate advances. At December 31, 1996, the Bank had total
FHLB advances of $409.7 million at a weighted average interest rate of 5.61%.
The Bank also obtains funds from the sales of securities to investment
dealers and the FHLB 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 either the
same or a substantially identical security on a specified later date at a
price less than the original sales price. The difference in the sale price
and purchase price is the cost of the use of the proceeds. The
mortgage-backed securities underlying the agreements are delivered to the
dealers who arrange the transactions. For agreements in which the Bank has
agreed to repurchase substantially identical securities, the dealers may sell,
loan or otherwise dispose of the Bank's securities 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, 1996, the Company had
$967.0 million in borrowings under reverse repurchase agreements at a weighted
average interest rate of 5.55%. At December 31, 1996, the Company had amounts
of securities at risk under securities sold under agreements to repurchase
with three individual counterparties which exceeded ten percent of
stockholders' equity. The amount at risk with Solomon Brothers Inc. was $12.3
million with an average maturity of 708 days at December 31, 1996. The amount
at risk with Credit Suisse First Boston Corporation was $33.6 million with an
average maturity of 20 days at December 31, 1996. The amount at risk with
Goldman Sachs was $38.3 million with an average maturity of 27 days at
December 31, 1996.
The Securities Investment Subcommittee of the Bank attempts to match the
maturity of reverse repurchase agreements 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 attempts to alter the interest rate risk associated
with the reverse repurchase agreements through the use of interest rate swaps
and interest rate caps purchased from the FHLB and certain large securities
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 10.0% 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, 1996, the Bank was authorized to have a maximum
investment of approximately $287.3 million in its subsidiaries.
At December 31, 1996, the Bank had two active wholly-owned subsidiaries,
the activities of which are described below. At December 31, 1996, the Bank's
aggregate equity investment in all of its subsidiaries was $7.1 million and
the total amount of conforming loans outstanding to such subsidiaries was $1.1
million.
CBS MORTGAGE CORP. The Bank is the sole stockholder of CBS Mortgage, a
Texas corporation formed in 1989 to engage in the business of originating,
purchasing, selling and servicing loans secured by first lien mortgages on
completed one-to four-family dwelling units. Beginning on January 1, 1996,
the origination, purchasing and selling functions of the Company were
performed by the Bank, with CBS Mortgage's activities then limited to
primarily loan servicing. For a detailed discussion of CBS Mortgage's
business operations, see "Mortgage Banking Activities."
The Bank and CBS Mortgage have entered into a ten year mortgage warehouse
revolving loan agreement pursuant to which the Bank has established a $15.0
million revolving line of credit to be drawn upon from time to time by CBS
Mortgage to finance the acquisition of PMSRs and, prior to 1996, the
origination or acquisition of mortgage loans and the holding of such loans
until they were sold, delivered or pledged to secondary market investors.
The advances drawn by CBS Mortgage are secured by a promissory note
payable upon demand. Interest on the funds advanced by the Bank is payable
monthly at the local prime rate plus 1% per annum. The promissory note between
the Bank and CBS Mortgage provides that CBS Mortgage is credited an amount
equal to the local prime rate less 1% per annum on the average monthly balance
of all escrowed funds held by the Bank. The credit is limited in amount to
the interest charged by the Bank. As a result of such credit, CBS Mortgage
made no interest payments to the Bank under this loan for the year ended
December 31, 1996. Principal balances under the loan are generally repaid
through servicing income generated from PMSRs. At December 31, 1996, the
Bank's equity investment in CBS Mortgage was $7.0 million and the balance of
all intercompany advances (including advances under the revolving line of
credit) was $1.0 million. CBS Mortgage had net income of $2.3 million, $1.3
million and $1.2 million for the years ended December 31, 1996, 1995 and 1994,
respectively.
COASTALBANC FINANCIAL CORP. CoastalBanc Financial Corp. ("Financial
Corp.") was formed in 1986 to act as an investment advisor to other insured
financial institutions. The Bank is the sole stockholder of Financial Corp.
Over the past three years, Financial Corp. has been inactive in its investment
advisory capacity. Financial Corp. became active during the last quarter of
1992 in connection with the sale of mutual funds through a third party
intermediary. Fees generated net of expenses, resulted in a net income of
$40,000, $34,000 and $47,000 for the years ended December 31, 1996, 1995 and
1994, respectively.
THE SOUTHWEST PLAN ACQUISITION
During the latter half of the 1980's, severely depressed economic
conditions prevailed in the southwestern United States, and in Texas in
particular, which seriously impaired the operating results of many
corporations. A large number of savings institutions suffered significant
losses, which were attributable to the economic deterioration in the region,
as well as, in some instances, to improper or fraudulent practices by persons
affiliated with such institutions. In an attempt to address the problems of a
record number of savings institution failures, in February 1988 the Federal
Home Loan Bank Board as operating head of the FSLIC, announced the
establishment of its "Southwest Plan," which was designed to consolidate
failed or failing savings institutions located in the southwestern United
States with healthy savings institutions, shrink the number of savings
institutions in the Southwest and promote the infusion of additional capital
into the savings industry through financial assistance and other incentives.
During this period, the Bank developed a business strategy oriented
toward growth and increasing profitability through prudent acquisitions, with
assistance from the Federal government. The strategy was designed to utilize
the deposits obtained in such transactions as an inexpensive source of funds
for growth, which would facilitate reduced overhead levels as a proportion of
assets from economies of scale and lower cost of funds from a more meaningful
market share of core deposits. In order to implement this strategy, the Bank
decided to participate in the Southwest Plan and on May 13, 1988, the Bank
became the first acquiror of failed or failing savings institutions under the
FSLIC's Southwest Plan. The Southwest Plan Acquisition was implemented
pursuant to the terms of an Assistance Agreement, entered into by the FSLIC
and the Bank. The Southwest Plan Acquisition significantly increased the
total size and market penetration of the Bank.
The FSLIC agreed in the Assistance Agreement to provide the Bank with
certain forms of financial assistance, including a guaranteed yield on, and
reimbursement for losses incurred or write-downs directed by the government or
provided by the Bank with respect to, certain assets acquired from the
Acquired Associations (the "Guaranteed Assets") and certain additional forms
of financial assistance.
On April 15, 1994, the Bank and the FDIC announced the early termination
of the Assistance Agreement, effective March 31, 1994. Under the terms of the
agreement, the Bank transferred substantially all of its remaining Guaranteed
Assets to the FDIC in exchange for cash of $37.4 million and also received
cash of $12.7 million for the remaining receivable from the government in
order to record acquired assets at fair value. In addition, the Bank
repurchased for $5.9 million a warrant to purchase Bank common stock that had
been granted to the Federal government. The Federal government will continue
to receive the future federal income tax benefits of the net operating loss
carryforwards acquired from the Acquired Associations. See "Taxation-Federal
Taxation" and Note 20 of the Notes to the Consolidated Financial Statements.
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.
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. However, if the Director of the OTS determines that
there is reasonable cause to believe that the continuation by a savings and
loan holding company of an activity constitutes a serious risk to the
financial safety, soundness or stability of its subsidiary savings institution
(i.e., a savings association or savings bank), the Director may impose such
restrictions as deemed necessary to address such risk, including limiting (i)
payment of dividends by the savings institution; (ii) transactions between the
savings institution and its affiliates; and (iii) any activities of the
savings institution that might create a serious risk that the liabilities of
the holding company and its affiliates may be imposed on the savings
institution. Notwithstanding the foregoing, if the savings institution
subsidiary of such a holding company fails to meet the Qualified Thrift Lender
("QTL") test, then such unitary holding company also shall become subject to
the activities restrictions applicable to multiple savings and loan holding
companies and, unless the savings institution requalifies as a QTL within one
year thereafter, shall register as, and become subject to the restrictions
applicable to, a bank holding company. See "- Regulation of The Bank -
Qualified Thrift Lender Test."
If the Company were to acquire control of another savings institution,
other than through merger or other business combination with the Bank, the
Company would thereupon become a multiple savings and loan holding company.
Except where such acquisition is pursuant to the authority to approve
emergency thrift acquisitions and where each subsidiary savings institution
meets the QTL test, as set forth below, the activities of the Company and any
of its subsidiaries (other than the Bank or other subsidiary savings
institutions) would thereafter be subject to further restrictions. No
multiple savings and loan holding company or subsidiary thereof which is not a
savings institution shall commence or continue beyond a limited period of time
after becoming a multiple savings and loan holding company or subsidiary
thereof any business activity, other than: (i) furnishing or performing
management services for a subsidiary savings institution; (ii) conducting an
insurance agency or escrow business; (iii) holding, managing, or liquidating
assets owned by or acquired from a subsidiary savings institution; (iv)
holding or managing properties used or occupied by a subsidiary savings
institution; (v) acting as trustee under deeds of trust; (vi) those activities
authorized by regulation as of March 5, 1987 to be engaged in by multiple
savings and loan holding companies; or (vii) unless the Director of the OTS by
regulation prohibits or limits such activities for savings and loan holding
companies, those activities authorized by the Federal Reserve Board as
permissible for bank holding companies. 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 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).
TEXAS REGULATIONS. Under the Texas Savings Bank Act ("TSBA"), each
registered holding company, such as the Company, is required to file reports
with the Department as required by the Texas Savings and Loan Commissioner
("Commissioner") and is subject to such examination as the Commissioner may
prescribe.
REGULATION OF THE BANK
The Bank is required to file reports with the Department and the FDIC
concerning its activities and financial condition, in addition to obtaining
regulatory approvals prior to entering into certain transactions, such as any
merger or acquisition with another institution. The regulatory system to
which the Bank is subject is intended primarily for the protection of the
deposit insurance fund and depositors, not stockholders. The regulatory
structure also provides the Department and the FDIC with substantial
discretion in connection with their supervisory and enforcement functions.
The Department and the FDIC conduct periodic examinations of the Bank in order
to assess its compliance with federal and state regulatory requirements. As a
result of such examinations, the Department and the FDIC may require various
corrective actions.
Virtually every aspect of the Bank's business is subject to numerous
federal and/or state regulatory requirements and restrictions with respect to
such matters as, for example, the nature and amounts of loans and investments
that may be made, the issuance of securities, the amount of reserves that must
be established against deposits, the establishment of branches, mergers,
non-banking activities and other operations. Numerous laws and regulations
also set forth special restrictions and procedural requirements with respect
to the extension of credit, credit practices, the disclosure of credit terms
and discrimination in credit transactions.
The description of statutory provisions and regulations applicable to
savings banks set forth in this Form 10-K does not purport to be a complete
description of such statutes and regulations and their effects on the Bank.
Moreover, because some of the provisions of the FDIA, as amended by the
FDICIA, have not yet been fully implemented through the adoption of
regulations by the various federal banking agencies, the Bank cannot yet fully
assess the impact of these provisions on its operations.
In particular, the Bank cannot predict whether it will be in compliance
with such new regulations at the time they become effective. Furthermore, the
Bank cannot predict what other new regulatory requirements might be imposed in
the future.
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, Sections 23A and 23B (i) limit 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 and (ii) require 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, purchase of assets, issuance of a
guarantee and similar transactions. 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, 1996, 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 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 PMSRs up to certain specified limits and
minus net deferred tax assets in excess of certain specified limits. At
December 31, 1996, 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, with an additional cushion of at least 100 to 200 basis
points for all other state-chartered, FDIC-supervised banks, which effectively
imposes a minimum Tier 1 capital ratio for such other banks of between 4.0% to
5.0%. 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,
1996, the required Tier 1 capital ratio for the Bank was 4.0% and its actual
Tier 1 capital ratio was 5.35%.
RISK-BASED CAPITAL REQUIREMENTS. The risk-based capital requirements
contained in FDIC regulations generally require the Bank to maintain a 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, 1996, the Bank's Tier 1 capital to risk-weighted assets
ratio was 11.77% and its total risk-based capital to risk weighted assets
ratio was 12.30%.
The following table sets forth information with respect to each of the
Bank's capital requirements as of the dates shown.
As of December 31,
1996 1995 1994
------------------- ------- -------
Actual Required Actual Required Actual Required
-------------- --------- ------- --------- ------- ---------
Tier 1 capital to total assets 5.35% 4.00% 5.30% 4.00% 4.54% 4.00%
Tier 1 risk-based capital
to risk weighted assets 11.77 4.00 12.36 4.00 12.37 4.00
Total risk-based capital
risk to risk weighted assets 12.30 8.00 12.84 8.00 12.63 8.00
The following table sets forth a reconciliation between the Bank's
stockholders' equity and each of its three regulatory capital requirements at
December 31, 1996.
Tier 1 Total
Tier 1 Risk-based Risk-based
Capital Capital Capital
----------------------- ----------- -----------
(Dollars in thousands)
Total stockholders' equity $ 165,425 $ 165,425 $ 165,425
Unrealized loss on securities
available-for-sale 3,103 3,103 3,103
Less nonallowable assets:
Goodwill (15,596) (15,596) (15,596)
Plus allowances for loan
and lease losses -- -- 6,880
----------- -------- --------
Total regulatory capital 152,932 152,932 159,812
Minimum required capital 114,377 51,970 103,940
Excess regulatory capital $ 38,555 $ 100,962 $ 55,872
=========== ======== ========
Bank's regulatory capital
percentage (1) 5.35% 11.77% 12.30%
Minimum regulatory capital
required percentage 4.00% 4.00% 8.00%
----------- -------- --------
Bank's regulatory capital
percentage in excess of
requirement 1.35% 7.77% 4.30%
=========== ======== ========
_______________
1Tier 1 capital is computed as a percentage of total assets of $2.9 billion.
Risk-based capital is computed as a percentage of adjusted risk-weighted
assets of $1.3 billion.
FDIC INSURANCE PREMIUMS. The deposits of the Bank are insured to the
maximum extent permitted by the SAIF and the Bank Insurance Fund (the "BIF"),
both of which are administered by the FDIC, and are backed by the full faith
and credit of the U.S. Government. As the insurer, the FDIC is authorized to
conduct examinations of, and to require reporting by, FDIC-insured
institutions. It also may prohibit any FDIC-insured institution from engaging
in any activity the FDIC determines by regulation or order to pose a serious
threat to the FDIC. The FDIC also has the authority to initiate enforcement
actions against savings institutions.
The Bank currently pays deposit insurance premiums to the FDIC based on a
risk-based assessment system established by the FDIC for all SAIF-member
institutions. In addition, because the Bank acquired approximately $157.2
million in deposits from Texas Capital as of November 1, 1995 and $79.8 in
deposits as a result of the Bay City branch acquisition on September 5, 1996,
the Bank became responsible for paying deposit insurance premiums on such
deposits at the BIF premium rate. 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, prior to the FDIA, as amended, being signed into
law, ranging from .23% for well capitalized, healthy SAIF-member institutions
to .31% for undercapitalized SAIF-member institutions with substantial
supervisory concerns. On November 14, 1995, the FDIC adopted a new assessment
rate schedule of zero to 27 basis points (subject to a $2,000 minimum) for BIF
members (or institutions, like the Bank, having BIF deposits) while retaining
the existing assessment rate schedule for SAIF-member institutions.
On September 30, 1996, amendments to the FDIA were signed into law. The
FDIA and implementing regulations provided that all SAIF-member institutions
would pay a special one time assessment of 65.7 basis points on the SAIF
assessment base as of March 31, 1995 to recapitalize the SAIF, which in the
aggregate, would be sufficient to bring the reserve ratio in the SAIF to 1.25%
of insured deposits. The Bank's special assessment amounted to $7.5 million
($4.8 million after applicable income taxes) pursuant to the FDIA. In
addition to the recapitalization provisions, the FDIA equalized the rate
schedule for SAIF and BIF institutions with the rates ranging from zero to 27
basis points beginning October 1, 1996. At December 31, 1996, the Bank was
categorized as well capitalized.
The FDIA provided for FICO debt sharing by banks and thrifts with
proration sharing in the year 2000. Prior to the year 2000, SAIF insured
institutions will pay approximately 6.5 basis points for FICO, while BIF
insured institutions will pay approximately 1.3 basis points. The FICO
provisions of the FDIA also prohibit deposit migration strategies to avoid
SAIF premiums. The FDIA also provided for the merger of the BIF and the SAIF
on January 1, 1999, with such merger being conditioned upon the prior
elimination of the federal thrift charter.
Under Section 593 of the Internal Revenue Code, thrift institutions such
as the Bank, which meet certain definitional tests primarily relating to their
assets and the nature of their business, are permitted to establish a tax
reserve for bad debts and to make annual additions thereto, which additions
may, within specified limitations, be deducted in arriving at their taxable
income. The Bank's deduction with respect to "qualifying loans" which are
generally loans secured by certain interests in real property, prior to 1996,
could be computed using an amount based on the Bank's actual loss experience
(the "experience method") or a percentage of taxable income, computed without
regard to this deduction, and with additional modifications and reduced by the
amount of any permitted addition to the non-qualifying reserve. See
"Taxation-Federal Taxation."
Effective January 1, 1996, the Bank is unable to make additions to its
tax bad debt reserve, is permitted to deduct bad debts only as they occur and
is additionally be required to recapture (i.e. take into taxable income) over
a six year period, the excess of the balance of its bad debt reserve as of
December 31, 1995 over the balance of such reserve as of December 31, 1987.
Such recapture requirements can be suspended for each of two successive
taxable years beginning January 1, 1996, in which the Bank originates a
minimum amount of certain residential loans based upon the average of the
principal amounts of such loans made by the Bank during its six taxable years
preceding 1996. At December 31, 1996, the Bank had approximately $4.0 million
of post-1987 tax bad debt reserves, for which deferred taxes have been
provided.
REGULATORY CAPITAL REQUIREMENTS. The FDIA requires the Federal banking
agencies to revise their risk-based capital guidelines to, among other things,
take adequate account of interest rate risk. The Federal banking agencies
continue to consider modification of the capital requirements applicable to
banking organizations. In August 1995, the Federal banking agencies amended
their risk-based capital guidelines to provide that the banking agencies will
include in their evaluations of a bank's capital adequacy an assessment of the
bank's exposure to declines in the economic value of the bank's capital due to
changes in interest rates. The agencies also issued a proposed policy
statement that describes the process that the agencies will use to measure and
assess the exposure of a bank's capital to changes in interest rates. The
agencies stated that after they and the banking industry gain sufficient
experience with the measurement process, the agencies would issue proposed
regulations for establishing explicit charges against capital to account for
interest rate risk.
The FDIA also requires the FDIC and the other Federal banking agencies to
revise their risk-based capital standards, with appropriate transition rules,
to ensure that they take into account concentration of credit risk and the
risks of non-traditional activities and to ensure that such standards reflect
the "actual performance and expected risk of loss of multifamily mortgages,"
of which the Bank had $139.5 million at December 31, 1996. See "Business -
Lending Activities." In December 1995, the FDIC and the other Federal banking
agencies promulgated final amendments to their respective risk-based capital
requirements which would explicitly identify concentration of credit risk and
certain risks arising from nontraditional activities, and the management of
such risks as important factors to consider in assessing an institution's
overall capital adequacy. The FDIC may now require higher minimum capital
ratios based on certain circumstances, including where the institution has
significant risks from concentration of credit or certain risks arising from
non-traditional activities.
The Federal banking agencies have agreed to adopt for regulatory purposes
Statement 115, which, among other things, generally adds a new element to
stockholders' equity under generally accepted accounting principles by
including net unrealized gains and losses on certain securities. In December
1994, the FDIC issued final amendments to its regulatory capital requirements
which would require that the net amount of unrealized losses from
available-for-sale equity securities with readily determinable fair values be
deducted for purposes of calculating the Tier 1 capital ratio. All other net
unrealized holding gains (losses) on available-for-sale securities are
excluded from the definition of Tier 1 capital. At December 31, 1996, the
Bank had $185.4 million of securities available-for-sale with $4.8 million of
aggregate net unrealized losses thereon.
SAFETY AND SOUNDNESS STANDARDS. Each Federal banking agency is required
to prescribe, for all insured depository institutions and their holding
companies, standards relating to internal controls, information systems and
internal audit systems, loan documentation, credit underwriting, interest rate
exposure, asset growth, compensation, fees and benefits and such other
operational and managerial standards as the agency deems appropriate. The
compensation standards would prohibit employment contracts or other
compensatory arrangements that provide excess compensation, fees or benefits
or could lead to material financial loss to the institution. In addition,
each Federal banking agency also is required to adopt for all insured
depository institutions and their holding companies standards that specify (i)
a maximum ratio of classified assets to capital, (ii) minimum earnings
sufficient to absorb losses without impairing capital, (iii) to the extent
feasible, a minimum ratio of market value to book value for publicly-traded
shares of the institution or holding company, and (iv) such other standards
relating to asset quality, earnings and valuation as the agency deems
appropriate. On July 10, 1995, the Federal banking agencies, including the
FDIC, adopted final rules and proposed guidelines concerning safety and
soundness required to be prescribed by regulations pursuant to Section 39 of
the FDIA. In general, the standards relate to operational and managerial
matters, asset quality and earnings and compensation. The operational and
managerial standards cover internal controls and information systems, internal
audit systems, loan documentation, credit underwriting, interest rate
exposure, asset growth, and compensation, fees and benefits. Under the asset
quality and earnings standards, which were adopted by the Federal Banking
agencies in October 1996, the Bank would be required to establish and maintain
systems to identify problem assets and prevent deterioration in those assets
and evaluate and monitor earnings to ensure that earnings are sufficient to
maintain adequate capital reserves. If an insured institution fails to meet
any of the standards promulgated by the regulators, then such institution will
be required to submit a plan within 30 days to the FDIC specifying the steps
that it will take to correct the deficiency. In the event that an insured
institution fails to submit or fails in any material respect to implement a
compliance plan within the time allowed by the FDIC, Section 39 of the FDIA
provides that the FDIC must order the institution to correct the deficiency
and may restrict asset growth, require the savings institution to increase its
ratio of tangible equity to assets, restrict the rates of interest that the
institution may pay or take any other action that would better carry out the
purpose of prompt corrective action. The Bank believes that it has been and
will continue to be in compliance with each of the standards as they have been
adopted by the FDIC.
Finally, each Federal banking agency is required to prescribe standards
for the employment contracts and other compensation arrangements of executive
officers, employees, directors and principal stockholders of insured
depository institutions that would prohibit compensation and benefits and
arrangements that are excessive or that could lead to a material financial
loss for the institution. In February 1996, the FDIC adopted final
regulations regarding the payment of severance and indemnification to
management officials and other affiliates of insured institutions (institution
affiliated parties or "IAPs"). The limitations on severance or "golden
parachute" payments apply to "troubled" institutions which seek to enter into
contracts with IAPs. A golden parachute payment is generally considered to be
any payment to an IAP which is contingent on the termination of that person's
employment and is received when the insured institution is in a troubled
condition. The definition of golden parachute payment does not include
payment pursuant to qualified retirement plans, non-qualified bona fide
deferred compensation plans, nondiscriminatory severance pay plans, other
types of common benefit plans, state statutes and death benefits. Certain
limited exceptions to the golden parachute payment prohibition are provided
for in cases involving the hiring of an outside executive, unassisted changes
of control and where the FDIC provides written permission to make such
payment. The limitations on indemnification payments apply to all insured
institutions, their subsidiaries and affiliated holding companies. Generally,
this provision prohibits such entities from indemnifying an IAP for that
portion of the costs sustained with regard to a civil or administrative
enforcement action commenced by any Federal banking agency which results in a
final order or settlement pursuant to which the IAP is assessed a civil
monetary penalty, removed from office, prohibited from participating in the
affairs of an insured institution or required to cease and desist from taking
certain affirmative actions. Nevertheless, institutions or holding companies
may purchase commercial insurance to cover such expenses (except for judgments
or penalties) and the institutions or holding company may advance legal
expenses to the IAP if its board of directors makes certain specific findings
and the IAP agrees in writing to reimburse the institution if it is ultimately
determined that the IAP violated a law, regulation or other fiduciary duty.
ACTIVITIES AND INVESTMENTS OF INSURED STATE-CHARTERED BANKS. The
activities and equity investments of FDIC-insured, state-chartered banks are
limited by Federal law to those that are permissible for national banks. An
insured state bank generally may not acquire or retain any equity investment
of a type, or in an amount, that is not permissible for a national bank. An
insured state bank is not prohibited from, among other things, (i) acquiring
or retaining a majority interest in a subsidiary, (ii) investing as a limited
partner in a partnership the sole purpose of which is direct or indirect
investment in the acquisition, rehabilitation or new construction of a
qualified housing project, provided that such limited partnership investments
may not exceed 2% of the bank's assets, (iii) acquiring up to 10% of the
voting stock of a company that solely provides or reinsures directors' and
officers' liability insurance, and (iv) acquiring or retaining the voting
shares of a depository institution if certain requirements are met.
COMMUNITY REINVESTMENT ACT. Under the Community Reinvestment Act
("CRA"), as implemented by FDIC regulations, a savings 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
savings institution, to assess the institution's record of meeting the credit
needs of its community and to take such record into account in its evaluation
of certain applications by such institution. As of the date of its most
recent regulatory examination, the Bank was rated "satisfactory" with respect
to its CRA compliance.
In May 1995, the FDIC and other Federal banking agencies promulgated
final revisions to their regulations concerning the CRA. The revised
regulations generally are intended to provide clearer guidance to financial
institutions on the nature and extent of their obligations under the CRA and
the methods by which the obligations will be assessed and enforced. Among
other things, the revised regulations substitute for the current process-based
assessment factors a new evaluation system that would rate institutions based
on their actual performance in meeting community credit needs. In particular,
the revised system will evaluate the degree to which an institution is
performing under tests and standards judged in the context of information
about the institution, its community, its competitors and its peers with
respect to (i) lending, (ii) service delivery systems and (iii) community
development. The revised regulations also specify that an institution's CRA
performance will be considered in an institution's expansion (e.g., branching)
proposals and may be the basis for approving, denying or conditioning the
approval of an application. Management of the Bank currently is unable to
predict the effects of the regulations under the CRA as recently adopted.
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. Under Section 2303 of the Economic Growth and Regulatory
Paperwork Reduction Act of 1996, a savings institution can comply 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, 1996, with 91.4% of its assets invested in qualified thrift
investments.
RESTRICTIONS ON CAPITAL DISTRIBUTIONS. The Bank is required to provide
to the OTS not less than 30 days' advance notice of the proposed declaration
by its board of directors of any dividend on its capital stock. The OTS may
object to the payment of the dividend on safety and soundness grounds. The
FDIA prohibits an insured depository institution from paying dividends on its
capital stock or interest on its capital notes or debentures (if such interest
is required to be paid only out of net profits) or distribute any of its
capital assets while it remains in default in the payment of any assessment
due the FDIC. Texas law permits the Bank to pay dividends out of current or
retained income in cash or additional stock.
LEGISLATIVE AND REGULATORY PROPOSALS. Proposals to change the laws and
regulations governing the operations and taxation of, and federal insurance
premiums paid by, savings banks and other financial institutions and companies
that control such institutions are frequently raised in Congress, state
legislatures and before the FDIC and other bank regulatory authorities. The
likelihood of any major changes in the future and the impact such changes
might have on the Bank are impossible to determine. Similarly, proposals to
change the accounting treatment applicable to savings banks and other
depository institutions are frequently raised by the SEC, the FDIC, the IRS
and other appropriate authorities, including, among others, proposals relating
to fair market value accounting for certain classes of assets and liabilities.
The likelihood and impact of any additional future accounting rule changes
and the impact such changes might have on the Bank are impossible to
determine.
FEDERAL HOME LOAN BANK SYSTEM. The Bank is a member of the FHLB of
Dallas, which is one of 12 regional FHLBs that administers 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, 1996, the Bank's advances from the FHLB of Dallas amounted
to $409.7 million or 14.2% of its total assets.
As a member, the Bank is required to purchase and maintain stock in the
FHLB of Dallas in an amount equal to the greater of 1% of its aggregate unpaid
residential mortgage loans, home purchase contracts or similar obligations at
the beginning of each year or 5% of total advances. At December 31, 1996, the
Bank had $26.0 million in FHLB stock, which was in compliance with this
requirement.
The FHLBs are required to provide funds for the resolution of troubled
savings associations and to contribute to affordable housing programs through
direct loans or interest subsidies on advances targeted for community
investment and low- and moderate-income housing projects. These contributions
have adversely affected the level of FHLB dividends paid and could continue to
do so in the future. These contributions also could have an adverse effect on
the value of FHLB stock in the future. For the year ended December 31, 1996,
dividends paid by the FHLB of Dallas to the Bank totaled $1.3 million.
FEDERAL RESERVE SYSTEM. The Federal Reserve Board requires all
depository institutions to maintain reserves against their transaction
accounts (primarily NOW and Super NOW checking accounts) and non-personal time
deposits. At December 31, 1996, 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, officers and
members 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, the Bank and its subsidiaries file a
consolidated Federal income tax return on a calendar year basis using the
accrual method. Savings banks are subject to provisions of the Internal
Revenue Code ("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 recently enacted legislation,
the Bank will no longer be able to utilize a reserve method for determining
the bad debt deduction, but will be allowed to deduct actual net charge-offs.
Further, the legislation requires the Bank to recapture, into taxable income,
over a six year period, the excess of the balance of its bad debt reserve as
of December 31, 1995 over the balance of such reserve as of December 31, 1987.
Such recapture requirements can be deferred for up to two years if certain
residential loan requirements are met. At December 31, 1996, the Bank had
approximately $4.0 million of post-1987 tax bad debt reserves, for which
deferred taxes have been provided.
The Bank is not required to provide deferred taxes on its pre-1988 (base
year) tax bad debt reserve of approximately $900,000. This reserve may be
included in taxable income in future years if the Bank makes distributions to
stockholders (including distributions in redemption, dissolution or
liquidation) that are considered to result in withdrawals from that excess bad
debt reserve, then the amounts considered withdrawn will be included in the
savings bank's taxable income. The amount that would be deemed withdrawn from
such reserves upon such distribution and which would be subject to taxation at
the savings bank level at the normal corporate tax rate would be an amount
that, after taxes on such amount, would equal the amount actually distributed
plus the amount necessary to pay the tax with respect to the withdrawal.
Dividends paid out of a savings bank's current or accumulated earnings and
profits as calculated for Federal income tax purposes, however, will not be
considered to result in withdrawals from its bad debt reserves to the extent
of such earnings and profits, but shall be regarded as taken from such
reserves only upon exhaustion of the earnings and profits accounts; however,
distributions in redemption of stock, and distributions in partial or complete
liquidation of a savings bank will be considered to come first from its loss
reserve. The Bank has not conducted a study to determine with certainty the
amount of its accumulated earnings and profits for Federal income tax
purposes.
In addition to regular income taxes, corporations are subject to an
alternative minimum tax which is generally equal to 20% of alternative minimum
taxable income (taxable income, increased by tax preference items and adjusted
for certain regular tax items). The preference items generally applicable to
savings banks include (i) prior to 1996, 100% of the excess of a savings
bank's bad debt deduction computed under the percentage of income method over
the amount that would have been allowable under the experience method and (ii)
an amount equal to 75% of the amount by which a savings bank's adjusted
current earnings (alternative minimum taxable income computed without regard
to this preference, adjusted for certain items) exceeds its alternative
minimum taxable income without regard to this preference. The amounts
received by the Bank pursuant to the Assistance Agreement were included in its
adjusted current earnings. 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 Assistance Agreement, an instrumentality of the
Federal government was obligated to provide the Bank with financial assistance
in connection with various matters that arose under the Assistance Agreement.
Payments to the Bank pursuant to the Assistance Agreement were taxed under the
applicable provisions of the Code which were in effect in 1988. These
provisions of the Code provide generally that payments from such
instrumentality to the Bank pursuant to the Assistance Agreement were not
included in the Bank's income and the Bank was not required to reduce its
basis in the Guaranteed Assets by the amount of such financial assistance.
Accordingly, the Bank was not required to pay Federal income taxes with
respect to any amount of the assistance payments it received pursuant to the
Assistance Agreement.
The Assistance Agreement did, however, require the Bank, in effect, to
pay to such instrumentality 100% of the Federal and state "net tax benefits,"
as defined, which are realized by the Bank from excluding from its income the
payments received pursuant to the Assistance Agreement on a tax-free basis.
The amount of assistance payments from that governmental instrumentality was
reduced by the amount of tax benefit realized by the Bank by excluding
assistance payments from its taxable income. Accordingly, the Bank, in
effect, was passing back to that governmental instrumentality the entire tax
benefit derived from the tax exemption provided by the Code provisions which
were in effect in 1988.
Further, the tax laws in 1988 which applied to the Southwest Plan
Acquisition provided that generally applicable limitations on the ability of
an acquiring corporation to utilize the net operating loss carryforwards, and
built-in losses, as defined, of acquired financial institutions did not apply
in the case of the acquisition of assets from insolvent savings and loan
associations. The generally applicable rules limit the rate at which the net
operating loss carryforwards and built-in (i.e., previously unrecognized)
losses of an acquired corporation may be used by a corporation which acquires
"control" of the corporation which generated the loss. Pursuant to this
exception which existed in 1988 to the generally applicable law, the Bank is
allowed to use the net operating losses and built-in losses of all of the
Acquired Associations except for one without limitation. The net operating
loss of one association is not available to the Bank because such
association's deposits at the time of its acquisition did not represent at
least 20% of the Bank's total deposits and equity as required by the
applicable provisions of the Code in 1988.
The Assistance Agreement required that the tax benefit derived by the
Bank from utilizing net operating loss carryforwards acquired from three of
the four Acquired Associations also be applied to reduce the amount of
assistance payments payable to the Bank by the government instrumentality.
The Bank's Consolidated Statements of Operations, therefore, includes a
provision for Federal income taxes which includes amounts credited to that
governmental instrumentality in lieu of Federal income taxes paid to the
Internal Revenue Service with certain adjustments. Although the termination
of the Assistance Agreement was effective March 31, 1994, that governmental
instrumentality will continue to receive the future federal income tax
benefits of the net operating loss carryforwards acquired from the Acquired
Associations.
The Company's Federal income tax returns have not yet been audited by the
United States Internal Revenue Service. The tax returns of the Company (and
the Acquired Associations) since 1988 are subject to review by the Internal
Revenue Service.
STATE TAXATION
The Company pays 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
Company's 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 37 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,
1996.
Net Book Value of
Owned/Leased Property or
Owned/Leased Leasehold
Location (with Lease Expiration Date) Improvements
(Dollars in thousands)
BRANCH OFFICES:
- -----------------
1329 North Virginia Owned
Port Lavaca, Texas 77979 $200
8 Greenway Plaza, Suite 100 Leased;
Houston, Texas 77046 June 30, 1997 --
8 Braeswood Square Leased;
Houston, Texas 77096 December 31, 2006 394
408 Walnut Owned
Columbus, Texas 78934 349
870 S. Mason, #100 Leased;
Katy, Texas 77450 August 31, 2003 70
602 Lyons Owned
Schulenburg, Texas 78956 101
325 Meyer Street Owned
Sealy, Texas 77474 569
116 E. Post Office Owned
Weimar, Texas 78962 49
323 Boling Road Owned
Wharton, Texas 77488 151
1621 Pine Drive Leased;
Dickinson, Texas 77539 September 30, 1998 1
295 West Highway 77 Owned
San Benito, Texas 78586 248
1260 Blalock, Suite 100 Leased;
Houston, Texas 77055 January 20, 1999 92
620 W. Main Owned
Tomball, Texas 77375 150
915-H North Shepherd Leased;
Houston, Texas 77008 October 31, 2001 218
6810 FM 1960 West Leased;
Houston, Texas 77069 September 30, 1997 --
7602 N. Navarro Owned
Victoria, Texas 77904 210
2308 So. 77 Sunshine Strip Leased;
Harlingen, Texas 78550 February 28, 1997 26
4900 N. 10th St., G-1 Leased;
McAllen, Texas 78504 August 14, 2001 200
10838 Leopard Street, Suite B Leased;
Corpus Christi, Texas 78410 December 31, 1998 2
4060 Weber Road Leased;
Corpus Christi, Texas 78411 April 30, 1999 7
Percent of Total
Location Deposits Deposits
BRANCH OFFICES:
- -----------------------------
1329 North Virginia
Port Lavaca, Texas 77979 $ 29,324 2.24%
8 Greenway Plaza, Suite 100
Houston, Texas 77046 22,157 1.69
8 Braeswood Square
Houston, Texas 77096 62,831 4.79
408 Walnut
Columbus, Texas 78934 58,968 4.50
870 S. Mason, #100
Katy, Texas 77450 23,051 1.76
602 Lyons
Schulenburg, Texas 78956 32,735 2.50
325 Meyer Street
Sealy, Texas 77474 41,180 3.14
116 E. Post Office
Weimar, Texas 78962 26,242 2.00
323 Boling Road
Wharton, Texas 77488 46,673 3.56
1621 Pine Drive
Dickinson, Texas 77539 43,652 3.30
295 West Highway 77
San Benito, Texas 78586 21,571 1.66
1260 Blalock, Suite 100
Houston, Texas 77055 58,715 4.48
620 W. Main
Tomball, Texas 77375 25,442 1.94
915-H North Shepherd
Houston, Texas 77008 32,300 2.46
6810 FM 1960 West
Houston, Texas 77069 28,241 2.15
7602 N. Navarro
Victoria, Texas 77904 74,889 5.71
2308 So. 77 Sunshine Strip
Harlingen, Texas 78550 20,389 1.56
4900 N. 10th St., G-1
McAllen, Texas 78504 15,798 1.21
10838 Leopard Street, Suite B
Corpus Christi, Texas 78410 44,111 3.37
4060 Weber Road
Corpus Christi, Texas 78411 64,429 4.92
(continued)
Net Book Value of
Owned/Leased Property or Deposits Percent of
Owned/Leased Leasehold Total Deposits
Location (with Lease Expiration Date) Improvements
(Dollars in thousands)
(continued from previous page)
301 E. Main Street Owned
Brenham, Texas 77833 $ 206 $ 64,391 4.91%
1192 W. Dallas Leased;
Conroe, Texas 77301 December 31, 1999 3 51,677 3.94
2353 Town Center Dr. Owned
Sugar Land, Texas 77478 1,136 16,764 1.28
1629 S. Voss Owned
Houston, Texas 77057 1,491 18,323 1.40
531-A Highway 1431 Leased;
Kingsland, Texas 78639 December 31, 1999 -- 13,313 1.02
209 W. Moreland Owned
Mason, Texas 76856 56 17,349 1.32
904 Highway 281 North Owned
Marble Falls, Texas 78654 187 11,344 0.87
101 East Polk Owned
Burnet, Texas 78611 103 17,221 1.31
Highway 29 West Owned
Buchanan Dam, Texas 78609 117 8,392 0.64
907 Ford Owned
Llano, Texas 78643 186 15,210 1.16
708 East Austin Owned
Giddings, Texas 78942 303 22,963 1.75
5718 Westheimer, Suite 100 Leased;
Houston, Texas 77057 March 14, 2004 165 36,012 2.76
7909 Parkwood Circle Drive Leased;
Houston, Texas 77036 August 31, 1999 949 12,560 0.96
1250 Pin Oak Road Owned
Katy, Texas 77494 483 16,960 1.29
2120 Thompson Highway Owned
Richmond, Texas 77469 510 36,825 2.81
7200 North Mopac Leased;
Austin, Texas 77469 December 31, 1997 -- 32,254 2.46
1112 Seventh Street Leased;
Bay City, Texas 77414 April 30, 1997 17 77,911 5.94
MORTGAGE BANKING OFFICE:
- ---------------------------
CBS Mortgage Corp.
6161 Savoy, Suite 600 Leased;
Houston, Texas 77036 September 30, 1997 18 -- --
ADMINISTRATIVE OFFICE(1)
- ---------------------------
Coastal Banc Tower Leased;
8 Greenway Plaza, Suite 1500 June 30, 1997 108 68,668 5.24
Houston, Texas 77046
RECORDS & RETENTION OFFICE:
- ------------------------------
227 Meyer St. Owned
Sealy, Texas 77474 65 -- -
Total $9,140 $1,310,835 100.00%
====== ========== =======
______________________
1Includes location of executive offices.
The net book value of the Company's investment in premises and equipment
totaled $15.0 million at December 31, 1996. At December 31, 1996, the net
book value of the Company's electronic data processing equipment, which
includes its in-house computer system, local area network and fourteen
automatic teller machines, was $3.0 million.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in routine legal proceedings occurring in the
ordinary course of business which, in the aggregate, are believed by
management to be immaterial to the financial condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The information required herein is incorporated by reference from page 53
of the Company's printed Annual Report to Stockholders for fiscal 1996
("Annual Report"), which is included herein as Exhibit 13.
ITEM 6. SELECTED FINANCIAL DATA
The information required herein is incorporated by reference from pages 6
through 9 of the Annual Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information required herein is incorporated by reference on pages 9
through 21 of the Annual Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data required herein are
incorporated by reference from pages 23 through 52 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 to be filed with the Securities and Exchange
Commission. 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 to be filed with the Securities and Exchange
Commission.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required herein is incorporated by reference from the
definitive proxy statement to be filed with the Securities and Exchange
Commission.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required herein is incorporated by reference from the
definitive proxy statement to be filed with the Securities and Exchange
Commission.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) The following financial statements are incorporated herein by
reference from pages 23 through 52 of the Annual Report.
Report of Independent Certified Public Accountants.
Consolidated Statements of Financial Condition as of December 31, 1996
and 1995.
Consolidated Statements of Operations for each of the years in the
three-year period ended December 31, 1996.
Consolidated Statements of Stockholders' Equity for each of the years in
the three-year period ended December 31, 1996.
Consolidated Statements of Cash Flows for each of the years in the
three-year period ended December 31, 1996.
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.
Page in
Manually signed
Exhibit No. report
3.1 Articles of Incorporation of the Company *
3.2 Bylaws of Company *
4 Form of Company common stock certificate *
4.1 Form of Indenture dated as of June 30, 1995,
with respect to the Company's 10% Notes, due 2002 **
10.1 1991 Stock Compensation Program *
10.2 1995 Stock Compensation Program ***
10.3 Change-In-Control Severance Agreements E-1
12 Ratio of earnings to combined fixed charges and
preferred stock dividends (See Exhibit 13)
13 Annual Report to Stockholders E -13
27 Financial Data Schedule (electronically filed)
28 Form of proxy to be mailed to stockholders
of the Company E -73
__________________
* Incorporated by reference to the Company's Registration Statement
on Form S-4 (No. 33-75952) filed on March 2, 1994.
** 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.
*** Incorporated by reference to the Company's Registration Statement
on Form S-1 (No. 33-91206) filed on April 14, 1995.
(b)(1) Form 8-K filed by the Company on February 14, 1996 concerning
the declaration of dividends for the fourth
quarter of 1995
(b)(2) Form 8-K filed by the Company on May 13, 1996 concerning the
execution of definitive agreements to exchange certain
branch locations with Compass Bank - San Antonio.
(b)(3) Form 8-K filed by the Company on December 2, 1996 concerning
the formation of Coastal Banc Holding Company, Inc.
on November 30, 1996.
(b)(4) Form 8-K filed by the Company on March 18, 1997 concerning the
execution of a definitive agreement to purchase the Wells Fargo
Bank branch in Port Arthur, Texas.
(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 26, 1997 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 26, 1997
Manuel J. Mehos, Chairman of the
Board and Chief Executive Officer
/s/ R. Edwin Allday Date: March 26, 1997
R. Edwin Allday, Director
/s/ D. Fort Flowers, Jr. Date: March 26, 1997
D. Fort Flowers, Jr., Director
/s/ Dennis S. Frank Date: March 26, 1997
Dennis S. Frank, Director
/s/ Robert E. Johnson, Jr. Date: March 26, 1997
Robert E. Johnson, Jr., Director
/s/ James C. Niver Date: March 26, 1997
James C. Niver, Director
/s/ Clayton T. Stone Date: March 26, 1997
Clayton T. Stone, Director
/s/ Catherine N. Wylie Date: March 26, 1997
Catherine N. Wylie, Chief Financial
Officer (principal financial and
accounting officer)