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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1998
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OR
[ ] Transition Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the Transition Period from _________ to _________
Commission File Number: 0-24526
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COASTAL BANCORP, INC.
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(Exact name of Registrant as specified in its charter)
Texas 76-0428727
- --------------------- ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
5718 Westheimer, Suite 600
Houston, Texas 77057
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(Address of principal executive office)
(713) 435-5000
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(Registrant's telephone number)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
N/A N/A
Securities registered pursuant to section 12(g) of the Act:
Common Stock, $0.00667 par value per share
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months and (2) has been subject to such filing requirements for the
past 90 days. Yes X No
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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 10, 1999, the aggregate market value of the 5,048,421 shares of
Common Stock of the Registrant issued and outstanding on such date, excluding
1,360,943 shares held by all directors and executive officers of the Registrant
as a group, was $82,983,420. This figure is based on the closing sale price of
$16.4375 per share of the Company's Common Stock on March 10, 1999, as reported
in The Wall Street Journal on March 11, 1999.
Number of shares of Common Stock outstanding as of March 10, 1999: 6,409,364
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, 1998, are incorporated into Part II, Items 5-8 of
this Form 10-K.
(2) Portions of the Registrant's definitive proxy statement for its 1999
Annual Meeting of Stockholders ("Proxy Statement") are incorporated into Part
III, Items 10-13 of this Form 10-K.
PART I.
ITEM 1. BUSINESS
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COASTAL BANCORP, INC.
Coastal Bancorp, Inc. (the "Company") is engaged primarily in the business
of serving as the parent holding company for Coastal Banc ssb (the "Bank"). The
Company was incorporated in March 1994 in connection with the reorganization of
Coastal Banc Savings Association, a Texas-chartered thrift institution (the
"Association") into the holding company form of organization. In connection
with the reorganization, which was completed in July 1994, the Association
concurrently converted into a Texas-chartered savings bank and took its present
name. In November 1996, in order to minimize state taxes, the Company's
corporate structure was again reorganized by forming Coastal Banc Holding
Company, Inc. ("HoCo") as a Delaware holding company. HoCo became a
wholly-owned subsidiary of the Company and the Bank became a wholly-owned
subsidiary of HoCo. Each of these reorganizations was treated as combinations
similar to a pooling-of-interests. The financial information and references
presented herein have been restated to give effect where appropriate to the
reorganizations as if they had occurred at the earliest date presented. In
October 1997, the Company formed Coastal Banc Capital Corp. ("CBCC") as a
wholly-owned subsidiary of HoCo. CBCC is a registered broker-dealer, and was
formed to trade packages of whole loan assets, primarily for the Bank and for
other institutional investors.
At December 31, 1998, the Company had total consolidated assets of $3.0
billion, total deposits of $1.7 billion, $28.8 million in Series A Preferred
Stock of the Bank and stockholders' equity of $112.8 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 Plaza, 5718
Westheimer, Suite 600, Houston, Texas 77057, and its telephone number is (713)
435-5000.
COASTAL BANC ssb
The Bank is a Texas-chartered, Federally insured state savings bank. It is
headquartered in Houston, Texas and operates through 49 branch offices in
metropolitan Houston, Austin, Corpus Christi, the Rio Grande Valley and small
cities in the southeast quadrant of Texas.
The Bank, which was originally organized in 1954, was acquired in 1986 by
an investor group (which includes a majority of the current members of the Board
of Directors and the present Chairman of the Board, President and Chief
Executive Officer of the Company) as a vehicle to take advantage of the failures
and consolidation in the Texas banking and thrift industries. At February 28,
1986 (the date of change in ownership), the Bank had one full service office and
total assets of approximately $10.7 million. Since then, the Bank has acquired
deposits and branch offices in transactions with the Federal government and
other private institutions, and, in 1995, acquired an independent national bank.
By December 31, 1998, the Bank's total assets had increased to $3.0 billion,
total deposits were $1.7 billion and stockholders' equity totaled $187.9
million.
The Bank attempts to maximize profitability through the generation of net
interest income and fee income. To meet this objective, the Bank has
implemented a strategy of building its core deposit base while deploying its
funds in assets which provide an attractive return with acceptable credit risk.
In carrying out this strategy, and to ultimately provide an attractive rate of
return to the Company's shareholders, the Bank adheres to four operating
principles: (i) continuing to expand its low cost core deposit base; (ii)
minimizing interest rate risk; (iii) minimizing credit risk, while increasing
the emphasis on commercial business lending; and (iv) maintaining a low level of
general overhead expense relative to its peers. These operating principles are
briefly discussed below.
CORE DEPOSITS. The Bank began to implement the first operating principle,
developing and expanding a core deposit base, in 1988 through a series of
transactions with the Federal government and competitively priced transactions
with private sector financial institutions. In 1988, the Bank became the first
acquiror of failed or failing savings institutions under the Federal
government's "Southwest Plan." In this transaction (the "Southwest Plan
Acquisition"), the Bank acquired from the Federal Savings and Loan Insurance
Corporation ("FSLIC"), as receiver for four insolvent savings associations (the
"Acquired Associations"), approximately $543.4 million of assets and assumed
approximately $543.4 million of deposits and other liabilities. The Bank
acquired an aggregate of 14 branch offices from the Acquired Associations in new
and existing markets in southwest Houston, west of Houston along the Houston-San
Antonio corridor and in the Rio Grande Valley. See "The Southwest Plan
Acquisition."
Since completion of the Southwest Plan Acquisition, the Bank has entered
into nine branch office transactions (including two disposition transactions)
acquisitions and one whole bank acquisition: two with an instrumentality of the
Federal government (acting as the receiver of insolvent financial institutions)
and eight with other private institutions. All of these transactions resulted
in the net assumption of $1.9 billion of deposits and the net acquisition of 58
branch offices. The Bank has also opened six de novo branches in the Houston
metropolitan area since its inception. The Bank will continue to pursue fairly
priced acquisitions in Texas as a vehicle for growth, although there can be no
assurance that the Bank will be able to continue to do so in the future.
INTEREST RATE RISK. The Bank has implemented its second operating
principle, minimizing interest rate risk, by matching, to the extent possible,
the repricing or maturity of its interest-earning assets to its interest-bearing
liabilities. The Bank also tries to match the basis or index (for example, the
London Interbank Offered Rate ("LIBOR") or the 11th District Federal Home Loan
Bank cost of funds index ("COFI")) upon which these assets and liabilities
reprice. Generally this is achieved through management of the composition of
the Bank's assets and liabilities. The Bank also attempts to achieve 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
purchases 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 attempts to 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, 1998,
of the Company's $1.3 billion of mortgage-backed securities, $1.1 billion or
89.0%, were 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, 1998, $511.2
million, or 33.2% of the Company's loans receivable portfolio was comprised of
adjustable rate first lien single-family residential mortgage loans.
CREDIT RISK. The Bank has implemented the third operating principle,
minimizing credit risk, while increasing the emphasis on commercial business
lending, by (i) holding a substantial portion of its assets in mortgage-backed
securities, and (ii) taking a cautious approach to its direct lending
operations, including the development of commercial business lending. At
December 31, 1998, of the Company's $3.0 billion in total assets, $1.3 billion
or 41.9% of total assets consisted of mortgage-backed securities. At December
31, 1998, the Company's total loans receivable portfolio amounted to $1.5
billion or 51.6% of total assets, $690.5 million of which were comprised of
first lien residential mortgage loans. The Bank's commercial loans represented
16.3% of the Company's total loans receivable portfolio at December 31, 1998.
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
increased only 0.47% from December 31, 1994 to December 31, 1998, while total
assets grew 29.7% over the same period.
The Bank is subject to regulation by the Department, as its chartering
authority and by the Federal Deposit Insurance Corporation ("FDIC"), which
regulates the Bank and insures its deposits to the fullest extent provided by
law. The Bank also is subject to certain regulation by the Board of Governors
of the Federal Reserve System (the "Federal Reserve Board") and is a member of
the Federal Home Loan Bank of Dallas (the "FHLB"), one of the 12 regional banks
which comprise the Federal Home Loan Bank System.
LENDING ACTIVITIES
GENERAL. Since 1995, the Bank has attempted to re-align its lending
products to compete with commercial banks in an effort to increase its net
interest margin while at the same time minimizing credit risk. In order to
avoid incurring undue credit risk, the Bank historically invested a significant
percentage of its assets in alternative financial instruments, particularly
mortgage-backed securities, most of which have certain repayments guaranteed by
the United States government or Government Sponsored Enterprises ("GSEs"). See
"Mortgage-Backed Securities." In addition, the Bank has originated and
purchased for retention in its portfolio only those loans determined by
management to have an acceptable credit risk and which provide a positive
interest rate spread over funding liabilities matched with similar maturities.
This strategy is designed to achieve an acceptable risk adjusted rate of return,
as determined and continuously evaluated by the Board of Directors and
management.
The Bank has taken a cautious approach to the development and growth of its
direct lending operations in order to minimize credit risk. In November 1995,
the Bank acquired its first commercial bank, Texas Capital Bancshares, Inc.
("Texas Capital"). The $103.3 million in loans acquired from Texas Capital
included first lien residential, multifamily and commercial real estate,
residential construction, real estate acquisition and development, commercial,
financial and industrial and consumer loans. In 1998, the Bank acquired twelve
commercial bank branches and established them as the foundation for the Bank's
Business Banking Centers, which focus on the Bank's commercial banking
customers. In an effort to enhance its ability to service its commercial
customers, during the fourth quarter of 1997, the Bank implemented a new process
for originating, underwriting and approving all loans over $1.0 million. The
staff of the Portfolio Control Center ("PCC"), manages this process, and applies
Internet and network computer technology to take a loan from application to
closing in less time and incorporating more comprehensive credit information.
The PCC is also responsible for monitoring and managing the Bank's assets and
liabilities.
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.
At December 31,
1998 1997 1996
--------------------- ---------------------- --------------------
Amount Percent Amount Percent Amount Percent
-------- -------- --------- -------- --------- --------
(Dollars in thousands)
Real-estate mortgage loans:
First lien residential $ 690,510 41.87% $ 689,767 52.33% $ 791,337 61.96%
Multifamily 119,447 7.24 131,454 9.97 139,486 10.92
Residential construction 115,714 7.02 83,359 6.33 77,146 6.04
Acquisition and development 75,932 4.61 31,619 2.40 26,132 2.05
Commercial 257,723 15.63 181,315 13.76 119,004 9.32
Commercial construction 40,344 2.45 14,506 1.10 3,963 0.31
Commercial secured by residential
mortgage loans held for sale
("Warehouse") 173,124 10.50 98,679 7.49 53,573 4.19
Commercial secured by mortgage
servicing rights ("MSR") 3,867 0.23 32,685 2.48 21,380 1.67
Commercial, financial and industrial 92,218 5.59 30,877 2.34 21,965 1.72
Loans secured by savings deposits 13,164 0.80 8,695 0.66 8,849 0.69
Consumer and other 66,989 4.06 15,030 1.14 14,400 1.13
---------------- -------- ------------ -------- ------------ --------
Total loans 1,649,032 100.00% 1,317,986 100.00% 1,277,235 100.00%
--------------- ======== ------------ ======== ------------ ========
Loans in process (99,790) (47,893) (38,742)
Allowance for loan losses (11,358) (7,412) (6,880)
Unearned interest and loan fees (3,493) (2,926) (2,344)
Premium on purchased loans, net 3,758 1,680 479
--------------- ------------ ------------
Total loans receivable, net $ 1,538,149 $ 1,261,435 $ 1,229,748
=============== ============ ============
SCHEDULED MATURITIES. The following table sets forth certain
information at December 31, 1998 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, 1998
(In thousands)
More than More than More than More than Over
One year one year to three years five years to ten years to twenty
or less three years to five years ten years twenty years years Total
--------- ------------ -------------- -------------- ------------- -------- ----------
First lien residential mortgage $ 7,595 $ 13,818 $ 33,229 $ 32,270 $ 184,050 $419,080 $ 690,042
Multifamily mortgage 44,726 54,539 16,464 2,364 399 -- 118,492
Residential construction 63,216 1,273 1,721 662 -- -- 66,872
Real estate acquisition
and development 8,929 31,168 586 -- 1,310 -- 41,993
Commercial real estate 50,105 107,961 37,336 20,104 38,673 -- 254,179
Commercial construction 8,077 3,659 5,652 379 3,112 -- 20,879
Commercial, other 220,834 20,468 21,551 3,620 130 -- 266,603
Consumer and other 19,527 14,738 28,795 12,515 3,514 -- 79,089
--------- ------------ -------------- -------------- ------------- -------- ----------
Total loans $ 423,009 $ 247,624 $ 145,334 $ 71,914 $ 231,188 $419,080 $1,538,149
========= ============ ============== ============== ============= ======== ==========
The average maturity of loans is generally substantially less than their
average contractual terms because of prepayments and, in the case of
conventional mortgage loans, due-on-sale clauses, which generally give the Bank
the right to declare a loan immediately due and payable in the event, among
other things, that the borrower sells the real property subject to the mortgage
and the loan is not repaid. The average life of mortgage loans tends to
increase when current mortgage loan rates are substantially higher than rates on
existing mortgage loans and, conversely, decrease when rates on current
mortgages are substantially lower than existing mortgage loan rates (due to
refinancings 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 amount of loans due after one year from
December 31, 1998 by category and which have fixed or adjustable rates.
Interest-Rate
-------------
Fixed Adjustable Total
--------------- ----------- ----------
(In thousands)
First lien residential mortgage $ 174,226 $ 508,221 $ 682,447
Multifamily mortgage 10,047 63,719 73,766
Residential construction 2,440 1,216 3,656
Real estate acquisition and development 377 32,687 33,064
Commercial real estate 78,953 125,121 204,074
Commercial construction 6,579 6,223 12,802
Commercial, other 17,118 28,651 45,769
Consumer and other 58,851 711 59,562
----------- ----------- ----------
Total $ 348,591 $ 766,549 $1,115,140
=========== =========== ==========
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 servicing mortgage loans
for other institutions, GSEs or entities during the periods presented. See
"Mortgage Loan Servicing."
Year Ended December 31,
1998 1997 1996
--------------- ----------- -----------
(In thousands)
First lien mortgage loan originations:
Adjustable rate $ 725 $ 1,458 $ 3,542
Fixed rate 15,470 4,849 5,471
Adjustable rate by correspondent lenders 1,426 26,220 67,461
Fixed rate by correspondent lenders -- 686 4,058
Home equity 7,022 -- --
Residential construction and acquisition
and development loan originations 189,686 145,727 154,182
Warehouse loan originations 1,642,445 1,174,639 887,252
MSR loan originations 7,554 55,259 69,172
Multifamily loan originations 228,553 81,148 67,657
Commercial real estate loan originations 126,916 171,497 41,170
Commercial construction originations 15,543 12,222 3,806
Commercial, financial and industrial loan originations 107,890 43,497 30,080
Consumer loan originations 38,002 18,679 22,256
--------------- ----------- -----------
Total loan originations 2,381,232 1,735,881 1,356,107
Purchase of residential mortgage loans
(net of repurchases by investors) 293,023 108,226 115,928
Loans acquired (net of loans sold) in connection
with acquisition and disposition transactions 176,158 -- 1,018
Purchase of multifamily and commercial
real estate loans -- -- 4,604
Purchase of automobile loans 34,609 70 --
--------------- ----------- -----------
Total loan originations and purchases 2,885,022 1,844,177 1,477,657
--------------- ----------- -----------
Foreclosures 4,178 4,226 4,363
Principal repayments and reductions to
principal balance 2,587,252 1,790,790 1,339,691
Residential loans sold 10,663 12,855 --
--------------- ----------- -----------
Total foreclosures, repayments and sales of loans 2,602,093 1,807,871 1,344,054
--------------- ----------- -----------
Amortization of premiums, discounts and fees on loans (3,115) (2,819) (485)
Provision for loan losses (3,100) (1,800) (1,925)
--------------- ----------- -----------
Net increase in loans receivable $ 276,714 $ 31,687 $ 131,193
=============== =========== ===========
FIRST LIEN MORTGAGE LOAN ORIGINATIONS, PURCHASES AND SALES. The Bank
originates and purchases for its own portfolio loans secured by first lien
mortgages on completed single family residences. The Bank originates these
loans primarily in the Houston metropolitan area and in geographic areas
surrounding the Bank's branch locations. During 1998, 1997 and 1996, the Bank
originated residential real estate loans for portfolio totaling $16.2 million,
$6.3 million and $9.0 million, respectively. The majority of the Bank's
residential loans have been acquired through bulk purchases in the traditional
secondary market. During 1998, 1997 and 1996, the Bank purchased $293.6
million, $107.9 million and $112.4 million of such loans, respectively.
The Bank offers, but does not actively solicit, a variety of mortgage
products designed to respond to consumer needs and competitive factors.
Conventional conforming loans that are secured by first liens on completed
residential real estate are generally originated for amounts up to 95% of the
appraised value or selling price of the mortgaged property, whichever is less.
All loans with loan-to-value ratios in excess of 80% generally require the
borrower to purchase private mortgage insurance from approved third party
insurers. The Bank also originates conventional non-conforming mortgage loans
(i.e., loans for single family homes with an original balance in excess of the
maximum loan balance amount set by the Federal National Mortgage Association
("FNMA") or the Federal Home Loan Mortgage Corporation ("FHLMC"), which is
presently $240,000, or loans that do not otherwise meet the criteria established
by FNMA or FHLMC). Such loans are originated based on underwriting guidelines
or standards required by the Secondary Market Investors ("SMI") to whom such
loans are intended to be sold. During 1998, 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, the Bank offers
special products designed to provide to its customers lower rates of interest or
lower principal and interest payments. Borrowers may choose from a wide variety
of combinations of interest rates and points on many products so that they may
elect to pay higher points at closing and lower interest over the life of the
loan, or pay a higher interest rate and reduce the points payable at closing.
In addition, from time to time mortgages are offered in the following
categories: those which allow the borrower to make lower monthly payments for
the first one, two or three years of the loan; fixed rate mortgages; and
adjustable rate mortgages having interest rate adjustments every one, five or
seven years based upon a specified independent index.
Borrower demand for adjustable rate mortgage loans compared to fixed rate
mortgage loans is a function of interest rate levels, consumer expectations for
changes in interest rate levels and the difference between interest rates and
loan fees offered for fixed rate mortgage loans and for adjustable rate mortgage
loans. The Bank's loan origination volume has been subject to some minor
seasonal variations, with the heaviest demand in the late spring and summer
months. Loan demand is also affected by the general interest rate environment
and, to a large measure, by the general state of the local economy.
During times of relatively lower market interest rates, demand by previous
borrowers for refinancings increases. Refinancings are not solicited by the
Bank. However, if a request for a refinancing is received, borrowers are
offered current mortgage loan products. Refinancings are generally processed in
a manner identical to original originations and charged the same fees.
The Bank has also acquired residential real estate loans for its portfolio
through purchases from correspondent lenders and through bulk purchases when the
prices of these purchases are considered to be favorable.
Beginning in 1994, the Bank began originating residential mortgage loans
through selected correspondent lenders who would originate then immediately sell
the loans to the Bank. All such loans were underwritten in accordance with the
Bank's policies and procedures. During 1998, 1997 and 1996, the Bank originated
$1.4 million, $26.9 million and $71.5 million, respectively, through these
correspondent lenders. The use of correspondent lenders was essentially
discontinued during 1997, with the focus of acquiring loans turning to bulk
purchases.
The acquisition of residential real estate loans has primarily been
accomplished through bulk purchases in the traditional secondary market (from
mortgage companies, financial institutions, investment banks and CBCC beginning
in 1997). Bulk purchases allow the Bank to obtain residential real estate
mortgage loans without the cost of origination activities. Personnel from the
Bank generally analyze loan bid packages, as they become available from CBCC and
from third parties, and the PCC 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 bid price with respect to such loan packages is based on a
number of factors, including the ability to create spread income with a funding
source of comparable maturity, the pricing of alternative investments,
particularly mortgage-backed securities, which offer little or no credit risk,
and the credit risk profile of the portfolio offered. The Bank analyzes credit
risk in a whole loan package through its due diligence investigation, which is
designed to provide management with basic underwriting information on each loan
or group of loans, including loan-to-value, payment history, insurance and other
documentation. Because the Bank is purchasing loans in bulk, the Bank prices the
loan packages to take into consideration, among other things, delinquency and
foreclosure assumptions based on the risk characteristics of the loan packages.
The Bank intends to continue to make competitive bids on loan portfolios that
meet the Bank's purchase criteria.
The Bank sells 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 less interest rate risk. During 1998, the Bank did not
originate or purchase any loans with the intent to sell them to SMIs, but did
sell $10.7 million of single family residential loans to SMIs. During the years
ended 1997 and 1996, the Bank originated or purchased with the intent to sell
$4.1 million and $11.2 million, respectively, of single family residential
mortgage loans and sold $4.4 million and $11.7 million, respectively, of such
loans to SMIs.
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.
RESIDENTIAL CONSTRUCTION LENDING. The Bank initiated a construction
lending program with local builders in the latter part of 1989 which has grown
considerably since its inception. At the initiation of the program, management
of the Bank surveyed the members of the residential construction industry in the
Bank's Houston market area and targeted those companies, and, in the ensuing
years, others that management believed, based upon its market research, to be
financially strong and reputable. Loans are made primarily to fund residential
construction. Construction loans are made on pre-sold and speculative
residential homes 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. Upon approval of the line of credit, the Bank issues a letter
which indicates to the builder the maximum amount which will be available under
the line, the term of the line of credit (which is generally 90 days to one
year), the interest rate of the loans to be offered under the line (which is
generally set at a rate above The Wall Street Journal prime rate or LIBOR on the
outstanding monthly loan balance) and the loan fees payable. When the builder
desires to draw upon a short-term line of credit, a separate loan application
must be made under the line for a specific loan amount. Each loan commitment
under a short-term line of credit is separately underwritten and approved after
the builder's master file is updated and reviewed.
The terms of the Bank's construction loans are generally for nine months or
less, unless extended by the Bank. If a construction loan is extended, the
borrower is generally charged a loan fee for each 90 day extension period. The
Bank reserves the right to extend any loan term, but generally does not permit
the original term and all extensions to exceed 24 months without amortization of
principal either in monthly increments or a lump sum.
The loan-to-value ratio (applied to the underlying property that
collateralizes the loan) of any residential construction loan may not exceed the
lesser of 85% of appraised value or 100% of the actual cost. All individual
loans are limited in dollar amount based upon the project proposed by the
builder. Draws for lot purchases are generally limited to the contracted sales
price of the lot (to include escalations) not to exceed 100% of the lot's
appraised value. Other special conditions which the Bank attaches to its
construction loans include a requirement that limits the number and dollar
amount of loans which may be made based upon unsold inventory. The Bank may
also, in its sole discretion, discontinue making any further loans if the
builder's unsold inventory exceeds a certain level from all lending sources or
if the builder fails to pay its suppliers or subcontractors in a timely manner.
The Bank provides construction financing for homes that generally are
priced below $450,000, with most homes priced between $125,000 and $300,000. In
this price range, the Bank has experienced the shortest duration of term, the
highest annualized yield and the least likelihood of defaults because of the
generally high number of pre-completion sales. The Bank will also make
individual construction loans to builders or individuals on single homes or 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, 1998, the Bank had $67.5 million in outstanding residential
construction loans (net of loans in process of $48.2 million) of which $192,000
were on nonaccrual status. At the present time, the Bank has approved builders
domiciled in the Houston, Dallas, and Austin metropolitan areas and is
selectively soliciting new builders for its residential construction lending
program. Of the approved builders, two of the builders domiciled in Houston are
authorized for the funding of loans outside the state of Texas. At December
31, 1998, there were loans totaling $519,000 for these builders in the state of
Arizona. The Bank intends to continue to do business with the companies
involved in its line of credit program and believes that it will continue to
have construction loan demand from the builders with whom it currently has an
established lending relationship.
Construction financing is generally considered to involve a higher degree
of risk than long-term financing on improved, occupied residential real estate,
due to the lender's reliance on the borrower to add to the estimated value of
the property through construction within the budget set forth in the loan
application. The Bank attempts to limit its risk exposure by, among other
things: limiting the number of borrowers to whom it lends and establishing
specific qualification requirements for borrowers generally; continually
monitoring the general economic conditions in the market, recent housing starts
and sales; continually monitoring the financial position of its borrowers
throughout the term of the loan 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.
COMMERCIAL REAL ESTATE AND MULTIFAMILY MORTGAGE LENDING. The Bank
initiated a program in 1993 to actively seek loans secured by commercial or
multifamily properties. Commercial real estate and multifamily mortgage loans
typically involve higher principal amounts and repayment of the loans generally
depends, in large part, on sufficient cash flow being generated by the
underlying properties to cover operating expenses and loan repayments. Market
values may vary as a result of economic events or governmental regulations which
are outside the control of the borrower or lender and which can affect the
future cash flow of the properties. The loans are for a short to medium term of
between one to seven years, and have floating rates or fixed rates based on a
spread over similarly fixed borrowings from the FHLB. The properties securing
the loans originated by the Bank are primarily located in Texas. The Bank
attempts to limit its risk exposure by, among other things: lending to proven
developers/owners, only considering properties with existing operating
performance which can be analyzed, requiring conservative debt coverage ratios,
and continually monitoring the operation and physical condition of the
collateral. At December 31, 1998, commercial real estate loans totaling $257.7
million and multifamily mortgage loans of $119.4 million were outstanding. At
December 31, 1998, the Bank had commercial real estate loans totaling
approximately $149,000 that were on nonaccrual status and no multifamily
mortgage loans on nonaccrual status.
The Bank began originating commercial real estate and multifamily
construction loans in 1996. The Bank generally underwrites these loans in the
same way it underwrites its multifamily mortgage loans and attempts to manage
the risk of such loans by requiring that the builders provide more equity in the
project than is required in refinancings, lending to 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, 1998, commercial and multifamily construction loans totaling
$21.3 million (net of loans in process of $19.0 million) were outstanding, none
of which were on nonaccrual status.
WAREHOUSE LENDING. Since 1992, the Bank has provided or participated in
lines of credit to mortgage companies generally for their origination of single
family residential loans which are generally sold no more than 90 days from
origination to FNMA, FHLMC, the Government National Mortgage Association
("GNMA") or to private investors. The lines of credit are generally renewable
annually. Borrowers pay interest on funds drawn at a floating rate. In
addition, the Bank usually receives a fee for each loan file processed. The
Bank (or the lead lender in a participation) holds the original mortgage loan
notes and other documentation as collateral until repayment of the related lines
of credit, except when a third party bank is acting as the lead bank in the
lending relationship.
Warehouse loans are underwritten in accordance with Bank policies and
procedures. Interested loan originators who contact or are contacted by the
Bank are asked to prepare a loan application which seeks detailed information on
the originator's business. After evaluating the application and independently
verifying the applicant's credit history, if the originator appears to be a
likely candidate for approval, Bank personnel will visit the originator and
review, among other things, its business organization, management, quality
control, funding sources, risk management, loan volume and historical
delinquency rate, financial condition, contingent obligations and regulatory
compliance. The originator pays a fee for this review to offset a portion of
the Bank's expense; this amount is deducted from the origination fee if the line
of credit is approved. If the originator meets the established criteria, its
application is submitted for approval. It is the policy of the Bank to apply
substantially the same underwriting standards to loan participations as are
applied to loans with similar characteristics originated directly by the Bank.
Bank personnel attempt to minimize the risk of making Warehouse loans
(excluding participations in loans where a third party bank is acting as the
lead bank) by, among other things, (i) taking physical possession of the
originator's collateral, (ii) directly receiving payment from secondary market
investors when the loans are sold and remitting any balance to the borrower
after deducting the amount borrowed for that particular loan, (iii) visiting the
originator's office from time to time to review its financial and other records
and (iv) monitoring each originator: (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. In particpations in loans where a third party bank is acting as the
lead bank, the Bank relies on the lead bank to perform substantially the same
procedures as noted above.
During 1998, the Bank originated $1.6 billion of Warehouse loans and had
Warehouse loans outstanding of $173.1 million at December 31, 1998. At December
31, 1998, there were two Warehouse loans, totaling $10.0 million, on nonaccrual
status, one of which is described below.
On August 11, 1998, the Bank approved the purchase of a $10.0 million
participation in a warehouse loan aggregating $25.0 million to MCA Financial
Corp., and certain of its affiliates, of Southfield, Michigan (collectively the
"Mortgage Banker"). The lead lender ("Lead Lender") in this facility is a major
commercial bank and the loan is secured by subprime residential loans. In late
January 1999, due to a lack of liquidity, the Mortgage Banker ceased operations
and shortly thereafter was seized by the Michigan Bureau of Financial
Institutions. A conservator was appointed to take control of the Mortgage
Banker's books and records, marshal that company's assets and continue its loan
servicing operations. A voluntary petition under Chapter 11 of the U.S.
Bankruptcy Code was filed in the U.S. Bankruptcy Court for the Eastern District
of Michigan for the Mortgage Banker on or about February 11, 1999, by the
conservator, who has been appointed the "debtor-in-possession", to allow the
conservator time to develop a plan of reorganization while protecting the assets
of the Mortgage Banker.
The Bank has hired special bankruptcy counsel to represent it in this
situation and has been involved in discussions with the Lead Lender regarding
the status of the loan. Although the Bank has been informed by the Lead Lender
that the Bank's loan is collateralized by residential loans, the Bank, as of the
date hereof, has been unable to verify the extent to which the collateral, if
any, is sufficient to prevent the Bank from incurring a loss. Effective
December 31, 1998, the Bank put this loan on nonaccrual and has allocated $1.5
million of the general reserve to this loan. The Bank is continuing to monitor
this situation and will make additions to the overall allowance for loan losses
as considered necessary based on its existing policy. At this time, the Bank is
unable to determine the timing, probability, or the amount of any loss which
might result from the default by the Mortgage Banker.
MSR 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 70.0% of the price paid by the mortgage company for servicing rights,
or of the value of the originated servicing rights (subject to the regulatory
maximum for loans to one borrower). MSR loans are made at adjustable rates of
interest tied to LIBOR or the Bank's borrowing rate plus a spread and a
commitment fee. MSR 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. MSR
loans are underwritten in substantially the same manner as Warehouse loans.
Bank personnel closely monitor MSR borrowers 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 MSR portfolio
(through evaluation of the estimated future net cash flows from the servicing
rights) in order to ensure that the loan-to-value ratio does not exceed 75.0%
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, 1998, the Bank had $3.9 million in
outstanding MSR loans and had discontinued soliciting MSR financing during the
year. At December 31, 1998, there were no MSR loans on nonaccrual status.
REAL ESTATE ACQUISITION AND DEVELOPMENT LENDING. The Bank originates loans
to residential real estate builders and developers for the acquisition and/or
development of vacant land. The proceeds of the loans are generally used to
acquire the land and make the site improvements necessary to develop the land
into saleable lots. The Bank generally lends only to major developers 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, 1998, the Bank had $43.3 million (net of loans in process
of $32.6 million) of real estate acquisition and development loans outstanding.
At December 31, 1998, there were no real estate acquisition and development
loans on nonaccrual status.
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 1997 and 1998, management continued to develop the
infrastructure for commercial business lending in most of the Bank's major
markets by developing the PCC and adding business banking loan officers. In
1998, the Bank acquired twelve commercial bank branches and significantly
increased the Bank's commercial business loan origination capacity. The
commercial, financial and industrial loans ("Commercial Business loans") are
generally made to provide working capital financing or asset acquisition
financing to businesses and are generally secured by the borrower's working
capital assets (i.e., accounts receivable, inventory, etc.) or assets purchased
by the borrower (i.e., operating assets, equipment, etc.). Commercial Business
loans generally have shorter terms (one to five years) at a spread over prime
rate or LIBOR and are of greater risk than real estate secured loans because of
the type and nature of the collateral. In addition, Commercial Business loan
collections are more dependent on the continuing financial stability of the
borrower. The Bank intends to continue to expand the acquired commercial
business lending program, while managing the associated credit risk by
continually monitoring borrowers' financial position and underlying collateral
securing the loans. At December 31, 1998, Commercial Business loans outstanding
totaled $92.2 million, of which $496,000 of such loans were on nonaccrual
status.
CONSUMER LENDING. The Bank makes available traditional consumer loans,
such as home improvement, home equity, new and used car financing, new and used
boat and recreational vehicle financing and loans secured by savings deposits to
consumers in the markets served by its retail branches and business banking
centers. The interest rate on loans secured by savings deposits is typically
set at a rate above that paid on the underlying account and adjusts if the rate
on the account changes. At December 31, 1998, the Bank had $67.0 million in
consumer and other loans outstanding and $13.2 million in loans secured by
savings deposits.
Consumer loans (other than savings deposit secured loans) generally have
shorter terms and higher interest rates than mortgage loans but usually involve
greater credit risk than mortgage loans because of the type and nature of the
collateral. In addition, consumer lending collections are dependent on the
borrower's continuing financial stability, and are thus likely to be adversely
affected by job loss, 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 has a lending agreement to purchase loans through a correspondent
to refinance new and used automobiles. During 1998, the Bank purchased a total
of $34.6 million automobile loans under this agreement, of which $29.6 million,
included in total consumer and other loans, were outstanding at December 31,
1998. At December 31, 1998, $75,000 of these loans were on nonaccrual status
and as of December 31, 1998, only $160,000 of these loans had been repossessed
or charged off.
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 nonaccrual 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, particularly if
management believes that the individual loan is in the process of collection and
the interest is fully collectible.
The following table sets forth information regarding the Bank's
nonperforming assets of the dates shown.
At December 31,
1998 1997 1996
----------- -------- --------
(Dollars in thousands)
Nonaccrual loans:
First lien single family mortgage $ 11,883 $15,591 $12,238
Residential construction 192 -- --
Commercial real estate 149 322 32
Commercial construction -- 900 --
Commercial, Warehouse 10,042 -- --
Commercial, financial and industrial 496 485 496
Consumer and other 75 53 73
----------- -------- --------
Total nonaccrual loans 22,837 17,351 12,839
----------- -------- --------
Loans greater than 90 days delinquent
and still accruing:
First lien single family mortgage 189 -- 106
Multifamily mortgage 190 -- --
Residential construction -- 79 52
Commercial real estate 293 91 881
Commercial, financial and industrial 808 120 14
Consumer and other 224 50 142
Total loans greater than 90 days
delinquent and still accruing 1,704 340 1,195
----------- -------- --------
Total nonperforming loans 24,541 17,691 14,034
----------- -------- --------
Total REO and repossessed assets 4,927 3,198 3,161
----------- -------- --------
Total nonperforming assets $ 29,468 $20,889 $17,195
=========== ======= =======
Ratio of nonperforming
assets to total assets 0.99% 0.72% 0.60%
=========== ======= =======
Ratio of nonaccrual loans to total
loans receivable 1.48% 1.38% 1.04%
=========== ======== ========
Ratio of nonperforming loans to total
loans receivable 1.60% 1.40% 1.14%
=========== ======== ========
At December 31, 1998, approximately $835,000 in additional interest income
would have been recorded in the year then ended on the above loans accounted for
on a nonaccrual basis if such loans had been current in accordance with their
original terms and had been outstanding throughout the period or since
origination if held for part of the period. For the year ended December 31,
1998, $480,000 in interest income was included in net income for these same
loans prior to the time they were placed on nonaccrual status.
At December 31, 1998, the Bank had 173 first lien single family residential
mortgage loans on nonaccrual status, aggregating $11.9 million, with an average
balance of approximately $69,000. A total of 151 of these loans, with an
aggregate balance of $9.7 million, were acquired through bulk loan purchases and
7 of these loans, with an aggregate balance of $294,000, were acquired in
acquisitions. Of the 151 residential mortgage loans acquired through bulk
purchases, at December 31, 1998, 30 of such loans totaling $1.5 million were
being serviced by other institutions, which constituted 1.0% of the $154.6
million of aggregate loans serviced by others.
At December 31, 1998, the Bank had 2 warehouse loans totaling $10.0 million
on nonaccrual status. See "Warehouse Lending."
At December 31, 1998, nonperforming assets included REO with an aggregate
book value of $4.9 million and repossessed assets of $2,000. At such date, the
Bank's REO consisted of 24 single family residential properties totaling $2.1
million, 11 commercial properties totaling $2.7 million and 2 residential
construction properties totaling $104,000.
At December 31, 1998, in addition to the loans on nonaccrual status, the
Bank had $9.7 million in loans classified as substandard, $83,000 classified as
doubtful, $9,000 classified as loss and $9.7 million of loans designated as
"special mention" for regulatory purposes. 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.
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, 1998, the
carrying value of impaired loans totaled approximately $1.7 million and the
related allowance for loan losses on those impaired loans totaled $880,000. The
average balance of impaired loans during the year ended December 31, 1998 was
approximately $1.7 million. For the year ended December 31, 1998, the Bank did
not recognize interest income on loans considered impaired.
The Bank had loaned $115.7 million at December 31, 1998, 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, 1998, the Bank had $173.1
million of Warehouse loans outstanding. See "Warehouse Lending."
ALLOWANCE FOR LOAN LOSSES. The Bank maintains loan loss allowances to
absorb future losses that may be realized on its loans receivable portfolio.
The following table summarizes activity in the Bank's allowance for loan losses
during the periods indicated.
Year Ended December 31,
1998 1997 1996 1995 1994
--------- -------- ------- ------- -------
(Dollars in thousands)
Balance at beginning of year $ 7,412 $ 6,880 $5,703 $2,158 $1,527
Charge-offs(1) (1,693) (1,416) (851) (404) (329)
Recoveries 282 148 103 17 26
Provision for loan losses 3,100 1,800 1,925 1,664 934
Allowance of acquired entities(2) 2,257 -- -- 2,268 --
--------- -------- ------- ------- -------
Balance at end of the year $ 11,358 $ 7,412 $6,880 $5,703 $2,158
========= ======== ======= ======= =======
Ratio of net charge-offs during the
period to average net loans
outstanding during the period 0.10% 0.10% 0.06% 0.05% 0.06%
========= ======== ======= ======= =======
________________________
(1)In 1998, $544,000 of the charge-offs were attributable to single family
residential loans, $648,000 to Commercial Business loans, $477,000 to consumer
and other loans and $24,000 to commercial real estate loans. In 1997, $591,000
of the charge-offs were attributable to single family residential loans,
$472,000 to Commercial Business loans, $349,000 to consumer and other loans and
$4,000 to commercial real estate loans. In 1996, $651,000 of the charge-offs
were attributable to single family residential loans, $142,000 to consumer and
other loans and $58,000 to Commercial Business loans. In 1995, $359,000 of the
charge-offs were attributable to single family residential loans and $45,000 to
consumer and other loans. In 1994, the charge-offs were fully attributable to
single family residential loans.
(2)The allowance of acquired entities in 1998 represents the allowance for loan
losses recorded in connection with the loans acquired in the 1998 branch
acquisition. The amount in 1995 represents the allowance for loan losses
recorded 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,
1998 1997 1996 1995 1994
-------- ------- ------- ------- -------
(In thousands)
First lien residential mortgage $ 3,238 $ 2,566 $ 2,217 $ 2,992 $ 1,191
Multifamily mortgage 383 511 369 249 188
Residential construction 343 251 223 307 278
Real estate acquisition and development 759 316 261 130 142
Commercial real estate 2,112 1,468 1,151 1,072 152
Commercial construction 225 203 20 -- --
Commercial, Warehouse and MSR 1,722 494 361 230 98
Commercial, financial and industrial 1,750 1,008 985 395 --
Consumer and other 826 233 374 177 109
Unallocated -- 362 919 151 --
-------- ------- ------- ------- -------
$ $ 11,358 $ 7,412 $ 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.
Year Ended December 31,
1998 1997 1996 1995 1994
-------- -------- -------- -------- ------
(In thousands)
First lien residential mortgage $ 1,142 $ 908 $ (180) $ 1,032 $ 743
Multifamily mortgage (184) 142 120 23 60
Residential construction 55 28 (84) (67) (174)
Real estate acquisition and development 443 55 131 (25) 106
Commercial real estate 82 321 79 479 128
Commercial construction (36) 183 20 -- --
Commercial, Warehouse and MSR 1,228 133 131 132 (49)
Commercial, financial and industrial 240 416 618 -- --
Consumer and other 846 171 322 90 120
Unallocated (716) (557) 768 -- --
-------- -------- ------- ------- ------
$ 3,100 $ 1,800 $ 1,925 $ 1,664 $ 934
======== ======== ======== ======== ======
Provisions for loan losses are charged to earnings to bring the total
allowance to a level deemed appropriate by management based on such factors as
historical loss experience, the volume and type of lending conducted by the
Bank, identification of adverse situations which may affect the ability of
borrowers to repay, the 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. During the
year ended December 31, 1998, the increased provision for loan losses was
recorded due to the continuing change in the composition of the loans receivable
portfolio from more traditional residential real estate type loans to commercial
type loans. At December 31, 1998, single family mortgage and residential
construction loans made up approximately 49% of the loans receivable portfolio
as compared to 58% at December 31, 1997, a decrease of 9%. This change
occurred, and is expected to continue to occur, as a result of management's
emphasis on commercial business lending and the loans acquired in 1998.
The Board of Directors of the Bank reviews its Asset Classification and
Allowance Policy ("ACAP") at least 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 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, MSR, 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% 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 allocations of the general allowance are established by management on
specific loans or groups of 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 historical loss experience.
Management continues to review its loan portfolio to determine whether its ACAP
should be altered in light of current conditions and to make any additional
provisions which may be deemed necessary. While management uses the best
information available to make such determinations, additional provisions for
loan losses may be required to be established in the future should economic or
other conditions change substantially. In addition, the FDIC and the
Department, as an integral part of their examination processes, periodically
review the Bank's 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.
As noted previously, on August 11, 1998, the Bank approved the purchase of
a $10.0 million participation in a warehouse loan. In late January 1999, due to
a lack of liquidity, the Mortgage Banker ceased operations and shortly
thereafter was seized by the Michigan Bureau of Financial Institutions. A
conservator was appointed to take control of the Mortgage Banker's operations
and has also been appointed "debtor-in-possession" under a voluntary petition
under Chapter 11 of the U.S. Bankruptcy Code.
The Bank has hired special bankruptcy counsel to represent it in this
situation and has been involved in discussions with the Lead Lender regarding
the status of the loan. Although the Bank has been informed by the Lead Lender
that the Bank's loan is collateralized by residential loans, the Bank, as of the
date hereof, has been unable to verify the extent to which the collateral, if
any, is sufficient to prevent the Bank from incurring a loss. Effective
December 31, 1998, the Bank put this loan on nonaccrual and has allocated $1.5
million of the general reserve to this loan. The Bank is continuing to monitor
this situation and will make additions to the overall allowance for loan losses
as considered necessary based on its existing policy. At this time, the Bank is
unable to determine the timing, probability, or the amount of any loss which
might result from a default by the Mortgage Banker.
MORTGAGE LOAN SERVICING. The Bank services residential real estate loans
for its own portfolio as well as for others, including FNMA, FHLMC and other
private mortgage investors through CBS Mortgage, a division of the Bank ("CBS
Mortgage"). 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, 1998,
the Bank had $5.0 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 1998, 1997 and 1996, CBS Mortgage earned
$642,000, $1.4 million and $1.6 million, respectively, in conjunction with its
loan servicing. Servicing fees are collected out of the monthly mortgage
payments made by borrowers and are net of the amortization of mortgage servicing
rights.
CBS Mortgage's servicing portfolio is subject to reduction by normal
amortization, by prepayment or by foreclosure of outstanding loans. At December
31, 1998, 1997 and 1996, CBS Mortgage had an aggregate loan servicing portfolio
of $1.2 billion, $1.6 billion and $1.7 billion, respectively. Of these amounts
at such respective dates, CBS Mortgage serviced loans for the Bank's portfolio
aggregating $707.0 million, $890.3 million and $958.4 million and serviced loans
for others aggregating $519.2 million, $675.7 million and $776.7 million. At
December 31, 1998, 57.7% of the dollar value of loans being serviced by CBS
Mortgage was for the Bank's portfolio, 13.6% was being serviced for FHLMC, 27.0%
was being serviced for FNMA and 1.7% was being serviced for others.
No servicing rights were purchased by CBS Mortgage in 1998, 1997 or 1996.
As of December 31, 1998, an aggregate of $519.2 million of CBS Mortgage's $1.2
billion servicing portfolio, or 42.3%, was loans serviced for others. At
December 31, 1998, CBS Mortgage had no commitments for further purchases of
mortgage servicing rights.
The amount, if any, by which purchased mortgage servicing rights 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, 1998, there were no deductions from the Bank's capital for
purchased mortgage servicing rights 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,
1998 1997 1996
----------- ----------- -----------
(In thousands)
Beginning servicing portfolio $ 1,566,004 $ 1,735,089 $ 1,725,400
----------- ----------- -----------
Bank loan originations 127,620 140,673 104,023
Bank whole loans acquired 93,170 126,864 185,176
----------- ----------- -----------
Total servicing originated
and acquired 220,790 267,537 289,199
----------- ----------- -----------
Loans sold servicing released 764 -- 47
Amortization and payoffs 554,603 430,373 273,219
Foreclosures 5,189 6,249 6,244
----------- ----------- -----------
Total servicing reductions 560,556 436,622 279,510
----------- ---------- -----------
Ending servicing portfolio $ 1,226,238 $ 1,566,004 $ 1,735,089
=========== =========== ===========
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, 1998, the Company's mortgage-backed securities portfolio (including $96.6
million of mortgage-backed securities available-for-sale), net of unamortized
premiums and unearned discounts, amounted to $1.3 billion, or 41.9%, of total
assets. When investing in mortgage-backed securities, management seeks to
achieve a positive spread over the cost of funds used to purchase these
securities. At December 31, 1998, the Company's net mortgage-backed securities
had an aggregate market value of $1.2 billion.
The following table sets forth the composition of the Company's
mortgage-backed securities portfolio at the dates indicated.
At December 31,
1998 1997 1996
----------------------- ---------------------- -----------------------
Amount Percent Amount Percent Amount Percent
------------ -------- ---------- -------- ---------- ---------
(Dollars in thousands)
Held-to-maturity:
REMICS $ 1,059,924 91.82% $ 1,232,219 91.59% $ 1,213,849 90.25%
FNMA certificates 61,590 5.34 69,906 5.20 77,324 5.75
GNMA certificates 21,235 1.84 28,701 2.13 33,900 2.52
Non-agency certificates 11,530 1.00 14,586 1.08 19,826 1.48
Interest-only securities 1 -- 20 -- 38 --
------------ -------- ------------ -------- ------------ --------
1,154,280 100.00% 1,345,432 100.00% 1,344,937 100.00%
======== ======== ========
Unamortized premium 2,100 2,831 3,153
Unearned discount (2,264) (3,173) (3,503)
----------- ------------ ------------
Total held-to-maturity $ 1,154,116 $ 1,345,090 $ 1,344,587
============ ============ ============
Available-for-sale:
REMICS $ 98,892 $ 173,717 $ 185,651
Unamortized premium 8 25 33
Unearned discount (168) (247) (255)
Net unrealized loss (2,123) (3,498) (4,773)
----------- ------------ ------------
Total available-for-sale $ 96,609 $ 169,997 $ 180,656
============ ============ ============
Total mortgage-backed
securities $ 1,250,725 $ 1,515,087 $ 1,525,243
============ ============ ============
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 IO
securities held at December 31, 1998 were purchased in 1990 and have a net book
value of only $1,000. The Company has not purchased IO securities since 1990.
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 generally earn a credit
rating of "A" or better from one or more of the national securities rating
agencies.
A CMO is a special type of pay-through debt obligation in which the stream
of principal and interest payments on the underlying mortgages or
mortgage-backed securities is used to create classes with different maturities
and, in some cases, amortization schedules and a residual class of the CMO
security being sold, with each such class possessing different risk
characteristics. The residual interest sold represents any residual cash flows
which result from the excess of the monthly receipts generated by principal and
interest payments on the underlying mortgage collateral and any reinvestment
earnings thereon, less the cash payments to the CMO holders and any
administrative expenses. As a matter of policy, due to the risk associated with
residual interests, the Bank has never invested in, and does not intend to
invest in, residual interests in CMOs.
Mortgage-backed securities generally yield less than the loans which
underlie such securities because of their payment guarantees or credit
enhancements which reduce credit risk. In addition, mortgage-backed securities
are more liquid than individual mortgage loans and may be used to collateralize
obligations of the Bank. Mortgage-backed securities issued or guaranteed by
FNMA or FHLMC (except 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, 1998, the Bank had mortgage-backed securities considered
"high risk" with a recorded booked value of approximately $9.9 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,
1998 1997 1996
---------- --------- ---------
(In thousands)
Mortgage-backed securities
held-to-maturity purchased $ 8,203 $ 56,136 $ --
Mortgage-backed securities
available-for-sale sold (48,550) (11,308) (864)
Amortization of premiums,
net of discount accretion (132) (83) (552)
Change in unrealized loss on
mortgage-backed securities
available-for-sale 1,375 1,275 (4,013)
Principal repayments on
mortgage-backed securities (225,258) (56,176) (51,495)
---------- --------- ---------
Net decrease in
mortgage-backed securities $(264,362) $(10,156) $(56,924)
========== ========= =========
The Company classifies securities as either held-to-maturity or
available-for-sale. Securities are classified as held-to-maturity when the
Company has the positive intent and ability to hold such securities to maturity.
Securities held-to-maturity are recorded at amortized cost. Permanent declines
in the value of held-to-maturity securities are charged to earnings in the
periods in which the declines are determined. Securities available-for-sale are
securities other than those held-to-maturity or for trading purposes and are
recorded at fair value, with unrealized gains and losses excluded from earnings
and recorded net of tax as other comprehensive income (loss) in stockholders'
equity until realized. Realized gains and losses on securities are recorded in
earnings in the year of sale based on the specific identification of each
individual security sold. Premiums and discounts on mortgage-backed securities
are amortized or accreted as a yield adjustment over the life of the securities
using the interest method, with the amortization or accretion being adjusted
when the prepayments are received.
INVESTMENT ACTIVITIES
Under the Texas Savings Bank Act (the "Act"), the Bank is permitted to
invest in obligations of, or guaranteed as to principal and interest by, the
United States or the State of Texas, in the stock or in any obligations or
consolidated obligations of the FHLB, and in various other specified
instruments. The Bank holds investment securities from time to time to help
meet its liquidity requirements and as temporary investments until funds can be
utilized to purchase mortgage-backed securities, residential mortgage loans or
to originate other loans for the Bank's portfolio. See Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of
Operations-Liquidity and Capital Resources."
SOURCES OF FUNDS
GENERAL. Advances from the FHLB, deposits, sales of securities under
agreements to repurchase 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 attracts a majority of its deposits through its 49
branch offices in metropolitan Houston, Austin, Corpus Christi, the Rio Grande
Valley and small cities in the southeast quadrant of Texas. The Bank also
obtains deposits through acquisitions. In 1998, the Bank assumed approximately
$355.4 million in deposits in an acquisition of twelve commercial bank branches.
The Bank offers a variety of traditional deposit products which currently
includes interest-bearing checking, noninterest-bearing checking, savings, money
market demand accounts and certificates of deposit which generally range in
terms from three to 60 months. Included among these deposit products are
individual retirement account certificates. Beginning in 1995 with the
acquisition of Texas Capital, the Bank's management has pursued its commercial
banking strategy related to deposits designed to increase the level of lower
cost transaction and commercial deposit accounts. 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 acquisitions and marketing efforts
have resulted in the outstanding balances of demand deposit accounts increasing
to 32.1% of total deposits at December 31, 1998 from 26.4% at December 31, 1997.
The following table shows the distribution of and certain other information
relating to the Company's deposits by type at the dates indicated.
At December 31,
-----------------
1998(1) 1997(2) 1996(3)
Percent Percent Percent
of of of
Amount Deposits Amount Deposits Amount Deposits
------------ --------- ----------- --------- ----------- ---------
(Dollars in Thousands)
Demand deposit accounts:
Noninterest-bearing checking(4) $ 95,398 5.60% $ 101,782 7.40% $ 85,259 6.50%
Interest-bearing checking(4) 63,067 3.70 69,972 5.09 56,862 4.34
Savings 48,571 2.85 25,555 1.86 22,135 1.69
Money market demand(4) 339,481 19.91 165,986 12.07 151,046 11.52
------------ --------- ----------- --------- ----------- ---------
Total demand deposit accounts 546,517 32.06 363,295 26.42 315,302 24.05
------------ --------- ----------- --------- ----------- ---------
Certificate accounts:
Within 1 year 965,443 56.64 781,455 56.83 772,690 58.94
1-2 years 148,049 8.69 186,734 13.58 158,583 12.10
2-3 years 22,347 1.31 30,028 2.18 40,961 3.12
3-4 years 11,833 0.69 7,292 0.53 18,268 1.39
4-5 years 10,176 0.60 6,153 0.45 5,064 0.39
Over 5 years 240 0.01 178 0.01 165 0.01
------------ --------- ----------- --------- ----------- ---------
Total certificate accounts 1,158,088 67.94 1,011,840 73.58 995,731 75.95
------------ --------- ----------- --------- ----------- --------
1,704,605 100.00% 1,375,135 100.00% 1,311,033 100.00%
========== ========= =========
Premium (discount) on purchased
savings deposits, net 399 (75) (198)
------------ ----------- -----------
Total $ 1,705,004 $1,375,060 $1,310,835
============ =========== ===========
________________________
(1)In 1998, the Bank assumed approximately $355.4 in deposits in connection with
the acquisition of twelve branches of another financial institution.
(2)In 1997, the Bank assumed approximately $54.6 million in deposits in
connection with the acquisition of one branch office of another financial
institution.
(3)In 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.
(4)Effective January 1, 1998, the Bank implemented a software program which
performs calculations and reclassifies a portion of the balances in
noninterest-bearing and interest-bearing checking accounts to money market
demand accounts pursuant to deposit types under Federal Reserve Regulation D.
The amount of such reclassification was approximately $126.0 million ($55.8
million from noninterest-bearing checking and $70.2 million from
interest-bearing checking) at December 31, 1998.
The following table sets forth the average balance of each deposit type and
the average rate paid on each deposit type for the periods indicated.
Year Ended December 31,
1998 1997 1996
----------------------- ----------------------- ----------------------
(Dollars in Thousands)
Average Average Average Average Average Average
Balance Rate Paid Balance Rate Paid Balance Rate Paid
----------- ---------- ----------- ---------- ----------- ----------
Demand deposit accounts:
Noninterest-bearing checking $ 51,612 --% $ 91,293 --% $ 85,469 --%
Interest-bearing checking 20,628 2.18 61,392 1.78 49,181 2.07
Savings 35,162 2.20 23,912 2.29 22,104 2.32
Money market demand(1) 315,141 2.37 158,993 3.63 157,933 3.64
Certificate accounts 1,063,277 5.40 1,008,845 5.50 970,433 5.42
----------- ---------- ----------- ---------- ----------- ----------
Total deposits $ 1,485,820 4.45% $ 1,344,435 4.68% $ 1,285,120 4.66%
=========== ========== =========== ========== =========== ==========
________________________
(1)Includes amounts reclassified from noninterest-bearing and interest-bearing
checking accounts pursuant to the Bank's program under Federal Reserve
Regulation D as follows:
Noninterest-bearing checking $ 63,130
Interest-bearing checking 67,778
----------
$130,908
==========
The following table presents by various interest rate categories the
amounts of certificate accounts at the dates indicated and the amounts of
certificate accounts at December 31, 1998, which mature during the periods
indicated.
Amounts at December 31, 1998 Maturing
(In thousands)
One Year Greater than
Amounts at December 31, or Less Two Years Three Years Three Years
----------------------- ---------- --------- ------------ ------------
1998 1997
---------- ------------
Certificate accounts:
2.00% to 3.99% $ 45,152 $ 7,905 $ 43,174 $ 1,674 $ 28 $ 276
4.00% to 5.99% 1,019,910 899,205 860,538 118,799 20,636 19,937
6.00 to 7.99% 92,004 102,029 60,916 27,567 1,584 1,937
8.00 to 9.99% 1,004 2,701 806 -- 99 99
over 10.00% 18 -- 9 9 -- --
---------- ------------ -------- -------- ------- -------
Total $1,158,088 $ 1,011,840 $965,443 $148,049 $22,347 $22,249
========== ============ ======== ======== ======= =======
Certificates maturing within one year consist primarily of six month and
one year certificates. Historically, a majority of such certificate holders roll
over their balances into new certificates with similar terms at the Bank's then
current interest rates. The Bank believes that it can continue to achieve
balance levels of deposits deemed appropriate by management on a continuing
basis through competitive pricing.
The following table sets forth the net deposit flows of the Bank during the
periods indicated.
Year Ended December 31,
1998 1997 1996
----------- -------- ---------
(In thousands)
Net increase (decrease) before interest credited(1) $ 264,148 $ 2,383 $(34,707)
Interest credited 65,796 61,842 58,458
----------- -------- ---------
Net deposit increase $ 329,944 $ 64,225 $ 23,751
=========== ======== =========
________________________
(1)For the years ended December 31, 1998, 1997 and 1996, reflects the effect of
the assumption of $355.4 million, $54.6 million and $11.1 million of net deposit
liabilities acquired in connection with branch office transactions in each
respective year. The net deposit outflow in each year (net of acquired
deposits) was primarily due to financial disintermediation as described below.
The following table sets forth the amount of the Bank's certificates of
deposits which are $100,000 or more by time remaining until maturity at December
31, 1998.
At December 31, 1998
Number of accounts Deposit Amount
------------------ ---------------
(Dollars in thousands)
Three months or less 784 $ 58,172
Over three through six months 440 49,140
Over six through twelve months 578 63,534
Over twelve months 261 28,153
---------------- ---------------
Total 2,063 $ 198,999
================ ===============
The Bank's deposits are obtained primarily from residents of Houston,
Austin, Corpus Christi, the Rio Grande Valley and small cities in the southeast
quadrant of Texas. Currently, the principal methods used by the Bank to attract
and retain deposit accounts include competitive interest rates, having branch
locations in under-served markets and offering a variety of services for the
Bank's customers. The Bank uses traditional marketing methods to attract new
customers and savings deposits, including newspaper advertising. Through 1998,
except as noted below, the Bank has not solicited brokered deposit accounts and
generally has not negotiated rates on larger denomination (i.e., jumbo)
certificates of deposit. In early 1997, the Bank began the solicitation of
deposit accounts through a "money desk." Money desk rates are only offered to
institutions (primarily credit unions and municipal utility districts) and are
generally up to 50 basis points higher than on regular certificate of deposit
accounts.
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 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 market rates of interest.
The Bank also provides its customers with the opportunity to invest in
noninsured mutual funds, including government bond funds, tax-free municipal
bond funds, growth funds, income growth funds, and sector funds specific to an
industry, which are provided through a third party arrangement with another
company, which maintains representatives at the Bank's branch offices. The Bank
earns a fee after the payment of all expenses, which was not material to the
Bank's results of operations for the years ended December 31, 1998, 1997 or
1996. See "Subsidiaries of the Bank - CoastalBanc Financial Corp".
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,
1998 1997 1996
----------- ----------- -----------
(Dollars in thousands)
FHLB advances:
Average balance outstanding $ 713,197 $ 368,896 $ 387,296
Maximum amount outstanding
at any month-end during the
period 969,036 540,475 491,930
Balance outstanding at end of
period 966,720 540,475 409,720
Average interest rate during the
period 5.55% 5.78% 5.62%
Average interest rate at end of
period 5.24% 5.95% 5.61%
Securities sold under agreements
to repurchase:
Average balance outstanding $ 579,561 $ 974,136 $ 930,706
Maximum amount outstanding
at any month-end during the
period 874,784 1,035,576 1,022,085
Balance outstanding at end of
period 100,000 791,760 966,987
Average interest rate during the
period 5.49% 5.66% 5.52%
Average interest rate at end of
period 4.93% 6.00% 5.55%
Federal funds purchased averaged approximately $149,000 and $161,000 during
the years ended December 31, 1998 and 1997, respectively with an average
interest rate during the periods of 5.33% and 5.59%, respectively. There were
no federal funds purchased outstanding at any month-end during 1998 or 1997 and
there were no federal funds purchased outstanding during the year ended December
31, 1996.
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 and mortgage-backed securities, provided certain standards
related to creditworthiness of the Bank have been met. FHLB advances are
generally available for general business purposes to expand lending and
investing activities. Borrowings have generally been used to fund the purchase
of loans receivable and mortgage-backed securities.
Advances from the FHLB are made pursuant to several different credit
programs, each of which has its own interest rate and range of maturities. The
programs of the FHLB currently utilized by the Bank include a $50.0 million
variable rate line of credit, various short-term, fixed rate advances and long
term, fixed and variable-rate advances. At December 31, 1998, the Bank had
total FHLB advances of $966.7 million at a weighted average interest rate of
5.24%. Of the advances outstanding at December 31, 1998, $389.2 million were
short-term advances with an original maturity of less than 60 days.
The Bank also obtains funds from the sales of securities to investment
dealers under agreements to repurchase ("reverse repurchase agreements"). In a
reverse repurchase agreement transaction, the Bank will generally sell a
mortgage-backed security agreeing to repurchase the same security on a specified
later date at an agreed upon price. The mortgage-backed securities underlying
the agreements are delivered to the dealers who arrange the transactions. The
dealers may loan 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, 1998, the Bank had $100.0 million in borrowings
under reverse repurchase agreements at a weighted average interest rate of
4.93%. At December 31, 1998, the Bank had amounts of securities at risk under
securities sold under agreements to repurchase with one individual counterparty.
The amount at risk with Salomon Smith Barney Inc. was $16.0 million with a
maturity of 3,295 days at December 31, 1998.
To a lesser extent, beginning in 1997, the Bank has utilized federal funds
purchased from a correspondent bank for overnight borrowing purposes.
The Asset/Liability 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 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% 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,
1998, the Bank was authorized to have a maximum investment of approximately
$298.0 million in its subsidiaries.
At December 31, 1998, the Bank had one active wholly-owned subsidiary, the
activity of which is described below. At December 31, 1998, the Bank's
aggregate equity investment in its subsidiary was $131,000 and the Bank had a
receivable from such subsidiary totaling $26,000.
On December 30, 1998, CBS Mortgage Corp., a former subsidiary of the Bank,
was dissolved and merged into the Bank. The former CBS Mortgage Corp. is now
operated as CBS Mortgage, a division of the Bank.
COASTALBANC FINANCIAL CORP. CoastalBanc Financial Corp. ("Financial
Corp.") was formed in 1986 to act as an investment advisor to other insured
financial institutions. The Bank is the sole stockholder of Financial Corp.
Over the past four years, Financial Corp. has been inactive in its investment
advisory capacity. Financial Corp. became active during the last quarter of
1992 in connection with the sale of mutual funds through third party
intermediaries. Fees generated net of expenses, resulted in a net income of
$49,000, $35,000 and $40,000 for the years ended December 31, 1998, 1997 and
1996, respectively.
AFFILIATE OF THE BANK
COASTAL BANC CAPITAL CORP. CBCC is a direct subsidiary of HoCo and an
affiliate of the Bank. CBCC is engaged in the business of purchasing and
reselling packages of whole loan assets on behalf of the Bank and institutional
investors. The loan packages acquired by CBCC are offered to the Bank on the
same terms and at the same time that they are offered to other prospective
purchasers. During 1998, CBCC purchased whole loan assets totaling $316.3
million, $290.0 million of which were sold to the Bank and $26.3 million of
which were sold to third party investors. During the year ended December 31,
1998, CBCC recorded gains on the sale of loans to the Bank of $841,000 and gains
on the sale of loans to third party investors of $164,000. The $841,000 gain on
the sale of loans to the Bank was recorded on the Bank's financial statements as
a premium on purchased loans and is being amortized over the life of those
loans. All intercompany balances and transactions have been eliminated in
consolidation. At December 31, 1998, HoCo's unconsolidated equity investment in
CBCC was $351,000. CBCC had net income (before eliminations) of $275,000 for
the year ended December 31, 1998 and a net loss of $24,000 for the period ended
December 31, 1997.
Commissions received by CBCC from the Bank are calculated at a market rate
and are not greater than those paid to non-affiliates in similar transactions.
The Bank and CBCC have entered into a mortgage warehouse revolving loan
agreement pursuant to which the Bank has established a $17.0 million revolving
line of credit to be drawn upon from time to time by CBCC to finance the
acquisition of whole loan assets and the holding of such assets until they are
sold. The advances drawn by CBCC are collateralized by such assets purchased
and held by CBCC. There were no amounts outstanding on this line of credit at
December 31, 1998. All transactions between the Bank and CBCC are within
regulatory guidelines.
REGULATION
Set forth below is a brief description of certain laws and regulations
which relate to the regulation of the Company and the Bank. The description
does not purport to be complete and is qualified in its entirety by reference to
applicable laws and regulations.
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 Federal
Deposit Insurance Act ("FDIA"), or (iii) the statutes of the state in which the
institution to be acquired is located specifically permit institutions to be
acquired by the state-chartered institutions or savings and loan holding
companies located in the state where the acquiring entity is located (or by a
holding company that controls such state-chartered savings institutions).
TEXAS REGULATIONS. Under the Texas Savings Bank Act ("TSBA"), each
registered holding company, such as the Company, is required to file reports
with the Department as required by the Texas Savings and Loan Commissioner
("Commissioner") and is subject to such examination as the Commissioner may
prescribe.
REGULATION OF THE BANK
The Bank is required to file reports with the Department and the FDIC
concerning its activities and financial condition, in addition to obtaining
regulatory approvals prior to entering into certain transactions, such as any
merger or acquisition with another institution. The regulatory system to which
the Bank is subject is intended primarily for the protection of the deposit
insurance fund and depositors, not stockholders. The regulatory structure also
provides the Department and the FDIC with substantial discretion in connection
with their supervisory and enforcement functions. The Department and the FDIC
conduct periodic examinations of the Bank in order to assess its compliance with
federal and state regulatory requirements. As a result of such examinations,
the Department and the FDIC may require various corrective actions.
Virtually every aspect of the Bank's business is subject to numerous
federal and/or state regulatory requirements and restrictions with respect to
such matters as, for example, the nature and amounts of loans and investments
that may be made, the issuance of securities, the amount of reserves that must
be established against deposits, the establishment of branches, mergers,
non-banking activities and other operations. Numerous laws and regulations also
set forth special restrictions and procedural requirements with respect to the
extension of credit, credit practices, the disclosure of credit terms and
discrimination in credit transactions.
LIMITATIONS ON TRANSACTIONS WITH AFFILIATES. Transactions between savings
institutions and any affiliate are governed by Sections 23A and 23B of the
Federal Reserve Act. An affiliate of a savings institution is any company or
entity which controls, is controlled by or is under common control with the
savings institution. In a holding company context, the parent holding company
of a savings institution (such as the Company) and any companies which are
controlled by such parent holding company are affiliates of the savings
institution. Generally, 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, 1998, 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 mortgage servicing assets, nonmortgage servicing
assets and purchased credit card relationships up to certain specified limits
and minus net deferred tax assets in excess of certain specified limits. At
December 31, 1998, the Bank did not have any net deferred tax assets in excess
of the specified limits.
TIER 1 CAPITAL RATIO. FDIC regulations establish a minimum 3.0% ratio of
Tier 1 capital to total assets for the most highly-rated state-chartered,
FDIC-supervised banks and for all other state-chartered, FDIC-supervised banks,
the minimum Tier 1 capital ratio shall not be less than 4.0%. Under FDIC
regulations, highly-rated banks are those that the FDIC determines are not
anticipating or experiencing significant growth and have well diversified risk,
including no undue interest rate risk exposure, excellent asset quality, high
liquidity and good earnings. At December 31, 1998, the required Tier 1 capital
ratio for the Bank was 4.0% and its actual Tier 1 capital ratio was 5.25%.
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, 1998, the Bank's Tier 1 capital to risk-weighted assets
ratio was 9.54% and its total risk-based capital to risk weighted assets ratio
was 10.23%.
The following table sets forth information with respect to each of the
Bank's capital requirements at the dates shown.
At December 31,
1998 1997 1996
------- ------- -------
Actual Required Actual Required Actual Required
------- --------- ------- --------- ------- ---------
Tier 1 capital to total assets 5.25% 4.00% 5.52% 4.00% 5.35% 4.00%
Tier 1 risk-based capital
to risk weighted assets 9.54 4.00 11.46 4.00 11.77 4.00
Total risk-based capital
risk to risk weighted assets 10.23 8.00 11.98 8.00 12.30 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, 1998.
Tier 1 Total
Tier 1 Risk-based Risk-based
Capital Capital Capital
-------------- ------------ ------------
(Dollars in thousands)
Total stockholders' equity $ 187,919 $ 187,919 $ 187,919
Unrealized loss on securities
available-for-sale 1,374 1,374 1,374
Less nonallowable assets:
Goodwill (30,687) (30,687) (30,687)
Plus allowances for loan
and lease losses -- -- 11,358
----------- ------------ ------------
Total regulatory capital 158,606 158,606 169,964
Minimum required capital 120,935 66,467 132,935
----------- ------------ ------------
Excess regulatory capital $ 37,671 $ 92,139 $ 37,029
=========== ============ ============
Bank's regulatory capital
percentage (1) 5.25% 9.54% 10.23%
Minimum regulatory capital
required percentage 4.00% 4.00% 8.00%
- --------- ------------ ------------
Bank's regulatory capital
percentage in excess of
requirement 1.25% 5.54% 2.23%
=========== ============ ============
________________________
(1)Tier 1 capital is computed as a percentage of total assets of $3.0 billion.
Risk-based capital is computed as a percentage of adjusted risk-weighted assets
of $1.7 billion.
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 $119.4 million at December 31, 1998. 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 of Financial Accounting Standards No. 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, 1998, the Bank had $98.6 million of securities
available-for-sale with $2.1 million of aggregate net unrealized losses thereon.
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, the Bank has acquired deposits of approximately
$291.6 million for which deposit insurance premiums are calculated 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, 1998, the Bank was categorized as
well capitalized.
The FDIA provided for Financing Corporation ("FICO") debt sharing by banks
and thrifts with proration sharing in the year 2000. Prior to the year 2000,
SAIF insured institutions 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. Starting in the year 2000, BIF and SAIF institutions will begin
sharing the FICO burden on a pro rata basis until termination of the FICO
obligation in 2017.
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."
After 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 required to recapture (i.e. take into taxable income) over a six
year period, beginning January 1, 1998, 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. At December 31, 1998, the Bank had approximately $3.1
million of post-1987 tax bad debt reserves, for which deferred taxes have been
provided.
SAFETY AND SOUNDNESS STANDARDS. Each Federal banking agency is required to
prescribe, for all insured depository institutions and their holding companies,
standards relating to internal controls, information systems and internal audit
systems, loan documentation, credit underwriting, interest rate exposure, asset
growth, compensation, fees and benefits and such other operational and
managerial standards as the agency deems appropriate. The compensation
standards would prohibit employment contracts or other compensatory arrangements
that provide excess compensation, fees or benefits or could lead to material
financial loss to the institution. In addition, each Federal banking agency
also is required to adopt for all insured depository institutions and their
holding companies standards that specify (i) a maximum ratio of classified
assets to capital, (ii) minimum earnings sufficient to absorb losses without
impairing capital, (iii) to the extent feasible, a minimum ratio of market value
to book value for publicly-traded shares of the institution or holding company,
and (iv) such other standards relating to asset quality, earnings and valuation
as the agency deems appropriate. On July 10, 1995, the Federal banking
agencies, including the FDIC, adopted final rules and proposed guidelines
concerning safety and soundness required to be prescribed by regulations
pursuant to Section 39 of the FDIA. In general, the standards relate to
operational and managerial matters, asset quality and earnings and compensation.
The operational and managerial standards cover internal controls and information
systems, internal audit systems, loan documentation, credit underwriting,
interest rate exposure, asset growth, and compensation, fees and benefits.
Under the asset quality and earnings standards, which were adopted by the
Federal banking agencies in October 1996, the Bank is required to establish and
maintain systems to identify problem assets and prevent deterioration in those
assets and evaluate and monitor earnings to ensure that earnings are sufficient
to maintain adequate capital reserves. If an insured institution fails to meet
any of the standards promulgated by the regulators, then such institution will
be required to submit a plan within 30 days to the FDIC specifying the steps
that it will take to correct the deficiency. In the event that an insured
institution fails to submit or fails in any material respect to implement a
compliance plan within the time allowed by the FDIC, Section 39 of the FDIA
provides that the FDIC must order the institution to correct the deficiency and
may restrict asset growth, require the savings institution to increase its ratio
of tangible equity to assets, restrict the rates of interest that the
institution may pay or take any other action that would better carry out the
purpose of prompt corrective action. The Bank believes that it has been and at
December 31, 1998 was 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 financial institution has a continuing and
affirmative obligation consistent with its safe and sound operation to help meet
the credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the CRA. The CRA
requires the FDIC, in connection with its examination of a financial
institution, to assess the institution's record of meeting the credit needs of
its community and to take such record into account in its evaluation of certain
applications by such institution. As of the date of its most recent regulatory
examination, the Bank was rated "satisfactory" with respect to its CRA
compliance.
In May 1995, the FDIC and other Federal banking agencies promulgated final
revisions to their regulations concerning the CRA. The revised regulations
generally are intended to provide clearer guidance to financial institutions on
the nature and extent of their obligations under the CRA and the methods by
which the obligations will be assessed and enforced. Among other things, the
revised regulations substitute for the current process-based assessment factors
a new evaluation system that rates institutions based on their actual
performance in meeting community credit needs. In particular, the revised
system evaluates the degree to which an institution is performing under tests
and standards judged in the context of information about the institution, its
community, its competitors and its peers with respect to (i) lending, (ii)
service delivery systems and (iii) community development. The revised
regulations also specify that an institution's CRA performance will be
considered in an institution's expansion (e.g., branching) proposals and may be
the basis for approving, denying or conditioning the approval of an application.
Management of the Bank is unable to predict the effects of the current CRA
regulations.
QUALIFIED THRIFT LENDER TEST. All savings institutions, including the
Bank, are required to meet a QTL test set forth under Section 10(m) of the Home
Owners Loan Act, as amended, ("HOLA") to avoid certain restrictions on their
operations. 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, 1998, with 80.4% 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 administer the home financing credit
function of savings institutions and commercial banks. Each FHLB serves as a
source of liquidity for its members within its assigned region. It is funded
primarily from proceeds derived from the sale of consolidated obligations of the
FHLB System. It makes loans to members (i.e., advances) in accordance with
policies and procedures established by its Board of Directors. As of December
31, 1998, the Bank's advances from the FHLB of Dallas amounted to $966.7 million
or 32.4% 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, 1998, the
Bank had $49.8 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, 1998,
dividends paid by the FHLB of Dallas to the Bank totaled $2.2 million.
FEDERAL RESERVE SYSTEM. The Federal Reserve Board requires all depository
institutions to maintain reserves against their transaction accounts (primarily
checking accounts) and non-personal time deposits. At December 31, 1998, the
Bank was in compliance with such requirements.
The balances maintained to meet the reserve requirements imposed by the
Federal Reserve Board may be used to satisfy applicable liquidity requirements.
Because required reserves must be maintained in the form of vault cash or a
noninterest-bearing account at a Federal Reserve Bank, the effect of this
reserve requirement is to reduce a bank's earning assets. The amount of funds
necessary to satisfy this requirement has not had a material affect on the
Bank's operations.
TEXAS SAVINGS BANK LAW. As a Texas chartered savings bank, the Bank is
subject to regulation and supervision by the Department under the TSBA. The
TSBA contains provisions governing the incorporation and organization, location
of offices, rights and responsibilities of directors and officers as well as the
corporate powers, savings, lending, capital and investment requirements and
other aspects of the Bank and its affairs. In addition, the Department is given
extensive rulemaking power and administrative discretion under the TSBA,
including authority to enact and enforce rules and regulations.
The Bank is required under the TSBA to comply with certain capital
requirements established by the Department. The TSBA also restricts the amount
the Bank can lend to one borrower to that permitted to national banks, which is
generally not more than 15% of the Bank's unimpaired capital and unimpaired
surplus and, if such loans are fully secured by readily marketable collateral,
an additional 10% of unimpaired capital and unimpaired surplus. The Department
generally examines the Bank once every year and the current practice is for the
Department to conduct a joint examination with the FDIC. The Department
monitors the extraordinary activities of the Bank by requiring that the Bank
seek the Department's approval for certain transactions such as the
establishment of additional offices, a reorganization, merger or purchase and
assumption transaction, changes of control, or the issuance of capital
obligations. The Department may intervene in the affairs of a savings bank if
the savings bank, or its director, officer or agent has: engaged in an unsafe
and unsound practice, violated the savings bank's articles of incorporation,
violated a statute or regulation, filed materially false or misleading
information, committed a criminal act or a breach of fiduciary duty, or if the
savings bank is, or is in imminent danger of becoming, insolvent.
TAXATION
FEDERAL TAXATION. The Company, 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 1996 legislation, the Bank no longer is able to
utilize a reserve method for determining the bad debt deduction, but is allowed
to deduct actual net charge-offs. Further, the Bank's post-1987 tax bad debt
reserve will be recaptured into income over a six year period. At December 31,
1998, the Bank had approximately $3.1 million of post-1987 tax bad debt
reserves, for which deferred taxes have been provided.
The Bank is not required to provide deferred taxes on its pre-1988 (base
year) tax bad debt reserve of approximately $900,000. This reserve may be
included in taxable income in future years if the Bank makes distributions to
stockholders (including distributions in redemption, dissolution or liquidation)
that are considered to result in withdrawals from that excess bad debt reserve,
then the amounts considered withdrawn will be included in the savings bank's
taxable income. The amount that would be deemed withdrawn from such reserves
upon such distribution and which would be subject to taxation at the savings
bank level at the normal corporate tax rate would be an amount that, after taxes
on such amount, would equal the amount actually distributed plus the amount
necessary to pay the tax with respect to the withdrawal. Dividends paid out of
a savings bank's current or accumulated earnings and profits as calculated for
Federal income tax purposes, however, will not be considered to result in
withdrawals from its bad debt reserves to the extent of such earnings and
profits, but shall be regarded as taken from such reserves only upon exhaustion
of the earnings and profits accounts; however, distributions in redemption of
stock, and distributions in partial or complete liquidation of a savings bank
will be considered to come first from its loss reserve. The Bank has not
conducted a study to determine with certainty the amount of its accumulated
earnings and profits for Federal income tax purposes.
In addition to regular income taxes, corporations are subject to an
alternative minimum tax which is generally equal to 20% of alternative minimum
taxable income (taxable income, increased by tax preference items and adjusted
for certain regular tax items). Payment of alternative minimum tax gives rise
to alternative minimum tax credit carryovers which may be carried forward
indefinitely. These credits may be used to offset future regular tax liability
to the extent the regular tax liability exceeds future alternative minimum tax.
In connection with the Southwest Plan Acquisition, the FSLIC Resolution
Fund ("FRF") retained all of the future federal income tax benefits (as defined)
derived from the federal income tax treatment of certain items, in addition to
net operating loss carryforwards, related to the Southwest Plan Acquisition for
which the Bank agreed to pay the FRF when actually realized. The provisions for
federal income taxes recorded for the years ended December 31, 1998, 1997 and
1996, represent the gross tax liability computed under these tax sharing
provisions before reduction for actual federal taxes paid to the Internal
Revenue Service. Alternative minimum taxes paid with the federal return in
1998, 1997 and 1996 will be available as credit carryforwards to reduce regular
federal tax liabilities in future years, over an indefinite period. To the
extent these credits were generated due to the utilization of other tax benefits
retained by the FRF, they will also be treated as tax benefit items. Although
the termination of the assistance agreement related to the Southwest Plan
Acquisition was effective March 31, 1994, the FRF will continue to receive the
related future net tax benefits as defined.
The Company's Federal income tax returns have not yet been audited by the
United States Internal Revenue Service. The tax returns of the Company 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 49 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,
1998.
Net Book
Value of
Property
Owned/Leased or Percent of
(with Lease Expiration Leasehold Total
Location Date) Improvements Deposits Deposits
- ----------------------------- ----------------------- ----------------------- --------- -----------
(Dollars in thousands)
BRANCH OFFICES:
- -----------------------------
1329 North Virginia Owned
Port Lavaca, Texas 77979 $ 152 $ 28,476 1.67%
- -----------------------------
8 Greenway Plaza, Suite 100 Leased;
Houston, Texas 77046 February 28, 1999 -- 17,946 1.05
- -----------------------------
8 Braeswood Square Leased;
Houston, Texas 77096 December 31, 2006 442 60,820 3.57
- -----------------------------
408 Walnut Owned
Columbus, Texas 78934 255 55,041 3.23
- -----------------------------
870 S. Mason, #100 Leased;
Katy, Texas 77450 August 31, 2003 30 25,109 1.47
- -----------------------------
602 Lyons Owned
Schulenburg, Texas 78956 89 30,793 1.81
- -----------------------------
325 Meyer Street Owned
Sealy, Texas 77474 557 41,206 2.42
- -----------------------------
116 E. Post Office Owned
Weimar, Texas 78962 36 26,476 1.55
- -----------------------------
323 Boling Road Owned
Wharton, Texas 77488 121 44,792 2.63
- -----------------------------
1621 Pine Drive Leased;
Dickinson, Texas 77539 September 30, 2000 -- 41,425 2.43
- -----------------------------
300 S. Cage Owned
Pharr, Texas 78577 184 16,811 0.99
- -----------------------------
295 West Highway 77 Owned
San Benito, Texas 78586 226 21,068 1.24
- -----------------------------
1260 Blalock, Suite 100 Leased;
Houston, Texas 77055 January 20, 2004 2 54,880 3.22
- -----------------------------
620 W. Main Owned
Tomball, Texas 77375 117 25,314 1.48
- -----------------------------
915-H North Shepherd Leased;
Houston, Texas 77008 October 31, 2001 135 31,745 1.86
- -----------------------------
6810 FM 1960 West Leased;
Houston, Texas 77069 September 30, 2000 -- 27,682 1.62
- -----------------------------
7602 N. Navarro Owned
Victoria, Texas 77904 200 77,327 4.54
- -----------------------------
2308 So. 77 Sunshine Strip Leased;
Harlingen, Texas 78550 May 31, 1999 -- 16,743 0.98
- -----------------------------
4900 N. 10th St., G-1 Leased;
McAllen, Texas 78504 August 14, 2001 117 15,016 0.88
- -----------------------------
10838 Leopard Street, Suite B Leased;
Corpus Christi, Texas 78410 December 31, 1999 1 41,107 2.41
(continued)
(continued from previous page)
Net Book
Value of
Property
Owned/Leased or Percent of
(with Lease Expiration Leasehold Total
Location Date) Improvements Deposits Deposits
- ---------------------------------- ----------------------- ----------------------- --------- -----------
(Dollars in thousands)
4060 Weber Road Leased;
Corpus Christi, Texas 78411 April 30, 2004 $ 1 $ 58,793 3.45%
- -----------------------------
301 E. Main Street Owned
Brenham, Texas 77833 157 63,014 3.70
- -----------------------------
1192 W. Dallas Leased;
Conroe, Texas 77301 December 31, 2003 -- 48,027 2.82
- -----------------------------
2353 T own Center Dr. Owned
Sugar Land, Texas 77478 1,087 20,466 1.20
- -----------------------------
1629 S. Voss Owned
Houston, Texas 77057 1,451 22,820 1.34
- -----------------------------
531-A Highway 1431 Leased;
Kingsland, Texas 78639 December 31, 2003 -- 20,200 1.18
- -----------------------------
204 Westmoreland Owned
Mason, Texas 76856 50 17,431 1.02
- -----------------------------
904 Highway 281 North Owned
Marble Falls, Texas 78654 173 11,824 0.69
- -----------------------------
101 East Polk Owned
Burnet, Texas 78611 96 20,453 1.20
- -----------------------------
907 Ford Owned
Llano, Texas 78643 168 17,075 1.00
- -----------------------------
708 East Austin Owned
Giddings, Texas 78942 257 23,863 1.40
- -----------------------------
5718 Westheimer, Suite 100 Leased;
Houston, Texas 77057 July 31, 2012 112 54,387 3.19
- -----------------------------
8080 Parkwood Circle Drive Owned
Houston, Texas 77036 283 11,035 0.65
- -----------------------------
1250 Pin Oak Road Owned
Katy, Texas 77494 1,171 15,823 0.93
- -----------------------------
2120 Thompson Highway Owned
Richmond, Texas 77469 469 47,611 2.79
- -----------------------------
7200 North Mopac Leased;
Austin, Texas 78731 December 31, 2002 6 38,352 2.25
- -----------------------------
1112 Seventh Street Leased;
Bay City, Texas 77414 April 30, 2002 -- 69,347 4.07
- -----------------------------
441 Austin Avenue Owned
Port Arthur, Texas 77640 644 43,449 2.55
- -----------------------------
1114 Lost Creek Blvd., Suite 100 Leased;
Austin, Texas 78746 December 31, 2003 -- -- --
- -----------------------------
3302 Boca Chica Leased;
Brownsville, Texas 78521 December 14, 1999 14 9,606 0.56
- -----------------------------
744 S. East Elizabeth Leased;
Brownsville, Texas 78520 March 31, 2003 294 20,617 1.21
- -----------------------------
1603 Price Road Owned
Brownsville, Texas 78521 291 12,311 0.72
- -----------------------------
700 Padre Blvd., Suite A Leased;
South Padre Island, Texas 78597 May 31, 2000 5 5,894 0.35
- -----------------------------
2000 N. Conway Owned
Mission, Texas 78572 1,254 22,866 1.34
(continued)
(continued from previous page)
Net Book
Value of
Property
Owned/Leased or Percent of
(with Lease Expiration Leasehold Total
Location Date) Improvements Deposits Deposits
- ------------------------------ ----------------------- ----------------------- ---------- -----------
(Dollars in thousands)
- ------------------------------
509 South Main Leased;
McAllen, Texas 78501 December 22, 2002 $ 1 $ 43,100 2.53%
- ------------------------------
198 South Sam Houston Owned
San Benito, Texas 78586 1,139 68,168 4.00
- ------------------------------
502 S. Dixieland Road Owned
Harlingen, Texas 78552 350 19,297 1.13
- ------------------------------
200 Sugar Road Owned
Edinburg, Texas 78539 166 8,083 0.47
- ------------------------------
300 S. Closner Owned
Edinburg, Texas 78539 887 42,607 2.50
- ------------------------------
221 East Van Buren Owned
Harlingen, Texas 78550 3,877 88,345 5.18
- ------------------------------
3207 Westpark Drive Under Construction
Houston, Texas 77027 1,887 -- --
- ------------------------------
1410 Ed Carey Under Construction
Harlingen, Texas 78554 810 -- --
- ------------------------------
ADMINISTRATIVE OFFICE(1)
- ------------------------------
Coastal Banc Plaza Leased;
5718 Westheimer, Suite 600 July 31, 2012 2,917 60,363 3.53
Houston, Texas 77057
- ------------------------------
RECORDS & RETENTION OFFICE:
- ------------------------------
227 Meyer St. Owned
Sealy, Texas 77474 62 -- -
------------- ---------- -----------
Total $ 22,743 $1,705,004 100.00%
============= ========== ===========
______________________
(1)Includes location of administrative, primary lending and mortgage servicing
offices.
The net book value of the Company's investment in premises and equipment totaled
$33.1 million at December 31, 1998. At December 31, 1998, the net book value of
the Company's electronic data processing equipment, which includes its in-house
computer system, local area network and twenty-five automatic teller machines,
was $4.2 million.
ITEM 3. LEGAL PROCEEDINGS
------------------
The Company is involved from time to time in routine legal proceedings
occurring in the ordinary course of business which, in the aggregate, are
believed by management to be immaterial to the financial condition of the
Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
-----------------------------------------------------------
Not applicable.
PART II
- --------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
--------------------------------------------------------------
MATTERS
-
The information required herein is incorporated by reference from page 51
of the Company's printed Annual Report to Stockholders for fiscal 1998 ("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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
-------------------------------------------------------------
The information required herein is incorporated by reference from pages 16
through 17 of the Annual Report. The Company's principal market risk exposure
is to interest rates.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-----------------------------------------------
The financial statements and supplementary data required herein are
incorporated by reference from pages 23 through 50 of the Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
---------------------------------------------------------------
FINANCIAL DISCLOSURE
-----------------
Not applicable.
PART III
- ---------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------------
The information required herein is incorporated by reference from the
definitive Proxy Statement filed with the 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 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 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 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 50 of the Annual Report.
Report of Independent Certified Public Accountants.
Consolidated Statements of Financial Condition as of December 31, 1998
and 1997.
Consolidated Statements of Operations for each of the years in the
three-year period ended December 31, 1998.
Consolidated Statements of Comprehensive Income for each of the years
in the three-year period ended December 31, 1998.
Consolidated Statements of Stockholders' Equity for each of the years
in the three-year period ended December 31, 1998.
Consolidated Statements of Cash Flows for each of the years in the
three-year period ended December 31, 1998.
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
report
Exhibit No.
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) The Company filed no reports on Form 8-K during the last quarter
of fiscal 1998.
(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 23, 1999 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 23, 1999
- ----------------------
Manuel J. Mehos, Chairman of the
Board and Chief Executive Officer
/s/ R. Edwin Allday Date: March 23, 1999
- ----------------------
R. Edwin Allday, Director
/s/ D. Fort Flowers, Jr. Date: March 23, 1999
- -------------------------
D. Fort Flowers, Jr., Director
/s/ Dennis S. Frank Date: March 23, 1999
- ----------------------
Dennis S. Frank, Director
/s/ Robert E. Johnson, Jr. Date: March 23, 1999
- -----------------------------
Robert E. Johnson, Jr., Director
/s/ James C. Niver Date: March 23, 1999
- ---------------------
James C. Niver, Director
/s/ Paul W. Hobby Date: March 23, 1999
- --------------------
Paul W. Hobby, Director
/s/ Catherine N. Wylie Date: March 23, 1999
- -------------------------
Catherine N. Wylie, Chief Financial
Officer (principal financial and
accounting officer)
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