UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended DECEMBER 31, 1996
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the Transition Period from _________ to
Commission File Number: 0-24526
COASTAL BANCORP, INC.
(Exact name of Registrant as specified in its charter)
Texas 76-0428727
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8 Greenway Plaza, Suite 1500
Houston, Texas 77046
(Address of principal executive office)
(713) 623-2600
(Registrant's telephone number)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
N/A N/A
Securities registered pursuant to section 12(g) of the Act:
Common Stock, $0.01 par value per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements
for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ ]
As of March 14, 1997, the aggregate market value of the 3,959,759 shares of
Common Stock of the Registrant issued and outstanding on such date, excluding
1,008,832 shares held by all directors and executive officers of the
Registrant as a group, was $108,893,372. This figure is based on the closing
sale price of $27.50 per share of the Company's Common Stock on March 14,
1997, as reported in The Wall Street Journal on March 17, 1997.
Number of shares of Common Stock outstanding as of March 14, 1997: 4,968,591
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents incorporated by reference and the
Part of Form 10-K into which the document is incorporated:
(1) Portions of the Registrant's Annual Report to Stockholders for the
fiscal year ended December 31, 1996, are incorporated into Part II, Items 5-8
of this Form 10-K.
(2) Portions of the Registrant's definitive proxy statement for its 1997
Annual Meeting of Stockholders are incorporated into Part III, Items 10-13 of
this Form 10-K.
48
PART I.
ITEM 1. BUSINESS
COASTAL BANCORP, INC.
Coastal Bancorp, Inc. (the "Company") is engaged primarily in the
business of serving as the ultimate holding company for Coastal Banc ssb (the
"Bank"). The Company was incorporated in March 1994 in connection with the
reorganization of Coastal Banc Savings Association (the "Association") into
the holding company form of organization. The reorganization occurred in July
1994. In addition, in July 1994, the Association converted to a
Texas-chartered savings bank operating under the name Coastal Banc ssb. On
November 30, 1996, Coastal Banc Holding Company, Inc. ("HoCo") was created as
a Delaware unitary savings bank holding company in accordance with the terms
of an agreement and plan of reorganization dated August 19, 1996 (the
"Agreement"). Pursuant to the terms of the Agreement, the Bank became a
wholly-owned subsidiary of HoCo and HoCo became a wholly-owned subsidiary of
the Company. The reorganizations were treated as combinations similar to a
pooling of interests. Accordingly, the financial information and references
presented herein have been restated to give effect where appropriate, as if
the reorganizations had occurred at the earliest date presented.
On June 30, 1995, the Company issued $50.0 million of 10.0% Senior Notes
due June 30, 2002 (the "Senior Notes"). The Senior Notes are redeemable at
the Company's option, in whole or in part, on or after June 30, 2000, at par,
plus accrued interest to the redemption date. Of the proceeds received from
the issuance of the Senior Notes, $44.9 million was used to purchase 11.13%
Noncumulative Preferred Stock, Series B, of the Bank (the "Series B Preferred
Stock") which is now owned by HoCo.
At December 31, 1996, the Company had total consolidated assets of $2.9
billion, total deposits of $1.3 billion, $28.8 million in Series A Preferred
Stock and stockholders' equity of $94.1 million.
The Company is subject to examination and regulation by the Office of
Thrift Supervision (the "OTS") and the Company and the Bank are subject to
examination and regulation by the Texas Savings and Loan Department (the
"Department"). The Company is also subject to various reporting and other
requirements of the Securities and Exchange Commission (the "SEC").
The Company's executive offices are located at Coastal Banc Tower, 8
Greenway Plaza, Suite 1500, Houston, Texas 77046, and its telephone number is
(713) 623-2600.
COASTAL BANC SSB
The Bank is a Texas-chartered, Federally insured state savings bank. It
is headquartered in Houston, Texas and operates through 37 branch offices in
metropolitan Houston, Corpus Christi, Austin and small cities in central and
south Texas.
The Bank was originally acquired by an investor group (which includes a
majority of the Board of Directors and the present Chairman of the Board,
President and Chief Executive Officer of the Company) in 1986 as a vehicle to
take advantage of the failures and consolidation in the Texas banking and
thrift industries. The Bank has acquired deposits and branch offices in
transactions with the Federal government and other private institutions, in
addition to acquiring an independent national bank in 1995, as a base for
developing an ongoing savings bank business. At February 28, 1986 (the date of
change in ownership), the Bank had one full service office and total assets of
approximately $10.7 million. Accordingly, although originally organized in
1954, the Bank in its current form effectively commenced operations with the
1986 change in control. By December 31, 1996, the Bank's total assets had
increased to $2.9 billion, total deposits were $1.3 billion and stockholders'
equity totaled $165.4 million.
The Bank attempts to maximize profitability through the generation of net
interest income and fee income. To meet this objective, the Bank has
implemented a strategy of building its core deposit base while deploying its
funds in assets which provide an attractive return with relatively low credit
risk. In carrying out this strategy and to ultimately provide a respectable
return to the Company's shareholders, the Bank adheres to four operating
principles: (i) continuing to expand its low cost core deposit base through
acquisitions; (ii) minimizing interest rate risk; (iii) minimizing credit
risk; and (iv) maintaining a low level of general overhead expense relative to
its peers. These operating principles are briefly discussed below.
CORE DEPOSITS. The Bank has implemented the first operating principle,
developing and expanding a core deposit base, beginning in 1988 through a
series of transactions with the Federal government and private sector
financial institutions, gaining in the process entry into additional markets
in Houston, Corpus Christi, Austin, San Antonio and south Texas.
In 1988, the Bank became the first acquiror of failed or failing savings
institutions under the Federal government's "Southwest Plan." In this
transaction (the "Southwest Plan Acquisition"), the Bank acquired from the
Federal Savings and Loan Insurance Corporation ("FSLIC"), as receiver for four
insolvent savings associations (the "Acquired Associations"), approximately
$543.4 million of assets and assumed approximately $543.4 million of deposits
and other liabilities. The Bank acquired an aggregate of 14 branch offices
from the Acquired Associations in new and existing markets in southwest
Houston, west of Houston along the Houston-San Antonio corridor and in the Rio
Grande Valley. See "The Southwest Plan Acquisition."
Since completion of the Southwest Plan Acquisition, the Bank has entered
into five branch office acquisitions and one whole bank acquisition: two with
an instrumentality of the Federal government (acting as the receiver of
insolvent financial institutions) and four with other private institutions.
In each, the Bank generally agreed to acquire certain assets in consideration
of the assumption of certain deposit and other liabilities with respect to
each institution. In addition, in 1996 the Bank chose to exit two Texas
cities, San Antonio and San Angelo. The Bank sold its San Angelo branch and
swapped its three San Antonio branches for one branch in Bay City, Texas.
In the first branch acquisition, completed in 1990, the Bank assumed
deposits of $151.1 million in connection with the acquisition of nine branch
offices, which are primarily located in the northwestern Houston metropolitan
area. The acquisition provided the Bank with further penetration in the
Houston market. In the second branch acquisition, completed in 1991, the Bank
assumed deposits of $71.4 million in connection with the acquisition of an
office located in Victoria, Texas. The acquisition of that office expanded
the Bank's presence in the small cities market southwest of Houston toward
Port Lavaca. In the third branch acquisition, completed in 1993, the Bank
assumed deposits of $386.4 million in connection with the acquisition of nine
branches located in Corpus Christi, San Antonio, Conroe, Brenham and Sealy.
The Corpus Christi and San Antonio branch acquisitions allowed the Bank to
enter new markets. In the fourth branch acquisition, also completed in 1993,
the Bank assumed deposits of $45.7 million and acquired two branches located
in Harlingen and McAllen, two small cities southwest of Houston in the Rio
Grande Valley (the "Valley"). As a result of this acquisition, the Bank
increased its presence in the Valley. In the fifth branch acquisition, which
was completed in December 1994, the Bank assumed deposits of $150.2 million
and acquired eight branches located in San Angelo, Marble Falls, Kingsland,
Llano, Giddings, Buchanan Dam, Mason and Burnet, which allowed the Bank to
enter new markets in central Texas.
In 1995, the Bank continued to expand its market presence by opening two
de novo branches in the Houston metropolitan area and by completing its first
whole bank acquisition. On November 1, 1995, the Bank consummated the
acquisition of all of the outstanding capital stock of Texas Capital
Bancshares, Inc. ("Texas Capital"). As a result of the acquisition of Texas
Capital, Texas Capital Bank, N.A., a national banking association, with five
branch offices, located in Houston, Katy, Richmond and Austin and total assets
of $170.7 million, was merged with and into the Bank.
In 1996, the Bank consummated the sale of its San Angelo location which
had $14.9 million in deposits and was acquired in the Bank's December 1994
branch acquisition. In connection with this sale, the Bank recorded a
$521,000 gain before applicable income taxes. On September 5, 1996, the Bank
consummated the exchange of its three San Antonio branches having deposits of
$53.8 million for a branch in Bay City, Texas having deposits of $79.8
million.
All of these transactions resulted in the net assumption of $1.5 billion
of deposits and the acquisition of 45 branch offices (after the San Angelo
branch sale and the swap of the San Antonio branches). The Bank has also
opened six de novo branches since inception. Since its first acquisition, the
Bank has been able to achieve operating economies and improve efficiency by
closing an aggregate of 15 branch offices and transferring the deposits to
other offices located in the same market areas.
The Bank will continue to pursue acquisitions as vehicles for growth,
although there can be no assurance that the Bank will be able to continue to
grow through acquisitions in the future. In the absence of any available,
cost-effective acquisitions, management will continue to focus on internally
generated earnings growth including further development of the Bank's
commercial lending and commercial business deposits.
INTEREST RATE RISK. The Bank has implemented the second operating
principle, minimizing interest rate risk, by matching, to the extent possible,
the repricing or maturity of its interest-earning assets to its
interest-earning liabilities as well as the basis or index (for example, the
London Interbank Offered Rate ("LIBOR") or the 11th District Federal Home Loan
Bank cost of funds index ("COFI")) upon which these assets and liabilities
reprice. Generally this is achieved through management of the composition of
its assets and liabilities. The Bank also undertakes to lock in an acceptable
interest rate spread between interest-earning assets and interest-bearing
liabilities by altering the Bank's cost of funds, or, at times, the yield on
certain assets in its portfolio. To accomplish this, the Bank has purchased
interest rate swaps and caps. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Asset and Liability
Management" set forth in Item 7 hereof.
The Bank will originate and purchase for retention in its portfolio only
those loans and investments which provide a positive interest rate spread over
funding liabilities matched with similar maturities. Consistent with this
philosophy, a significant portion of the Bank's assets have been invested in
adjustable-rate high quality mortgage-backed securities. At December 31,
1996, of the Bank's $1.5 billion of mortgage-backed securities, $1.3 billion
or 84.2%, were invested in adjustable rate mortgage-backed securities. To a
lesser extent, the Bank has purchased first lien mortgages on single-family
residences, the majority of which are adjustable rate mortgages. At December
31, 1996, $591.3 million, or 48.1% of the Bank's loans receivable portfolio,
net was comprised of such adjustable rate single-family residential mortgage
loans.
The Bank also originates and purchases fixed and adjustable rate
long-term, single-family residential loans primarily for sale into the
secondary market. Prior to 1996, this and certain other lending functions
were performed for the Bank by its wholly-owned mortgage banking subsidiary,
CBS Mortgage Corp. ("CBS Mortgage"). Beginning in 1996, the origination
function was performed by the Bank. By originating such loans for sale and
generally obtaining a commitment for the purchase of such loans at the time
that the loan applications are approved, the Bank avoids a significant portion
of the interest rate risk associated with holding fixed-rate mortgage loans.
CREDIT RISK. The Bank has implemented the third operating principle,
minimizing credit risk, by (i) investing a substantial portion of its assets
in cash and mortgage-backed securities, and (ii) taking a cautious approach to
the development of its direct lending operations. At December 31, 1996, of
the Company's $2.9 billion in total assets, $1.5 billion or 53.0% of total
assets consisted of mortgage-backed securities and $27.7 million or 1.0% of
total assets consisted of cash and cash equivalents. At December 31, 1996,
the Company's total net loans receivable portfolio amounted to $1.2 billion or
42.8% of total assets comprised primarily of $788.9 million of first lien
residential mortgage loans and $138.4 million of multifamily mortgage loans,
which constituted 64.2% and 11.3%, respectively, of the net loans receivable
portfolio. The balance of the net loans receivable portfolio, by dollar
amount and percent of the portfolio, was comprised of the following: $116.8
million (or 9.5%) of commercial real estate loans, $53.4 million (or 4.4%) of
warehouse loans to residential mortgage originators ("Warehouse loans"), $44.6
million (or 3.6%) of residential construction loans, $22.6 million (or 1.8%)
of consumer and other loans, $21.6 million (or 1.8%) of real estate
acquisition and development loans, $21.2 million (or 1.7%) of loans secured by
purchased mortgage servicing rights ("PMSR loans") and $20.7 million (or 1.7%)
of commercial, financial and industrial loans. The Company's non-accrual
loans as of such date were $12.8 million or 1.04% of total loans receivable,
and the Company's total nonperforming assets were $16.0 million, or 0.56% of
total assets.
The Bank will develop and seek to market loan products actively only when
and as management concludes that the Texas economy supports such steps without
the incidence of undue credit risk. This is consistent with the Bank's
approach in its lending activities. See "Lending Activities-General."
NONINTEREST EXPENSE. The Bank has implemented the fourth operating
principle, maintaining a low level of general overhead expense relative to its
peers by operating an efficiently staffed branch office system which is able
to administer and deliver its products and services in an economical manner.
The Bank believes that it has significant operating leverage, and that
continued incremental growth will not cause its overhead expenses to increase
by a corresponding amount. The growth achieved from the Bank's acquisitions
has facilitated reduced overhead levels as a proportion of assets and a lower
cost of funds from a more meaningful market share of core deposits. The
Company's ratio of noninterest expense to average total assets on a
consolidated basis has decreased, from 2.71% for the year ended December 31,
1988 to 1.40% for the year ended December 31, 1996, before the 1996 Savings
Association Insurance Fund ("SAIF") insurance special assessment. The Bank's
unconsolidated ratio of noninterest expense to average total assets was 1.36%
for the year ended December 31, 1996, before the 1996 SAIF insurance
assessment.
On September 30, 1996, the Bank recorded the one-time SAIF insurance
special assessment (the "Special Assessment") of $7.5 million ($4.8 million
after applicable income taxes) as a result of the Federal Deposit Insurance
Act, as amended (the "FDIA") being signed into law. The Special Assessment
pursuant to the FDIA was equal to 65.7 basis points on the SAIF assessment
base of deposits existing as of March 31, 1995.
The Bank is subject to regulation by the Department, as its chartering
authority and by the FDIC, which regulates the Bank and insures its deposits
to the fullest extent provided by law. The Bank also is subject to certain
regulation by the Board of Governors of the Federal Reserve System (the
"Federal Reserve Board") and is a member of the Federal Home Loan Bank of
Dallas (the "FHLB"), one of the 12 regional banks which comprise the Federal
Home Loan Bank System.
LENDING ACTIVITIES
GENERAL. The Bank has taken a cautious approach to the development and
growth of its direct lending operations to minimize credit risk. In order to
avoid incurring undue credit risk, the Bank historically invested a
significant percentage of its assets in alternative financial instruments,
particularly mortgage-backed securities, most of which have certain repayments
guaranteed by the government or Government Sponsored Enterprises ("GSEs").
See "Mortgage-Backed Securities." The Bank will originate and purchase for
retention in its portfolio only those loans determined by management to have
an acceptable credit risk and which provide a positive interest rate spread
over funding liabilities matched with similar maturities. This strategy is
designed to achieve an acceptable risk adjusted rate of return, as determined
and continuously evaluated by the Board of Directors.
Consistent with the Bank's lending strategy, the Bank originates and
purchases single-family residential loans for sale into the secondary market
and to retain in its portfolio. Through 1995, this and certain other lending
functions described herein were performed for the Bank by CBS Mortgage, its
wholly-owned mortgage banking subsidiary. Beginning in 1996, the Bank
performed these functions. By originating and purchasing such loans for sale
and generally obtaining a commitment for the purchase of such loans at the
time that the loan applications are approved or the purchase is approved, the
Bank believes that it avoids a significant amount of the interest rate risk
associated with holding fixed rate mortgage loans. Although the Bank and CBS
Mortgage have from time to time originated adjustable rate and short-term
fixed residential mortgage loans for the Bank's portfolio, the number of such
loans has been relatively small compared to the bulk loan purchases described
below.
In 1995, the Bank completed the acquisition of Texas Capital and its
$103.3 million in loans. The loans acquired from Texas Capital included first
lien residential, multifamily, commercial real estate, residential
construction, real estate acquisition and development, commercial, financial
and industrial and consumer loans. Utilizing this acquisition as a
springboard, the Bank implemented its strategic shift towards building a
commercial banking business.
<PAGE>
The following table sets forth information concerning the composition of
the Bank's net loans receivable portfolio by type of loan at the dates
indicated. The table does not include loans which were subject to special
coverage by the Federal government in connection with the Southwest Plan
Acquisition.
<TABLE>
<CAPTION>
At December 31,
-----------------------
1996 1995 1994
---------- ---------- ------
Amount Percent Amount Percent Amount
------------------ ---------- ------ -------- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Real-estate mortgage loans:
First lien residential $ 791,337 61.96% $ 742,880 66.38% $428,237
Multifamily 139,486 10.92 95,297 8.52 75,142
Residential construction 77,146 6.04 33,935 3.03 27,777
Acquisition and development 26,132 2.05 15,517 1.39 14,119
Commercial 119,004 9.32 122,622 10.96 30,405
Commercial construction 3,963 0.31 -- -- --
Commercial, warehouse 53,573 4.19 48,822 4.36 15,724
Commercial, PMSR 21,380 1.67 21,548 1.93 11,625
Commercial, financial and industrial 21,965 1.72 19,860 1.77 --
Loans secured by savings deposits 8,849 0.69 8,292 0.74 5,141
Consumer and other 14,400 1.13 10,316 0.92 4,179
---------------------------------------------------------
Total loans 1,277,235 100.00% 1,119,089 100.00% 612,349
---------------==========--------------------------------
Loans in process (38,742) (11,526) (12,970)
Premium (discount) to record
purchased loans, net 479 (1,366) (8,925)
Unearned interest and loan fees (2,344) (1,939) (1,264)
Allowance for loan losses (6,880) (5,703) (2,158)
---------------------------------------------------------
Total loans receivable, net $ 1,229,748 $ 1,098,555 $587,032
=========================================================
At December 31,
---------------
1994
------
Percent
-------
<S> <C>
Real-estate mortgage loans:
First lien residential 69.93%
Multifamily 12.27
Residential construction 4.54
Acquisition and development 2.30
Commercial 4.97
Commercial construction --
Commercial, warehouse 2.57
Commercial, PMSR 1.90
Commercial, financial and industrial --
Loans secured by savings deposits 0.84
Consumer and other 0.68
-------
Total loans 100.00%
-------
Loans in process
Premium (discount) to record
purchased loans, net
Unearned interest and loan fees
Allowance for loan losses
Total loans receivable, net
</TABLE>
<PAGE>
SCHEDULED MATURITIES. The following table sets forth certain
information at December 31, 1996 regarding the principal amount of loans
maturing in the Bank's loans receivable portfolio based on their contractual
terms to maturity. Demand loans, loans having no stated schedule of
repayments and no stated maturity are reported as due in one year or less.
First lien residential mortgage, multifamily mortgage and commercial real
estate loans are based on their contractual terms to maturity assuming no
periodic amortization of principal.
<TABLE>
<CAPTION>
AT DECEMBER 31. 1996
----------------------
More than More than More than More than Over
One year one year to three years five years to ten years to twenty
or less three years to five years ten years twenty years years
- --------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
First lien residential mortgage $5,512 $6,755 $8,406 $33,918 $168,019 $568,727
Multifamily mortgage 31,207 88,450 16,864 508 2,457 --
Residential construction 35,957 9,028 -- -- -- --
Real estate acquisition and
development 5,184 16,919 -- -- -- --
Commercial real estate 15,301 39,837 23,700 14,275 25,891 --
Commercial construction 805 71 135 -- 400 --
Commercial, other 69,807 16,199 9,937 975 -- --
Consumer and other 11,343 5,923 4,279 906 798 --
-----------------------------------------------------------
Total loans $ 175,116 $ 183,182 $ 63,321 $50,582 $197,565 $568,727
===========================================================
Total
----------
<S> <C>
First lien residential mortgage $ 791,337
Multifamily mortgage 139,486
Residential construction 44,985
Real estate acquisition and
development 22,103
Commercial real estate 119,004
Commercial construction 1,411
Commercial, other 96,918
Consumer and other 23,249
----------
Total loans $1,238,493
==========
</TABLE>
The average maturity of loans is generally substantially less than their
average contractual terms because of prepayments and, in the case of
conventional mortgage loans, due-on-sale clauses, which generally give the
Bank the right to declare a loan immediately due and payable in the event,
among other things, that the borrower sells the real property subject to the
mortgage and the loan is not repaid. The average life of mortgage loans tends
to increase when current mortgage loan rates are substantially higher than
rates on existing mortgage loans and, conversely, decrease when rates on
existing mortgages are substantially lower than current mortgage loan rates
(due to refinancings or adjustable-rate and fixed-rate loans at lower rates).
Under the latter circumstances, the weighted average yield on loans decreases
as higher yielding loans are repaid or refinanced at lower rates.
<PAGE>
The following table sets forth the amounts of loans due after one year
from December 31, 1996 by category and which have fixed or adjustable rates.
<TABLE>
<CAPTION>
Interest-Rate
--------------
Fixed Adjustable Total
-------------- ---------- ----------
<S> <C> <C> <C> <C> <C>
(In thousands)
First lien residential mortgage $ 195,298 $ 590,527 $ 785,825
Multifamily mortgage 20,545 87,734 108,279
Residential construction 8,628 400 9,028
Real estate acquisition and development -- 16,919 16,919
Commercial real estate 53,568 50,135 103,703
Commercial construction 400 206 606
Commercial, other 4,182 22,929 27,111
Consumer and other 11,344 562 11,906
-----------------------------------------
Total $ 293,965 $ 769,412 $1,063,377
=========================================
</TABLE>
<PAGE>
ORIGINATION, PURCHASE AND SALE OF LOANS. The following table sets forth
the loan origination, purchase and sale activity of the Bank during the
periods indicated. The table does not reflect the activity of CBS Mortgage
for other institutions, GSEs or entities during the periods presented. See
"Mortgage Banking Activities."
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1996 1995 1994
-----------------------------
(In thousands)
<S> <C> <C> <C>
First lien mortgage loan originations:
Adjustable rate $3,542 $985 $ 12,760
Fixed rate 5,471 746 5,269
Adjustable rate by correspondent lenders 67,461 92,911 4,842
Fixed rate by correspondent lenders 4,058 -- --
Residential construction and
acquisition and development loan originations 154,182 61,713 83,804
Warehouse loan originations 887,252 549,628 388,303
PMSR loan originations 69,172 67,578 41,084
Multifamily loan originations 67,657 42,366 26,013
Commercial real estate loan originations 41,170 29,595 26,756
Commercial construction originations 3,806 -- --
Commercial, financial and industrial loan originations 30,080 5,100 --
Consumer loan originations 22,256 12,429 7,236
-----------------------------------
Total loan originations 1,356,107 863,051 596,067
Purchase of residential mortgage loans 115,928 298,613 144,290
Loans acquired (net) in connection with
acquisition and disposition transactions 1,018 103,319 2,428
Purchase of multifamily and commercial real estate loans 4,604 25,045 --
Multifamily and commercial real estate
loans transferred from Covered Assets -- -- 6,671
----------------------------------
Total loan originations and purchases 1,477,657 1,290,028 749,456
------------------------------------
Foreclosures 4,363 3,394 2,386
Principal repayments and reductions to
principal balance 1,339,691 776,084 609,995
Residential loans sold -- 679 732
Total foreclosures, repayments and sales of loans 1,344,054 780,157 613,113
-------------------------------------
Amortization of premiums and discounts and
fees on loans (485) 3,316 1,519
Provision for loan losses (1,925) (1,664) (934)
-------------------------------------
Net increase in loans receivable $ 131,193 $ 511,523 $136,928
=====================================
</TABLE>
<PAGE>
The following table sets forth the number of bulk loan purchases and the
amount of first lien residential mortgage loans acquired by the Bank through
bulk purchases for the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1996 1995 1994
--------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C>
Amount purchased $ 112,395 $296,452 $141,775
Number of bulk
loan purchases 9 24 22
</TABLE>
Personnel from the Bank generally analyze loan bid packages, as they
become available, and the Securities Investment Subcommittee of the Bank
reviews the information in the loan packages to determine whether to bid (or
make an offer) on a package and the price of such bid (or offer). The pricing
with respect to such loan packages is based on a number of factors, including
the ability to create spread income with a funding source of comparable
maturity, the pricing of alternative investments, particularly mortgage-backed
securities, which offer little or no credit risk, and the credit risk profile
of the portfolio offered. The Bank analyzes credit risk in a whole loan
package through its due diligence investigation, which is designed to provide
management with basic underwriting information on each loan or group of loans,
including loan-to-value, payment history, insurance and other documentation.
Because the Bank is purchasing loans in bulk, the Bank prices the loan
packages that it bids on to take into consideration, among other things,
delinquency and foreclosure assumptions based on the risk characteristics of
the loan packages. The Bank intends to continue to make competitive bids on
loan portfolios that meet the Bank's purchase criteria.
Beginning in 1994, the Bank has been originating adjustable rate
residential mortgage loans through approximately 18 correspondent lenders.
The correspondents originate and immediately sell such loans to the Bank. All
such loans are underwritten in accordance with the Bank's policies and
procedures. During 1996, loans purchased from the correspondent lenders
totaled $74.3 million.
The Bank will directly sell mortgage loans and mortgage loan servicing
from time to time in order to replace the loans and servicing with instruments
which have higher credit quality and which generate less interest rate risk.
While the Bank has the general authority to originate and purchase loans
secured by real estate located anywhere in the United States, the largest
concentration of its residential first lien mortgage and construction loan
portfolios is secured by realty located in Texas. Other than in Texas, there
are no other concentrations of ten percent or more.
RESIDENTIAL CONSTRUCTION LENDING. The Bank initiated a construction
lending program with local builders in the latter part of 1989 which has grown
considerably since its inception. At the time of initiation of the program,
management of the Bank surveyed the members of the residential construction
industry in the Bank's Houston market area and targeted those companies which
management believed, based upon its market research, to be financially strong
and reputable. Loans are made primarily to fund residential construction.
Construction loans are made on pre-sold and speculative residential homes only
in well located, viable subdivisions and planned unit developments.
The builders with whom the Bank does business generally apply for either
a non-binding short-term line of credit or for an annual line of credit
(subject to covenants) from the Bank for a maximum amount of borrowing to be
outstanding at any one time. The line of credit applications are processed by
the loan administration and credit departments and are underwritten by the
Lending Subcommittee. Loans to any one builder are limited to $5.0 million
for new lines and $12.0 million for increases or renewals of existing lines if
approved by this Committee, or up to the regulatory loans to one borrower
limit if approved by the Board of Directors' Loan Committee. Upon approval of
the line of credit, the Bank issues a letter which indicates to the builder
the maximum amount which will be available under the line, the term of the
line of credit, which is generally 90 days to one year, the interest rate of
the loans to be offered under the line, which is set at a rate above the local
prime rate or LIBOR on the outstanding monthly loan balance, and the loan fees
payable. When the builder desires to draw upon a short-term line of credit,
it must make a separate loan application under the line for a specific loan
amount. Each loan commitment under a short-term line of credit is separately
underwritten and approved by at least two members of the Lending Subcommittee
after the builder's master file is updated and reviewed. The Bank also funds
construction loans outstanding to builders or individuals under individual
construction loans.
The terms of the Bank's construction loans are generally for nine months
or less, unless extended by the Bank. If a construction loan is extended, the
borrower is generally charged a loan fee for each 90 day extension period.
The Bank reserves the right to extend any loan term, but generally does not
permit the original term and all extensions to exceed 24 months without
amortization of principal either in monthly increments or a lump sum.
The Bank generally requires that construction loans be personally
guaranteed by the borrower and its principals. The maximum loan-to-value
ratio of any construction loan may not exceed the lesser of 80% of the
appraised value of the collateral property, 80% of the proposed sale or
contract price or 100% of the actual cost. All individual loans are limited
in dollar amount based upon the project proposed by the builder. Draws for
lot purchases are generally limited to the contracted sales price of the lot
(to include escalations) not to exceed 100% of the lot's appraised value.
Other special conditions which the Bank attaches to its construction loans
include a requirement that limits the number and dollar amount of loans which
may be made based upon unsold inventory. The Bank may also, in its sole
discretion, discontinue making any further loans if the builder's unsold
inventory exceeds a certain level from all lending sources or if the builder
fails to pay its suppliers or subcontractors in a timely manner.
The Bank provides construction financing for homes that generally are
priced below $450,000, with most homes priced between $70,000 and $175,000.
In this price range, the Bank has experienced the shortest duration of term,
the highest annualized yield and the least likelihood of defaults because of
the generally high number of pre-completion sales. The Bank will also make
individual construction loans to builders or individuals on single homes or a
panel of homes on substantially the same terms and conditions as loans granted
under the Bank's line of credit program.
At December 31, 1996, the Bank had $45.0 million in outstanding
residential construction loans (net of loans in process). Of the construction
loans outstanding at December 31, 1996, $35.6 million were to 16 builders
originated under the Bank's line of credit program and $9.4 million were to
builders or individuals under individual construction loans. At the present
time, the Bank has approved builders in the Houston, Dallas, and Austin
metropolitan areas and is selectively soliciting new builders for its
residential construction lending program. The Bank intends to continue to do
business with the companies involved in its line of credit program and
believes that it will continue to have construction loan demand from the
builders with whom it currently has an established lending relationship. The
Bank does not otherwise actively solicit construction loans directly or
through the mass media.
Construction financing is generally considered to involve a higher degree
of risk than long-term financing on improved, occupied residential real
estate, due to the lender's reliance on the borrower to add to the estimated
value of the property through construction within the budget set forth in the
loan application. The Bank attempts to limit its risk exposure by, among
other things: limiting the number of borrowers to whom it lends and
establishing specific qualification requirements for borrowers generally;
continually monitoring the general economic conditions in the market, recent
housing starts and sales; continually monitoring the financial position of its
borrowers throughout the term of the loan through periodic builder reports and
inquiries to the builder's suppliers and subcontractors; continually
monitoring the progress of the development through site inspections prior to
loan disbursements; utilizing only qualified, approved appraisers; and
requiring that the builder maintain a pre-approved ratio (generally not
greater than 50%) of speculative to pre-sold homes in the development.
MULTIFAMILY MORTGAGE AND COMMERCIAL REAL ESTATE LENDING. Beginning in
1993, the Bank initiated a program to actively seek loans secured by
multifamily or commercial properties (primarily retail shopping centers).
Multifamily mortgage and commercial real estate loans typically involve higher
principal amounts and repayment of the loans generally is dependent, in large
part, on sufficient cash flow being generated by the underlying properties to
cover operating expenses and loan repayments. Market values may vary as a
result of economic events or governmental regulations which are outside the
control of the borrower or lender and which can affect the future cash flow of
the properties. The loans are for a short to medium term of between one to
seven years, and have floating rates or fixed rates based on a spread over
similarly fixed borrowings from the FHLB. The properties securing the loans
originated by the Bank are generally located in Texas. The Bank attempts to
limit its risk exposure by, among other things: lending to proven
developers/owners, only considering properties with existing operating
performance which can be analyzed, requiring conservative debt coverage
ratios, and continually monitoring the operation and physical condition of the
collateral. At December 31, 1996, multifamily mortgage loans totaling $139.5
million and commercial real estate loans of $119.0 million were outstanding.
The decision to increase commercial real estate lending resulted primarily
from the improvement in the local economies throughout Texas, which was caused
by improved occupancy in retail centers together with an improvement in the
quality of the borrowers seeking such loans. At December 31, 1996, the Bank
had outstanding commercial real estate loans (acquired from Texas Capital)
totaling approximately $32,000 that were on non-accrual status.
The Bank began seeking multifamily mortgage and commercial real estate
construction loans in 1996. The Bank will generally underwrite these loans,
with principal balances up to $5.0 million, in the same way it currently
underwrites its multifamily mortgage lending and will attempt to manage the
risk of such loans by requiring that the builders provide more equity in the
project than is required in refinancings, lending to those builders with
strong financial statements and requiring that borrowers purchase, if required
by the movement of general market interest rates, interest rate caps for their
loans. At December 31, 1996, commercial construction loans totaling $4.0
million were outstanding.
WAREHOUSE LENDING. Since 1992, the Bank has provided lines of credit to
mortgage companies generally for their origination of single family
residential loans which are normally sold no more than 90 days from
origination to the Federal National Mortgage Association (the "FNMA"), Federal
Home Loan Mortgage Corporation ("FHLMC"), Government National Mortgage
Association ("GNMA") or to private investors. The lines of credit are
generally renewable annually. Borrowers pay the Bank a commitment and/or
non-usage fee and pay interest on funds drawn at a floating rate. In
addition, the Bank receives a fee for each loan file processed. The Bank
holds the original mortgage loan notes and other documentation as collateral
until repayment of the related lines of credit. The lines of credit may be
drawn to the extent of 98.0% of the principal balance of the mortgages being
financed or to the lesser of 100% of the sale commitment amount or the note
amount of each mortgage being financed depending on the agreement. The Bank
generally will not accept any loan older than 60 days as collateral and
generally requires the originator to pay down the line for any loan held as
collateral which is 90 days or older from the date of its origination. Thus,
the overall security for the lines of credit is easily valued, highly liquid
and turns over rapidly.
Warehouse loans are underwritten in accordance with Bank policies and
procedures. Interested loan originators who contact or are contacted by the
Bank are asked to prepare a loan application which seeks detailed information
on the originator's business. After evaluating the application and
independently verifying the applicant's credit history, if the originator
appears to be a likely candidate for approval, Bank personnel will visit the
originator and review, among other things, its business organization,
management, quality control, funding sources, risk management, loan volume and
historical delinquency rate, financial condition, contingent obligations and
regulatory compliance. The originator pays a fee for this review to offset a
portion of the Bank's expense, which amount is deducted from the origination
fee if the line of credit is approved. If the originator meets the
established criteria, its application is submitted to the Lending Subcommittee
for review and if required, is thereafter referred to the Board of Directors'
Loan Committee.
Bank personnel attempt to minimize the risk of making Warehouse loans by,
among other things, (i) taking physical possession of the originator's
collateral, (ii) directly receiving payment from secondary market investors
when the loans are sold and remitting any balance to the borrower after
deducting the amount borrowed for that particular loan, (iii) visiting the
originator's office from time to time to review its financial and other
records and (iv) monitoring each originator: (a) by periodically reviewing
each originator's financial statements, loan production delinquency and
commitment reports; and, (b) on an annual basis, by reviewing the originator's
audited financial statements and the auditor's letter to the originator's
board of directors.
During 1996, the Bank originated $887.3 million of Warehouse loans and
had such loans outstanding of $53.6 million at December 31, 1996.
PMSR LENDING. Since 1992, the Bank has loaned funds to mortgage
companies for their purchase of mortgage servicing rights or to finance the
mortgage companies ongoing operations to originate and retain mortgage
servicing. The mortgage companies receive fees for servicing mortgage loans
which include collecting and remitting loan payments to FNMA, FHLMC and other
investors. Loans of this nature generally have terms of one to five years, and
are generally limited to the lesser of 65.0% of the price paid by the mortgage
company for servicing rights, or the value of the originated servicing rights
(subject to the regulatory maximum for loans to one borrower). PMSR loans are
made at adjustable rates of interest tied to LIBOR or the Bank's borrowing
rate plus a spread and a commitment or non-usage fee. PMSR loans are
collateralized by purchased or originated mortgage servicing rights to the
remaining cash flows after remittance of payments to FNMA, FHLMC or other
investors on the servicing portfolio. PMSR loans are underwritten in
substantially the same manner as Warehouse loans. Bank personnel closely
monitor PMSR borrowers on a semi-annual basis by, among other things,
reviewing the borrower's financial condition and operations in the same manner
as they do for Warehouse loans and by examining the value of the borrower's
PMSR portfolio (through evaluation of the estimated future net cash flows from
the servicing rights) in order to ensure that the loan-to-value ratio does not
exceed 70.0% during the life of the loan. If the continuing loan-to-value
ratio exceeds that amount, the borrower is asked to repay a portion of the
principal balance to maintain the ratio limit. At December 31, 1996, the Bank
had $21.4 million in outstanding PMSR loans.
REAL ESTATE ACQUISITION AND DEVELOPMENT LENDING. The Bank has increased
the number of loans originated to residential real estate builders and
developers for the acquisition and/or development of vacant land. The proceeds
of the loans are generally used to acquire the land and make the site
improvements necessary to develop the land into saleable lots. The Bank lends
only to the major developers in Houston with good track records and strong
financial capacity and on property where substantially all of the lots to be
developed are pre-sold. The term of the loans have generally been from 18 to
24 months at a spread over the prime rate, plus an origination fee. Repayment
on the loans is generally made as the lots are sold to builders. Land
acquisition and development loans involve additional risks when compared to
loans on existing residential properties. These loans typically involve
relatively large loan balances to single borrowers, and the repayment
experience is dependent upon the successful development of the land and the
resale of the lots. These risks can be significantly impacted by supply and
demand conditions and the general economic conditions in the local market
area. At December 31, 1996, the Bank had $26.1 million of real estate
acquisition and development loans outstanding.
COMMERCIAL BUSINESS LENDING. Development of a commercial business
lending program is a strategic goal of Bank management. The Texas Capital
acquisition provided the Bank with an established commercial business lending
program to small and medium sized companies primarily in the Houston and
Austin metropolitan areas. In 1996, management continued to develop the
infrastructure for commercial business lending in most of the Bank's major
markets. The commercial, financial and industrial loans ("Commercial Business
loans") are generally made to provide working capital financing or purchase
financing to businesses and are generally secured by the borrower's working
capital assets (i.e. accounts receivable, inventory, etc.) or assets purchased
by the borrower (i.e. operating assets, equipment, etc.). Commercial Business
loans generally have shorter terms (one to five years) at a spread over prime
rate and are of greater risk than real estate secured loans because of the
type and nature of the collateral. In addition, Commercial Business loan
collections are more dependent on the continuing financial stability of the
borrower. The Bank intends to expand the acquired commercial business lending
program, while managing the associated credit risk by monitoring borrowers'
financial position and underlying collateral securing the loans. At December
31, 1996, Commercial Business loans outstanding totaled $22.0 million, of
which $496,000 (acquired from Texas Capital) was on non-accrual status.
CONSUMER LENDING. The Bank makes available traditional consumer loans,
such as home improvement, new and used car financing, new and used boat and
recreational vehicle financing and loans secured by savings deposits. The
interest rate on loans secured by savings deposits is typically set at a rate
above that paid on the underlying account and adjusts if the rate on the
account changes. At December 31, 1996, the Bank had $23.2 million in consumer
loans outstanding, of which $8.8 million were savings deposit secured loans.
Consumer loans (other than savings deposit secured loans) generally have
shorter terms and higher interest rates than mortgage loans but usually
involve greater credit risk than mortgage loans because of the type and nature
of the collateral. In addition, consumer lending collections are dependent on
the borrower's continuing financial stability, and are thus likely to be
adversely affected by job loss, marital status, illness and personal
bankruptcy. In many cases, repossessed collateral for a defaulted consumer
loan will not provide an adequate source of repayment of the outstanding loan
balance because of depreciation of the underlying collateral. The Bank
believes that the generally higher yields earned on consumer loans compensate
for the increased credit risk associated with such loans and that consumer
loans are important to its efforts to serve the credit needs of the
communities that it serves.
The Bank's consumer loan lending territory approximates the markets
served by its retail branches. Persons desiring consumer loans are typically
individuals who have a pre-existing banking relationship with the Bank.
ASSET QUALITY. The Bank, like all financial institutions, is exposed to
certain credit risks related to the value of the collateral which secures
loans held in its portfolio and the ability of borrowers to repay their loans
during the term thereof. Management of the Bank closely monitors the loan
portfolio and the Bank's real estate acquired as a result of foreclosure
("REO") for potential problems on a weekly basis and reports to the Board of
Directors on a monthly basis. When a borrower fails to make a required loan
payment or other weaknesses are detected in a borrower's financial condition,
the Bank attempts to determine an appropriate course of action by contacting
the borrower. Delinquencies are cured promptly in most cases. If the
delinquency on a mortgage loan exceeds 90 days and is not cured through the
Bank's normal collection procedures, or an acceptable arrangement is not
worked out with the borrower, the Bank will institute measures to remedy the
default, including commencing a foreclosure action. As a matter of policy,
the Bank generally does not accept from the mortgagor a voluntary deed of the
secured property in lieu of foreclosure. If foreclosure is effected, the
property is sold at a public auction in which the Bank may participate as a
bidder. If the Bank is the successful bidder, the foreclosed real estate is
then included in the Bank's REO portfolio until it is sold.
Upon acquisition, REO is recorded at the lower of unpaid principal
balance adjusted for any remaining acquisition premiums or discounts less any
applicable valuation allowance or estimated fair value, based on an appraisal,
less estimated selling costs. All costs incurred from the date of acquisition
forward relating to maintaining the property are recorded as a current
expense.
It is the Bank's general policy not to recognize interest income on loans
past due 90 days or more. When a loan is placed on non-accrual status,
previously accrued but unpaid interest is reversed against current interest
income. On a loan-by-loan basis, Bank management may continue to accrue
interest on loans that are past due more than 90 days, primarily if management
believes that the individual loan is in the process of collection and the
interest is fully collectible. At December 31, 1996, 1995 and 1994, the Bank
had the following loans which were 90 days or more delinquent and were on
accrual status:
<PAGE>
<TABLE>
<CAPTION>
At December 31,
-----------------------
1996 1995 1994
-------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
First lien single family mortgage $ 106 $ -- $ --
Residential construction 52 -- --
Commercial real estate 881 -- --
Commercial, financial and industrial 14 231 --
Consumer 142 -- --
=========================================
Total $ 1,195 $ 231 $ --
=========================================
</TABLE>
The following table sets forth information regarding the Bank's non-accrual
loans and REO as of the dates shown.
<TABLE>
<CAPTION>
At December 31,
----------------
1996 1995 1994
----------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Non-accrual loans:
First lien single family $ 12,238 $ 12,925 $ 6,077
mortgage
Residential construction -- 353 --
Commercial real estate 32 965 --
Commercial, financial and
industrial 496 337 --
Consumer 73 42 25
--------------------------------------------------
Total non-accrual loans 12,839 14,622 6,102
Total REO 3,161 4,216 781
-------------------------------------------------
Total nonperforming assets $ 16,000 $ 18,838 $ 6,883
=================================================
Ratio of nonperforming
assets to total assets 0.56% 0.68% 0.30%
Ratio of non-accrual loans to total
loans receivable 1.04% 1.33% 1.04%
==================================================
</TABLE>
<PAGE>
At December 31, 1996, approximately $816,000 in additional interest
income would have been recorded in the year then ended on the above loans
accounted for on a non-accrual basis if such loans had been current in
accordance with their original terms and had been outstanding throughout the
period or since origination if held for part of the period. For the year
ended December 31, 1996, $507,000 in interest income was included in net
income for these same loans prior to the time they were placed on non-accrual
status.
The increase in total nonperforming assets between 1994 and 1996 is
largely attributable to the growth in the Bank's single family residential
mortgage loan portfolio, which occurred primarily as a result of whole loan
acquisitions through bulk purchases, and due to the loans acquired in the
Texas Capital acquisition. At December 31, 1996, the Bank had 200 first lien
residential mortgage loans in non-accrual status, aggregating $12.2 million,
with an average balance of approximately $61,000. A total of 181 of these
loans, with an aggregate balance of $10.3 million, were acquired through bulk
loan purchases, 3 of these loans, with an aggregate balance of $26,000, were
acquired through the Southwest Plan Acquisition and 2 of these loans, with an
aggregate balance of $197,000, were acquired in the Texas Capital acquisition.
Of the 181 residential mortgage loans acquired through bulk purchases, at
December 31, 1996, 39 of such loans totaling $1.8 million were being serviced
by other institutions, which constituted 4.6% of the $38.2 million of
aggregate loans serviced by others.
The commercial real estate and commercial, financial and industrial loans
on non-accrual status at December 31, 1996 were acquired in the Texas Capital
acquisition.
At December 31, 1996, nonperforming assets included REO with an aggregate
book value of $3.2 million. At such date, the Bank's REO consisted of 36
single family residential properties and six commercial properties (also
acquired from Texas Capital).
At December 31, 1996, in addition to the loans in non-accrual status, the
Bank had $8.0 million in loans classified as substandard, $126,000 classified
as loss and $10.0 million of loans designated as "special mention" for
regulatory purposes. Of these loans, $2.5 million of the substandard loans
and $1.3 million of the "special mention" loans were acquired from Texas
Capital. The loans classified as loss at December 31, 1996 were consumer
loans specifically provided for in the allowance for loan losses allocation at
that date. Loans designated as "special mention" are not currently required
to be classified for regulatory purposes but have potential weaknesses or risk
characteristics that could result in future problems.
On January 1, 1995, the Bank adopted the Financial Accounting Standards
Board's (the "FASB") Statement of Financial Accounting Standards No. 114
(Statement 114), "Accounting by Creditors for Impairment of a Loan," as
amended by Statement 118. Under Statement 114, a loan is impaired when it is
"probable" that a creditor will be unable to collect all amounts due (i.e.,
both principal and interest) according to the contractual terms of the loan
agreement. Statement 114 requires that the measurement of impaired loans be
based on (i) the present value of the expected future cash flows discounted at
the loan's effective interest rate, (ii) the loan's observable market price,
or (iii) the fair value of the loan's collateral. Statement 114 does not
apply to large groups of smaller balance homogeneous loans that are
collectively evaluated for impairment. The Bank collectively reviews all
first-lien residential loans under $500,000 as a group and all consumer and
other loans as a group for impairment, excluding loans in which foreclosure is
probable. The adoption of Statement 114, as amended by Statement 118, had no
material impact on the Bank's consolidated financial statements as the Bank's
existing policy of measuring loan impairment was generally consistent with
methods prescribed in these standards.
The Bank considers a loan to be impaired when, based upon current
information and events, it is probable that the Bank will be unable to collect
all amounts due according to the contractual terms of the loan agreement. In
determining impairment, the Bank considers, among other things, large
non-homogeneous loans which may include nonaccrual loans or troubled debt
restructurings, and performing loans which exhibit, among other
characteristics, high loan-to-value ratios, low debt coverage ratios, or
indications that the borrowers are experiencing increased levels of financial
difficulty. The Bank bases the measurements of collateral-dependent impaired
loans on the fair value of their collateral. The amount by which the recorded
investment in the loan exceeds the measure of the fair value of the collateral
securing the loan is recognized by recording a valuation allowance. At
December 31, 1996, the carrying value of loans that are considered to be
impaired under Statement 114 totaled approximately $725,000 (all of which were
on non-accrual) and the related allowance for loan losses on those impaired
loans totaled $524,000. The average balance of impaired loans during the year
ended December 31, 1996 was approximately $846,000. For the year ended
December 31, 1996, the Bank did not recognize interest income on loans
considered impaired.
The Bank had loaned $77.1 million at December 31, 1996, under its
residential construction lending program to multiple borrowers who are engaged
in similar activities. These borrowers could be similarly impacted by
economic conditions in the Houston metropolitan area. See "Residential
Construction Lending." Except for concentrations in its Warehouse lending
lines, the Bank had no other loan concentrations. At December 31, 1996, the
Bank had $53.6 million of Warehouse loans outstanding. See "Warehouse
Lending."
<PAGE>
ALLOWANCE FOR LOAN LOSSES. The Bank maintains loan loss allowances to absorb
future and known losses that may be realized on its loans receivable
portfolio. The following table summarizes activity in the Bank's allowance
for loan losses during the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1996 1995 1994
----------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of year $ 5,703 $ 2,158 $ 1,527
Total charge-offs, net(1) (748) (387) (303)
Provisions for loan losses 1,925 1,664 934
Acquisition allowance adjustment(2) -- 2,268 --
------------------------------------
Balance at end of the year $ 6,880 $ 5,703 $ 2,158
====================================
Ratio of net charge-offs during the
period to average net loans
outstanding during the period 0.06% 0.05% 0.06%
====================================
</TABLE>
1Net charge-offs in all years are fully attributable to single family
residential loans, except for $154,000 in 1996 and $45,000 in 1995, which are
attributable to consumer and other loans. Net charge-offs also include
recoveries of $103,000 in 1996, $17,000 in 1995 and $26,000 in 1994.
2The acquisition allowance adjustment in 1995 represents the amount allocated
to the allowance for loan losses during the year in connection with (i) a bulk
loan package acquired and (ii) the loans acquired in the Texas Capital
acquisition.
<PAGE>
The following table sets forth the allocation of the allowance for loan
losses by type of loan outstanding at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
----------------
1996 1995 1994
------- ----- -----
(In thousands)
<S> <C> <C> <C> <C> <C>
First lien residential mortgage $ 2,217 $ 2,992 $ 1,191
Multifamily mortgage 369 249 188
Residential construction 223 307 278
Real estate acquisition and development 261 130 142
Commercial real estate 1,151 1,072 152
Commercial construction 20 -- --
Commercial, Warehouse and PMSR 361 230 98
Commercial, financial and industrial 985 395 --
Consumer and other 374 177 109
Unallocated 919 151 --
--------------------------------
$ 6,880 $ 5,703 $ 2,158
================================
</TABLE>
<PAGE>
The following table sets forth the allocation of the provision
(reduction of allowance)for loan losses by loan type during
the periods indicated.
<TABLE>
<CAPTION>
At December 31,
----------------
1996 1995 1994
-------- ----- ------
(In thousands)
<S> <C> <C> <C> <C> <C>
First lien residential mortgage $ (180) $ 1,032 $ 743
Multifamily mortgage 120 23 60
Residential construction (84) (67) (174)
Real estate acquisition and development 131 (25) 106
Commercial real estate 79 479 128
Commercial construction 20 -- --
Commercial, Warehouse and PMSR 131 132 (49)
Commercial, financial and industrial 618 -- --
Consumer and other 322 90 120
Unallocated 768 -- --
-------------------------------------
$ 1,925 $ 1,664 $ 934
=====================================
</TABLE>
Provisions for loan losses, currently $450,000 per quarter, are charged
to earnings to bring the total allowance to a level deemed appropriate by
management based on such factors as historical experience, the volume and type
of lending conducted by the Bank, the amount of nonperforming assets, industry
standards, regulatory policies, generally accepted accounting principles,
general economic conditions, particularly as they relate to the Bank's lending
area, and other factors related to the collectibility of the Bank's loan
portfolio.
The Bank periodically reviews its loan loss allowance policy, at a
minimum, annually. As a result of a comprehensive revision of such policy in
1996, the Bank changed its method of assessing the adequacy of the allowance
for loan losses. The revised policy provides that the Bank will annually
establish a monthly provision amount to be added to the allowance for loan
losses and the resultant allowance will be "tested" monthly for adequacy based
on the allocation methodology described below. The policy provides that any
"excess" based on this calculation will be maintained in the allowance for
loan losses as "unallocated". The minimum allowance allocation to first lien
residential mortgage loans greater than 90 days delinquent is a general
allocation of 5% of the aggregate net book value. All other first lien
residential mortgage loans are allocated a general allowance of 0.10% of the
aggregate net book value. The Bank generally allocates the allowance to
multifamily, residential construction, commercial construction, real estate
acquisition and development, commercial real estate, Warehouse, PMSR,
Commercial Business and consumer and other loans in the following percentages
of outstanding principal amounts: 0.25%, 0.25%, 0.50%, 1.0%, 0.50%, 0.25%,
0.50%, 1.0-2.0% and 1.0%. In addition, a general allowance allocation is
calculated on unfunded commitments and letters of credit using the general
allowance percentages described above for the applicable loan type. Specific
allowances are established by management on specific loans as considered
necessary.
The Bank's management believes that its present allowance for loan losses
is adequate based upon, among other considerations, the factors discussed
above, its low level of nonperforming loans and its nominal loss experience.
Management continues to review its loan portfolio to determine whether its
loan loss allowance policy should be altered in light of current conditions
and to make any additional provisions which may be deemed necessary. While
management uses the best information available to make such determinations,
additional provisions for loan losses may be required to be established in the
future should economic or other conditions change substantially. In addition,
the FDIC and the Department, as an integral part of their examination
processes, periodically review the Bank's loan loss allowances. These
agencies may require the Bank to establish additional loan loss allowances,
based on their respective judgments of the information available at the time
of the examinations.
MORTGAGE BANKING ACTIVITIES
LOAN ORIGINATIONS AND SALES. Through 1995, the Bank's wholly-owned
subsidiary, CBS Mortgage, originated loans for the Bank and for others secured
by first lien mortgages on completed single family residences located
principally in the Houston metropolitan area and in geographic areas
surrounding the Bank's branch locations. Beginning on January 1, 1996, the
origination function was performed by the Bank, with CBS Mortgage's activities
then limited to primarily loan servicing. The Bank's present policy is to
originate and sell to third party investors residential mortgage loans
principally to generate fee income, while avoiding the interest rate and
credit risk associated with holding fixed rate mortgage loans in portfolio.
During the years ended 1996, 1995 and 1994, the Bank (in 1996) and CBS
Mortgage (in 1995 and 1994) originated or purchased with the intent to sell
$11.2 million, $8.8 million and $25.0 million, respectively, of single family
residential mortgage loans and sold $11.7 million, $8.3 million and $10.2
million, respectively, of such loans to secondary market investors ("SMI").
During 1996, 1995 and 1994, the Bank (in 1996) and CBS Mortgage (in 1995 and
1994) originated residential real estate loans for portfolio totaling $9.0
million, $1.7 million, and $18.0 million, respectively.
"Pipeline risk," which is inherent in mortgage lending operations, arises
when the originator of a loan makes an uncovered commitment to lend funds to a
borrower at a locked-in rate of interest over the period of time which is
required for the lender to close and/or sell the loan. The risk is that
market rates of interest will move higher in the period between the time of
commitment and the time of funding the loan, and the lender will thereafter
have difficulty finding a buyer for such loan at a break-even or better price.
Management of the Bank and of CBS Mortgage believes that its loan origination
strategy eliminates to a large extent any "pipeline risk." The majority of
applications taken are accepted on the basis that rates will be set
immediately prior to closing. Applications that carry a locked in rate are
covered for interest rate risk by the use of the forward sales of
mortgage-backed securities or by registering each loan with an investor that
offers loan-by-loan protection until closing and delivery to the investor.
Through 1995, CBS Mortgage made available a variety of mortgage products
designed to respond to consumer needs and competitive factors. Beginning on
January 1, 1996, with the transfer of the origination function, these mortgage
products were being made available from the Bank. Conventional conforming
loans that are secured by first liens on completed residential real estate are
originated for up to 95% of the appraised value or selling price of the
mortgaged property, whichever is less. All loans with loan-to-value ratios in
excess of 80% require the borrower to purchase private mortgage insurance from
approved third party insurers. Conventional non-conforming mortgage loans
(i.e., loans for single family homes with an original balance in excess of the
maximum loan balance amount set by FNMA or FHLMC, which is presently $203,150,
or loans that do not otherwise meet the criteria established by FNMA or FHLMC)
are also originated. Such loans are originated based on underwriting
guidelines or standards required by the SMI to whom such loans are intended to
be sold. During 1996, fewer than 10% of the mortgage loans originated by the
Bank were non-conforming mortgage loans.
In addition to 15-year and 30-year conventional mortgages, CBS Mortgage
offered, and now the Bank offers special products designed to provide lower
rates of interest or lower principal and interest payments to its customers.
Borrowers may choose from a wide variety of combinations of interest rates and
points on many of its products so that its customers may elect to pay higher
points at closing and lower interest over the life of the loan, or pay a
higher interest rate and reduce the points payable at closing. In addition,
from time to time mortgages are offered in the following categories: those
which allow the borrower to make lower monthly payments for the first one, two
or three years of the loan; fixed rate mortgages; and adjustable rate
mortgages having interest rate adjustments every one, five or seven years
based upon a specified independent index.
Borrower demand for adjustable rate mortgage loans compared to fixed rate
mortgage loans is a function of interest rate levels, consumer expectations
for changes in interest rate levels and the difference between interest rates
and loan fees offered for fixed rate mortgage loans and for adjustable rate
mortgage loans. The Bank's and CBS Mortgage's loan origination volume has
been subject to some minor seasonal variations, with the heaviest demand in
the late spring and summer months. Loan demand is also affected by the
general interest rate environment and, to a large measure, by the general
state of the local economy.
During times of relatively lower market interest rates, demand by
previous borrowers for refinancings increases. Refinancings are not solicited
by CBS Mortgage or the Bank. However, if a request for a refinancing is
received, borrowers are offered current mortgage loan products. Refinancings
are processed in a manner identical to original originations and are charged
the same fees as charged for original originations.
LOAN SERVICING. CBS Mortgage services residential real estate loans
owned by the Bank as well as for others, including FNMA, FHLMC and other
private mortgage investors. Loan servicing includes collecting and remitting
loan payments, accounting for principal and interest, making advances to cover
delinquent payments, making inspections as required of mortgaged premises,
contacting delinquent mortgagors, supervising foreclosures and property
dispositions in the event of unremedied defaults and generally administering
the loans. Funds that have been escrowed by borrowers for the payment of
mortgage related expenses, such as property taxes and hazard and mortgage
insurance premiums, are maintained in non-interest-bearing accounts at the
Bank. At December 31, 1996, the Bank had $5.5 million deposited in such escrow
accounts.
CBS Mortgage receives fees for servicing mortgage loans, which generally
range from 0.250% to 0.375% per annum on the declining principal balance of
fixed rate mortgage loans and from 0.375% to 0.500% per annum on the declining
principal balance of adjustable rate mortgage loans. Such fees serve to
compensate CBS Mortgage for the costs of performing the servicing function.
Other sources of loan servicing revenues include late charges and other
ancillary fees. For the years ended 1996, 1995 and 1994, the Bank earned $3.0
million, $3.5 million and $3.7 million, respectively, in conjunction with CBS
Mortgage's loan servicing. Servicing fees are collected by CBS Mortgage out of
the monthly mortgage payments made by borrowers.
CBS Mortgage's servicing portfolio is subject to reduction by normal
amortization, by prepayment or by foreclosure of outstanding loans. At
December 31, 1996, 1995 and 1994, CBS Mortgage had an aggregate loan servicing
portfolio of $1.7 billion, $1.7 billion and $1.5 billion, respectively. Of
these amounts at such respective dates, CBS Mortgage serviced loans for the
Bank aggregating $958.2 million, $824.6 million and $481.8 million and loans
for others aggregating $776.7 million, $900.7 million and $1.0 billion. At
December 31, 1996, 55.2% of the dollar value of loans being serviced by CBS
Mortgage was for the Bank, 16.1% was being serviced for FHLMC, 26.6% was being
serviced for FNMA and 2.1% was being serviced for others. At December 31,
1996, $33.4 million of the loans serviced for private mortgage investors were
being subserviced for CBS Mortgage by a third party mortgage company.
Beginning in 1990, in order to increase the size of its loan servicing
portfolio, CBS Mortgage began to purchase bulk packages of mortgage servicing
rights from the Federal government and other institutions on a competitive bid
basis. The PMSRs, which were acquired in 1990 and 1991, were primarily
conventional loans secured by real property. The bulk purchase market for
loan servicing was attractive to purchasers in the early 1990s due to the
relatively large amounts of such servicing rights that were being sold by
banks and thrift institutions due to the introduction of new regulatory
capital standards, and by the Resolution Trust Corporation as part of its
liquidation function. Prices bid on these bulk offerings ranged from 0.35% to
1.25% of the principal balance of the underlying mortgages. Between 1992 and
1994, CBS Mortgage pursued the purchase of PMSRs from private institutions.
The packages of servicing rights purchased from the private institutions
during this period were purchased at prices which have generally ranged
between 0.82% to 1.47% on the principal balances of the underlying mortgages.
No servicing rights were purchased by CBS Mortgage in 1996 or 1995. As of
December 31, 1996, an aggregate of $776.7 million of CBS Mortgage's $1.7
billion servicing portfolio, or 44.8%, was loans serviced for others. At
December 31, 1996, CBS Mortgage had no commitments for further purchases of
PMSRs.
The amount, if any, by which PMSRs exceed the lower of 90% of
determinable fair market value, 90% of origination cost or current amortized
book value must be deducted from capital in calculating regulatory capital.
See "Regulation - Regulatory Capital Requirements." At December 31, 1996,
there were no deductions from capital for PMSR valuation adjustments.
<PAGE>
The following table sets forth certain information regarding CBS
Mortgage's servicing portfolio of mortgage loans for the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1996 1995 1994
---------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Beginning servicing portfolio $ 1,725,400 $ 1,511,263 $ 1,239,756
----------------------------------------
Loans originated(1) -- 8,810 24,965
Bulk servicing acquired -- -- 323,149
Bank loan originations 104,023 68,960 52,769
Bank whole loans acquired 185,176 390,230 139,621
----------------------------------------
Total servicing originated
and acquired 289,199 468,000 540,504
----------------------------------------
Loans sold servicing
released 47 2,602 210
Amortization and payoffs 273,219 246,223 263,903
Foreclosures 6,244 5,038 4,884
----------------------------------------
Total servicing reductions 279,510 253,863 268,997
----------------------------------------
Ending servicing portfolio $ 1,735,089 $ 1,725,400 $ 1,511,263
========================================
</TABLE>
________________________
1Includes loans originated for the Bank in 1995 and 1994.
MORTGAGE-BACKED SECURITIES
The Bank maintains a significant portfolio of mortgage-backed securities
as a means of investing in housing-related mortgage instruments without the
costs associated with originating mortgage loans for portfolio retention. At
December 31, 1996, the Company's mortgage-backed securities portfolio
(including $180.7 million of mortgage-backed securities available-for-sale),
net of unamortized premiums and unearned discounts, amounted to $1.5 billion,
or 53.0%, of total assets. By investing in mortgage-backed securities,
management seeks to achieve a positive spread over the cost of funds used to
purchase these securities. At December 31, 1996, the Company's net
mortgage-backed securities had an aggregate market value of $1.5 billion.
<PAGE>
The following table sets forth the composition of the Company's
mortgage-backed securities portfolio at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
1996 1995 1994
---------- -------- ------
Amount Percent Amount Percent Amount Percent
-----------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Held-to-maturity:
REMICS $ 1,213,849 90.25% $1,241,999 89.00% $1,426,757 88.90%
FNMA certificates 77,324 5.75 90,061 6.45 101,633 6.33
GNMA certificates 33,900 2.52 39,363 2.82 44,843 2.79
Non-agency certificates 19,826 1.48 24,091 1.73 30,431 1.90
FHLMC certificates -- -- -- -- 1,239 0.08
Interest-only securities 38 -- 55 -- 81 --
------------------------------------------------------------------
1,344,937 100.00% 1,395,569 100.00% 1,604,984 100.00%
======== ======= =======
Unamortized premium 3,153 3,841 4,550
Unearned discount (3,503) (3,657) (3,695)
------------------------------------------------------------------
Total held-to-maturity $1,344,587 $1,395,753 $1,605,839
===================================================================
Available-for-sale:
REMICS $ 185,651 100.00% $ 186,505 99.52% $ 32,978 100.00%
Non-agency certificates -- 0.00 908 0.48 -- --
-------------------------------------------------------------------
185,651 100.00% 187,413 100.00% 32,978 100.00%
======== ======= =======
Unamortized premium 33 44 6
Unearned discount (255) (284) --
Net unrealized loss (4,773) (759) (735)
-------------------------------------------------------------------
Total available-for-sale $ 180,656 $ 186,414 $ 32,249
===================================================================
Total mortgage-backed
securities $1,525,243 $1,582,167 $1,638,088
===================================================================
</TABLE>
The mortgage-backed securities which the Bank purchases and maintains in
portfolio can include FNMA, FHLMC and GNMA certificates, certain privately
issued, credit-enhanced mortgage-backed securities which are rated "A" or
better by the national securities rating agencies, certain types of
collateralized mortgage obligations ("CMOs") and interest-only ("IO")
certificates. The FNMA, FHLMC and GNMA certificates are modified pass-through
mortgage-backed securities, which represent undivided interests in underlying
pools of fixed-rate, or certain types of adjustable rate, single family
residential mortgages issued by these quasi-governmental (GNMA) and private
(FNMA and FHLMC) corporations. FNMA and GNMA provide to the certificate
holder a guarantee (which is backed by the full faith and credit of the U.S.
government in the case of GNMA certificates) of timely payments of interest
and scheduled principal payments, whether or not they have been collected.
FHLMC guarantees the timely payment of interest and the full (though not
necessarily timely) payment of principal. The guarantees of FNMA and FHLMC
are not backed by the full faith and credit of the U.S. government. The
mortgage-backed securities acquired by the Bank that have been pooled and sold
by private issuers, generally large investment banking firms, provide for the
timely payments of principal and interest either through insurance issued by a
reputable insurer or the right to receive certain payments thereunder is
subordinated in a manner which is sufficient to have such mortgage-backed
securities earn a credit rating of "A" or better from one or more of the
national securities rating agencies.
A CMO is a special type of pay-through debt obligation in which the
stream of principal and interest payments on the underlying mortgages or
mortgage-backed securities is used to create classes with different maturities
and, in some cases, amortization schedules and a residual class of the CMO
security being sold, with each such class possessing different risk
characteristics. The residual interest sold represents any residual cash flows
which result from the excess of the monthly receipts generated by principal
and interest payments on the underlying mortgage collateral and any
reinvestment earnings thereon, less the cash payments to the CMO holders and
any administrative expenses. As a matter of policy, due to the risk
associated with residual interests, the Bank has never invested in, and does
not intend to invest in, residual interests in CMOs. CMOs and other
mortgage-backed securities may be structured as Real Estate Mortgage
Investment Conduits ("REMICs") for U.S. Federal income tax purposes.
Mortgage-backed securities generally yield less than the loans which
underlie such securities because of their payment guarantees or credit
enhancements which reduce credit risk. In addition, mortgage-backed securities
are more liquid than individual mortgage loans and may be used to
collateralize obligations of the Bank. Mortgage-backed securities issued or
guaranteed by FNMA or FHLMC (except IO securities or the residual interests in
CMOs) are weighted at no more than 20% for risk-based capital purposes,
compared to a weight of 50% to 100% for residential loans. See "Regulation -
Regulatory Capital Requirements."
The FDIC has issued a statement of policy which states, among other
things, that mortgage derivative products (including CMOs and CMO residuals
and stripped mortgage-backed securities such as IOs) which possess average
life or price volatility in excess of a benchmark fixed rate 30 year
mortgage-backed pass-through security are "high-risk mortgage securities," are
not suitable investments for depository institutions, and if considered "high
risk" at purchase must be carried in the institution's trading account or as
assets held for sale, and must be marked to market on a regular basis. In
addition, if a security was not considered "high risk" at purchase but was
later found to be "high risk" based on the tests, the security may remain in
the held-to-maturity portfolio as long as the institution has the positive
intent to hold the security to maturity and has a documented plan in place to
manage the higher risk. At December 31, 1996, the Bank had mortgage-backed
securities considered "high risk" with a recorded booked value of
approximately $114.3 million. These securities were not considered "high
risk" at purchase, but were later found to be "high risk" based on the results
of the required tests. The Bank has the positive intent to hold these
securities to maturity and has documented the Bank's plan to manage the higher
risk of these securities. If the Bank should elect to consider a new type of
security for its portfolio, the Bank intends to ascertain in advance that the
security does not fail any of the tests that will qualify it as a "high risk
mortgage security." The Bank will not purchase any security that fails such
tests unless it has in place a documented plan to manage the higher risk of
that security and has approval from the Board of Directors.
<PAGE>
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.
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994
----------------------------------------
(In thousands)
<S> <C> <C> <C>
Mortgage-backed securities
held-to-maturity purchased $ --- $ 52,741 $511,847
--------------------------------------
Available-for-sale securities sold(1) 864 72,298 794
Amortization of premiums, net of discount
accretion 552 495 1,589
Change in unrealized loss on mortgage-backed
securities available-for-sale 4,013 24 735
Principal repayments on mortgage-backed
securities 51,495 35,845 195,545
----------------------------------------
Total decrease 56,924 108,662 198,663
----------------------------------------
Net increase (decrease) in mortgage-backed
securities $ (56,924) $(55,921) $313,184
======================================
</TABLE>
1Securities sold in 1995 after reclassification from held-to-maturity
portfolio pursuant to the FASB's Special Report, "A Guide to Implementation of
Statement 115 on Accounting for Certain Investments in Debt and Equity
Securities."
On January 1, 1994, the Company adopted the FASB Statement of Financial
Accounting Standards No. 115 (Statement 115), "Accounting for Certain
Investments in Debt and Equity Securities." In accordance with Statement 115,
the Company classifies securities as either held-to-maturity or
available-for-sale. Securities are classified as held-to-maturity when the
Company has the positive intent and ability to hold such securities to
maturity. Securities held-to-maturity are recorded at amortized cost.
Permanent declines in the value of held-to-maturity securities are charged to
earnings in the periods in which the declines are determined. Securities
available-for-sale are securities other than those held-to-maturity or for
trading purposes and are recorded at fair value, with unrealized gains and
losses excluded from earnings and recorded as a separate component of
stockholders' equity. In connection with the adoption of Statement 115, in
1994 the Company transferred approximately $50.8 million of mortgage-backed
securities to the available-for-sale category. Realized gains and losses on
securities are recorded in earnings in the year of sale based on the specific
identification of each individual security sold. Premiums and discounts on
mortgage-backed securities are amortized or accreted as a yield adjustment
over the life of the securities using the interest method, with the
amortization or accretion being adjusted when the prepayments are received.
In November 1995, the FASB issued the Special Report, "A Guide to
Implementation of Statement 115 on Accounting for Certain Investments in Debt
and Equity Securities." Provisions in this Special Report granted all
entities a one-time opportunity, until no later than December 31, 1995, to
reassess the appropriateness of the classifications of all securities held and
to account for any resulting reclassifications at fair value in accordance
with Statement 115. The provisions of the Special Report also directed that
any reclassifications as a result of this one-time reassessment would not call
into question the intent to hold other debt securities to maturity in the
future. In accordance with this Special Report, on November 20, 1995, the
Company reclassified approximately $226.6 million of mortgage-backed
securities to the available-for-sale category. These mortgage-backed
securities reclassified to the available-for-sale category were primarily COFI
securities and gave the Company the opportunity to somewhat change the
composition of the portfolio by selling certain securities if that was
considered necessary. In 1996 and 1995, the Company sold $864,000 and $72.3
million, respectively, of these mortgage-backed securities available-for-sale.
INVESTMENT ACTIVITIES
Under the Texas Savings Bank Act (the "Act"), the Bank is permitted to
invest in obligations of, or guaranteed as to principal and interest by, the
United States or the State of Texas, in the stock or in any obligations or
consolidated obligations of the FHLB, and in various other specified
instruments. The Bank holds investment securities from time to time to help
meet its liquidity requirements and as temporary investments until funds can
be utilized to purchase mortgage-backed securities, residential mortgage loans
or to originate construction loans for the Bank's portfolio. See Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations- Liquidity and Capital Resources."
SOURCES OF FUNDS
GENERAL. Advances from the FHLB, deposits, sales of securities under
agreements to repurchase and maturities and principal repayments on loans and
mortgage-backed securities have been the major sources of funds for use in the
Bank's lending and investments, and for other general business purposes.
Management of the Bank closely monitors rates and terms of competing sources
of funds on at least a weekly basis and utilizes the source which is the more
cost effective.
DEPOSITS. The Bank's market for deposits is competitive, which has
necessitated the Bank's emphasis on primarily short term certificate accounts
that are more responsive to market interest rates than savings accounts. The
Bank offers a traditional line of deposit products which currently includes
savings, interest-bearing checking (NOW), noninterest-bearing checking, money
market demand accounts and certificates of deposit which generally range in
terms from three to 60 months. Included among these deposit products are
individual retirement account certificates. During 1996 and early in 1997,
the Bank began to offer a range of products for commercial businesses
including Small Business Checking, Business Interest Checking, Analysis
Checking and Commercial Money Market Accounts, the amounts of which, in 1996,
are not material for separate presentation.
<PAGE>
The following table shows the distribution of and certain other
information relating to the Bank's deposits by type as of the dates indicated.
<TABLE>
<CAPTION>
At December 31,
----------------
1996(1) 1995(2)
Percent Percent
of of
Amount Deposits Amount Deposits
--------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Demand deposit accounts:
Noninterest-bearing checking $ 85,259 6.50% $ 81,207 6.31%
NOW 56,862 4.34 47,476 3.69
Savings 22,135 1.69 22,374 1.74
Money market demand 151,046 11.52 165,214 12.83
-------------------------------------------------
Total demand deposit accounts 315,302 24.05 316,271 24.57
-------------------------------------------------
Certificate accounts:
Within 1 year 772,690 58.94 704,966 54.76
1-2 years 158,583 12.10 188,400 14.63
2-3 years 40,961 3.12 32,556 2.53
3-4 years 18,268 1.39 29,717 2.31
4-5 years 5,064 0.39 15,210 1.18
Over 5 years 165 0.01 319 0.02
Total certificate accounts 995,731 75.95 971,168 75.43
------------------------------------------------------
1,311,033 100.00% 1,287,439 100.00%
========= =========
Discount to record
savings deposits at fair value, net (198) (355)
------------------------------------------------
Total $ 1,310,835 $ 1,287,084
=========== ==========
At December 31,
1994(3)
Percent
of
Amount Deposit
(Dollars in thousands)
<S> <C> <C>
Demand deposit accounts:
Noninterest-bearing checking $ 39,656 3.48%
NOW 25,477 2.23
Savings 22,146 1.94
Money market demand 204,188 17.90
--------------------
Total demand deposit accounts 291,467 25.55
--------------------
Certificate accounts:
Within 1 year 640,021 56.11
1-2 years 125,578 11.01
2-3 years 24,901 2.18
3-4 years 28,610 2.51
4-5 years 29,673 2.60
Over 5 years 407 0.04
--------------------
Total certificate accounts 849,190 74.45
--------------------
1,140,657 100.00%
===================
Discount to record
savings deposits at fair value, net (1,035)
-----------
Total $1,139,622
===========
</TABLE>
_______________
1In 1996, the Bank assumed approximately $11.1 million in net deposits in
connection with the exchange of three branch offices for one and the sale of
another branch office.
2In 1995, the Bank assumed approximately $157.2 million in deposits in
connection with the acquisition of five branch offices of another financial
institution.
3In 1994, the Bank assumed approximately $150.2 million in deposits in
connection with the acquisition of eight branch offices of another financial
institution.
<PAGE>
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.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1996 1995 1994
--------------------------------------
(Dollars in Thousands)
Average Average Average Average Average Average
Balance Rate Paid Balance Rate Paid Balance Rate Paid
-----------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Demand deposit accounts:
Noninterest-bearing checking $85,469 --% $ 62,164 --% $ 54,831 --%
NOW 49,181 2.07 29,904 2.06 22,041 1.79
Savings 22,104 2.32 20,162 2.52 21,754 2.49
Money market demand 157,933 3.64 156,730 3.61 214,092 3.11
Certificate accounts 970,433 5.42 909,992 5.49 707,324 4.34
--------------------------------------------------------------
Total deposits $1,285,120 4.66% $1,178,952 4.81% $1,020,042 3.75%
===============================================================
</TABLE>
The following table presents by various interest rate categories the
amounts of certificate accounts at the dates indicated and the amounts of
certificate accounts at December 31, 1996, which mature during the periods
indicated.
<TABLE>
<CAPTION>
Amounts at December 31, 1996 Maturing
(In thousands)
---------------------------------------
One Year
Amounts at December 31, or Less
---------------------------------------
1996 1995
---------- ---------
(In thousands)
<S> <C> <C> <C>
Certificate accounts:
2.00% to 3.99% $14,835 $14,387 $14,223
4.00% to 5.99% 871,852 721,943 715,884
6.00 to 7.99% 104,092 223,310 40,363
8.00 to 9.99% 4,686 6,513 2,053
10.00% to 11.99% 266 5,015 167
-----------------------------------------
Total $995,731 $971,168 $772,690
=========================================
Greater than
Two Years Three Years Three Years
----------------------------------------
<S> <C> <C> <C>
Certificate accounts:
2.00% to 3.99% 376 $ 95 $ 141
4.00% to 5.99% 136,942 11,565 7,461
6.00 to 7.99% 19,495 28,438 15,796
8.00 to 9.99% 1,766 768 99
10.00% to 11.99% 4 95 --
-----------------------------------
Total 158,583 $40,961 $23,497
===================================
</TABLE>
<PAGE>
Certificates maturing within one year consist primarily of six month and
one year certificates. Historically, a majority of such certificate holders
roll over their balances into new certificates with similar terms at the
Bank's then current interest rates. The Bank believes that its pricing
strategy will help the Bank to achieve balance levels deemed appropriate by
management on a continuing basis.
The following table sets forth the net deposit flows of the Bank during
the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1996 1995 1994
-------- ------- -------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Net increase (decrease) before
interest credited(1) $ (34,707) $ 91,052 $ 77,893
Interest credited 58,458 56,410 38,624
Net deposit increase $ 23,751 $ 147,462 $ 116,517
======== ======= =======
</TABLE>
1For the years ended December 31, 1996, 1995 and 1994, reflects the effect of
the assumption of $11.1 million, $157.2 million and $150.2 million of net
deposit liabilities in connection with branch office transactions in each
respective year. The net deposit outflow in 1996 was primarily due to
financial disintermediation as described below.
The following table sets forth the amount of the Bank's certificates of
deposits which are $100,000 or more by time remaining until maturity as of
December 31, 1996.
<TABLE>
<CAPTION>
At December 31, 1996
----------------------
Number of Deposit
accounts Amount
---------------------- -------
(Dollars in thousands)
<S> <C> <C> <C>
Three months or less 277 $ 29,242
Over three through six
months 265 29,599
Over six through twelve
months 280 29,397
Over twelve months 190 21,133
Total 1,012 $ 109,371
========== =============
</TABLE>
The Bank's deposits are obtained primarily from residents of central and
south Texas. Currently, the principal methods used by the Bank to attract and
retain deposit accounts include competitive interest rates, having branch
locations in under-served markets and offering a variety of services for the
Bank's customers. The Bank uses traditional marketing methods to attract new
customers and savings deposits, including newspaper advertising. Through
1996, the Bank has not solicited brokered deposit accounts and generally has
not negotiated rates on larger denomination (i.e., jumbo) certificates of
deposit. The Bank did, however, acquire deposits, classified on the books and
records of a prior entity as brokered, through the branch acquisition in 1994.
In addition, in early 1997, the Bank has begun the solicitation of deposit
accounts through a "money desk." Money desk rates are only offered to
institutions (primarily credit unions and municipal utility districts) and are
generally up to 50 basis points higher than on regular certificate of deposit
accounts.
Management of the Bank intensified its deposit product marketing
beginning in 1993 in order to increase its share of core deposits in the
markets in which it operates. Management believes that the combination of the
new packaged deposit products (which generally have higher minimum balance
requirements and which provide value-added incentives to the customer, such
as, for example, free traveler's checks, reduced or waived monthly service
charges and free money orders) plus increased advertising, sales training,
branch promotion and cross-selling of products will help maintain the volume
of the Bank's deposits and strengthen customer relationships without requiring
the Bank to alter its deposit pricing strategy. The Bank's management also
believes that such efforts will assist the Bank in maintaining deposits,
particularly during periods of relatively low deposit rates, which might
otherwise flow out of the institution due to disintermediation (the movement
of funds away from savings institutions and into direct investment vehicles
such as government and corporate securities and mutual funds). Notwithstanding
this plan, the ability of the Bank to attract and maintain deposits and the
Bank's cost of funds have been, and will continue to be, significantly
affected by general money market conditions.
The Bank also provides its customers with the opportunity to invest in
mutual funds, including government bond funds, tax-free municipal bond funds,
growth funds, income growth funds, and sector funds specific to an industry,
which are provided through a third party arrangement with another company,
which maintains representatives at the Bank's branch offices. The Bank earns a
fee after the payment of all expenses, which was not material to the Bank's
financial condition.
<PAGE>
BORROWINGS. The following table sets forth certain information regarding
the borrowings of the Bank at or for the dates indicated.
<TABLE>
<CAPTION>
At or For the Year
Ended December 31,
-----------------------
1996 1995 1994
---------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
FHLB advances:
Average balance outstanding $ 387,296 $ 367,895 $ 511,407
Maximum amount outstanding
at any month-end during the
period 491,930 405,016 914,279
Balance outstanding at end of
period 409,720 312,186 386,036
Average interest rate during the
period 5.62% 6.01% 4.46%
Average interest rate at end of
period 5.61% 5.88% 5.99%
Securities sold under agreements
to repurchase:
Average balance outstanding $ 930,706 $ 752,427 $ 593,054
Maximum amount outstanding
at any month-end during the
period 1,022,085 993,832 763,952
Balance outstanding at end of
period 966,987 993,832 645,379
Average interest rate during the
period 5.52% 5.98% 4.65%
Average interest rate at end of
period 5.55% 5.78% 6.16%
</TABLE>
The Bank obtains long term, fixed rate and short term, variable rate
advances from the FHLB upon the security of certain of its residential first
mortgage loans, mortgage-backed securities and other assets, provided certain
standards related to creditworthiness of the Bank have been met. FHLB advances
are generally available for general business purposes to expand lending and
investing activities. Borrowings have generally been used to fund the
purchase of loans receivable and mortgage-backed securities.
Advances from the FHLB are made pursuant to several different credit
programs, each of which has its own interest rate and range of maturities.
The programs of the FHLB currently utilized by the Bank include a variable
rate line of credit, various short-term, variable rate advances and long term,
fixed and variable-rate advances. At December 31, 1996, the Bank had total
FHLB advances of $409.7 million at a weighted average interest rate of 5.61%.
The Bank also obtains funds from the sales of securities to investment
dealers and the FHLB under agreements to repurchase ("reverse repurchase
agreements"). In a reverse repurchase agreement transaction, the Bank will
generally sell a mortgage-backed security agreeing to repurchase either the
same or a substantially identical security on a specified later date at a
price less than the original sales price. The difference in the sale price
and purchase price is the cost of the use of the proceeds. The
mortgage-backed securities underlying the agreements are delivered to the
dealers who arrange the transactions. For agreements in which the Bank has
agreed to repurchase substantially identical securities, the dealers may sell,
loan or otherwise dispose of the Bank's securities in the normal course of
their operations; however, such dealers or third party custodians safe-keep
the securities which are to be specifically repurchased by the Bank. Reverse
repurchase agreements represent a competitive cost funding source for the
Bank; however, the Bank is subject to the risk that the lender may default at
maturity and not return the collateral. In order to minimize this potential
risk, the Bank only deals with large, established investment brokerage firms
when entering into these transactions. At December 31, 1996, the Company had
$967.0 million in borrowings under reverse repurchase agreements at a weighted
average interest rate of 5.55%. At December 31, 1996, the Company had amounts
of securities at risk under securities sold under agreements to repurchase
with three individual counterparties which exceeded ten percent of
stockholders' equity. The amount at risk with Solomon Brothers Inc. was $12.3
million with an average maturity of 708 days at December 31, 1996. The amount
at risk with Credit Suisse First Boston Corporation was $33.6 million with an
average maturity of 20 days at December 31, 1996. The amount at risk with
Goldman Sachs was $38.3 million with an average maturity of 27 days at
December 31, 1996.
The Securities Investment Subcommittee of the Bank attempts to match the
maturity of reverse repurchase agreements with particular repricing dates of
certain assets in order to maintain a pre-determined interest rate spread.
The Bank's objective is to minimize the increase or decrease in the interest
rate spread during periods of fluctuating interest rates from that which was
contemplated at the time the assets and liabilities were first put on the
Bank's books. The Bank attempts to alter the interest rate risk associated
with the reverse repurchase agreements through the use of interest rate swaps
and interest rate caps purchased from the FHLB and certain large securities
dealers. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Asset and Liability Management" in Item 7 hereof.
SUBSIDIARIES OF THE BANK
GENERAL. The Bank is permitted to invest in the capital stock,
obligations and other securities of its service corporations in an aggregate
amount not to exceed 10.0% of the Bank's assets. In addition, the Bank may
make conforming loans in an amount not exceeding 50% of the Bank's regulatory
capital to service corporations of which the Bank owns more than 10% of the
stock. At December 31, 1996, the Bank was authorized to have a maximum
investment of approximately $287.3 million in its subsidiaries.
At December 31, 1996, the Bank had two active wholly-owned subsidiaries,
the activities of which are described below. At December 31, 1996, the Bank's
aggregate equity investment in all of its subsidiaries was $7.1 million and
the total amount of conforming loans outstanding to such subsidiaries was $1.1
million.
CBS MORTGAGE CORP. The Bank is the sole stockholder of CBS Mortgage, a
Texas corporation formed in 1989 to engage in the business of originating,
purchasing, selling and servicing loans secured by first lien mortgages on
completed one-to four-family dwelling units. Beginning on January 1, 1996,
the origination, purchasing and selling functions of the Company were
performed by the Bank, with CBS Mortgage's activities then limited to
primarily loan servicing. For a detailed discussion of CBS Mortgage's
business operations, see "Mortgage Banking Activities."
The Bank and CBS Mortgage have entered into a ten year mortgage warehouse
revolving loan agreement pursuant to which the Bank has established a $15.0
million revolving line of credit to be drawn upon from time to time by CBS
Mortgage to finance the acquisition of PMSRs and, prior to 1996, the
origination or acquisition of mortgage loans and the holding of such loans
until they were sold, delivered or pledged to secondary market investors.
The advances drawn by CBS Mortgage are secured by a promissory note
payable upon demand. Interest on the funds advanced by the Bank is payable
monthly at the local prime rate plus 1% per annum. The promissory note between
the Bank and CBS Mortgage provides that CBS Mortgage is credited an amount
equal to the local prime rate less 1% per annum on the average monthly balance
of all escrowed funds held by the Bank. The credit is limited in amount to
the interest charged by the Bank. As a result of such credit, CBS Mortgage
made no interest payments to the Bank under this loan for the year ended
December 31, 1996. Principal balances under the loan are generally repaid
through servicing income generated from PMSRs. At December 31, 1996, the
Bank's equity investment in CBS Mortgage was $7.0 million and the balance of
all intercompany advances (including advances under the revolving line of
credit) was $1.0 million. CBS Mortgage had net income of $2.3 million, $1.3
million and $1.2 million for the years ended December 31, 1996, 1995 and 1994,
respectively.
COASTALBANC FINANCIAL CORP. CoastalBanc Financial Corp. ("Financial
Corp.") was formed in 1986 to act as an investment advisor to other insured
financial institutions. The Bank is the sole stockholder of Financial Corp.
Over the past three years, Financial Corp. has been inactive in its investment
advisory capacity. Financial Corp. became active during the last quarter of
1992 in connection with the sale of mutual funds through a third party
intermediary. Fees generated net of expenses, resulted in a net income of
$40,000, $34,000 and $47,000 for the years ended December 31, 1996, 1995 and
1994, respectively.
THE SOUTHWEST PLAN ACQUISITION
During the latter half of the 1980's, severely depressed economic
conditions prevailed in the southwestern United States, and in Texas in
particular, which seriously impaired the operating results of many
corporations. A large number of savings institutions suffered significant
losses, which were attributable to the economic deterioration in the region,
as well as, in some instances, to improper or fraudulent practices by persons
affiliated with such institutions. In an attempt to address the problems of a
record number of savings institution failures, in February 1988 the Federal
Home Loan Bank Board as operating head of the FSLIC, announced the
establishment of its "Southwest Plan," which was designed to consolidate
failed or failing savings institutions located in the southwestern United
States with healthy savings institutions, shrink the number of savings
institutions in the Southwest and promote the infusion of additional capital
into the savings industry through financial assistance and other incentives.
During this period, the Bank developed a business strategy oriented
toward growth and increasing profitability through prudent acquisitions, with
assistance from the Federal government. The strategy was designed to utilize
the deposits obtained in such transactions as an inexpensive source of funds
for growth, which would facilitate reduced overhead levels as a proportion of
assets from economies of scale and lower cost of funds from a more meaningful
market share of core deposits. In order to implement this strategy, the Bank
decided to participate in the Southwest Plan and on May 13, 1988, the Bank
became the first acquiror of failed or failing savings institutions under the
FSLIC's Southwest Plan. The Southwest Plan Acquisition was implemented
pursuant to the terms of an Assistance Agreement, entered into by the FSLIC
and the Bank. The Southwest Plan Acquisition significantly increased the
total size and market penetration of the Bank.
The FSLIC agreed in the Assistance Agreement to provide the Bank with
certain forms of financial assistance, including a guaranteed yield on, and
reimbursement for losses incurred or write-downs directed by the government or
provided by the Bank with respect to, certain assets acquired from the
Acquired Associations (the "Guaranteed Assets") and certain additional forms
of financial assistance.
On April 15, 1994, the Bank and the FDIC announced the early termination
of the Assistance Agreement, effective March 31, 1994. Under the terms of the
agreement, the Bank transferred substantially all of its remaining Guaranteed
Assets to the FDIC in exchange for cash of $37.4 million and also received
cash of $12.7 million for the remaining receivable from the government in
order to record acquired assets at fair value. In addition, the Bank
repurchased for $5.9 million a warrant to purchase Bank common stock that had
been granted to the Federal government. The Federal government will continue
to receive the future federal income tax benefits of the net operating loss
carryforwards acquired from the Acquired Associations. See "Taxation-Federal
Taxation" and Note 20 of the Notes to the Consolidated Financial Statements.
REGULATION
Set forth below is a brief description of certain laws and regulations
which relate to the regulation of the Company and the Bank. The description
does not purport to be complete and is qualified in its entirety by reference
to applicable laws and regulations.
THE COMPANY
REGULATIONS. The Company and HoCo are registered unitary savings and
loan holding companies and are subject to OTS and Department regulation,
examination, supervision and reporting requirements. In addition, because the
capital stock of the Company is registered under Section 12(g) of the
Securities Exchange Act of 1934, the Company is also subject to various
reporting and other requirements of the SEC. As a subsidiary of a savings and
loan holding company, the Bank is also subject to certain Federal and state
restrictions in its dealings with the Company and affiliates thereof.
FEDERAL ACTIVITIES RESTRICTIONS. There are generally no restrictions on
the activities of a savings and loan holding company which holds only one
subsidiary savings bank. However, if the Director of the OTS determines that
there is reasonable cause to believe that the continuation by a savings and
loan holding company of an activity constitutes a serious risk to the
financial safety, soundness or stability of its subsidiary savings institution
(i.e., a savings association or savings bank), the Director may impose such
restrictions as deemed necessary to address such risk, including limiting (i)
payment of dividends by the savings institution; (ii) transactions between the
savings institution and its affiliates; and (iii) any activities of the
savings institution that might create a serious risk that the liabilities of
the holding company and its affiliates may be imposed on the savings
institution. Notwithstanding the foregoing, if the savings institution
subsidiary of such a holding company fails to meet the Qualified Thrift Lender
("QTL") test, then such unitary holding company also shall become subject to
the activities restrictions applicable to multiple savings and loan holding
companies and, unless the savings institution requalifies as a QTL within one
year thereafter, shall register as, and become subject to the restrictions
applicable to, a bank holding company. See "- Regulation of The Bank -
Qualified Thrift Lender Test."
If the Company were to acquire control of another savings institution,
other than through merger or other business combination with the Bank, the
Company would thereupon become a multiple savings and loan holding company.
Except where such acquisition is pursuant to the authority to approve
emergency thrift acquisitions and where each subsidiary savings institution
meets the QTL test, as set forth below, the activities of the Company and any
of its subsidiaries (other than the Bank or other subsidiary savings
institutions) would thereafter be subject to further restrictions. No
multiple savings and loan holding company or subsidiary thereof which is not a
savings institution shall commence or continue beyond a limited period of time
after becoming a multiple savings and loan holding company or subsidiary
thereof any business activity, other than: (i) furnishing or performing
management services for a subsidiary savings institution; (ii) conducting an
insurance agency or escrow business; (iii) holding, managing, or liquidating
assets owned by or acquired from a subsidiary savings institution; (iv)
holding or managing properties used or occupied by a subsidiary savings
institution; (v) acting as trustee under deeds of trust; (vi) those activities
authorized by regulation as of March 5, 1987 to be engaged in by multiple
savings and loan holding companies; or (vii) unless the Director of the OTS by
regulation prohibits or limits such activities for savings and loan holding
companies, those activities authorized by the Federal Reserve Board as
permissible for bank holding companies. The activities described in (i)
through (vi) above may be engaged in only after giving the OTS prior notice
and being informed that the OTS does not object to such activities. In
addition, the activities described in (vii) above also must be approved by the
Director of the OTS prior to being engaged in by a multiple savings and loan
holding company.
RESTRICTIONS ON ACQUISITIONS. Except under limited circumstances,
savings and loan holding companies are prohibited from acquiring, without
prior approval of the Director of the OTS, (i) control of any other savings
institution or savings and loan holding company or substantially all the
assets thereof or (ii) more than 5% of the voting shares of a savings
institution or holding company thereof which is not a subsidiary. Except with
the prior approval of the Director of the OTS, no director or officer of a
savings and loan holding company or person owning or controlling by proxy or
otherwise more than 25% of such company's stock, may acquire control of any
savings institution, other than a subsidiary savings institution, or of any
other savings and loan holding company.
The Director of the OTS may approve acquisitions resulting in the
formation of a multiple savings and loan holding company which controls
savings institutions in more than one state only if (i) the multiple savings
and loan holding company involved controls a savings institution which
operated a home or branch office located in the state of the association to be
acquired as of March 5, 1987; (ii) the acquiror is authorized to acquire
control of the savings institution pursuant to the emergency acquisition
provisions of the FDIA, or (iii) the statutes of the state in which the
institution to be acquired is located specifically permit institutions to be
acquired by the state-chartered institutions or savings and loan holding
companies located in the state where the acquiring entity is located (or by a
holding company that controls such state-chartered savings institutions).
TEXAS REGULATIONS. Under the Texas Savings Bank Act ("TSBA"), each
registered holding company, such as the Company, is required to file reports
with the Department as required by the Texas Savings and Loan Commissioner
("Commissioner") and is subject to such examination as the Commissioner may
prescribe.
REGULATION OF THE BANK
The Bank is required to file reports with the Department and the FDIC
concerning its activities and financial condition, in addition to obtaining
regulatory approvals prior to entering into certain transactions, such as any
merger or acquisition with another institution. The regulatory system to
which the Bank is subject is intended primarily for the protection of the
deposit insurance fund and depositors, not stockholders. The regulatory
structure also provides the Department and the FDIC with substantial
discretion in connection with their supervisory and enforcement functions.
The Department and the FDIC conduct periodic examinations of the Bank in order
to assess its compliance with federal and state regulatory requirements. As a
result of such examinations, the Department and the FDIC may require various
corrective actions.
Virtually every aspect of the Bank's business is subject to numerous
federal and/or state regulatory requirements and restrictions with respect to
such matters as, for example, the nature and amounts of loans and investments
that may be made, the issuance of securities, the amount of reserves that must
be established against deposits, the establishment of branches, mergers,
non-banking activities and other operations. Numerous laws and regulations
also set forth special restrictions and procedural requirements with respect
to the extension of credit, credit practices, the disclosure of credit terms
and discrimination in credit transactions.
The description of statutory provisions and regulations applicable to
savings banks set forth in this Form 10-K does not purport to be a complete
description of such statutes and regulations and their effects on the Bank.
Moreover, because some of the provisions of the FDIA, as amended by the
FDICIA, have not yet been fully implemented through the adoption of
regulations by the various federal banking agencies, the Bank cannot yet fully
assess the impact of these provisions on its operations.
In particular, the Bank cannot predict whether it will be in compliance
with such new regulations at the time they become effective. Furthermore, the
Bank cannot predict what other new regulatory requirements might be imposed in
the future.
LIMITATIONS ON TRANSACTIONS WITH AFFILIATES. Transactions between
savings institutions and any affiliate are governed by Sections 23A and 23B of
the Federal Reserve Act. An affiliate of a savings institution is any company
or entity which controls, is controlled by or is under common control with the
savings institution. In a holding company context, the parent holding company
of a savings institution (such as the Company) and any companies which are
controlled by such parent holding company are affiliates of the savings
institution. Generally, Sections 23A and 23B (i) limit the extent to which
the savings institution or its subsidiaries may engage in "covered
transactions" with any one affiliate to an amount equal to 10% of such
institution's capital stock and surplus, and contain an aggregate limit on all
such transactions with all affiliates to an amount equal to 20% of such
capital stock and surplus and (ii) require that all such transactions be on
terms substantially the same, or at least as favorable to the institution or
subsidiary, as those provided to a non-affiliate. The term "covered
transaction" includes the making of loans, purchase of assets, issuance of a
guarantee and similar transactions. In addition to the restrictions imposed
by Sections 23A and 23B, no savings institution may (i) loan or otherwise
extend credit to an affiliate, except for any affiliate which engages only in
activities which are permissible for bank holding companies, or (ii) purchase
or invest in any stocks, bonds, debentures, notes or similar obligations of
any affiliate, except for affiliates which are subsidiaries of the savings
institution.
In addition, Sections 22(h) and (g) of the Federal Reserve Act place
restrictions on loans to executive officers, directors and principal
stockholders. Under Section 22(h), loans to a director, an executive officer
and to a greater than 10% stockholder of a savings institution (a "principal
stockholder"), and certain affiliated interests of each of them, may not
exceed, together with all other outstanding loans to such person and
affiliated interests, the savings institution's loans to one borrower limit
(generally equal to 15% of the institution's unimpaired capital and surplus).
Section 22(h) also requires that loans to directors, executive officers and
principal stockholders be made on terms substantially the same as offered in
comparable transactions to other persons and also requires prior board
approval for certain loans. In addition, the aggregate amount of extensions
of credit by a savings institution to all insiders cannot exceed the
institution's unimpaired capital and surplus. Furthermore, Section 22(g)
places additional restrictions on loans to executive officers. At December
31, 1996, the Bank was in compliance with the above restrictions.
REGULATORY CAPITAL REQUIREMENTS. Federally-insured state-chartered banks
are required to maintain minimum levels of regulatory capital. These
standards generally must be as stringent as the comparable capital
requirements imposed on national banks. The FDIC also is authorized to impose
capital requirements in excess of these standards on individual banks on a
case-by-case basis.
Under current FDIC regulations, the Bank is required to comply with three
separate minimum capital requirements: a "Tier 1 capital ratio" and two
"risk-based" capital requirements. "Tier 1 capital" generally includes common
stockholders' equity (including retained earnings), qualifying noncumulative
perpetual preferred stock and any related surplus, and minority interests in
the equity accounts of fully consolidated subsidiaries, minus intangible
assets, other than properly valued PMSRs up to certain specified limits and
minus net deferred tax assets in excess of certain specified limits. At
December 31, 1996, the Bank did not have any net deferred tax assets in excess
of the specified limits.
TIER 1 CAPITAL RATIO. FDIC regulations establish a minimum 3.0% ratio of
Tier 1 capital to total assets for the most highly-rated state-chartered,
FDIC-supervised banks, with an additional cushion of at least 100 to 200 basis
points for all other state-chartered, FDIC-supervised banks, which effectively
imposes a minimum Tier 1 capital ratio for such other banks of between 4.0% to
5.0%. Under FDIC regulations, highly-rated banks are those that the FDIC
determines are not anticipating or experiencing significant growth and have
well diversified risk, including no undue interest rate risk exposure,
excellent asset quality, high liquidity and good earnings. At December 31,
1996, the required Tier 1 capital ratio for the Bank was 4.0% and its actual
Tier 1 capital ratio was 5.35%.
RISK-BASED CAPITAL REQUIREMENTS. The risk-based capital requirements
contained in FDIC regulations generally require the Bank to maintain a ratio
of Tier 1 capital to risk-weighted assets of at least 4.00% and a ratio of
total risk-based capital to risk-weighted assets of at least 8.00%. To
calculate the amount of capital required, assets are placed in one of four
categories and given a percentage weight (0%, 20%, 50% or 100%) based on the
relative risk of the category. For example, U.S. Treasury Bills and GNMA
securities are placed in the 0% risk category. FNMA and FHLMC securities are
placed in the 20% risk category, loans secured by one-to-four family
residential properties and certain privately-issued mortgage-backed securities
are generally placed in the 50% risk category and commercial and consumer
loans and other assets are generally placed in the 100% risk category. In
addition, certain off-balance sheet items are converted to balance sheet
credit equivalent amounts and each amount is then assigned to one of the four
categories.
For purposes of the risk-based capital requirements, "total capital"
means Tier 1 capital plus supplementary or Tier 2 capital, so long as the
amount of supplementary or Tier 2 capital that is used to satisfy the
requirement does not exceed the amount of Tier 1 capital. Supplementary or
Tier 2 capital includes, among other things, so-called permanent capital
instruments (cumulative or other perpetual preferred stock, mandatory
convertible subordinated debt and perpetual subordinated debt), so-called
maturing capital instruments (mandatorily redeemable preferred stock,
intermediate-term preferred stock, mandatory convertible subordinated debt and
subordinated debt), and a certain portion of the allowance for loan losses up
to a maximum of 1.25% of risk-weighted assets.
At December 31, 1996, the Bank's Tier 1 capital to risk-weighted assets
ratio was 11.77% and its total risk-based capital to risk weighted assets
ratio was 12.30%.
The following table sets forth information with respect to each of the
Bank's capital requirements as of the dates shown.
<TABLE>
<CAPTION>
As of December 31,
1996 1995 1994
------------------- ------- -------
Actual Required Actual Required Actual Required
-------------- --------- ------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Tier 1 capital to total assets 5.35% 4.00% 5.30% 4.00% 4.54% 4.00%
Tier 1 risk-based capital
to risk weighted assets 11.77 4.00 12.36 4.00 12.37 4.00
Total risk-based capital
risk to risk weighted assets 12.30 8.00 12.84 8.00 12.63 8.00
</TABLE>
<PAGE>
The following table sets forth a reconciliation between the Bank's
stockholders' equity and each of its three regulatory capital requirements at
December 31, 1996.
<TABLE>
<CAPTION>
Tier 1 Total
Tier 1 Risk-based Risk-based
Capital Capital Capital
----------------------- ----------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Total stockholders' equity $ 165,425 $ 165,425 $ 165,425
Unrealized loss on securities
available-for-sale 3,103 3,103 3,103
Less nonallowable assets:
Goodwill (15,596) (15,596) (15,596)
Plus allowances for loan
and lease losses -- -- 6,880
----------- -------- --------
Total regulatory capital 152,932 152,932 159,812
Minimum required capital 114,377 51,970 103,940
Excess regulatory capital $ 38,555 $ 100,962 $ 55,872
=========== ======== ========
Bank's regulatory capital
percentage (1) 5.35% 11.77% 12.30%
Minimum regulatory capital
required percentage 4.00% 4.00% 8.00%
----------- -------- --------
Bank's regulatory capital
percentage in excess of
requirement 1.35% 7.77% 4.30%
=========== ======== ========
</TABLE>
_______________
1Tier 1 capital is computed as a percentage of total assets of $2.9 billion.
Risk-based capital is computed as a percentage of adjusted risk-weighted
assets of $1.3 billion.
FDIC INSURANCE PREMIUMS. The deposits of the Bank are insured to the
maximum extent permitted by the SAIF and the Bank Insurance Fund (the "BIF"),
both of which are administered by the FDIC, and are backed by the full faith
and credit of the U.S. Government. As the insurer, the FDIC is authorized to
conduct examinations of, and to require reporting by, FDIC-insured
institutions. It also may prohibit any FDIC-insured institution from engaging
in any activity the FDIC determines by regulation or order to pose a serious
threat to the FDIC. The FDIC also has the authority to initiate enforcement
actions against savings institutions.
<PAGE>
The Bank currently pays deposit insurance premiums to the FDIC based on a
risk-based assessment system established by the FDIC for all SAIF-member
institutions. In addition, because the Bank acquired approximately $157.2
million in deposits from Texas Capital as of November 1, 1995 and $79.8 in
deposits as a result of the Bay City branch acquisition on September 5, 1996,
the Bank became responsible for paying deposit insurance premiums on such
deposits at the BIF premium rate. Under applicable regulations, institutions
are assigned to one of three capital groups based solely on the level of an
institution's capital - "well capitalized," "adequately capitalized" and
"undercapitalized" - which are defined in the same manner as the regulations
establishing the prompt corrective action system under Section 38 of the FDIA.
These three groups are then divided into three subgroups which reflect
varying levels of supervisory concern, from those which are considered to be
healthy to those which are considered to be of substantial supervisory
concern. The matrix so created results in nine assessment risk
classifications, with rates, prior to the FDIA, as amended, being signed into
law, ranging from .23% for well capitalized, healthy SAIF-member institutions
to .31% for undercapitalized SAIF-member institutions with substantial
supervisory concerns. On November 14, 1995, the FDIC adopted a new assessment
rate schedule of zero to 27 basis points (subject to a $2,000 minimum) for BIF
members (or institutions, like the Bank, having BIF deposits) while retaining
the existing assessment rate schedule for SAIF-member institutions.
On September 30, 1996, amendments to the FDIA were signed into law. The
FDIA and implementing regulations provided that all SAIF-member institutions
would pay a special one time assessment of 65.7 basis points on the SAIF
assessment base as of March 31, 1995 to recapitalize the SAIF, which in the
aggregate, would be sufficient to bring the reserve ratio in the SAIF to 1.25%
of insured deposits. The Bank's special assessment amounted to $7.5 million
($4.8 million after applicable income taxes) pursuant to the FDIA. In
addition to the recapitalization provisions, the FDIA equalized the rate
schedule for SAIF and BIF institutions with the rates ranging from zero to 27
basis points beginning October 1, 1996. At December 31, 1996, the Bank was
categorized as well capitalized.
The FDIA provided for FICO debt sharing by banks and thrifts with
proration sharing in the year 2000. Prior to the year 2000, SAIF insured
institutions will pay approximately 6.5 basis points for FICO, while BIF
insured institutions will pay approximately 1.3 basis points. The FICO
provisions of the FDIA also prohibit deposit migration strategies to avoid
SAIF premiums. The FDIA also provided for the merger of the BIF and the SAIF
on January 1, 1999, with such merger being conditioned upon the prior
elimination of the federal thrift charter.
Under Section 593 of the Internal Revenue Code, thrift institutions such
as the Bank, which meet certain definitional tests primarily relating to their
assets and the nature of their business, are permitted to establish a tax
reserve for bad debts and to make annual additions thereto, which additions
may, within specified limitations, be deducted in arriving at their taxable
income. The Bank's deduction with respect to "qualifying loans" which are
generally loans secured by certain interests in real property, prior to 1996,
could be computed using an amount based on the Bank's actual loss experience
(the "experience method") or a percentage of taxable income, computed without
regard to this deduction, and with additional modifications and reduced by the
amount of any permitted addition to the non-qualifying reserve. See
"Taxation-Federal Taxation."
Effective January 1, 1996, the Bank is unable to make additions to its
tax bad debt reserve, is permitted to deduct bad debts only as they occur and
is additionally be required to recapture (i.e. take into taxable income) over
a six year period, the excess of the balance of its bad debt reserve as of
December 31, 1995 over the balance of such reserve as of December 31, 1987.
Such recapture requirements can be suspended for each of two successive
taxable years beginning January 1, 1996, in which the Bank originates a
minimum amount of certain residential loans based upon the average of the
principal amounts of such loans made by the Bank during its six taxable years
preceding 1996. At December 31, 1996, the Bank had approximately $4.0 million
of post-1987 tax bad debt reserves, for which deferred taxes have been
provided.
REGULATORY CAPITAL REQUIREMENTS. The FDIA requires the Federal banking
agencies to revise their risk-based capital guidelines to, among other things,
take adequate account of interest rate risk. The Federal banking agencies
continue to consider modification of the capital requirements applicable to
banking organizations. In August 1995, the Federal banking agencies amended
their risk-based capital guidelines to provide that the banking agencies will
include in their evaluations of a bank's capital adequacy an assessment of the
bank's exposure to declines in the economic value of the bank's capital due to
changes in interest rates. The agencies also issued a proposed policy
statement that describes the process that the agencies will use to measure and
assess the exposure of a bank's capital to changes in interest rates. The
agencies stated that after they and the banking industry gain sufficient
experience with the measurement process, the agencies would issue proposed
regulations for establishing explicit charges against capital to account for
interest rate risk.
The FDIA also requires the FDIC and the other Federal banking agencies to
revise their risk-based capital standards, with appropriate transition rules,
to ensure that they take into account concentration of credit risk and the
risks of non-traditional activities and to ensure that such standards reflect
the "actual performance and expected risk of loss of multifamily mortgages,"
of which the Bank had $139.5 million at December 31, 1996. See "Business -
Lending Activities." In December 1995, the FDIC and the other Federal banking
agencies promulgated final amendments to their respective risk-based capital
requirements which would explicitly identify concentration of credit risk and
certain risks arising from nontraditional activities, and the management of
such risks as important factors to consider in assessing an institution's
overall capital adequacy. The FDIC may now require higher minimum capital
ratios based on certain circumstances, including where the institution has
significant risks from concentration of credit or certain risks arising from
non-traditional activities.
The Federal banking agencies have agreed to adopt for regulatory purposes
Statement 115, which, among other things, generally adds a new element to
stockholders' equity under generally accepted accounting principles by
including net unrealized gains and losses on certain securities. In December
1994, the FDIC issued final amendments to its regulatory capital requirements
which would require that the net amount of unrealized losses from
available-for-sale equity securities with readily determinable fair values be
deducted for purposes of calculating the Tier 1 capital ratio. All other net
unrealized holding gains (losses) on available-for-sale securities are
excluded from the definition of Tier 1 capital. At December 31, 1996, the
Bank had $185.4 million of securities available-for-sale with $4.8 million of
aggregate net unrealized losses thereon.
SAFETY AND SOUNDNESS STANDARDS. Each Federal banking agency is required
to prescribe, for all insured depository institutions and their holding
companies, standards relating to internal controls, information systems and
internal audit systems, loan documentation, credit underwriting, interest rate
exposure, asset growth, compensation, fees and benefits and such other
operational and managerial standards as the agency deems appropriate. The
compensation standards would prohibit employment contracts or other
compensatory arrangements that provide excess compensation, fees or benefits
or could lead to material financial loss to the institution. In addition,
each Federal banking agency also is required to adopt for all insured
depository institutions and their holding companies standards that specify (i)
a maximum ratio of classified assets to capital, (ii) minimum earnings
sufficient to absorb losses without impairing capital, (iii) to the extent
feasible, a minimum ratio of market value to book value for publicly-traded
shares of the institution or holding company, and (iv) such other standards
relating to asset quality, earnings and valuation as the agency deems
appropriate. On July 10, 1995, the Federal banking agencies, including the
FDIC, adopted final rules and proposed guidelines concerning safety and
soundness required to be prescribed by regulations pursuant to Section 39 of
the FDIA. In general, the standards relate to operational and managerial
matters, asset quality and earnings and compensation. The operational and
managerial standards cover internal controls and information systems, internal
audit systems, loan documentation, credit underwriting, interest rate
exposure, asset growth, and compensation, fees and benefits. Under the asset
quality and earnings standards, which were adopted by the Federal Banking
agencies in October 1996, the Bank would be required to establish and maintain
systems to identify problem assets and prevent deterioration in those assets
and evaluate and monitor earnings to ensure that earnings are sufficient to
maintain adequate capital reserves. If an insured institution fails to meet
any of the standards promulgated by the regulators, then such institution will
be required to submit a plan within 30 days to the FDIC specifying the steps
that it will take to correct the deficiency. In the event that an insured
institution fails to submit or fails in any material respect to implement a
compliance plan within the time allowed by the FDIC, Section 39 of the FDIA
provides that the FDIC must order the institution to correct the deficiency
and may restrict asset growth, require the savings institution to increase its
ratio of tangible equity to assets, restrict the rates of interest that the
institution may pay or take any other action that would better carry out the
purpose of prompt corrective action. The Bank believes that it has been and
will continue to be in compliance with each of the standards as they have been
adopted by the FDIC.
Finally, each Federal banking agency is required to prescribe standards
for the employment contracts and other compensation arrangements of executive
officers, employees, directors and principal stockholders of insured
depository institutions that would prohibit compensation and benefits and
arrangements that are excessive or that could lead to a material financial
loss for the institution. In February 1996, the FDIC adopted final
regulations regarding the payment of severance and indemnification to
management officials and other affiliates of insured institutions (institution
affiliated parties or "IAPs"). The limitations on severance or "golden
parachute" payments apply to "troubled" institutions which seek to enter into
contracts with IAPs. A golden parachute payment is generally considered to be
any payment to an IAP which is contingent on the termination of that person's
employment and is received when the insured institution is in a troubled
condition. The definition of golden parachute payment does not include
payment pursuant to qualified retirement plans, non-qualified bona fide
deferred compensation plans, nondiscriminatory severance pay plans, other
types of common benefit plans, state statutes and death benefits. Certain
limited exceptions to the golden parachute payment prohibition are provided
for in cases involving the hiring of an outside executive, unassisted changes
of control and where the FDIC provides written permission to make such
payment. The limitations on indemnification payments apply to all insured
institutions, their subsidiaries and affiliated holding companies. Generally,
this provision prohibits such entities from indemnifying an IAP for that
portion of the costs sustained with regard to a civil or administrative
enforcement action commenced by any Federal banking agency which results in a
final order or settlement pursuant to which the IAP is assessed a civil
monetary penalty, removed from office, prohibited from participating in the
affairs of an insured institution or required to cease and desist from taking
certain affirmative actions. Nevertheless, institutions or holding companies
may purchase commercial insurance to cover such expenses (except for judgments
or penalties) and the institutions or holding company may advance legal
expenses to the IAP if its board of directors makes certain specific findings
and the IAP agrees in writing to reimburse the institution if it is ultimately
determined that the IAP violated a law, regulation or other fiduciary duty.
ACTIVITIES AND INVESTMENTS OF INSURED STATE-CHARTERED BANKS. The
activities and equity investments of FDIC-insured, state-chartered banks are
limited by Federal law to those that are permissible for national banks. An
insured state bank generally may not acquire or retain any equity investment
of a type, or in an amount, that is not permissible for a national bank. An
insured state bank is not prohibited from, among other things, (i) acquiring
or retaining a majority interest in a subsidiary, (ii) investing as a limited
partner in a partnership the sole purpose of which is direct or indirect
investment in the acquisition, rehabilitation or new construction of a
qualified housing project, provided that such limited partnership investments
may not exceed 2% of the bank's assets, (iii) acquiring up to 10% of the
voting stock of a company that solely provides or reinsures directors' and
officers' liability insurance, and (iv) acquiring or retaining the voting
shares of a depository institution if certain requirements are met.
COMMUNITY REINVESTMENT ACT. Under the Community Reinvestment Act
("CRA"), as implemented by FDIC regulations, a savings institution has a
continuing and affirmative obligation consistent with its safe and sound
operation to help meet the credit needs of its entire community, including low
and moderate income neighborhoods. The CRA does not establish specific
lending requirements or programs for financial institutions nor does it limit
an institution's discretion to develop the types of products and services that
it believes are best suited to its particular community, consistent with the
CRA. The CRA requires the FDIC, in connection with its examination of a
savings institution, to assess the institution's record of meeting the credit
needs of its community and to take such record into account in its evaluation
of certain applications by such institution. As of the date of its most
recent regulatory examination, the Bank was rated "satisfactory" with respect
to its CRA compliance.
In May 1995, the FDIC and other Federal banking agencies promulgated
final revisions to their regulations concerning the CRA. The revised
regulations generally are intended to provide clearer guidance to financial
institutions on the nature and extent of their obligations under the CRA and
the methods by which the obligations will be assessed and enforced. Among
other things, the revised regulations substitute for the current process-based
assessment factors a new evaluation system that would rate institutions based
on their actual performance in meeting community credit needs. In particular,
the revised system will evaluate the degree to which an institution is
performing under tests and standards judged in the context of information
about the institution, its community, its competitors and its peers with
respect to (i) lending, (ii) service delivery systems and (iii) community
development. The revised regulations also specify that an institution's CRA
performance will be considered in an institution's expansion (e.g., branching)
proposals and may be the basis for approving, denying or conditioning the
approval of an application. Management of the Bank currently is unable to
predict the effects of the regulations under the CRA as recently adopted.
QUALIFIED THRIFT LENDER TEST. All savings institutions, including the
Bank, are required to meet a QTL test set forth under Section 10(m) of the
Home Owners Loan Act, as amended, ("HOLA") to avoid certain restrictions on
their operations. Under Section 2303 of the Economic Growth and Regulatory
Paperwork Reduction Act of 1996, a savings institution can comply with the QTL
test set forth in the HOLA and implementing regulations or by qualifying as a
domestic building and loan association as defined in Section 7701(a)(19) of
the Code. The QTL test set forth in HOLA requires that a depository
institution must have at least 65% of its portfolio assets (which consist of
total assets less intangibles, properties used to conduct the savings
institution's business and liquid assets not exceeding 20% of total assets) in
qualified thrift investments on a monthly average basis in nine of every 12
months. Loans and mortgage-backed securities secured by domestic residential
housing, as well as certain obligations of the FDIC and certain other related
entities may be included in qualifying thrift investments without limit.
Certain other housing-related and non-residential real estate loans and
investments, including loans to develop churches, nursing homes, hospitals and
schools, and consumer loans and investments in subsidiaries engaged in
housing-related activities may also be included. Qualifying assets for the QTL
test include investments related to domestic residential real estate or
manufactured housing, the book value of property used by an institution or its
subsidiaries for the conduct of its business, an amount of residential
mortgage loans that the institution or its subsidiaries sold within 90 days of
origination, shares of stock issued by any FHLB and shares of stock issued by
the FHLMC or the FNMA. The Bank was in compliance with the QTL test as of
December 31, 1996, with 91.4% of its assets invested in qualified thrift
investments.
RESTRICTIONS ON CAPITAL DISTRIBUTIONS. The Bank is required to provide
to the OTS not less than 30 days' advance notice of the proposed declaration
by its board of directors of any dividend on its capital stock. The OTS may
object to the payment of the dividend on safety and soundness grounds. The
FDIA prohibits an insured depository institution from paying dividends on its
capital stock or interest on its capital notes or debentures (if such interest
is required to be paid only out of net profits) or distribute any of its
capital assets while it remains in default in the payment of any assessment
due the FDIC. Texas law permits the Bank to pay dividends out of current or
retained income in cash or additional stock.
LEGISLATIVE AND REGULATORY PROPOSALS. Proposals to change the laws and
regulations governing the operations and taxation of, and federal insurance
premiums paid by, savings banks and other financial institutions and companies
that control such institutions are frequently raised in Congress, state
legislatures and before the FDIC and other bank regulatory authorities. The
likelihood of any major changes in the future and the impact such changes
might have on the Bank are impossible to determine. Similarly, proposals to
change the accounting treatment applicable to savings banks and other
depository institutions are frequently raised by the SEC, the FDIC, the IRS
and other appropriate authorities, including, among others, proposals relating
to fair market value accounting for certain classes of assets and liabilities.
The likelihood and impact of any additional future accounting rule changes
and the impact such changes might have on the Bank are impossible to
determine.
FEDERAL HOME LOAN BANK SYSTEM. The Bank is a member of the FHLB of
Dallas, which is one of 12 regional FHLBs that administers the home financing
credit function of savings institutions and commercial banks. Each FHLB
serves as a source of liquidity for its members within its assigned region.
It is funded primarily from proceeds derived from the sale of consolidated
obligations of the FHLB System. It makes loans to members (i.e., advances) in
accordance with policies and procedures established by its Board of Directors.
As of December 31, 1996, the Bank's advances from the FHLB of Dallas amounted
to $409.7 million or 14.2% of its total assets.
As a member, the Bank is required to purchase and maintain stock in the
FHLB of Dallas in an amount equal to the greater of 1% of its aggregate unpaid
residential mortgage loans, home purchase contracts or similar obligations at
the beginning of each year or 5% of total advances. At December 31, 1996, the
Bank had $26.0 million in FHLB stock, which was in compliance with this
requirement.
The FHLBs are required to provide funds for the resolution of troubled
savings associations and to contribute to affordable housing programs through
direct loans or interest subsidies on advances targeted for community
investment and low- and moderate-income housing projects. These contributions
have adversely affected the level of FHLB dividends paid and could continue to
do so in the future. These contributions also could have an adverse effect on
the value of FHLB stock in the future. For the year ended December 31, 1996,
dividends paid by the FHLB of Dallas to the Bank totaled $1.3 million.
FEDERAL RESERVE SYSTEM. The Federal Reserve Board requires all
depository institutions to maintain reserves against their transaction
accounts (primarily NOW and Super NOW checking accounts) and non-personal time
deposits. At December 31, 1996, the Bank was in compliance with such
requirements.
The balances maintained to meet the reserve requirements imposed by the
Federal Reserve Board may be used to satisfy applicable liquidity
requirements. Because required reserves must be maintained in the form of
vault cash or a noninterest-bearing account at a Federal Reserve Bank, the
effect of this reserve requirement is to reduce a bank's earning assets. The
amount of funds necessary to satisfy this requirement has not had a material
affect on the Bank's operations.
TEXAS SAVINGS BANK LAW. As a Texas chartered savings bank, the Bank is
subject to regulation and supervision by the Department under the TSBA. The
TSBA contains provisions governing the incorporation and organization,
location of offices, rights and responsibilities of directors, officers and
members as well as the corporate powers, savings, lending, capital and
investment requirements and other aspects of the Bank and its affairs. In
addition, the Department is given extensive rulemaking power and
administrative discretion under the TSBA, including authority to enact and
enforce rules and regulations.
The Bank is required under the TSBA to comply with certain capital
requirements established by the Department. The TSBA also restricts the
amount the Bank can lend to one borrower to that permitted to national banks,
which is generally not more than 15% of the Bank's unimpaired capital and
unimpaired surplus and, if such loans are fully secured by readily marketable
collateral, an additional 10% of unimpaired capital and unimpaired surplus.
The Department generally examines the Bank once every year and the current
practice is for the Department to conduct a joint examination with the FDIC.
The Department monitors the extraordinary activities of the Bank by requiring
that the Bank seek the Department's approval for certain transactions such as
the establishment of additional offices, a reorganization, merger or purchase
and assumption transaction, changes of control, or the issuance of capital
obligations. The Department may intervene in the affairs of a savings bank if
the savings bank, or its director, officer or agent has: engaged in an unsafe
and unsound practice, violated the savings bank's articles of incorporation,
violated a statute or regulation, filed materially false or misleading
information, committed a criminal act or a breach of fiduciary duty, or if the
savings bank is, or is in imminent danger of becoming, insolvent.
TAXATION
FEDERAL TAXATION. The Company, the Bank and its subsidiaries file a
consolidated Federal income tax return on a calendar year basis using the
accrual method. Savings banks are subject to provisions of the Internal
Revenue Code ("Code") in the same general manner as other corporations.
However, prior to 1996, institutions such as the Bank which met certain
definitional tests and other conditions prescribed by the Code, benefited from
certain favorable provisions regarding their deductions from taxable income
for annual additions to their bad debt reserve. In years prior to 1996, the
Bank was permitted under the Code to deduct an annual addition to the reserve
for bad debts in determining taxable income based on the experience method or
the percentage of taxable income method. Due to recently enacted legislation,
the Bank will no longer be able to utilize a reserve method for determining
the bad debt deduction, but will be allowed to deduct actual net charge-offs.
Further, the legislation requires the Bank to recapture, into taxable income,
over a six year period, the excess of the balance of its bad debt reserve as
of December 31, 1995 over the balance of such reserve as of December 31, 1987.
Such recapture requirements can be deferred for up to two years if certain
residential loan requirements are met. At December 31, 1996, the Bank had
approximately $4.0 million of post-1987 tax bad debt reserves, for which
deferred taxes have been provided.
The Bank is not required to provide deferred taxes on its pre-1988 (base
year) tax bad debt reserve of approximately $900,000. This reserve may be
included in taxable income in future years if the Bank makes distributions to
stockholders (including distributions in redemption, dissolution or
liquidation) that are considered to result in withdrawals from that excess bad
debt reserve, then the amounts considered withdrawn will be included in the
savings bank's taxable income. The amount that would be deemed withdrawn from
such reserves upon such distribution and which would be subject to taxation at
the savings bank level at the normal corporate tax rate would be an amount
that, after taxes on such amount, would equal the amount actually distributed
plus the amount necessary to pay the tax with respect to the withdrawal.
Dividends paid out of a savings bank's current or accumulated earnings and
profits as calculated for Federal income tax purposes, however, will not be
considered to result in withdrawals from its bad debt reserves to the extent
of such earnings and profits, but shall be regarded as taken from such
reserves only upon exhaustion of the earnings and profits accounts; however,
distributions in redemption of stock, and distributions in partial or complete
liquidation of a savings bank will be considered to come first from its loss
reserve. The Bank has not conducted a study to determine with certainty the
amount of its accumulated earnings and profits for Federal income tax
purposes.
In addition to regular income taxes, corporations are subject to an
alternative minimum tax which is generally equal to 20% of alternative minimum
taxable income (taxable income, increased by tax preference items and adjusted
for certain regular tax items). The preference items generally applicable to
savings banks include (i) prior to 1996, 100% of the excess of a savings
bank's bad debt deduction computed under the percentage of income method over
the amount that would have been allowable under the experience method and (ii)
an amount equal to 75% of the amount by which a savings bank's adjusted
current earnings (alternative minimum taxable income computed without regard
to this preference, adjusted for certain items) exceeds its alternative
minimum taxable income without regard to this preference. The amounts
received by the Bank pursuant to the Assistance Agreement were included in its
adjusted current earnings. Payment of alternative minimum tax gives rise to
alternative minimum tax credit carryovers which may be carried forward
indefinitely. These credits may be used to offset future regular tax
liability to the extent the regular tax liability exceeds future alternative
minimum tax.
In connection with the Assistance Agreement, an instrumentality of the
Federal government was obligated to provide the Bank with financial assistance
in connection with various matters that arose under the Assistance Agreement.
Payments to the Bank pursuant to the Assistance Agreement were taxed under the
applicable provisions of the Code which were in effect in 1988. These
provisions of the Code provide generally that payments from such
instrumentality to the Bank pursuant to the Assistance Agreement were not
included in the Bank's income and the Bank was not required to reduce its
basis in the Guaranteed Assets by the amount of such financial assistance.
Accordingly, the Bank was not required to pay Federal income taxes with
respect to any amount of the assistance payments it received pursuant to the
Assistance Agreement.
The Assistance Agreement did, however, require the Bank, in effect, to
pay to such instrumentality 100% of the Federal and state "net tax benefits,"
as defined, which are realized by the Bank from excluding from its income the
payments received pursuant to the Assistance Agreement on a tax-free basis.
The amount of assistance payments from that governmental instrumentality was
reduced by the amount of tax benefit realized by the Bank by excluding
assistance payments from its taxable income. Accordingly, the Bank, in
effect, was passing back to that governmental instrumentality the entire tax
benefit derived from the tax exemption provided by the Code provisions which
were in effect in 1988.
Further, the tax laws in 1988 which applied to the Southwest Plan
Acquisition provided that generally applicable limitations on the ability of
an acquiring corporation to utilize the net operating loss carryforwards, and
built-in losses, as defined, of acquired financial institutions did not apply
in the case of the acquisition of assets from insolvent savings and loan
associations. The generally applicable rules limit the rate at which the net
operating loss carryforwards and built-in (i.e., previously unrecognized)
losses of an acquired corporation may be used by a corporation which acquires
"control" of the corporation which generated the loss. Pursuant to this
exception which existed in 1988 to the generally applicable law, the Bank is
allowed to use the net operating losses and built-in losses of all of the
Acquired Associations except for one without limitation. The net operating
loss of one association is not available to the Bank because such
association's deposits at the time of its acquisition did not represent at
least 20% of the Bank's total deposits and equity as required by the
applicable provisions of the Code in 1988.
The Assistance Agreement required that the tax benefit derived by the
Bank from utilizing net operating loss carryforwards acquired from three of
the four Acquired Associations also be applied to reduce the amount of
assistance payments payable to the Bank by the government instrumentality.
The Bank's Consolidated Statements of Operations, therefore, includes a
provision for Federal income taxes which includes amounts credited to that
governmental instrumentality in lieu of Federal income taxes paid to the
Internal Revenue Service with certain adjustments. Although the termination
of the Assistance Agreement was effective March 31, 1994, that governmental
instrumentality will continue to receive the future federal income tax
benefits of the net operating loss carryforwards acquired from the Acquired
Associations.
The Company's Federal income tax returns have not yet been audited by the
United States Internal Revenue Service. The tax returns of the Company (and
the Acquired Associations) since 1988 are subject to review by the Internal
Revenue Service.
STATE TAXATION
The Company pays an annual franchise tax equal to the greater of $2.50
per $1,000 of taxable capital apportioned to Texas, or $4.50 per $100 of net
taxable earned surplus apportioned to Texas. Taxable earned surplus is the
Company's Federal taxable income with certain modifications, such as the
exclusion of interest earned on Federal obligations.
ITEM 2. PROPERTIES
The Company's business is conducted from 37 offices in Texas. The
following table sets forth the location of the offices of the Company, as well
as certain additional information relating to these offices as of December 31,
1996.
<TABLE>
<CAPTION>
Net Book Value of
Owned/Leased Property or
Owned/Leased Leasehold
Location (with Lease Expiration Date) Improvements
(Dollars in thousands)
<S> <C> <C>
BRANCH OFFICES:
- -----------------
1329 North Virginia Owned
Port Lavaca, Texas 77979 $200
8 Greenway Plaza, Suite 100 Leased;
Houston, Texas 77046 June 30, 1997 --
8 Braeswood Square Leased;
Houston, Texas 77096 December 31, 2006 394
408 Walnut Owned
Columbus, Texas 78934 349
870 S. Mason, #100 Leased;
Katy, Texas 77450 August 31, 2003 70
602 Lyons Owned
Schulenburg, Texas 78956 101
325 Meyer Street Owned
Sealy, Texas 77474 569
116 E. Post Office Owned
Weimar, Texas 78962 49
323 Boling Road Owned
Wharton, Texas 77488 151
1621 Pine Drive Leased;
Dickinson, Texas 77539 September 30, 1998 1
295 West Highway 77 Owned
San Benito, Texas 78586 248
1260 Blalock, Suite 100 Leased;
Houston, Texas 77055 January 20, 1999 92
620 W. Main Owned
Tomball, Texas 77375 150
915-H North Shepherd Leased;
Houston, Texas 77008 October 31, 2001 218
6810 FM 1960 West Leased;
Houston, Texas 77069 September 30, 1997 --
7602 N. Navarro Owned
Victoria, Texas 77904 210
2308 So. 77 Sunshine Strip Leased;
Harlingen, Texas 78550 February 28, 1997 26
4900 N. 10th St., G-1 Leased;
McAllen, Texas 78504 August 14, 2001 200
10838 Leopard Street, Suite B Leased;
Corpus Christi, Texas 78410 December 31, 1998 2
4060 Weber Road Leased;
Corpus Christi, Texas 78411 April 30, 1999 7
Percent of Total
Location Deposits Deposits
<S> <C> <C>
BRANCH OFFICES:
- -----------------------------
1329 North Virginia
Port Lavaca, Texas 77979 $ 29,324 2.24%
8 Greenway Plaza, Suite 100
Houston, Texas 77046 22,157 1.69
8 Braeswood Square
Houston, Texas 77096 62,831 4.79
408 Walnut
Columbus, Texas 78934 58,968 4.50
870 S. Mason, #100
Katy, Texas 77450 23,051 1.76
602 Lyons
Schulenburg, Texas 78956 32,735 2.50
325 Meyer Street
Sealy, Texas 77474 41,180 3.14
116 E. Post Office
Weimar, Texas 78962 26,242 2.00
323 Boling Road
Wharton, Texas 77488 46,673 3.56
1621 Pine Drive
Dickinson, Texas 77539 43,652 3.30
295 West Highway 77
San Benito, Texas 78586 21,571 1.66
1260 Blalock, Suite 100
Houston, Texas 77055 58,715 4.48
620 W. Main
Tomball, Texas 77375 25,442 1.94
915-H North Shepherd
Houston, Texas 77008 32,300 2.46
6810 FM 1960 West
Houston, Texas 77069 28,241 2.15
7602 N. Navarro
Victoria, Texas 77904 74,889 5.71
2308 So. 77 Sunshine Strip
Harlingen, Texas 78550 20,389 1.56
4900 N. 10th St., G-1
McAllen, Texas 78504 15,798 1.21
10838 Leopard Street, Suite B
Corpus Christi, Texas 78410 44,111 3.37
4060 Weber Road
Corpus Christi, Texas 78411 64,429 4.92
(continued)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Net Book Value of
Owned/Leased Property or Deposits Percent of
Owned/Leased Leasehold Total Deposits
Location (with Lease Expiration Date) Improvements
(Dollars in thousands)
(continued from previous page)
<S> <C> <C> <C> <C>
301 E. Main Street Owned
Brenham, Texas 77833 $ 206 $ 64,391 4.91%
1192 W. Dallas Leased;
Conroe, Texas 77301 December 31, 1999 3 51,677 3.94
2353 Town Center Dr. Owned
Sugar Land, Texas 77478 1,136 16,764 1.28
1629 S. Voss Owned
Houston, Texas 77057 1,491 18,323 1.40
531-A Highway 1431 Leased;
Kingsland, Texas 78639 December 31, 1999 -- 13,313 1.02
209 W. Moreland Owned
Mason, Texas 76856 56 17,349 1.32
904 Highway 281 North Owned
Marble Falls, Texas 78654 187 11,344 0.87
101 East Polk Owned
Burnet, Texas 78611 103 17,221 1.31
Highway 29 West Owned
Buchanan Dam, Texas 78609 117 8,392 0.64
907 Ford Owned
Llano, Texas 78643 186 15,210 1.16
708 East Austin Owned
Giddings, Texas 78942 303 22,963 1.75
5718 Westheimer, Suite 100 Leased;
Houston, Texas 77057 March 14, 2004 165 36,012 2.76
7909 Parkwood Circle Drive Leased;
Houston, Texas 77036 August 31, 1999 949 12,560 0.96
1250 Pin Oak Road Owned
Katy, Texas 77494 483 16,960 1.29
2120 Thompson Highway Owned
Richmond, Texas 77469 510 36,825 2.81
7200 North Mopac Leased;
Austin, Texas 77469 December 31, 1997 -- 32,254 2.46
1112 Seventh Street Leased;
Bay City, Texas 77414 April 30, 1997 17 77,911 5.94
MORTGAGE BANKING OFFICE:
- ---------------------------
CBS Mortgage Corp.
6161 Savoy, Suite 600 Leased;
Houston, Texas 77036 September 30, 1997 18 -- --
ADMINISTRATIVE OFFICE(1)
- ---------------------------
Coastal Banc Tower Leased;
8 Greenway Plaza, Suite 1500 June 30, 1997 108 68,668 5.24
Houston, Texas 77046
RECORDS & RETENTION OFFICE:
- ------------------------------
227 Meyer St. Owned
Sealy, Texas 77474 65 -- -
Total $9,140 $1,310,835 100.00%
====== ========== =======
</TABLE>
______________________
1Includes location of executive offices.
The net book value of the Company's investment in premises and equipment
totaled $15.0 million at December 31, 1996. At December 31, 1996, the net
book value of the Company's electronic data processing equipment, which
includes its in-house computer system, local area network and fourteen
automatic teller machines, was $3.0 million.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in routine legal proceedings occurring in the
ordinary course of business which, in the aggregate, are believed by
management to be immaterial to the financial condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The information required herein is incorporated by reference from page 53
of the Company's printed Annual Report to Stockholders for fiscal 1996
("Annual Report"), which is included herein as Exhibit 13.
ITEM 6. SELECTED FINANCIAL DATA
The information required herein is incorporated by reference from pages 6
through 9 of the Annual Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information required herein is incorporated by reference on pages 9
through 21 of the Annual Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data required herein are
incorporated by reference from pages 23 through 52 of the Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required herein is incorporated by reference from the
definitive proxy statement to be filed with the Securities and Exchange
Commission. Otherwise, the requirements of this Item 10 are not applicable.
ITEM 11. EXECUTIVE COMPENSATION
The information required herein is incorporated by reference from the
definitive proxy statement to be filed with the Securities and Exchange
Commission.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required herein is incorporated by reference from the
definitive proxy statement to be filed with the Securities and Exchange
Commission.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required herein is incorporated by reference from the
definitive proxy statement to be filed with the Securities and Exchange
Commission.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) The following financial statements are incorporated herein by
reference from pages 23 through 52 of the Annual Report.
Report of Independent Certified Public Accountants.
Consolidated Statements of Financial Condition as of December 31, 1996
and 1995.
Consolidated Statements of Operations for each of the years in the
three-year period ended December 31, 1996.
Consolidated Statements of Stockholders' Equity for each of the years in
the three-year period ended December 31, 1996.
Consolidated Statements of Cash Flows for each of the years in the
three-year period ended December 31, 1996.
Notes to Consolidated Financial Statements.
(a)(2) There are no financial statement schedules filed herewith.
(a)(3) The following exhibits are filed as part of this report.
<TABLE>
<CAPTION>
Page in
Manually signed
Exhibit No. report
<C> <S> <C>
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
</TABLE>
__________________
* Incorporated by reference to the Company's Registration Statement
on Form S-4 (No. 33-75952) filed on March 2, 1994.
** Incorporated by reference to the Company's Registration Statement
on Amendment No. 6 to Form S-1 (No. 33-91206) filed
on June 16, 1995.
*** Incorporated by reference to the Company's Registration Statement
on Form S-1 (No. 33-91206) filed on April 14, 1995.
(b)(1) Form 8-K filed by the Company on February 14, 1996 concerning
the declaration of dividends for the fourth
quarter of 1995
(b)(2) Form 8-K filed by the Company on May 13, 1996 concerning the
execution of definitive agreements to exchange certain
branch locations with Compass Bank - San Antonio.
(b)(3) Form 8-K filed by the Company on December 2, 1996 concerning
the formation of Coastal Banc Holding Company, Inc.
on November 30, 1996.
(b)(4) Form 8-K filed by the Company on March 18, 1997 concerning the
execution of a definitive agreement to purchase the Wells Fargo
Bank branch in Port Arthur, Texas.
(c) See (a)(3) above for all exhibits filed herewith and Exhibit
Index.
(d) All schedules are omitted as the required information is not
applicable or the information is presented in the
consolidated financial statements or related notes.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
COASTAL BANCORP, INC.
Date: March 26, 1997 By: /s/ Manuel J. Mehos
Manuel J. Mehos,
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report is signed below by the following persons on behalf of the Registrant
and in the capacities and on the dates indicated.
/s/ Manuel J. Mehos Date: March 26, 1997
Manuel J. Mehos, Chairman of the
Board and Chief Executive Officer
/s/ R. Edwin Allday Date: March 26, 1997
R. Edwin Allday, Director
/s/ D. Fort Flowers, Jr. Date: March 26, 1997
D. Fort Flowers, Jr., Director
/s/ Dennis S. Frank Date: March 26, 1997
Dennis S. Frank, Director
/s/ Robert E. Johnson, Jr. Date: March 26, 1997
Robert E. Johnson, Jr., Director
/s/ James C. Niver Date: March 26, 1997
James C. Niver, Director
/s/ Clayton T. Stone Date: March 26, 1997
Clayton T. Stone, Director
/s/ Catherine N. Wylie Date: March 26, 1997
Catherine N. Wylie, Chief Financial
Officer (principal financial and
accounting officer)
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated statement of financial condition, the consolidated staetment of
operations and notes thereto found in exhibit 13 of the Company's Form 10-K for
the year ended December 31, 1996 and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 27,735
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 180,667
<INVESTMENTS-CARRYING> 1,344,587
<INVESTMENTS-MARKET> 1,308,598
<LOANS> 1,229,748
<ALLOWANCE> 6,880
<TOTAL-ASSETS> 2,875,907
<DEPOSITS> 1,310,835
<SHORT-TERM> 1,156,114
<LIABILITIES-OTHER> 44,217
<LONG-TERM> 270,593
0
0
<COMMON> 50
<OTHER-SE> 94,098
<TOTAL-LIABILITIES-AND-EQUITY> 2,875,907
<INTEREST-LOAN> 96,143
<INTEREST-INVEST> 95,155
<INTEREST-OTHER> 1,521
<INTEREST-TOTAL> 192,819
<INTEREST-DEPOSIT> 60,076
<INTEREST-EXPENSE> 138,185
<INTEREST-INCOME-NET> 54,634
<LOAN-LOSSES> 1,925
<SECURITIES-GAINS> (4)
<EXPENSE-OTHER> 49,436
<INCOME-PRETAX> 15,210
<INCOME-PRE-EXTRAORDINARY> 15,210
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,951
<EPS-PRIMARY> 1.38
<EPS-DILUTED> 1.38
<YIELD-ACTUAL> 1.99
<LOANS-NON> 12,839
<LOANS-PAST> 1,195
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 5,703
<CHARGE-OFFS> 851
<RECOVERIES> 103
<ALLOWANCE-CLOSE> 6,880
<ALLOWANCE-DOMESTIC> 6,880
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
CORPORATE PROFILE
Coastal Bancorp, Inc., headquartered in Houston, Texas, is the holding company
for Coastal Banc Holding Company, Inc. ("HoCo"), a Delaware unitary savings
bank holding company. HoCo is the parent company to Coastal Banc ssb, a
Texas-chartered, state savings bank. Coastal Banc ssb operates 37 retail
banking offices in metropolitan Houston, Corpus Christi, Austin and small
cities in central and south Texas. At December 31, 1996, Coastal Banc ssb had
$2.9 billion in assets and was considered to be a "well capitalized"
institution according to FDIC guidelines.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
<C>
<C>
Letter from the Chairman and Chief Executive Officer 2
Selected Consolidated Financial and Other Data 7
Management's Discussion and Analysis 10
Independent Auditors' Report 30
Consolidated Financial Statements 31
Notes to Consolidated Financial Statements 36
Stock Prices 67
Stockholder Information 68
</TABLE>
24
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
December 31,
-------------
(dollars in thousands, except per share data) 1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
FOR THE YEAR ENDED
Net interest income $ 54,634 $ 43,035 $ 39,534
Provision for loan losses 1,925 1,664 934
Noninterest income 9,349 7,605 9,561
SAIF insurance special assessment (1) 7,455 -- --
Other noninterest expense 39,393 31,369 27,577
Net income after preferred stock dividends 6,951 8,542 13,452
Net earnings per share before SAIF insurance
special assessment (2) 2.34 1.71 2.64
Net earnings per share 1.38 1.71 2.64
- ------------------------------------------ ---------- ---------- ------------
AT YEAR END
Total assets $ 2,875,907 $ 2,786,528 $ 2,299,769
Loans receivable 1,229,748 1,098,555 587,032
Mortgage-backed securities held-to-maturity 1,344,587 1,395,753 1,605,839
Mortgage-backed securities available-for-sale 180,656 186,414 32,249
Savings deposits 1,310,835 1,287,084 1,139,622
Borrowed funds 1,376,707 1,306,018 1,031,415
Senior Notes payable 50,000 50,000 --
Preferred Stock of the Bank 28,750 28,750 28,750
Stockholders' equity 94,148 91,679 84,680
Book value per common share 18.70 18.27 16.96
Tangible book value per common share 15.70 14.71 14.88
- --------------------------------------------- ---------- ---------- ----------
SIGNIFICANT RATIOS FOR THE YEAR ENDED
Return on average assets before SAIF insurance
special assessment (2) 0.51% 0.45% 0.71%
Return on average equity before SAIF insurance
special assessment (2) 12.53 9.71 16.57
Interest rate spread including noninterest-bearing
savings deposits 1.82 1.57 1.63
Net interest rate spread 1.65 1.42 1.52
Net interest margin 1.99 1.78 1.79
Average equity to average total assets 3.30 3.56 3.59
Noninterest expense to average total assets before
SAIF special assessment (2) 1.40 1.27 1.22
- ---------------------------------------- ---------- ---------- ----------
ASSET QUALITY RATIOS AT YEAR END
Nonperforming assets to total assets 0.56% 0.68% 0.30%
Nonperforming loans to total loans receivable 1.04 1.33 1.04
Allowance for loan losses to nonperforming loans 53.59 39.00 35.37
Allowance for loan losses to total loans receivable 0.56 0.52 0.37
- ---------------------------------------- ---------- ---------- ----------
</TABLE>
(1) On September 30, 1996, Coastal recorded the one-time Savings
Association Insurance Fund ("SAIF") insurance special assessment (the "special
assessment") of $7.5 million as a result of the Deposit Insurance Funds Act of
1996 (the "Act") being signed into law. The special assessment pursuant to
the Act was 65.7 basis points on the SAIF assessment base as of March 31,
1995.
(2) These ratios are calculated before the after-tax (as applicable)
effect of the special assessment of $4.8 million recorded on September 30,
1996.
CHAIRMAN'S LETTER
Writing to you this year is a great deal more fun than last year. In
last year's letter, I reported to you that Coastal Bancorp, Inc. and
subsidiaries ("Coastal") experienced the first core earnings decline of its
ten year history. I told you it wasn't part of our strategic plan, we didn't
like it, and, therefore, we must do something about it. We did something
about it in 1996 and Coastal's earnings reflected our efforts.
In 1996, Coastal returned to the level of core earnings growth we have
seen in every year but one since 1986. Stable short term interest rates
throughout 1996 certainly contributed to the recovery of Coastal's net
interest margin from the compression experienced in 1995. However, Coastal's
successful expansion of its existing lending programs and introduction of
commercial business banking at the end of 1995 and throughout 1996 contributed
both to the recovery of Coastal's net interest margin and to management's
program to reduce interest rate risk.
As a result, in 1996, net interest income expanded by 27.0% and core
earnings (before applicable income taxes) grew by 22.7% when compared to the
results of 1995. Management is pleased with the improvement. The solution I
proposed to you in last year's letter, to expand Coastal's margins and reduce
our interest rate risk through a strategic shift in our business mix, has been
implemented and is off to a good start. Coastal's 1996 earnings, margins, and
stock price are proving that.
However, as much as I would like to tell you we have completed our
mission, I can't. Not yet, anyway. We will continue to work to improve
Coastal's net interest margin and continue to work to reduce the interest rate
risk of Coastal's balance sheet. The margin has improved substantially, but
it's not quite where we want it to be. The solution is a continuous
work-in-process, and I will describe the progress to date and the future
expectations of the solution. But first, I will briefly summarize the results
for 1996.
1996 EARNINGS
Earnings before the after-tax effect of the one-time Savings Association
Insurance Fund ("SAIF") special assessment imposed by the FDIC ("special
assessment") for 1996 were $14.4 million or $2.34 per share, a 29.2% increase
over 1995 earnings of $11.1 million, or $1.71 per share. Earnings for 1996
after the special assessment were $9.5 million or $1.38 per share. Per share
data during 1996 and 1995 was based on 5.03 million and 4.99 million common
stock equivalents outstanding.
The special assessment was a one time assessment charged (pursuant to
1996 legislation) by the FDIC on September 30, 1996, to all SAIF insured
financial institutions at the rate of $0.657 per $100 of SAIF deposits as of
March 31, 1995. The assessment was intended to restore the SAIF fund to its
minimum required level and eventually equalize FDIC insurance premiums for
both Bank Insurance Fund and SAIF members. As a result of the legislation,
Coastal's FDIC insurance premiums dropped to approximately $0.0648 per $100 of
deposits from a rate of $.23 per $100 of deposits prior to the legislation.
Coastal's special assessment, after taxes in 1996, was $4.8 million, or $0.96
per share.
Core revenues reached a new record high with net interest income after
provision for loan losses reaching $52.7 million during 1996, compared to
$41.4 million in 1995, and loan fees, service charges, and loan servicing
income reached $8.3 million during 1996, compared to $6.9 million in 1995.
However, noninterest expenses (excluding the special assessment) reached $39.4
million during 1996, compared to $31.4 million during 1995. At December 31,
1996, Coastal had total assets of $2.9 billion, total deposits of $1.3 billion
in 37 branch offices, and stockholders' equity of $94.1 million.
STRATEGIC SHIFT IMPLEMENTED IN 1996
In pursuit of a higher, more sustainable net interest margin and a
reduction in interest rate risk, Coastal implemented its strategic shift
towards building a commercial banking business in 1996. Utilizing the fourth
quarter 1995 acquisition of Texas Capital Bancshares, Inc. as a springboard
for launching Coastal's business banking program, in 1996, management
developed the infrastructure for business banking in most of Coastal's major
markets. To facilitate this process, Coastal converted its data processing
system to a state-of-the art system for handling both commercial and retail
deposit and loan products. By the fourth quarter of 1996, management had put
together a group of seasoned business banking officers, many of whom joined
Coastal after leaving banks which had been acquired by out-of-state banks.
At December 31, 1996, total loans had reached $1.2 billion, compared to
$1.1 billion at December 31, 1995, representing a 11.9% increase. Only 37% of
the increase in 1996 was in single family residential loans, which generally
have lower interest rates than commercial and consumer loans. The majority of
the remaining 63% increase in total loans was in multifamily mortgage and
residential construction loans. Single family residential loans as a
percentage of total loans decreased from 67.2% at December 31, 1995 to 64.2%
at December 31, 1996. Due to this change in loan mix coupled with a less
volatile interest rate environment in 1996, the net interest margin for 1996
increased to 1.99% as compared to 1.78% during 1995.
More hard work, however, will be needed for management to complete its
strategic solution to reduce Coastal's interest rate risk and increase
Coastal's net interest margin. Based on Coastal's present asset size,
management believes that the optimal loan mix should be a portfolio whereby
single family residential loans represent 50% or less of the total portfolio.
At that level, Coastal's balance sheet will be better structured to reach
management's goal of a 2.25% net interest margin and sustain it during
volatile interest rate, economic, or credit cycles. Reaching that goal will
not be an easy task due to management's strict adherence to its operating
principles of minimizing credit risk and minimizing overhead. But management
believes that the commercial lending platform developed in 1996 and scheduled
for further refinement in 1997 is capable of producing the type of quality
loan growth needed for the task.
PROFITABILITY STILL BEGINS WITH LOW OVERHEAD
Those who have followed Coastal's ten year history, as we grew from $10
million in assets to almost $3 billion in assets, are familiar with our
successful growth strategy. The core of the strategy was growth through
acquisitions while minimizing overhead, minimizing interest rate risk, and
minimizing credit risk. In the late 1980's and early 1990's, Coastal acquired
deposit market share in government assisted transactions, then turned to the
private market to acquire further market share from banks and thrifts in
Texas. The transactions were priced whereby the optimal avenue to earnings
growth was through acquisitions rather than building internally.
Following each acquisition, Coastal consolidated operations and
eliminated redundant overhead in order to increase earnings. Simultaneously,
management internally developed lending programs, mostly housing and
commercial real estate related, which served to replace the eventual payoffs
of the loans acquired in many of these transactions. But throughout this
process, the key to Coastal's profitability, in a period when loans were a
relatively small part of interest-earning assets, was management's strict
adherence to its principle of minimizing overhead. In other words, as long as
we kept expenses significantly lower than our peers, we would not have to take
as much credit risk as our peers to earn an adequate yield to pay expenses and
earn a competitive return on equity.
When compared to Coastal's first ten years, today's environment for
growth has changed significantly. Prices for acquisitions have increased to a
level whereby it is difficult to improve earnings immediately following the
acquisition, even after extensive cost cutting. Although Coastal will
continue to pursue acquisitions as vehicles for growth, management believes it
will be more difficult to consummate economic transactions for the foreseeable
future at the same pace of Coastal's first ten years. Therefore, for the next
few years, or until acquisition prices become more economical, management
expects to focus most of its resources on internally generated earnings
growth. This will be accomplished by further development of Coastal's
commercial lending and commercial deposit business and further development of
our deposit markets the old fashioned way: new products, good marketing, and
new branches started from scratch.
However, the success of these evolving programs will depend on the same
core principle that made the acquisition strategy of the first ten years
successful: low overhead. Even though many of these new programs -
particularly business lending - require a higher level of resources to be
successful, new technology and non-traditional approaches to delivery of these
programs will make it possible for management to maintain its low overhead
philosophy. As long as we keep costs down through innovative delivery
techniques, substantially more credit risk is not required for Coastal to
achieve its profitability goals. It's simple: If we keep it cheap, we can
keep it safe - and still improve profitability for all economic and interest
rate cycles.
A MORE FOCUSED AND MARKET DRIVEN BRANCH SYSTEM
Coastal was built on a base of core retail deposit customers in central
and south Texas. For our first ten years, managing Coastal's branch delivery
system was a fairly simple formula: Offer the same competitive menu of retail
banking products through all Coastal branches and allocate resources evenly
throughout the branch system. That formula works as long as the customers are
the same in each geographical market.
With the introduction in 1996 of commercial business banking and the
conversion of Coastal's data processing to a commercial friendly system,
Coastal's product menu and universe of customer types expanded significantly.
Additional resources would be needed to deliver each product and maintain the
personal level of service Coastal's customers expect and deserve. But instead
of increasing the overall budget for the branch system, management chose to
reallocate the present level of branch banking resources according to market
needs and limit Coastal's geographic reach beyond our core markets.
In pursuit of the latter, Coastal chose to exit two Texas cities, San
Antonio and San Angelo, where our market presence was neither significant
enough nor promising enough to justify the cost. During 1996, Coastal sold
its San Angelo branch for a profit and swapped three San Antonio branches for
one Compass Bank branch in Bay City, Texas. The net effect: Coastal gained
approximately $11.1 million in deposits, but also reduced annual branch
expenses. Management then redeployed some of the savings into delivery of
commercial deposit products. By the end of 1996, Coastal had condensed its
branch system to 37 branches in its most promising markets, Houston, Austin,
Corpus Christi, Victoria, the Rio Grande Valley, and small cities in adjacent
markets throughout central and south Texas.
To properly reallocate resources without compromising service, management
chose to discontinue the practice of actively offering all Coastal products in
all Coastal markets. Instead, beginning in 1997, Coastal has implemented a
plan in which each of our 37 branches will be assigned, based on market and
customer characteristics, to one of three categories: 1. Full service "hub"
branches with commercial and retail capacity, and commercial loan officers on
site; 2. Full service "spoke" branches with commercial and retail capacity,
but without commercial loan officers on site; and 3. Limited service retail
branches offering a full complement of retail products only.
This market driven approach to product availability will channel
resources where they are needed and allow management to develop Coastal's
business banking programs in our most promising commercial markets. During
1996 and early in 1997, Coastal introduced a full menu of commercial products,
including Small Business Checking, Business Interest Checking, Analysis
Checking, and Commercial Money Market accounts as well as BusinessLINK, which
links our customer's PC to all of their deposit accounts at Coastal. At the
same time, Coastal's large retail customer base continues to enjoy the
excellent level of service and full choice of competitive products to which
they have grown accustomed.
COMPETITIVE LOAN VELOCITY AT A LOW COST
Rapidly advancing Internet and network technology is revolutionizing
banking in new ways on a daily basis. Suddenly, the world is connected to the
entire banking industry with a dizzying array of products which, when compared
from bank to bank, are all pretty much the same. Price and execution of
delivery are the only things that end up distinguishing one bank from the
next. Products are becoming more like commodities and, therefore, price and
delivery win.
"Mass Customization" is the process of custom designing standardized
products to fit individual customer needs. An example of mass customization
in banking would be a mortgage or consumer loan tailor made and executed by a
customer on the Internet. Rather than competing in those markets where
margins are thin and volume is crucial, Coastal chooses to compete by
delivering highly customized products - local market business loans and
commercial real estate loans - at the speed of standardized products. To do
this, Coastal is creatively applying network technology to the delivery
process rather than to the product itself.
Coastal is redesigning the process of approving commercial loans to a
more dynamic, interactive process. With instant access to information through
the Internet and the ability to interactively process that information on a
cost effective basis, Coastal is centralizing the origination cycle of
commercial lending. Stated simply, the traditional banking practice of the
loan officer compiling and processing large volumes of financial and economic
information will become obsolete. Most of that function will be performed by
a full time lending committee, the Portfolio Control Committee (PCC), who will
manage the gathering of data, approve the loans, and manage and monitor the
entire loan portfolio.
Loans will be approved through a dynamic process with better information,
and the committee approving the loans will be more familiar with the
information. The loan officers' time will be better spent finding new
business and servicing the needs of existing customers. And here's the best
part: Loan velocity, the time elapsed between application and funding, will
differentiate Coastal in the highly competitive, customized world of
commercial lending. We intend to do it faster and cheaper than our
competitors.
INFRASTRUCTURE WINS AGAIN
Now we have established our strategy of winning through a better
infrastructure. In 1996, we put Coastal on a path to improve our business mix
by introducing business banking. We begin 1997 with resources allocated to
the appropriate markets so we can offer a full line of business banking
products without substantially increasing costs. We are launching a faster
and more effective method of originating and managing a commercial loan
portfolio. In other words, in 1997, after ten years of growing up as a
predominantly retail based thrift, Coastal is evolving into a full service
commercial bank, but with levels of overhead and credit risk much lower than
the levels typically witnessed in commercial banking.
Assuming that the economy continues at its current pace, management
believes this new infrastructure will generate the level of loan production
needed to change Coastal's loan mix whereby single family residential loans
will represent 50% or less of total loans within 3 to 5 years. This change in
loan mix is expected to increase the yield of the overall portfolio and make
it more responsive to volatile market interest rates. Management's desired
loan mix coupled with a proportionate increase in business deposits is
intended to increase Coastal's net interest margin to management's objective
of at least 2.25%. However, due to the low cost, innovative design of the
infrastructure built to achieve that objective, a significant amount of
additional credit risk will not be required to achieve a competitive return on
equity. That way, when an economic downturn arrives - and history tells us,
it will arrive - Coastal will be better prepared to withstand a temporary
deterioration of the local credit market.
A NEW BANK....BUT WITH THE SAME SUCCESSFUL PRINCIPLES
In mid-1997, Coastal will consolidate all of its corporate offices into a
22-story office building in the Southwest area of Houston. The building will
be re-named Coastal Banc Plaza. After more than ten years in Coastal's
present headquarters, the move to a new office building, at the top of which
Coastal's name will be seen for miles around, will be symbolic of our arrival
as a full service bank. In 1986, Coastal was a small, retail thrift which
made few loans and offered a limited number of retail savings products.
Today, Coastal is an independent, publicly traded, Texas-based savings bank
offering a full menu of commercial and retail banking products.
But not everything has changed. The core of management's operating
philosophy for maintaining earnings growth and a competitive return on equity
in all economic environments is the same as it has always been. We start with
the principle of minimizing overhead, then we only take the amount of interest
rate risk and credit risk needed to consistently achieve a competitive return
on equity. And, we still manage to build Coastal into one of the leading
independent savings banks in Texas.
Coastal's shareholders seem to agree with that philosophy as well as our
strategic shift into business banking. In the fourth quarter of 1996 and
again in January of 1997, the price of Coastal's stock reached a new high.
That strong signal from our shareholders is important to management, because
it tells us that we are on the right track to fulfilling the core objective of
our operating philosophy: Maximize the return to Coastal's shareholders.
/s/ Manuel J. Mehos
Manuel J. Mehos
Chairman of the Board and
Chief Executive Officer
COASTAL BANCORP, INC. AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following selected consolidated summary financial and other data of
Coastal Bancorp, Inc. and subsidiaries ("Coastal") does not purport to be
complete and should be read in conjunction with, and is qualified in its
entirety by, the more detailed information contained in the Consolidated
Financial Statements and Notes thereto included elsewhere herein.
<TABLE>
<CAPTION>
At December 31,
---------------------------------
(in thousands) 1996 1995 1994 1993
--------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balance Sheet Data
Total assets $ 2,875,907 $2,786,528 $2,299,769 $1,928,550
Mortgage-backed securities
held-to-maturity (1) 1,344,587 1,395,753 1,605,839 1,324,904
Mortgage-backed securities
available-for-sale 180,656 186,414 32,249 --
Loans receivable (1) 1,229,748 1,098,555 587,032 450,104
Mortgage loans held for sale 298 731 189 2,571
Guaranteed Assets (2) -- -- -- 68,928
Savings deposits 1,310,835 1,287,084 1,139,622 1,023,105
Securities sold under agreements
to repurchase 966,987 993,832 645,379 --
Advances from the Federal Home Loan
Bank of Dallas (FHLB) 409,720 312,186 386,036 788,867
Senior Notes payable 50,000 50,000 -- --
Preferred Stock of the Bank 28,750 28,750 28,750 28,750
Stockholders' equity 94,148 91,679 84,680 79,254
For the Year Ended December 31,
---------------------------------
1996 1995 1994 1993
--------- -------- ----------- ---------
Operating Data
Interest income on assets other
than Guaranteed Assets $ 192,819 $ 169,389 $ 127,291 $ 84,228
Interest income on Guaranteed Assets (2) -- -- 762 5,338
--------- -------- -------- ------
Total interest income 192,819 169,389 128,053 89,566
Interest expense 138,185 126,354 88,519 53,578
--------- --------- -------- -------
Net interest income 54,634 43,035 39,534 35,988
Provision for loan losses 1,925 1,664 934 1,151
-------- ----------- ----------- -----------
Net interest income after provision
for loan losses 52,709 41,371 38,600 34,837
Gain on trading account securities, net -- -- -- 62
Gain on sales of mortgage-backed
securities, net -- -- -- --
Gain (loss) on sales of
mortgage-backed securities
available-for-sale, net (4) 81 192 --
Gain on sale of branch office 521 -- -- --
Other noninterest income 8,832 7,524 9,369 6,825
SAIF insurance special assessment (3) (7,455) -- -- --
Other noninterest expense (39,393) (31,369) (27,577) (25,423)
---------- ----------- ----------- -----------
Income before provision for Federal
income taxes, minority interest and
cumulative effect of accounting change 15,210 17,607 20,584 16,301
Provision for Federal income taxes 5,671 6,477 4,333 4,925
Minority interest in income of consolidated
subsidiary -- -- (211) (643)
Cumulative effect of change in accounting
for income taxes (4) -- -- -- 973
-------- ----------- ----------- -----------
Net income before preferred stock
dividends 9,539 11,130 16,040 11,706
Preferred stock dividends of the Bank (2,588) (2,588) (2,588) (395)
--------- ----------- ----------- -----------
Net income after preferred stock dividends $ 6,951 $ 8,542 $ 13,452 $ 11,311
===============================================
Earnings per share before cumulative
effect of accounting change $ 1.38 $ 1.71 $ 2.64 $ 1.92
===============================================
Net earnings per share (4) $ 1.38 $ 1.71 $ 2.64 $ 2.10
===============================================
(in thousands except per share data and selected ratios) 1992
-----------
<S> <C>
Balance Sheet Data
Total assets $1,111,963
Mortgage-backed securities held-to-maturity (1) 656,561
Mortgage-backed securities available-for-sale --
Loans receivable (1) 293,645
Mortgage loans held for sale 1,098
Guaranteed Assets (2) 122,016
Savings deposits 590,106
Securities sold under agreements to repurchase 126,172
Advances from the Federal Home Loan Bank of
Dallas (FHLB) 316,748
Senior Notes payable --
Preferred Stock of the Bank --
Stockholders' equity 69,136
1992
-----------
Operating Data
Interest income on assets other than
Guaranteed Assets $ 60,583
Interest income on Guaranteed Assets (2) 9,462
-----------
Total interest income 70,045
Interest expense 44,288
-----------
Net interest income 25,757
Provision for loan losses 21
-----------
Net interest income after provision for loan losses 25,736
Gain on trading account securities, net 259
Gain on sales of mortgage-backed securities, net 663
Gain (loss) on sales of mortgage-backed securities
available-for-sale, net 1,837
Gain on sale of branch office --
Other noninterest income 4,323
SAIF insurance special assessment (3) --
Other noninterest expense (20,572)
-----------
Income before provision for Federal income taxes,
minority interest and cumulative effect of
accounting change 12,246
Provision for Federal income taxes 2,808
Minority interest in income of consolidated
subsidiary (798)
Cumulative effect of change in accounting for
income taxes (4) --
-----------
Net income before preferred stock dividends 8,640
Preferred stock dividends of the Bank --
-----------
Net income after preferred stock dividends $ 8,640
===========
Earnings per share before cumulative effect
of accounting change $ 1.79
Net earnings per share (4) $ 1.79
===========
</TABLE>
(Footnotes appear on page 8)
COASTAL BANCORP, INC. AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
<TABLE>
<CAPTION>
At or For the Year Ended December 31,
--------------------------------------
1996 1995 1994 1993
------------------------------------
<S> <C> <C> <C> <C>
Selected Ratios
Performance Ratios (5):
Return on average assets before SAIF
insurance special assessment (6) 0.51% 0.45% 0.71% 0.75%
Return on average assets after SAIF
insurance special assessment 0.34 0.45 0.71 0.75
Return on average equity before SAIF
insurance special assessment (6) 12.53 9.71 16.57 15.16
Return on average equity after SAIF
insurance special assessment 7.50 9.71 16.57 15.16
Dividend payout ratio before SAIF
insurance special assessment (6) 16.82 18.56 8.83 --
Dividend payout ratio after SAIF
insurance special assessment 28.55 18.56 8.83 --
Average equity to average total assets 3.30 3.56 3.59 4.77
Net interest margin (7) 1.99 1.78 1.79 2.39
Interest rate spread including
noninterest-bearing savings deposits (7) 1.82 1.57 1.63 2.27
Interest rate spread (7) 1.65 1.42 1.52 2.18
Noninterest expense to average total
assets before SAIF insurance special
assessment (6) 1.40 1.27 1.22 1.63
Noninterest expense to average
total assets after SAIF insurance
special assessment 1.67 1.27 1.22 1.63
Average interest-earning assets to
average interest-bearing liabilities 106.75 106.78 106.71 105.91
Ratio of earnings to combined fixed charges
and preferred stock dividends before SAIF
insurance special assessment (6):
Excluding interest on deposits 1.25X 1.21X 1.33X 1.64X
Including interest on deposits 1.14 1.12 1.19 1.28
Ratio of earnings to combined fixed
charges and preferred stock dividends
after SAIF insurance special assessment:
Excluding interest on deposits 1.15 1.21 1.33 1.64
Including interest on deposits 1.09 1.12 1.19 1.28
Asset Quality Ratios:
Nonperforming assets to total assets (8) 0.56% 0.68% 0.30% 0.22%
Nonperforming loans to total loans receivable 1.04 1.33 1.04 0.91
Allowance for loan losses to nonperforming loans 53.59 39.00 35.37 37.32
Allowance for loan losses to total loans
receivable 0.56 0.52 0.37 0.34
Bank Regulatory Capital Ratios (9):
Tangible capital to adjusted total
assets N/A N/A N/A 5.11
Tier 1 capital to total assets 5.35 5.30 4.54 5.17
Tier 1 risk-based capital to risk-weighted assets 11.77 12.36 12.37 N/A
Total risk-based capital to risk-weighted assets 12.30 12.84 12.63 18.63
Other Data:
Full-time employee equivalents 453 390 298 288
Number of full service offices 37 40 34 26
1992
-------
<S> <C>
Selected Ratios
Performance Ratios (5):
Return on average assets before SAIF insurance special
assessment (6) 0.81%
Return on average assets after SAIF insurance special
assessment 0.81
Return on average equity before SAIF insurance special
assessment (6) 15.02
Return on average equity after SAIF insurance special
assessment 15.02
Dividend payout ratio before SAIF insurance special --
assessment (6)
Dividend payout ratio after SAIF insurance special assessment --
Average equity to average total assets 5.41
Net interest margin (7) 2.53
Interest rate spread including noninterest-bearing savings
deposits (7) 2.40
Interest rate spread (7) 2.32
Noninterest expense to average total assets before SAIF
insurance special assessment (6) 1.94
Noninterest expense to average total assets after SAIF
insurance special assessment 1.94
Average interest-earning assets to average interest-bearing
liabilities 104.86
Ratio of earnings to combined fixed charges and preferred
stock dividends before SAIF insurance special
assessment (6):
Excluding interest on deposits 1.69X
Including interest on deposits 1.26
Ratio of earnings to combined fixed charges and preferred
stock dividends after SAIF insurance special assessment:
Excluding interest on deposits 1.69
Including interest on deposits 1.26
Asset Quality Ratios:
Nonperforming assets to total assets (8) 0.33%
Nonperforming loans to total loans receivable 0.79
Allowance for loan losses to nonperforming loans 32.97
Allowance for loan losses to total loans receivable 0.26
Bank Regulatory Capital Ratios (9):
Tangible capital to adjusted total assets 5.88
Tier 1 capital to total assets 6.03
Tier 1 risk-based capital to risk-weighted assets N/A
Total risk-based capital to risk-weighted assets 22.27
Other Data:
Full-time employee equivalents 194
Number of full service offices 16
</TABLE>
(Footnotes appear on page 8)
<PAGE>
(1) Loans receivable are net of loans in process, premiums, discounts,
unearned interest and loan fees and the allowance for loan losses.
Mortgage-backed securities held-to-maturity are net of premiums and discounts.
(2) Guaranteed Assets were governed by the Assistance Agreement in
connection with the Southwest Plan Acquisition. Coastal and the FDIC
terminated the Assistance Agreement, effective March 31, 1994, pursuant to
which Coastal transferred substantially all the Guaranteed Assets back to the
FDIC in exchange for cash.
(3) On September 30, 1996, Coastal recorded the one-time Savings
Association Insurance Fund ("SAIF") insurance special assessment (the "special
assessment") of $7.5 million as a result of the Deposit Insurance Funds Act of
1996 (the "Act") being signed into law. The special assessment pursuant to
the Act was 65.7 basis points on the SAIF assessment base as of March 31,
1995. See Note 21 of the Notes to Consolidated Financial Statements.
(4) Coastal adopted the Financial Accounting Standards Board's Statement
No. 109 as of January 1, 1993. The cumulative effect of this change in
accounting for income taxes of $973,000 was determined as of January 1, 1993.
Prior years' financial statements were not restated to apply the provisions of
Statement No. 109.
(5) Ratio, yield and rate information are based on year-to-date average
balances in 1996, 1995, 1994 and 1993 and weighted average monthly balances in
1992.
(6) These ratios are calculated before the after-tax effect of the special
assessment of $4.8 million recorded on September 30, 1996. See Note 21 of the
Notes to Consolidated Financial Statements.
(7) Net interest margin represents net interest income as a percentage of
average interest-earning assets. Interest rate spread including
noninterest-bearing savings deposits represents the difference between the
weighted average yield on interest-earning assets and the weighted average
rate on interest-bearing liabilities and noninterest-bearing savings deposits.
Interest rate spread represents the difference between the weighted average
yield on interest-earning assets and the weighted average rate on
interest-bearing liabilities.
(8) Nonperforming assets consist of nonaccrual loans and real estate
acquired by foreclosure but do not include Guaranteed Assets acquired in the
Southwest Plan Acquisition. See Note 2 above.
(9) Prior to the conversion of the Bank to a state savings bank in July
1994, OTS regulations required the Bank to maintain tangible capital equal to
at least 1.5% of adjusted total assets, minimum core or Tier 1 capital equal
to at least 3.0% of adjusted total assets and a minimum ratio of total capital
to risk-weighted assets of 8.0%. Current FDIC regulations require the Bank to
maintain Tier 1 capital equal to at least 4.0% of total assets, Tier 1
risk-based capital equal to at least 4.0% of risk-weighted assets and total
risk-based capital equal to at least 8.0% of risk-weighted assets.
COASTAL BANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
GENERAL
Coastal Bancorp, Inc. was incorporated on March 8, 1994 as a first-tier
subsidiary of Coastal Banc Savings Association (the "Association") in
connection with the proposed reorganization of the Association into the
holding company form of organization, which occurred on July 29, 1994. In
addition, effective July 29, 1994, the Association converted to a
Texas-chartered savings bank known as Coastal Banc ssb (the "Bank"). As a
result of the reorganization, Coastal Bancorp, Inc. ("Bancorp") became the
owner of 100% of the voting stock of Coastal Banc ssb and each share of the
Association's common stock now represents one share of common stock of
Bancorp. The holders of the 9.0% Noncumulative Preferred Stock, Series A, of
the former Coastal Banc Savings Association now own an equal number of shares
of 9.0% Noncumulative Preferred Stock, Series A, of the Bank.
On November 30, 1996, Coastal Banc Holding Company, Inc. ("HoCo") was
created as a Delaware unitary savings bank holding company in accordance with
the terms of an agreement and plan of reorganization dated August 19, 1996
(the "Agreement"). Pursuant to the terms of the Agreement, the Bank became a
wholly-owned subsidiary of HoCo and HoCo became a wholly-owned subsidiary of
Bancorp.
On September 30, 1996, Coastal recorded the special assessment of $7.5
million ($4.8 million after applicable income taxes) as a result of the Act
being signed into law. The special assessment pursuant to the Act was 65.7
basis points on the SAIF deposit assessment base as of March 31, 1995. Other
provisions of the Act provide for a reduced SAIF deposit insurance premium
rate beginning in 1997.
On June 30, 1995, Bancorp issued $50.0 million of 10.0% Senior Notes due
June 30, 2002. The Senior Notes are redeemable at Coastal's option, in whole
or in part, on or after June 30, 2000, at par, plus accrued interest to the
redemption date. Of the proceeds received from the issuance of the Senior
Notes, $44.9 million was used to purchase the 11.13% Noncumulative Preferred
Stock, Series B, of the Bank which is now owned by HoCo.
FINANCIAL CONDITION
Total assets increased 3.21% or $89.4 million from December 31, 1995 to
December 31, 1996. The net increase resulted primarily from the increase in
loans receivable of $131.2 million offset by a decrease in mortgage-backed
securities held-to-maturity of $51.2 million due to principal payments
received. The increase in loans receivable consisted primarily of increases
of $48.4 million, $44.2 million and $20.0 million, in first-lien residential
mortgage loans, multifamily mortgage loans and residential construction loans
(net of loans in process), respectively. The net increase in first-lien
residential mortgage loans was due to loan purchases of $187.4 million offset
by principal reductions and payoffs. At December 31, 1996, loans receivable
as a percentage of total assets increased to 42.8% as compared to 39.4% at
December 31, 1995, as part of management's plan to increase the loans
receivable portfolio to approximately 50% of total assets within three to five
years.
Savings deposits increased 1.8% or $23.8 million from December 31, 1995
to December 31, 1996. Advances from the FHLB increased by 31.2% or $97.5
million and securities sold under agreements to repurchase decreased 2.7% or
$26.8 million from December 31, 1995 to December 31, 1996. The reallocation
of borrowings during such period was directly attributable to Coastal's change
in funding sources to take advantage of more favorable interest rates. The
net increase in advances from the FHLB and securities sold under agreements to
repurchase was used to fund the increase in the loans receivable portfolio.
Common stockholders' equity increased 2.7% or $2.5 million from December
31, 1995 to December 31, 1996 due to 1996 net income of $9.5 million, which
included the $4.8 million after-tax effect of the special assessment, offset
by common stock dividends declared of $2.0 million, preferred stock dividends
of the Bank declared of $2.6 million and a $2.6 million increase in the
unrealized loss on securities available-for-sale.
RESULTS OF OPERATIONS FOR THE THREE YEARS ENDED DECEMBER 31, 1996
The results of operations of Coastal Bancorp, Inc. and subsidiaries
depend primarily on its net interest income, which is the difference between
interest income on interest-earning assets and interest expense on its
interest-bearing liabilities. Coastal's interest-earning assets consist
principally of mortgage-backed securities, loans receivable and other
investments. Coastal's interest-bearing liabilities consist primarily of
savings deposits, advances from the FHLB, securities sold under agreements to
repurchase and the Senior Notes. Coastal's net income is also affected by its
level of noninterest income, including loan fees and service charges, loan
servicing income, asset management and disposition fees until November 1994
and gains on sales of assets, as well as by its noninterest expense, including
compensation and benefits and occupancy costs and, in 1996, the special
assessment.
The following table sets forth, for the periods and at the dates
indicated, information regarding Coastal's average balance sheets. Ratio,
yield and rate information is based on year-to-date average balances.
<TABLE>
<CAPTION>
At Year Ended December 31,
December 31, 1996
Yield/Rate Balance Interest Rate
<S> <C> <C> <C> <C> <C>
Assets
Interest-earning assets:
Loans receivable, net 8.23% $1,156,933 $96,143 8.31%
Mortgage-backed securities 5.98 1,556,966 95,155 6.11
Guaranteed Assets (1) -- -- -- --
U.S. Treasury security 5.44 1,002 54 5.39
Securities purchased underagreements -- -- -- --
to resell
FHLB stock 5.85 21,853 1,288 5.89
Interest-earning deposits in other
depository institutions 5.70 4,149 179 4.31
Total interest-earningassets 6.97 2,740,903 192,819 7.03
--------------------------------------
Noninterest-earning assets (2) 71,344
Total assets (3) $2,812,247
==========
LIABILITIES AND STOCKHOLDERSEQUITY
Interest-bearing liabilities:
Interest-bearing savings deposits 5.00% $1,199,651 $ 60,076 5.01%
Securities sold under agreemetns to repurchase 5.55 930,706 51,360 5.52
Advances from the FHLB 5.61 387,296 21,749 5.62
Senior Notes payable 10.00 50,000 5,000 10.00
------ ----------
Total interest-bearing liabilities 5.39 2,567,653 138,185 5.38
------ ------- ------
Noninterest-bearing liabilities 123,160
----------
Total liabilities 2,690,813
Preferred Stock of the Bank 28,750
Stockholders' equity 92,684
----------
Total liabilities and stockholders' equity $2,812,247
==========
Net interest income; interest rate spread 1.58% $ 54,634 1.65%
====== ======= ======
Net interest-earning assets; net interest yield on $ 1.99%
interest-earning assets 173,250
==========
Ratio of average interest-earning assets to average
interest-bearing liabilities 1.07x
==========
</TABLE>
(1) Reflects assets governed by the Assistance Agreement in connection
with the Southwest Plan Acquisition. Effective March 31, 1994, the Assistance
Agreement between Coastal and the FSLIC Resolution Fund ("FRF"), an
instrumentality of the Federal government, was terminated.
(2) Includes goodwill, accrued interest receivable, property and
equipment, cash, purchased loan servicing rights, capitalized excess servicing
fees and prepaid expenses and other assets, including, prior to the
termination of the Assistance Agreement, amounts from the FRF in connection
with the Southwest Plan Acquisition.
(3) Nonaccruing loans are included in total assets, but are immaterial.
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
1995
Balance Interest Rate
<S> <C> <C> <C> <C> <C>
Assets
Interest-earning assets:
Loans receivable, net $ 765,404 $ 65,508 8.56%
Mortgage-backed securities 1,625,044 102,194 6.29
Guaranteed Assets (1) -- -- --
U.S. Treasury security 667 39 5.85
Securities purchased underagreements -- -- --
to resell
FHLB stock 20,297 1,318 6.49
Interest-earning deposits in other depository 3,958 330 8.34
institutions
Total interest-earningassets 2,415,370 169,389 7.01
------- ------
Noninterest-earning assets (2) 56,370
Total assets (3) $ 2,471,740
=========
LIABILITIES AND STOCKHOLDERSEQUITY
Interest-bearing liabilities:
Interest-bearing savings deposits $ 1,116,788 $ 56,716 5.08%
Securities sold under agreemetns to repurchase 752,427 45,022 5.98
Advances from the FHLB 367,895 22,116 6.01
Senior Notes payable 25,000 2,500 10.00
---------
Total interest-bearing liabilities 2,262,110 126,354 5.59
------- ------
Noninterest-bearing liabilities 92,919
---------
Total liabilities 2,355,029
Preferred Stock of the Bank 28,750
Stockholders' equity 87,961
---------
Total liabilities and stockholders' equity $ 2,471,740
=========
Net interest income; interest rate spread $ 43,035 1.42%
======= ======
Net interest-earning assets; net interest yield on $ 153,260 1.78%
interest-earning assets
Ratio of average interest-earning assets to average 1.07x
interest-bearing liabilities
</TABLE>
(1) Reflects assets governed by the Assistance Agreement in connection
with the Southwest Plan Acquisition. Effective March 31, 1994, the Assistance
Agreement between Coastal and the FSLIC Resolution Fund ("FRF"), an
instrumentality of the Federal government, was terminated.
(2) Includes goodwill, accrued interest receivable, property and
equipment, cash, purchased loan servicing rights, capitalized excess servicing
fees and prepaid expenses and other assets, including, prior to the
termination of the Assistance Agreement, amounts from the FRF in connection
with the Southwest Plan Acquisition.
(3) Nonaccruing loans are included in total assets, but are immaterial.
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
1994
Balance Interest Rate
<S> <C> <C> <C> <C> <C>
Assets
Interest-earning assets:
Loans receivable, net $ 526,725 $ 42,403 8.05%
Mortgage-backed securities 1,602,619 82,065 5.12
Guaranteed Assets (1) 12,575 762 6.06
U.S. Treasury security -- -- --
Securities purchased underagreements 32,634 1,279 3.92
to resell
FHLB stock 27,460 1,252 4.56
Interest-earning deposits in other depository 4,891 292 5.97
institutions
Total interest-earningassets 2,206,904 128,053 5.80
----------------------------
Noninterest-earning assets (2) 52,413
Total assets (3) $ 2,259,317
=========
LIABILITIES AND STOCKHOLDERSEQUITY
Interest-bearing liabilities:
Interest-bearing savings deposits $ 963,659 $ 38,127 3.96%
Securities sold under agreemetns to repurchase 593,054 27,589 4.65
Advances from the FHLB 511,407 22,803 4.46
Senior Notes payable -- -- --
---------
Total interest-bearing liabilities 2,068,120 88,519 4.28
------- -----
Noninterest-bearing liabilities 81,281
---------
Total liabilities 2,149,401
Preferred Stock of the Bank 28,750
Stockholders' equity 81,166
---------
Total liabilities and stockholders' equity $ 2,259,317
=========
Net interest income; interest rate spread $ 39,534 1.52%
======= =====
Net interest-earning assets; net interest yield on $ 138,784 1.79%
interest-earning assets
Ratio of average interest-earning assets to average 1.07x
interest-bearing liabilities
</TABLE>
(1) Reflects assets governed by the Assistance Agreement in connection
with the Southwest Plan Acquisition. Effective March 31, 1994, the Assistance
Agreement between Coastal and the FSLIC Resolution Fund ("FRF"), an
instrumentality of the Federal government, was terminated.
(2) Includes goodwill, accrued interest receivable, property and
equipment, cash, purchased loan servicing rights, capitalized excess servicing
fees and prepaid expenses and other assets, including, prior to the
termination of the Assistance Agreement, amounts from the FRF in connection
with the Southwest Plan Acquisition.
(3) Nonaccruing loans are included in total assets, but are immaterial.
<PAGE>
The following table analyzes net interest income in terms of changes in
the volume of interest-earning assets and interest-bearing liabilities and
changes in yields and rates. The table reflects the extent to which changes
in Coastal's interest income and interest expense are attributable to changes
in volume (change in volume multiplied by prior year rate) and changes in
rate (changes in rate multiplied by prior year volume). Changes attributable
to the combined impact of volume and rate have been allocated proportionately
to changes due to volume and changes due to rate.
<TABLE>
<CAPTION>
Year Ended December 31,
1996 vs 1995 1995 vs 1994
Increase (Decrease) Due To Increase (Decrease) Due To
Volume Rate Net Volume Rate Net
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME
Loans receivable $ 32,601 $(1,966) $ 30,635 $ 20,271 $ 2,834 $23,105
Mortgage-backed securities (4,182) (2,857) (7,039) 1,161 18,968 20,129
Guaranteed Assets (1) -- -- -- (381) (381) (762)
U.S. Treasury security 18 (3) 15 20 19 39
Securities purchased
under agreements to resell -- -- -- (640) (639) (1,279)
FHLB stock 97 (127) (30) (379) 445 66
Interest-earning deposits in
other depository institutions 15 (166) (151) (63) 101 38
----------------------------------------------------------
Total 28,549 (5,119) 23,430 19,989 21,347 41,336
------------------------------------------------------------
INTEREST EXPENSE
Interest-bearing savings
deposits 4,152 (792) 3,360 6,687 11,902 18,589
Securities sold under
agreements to repurchase 10,010 (3,672) 6,338 8,445 8,988 17,433
Advances from the FHLB 1,122 (1,489) (367) (7,389) 6,702 (687)
Senior Notes payable 2,500 -- 2,500 1,250 1,250 2,500
--------------------------------------------------------------
Total 17,784 (5,953) 11,831 8,993 28,842 37,835
--------------------------------------------------------------
Net change in net
interest income $ 10,765 $ 834 $ 11,599 $ 10,996 $ (7,495) $ 3,501
=============================================================
</TABLE>
(1) Reflects assets guaranteed by the FRF governed by the Assistance
Agreement in connection with the Southwest Plan Acquisition. Effective March
31, 1994, the Assistance Agreement between Coastal and the FRF was terminated.
NET INCOME
Coastal reported net income before preferred stock dividends and before
the $4.8 million after-tax effect of the special assessment of $14.4 million
for the year ended December 31, 1996 and net income before preferred stock
dividends of $11.1 million and $16.0 million for the years ended December 31,
1995 and 1994, respectively, an increase of $3.3 million or 29.2% in 1996 and
a decrease of $4.9 million or 30.6% in 1995 in each case in comparison to the
prior year. The $3.3 million increase in 1996 was primarily due to a $11.6
million increase in net interest income, a $1.7 million increase in
noninterest income, offset by a $8.0 million increase in noninterest expense
before the $7.5 million special assessment. The increase in noninterest
income was primarily a result of increased loan fees and service charges of
$1.8 million, the $521,000 gain on the sale of a branch office, partially
offset by a decrease in loan servicing income of $471,000. The increase in
noninterest expense before the $7.5 million special assessment was primarily
due to increased operating expenses as a result of the Texas Capital
Bancshares, Inc. ("Texas Capital") acquisition on November 1, 1995. The
increased noninterest expense was also due to overall expenses related to the
expansion of the loan product base being offered by Coastal to its customers,
primarily the continuing development of commercial business lending programs,
the May 1996 bank data processing conversion and the June 1996 conversion of
the five former Texas Capital locations to the new data processing system.
The increased noninterest expense related to the expansion of the loan product
base and the continuing development of the commercial business lending
programs has primarily been due to staffing increases and will continue to
increase into 1997, as management's goal is to expand its commercial business
lending into select markets and to increase commercial business loans to 15%
of total assets within three to five years. Coastal engaged in the bank data
processing system conversion to a PC based client server technology throughout
its branch network to enable the branch offices to offer a more expanded
product base (including loan and deposit products) to its customers and to
automate and upgrade the work flow in the customer contact areas, allowing
branch office employees a better opportunity to serve their customers. The
cost during the period related to the data processing conversion was
approximately $360,000. Net income before preferred stock dividends and after
the after-tax effect of the special assessment was $9.5 million for the year
ended December 31, 1996.
The decrease in net income during 1995 was primarily due to three
factors: a $2.0 million non-recurring reversal of an accrual for income taxes
(previously provided for) in 1994 due to the settlement of certain tax issues
with the FDIC, a $1.7 million reduction in asset management and disposition
fees from a nonbanking subsidiary sold in 1994 and an increase in noninterest
expense of $3.8 million due primarily to the operation of the eight branches
acquired from Texas Trust Savings Bank, FSB ("Texas Trust") on December 30,
1994, the five offices acquired from Texas Capital on November 1, 1995 and the
two de novo branches opened by the Bank in the first quarter of 1995. The
decreases were partially offset by a $3.5 million increase in net interest
income in 1995.
NET INTEREST INCOME
Net interest income amounted to $54.6 million in 1996, an $11.6 million,
or 27.0% increase over 1995. This increase in net interest income was due to
an increase in average net interest-earning assets of $20.0 million and an
increase in interest rate spread, defined to exclude noninterest-bearing
deposits, from 1.42% in 1995 to 1.65% in 1996. Management also calculates an
alternative net interest spread which includes noninterest-bearing deposits.
Under this calculation, the net interest spread for 1996 and 1995 was 1.82%
and 1.57%, respectively. Net interest rate spread is affected by the changes
in the amount and composition of interest-earning assets and interest-bearing
liabilities and their concomitant interest rates. The increase in the net
interest spread in 1996 was primarily due to the decrease in the average
interest rates on interest-bearing liabilities from 5.59% in 1995 to 5.38% in
1996 and a slight increase in the average yield on interest-earning assets
from 7.01% in 1995 to 7.03% in 1996.
Net interest income amounted to $43.0 million in 1995, a $3.5 million, or
8.9% increase over 1994. During 1995, an increase of $37.8 million in total
interest expense was more than offset by a $41.3 million increase in total
interest income. This increase in net interest income was due to an increase
in average net interest-earning assets of $14.5 million offset by a decrease
in interest rate spread from 1.52% in 1994 to 1.42% in 1995. The decrease in
the net interest spread was primarily due to the increase in the average
interest rates on interest-bearing liabilities from 4.28% in 1994 to 5.59% in
1995, which was only partially offset by an increase in the average yield on
interest-earning assets from 5.80% in 1994 to 7.01% in 1995.
Total interest income amounted to $192.8 million during 1996, a $23.4
million, or 13.8%, increase from 1995. A $30.6 million, or 46.8%, increase in
interest earned on loans receivable during 1996 resulted primarily from a
$391.5 million, or 51.2%, increase in the average balance of loans receivable
offset partially by a decrease in the yield earned of 25 basis points compared
to 1995. A $7.0 million, or 6.9%, decrease in interest earned on
mortgage-backed securities during 1996 was due to a $68.1 million, or 4.2%,
decrease in the average balance of mortgage-backed securities due to principal
payments received and a decrease in the yield earned of 18 basis points. In
addition, interest earned on investment securities, certificates and time
deposits and other investments decreased $166,000, or 9.8%, due to the lower
average yield earned during 1996.
Total interest income amounted to $169.4 million during 1995, a $41.3
million, or 32.3%, increase from 1994. A $23.1 million, or 54.5%, increase in
interest earned on loans receivable during 1995 resulted primarily from a
$238.7 million or 45.3%, increase in the average balance of loans receivable
and an increase in the yield earned of 51 basis points compared to 1994. A
$20.1 million, or 24.5%, increase in interest earned on mortgage-backed
securities during 1995 was due to a $22.4 million, or 1.4%, increase in the
average balance of mortgage-backed securities and an increase in the yield
earned of 117 basis points. These increases were more than enough to offset a
$762,000 decrease in interest earned on Guaranteed Assets, due to the early
termination of the Assistance Agreement effective March 31, 1994, and a $1.1
million, or 40.2% decrease in interest earned on investment securities and
other interest-earning assets primarily due to a $40.1 million decrease in the
average balance.
Total interest expense amounted to $138.2 million in 1996, an $11.8
million, or 9.4%, increase from 1995. A $6.3 million, or 14.1%, increase in
interest paid on other borrowed money was due to a $178.3 million increase in
the average balance of securities sold under agreements to repurchase offset
by a 46 basis point decrease in interest rates paid. A $3.4 million, or 5.9%
increase in interest paid on savings deposits was due to a $82.9 million, or
7.4%, increase in the average balance of interest-bearing deposits offset by a
7 basis point decrease in interest rates paid. The interest expense of $5.0
million on the Senior Notes payable in 1996 was due to the issuance of $50.0
million of the 10.0% Senior Notes on June 30, 1995. These increases were
somewhat offset by the $367,000 decrease in interest paid on advances from the
FHLB. The decrease in interest paid on advances from the FHLB was due to a 39
basis point decrease in interest rates paid offset by a $19.4 million increase
in the average balance.
Total interest expense amounted to $126.4 million in 1995, a $37.8
million, or 42.7%, increase from 1994. A $18.6 million, or 48.8%, increase in
interest paid on savings deposits was due to a $153.1 million, or 15.9%,
increase in the average balance of interest-bearing savings deposits and a 112
basis point increase in interest rates paid. A $17.4 million, or 63.2%,
increase in interest paid on other borrowed money was due to a $159.4 million,
or 26.9% increase in the average balance of securities sold under agreements
to repurchase and a 133 basis point increase in interest rates paid. The
interest expense of $2.5 million on the Senior Notes payable was due to the
issuance of $50.0 million of the 10.0% Senior Notes on June 30, 1995. These
increases were more than enough to offset the $687,000 decrease in interest
paid on advances from the FHLB. The decrease in interest paid on advances
from the FHLB was due to a $143.5 million, or 28.1%, decrease in the average
balance offset by a 155 basis point increase in interest rates paid.
PROVISION FOR LOAN LOSSES
Management established provisions for loan losses of $1.9 million, $1.7
million and $934,000 for the years ended December 31, 1996, 1995 and 1994,
respectively. The increase in the provision for loan losses for 1996 was due
to the change in the composition of the loans receivable portfolio and the
increase in the loans receivable balance to $1.2 billion at December 31, 1996
as compared to $1.1 billion at December 31, 1995. Commercial loans (including
real estate related and business loans) increased $7.0 million to $219.9
million from December 31, 1995 to December 31, 1996. The 1995 increase of
$730,000 from the prior year's provision for loan losses was primarily due to
the $511.5 million increase in net loans receivable from December 31, 1994 to
December 31, 1995. Provisions for loan losses, currently $450,000 per
quarter, are charged to earnings to bring the total allowance for loan losses
to a level deemed appropriate by management based on such factors as
historical experience, the volume and type of lending conducted by Coastal,
the amount of nonperforming assets, industry standards, regulatory policies,
generally accepted accounting principles, general economic conditions,
particularly as they relate to Coastal's lending areas, and other factors
related to the collectibility of Coastal's loan portfolio. Coastal's asset
quality ratios have remained relatively consistent from December 31, 1994 to
December 31, 1996. Nonperforming loans as a percentage of total loans
receivable, net, was 1.0%, 1.3% and 1.0% at December 31, 1996, 1995 and 1994,
respectively. The allowance for loan losses as a percentage of nonperforming
loans was 53.6%, 39.0% and 35.4% at December 31, 1996, 1995 and 1994,
respectively. The allowance for loan losses as a percentage of total loans
receivable, net, was 0.6%, 0.5% and 0.4% at December 31, 1996, 1995 and 1994,
respectively.
Coastal's management believes that its present allowance for loan losses
is adequate, based upon, among other factors, its low level of nonperforming
assets and minimal loss experience. Management will continue to review its
loan loss policy as Coastal's loan portfolio grows and diversifies to
determine if changes to the policy are necessary.
NONINTEREST INCOME
Total noninterest income amounted to $9.3 million during 1996, an
increase of $1.7 million, or 22.9%, over 1995. The increase in noninterest
income was primarily due to an increase of $1.8 million in loan fees and
service charges and a $521,000 gain recorded as a result of the sale of a
branch office in May 1996 offset by a decrease of $471,000 in loan servicing
income in 1996 from 1995. The increase in loan fees and service charges
consisted of a $941,000 increase in loan fees resulting primarily from the
increased origination activity of primarily residential construction loans,
commercial loans secured by residential mortgage loans held for sale,
multifamily and commercial real estate loans and a $906,000 increase in
service charges on deposit accounts primarily due to the Texas Capital
acquisition. Coastal also experienced slight decreases of $85,000 and $68,000
in the gain (loss) on sales of mortgage-backed securities available-for-sale
and other noninterest income, respectively.
Total noninterest income amounted to $7.6 million during 1995, a decrease
of $2.0 million, or 20.5% compared to 1994. The decrease in noninterest
income was primarily due to the $1.7 million reduction in asset management and
disposition fees received in 1994 from a nonbanking subsidiary of the Bank,
CBS Asset Corp. CBS Asset Corp. owned 63% of Coastal Realty Partners until
the sale of its interest in the partnership effective November 1, 1994.
Coastal also experienced slight decreases of $14,000, $201,000, and $111,000
in loan fees and service charges, loan servicing income and gain on sales of
mortgage-backed securities available-for-sale, net, respectively during 1995.
These decreases were somewhat offset by a $101,000 increase in other
noninterest income.
NONINTEREST EXPENSE
Total noninterest expense, excluding the $7.5 million special assessment
(before applicable income taxes), amounted to $39.4 million during 1996, an
increase of $8.0 million, or 25.6%, over 1995. Compensation, payroll taxes
and other benefits and office occupancy expense increased $4.5 million and
$1.4 million to $16.5 million and $6.0 million, respectively, primarily due to
the operation of the five offices acquired from Texas Capital on November 1,
1995, two de novo branches opened in March 1995 and staffing increases related
to the expansion of the loan product base available to customers and
continuing development of the commercial business lending programs and to the
overtime and contract labor utilized for the data processing conversion. The
amortization of goodwill increased by $511,000 also due primarily to the Texas
Capital acquisition. Data processing expenses increased $443,000 due to the
Texas Capital acquisition, the May 1996 Bank data processing conversion and
the conversion in June 1996 of the five former Texas Capital locations
acquired in 1995 to the new data processing system. Expenses related to real
estate owned increased by $484,000 and other expenses (including advertising)
increased $1.8 million, or 27.5%, over the prior year. Insurance premiums
decreased $1.0 million, or 32.2%, due to the $636,000 refund of the fourth
quarter 1996 SAIF assessment payment as a result of the re-capitalization of
SAIF pursuant to the Act and an overall decrease in assessment rate applicable
in 1996 as compared to the rate applicable in 1995.
Total noninterest expense amounted to $31.4 million during 1995, an
increase of $3.8 million, or 13.8%, over 1994. Compensation, payroll taxes
and other benefits and office occupancy increased $1.0 million and $955,000 to
$12.0 million and $4.6 million, respectively, primarily due to the operation
in 1995 of the eight branches acquired from Texas Trust in December 1994, the
two de novo branches opened in the first quarter of 1995 and the five offices
acquired from Texas Capital on November 1, 1995. Insurance premiums, data
processing and the amortization of goodwill also increased by $343,000, or
11.8%, $225,000, or 14.6%, and $177,000, or 16.2%, respectively, due to the
acquisitions in December 1994 of Texas Trust and November 1995 of Texas
Capital. Expenses related to real estate owned increased by $261,000, due to
the increase in the real estate owned portfolio, while the amortization of
purchased loan servicing rights decreased $300,000 due to the decrease in the
underlying loans serviced. Other expenses (including advertising) increased
$1.1 million, or 20.4%, over the prior year.
<PAGE>
PROVISION FOR FEDERAL INCOME TAXES
Coastal generated no regular Federal taxable income in 1994, 1995 or 1996
primarily due to the utilization of the net operating loss carryovers acquired
from the associations obtained in connection with the Southwest Plan
Acquisition and because payments to Coastal pursuant to the Assistance
Agreement were excludable from taxable income, which resulted in Coastal
reporting losses each year for tax purposes. However, pursuant to the terms
of the Assistance Agreement, the FRF retained all of the future tax benefits
to be derived from the Federal income tax treatment of the assistance payments
received from such instrumentality and from the utilization of the net
operating loss carryovers acquired. The amount of tax benefit to Coastal
during these years (which corresponds to the amount of Federal taxes which
Coastal would have paid in these years but for the tax-exempt nature of the
assistance payments from such instrumentality and the utilization of the net
operating loss carryovers) is recorded in Coastal's Consolidated Statements of
Operations as its provision for Federal income taxes, which also includes
alternative minimum taxes paid. The alternative minimum taxes recorded during
these years will be available as credit carryforwards to reduce future Federal
regular income taxes, over an indefinite period.
The provisions for Federal income taxes were $5.7 million in 1996, $6.5
million in 1995 and $4.3 million in 1994. The 1994 provision for Federal
income taxes was affected by a reversal of approximately $2.0 million of
accrued income taxes due to the settlement of certain tax issues with the
FDIC. Although the termination of the Assistance Agreement was effective
March 31, 1994, the FRF will continue to receive the future Federal income tax
benefits of the net operating loss carryforwards acquired.
ASSET AND LIABILITY MANAGEMENT
The principal determinant of the exposure of Coastal's earnings to
interest rate risk is the timing difference between the repricing or maturity
of Coastal's interest-earning assets and the repricing or maturity of its
interest-bearing liabilities. In order to minimize interest rate risk and to
lock in an acceptable interest rate spread between interest-earning assets and
interest-bearing liabilities, Coastal endeavors to match the timing of the
repricing or maturities as well as the basis (for example, the London
Interbank Offered Rate ("LIBOR") or cost of funds rate) of its
interest-earning assets to its interest-bearing liabilities. Coastal also
uses interest rate swap and cap agreements to aid in minimizing exposure to
interest rate fluctuations. These strategies are described below.
Coastal's asset and liability management strategy is formulated and
monitored by the Securities Investment Committee of the Board of Directors of
the Bank (the "Board"). The Board's written policies and procedures are
implemented by the Management Securities Investment Subcommittee (the
"Subcommittee"), a management-staffed committee composed of the Chief
Executive Officer, the Chief Investment Officer and the Chief Lending Officer
of the Bank. The Subcommittee meets at least weekly to review, among other
things, the sensitivity of Coastal's assets and liabilities to interest rate
changes, including those transactions attributable to altering the interest
rate risk, the book and market values of assets and liabilities, unrealized
gains and losses, the past week's purchase and sale activity and maturities of
investments and borrowings. The Subcommittee also meets with members of
Coastal's banking and operations divisions to make pricing and funding
decisions with respect to Coastal's overall asset and liability composition.
In accordance therewith, the Subcommittee reviews Coastal's liquidity, cash
flow needs, maturities of investments, deposits and borrowings, core deposit
activity, current market conditions and interest rates on both a local and
national level.
The Securities Investment Committee of the Board of Directors of the Bank
and the Subcommittee regularly review interest rate risk by forecasting the
impact of alternative interest rate scenarios on net interest income and on
Coastal's market value of portfolio equity ("MVPE"), which is defined as the
net present value of an institution's existing assets, liabilities and
off-balance sheet instruments, and by evaluating such impact against the
maximum potential changes in net interest income and MVPE that is authorized
by the Board of Directors of Coastal. Coastal also utilizes market-value
analysis which addresses the change in equity value of Coastal's balance sheet
arising from movements in interest rates. The market value of equity is
estimated by valuing Coastal's assets and liabilities. The extent to which
assets have gained or lost value in relation to the gains or losses of
liabilities determines the appreciation or depreciation in equity on a
market-value basis. Market value analysis is intended to evaluate the impact
of immediate and sustained interest rate shifts of the current yield curve
upon the market value of the current balance sheet. Based on Coastal's
December 31, 1996 interest rate sensitivity position, management believes that
at December 31, 1996 an immediate 100 basis point increase in interest rates
could cause a short term decrease in net interest income due to timing
differences but would not have a significant impact over a twelve month
period. There can be no assurance that this conclusion will not change as the
assumptions utilized by management to reach such conclusion change over time.
The following table sets forth at December 31, 1996 and 1995 the
estimated percentage change in Coastal's net interest income over a
four-quarter period and MVPE based on the indicated changes in interest rates.
<TABLE>
<CAPTION>
Estimated Change In
Change Net Interest Income MVPE
In Interest Rates December 31, December 31,
(in basis points) (1) 1996 1995 1996 1995
<S> <C> <C> <C> <C>
+300 0.58% (19.68)% (55.68)% (17.54)%
+200 0.96 (10.88) (36.81) (11.08)
+100 (0.35) (3.33) (17.02) (3.45)
0 -- -- -- --
- -100 1.57 8.17 7.02 1.64
- -200 1.37 35.63 3.78 (2.73)
- -300 5.34 59.56 (1.62) (7.37)
</TABLE>
(1) Assumes an instantaneous uniform-change in interest rates at all
maturities.
Management of Coastal believes that all of the assumptions used in this
analysis to evaluate the vulnerability of Coastal's operations to changes in
interest rates approximate actual experience and considers them reasonable;
however, the interest rate sensitivity of Coastal's assets and liabilities and
the estimated effects of changes in interest rates on Coastal's net interest
income and MVPE indicated in the above analysis could vary substantially if
different assumptions were used or if actual experience differs from the
historical experience on which it is based. The assumptions used in this
analysis do not reflect the repricing lag relating to Coastal's
mortgage-backed securities discussed below.
Prepayment risk arises due to the possibility that the cash flow
experience of an asset may change as interest rates change. When interest
rates increase, assets will generally not be prepaid and conversely, when
interest rates decrease, prepayments increase. The magnitude of the risk that
a higher yielding asset will prepay is a direct function of interest rate
variability over the life of the assets. Prepayments affect Coastal's net
spread and the duration match of its assets and liabilities. Coastal has
prepayment risk on its mortgage-backed securities and loans receivable held at
a premium and on its purchased loan servicing rights due to the fact that the
amortization of the capitalized premiums on those assets will accelerate when
the underlying loans are prepaid. Coastal attempts to anticipate its
prepayment risk by extrapolation from past prepayment behavior after adjusting
for expected interest rate levels and other economic factors and utilizes
these assumptions when analyzing its risk exposure.
Due principally to the rapidly rising interest rate environment in 1994
coupled with the fact that a majority of Coastal's mortgage-backed securities
portfolio was indexed to the 11th District Federal Home Loan Bank cost of
funds index ("COFI"), an index in which changes in general market rates of
interest, particularly LIBOR, are not immediately reflected, the market value
of Coastal's mortgage-backed securities portfolio had a temporary unrealized
net loss of approximately $135.3 million at December 31, 1994. However,
during 1995, the COFI continued to increase while other short term indexes
such as LIBOR generally remained constant, resulting in an increase in the
market value of COFI indexed mortgage-backed securities. In addition, in
November 1995, the FASB issued the Special Report, "A Guide to Implementation
of Statement 115 on Accounting for Certain Investments in Debt and Equity
Securities." Provisions in this Special Report granted all entities a
one-time opportunity, until no later than December 31, 1995, to reassess the
appropriateness of the classifications of all securities held and to account
for any resulting reclassifications at fair value in accordance with Statement
115. The provisions of the Special Report also directed that any
reclassifications as a result of this one-time reassessment would not call
into question the intent to hold other debt securities to maturity in the
future. In accordance with this Special Report, on November 20, 1995, Coastal
reclassified approximately $226.6 million of mortgage-backed securities to the
available-for-sale category. These mortgage-backed securities reclassified to
the available-for-sale category were primarily COFI securities. At December
31, 1996, the mortgage-backed securities held-to-maturity portfolio had a
temporary unrealized net loss of approximately $36.0 million and the
mortgage-backed securities available-for-sale portfolio had a temporary
unrealized net loss of approximately $4.8 million. The changes in the market
value of these securities does not have an effect on net interest income.
A more conventional but limited asset and liability monitoring tool
involves analyzing of the extent to which assets and liabilities are "interest
rate sensitive" and measuring an institution's interest rate sensitivity
"gap." While this conventional gap measure may be useful, it is limited in
its ability to predict trends in future earnings and to predict the effect of
changing interest rates. It makes no assumptions about changes in prepayment
tendencies, deposit or loan maturity preferences or repricing time lags that
may occur in response to a change in the interest rate environment. An asset
or liability is said to be interest rate sensitive within a specific time
period if it will mature or reprice within that time period. The interest
rate sensitivity "gap" is defined as the difference between interest-earning
assets and interest-bearing liabilities maturing or repricing within a given
time period. A gap is considered positive when the amount of interest rate
sensitive assets exceeds the amount of interest rate sensitive liabilities. A
gap is considered negative when the amount of interest rate sensitive
liabilities exceeds interest rate sensitive assets. During a period of rising
interest rates, a negative gap would tend to adversely affect net interest
income, while a positive gap would tend to result in an increase in net
interest income. During a period of falling interest rates, a negative gap
would tend to increase net interest income, while a positive gap would tend to
adversely affect net interest income. Given Coastal's current position,
however, Coastal's net interest spread would benefit over time from a gradual
increase in interest rates, in which its assets may be redeployed at higher
yields. If interest rates were to fall, yields earned on interest rate
sensitive investments would be reduced, while longer term fixed liability
costs, such as Coastal's certificates of deposits, would not immediately
change. While this interest-sensitivity analysis takes into account repricing
and maturities of assets and liabilities, it fails to consider the interest
rate sensitivities of those asset and liability accounts. Management of
Coastal does not view the current mismatched assets and liabilities as
presenting high risk potential, although no assurance can be given that
Coastal is not at risk from interest rate increases.
The following table summarizes the contractual maturities or repricing
characteristics of Coastal's interest-earning assets and interest-bearing
liabilities adjusted for the effects of interest rate swaps and caps at
December 31, 1996. The principal balance of adjustable rate assets is
included in the period in which they are first scheduled to adjust rather than
in the period in which they mature. Other material assumptions are set forth
in the footnotes to the table.
(dollars in thousands)
<TABLE>
<CAPTION>
More than More than More than More than More than
Three months three months one year to three years to five years to ten years to Over
or less to one year three years five years ten years twenty years twenty
years Totals
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-SENSITIVE ASSETS
Loans, net (1)(2):
First lien mortgage-single
family fixed rate $1,226 $1,631 $5,154 $5,560 $22,679
First lien mortgage-single
family adjustable rate 46,097 411,029 106,270 22,685 5,266
First lien mortgage-multifamily
fixed rate 75 12,415 9,880 7,563 505
First lien mortgage-multifamily
variable rate 105,529 -- -- -- --
Construction and acquisition
and development, net of
loans in process 58,306 331 8,553 -- --
Commercial real estate 60,923 3,318 9,787 8,124 10,384
Commercial 91,004 426 2,134 1,625 192
Consumer and other 6,944 4,436 5,502 4,148 829
Mortgage-backed securities
held-to-maturity(1)(2) 1,104,042 -- -- 2 --
Mortgage-backed securities
available-for-sale 180,656 -- -- -- --
(1)(2)
Investment securities and other
interest-earning assets (3) 30,552 11 -- -- --
---------------------------------------------------------
Total interest-sensitive
assets 1,685,354 433,597 147,280 49,707 39,855
=========================================================
Noninterest-sensitive assets
Total assets
INTEREST-SENSITIVE LIABILITIES:
Savings deposits (4):
NOW accounts $ 56,862 $ -- $ -- $ -- $ --
Savings accounts 22,135 -- -- -- --
Money market accounts 151,046 -- -- -- --
Certificate accounts
(including discount) 281,090 491,477 199,469 23,332 165
Securities sold under
agreements to repurchase 822,275 -- 144,712 -- --
Advances from the FHLB 175,292 13,835 190,545 17,174 6,369
Senior Notes payable -- -- -- -- 50,000
Total interest-sensitive
liabilities 1,508,700 505,312 534,726 40,506 56,534
=================================================================
Noninterest-sensitive
liabilities
Total liabilities
Preferred Stock of the Bank
Common stockholders' equity
Total liabilities and stockholders'
equity
Gap during the period $ 176,654 $ (71,715) $ (387,446) $ 9,201 $ (16,679)
Effect of interest rate
swaps and caps(5) 142,902 (54,000) (58,000) (7,460) (23,442)
---------------------------------------------------------------
Cumulative gap after
effect of interest rate
swaps and caps $ 319,556 $ 193,841 $ (251,605) (249,864) (289,985)
================================================================
Interest-sensitive assets as a % of
interest-sensitive liabilities
(cumulative) 111.71% 105.21% 88.92% 89.44% 89.04%
Interest-sensitive assets
as a % of total assets
(cumulative) 58.60 73.68 78.80 80.53 81.91
Ratio of gap after
effect of interest rate
swaps and caps total asets 11.11 (4.37) (15.49) 0.06 (1.40)
Ratio of cumulative gap after
effect of interest rate
swaps and caps to total assets 11.11 6.74 (8.75) (8.69) (10.08)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-SENSITIVE ASSETS
Loans, net (1)(2):
First lien mortgage-single
family fixed rate $ 79,915 $ 81,688 $ 197,853
First lien mortgage-single family
adjustable rate -- -- 591,347
First lien mortgage-multifamily
fixed rate 2,438 -- 32,876
First lien mortgage-multifamily
variable rate -- -- 105,529
Construction and acquisition and
development, net of loans in process 393 -- 67,583
Commercial real estate 24,294 -- 116,830
Commercial -- -- 95,381
Consumer and other 788 -- 22,647
Mortgage-backed securities
held-to-maturity(1)(2) -- 240,543 1,344,587
Mortgage-backed securities available-for-sale -- -- 180,656
(1)(2)
Investment securities and other
interest-earning assets (3) -- -- 30,563
--------------------------------------
Total interest-sensitive assets 107,828 322,231 2,785,852
=====================================
Noninterest-sensitive assets 90,055
----------
Total assets $2,875,907
==========
INTEREST-SENSITIVE LIABILITIES:
Savings deposits (4):
NOW accounts $ -- $ -- $ 56,862
Savings accounts -- -- 22,135
Money market accounts -- -- 151,046
Certificate accounts (including discount) -- -- 995,533
Securities sold under agreements to repurchase -- -- 966,987
Advances from the FHLB 6,505 -- 409,720
Senior Notes payable -- -- 50,000
----------
Total interest-sensitive liabilities 6,505 -- 2,652,283
====================================
Noninterest-sensitive liabilities 100,726
----------
Total liabilities 2,753,009
Preferred Stock of the Bank 28,750
Common stockholders' equity 94,148
Total liabilities and stockholders' $ 2,875,907
equity
Gap during the period $ 101,323 $ 322,231
Effect of interest rate swaps and caps(5) -- --
--------- -------
Cumulative gap after effect of interest \
rate swaps and caps $ (188,662) $ 133,569
======================
Interest-sensitive assets as a % of interest-sensitive
liabilities (cululative) 92.89% 105.04
Interest-sensitive assets as a % of total
assets (cumulative) 85.66 96.87
Ratio of gap after effect of interest rate
swaps and caps
to tal asets 3.52 11.20
Ratio of cumulative gap after effect of
interest rate swaps and caps to total assets (6.56) 4.64
</TABLE>
(1) Fixed-rate mortgage loans, consumer loans and fixed-rate
mortgage-backed securities are based on contractual maturities (assuming no
periodic amortization).
(2) Variable and adjustable-rate mortgage loans and adjustable-rate
mortgage-backed securities are included in the period in which they reprice
(assuming no periodic amortization).
(3) Includes U.S. Treasury security available-for-sale, certificates and
time deposits, interest-bearing deposit accounts and FHLB stock.
(4) NOW accounts, savings accounts and money market accounts are all
assumed to be interest-rate sensitive. Fixed-rate certificate accounts are
based on contractual maturities. Adjustable-rate certificate accounts are
included in the period in which they reprice.
(5) Amounts represent the notional principal amount of the interest rate
swaps and certain interest rate cap agreements which are designed to protect
Coastal against rising interest rates, which are currently "in the money."
<PAGE>
INTEREST RATE RISK MANAGEMENT
Coastal enters into interest rate swap and interest rate cap agreements
with selected broker/dealers who are primarily government securities dealers
("Brokers") and with the FHLB to reduce its exposure to floating interest
rates on a portion of its adjustable rate liabilities.
An interest rate swap is an agreement where one party (generally Coastal)
agrees to pay a fixed rate of interest on a notional principal amount to a
second party (generally the FHLB or the Broker) in exchange for receiving from
the second party a variable rate of interest on the same notional amount for a
predetermined period of time. No actual assets are exchanged in a swap of
this type and interest payments are generally netted. Coastal enters into
this type of transaction in order to maintain a spread position between
certain assets and liabilities in the event that interest rates increase. If
Coastal pays a fixed rate and receives a variable rate, the variable rate to
be received by Coastal will reprice at the same time and at a similar rate as
the funding liabilities which are altered by the swap and will thereby offset,
to a certain degree, increases in funding costs. Under any other interest
rate scenario, the swap will have a negative impact on net interest income.
At December 31, 1996, Coastal was a party to interest rate swap
agreements which have an aggregate notional amount of $60.9 million and expire
from 1997 to 2005. With respect to such agreements, Coastal makes
weighted-average fixed interest payments ranging from 4.99 to 6.93%, and
receives payments based on the floating one- and three-month LIBOR. Coastal
records net interest income or expense relating to the swap agreements on a
monthly basis in interest expense on other borrowed money. The net effect of
the interest rate swaps to Coastal for the year ended December 31, 1996 was to
increase interest expense by approximately $593,000. See Note 18 of the Notes
to Consolidated Financial Statements.
An interest rate cap is a guarantee given by one party, referred to as
the issuer (the FHLB or a Broker), to another party, referred to as the
purchaser (Coastal), in exchange for the payment of a premium, that if
interest rates rise above a specified rate on a specified interest rate index,
the issuer will pay to the purchaser the difference between the then current
market rate and the specified rate on a notional principal amount for a pre
determined period of time. No funds are actually borrowed or repaid. The
principal purpose of purchasing these caps is to prevent the occurrence of a
negative spread relating to certain adjustable rate assets in Coastal's
portfolio during a period in which the cost of funds borrowed to acquire such
assets rises above the contractual interest rate ceiling on the asset
purchased. Interest rate caps generally decrease the interest margin because
Coastal receives no payment from the issuer (until the rate index rises above
the rate cap) but continues to amortize the prepaid premium. At December 31,
1996, Coastal had interest rate cap agreements, which expire from 1997 to
2000, covering an aggregate notional amount of $386.6 million and are
triggered, depending on the particular contract, whenever the defined floating
rate exceeds 5.0% to 12.5%. The purchase price or premium of the interest
rate cap agreements paid by Coastal is capitalized and included in prepaid
expenses and other assets and is amortized over the life of the agreements
using the straight-line method. For the year ended December 31, 1996, the
interest rate caps resulted in an overall decrease in interest income of
approximately $518,000. See Note 18 of the Notes to Consolidated Financial
Statements.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Coastal's assets increased from $2.8 billion at December 31, 1995 to $2.9
billion at December 31, 1996. Stockholders' equity amounted to $94.1 million,
or $18.95 per share, at December 31, 1996. The regulatory capital of
Coastal's subsidiary, Coastal Banc ssb, exceeded all three of the Bank's
regulatory capital requirements at December 31, 1996. At December 31, 1996,
the Bank's core capital amounted to 5.35% of adjusted total assets, compared
to the requirement of 4.0%, its Tier 1 risk-based capital amounted to 11.77%
of risk-adjusted assets as compared to the requirement of 4.0% and its total
risk-based capital amounted to 12.30% of risk-adjusted assets, compared to a
requirement of 8.0%.
Coastal's primary sources of funds consist of savings deposits bearing
market rates of interest, securities sold under agreements to repurchase,
advances from the FHLB and principal and interest payments on loans receivable
and mortgage-backed securities. On December 30, 1994, Coastal acquired eight
branches from Texas Trust which resulted in the assumption of $150.2 million
in savings deposits. On November 1, 1995, Coastal acquired all of the issued
and outstanding common stock of Texas Capital for a purchase price of
approximately $21.1 million. In connection with this acquisition, Coastal
acquired approximately $159.1 million in assets (net of the purchase price).
Coastal uses its funding resources principally to meet its ongoing commitments
to fund maturing deposits and deposit withdrawals, repay borrowings, purchase
mortgage-backed securities and loans receivable, fund existing and continuing
loan commitments, maintain its liquidity, meet operating expenses and fund
acquisitions. At December 31, 1996, Coastal had binding commitments to
originate or purchase loans totaling approximately $29.6 million and had $38.7
million of undisbursed loans in process. In addition, at December 31, 1996,
Coastal had commitments under lines of credit to originate primarily
construction and other loans of approximately $103.7 million and letters of
credit outstanding of $1.4 million. Scheduled maturities of certificates of
deposit during the twelve months following December 31, 1996 totaled $772.7
million. Management believes that Coastal has adequate resources to fund all
its commitments.
INFLATION AND CHANGING PRICES
The Consolidated Financial Statements and related data presented herein
have been prepared in accordance with generally accepted accounting
principles, which require the measurement of financial position and operating
results in terms of historical dollars, without considering changes in the
relative purchasing power of money over time due to inflation. Unlike most
commercial companies, substantially all of the assets and liabilities of
Coastal are monetary in nature. As a result, interest rates have a more
significant impact on Coastal's performance than the effects of general levels
of inflation. Interest rates do not necessarily move in the same direction or
with the same magnitude as the prices of goods and services.
FORWARD-LOOKING INFORMATION
The above discussion should be read in conjunction with the information
contained in the Consolidated Financial Statements and the Notes thereto. The
above information contains "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995 (the "Reform Act"), and
are subject to the safe harbor created by that Reform Act. The words
"estimate," "project," "anticipate," "expect," "intend," "believe," "plans,"
and similar expressions are intended to identify forward-looking statements.
Because such forward-looking statements involve risks and uncertainties, there
are important factors that could cause actual results to differ materially
from those expressed or implied by such forward-looking statements. Factors,
all of which are difficult to predict and many of which are beyond the control
of Coastal, that could cause actual results to differ materially include, but
are not limited to: risks related to Coastal's acquisition strategy,
including risks of adversely changing results of operations and factors
affecting Coastal's ability to consummate further acquisitions; changes in
general economic and business conditions; changes in market rates of interest;
changes in the laws and regulations applicable to Coastal; the risks
associated with the Bank's Non-Traditional lending (loans other than
single-family residential mortgage loans such as multifamily, real estate
acquisition and development, commercial, warehouse and PMSR loans); and
changes in business strategies and other factors as discussed in Coastal's
Annual Report on Form 10-K as filed with the Securities and Exchange
Commission.
<PAGE>
Coastal Bancorp, Inc. and Subsidiaries
DIRECTORS AND OFFICERS
BOARD OF DIRECTORS OF COASTAL BANCORP, INC., COASTAL BANC SSB AND SUBSIDIARIES
(AS NOTED)
MANUEL J. MEHOS
Chairman of the Board, President and Chief Executive Officer of Coastal
Bancorp, Inc.; Chairman of the Board, President and Chief Executive Officer of
Coastal Banc Holding Company, Inc.; Chairman of the Board, President and Chief
Executive Officer of the Bank, a wholly-owned subsidiary of Coastal Banc
Holding Company, Inc.; and President of CBS Asset Corp., and Chief Executive
Officer of CoastalBanc Financial Corp., each wholly-owned subsidiaries of the
Bank
R. EDWIN ALLDAY
Consultant for The Dini Partners, Inc., a company that provides counseling in
philanthropy and non-profit management, Houston, Texas
D. FORT FLOWERS, JR.
Chairman of the Board of DIFCO, Inc., a railroad car engineering and
manufacturing company, Houston, Texas, and Director of The Ohio Bank, Findlay,
Ohio
DENNIS S. FRANK
President and Chief Executive Officer of DSF Management Corp., a private
investment company, Houston, Texas, and Chief Executive Officer and President
of Silvergate Thrift and Loan, La Mesa, California
ROBERT E. JOHNSON, JR.
Partner, law firm of Johnson & Johnson, Austin, Texas
JAMES C. NIVER
Retired, former President of Century Land Company, a residential real estate
development company, Houston, Texas
CLAYTON T. STONE
Executive Vice President of Hines Interests Limited Partnership, Aspen,
Colorado
CORPORATE OFFICERS OF COASTAL BANCORP, INC.
MANUEL J. MEHOS
President and Chief Executive Officer
CATHERINE N. WYLIE
Executive Vice President, Chief Financial Officer and Treasurer
LINDA B. FRAZIER
Vice President and Secretary
CORPORATE OFFICERS OF COASTAL BANC HOLDING COMPANY, INC.
MANUEL J. MEHOS
Chairman of the Board, President and Chief Executive Officer
CATHERINE N. WYLIE
Executive Vice President, Chief Financial Officer and Director/Treasurer
LINDA B. FRAZIER
Vice President and Director/Secretary
BARBARA A. STEEN
Assistant Treasurer and Director/Assistant Secretary
CORPORATE OFFICERS OF COASTAL BANC SSB
MANUEL J. MEHOS
President and Chief Executive Officer
JOHN D. BIRD
Executive Vice President - Chief Administrative Officer
GARY R. GARRETT
Executive Vice President - Chief Lending Officer
DAVID R. GRAHAM
Executive Vice President - Real Estate Lending Group
SANDRA S. ORR
Executive Vice President - Chief Investment Officer
NANCY S. VADASZ
Executive Vice President - Market and Product Strategies
CATHERINE N. WYLIE
Executive Vice President - Chief Financial Officer
COASTAL
A HISTORICAL VIEWPOINT
Coastal was acquired by an investor group in 1986 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 the change in ownership),
Coastal had one full service office and total assets of approximately $10.7
million.
In May 1988, Coastal became the first acquirer of failed or failing
savings institutions under the Federal government's "Southwest Plan." In this
transaction, Coastal acquired from the Federal Savings and Loan Insurance
Corporation, as receiver for four insolvent savings associations, 14
additional branch offices and approximately $543.4 million of assets and
assumed $543.4 million in deposits and other liabilities. Since completion of
the Southwest Plan acquisition and through 1996, Coastal entered into five
branch acquisitions and one whole bank acquisition: two with an
instrumentality of the Federal government and four with private institutions.
In each transaction, Coastal agreed to acquire certain assets in consideration
of the assumption of certain deposit liabilities with respect to each
institution. In 1996, Coastal also exchanged three branches for one resulting
in a net deposit increase of $26.0 million and sold one branch in separate
transactions. All of these transactions resulted in the net assumption of
$1.5 billion of deposits and the net acquisition of 45 branch offices.
Coastal has also opened six de novo branches since inception. Coastal has
been able to achieve operating economies and improve efficiency by closing an
aggregate of 15 branch offices and transferring the deposits to other offices
located in the same market area.
At December 31, 1996, Coastal had total assets of approximately $2.9
billion and total deposits of approximately $1.3 billion with 37 branch
offices in metropolitan Houston, Corpus Christi, Austin and small cities in
central and south Texas.
71
Independent Auditors' Report
The Board of Directors
Coastal Bancorp, Inc.:
We have audited the accompanying consolidated statements of financial
condition of Coastal Bancorp, Inc. and subsidiaries as of December 31, 1996
and 1995 and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the years in the three-year period ended
December 31, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial condition of Coastal
Bancorp, Inc. and subsidiaries at December 31, 1996 and 1995 and the results
of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1996 in conformity with generally
accepted accounting principles.
As discussed in Notes 2 and 8 to the consolidated financial statements,
the Company changed its method of accounting for certain debt securities in
1994 to adopt the provisions of the Financial Accounting Standards Board's
Statement No. 115, "Accounting for Certain Investments in Debt and Equity
Securities."
January 15, 1997
Houston, Texas
<TABLE>
<CAPTION>
COASTAL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1996 AND 1995
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS 1996 1995
- --------------------------------------------------------------- ---------- ----------
<S> <C> <C>
Cash and amounts due from depository institutions $ 27,735 $ 9,870
Certificates and time deposits -- 174
---------- ----------
Cash and cash equivalents 27,735 10,044
Loans receivable (Notes 9 and 14) 1,229,748 1,098,555
Mortgage-backed securities held-to-maturity (market value of
$1,308,598 in 1996 and $1,381,650 in 1995) (Notes 8, 14,
15, 17 and 18) 1,344,587 1,395,753
Mortgage-backed securities available-for-sale, at market value
(Notes 8, 14 and 15) 180,656 186,414
U.S. Treasury security available-for-sale, at market value
(Note 6) 11 3,997
Mortgage loans held for sale 298 731
Accrued interest receivable (Note 10) 14,690 15,538
Property and equipment (net of accumulated depreciation and
amortization of $7,009 in 1996 and $5,439 in 1995) 14,987 13,439
Stock in the Federal Home Loan Bank of Dallas ("FHLB") 25,971 21,759
Goodwill (net of accumulated amortization of $9,430 in
1996 and $7,646 in 1995) 15,596 17,972
Purchased loan servicing rights (Note 11) 6,674 8,140
Capitalized excess servicing fees (Note 11) 136 183
Prepaid expenses and other assets (Notes 12, 18 and 20) 14,818 14,003
---------- ----------
$2,875,907 $2,786,528
========== ==========
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Liabilities:
Savings deposits (Note 13) $1,310,835 $1,287,084
Advances from the FHLB (Note 14) 409,720 312,186
Securities sold under agreements to repurchase (Note 15) 966,987 993,832
Senior Notes payable (Note 16) 50,000 50,000
Advances from borrowers for taxes and insurance 4,676 6,510
Other liabilities and accrued expenses 10,791 16,487
Total liabilities 2,753,009 2,666,099
----------- -----------
9.0% noncumulative preferred stock of Coastal Banc ssb
(Note 24) 28,750 28,750
Commitments and contingencies (Notes 3, 5, 9, 18, 22 and 25)
Stockholders' equity (Notes 3, 8, 22 and 26)
Preferred Stock, no par value; authorized shares 5,000,000;
no shares issued -- --
Common Stock, $.01 par value; authorized shares 30,000,000;
4,966,941 and 4,957,870 shares issued and outstanding in
1996 and 1995 50 50
Additional paid-in capital 32,604 32,492
Retained earnings 64,597 59,631
Unrealized gain (loss) on securities available-for-sale (Note 8) (3,103) (494)
Total stockholders' equity 94,148 91,679
----------- -----------
$2,875,907 $2,786,528
=========== ===========
</TABLE>
See accompanying notes to Consolidated Financial Statements.
<TABLE>
<CAPTION>
COASTAL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1996 1995 1994
---------------------------
<S> <C> <C> <C>
Interest income:
Mortgage-backed securities $ 95,155 $102,194 $ 82,065
Loans receivable 96,143 65,508 42,403
Covered Assets (Note 4) -- -- 762
Investment securities, certificates, time
deposits and other investments 1,521 1,687 2,823
192,819 169,389 128,053
------------------------------
Interest expense:
Savings deposits 60,076 56,716 38,127
Other borrowed money 51,360 45,022 27,589
Senior Notes payable 5,000 2,500 --
Advances from the FHLB:
Short-term 6,622 1,703 7,565
Long-term 15,127 20,413 15,238
----------------------------
138,185 126,354 88,519
------------------------------
Net interest income 54,634 43,035 39,534
Provision for loan losses (Note 9) 1,925 1,664 934
Net interest income after provision for loan losses 52,709 41,371 38,600
---------------------------------
Noninterest income:
Loan fees and service charges 5,242 3,395 3,409
Loan servicing income 3,031 3,502 3,703
Asset management and disposition fees -- -- 1,731
Gain on sale of branch office (Note 6) 521 -- --
Gain (loss) on sales of mortgage-backed securities
available-for-sale, net (4) 81 192
Other 559 627 526
9,349 7,605 9,561
------------------------------
Noninterest expense:
Compensation, payroll taxes and other benefits 16,547 12,029 10,995
Office occupancy 6,002 4,590 3,635
Insurance premiums 2,199 3,244 2,901
Amortization of purchased loan servicing rights 1,466 1,546 1,846
Data processing 2,212 1,769 1,544
Amortization of goodwill 1,784 1,273 1,096
Other 9,183 6,918 5,560
SAIF insurance special assessment (Note 21) 7,455 -- --
------------------------------
46,848 31,369 27,577
------------------------------
Income before provision for federal income taxes and minority interest
15,210 17,607 20,584
Provision for Federal income taxes (Note 20) 5,671 6,477 4,333
Minority interest in income of consolidated subsidiary -- -- 211
------------------------------
Net income before preferred stock dividends 9,539 11,130 16,040
Preferred stock dividends of Coastal Banc ssb 2,588 2,588 2,588
---------- --------
Net income after preferred stock dividends $ 6,951 $ 8,542 $ 13,452
========== ========
Net earnings per share $ 1.38 $ 1.71 $ 2.64
========== ======== ========
</TABLE>
See accompanying notes to Consolidated Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
COASTAL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS)
Unrealized
Warrant to loss on
purchase Additional securities
Common Common paid-in Retained available-for-
Stock Stock capital earnings sale Total
<S> <C> <C> <C> <C> <C> <C>
Balance - December 31, 1993 $ 1,228 $49 $32,405 $45,572 $ -- $79,254
Repurchase of warrant (Note 3) (1,228) -- -- (5,162) -- (6,390)
Dividends on preferred stock
of Coastal Banc ssb -- -- -- (2,588) -- (2,588)
Dividends on Common Stock -- -- -- (1,188) -- (1,188)
Exercise of stock options
(Note 22) -- 1 29 -- -- 30
Unrealized gain on securities
available-for-sale on
January 1, 1994 (Note 8) -- -- -- -- 264 264
Change in net unrealized
holding gain (loss) on
securities available-for-sale -- -- -- -- (742) (742)
Net income for 1994 -- -- -- 16,040 -- 16,040
----- --- ------- -------- -------- --------
Balance - December 31, 1994 -- 50 32,434 52,674 (478) 84,680
Dividends on preferred stock
of Coastal Banc ssb -- -- -- (2,588) -- (2,588)
Dividends on Common Stock -- -- -- (1,585) -- (1,585)
Exercise of stock options
(Note 22) -- -- 58 -- -- 58
Unrealized loss on securities --
transferred to available-for-
sale (Note 8) -- -- -- (1,556) (1,556)
Change in net unrealized holding --
gain (loss) on securities available-for-sale (Note 8)
-- -- -- 1,540 1,540
Net income for 1995 -- -- -- 11,130 -- 11,130
-------- --- ------- -------- -------- --------
Balance - December 31, 1995 -- 50 32,492 59,631 (494) 91,679
Dividends on preferred stock
of Coastal Banc ssb -- -- -- (2,588) -- (2,588)
Dividends on Common Stock -- -- -- (1,985) -- (1,985)
Exercise of stock options
(Note 22) -- -- 112 -- -- 112
Change in net unrealized holding
gain (loss) on securities available-for-sale (Note 8)
-- -- -- -- (2,609) (2,609)
Net income for 1996 -- -- -- 9,539 -- 9,539
-------- --- ------- -------- -------- --------
Balance - December 31, 1996 $ -- $50 $32,604 $64,597 $(3,103) $94,148
===================================================
</TABLE>
See accompanying notes to Consolidated Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
COASTAL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS)
1996 1995 1994
<S> <C> <C> <C>
Cash flows from operating activities:
Net income before preferred stock dividends $ 9,539 $ 11,130 $ 16,040
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization of property and
equipment, purchased loans servicing rights,
capitalized excess servicing fees and prepaid
expenses and other assets 6,098 5,191 4,947
Net premium amortization
(discount accretion) 1,146 (2,236) (238)
Provision for loan losses 1,925 1,664 934
Amortization of goodwill 1,784 1,273 1,096
Originations and purchases of mortgage
loans held for sale (19,739) (8,812) (7,858)
Sales of mortgage loans held for sale 20,158 8,268 10,240
(Gain) loss on sales of mortgage-backed
securities available-for-sale 4 (81) (192)
Gain on sale of branch office (521) -- --
Net change in minority interest of
consolidated subsidiary -- -- (474)
Decrease (increase) in:
Accrued interest receivable 853 (4,852) (2,471)
Other, net (3,024) 6,003 7,425
Stock dividends from the FHLB (1,288) (1,318) (1,256)
---------- ---------- ----------
Net cash provided by operating activities 16,935 16,230 28,193
---------- ---------- ----------
Cash flows from investing activities:
Purchases of mortgage-backed securities -- (52,741) (511,847)
Purchase of U.S. Treasury security
available-for-sale (11) -- --
Principal repayments on mortgage-backed
securities 50,616 35,742 178,523
Principal repayments on mortgage-backed
securities available-for-sale 879 103 17,022
Proceeds from maturity of U.S. Treasury
security available-for-sale 4,000 -- --
Proceeds from sales of mortgage-backed
securities available-for-sale 860 72,379 986
Purchases of loans receivable (190,612) (416,569) (149,608)
Net decrease in loans receivable 53,678 6,623 19,502
Net decrease in FSLIC Resolution Fund
guaranteed assets -- -- 55,549
Purchases of property and equipment, net (4,273) (3,579) (4,114)
Purchase of FHLB stock (7,924) (2,984) (17,900)
Proceeds from sales of FHLB stock 5,000 3,245 34,195
Purchase of loan servicing rights -- -- (3,655)
Cash and cash equivalents received in
business combination transactions, net
of disposition transaction 11,652 34,311 144,974
---------- ---------- ----------
Net cash used by investing activities (76,135) (323,470) (236,373)
---------- ---------- ----------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
COASTAL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(IN THOUSANDS)
1996 1995 1994
<S> <C> <C> <C>
Cash flows from financing activities:
Net decrease (increase) in savings deposits $ 12,497 $ (10,336) $ (33,382)
Advances from the FHLB 3,629,022 746,899 1,868,720
Principal payments on advances from the FHLB (3,531,488) (820,749) (2,271,551)
Securities sold under agreements to repurchase 9,276,713 8,648,728 9,316,043
Purchases of securities sold under agreements
to repurchase (9,303,558) (8,300,275) (8,670,664)
Proceeds from issuance of Senior Notes
payable, net -- 47,635 --
Exercise of stock options for purchase of
common stock, net 112 58 30
Net increase (decrease) in advances from
borrowers for taxes and insurance (1,834) 3,109 940
Dividends paid (4,573) (4,173) (3,776)
Net cash provided by financing activities 76,891 310,896 206,360
------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents 17,691 3,656 (1,820)
Cash and cash equivalents at beginning of
year 10,044 6,388 8,208
------------ ------------ ------------
Cash and cash equivalents at end of year $ 27,735 $ 10,044 $ 6,388
============ ============ ============
Supplemental schedule of cash flows--
interest paid $ 139,926 $ 123,030 $ 87,867
============ ============ ============
Supplemental schedule of noncash investing
and financing activities:
Transfer of mortgage-backed securities
to available-for-sale category $ -- $ 226,591 $ 50,802
============ ============ ============
Foreclosures of loans receivable $ 4,363 $ 3,394 $ 2,386
============ ============ ============
Covered Assets retained at termination
of Assistance Agreement:
Loans receivable $ -- $ -- $ 6,671
Property and equipment -- -- 823
============ ============ ============
Repurchase of warrant from FSLIC Resolution Fund:
Reduction of goodwill $ -- $ -- $ 505
Reduction of receivable -- -- 5,885
Reduction of retained earnings -- -- 5,162
============ ============ ============
</TABLE>
See accompanying notes to Consolidated Financial Statements.
COASTAL BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
(1) ORGANIZATION AND BACKGROUND
ORGANIZATION
Coastal Bancorp, Inc. was incorporated on March 8, 1994 as a first-tier
subsidiary of Coastal Banc Savings Association (the "Association") in
connection with the proposed reorganization of the Association into the
holding company form of organization.
The reorganization of the Association into the holding company form of
organization occurred on July 29, 1994. In addition, effective July 29, 1994,
the Association converted to a Texas-chartered savings bank known as Coastal
Banc ssb. As a result of the reorganization, Coastal Bancorp, Inc.
("Bancorp") became the owner of 100% of the voting stock of Coastal Banc ssb.
The holders of the 9.0% Noncumulative Preferred Stock, Series A, of the former
Coastal Banc Savings Association now own an equal number of shares of the 9.0%
Noncumulative Preferred Stock, Series A, of Coastal Banc ssb (the "Bank").
On November 30, 1996, Coastal Banc Holding Company, Inc. ("HoCo") was created
as a Delaware unitary savings bank holding company in accordance with the
terms of an agreement and plan of reorganization dated August 19, 1996 (the
"Agreement"). Pursuant to the terms of the Agreement, the Bank became a
wholly-owned subsidiary of HoCo and HoCo became a wholly-owned subsidiary of
Bancorp.
The reorganizations were accounted for in a manner similar to that in pooling
of interests accounting and all financial statements issued after consummation
of the reorganization reflect the consolidated operations as if the
reorganization had taken place prior to the periods covered by such
consolidated financial statements.
BACKGROUND
The Bank was acquired by an investor group in 1986 as a vehicle to take
advantage of the failures and consolidation in the Texas banking and thrift
industries. The Bank acquired deposits in transactions with the federal
government and other private institutions as a base for developing an ongoing
thrift and banking business. The Bank's first acquisition was under the
Federal Savings and Loan Insurance Corporation's ("FSLIC") Southwest Plan,
whereby the FSLIC provided financial and other forms of assistance in
connection with the acquisition of insolvent FSLIC-insured institutions.
As more fully described in notes 3 and 5 to the consolidated financial
statements, in con-junction with the FSLIC assisted acquisition of Alliance
Savings and Loan Association, Cameron County Savings Association, Security
Savings and Loan Association and Colorado County Federal Savings and Loan
Association (the "Acquired Associations"), the Bank received significant
financial assistance, including the purchase of cumulative preferred stock by
the FSLIC.
COASTAL BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(2) SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES AND BASIS OF PRESENTATION
The following significant accounting policies, together with those disclosed
elsewhere in the Consolidated Financial Statements or notes thereto, are
followed by Coastal Bancorp, Inc. and subsidiaries in preparing and presenting
the consol-idated financial statements.
BASIS OF CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements include the accounts of Coastal Bancorp,
Inc., its wholly-owned subsidiary, Coastal Banc Holding Company, Inc. and its
wholly-owned subsidiary, Coastal Banc ssb and subsidiaries (collectively,
"Coastal"). Coastal Banc ssb's subsidiaries include CoastalBanc Financial
Corp., CBS Mortgage Corp. and CBS Asset Corp. (collectively with Coastal Banc
ssb, the "Bank"). All significant intercompany balances and transactions have
been eliminated in consolidation.
CBS Asset Corp. accounted for its 63% ownership interest in the assets,
liabilities, revenues and expenses of Coastal Realty Partners, an
unincorporated venture, using the consolidation method of accounting with the
outside investor's interest in Coastal Realty Partners reflected as a minority
interest. Coastal Realty Partners was formed for the purpose of managing and
liquidating loans and real property on a contract basis for the Resolution
Trust Corporation ("RTC"), the FDIC and other financial institutions.
Effective November 1, 1994, CBS Asset Corp. sold its 63% ownership interest in
Coastal Realty Partners for its recorded book value.
Certain amounts within the accompanying consolidated financial statements and
the related notes have been reclassified to conform to the current year
presentation. Such reclassifications had no effect on net income or total
stockholders' equity.
USE OF ESTIMATES
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of income and
expenses during the reporting period. Actual results may differ from those
estimates.
INVESTMENT AND MORTGAGE-BACKED SECURITIES
On January 1, 1994, Coastal adopted the Financial Accounting Standards Board's
Statement of Financial Accounting Standards No. 115 ("Statement 115"),
"Accounting for Certain Investments in Debt and Equity Securities." In
accordance with Statement 115, Coastal classifies securities as either
held-to-maturity or available-for-sale. Securities are classified as
held-to-maturity when Coastal has the positive intent and ability to hold such
securities to maturity. Securities held-to-maturity are recorded at amortized
cost. Securities available-for-sale are securities other than those
held-to-maturity or trading and are recorded at fair value, with unrealized
gains and losses excluded from earnings and recorded as a separate component
of stockholders' equity.
In connection with the adoption of Statement 115 on January 1, 1994, Coastal
transferred approximately $50,802,000 of mortgage-backed securities to the
available-for-sale category and recorded an unrealized gain of approximately
$264,000 in stockholders' equity.
In November 1995, the Financial Accounting Standards Board issued the Special
Report, "A Guide to Implementation of Statement 115 on Accounting for Certain
Investments in Debt and Equity Securities." Provisions in this Special Report
granted all entities a one-time opportunity, until no later than December 31,
1995, to reassess the appropriateness of the classifications of all securities
held and to account for any resulting reclassifications at fair value in
accordance with Statement 115. The provisions of the Special Report also
directed that any reclassifications as a result of this one-time reassessment
would not call into question the intent to hold other debt securities to
maturity in the future. In accordance with this Special Report, on November
20, 1995, Coastal reclassified approximately $226,591,000 of mortgage-backed
securities to the available-for-sale category and recorded an unrealized loss
of approximately $1,556,000 in stockholders' equity.
Realized gains and losses on securities classified as available-for-sale are
recorded in earnings in the year of sale based on the specific identification
of each individual security sold.
Coastal records investment and mortgage-backed securities transactions as of
the settlement date. There were no pending transactions as of December 31,
1996 or 1995.
Premiums and discounts on investment and 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.
TRADING ACCOUNT SECURITIES
Trading account securities are recorded at market value; however, at December
31, 1996 and 1995, there were no trading account securities held. Gains or
losses on the revaluation or sale of trading account securities are included
in noninterest income.
LOANS RECEIVABLE
Loans receivable are stated at the principal balance outstanding net of loans
in process, the allowance for loan losses, unearned interest and loan fees and
the premium to record purchased loans. Interest on loans receivable is
primarily computed on the outstanding principal balance at appropriate rates
of interest. The net premium (discount) to record purchased loans is being
amortized using the level yield method, adjusted for prepayments.
It is the general policy of Coastal to stop accruing interest income and place
the recognition of interest on a cash basis when any loan is past due as to
principal and interest more than 90 days. When a loan is placed on
nonaccrual, any interest previously accrued but not collected is reversed
against current interest income.
Coastal adopted Statement of Financial Accounting Standards No. 114
("Statement 114"), "Accounting by Creditors for Impairment of a Loan," as
amended by Statement 118, effective January 1, 1995. Under Statement 114, a
loan is impaired when it is "probable" that a creditor will be unable to
collect all amounts due (i.e., both principal and interest) according to the
contractual terms of the loan agreement. Statement 114 requires that the
measurement of impaired loans be based on (i) the present value of the
expected future cash flows discounted at the loan's effective interest rate,
(ii) the loan's observable market price, or (iii) the fair value of the loan's
collateral. Statement 114 does not apply to large groups of smaller balance
homogeneous loans that are collectively evaluated for impairment. Coastal
collectively reviews all first-lien residential loans under $500,000 as a
group and all consumer and other loans as a group for impairment, excluding
loans in which foreclosure is probable. The adoption of Statement 114, as
amended by Statement 118, had no material impact on Coastal's consolidated
financial statements as Coastal's existing policy of measuring loan impairment
was generally consistent with methods prescribed in these standards.
Coastal considers a loan to be impaired when, based upon current information
and events, it is probable that Coastal will be unable to collect all amounts
due according to the contractual terms of the loan agreement. In determining
impairment, Coastal 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. Coastal
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.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is maintained at a level determined to be
adequate by management to absorb future losses on loans receivable. The
adequacy of the allowance is based on management's evaluation of the loan
receivable portfolio and considers such factors as historical loss experience,
identification of adverse situations which may affect the ability of borrowers
to repay, assessment of current and future economic conditions and the
estimated net realizable value of the underlying collateral. While management
uses available information to estimate losses on loans receivable, future
additions to the allowance may be necessary based on changes in economic
conditions. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review Coastal's allowance for loan
losses. Such agencies may require Coastal to recognize additions to the
allowance based on their judgments about information available to them at the
time of their examination.
SALES OF LOANS RECEIVABLE
Loans are sold periodically to institutional and private investors. When
Coastal sells whole mortgage loans, gains or losses on such sales are
recognized at the time of sale and are determined by the difference between
net sales proceeds and the unpaid principal balance of the loans sold,
adjusted for any yield differential, servicing fees and servicing costs
applicable to future years. Coastal continues to collect loan payments and
provide normal services to the borrower under loan servicing agreements with
the investors on those loans sold with servicing retained. The investor is
paid its share of the principal and interest collected, net of a service fee
retained by Coastal.
MORTGAGE LOANS HELD FOR SALE
Mortgage loans held for sale are carried at the lower of cost or market as
determined by outstanding commitments from investors or current investor
market yield requirements calculated on the aggregate loan basis.
LOAN FEES
Loan origination and commitment fees, as well as certain direct loan
origination and commitment costs, are deferred and amortized into income over
the lives of the related loans using the level yield method. When the loans
receivable are sold, the remaining loan fees are recognized as income in the
period of the sale.
STOCK IN THE FEDERAL HOME LOAN BANK OF DALLAS
As a member of the FHLB System, Coastal is required to purchase and maintain
stock in the FHLB in an amount equal to the greater of 1% of the aggregate
unpaid balance of loans and securities secured by single family and
multi-family properties, .3% of total assets, or 5% of total FHLB advances.
FHLB stock is redeemable at par value at the discretion of the FHLB.
GOODWILL
Goodwill resulting from acquisitions is amortized on a straight-line basis
over the estimated period of benefit, not to exceed fifteen years. Coastal
evaluates the recorded goodwill amounts for impairment on an ongoing basis to
determine whether events and circumstances have developed that warrant
revision of the estimated benefit periods.
<PAGE>
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost less accumulated depreciation and
amortiza-tion. Coastal computes depreciation and amortization on a
straight-line basis over the estimated useful lives (15-30 years for buildings
and 3-10 years for furniture and equip-ment) of the respective assets.
Leasehold improvements are amortized on a straight-line basis over the lesser
of the terms of the respective lease or the estimated useful lives of the
related assets.
MORTGAGE SERVICING RIGHTS
Coastal adopted the Financial Accounting Standards Board's Statement No. 122
("Statement 122"), "Accounting for Mortgage Servicing Rights -- an amendment
of FASB Statement No. 65" effective January 1, 1996. Statement 122 eliminates
the accounting distinction between rights to service mortgage loans for others
that are acquired through loan origination activities and those acquired
through purchase transactions. Under Statement 122, if Coastal sells or
securitizes loans and retains the mortgage servicing rights, Coastal is
required to allocate a portion of the cost of the mortgage loans to the
mortgage servicing rights and recognize the cost allocated as a separate
asset. The adoption of Statement 122 had no material impact on Coastal's
consolidated financial statements for the year ended December 31, 1996.
Purchased loan servicing rights are capitalized at the date of acquisition at
the lower of cost or the present value of the excess of estimated future
servicing income over estimated future servicing costs assuming an estimated
prepayment rate. The amount capitalized as mortgage servicing rights is
amortized in proportion to, and over the period of, estimated net servicing
revenues. Coastal periodically evaluates the carrying value of the mortgage
servicing rights for impairment based on the fair value of those rights. The
fair value of mortgage servicing rights is determined by discounting the
present value of the estimated future net servicing revenues using a discount
rate commensurate with the risks involved based on management's best estimate
of remaining loan lives.
REAL ESTATE OWNED
Real estate owned represents real estate acquired through foreclosure and is
initially recorded at the lower of unpaid principal balance adjusted for any
acquisition premiums or discounts remaining less any applicable valuation
allowance or estimated fair value less estimated selling costs. Subsequent to
foreclosure, real estate owned is carried at the lower of the new cost basis
or fair value, with any further declines in fair value charged to operations.
FEDERAL INCOME TAXES
Coastal files a consolidated federal income tax return with HoCo, the Bank and
all of its wholly-owned subsidiaries. Federal income taxes are allocated on
the basis of each entity's contribution to consolidated taxable income.
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts
of existing assets and liabilities and their respective tax bases. Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date.
OFF-BALANCE SHEET INSTRUMENTS USED FOR INTEREST RATE RISK MANAGEMENT
Coastal enters into interest rate swap and cap agreements to manage its
sensitivity to interest rate risk. For interest rate risk management swap and
cap agreements, interest income or interest expense is accrued over the terms
of the agreements and transaction fees are deferred and amortized to interest
income or expense over the terms of the agreements. The fair values of
interest rate swap and cap agreements used for interest rate risk management
are not recognized in the consolidated financial statements.
STOCK OPTIONS
Prior to January 1, 1996, Coastal accounted for its stock compensation
programs in accordance with the provisions of Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and
related interpretations. As such, compensation expense would be recorded on
the date of grant only if the current market price of the underlying stock
exceeded the exercise price. On January 1, 1996, Coastal adopted the
Financial Accounting Standards Board's Statement No. 123 ("Statement 123"),
"Accounting for Stock-Based Compensation," which permits entities to recognize
as expense over the vesting period the fair value of all stock-based awards on
the date of grant. Alternatively, Statement 123 also allows entities to
continue to apply the provisions of APB Opinion No. 25 and provide pro forma
net income and pro forma earnings per share disclosures for employee stock
option grants made in 1995 and future years as if the fair-value based method
defined in Statement 123 had been applied. Coastal has elected to continue to
apply the provisions of APB Opinion No. 25 and provide the pro forma
disclosure provisions of Statement 123.
NET EARNINGS PER SHARE
Earnings per share is calculated by dividing net income, reduced for dividends
paid on the Bank's preferred stock, by the weighted average number of common
shares and common stock equivalents. Stock options and the warrant to
purchase common stock (until the warrant was repurchased) are regarded as
common stock equivalents and are therefore considered in earnings per share
calculations if dilutive. Common stock equivalents are computed using the
treasury stock method. The weighted average numbers of shares used in the
computation of earnings per share are 5,031,238, 4,991,373 and 5,090,289, at
December 31, 1996, 1995 and 1994, respectively.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For purposes of reporting cash flows, cash and cash equivalents include cash
and amounts due from depository institutions, certificates and time deposits
and securities purchased under agreements to resell with an original maturity
of three months or less.
ACCOUNTING PRONOUNCEMENTS
Coastal adopted Statement of Financial Accounting Standards No. 121
("Statement 121"), "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," effective January 1, 1996. Statement
121 requires that long-lived assets and certain identifiable intangible assets
to be held and used by an entity be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. In addition, Statement 121 requires that certain long-lived
assets and certain identifiable intangible assets to be disposed of be
reported at the lower of carrying amount or fair value less costs to sell.
The adoption of Statement 121 did not have a material impact on Coastal's
financial position, results of operations or liquidity for the year ended
December 31, 1996.
In June 1996, the Financial Accounting Standards Board issued Statement No.
125 ("Statement 125"), "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities". Statement 125 is effective for
transfers and servicing of financial assets and extinguishments of liabilities
occurring after December 31, 1996 and is to be applied prospectively.
Statement 125 provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities based on
consistent application of a financial-components approach that focuses on
control. It distinguishes transfers of financial assets that are sales from
transfers that are secured borrowings. Management of Coastal does not expect
that the adoption of Statement 125 will have a material impact on Coastal's
financial position, results of operations, or liquidity.
<PAGE>
(3) ACQUISITION AND FSLIC ASSISTANCE
On May 13, 1988 ("date of acquisition"), Coastal acquired the Acquired
Associations. These institutions were insured by the FSLIC and the acquisition
was deemed by the FSLIC to be an acquisition instituted for supervisory
reasons. In connection with these acquisitions, the FSLIC agreed, in the form
of four substantially similar acquisition agreements and an assistance
agreement ("Assistance Agreement"), to provide financial assistance and
indemni-fication to Coastal.
On April 15, 1994, Coastal and the FDIC announced the early termination of the
Assistance Agreement with the FSLIC Resolution Fund effective March 31, 1994.
Under the terms of the agreement, Coastal transferred substantially all the
Covered Assets (as defined) (Note 4) back to the FDIC in exchange for cash and
also received cash of $12,733,000 for the remaining receivable from the FSLIC
Resolution Fund for the adjustment to record acquired assets at fair value.
Discussed below are the significant provisions of the Assistance Agreement.
On the date of the acquisition, the FSLIC as receiver for the Acquired
Associations transferred substantially all of the assets and substantially all
of the secured and deposit liabilities of Alliance Savings and Loan
Association, Cameron County Savings Association, and Security Savings and Loan
Association, and substantially all of the assets and liabilities of Colorado
County Federal Savings and Loan Association to Coastal. The FSLIC delivered a
promissory note to Coastal in the amount representing the combined Negative
Capital (as defined) of the Acquired Associations at the date of acquisition.
On March 6, 1991, the promissory note was prepaid in full by the FSLIC
Resolution Fund. Approximately 90 days after the effective date of the
Assistance Agreement and following the $3,300,000 capital investment by
Coastal required by the Assistance Agreement, the Bank issued 125,302 shares
of cumulative Series A Preferred Stock (Preferred Stock) to the FSLIC for cash
received of $12,530,000 and Coastal issued to the FSLIC a warrant to purchase
that whole number of shares of Common Stock of Coastal, which shall equal 15%
of the shares of Common Stock, determined after giving effect to the exercise
of the warrant. The warrant was recorded at $2.88 per share which represented
management's estimate of the fair value of such warrant at the date of
issuance.
In 1990, Coastal repurchased all of the outstanding Preferred Stock at a
discount. The repurchase resulted in an increase in additional paid-in
capital of $2,353,000, the difference between the recorded book value of the
Preferred Stock and the repurchase price of $10,177,000. On April 15, 1994,
in connection with the termination of the Assistance Agreement, Coastal
repurchased the warrant to purchase common stock from the FDIC for $5,885,000.
The repurchase resulted in a reduction of retained earnings of $5,162,000.
Certain loans and real estate and other assets of the Acquired Associations
were covered by FSLIC Resolution Fund assistance and were designated as
Covered Assets. These assets were subject to both capital loss coverage
(Coastal was reimbursed for losses on Covered Assets) and yield maintenance
(Coastal received a guaranteed yield on Covered Assets) from the date of the
acquisition for a period of ten years. The guaranteed yield specified in the
Assistance Agreement was considered a market rate for purposes of determining
the fair value of the Covered Assets acquired. The designated Covered Assets
were treated as interest-bearing assets and the fair value was calculated as
the expected future collection of principal pursuant to the capital loss
coverage of the Assistance Agreement.
These acquisitions under the Assistance Agreement were accounted for as
purchases. As a result of the purchase, a receivable of $29,173,715 was
recorded at the acquisi-tion date representing an amount equal to the
difference between the recorded book values and fair values of assets
acquired. In accordance with the Assistance Agreement, the adjustment was
recoverable from the FSLIC Resolution Fund over a ten-year period and was
included in receivable from the FSLIC Resolution Fund rather than goodwill.
In assigning values to Covered Assets (Note 4), the FSLIC Resolution Fund
guaranteed values (the recorded historical cost values of such assets on the
books of the Acquired Associations at acquisition date) were used. Also as a
result of the purchase, goodwill of $4,617,200 was recorded equal to the
difference between the recorded book values and fair values of liabilities
assumed and the fair value of the warrant issued to the FSLIC.
(4) FSLIC RESOLUTION FUND GUARANTEED ASSETS
In connection with the acquisition of the Acquired Associations (see Note 3),
during the period covered by the Assistance Agreement the FSLIC Resolution
Fund reimbursed Coastal for all losses realized on the sales of Covered Assets
or on approved write-downs of such assets. Coastal retained 10% of the gains
realized over the FSLIC Resolution Fund guaranteed value for the first $2
million of aggregate gain with increments of 2% for each additional $2 million
of gain realized up to 20% of gains. The FSLIC Resolution Fund received the
remaining percentage of gains.
Covered Assets were defined as:
Each asset acquired by Coastal pursuant to the Assistance Agreement
(except as noted below);
A loan contract, or investment made by Coastal pursuant to a legally
binding commitment of one of the Acquired Associations in effect immediately
prior to the acquisition date;
A loan contract, or investment made by Coastal in connection with the
sale of, or to salvage, a Covered Asset, or any property or interest therein
received in exchange for a Covered Asset if approved by the FDIC; and
The debit balance of Special Reserve Account I (as defined) treated as a
Covered Asset for yield maintenance purposes.
Covered Assets did not include:
One-to-four residential mortgage loans performing according to
contractual terms on the date of acquisition and continuing to perform for two
years;
Leasehold improvements, office furniture, fixtures and equipment that
were being used on May 13, 1989; and
Any asset that was owned by or was claimed to be owned by a subsidiary of
the Acquired Associations.
During the period covered by the Assistance Agreement, the FSLIC Resolution
Fund paid to Coastal the difference between the actual yield received on
remaining Covered Assets and the product of the average book value for all
Covered Assets multiplied by the Texas Cost of Funds (as defined) plus 225
basis points for the first five quarters after the date of acquisition. Such
spread over the Texas Cost of Funds was reduced periodically thereafter by
terms of the Assistance Agreement.
As discussed in Note 3, the Assistance Agreement was terminated effective
March 31, 1994 with substantially all the Covered Assets being transferred
back to the FSLIC Resolution Fund in exchange for cash. In addition, Coastal
received $12,733,000 in cash for the remaining receivable from the FSLIC
Resolution Fund for the adjustment to record acquired assets at fair value.
Interest income recorded on Covered Assets for the year ended December 31,
1994 was as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Real estate $122
Loans receivable 587
Other assets 53
----
$762
====
</TABLE>
<PAGE>
(5) INDEMNIFICATIONS
Coastal was involved in various claims and lawsuits arising from the
acquisition of the Acquired Associations. In accordance with the terms of the
Assistance Agreement, the FSLIC Resolution Fund indemnified Coastal for
amounts incurred and paid in connection with satisfaction, settlement or
compromise of challenges to the acquisitions, and the reasonable costs and
expenses related thereto. The FSLIC Resolution Fund also indemnified Coastal
for any claims based upon an action or failure to act of Coastal prior to the
date of consummation of the acquisitions. Indemnification occurred whether
the claim was filed before or after such date, to the extent that there was
not an adequate reserve or provision for such claim on the books and records
of the Acquired Associations prior to the date of consummation of the
acquisitions. Indemnification was made to the extent the claims were not
reimbursable under any insurance policy or from another third party. Amounts
received under the indemnification prior to the termination of the Assistance
Agreement was approximately $186,000 for the year ended December 31, 1994.
(6) ACQUISITION AND DISPOSITION TRANSACTIONS
BRANCH SWAP
On September 5, 1996, Coastal consummated the exchange of certain branch
locations with Compass Bank. Coastal sold its three San Antonio branches
having deposits of approximately $53.8 million to Compass Bank and purchased
the Compass Bay City branch having deposits of approximately $79.8 million.
Summarized below are the net assets and liabilities recorded at fair value at
the date of the swap (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Cash and cash equivalents $25,274
Loans receivable 1,173
Goodwill 72
Property and equipment (103)
Other assets 5
$26,421
========
Deposits 25,992
Other liabilities 429
--------
$26,421
========
</TABLE>
SAN ANGELO BRANCH SALE
On May 24, 1996, Coastal consummated the sale of its San Angelo location,
which had approximately $14.9 million in deposits, to First State Bank, N.A.,
a subsidiary of Independent Bankshares, Inc., headquartered in Abilene, Texas.
As a result of this sale, Coastal recorded a $521,000 gain before applicable
income taxes. Coastal acquired this location in the 1994 acquisition of Texas
Trust Savings Bank, FSB. In connection with the sale of this branch office,
Coastal recorded the following reductions of assets and liabilities (in
thousands):
<TABLE>
<CAPTION>
<S> <C>
Savings deposits sold $14,850
Accrued interest payable and other liabilities sold 69
Loans receivable sold 155
Property and equipment sold 438
Reduction of goodwill 179
</TABLE>
<PAGE>
TEXAS CAPITAL BANCSHARES, INC. ACQUISITION
On November 1, 1995, Coastal consummated the acquisition of all the issued and
outstanding common stock of Texas Capital Bancshares, Inc. ("Texas Capital")
for a purchase price of approximately $21,101,000. Summarized below are the
assets and liabilities recorded at fair value at the date of the acquisition
(in thousands):
<TABLE>
<CAPTION>
<S> <C>
Cash and cash equivalents, net of purchase price $ 34,311
Loans receivable 103,319
Goodwill 9,769
U.S. Treasury security available-for-sale 3,993
Property and equipment 2,782
Real estate owned 2,430
Other assets 2,471
--------
Total assets $159,075
========
Deposits 157,209
Other liabilities 1,866
--------
Total liabilities $159,075
========
</TABLE>
TEXAS TRUST SAVINGS BANK, FSB ACQUISITION
On December 30, 1994, Coastal consummated the acquisition of eight branches
from Texas Trust Savings Bank, FSB. Summarized below are the assets and
liabilities recorded at fair value at the date of the acquisition (in
thousands):
<TABLE>
<CAPTION>
<S> <C>
Cash $144,974
Deposit account loans 1,952
Goodwill 1,822
Property and equipment 1,504
Other assets 22
--------
Total assets $150,274
========
Deposits 150,207
Accrued interest payable 66
Other liabilities 1
--------
Total liabilities $150,274
========
</TABLE>
The acquisitions described above have been accounted for as purchases and,
accordingly, all assets and liabilities acquired were adjusted to and recorded
at estimated fair values as of the acquisition dates.
The transactions described above are not material to the consolidated
financial position or results of operations of Coastal therefore pro forma
information is not considered necessary.
(7) SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL
Coastal purchases securities under agreements to resell ("repurchase
agreements"). The amounts advanced under these agreements represent
short-term loans and are reflected as a receivable in the accompanying
consolidated statements of financial condition. The securities are delivered
by entry into Coastal's account maintained at a third-party custodian
designated by Coastal under a written custodial agreement that explicitly
recognizes Coastal's interest in the securities. There were no securities
purchased under agreements to resell outstanding during 1996, 1995 or at
December 31, 1994. Securities purchased under agreements to resell averaged
approximately $32,634,000 during 1994 and the maximum amount outstanding at
any month-end during 1994 was approximately $74,164,000.
(8) MORTGAGE-BACKED SECURITIES
Mortgage-backed securities held-to-maturity at December 31, 1996 are as
follows (in thousands):
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REMICS - Agency $ 932,488 $ 4,730 $ (31,142) $ 906,076
REMICS - Non-agency 278,612 834 (9,958) 269,488
FNMA certificates 79,628 72 (1,072) 78,628
GNMA certificates 34,031 282 -- 34,313
Non-agency securities 19,790 363 (95) 20,058
Interest-only securities 38 -- (3) 35
---------
$ 1,344,587 $ 6,281 $ (42,270) $ 1,308,598
========= ===== ======== =========
</TABLE>
Mortgage-backed securities held-to-maturity at December 31, 1995 are as
follows (in thousands):
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REMICS - Agency $ 948,027 $ 4,298 $ (13,430) $ 938,895
REMICS - Non-agency 291,124 1,039 (6,641) 285,522
FNMA certificates 92,977 44 (232) 92,789
GNMA certificates 39,520 618 -- 40,138
Non-agency securities 24,049 300 (93) 24,256
Interest-only securities 56 -- (6) 50
---------
$ 1,395,753 $ 6,299 $ (20,402) $ 1,381,650
========= ===== ======== =========
</TABLE>
As discussed in Note 2 to the Consolidated Financial Statements, pursuant to
the Financial Accounting Standards Board's Special Report, "A Guide to
Implementation of Statement 115 on Accounting for Certain Investments in Debt
and Equity Securities," Coastal reclassified in 1995 approximately
$226,591,000 of mortgage-backed securities to the available-for-sale category
and recorded an unrealized loss of approximately $1,556,000 in stockholders'
equity. Proceeds from sales of mortgage-backed securities available-for-sale
during 1996 and 1995 were approximately $860,000 and $72,379,000,
respectively. Gross losses of approximately $4,000 were realized on these
sales in 1996. Gross gains and gross losses of approximately $209,000 and
$128,000, respectively, were realized on these sales in 1995. At December 31,
1996 and 1995, mortgage-backed securities available-for-sale of $180,656,000
and $186,414,000 are recorded at market value, net of gross unrealized gains
of $1,207,000 and $1,216,000 and gross unrealized losses of $5,980,000 and
$1,975,000, respectively.
In connection with the adoption of Statement 115 on January 1, 1994, Coastal
transferred approximately $50,802,000 of mortgage-backed securities to the
available-for-sale category and recorded an unrealized gain of approximately
$264,000 in stockholders' equity. Proceeds from sales of mortgage-backed
securities available-for-sale during 1994 were approximately $986,000. Gross
gains and gross losses of approximately $220,000 and $28,000, respectively,
were realized on these sales in 1994. At December 31, 1994, mortgage-backed
securities available-for-sale are recorded at market value, net of gross
unrealized losses of $735,000.
(9) LOANS RECEIVABLE
Loans receivable at December 31, 1996 and 1995 are as follows (in
thousands):
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C> <C> <C>
Real estate mortgage loans:
First lien mortgage, primarily residential $ 791,337 $ 742,880
Multifamily 139,486 95,297
Residential construction 77,146 33,935
Acquisition and development 26,132 15,517
Commercial 119,004 122,622
Commercial construction 3,963 --
Commercial loans, secured by residential mortgage loans held
for sale 53,573 48,822
Commercial loans, secured by purchased loan servicing rights 21,380 21,548
Commercial, financial and industrial 21,965 19,860
Loans secured by savings deposits 8,849 8,292
Consumer and other loans 14,400 10,316
---------- ----------
1,277,235 1,119,089
Loans in process (38,742) (11,526)
Allowance for loan losses (6,880) (5,703)
Unearned loan fees (2,344) (1,939)
Premium (discount) to record purchased loans, net 479 (1,366)
---------- ----------
$ 1,229,748 $ 1,098,555
========== ==========
Weighted average yield 8.23% 8.52%
========== ==========
</TABLE>
In the normal course of business, Coastal enters into various transactions
which, in accordance with generally accepted accounting principles, are not
included on the balance sheets. These transactions are referred to as
"off-balance sheet commitments." Coastal enters into these transactions to
meet the financing needs of its customers. These transactions include
commitments to extend credit which involve elements of credit risk in excess
of the amounts recognized in the balance sheets. Coastal minimizes its
exposure to loss under these commitments by subjecting them to credit approval
and monitoring procedures.
Coastal enters into contractual commitments to extend credit, normally with
fixed expiration dates or termination clauses, at specified rates and for
specific purposes. Customers use credit commitments to ensure that funds will
be available for working capital purposes, for capital expenditures and to
ensure access to funds under specified terms and conditions. Substantially
all of Coastal's commitments to extend credit are contingent upon customers
maintaining specific credit standards at the time of loan funding. Management
assesses the credit risk associated with certain commitments to extend credit
in determining the level of the allowance for loan losses.
<PAGE>
At December 31, 1996, Coastal had outstanding commitments to originate or
purchase approximately $29,600,000 of first lien mortgage and other loans and
had commitments under lines of credit to originate primarily construction and
other loans of approximately $103,726,000. In addition, at December 31, 1996,
Coastal had letters of credit of approximately $1,372,000 outstanding.
Coastal services for others loans receivable which are not included in the
consolidated financial statements. The total amounts of such loans were
approximately $776,694,000, $900,702,000, and $1,029,268,000 at December 31,
1996, 1995 and 1994, respectively. At December 31, 1996 and December 31,
1995, Coastal serviced approximately $2,750,000 and $3,361,000 of loans sold
with recourse, respectively.
A portion of Coastal's first lien mortgage loan portfolio is pledged as
collateral to secure advances from the FHLB (Note 14).
Included in loans receivable at December 31, 1996 and 1995 are loans totaling
approximately $12,839,000 and $14,622,000, respectively, which are on
nonaccrual (loans which are 90 days or more delinquent or on which the
collection of interest is considered doubtful). During the years ended
December 31, 1996, 1995 and 1994, Coastal recognized interest income on these
nonaccrual loans (outstanding as of the period end) of approximately $507,000,
$303,000 and $285,000, respectively, whereas approximately $816,000, $499,000
and $208,000, respectively, in additional interest income would have been
recorded if such loans had been performing in accordance with their original
terms.
At December 31, 1996 and 1995, the carrying value of loans that are considered
to be impaired under Statement 114 totaled approximately $725,000 and
$1,983,000, respectively, (all of which are on nonaccrual) and the related
allowance for loan losses on those impaired loans totaled $524,000 and
$674,000, respectively. The average recorded investment in impaired loans
during the years ended December 31, 1996 and 1995 was approximately $846,000
and $311,000, respectively. For the years ended December 31, 1996 and 1995,
Coastal did not recognize interest income on loans considered impaired.
An analysis of activity in the allowance for loan losses is as follows (in
thousands):
<TABLE>
<CAPTION>
Years ended December 31,
1996 1995 1994
<S> <C> <C> <C>
Balance, beginning of year $5,703 $2,158 $1,527
Provision for loan losses 1,925 1,664 934
Charge-offs, net of recoveries (748) (387) (303)
Acquisition allowance adjustment -- 2,268 --
------- ------- -------
Balance, end of year $6,880 $5,703 $2,158
======= ======= =======
</TABLE>
The adoption of Statement 114, as amended by Statement 118, effective January
1, 1995, did not result in additional provisions for loan losses during the
years ended December 31, 1996 or 1995.
<PAGE>
(10) ACCRUED INTEREST RECEIVABLE
Accrued interest receivable at December 31, 1996 and 1995 is as follows (in
thousands):
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Mortgage-backed securities $ 6,606 $ 7,295
Loans receivable 8,084 8,191
Investment securities, certificates and time
deposits and other investments -- 52
------- -------
$14,690 $15,538
======= =======
</TABLE>
(11) MORTGAGE SERVICING RIGHTS
An analysis of activity of purchased loan servicing rights and capitalized
excess servicing fees is as follows (in thousands):
<TABLE>
<CAPTION>
Purchased Loan Capitalized Excess
Servicing Rights Servicing Fees
<S> <C> <C> <C> <C>
Balance, December 31, 1993 $ 7,882 $ 343
Additions 3,655 --
Amortization (1,846) (109)
------- -----
Balance, December 31, 1994 9,691 234
Adjustments (5) --
Amortization (1,546) (51)
------- -----
Balance, December 31, 1995 8,140 183
Amortization (1,466) (47)
------- -----
Balance, December 31, 1996 $ 6,674 $ 136
======= =====
</TABLE>
(12) REAL ESTATE OWNED
Included in prepaid expenses and other assets is real estate owned at December
31, 1996 and 1995 of approximately $3,161,000 and $4,216,000, respectively.
<PAGE>
(13) SAVINGS DEPOSITS
Savings deposits and the related weighted average interest rates at December
31, 1996 and 1995 are summarized as follows (dollars in thousands):
<TABLE>
<CAPTION>
1996 1995
---------------- -------------------
Stated Rate Amount Stated Rate Amount
---------------- ------- ------------ ----------------
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing checking 0.00% $ 85,259 0.00% $ 81,207
NOW accounts 2.00 56,862 1.50 - 2.00 47,476
Savings accounts 2.28 - 2.75 22,135 2.50 - 2.75 22,374
Money market demand accounts 3.15 - 4.51 151,046 2.90 - 4.89 165,214
-------- ----------
315,302 316,271
------------ ----------
Certificate accounts 2.00 - 2.99 12,930 2.00 - 2.99 10,915
3.00 - 3.99 1,905 3.00 - 3.99 3,472
4.00 - 4.99 95,087 4.00 - 4.99 108,845
5.00 - 5.99 776,765 5.00 - 5.99 613,098
6.00 - 6.99 91,128 6.00 - 6.99 214,534
7.00 - 7.99 12,964 7.00 - 7.99 8,776
8.00 - 8.99 3,515 8.00 - 8.99 4,893
9.00 - 9.99 1,171 9.00 - 9.99 1,620
10.00 - 10.99 249 10.00 - 10.99 1,297
11.00 - 11.99 17 11.00 - 11.99 3,718
995,731 971,168
------------ ----------
Discount to record savings deposits
at fair value, net (198) (355)
------------ ----------
$ 1,310,835 $ 1,287,084
============ ==========
Weighted average rate 4.67% 4.82%
============ ==========
</TABLE>
The scheduled maturities of certificate accounts outstanding at December
31, 1996 were as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
- -----------------------
<S> <C> <C>
1997 $ 772,690
1998 158,583
1999 40,961
2000 18,268
2001 5,064
Subsequent years 165
-------
$ 995,731
=======
</TABLE>
The aggregate amount of certificate accounts with balances of $100,000 or
more was approximately $109,371,000 and $91,190,000 at December 31, 1996 and
1995, respectively.
<PAGE>
(14) ADVANCES FROM THE FEDERAL HOME LOAN BANK OF DALLAS
The weighted average interest rates on advances from the FHLB at December 31,
1996 and 1995 were 5.61% and 5.88%, respectively. Advances and related
interest rates and maturities at December 31, 1996 and 1995 are summarized as
follows (dollars in thousands):
<TABLE>
<CAPTION>
Due during the year
ended December 31, Interest rates 1996 1995
- ------------------- --------------- ------- -------
<S> <C> <C> <C> <C> <C>
1996 4.23 - 8.71% $ -- $ 225,445
1997 4.93 - 8.31 189,127 24,293
1998 5.25 - 6.96 19,674 16,221
1999 4.95 - 8.11 170,871 19,916
2000 5.57 - 7.76 8,320 8,614
2001 6.03 - 6.46 8,854 9,025
2004 6.52 3,201 3,526
2006 6.91 3,167 --
2007 6.80 - 7.94 488 270
2009 8.25 4,681 4,876
2011 6.35 - 7.24 1,337 --
------- -------
$ 409,720 $ 312,186
======= =======
</TABLE>
At December 31, 1996, Coastal had a $5,000,000 unused line of credit with the
FHLB. The FHLB advances are secured by first lien mortgage loans and
mortgage-backed securities with an aggregate carrying value of approximately
$409,800,000 at December 31, 1996.
<PAGE>
(15) SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase at December 31, 1996 and 1995
are as follows (dollars in thousands):
<TABLE>
<CAPTION>
Repurchase Repurchase Repurchase
Liability Liability Liability
Maturing in Maturing in Maturing in
in up to 30 days in 30 to 90 days Over 90 days Total
-----------------------------------------------------------
<S> <C> <C> <C> <C>
December 31, 1996:
- -------------------------------
Book value of mortgage-backed
securities sold $ 755,512 $ 138,720 $156,987 $1,051,219
Market value of mortgage-backed
securities sold 738,861 136,188 152,233 1,027,282
Repurchase liability 695,132 127,143 144,712 966,987
Weighted average interest rate 5.55%
Weighted average maturity 126 days
December 31, 1995:
- -------------------------------
Book value of mortgage-backed
securities sold $ 740,342 $ 143,897 $193,043 $1,077,282
Market value of mortgage-backed
securities sold 734,218 143,860 189,220 1,067,298
Repurchase liability 714,574 134,546 144,712 993,832
Weighted average interest rate 5.78%
Weighted average maturity 176 days
</TABLE>
Coastal enters into sales of securities under agreements to repurchase
("reverse repurchase agreements"). Fixed coupon reverse repurchase agreements
are treated as financing arrangements, and the obligations to repurchase
securities sold are reflected as a liability in the consolidated statements of
financial condition. The dollar amounts of securities underlying the
agreements are recorded in the respective asset accounts.
At December 31, 1996 and 1995, $940,320,000 and $993,832,000, respectively, of
the agreements relating to the mortgage-backed securities were agreements to
repurchase the same securities, while $26,667,000 of the agreements at
December 31, 1996, were agreements to repurchase substantially identical
securities. Securities sold under agreements to repurchase at December 31,
1996, mature as follows: $822,275,000 in 1997 and $144,712,000 in 1998.
Securities sold under agreements to repurchase averaged approximately
$930,706,000 and $752,427,000 during 1996 and 1995, respectively, and the
maximum outstanding amounts at any month-end during 1996 and 1995 were
approximately $1,022,085,000 and $993,832,000, respectively.
At December 31, 1996, Coastal had amounts of securities at risk under
securities sold under agreements to repurchase with three individual
counterparties which exceeded ten percent of stockholders' equity. The amount
at risk with Salomon Brothers Inc. was $12,275,000 with an average maturity of
708 days at December 31, 1996. The amount at risk with Credit Suisse First
Boston Corporation was $33,594,000 with an average maturity of 20 days at
December 31, 1996. The amount at risk with Goldman Sachs was $38,263,000 with
an average maturity of 27 days at December 31, 1996.
<PAGE>
(16) SENIOR NOTES PAYABLE
On June 30, 1995, Coastal issued $50.0 million of 10.0% Senior Notes due
June 30, 2002. The Senior Notes are redeemable at Coastal's option, in whole
or in part, on or after June 30, 2000, at par, plus accrued interest to the
redemption date. Interest on the Senior Notes is payable quarterly.
(17) INTEREST RATE RISK MANAGEMENT
Coastal's strategy to manage interest rate risk is to minimize
interest rate risk rather than hedge market values. Generally, Coastal
minimizes its exposure to interest rate fluctuations by the origination and
purchase of adjustable-rate mortgage loans, adjustable-rate mortgage-backed
securities and the use of interest rate swap and interest rate cap agreements.
Coastal's goal is to minimize the timing differences between the repricing or
maturity of its assets and the repricing or maturity of its liabilities,
without speculation of interest rates, to alter interest rate risk as much as
possible to withstand interest rate changes. Coastal's approach to minimizing
interest rate risk is through the structure of its balance sheet whereby asset
purchases are closely matched with funding sources that have similar rate
movement and repricing terms.
(18) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
Coastal is a party to financial instruments with off-balance sheet risk in the
normal course of business to reduce its own exposure to fluctuations in
interest rates. These financial instruments include interest rate swap
agreements, interest rate cap agreements and financial futures contracts.
INTEREST RATE AGREEMENTS
Coastal is a party to interest rate swap and interest rate cap agreements in
order to reduce its exposure to floating interest rates on a portion of its
variable rate assets and borrowings. At December 31, 1996, Coastal had
interest rate swap and cap agreements on notional amounts totaling $60,902,000
and $386,612,000, respectively.
Coastal has entered into interest rate swap agreements with various investment
companies. The agreements provide for Coastal to make fixed interest payments
and receive payments based on a floating LIBOR index, as defined in each
agreement.
The weighted average interest rate of payments received on all of the interest
rate swap agreements was approximately 5.56% in 1996 and 6.12% in 1995. The
weighted average interest rate of payments made on all of the interest rate
swap agreements was approximately 6.35% in 1996 and 5.99% in 1995. Payments
on the interest rate swap agreements are based on the notional principal
amount of the agreements; no funds were actually borrowed or are to be repaid.
Coastal records net interest expense or income related to these agreements on
a monthly basis in "interest expense on other borrowed money" in the
accompanying consolidated statements of operations. The interest expense
related to these agreements was approximately $593,000, $24,000 and $888,000,
for the years ended December 31, 1996, 1995 and 1994, respectively. Coastal
had pledged approximately $6,123,000 and $6,324,000 of mortgage-backed
securities to secure interest rate swap agreements at December 31, 1996 and
1995, respectively.
<PAGE>
The terms of the interest rate swap agreements outstanding at December 31,
1996 and 1995 are summarized as follows (dollars in thousands):
<TABLE>
<CAPTION>
Fair Value at
End of Period
Floating Rate gain (loss)
---------------
Notional LIBOR Fixed at
Maturity Amount Index Rate End of Period
- --------------------- -------- ----------- ------ --------------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
At December 31, 1996:
1997 $ 5,000 One-month 4.990% 5.633% $ 6
6,000 Three-month 6.493 5.500 (65)
1998 4,400 Three-month 6.709 5.500 (111)
1999 14,600 Three-month 6.926 5.500 (619)
2000 4,800 Three-month 6.170 5.543 (64)
2,660 Three-month 6.000 5.617 24
2005 23,442 Three-month 6.500 5.500 (15)
--------
$ 60,902 $ (844)
======== ===============
At December 31, 1995:
1996 $ 7,300 Three-month 6.130% 5.875% $ (46)
2,750 Six-month 5.630 5.676 (7)
1997 5,000 One-month 4.990 5.938 26
6,000 Three-month 6.493 5.875 (124)
1998 4,400 Three-month 6.709 5.875 (150)
1999 14,600 Three-month 6.926 5.875 (696)
2000 4,800 Three-month 6.170 5.813 (104)
2,800 Three-month 6.000 5.938 (40)
2005 28,077 Three-month 6.500 5.938 (1,106)
-------- ---------------
$ 75,727 $ (2,247)
======== ===============
</TABLE>
Coastal has interest rate cap agreements with third parties. The agreements
provide for the third parties to make payments to Coastal whenever a defined
floating rate exceeds rates ranging from 5.00% to 12.50%, depending on the
agreement. Payments on the interest rate cap agreements are based on the
notional principal amount of the agreements; no funds were actually borrowed
or are to be repaid. The purchase prices of the interest rate cap agreements
are capitalized and included in "prepaid expenses and other assets" in the
accompanying consolidated statements of financial condition and are amortized
over the life of the agreements using the straight-line method. The
unamortized portion of the purchase price was approximately $1,070,000 and
$2,457,000 at December 31, 1996 and 1995 respectively, with the estimated fair
value of the agreements being $639,000 and $1,641,000 at December 31, 1996 and
1995, respectively. The interest rate cap agreements are used to alter the
interest rate sensitivity of a portion of Coastal's mortgage-backed
securities, loans receivable and their related funding sources. As such, the
amortization of the purchase price and interest income from the interest rate
cap agreements are recorded in "interest income on mortgage-backed securities
or loans receivable," as appropriate, in the accompanying consolidated
statements of operations. The net increase (decrease) in interest income
related to the interest rate cap agreements was approximately $(518,000),
$681,000 and ($1,464,000) for the years ended December 31, 1996, 1995, and
1994, respectively.
<PAGE>
Interest rate cap agreements outstanding at December 31, 1996 expire as
follows (dollars in thousands):
<TABLE>
<CAPTION>
Year of Strike rate Notional
expiration range amount
- ---------- ---------------- ---------
<S> <C> <C>
1997 5.0 - 9.0% $ 195,650
1998 5.0 - 12.5 156,400
1999 7.25 - 11.0 31,562
2000 9.5 3,000
---------
$ 386,612
=========
</TABLE>
Market risk, or the risk of loss due to movement in market prices or rates is
quantified by Coastal through a risk monitoring process of marking to market
the portfolio to expected market level changes in an instantaneous shock of
plus and minus 300 basis points. This process is performed monthly and
discloses the effects on market values of the assets and liabilities,
unrealized gains and losses, including off-balance sheet items, as well as
potential changes in net interest income.
The fluctuation in the market value, however, has no effect on the level of
earnings of Coastal because the securities are categorized as
"held-to-maturity" and Coastal has the positive intent and ability to hold
these to maturity.
Coastal is exposed to credit loss in the event of nonperformance by the
counterparty to the swap or cap and controls this risk through credit
monitoring procedures. The notional principal amount does not represent
Coastal's exposure to credit loss.
FINANCIAL FUTURES
Coastal has used financial futures contracts in its asset/liability management
function to alter the interest rate sensitivity of Coastal's net interest
income. In 1992, Coastal discontinued this hedging strategy. The net
unamortized contract losses on closed positions were approximately $1,410,000
and $1,819,000 at December 31, 1996 and 1995, respectively.
(19) FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments" ("Statement 107"), requires that Coastal
disclose estimated fair values for its financial instruments. The fair value
estimates, methods and assumptions used are set forth below for Coastal's
financial instruments (in thousands):
<TABLE>
<CAPTION>
At At
December 31, 1996 December 31, 1995
------------------ -----------------
Carrying Fair Carrying Fair
Value Value Value Value
------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 27,735 $ 27,735 $ 10,044 $10,044
Loans receivable 1,229,748 1,247,527 1,098,555 1,113,542
Mortgage-backed securities
held-to-maturity 1,344,587 1,308,598 1,395,753 1,381,650
Securities available-
for-sale 180,667 180,667 190,411 190,411
Mortgage loans held for sale 298 301 731 731
Stock in the FHLB 25,971 25,971 21,759 21,759
Interest rate cap agreements 1,070 639 2,457 1,641
Financial liabilities:
Savings deposits 1,310,835 1,313,385 1,287,084 1,288,208
Advances from the FHLB 409,720 409,478 312,186 314,106
Securities sold under
agreements to repurchase 966,987 966,881 993,832 994,226
Senior Notes payable 50,000 51,000 50,000 50,000
Off-balance sheet instruments:
Interest rate swap agreements -- (844) -- (2,247)
Commitments to extend credit -- 134,698 -- 141,815
</TABLE>
CASH AND CASH EQUIVALENTS
Carrying value approximates fair value because of the short maturity of these
instruments and no anticipated credit concerns.
LOANS RECEIVABLE
The fair values of loans receivable are estimated for segregated groupings of
loans with similar financial characteristics. Loans are segregated by type
such as residential mortgage, commercial and consumer. Residential mortgage
loans are further subdivided into fixed and adjustable rate loans including
single family, multifamily and construction.
The fair value of single family residential loans is estimated based on
current investor market prices and yields for mortgage-backed securities with
similar maturities, interest rate indexes and prepayment characteristics. The
fair value of multifamily residential, construction, commercial and consumer
loans are estimated using factors that reflect the credit and interest rate
risk in these loans.
MORTGAGE-BACKED SECURITIES HELD-TO-MATURITY AND SECURITIES
AVAILABLE-FOR-SALE
The fair values of mortgage-backed securities are estimated based on quoted
market prices from investment dealers and companies. If a quoted market price
is not available, fair value is estimated using quoted market prices for
similar securities.
MORTGAGE LOANS HELD FOR SALE
The fair value of mortgage loans held for sale is estimated based on
outstanding commitments from investors or current investor market yields
calculated on an aggregate loan basis.
<PAGE>
STOCK IN THE FHLB
The carrying amount of the stock in the FHLB approximates fair value.
INTEREST RATE CAP AND SWAP AGREEMENTS
The fair values of interest rate cap and swap agreements are based on the
discounted value of the differences between contractual interest rates and
current market rates for similar agreements.
SAVINGS DEPOSITS
The fair value of deposits with short-term or no stated maturity, such as
noninterest-bearing checking, NOW accounts, savings accounts, money market
demand accounts and certificate accounts with maturities less than one year is
equal to the amounts payable as of December 31, 1996 and 1995. The fair value
of certificate accounts with maturities in excess of one year is based on the
discounted value of contractual cash flows. The discount rate is estimated
using the rates currently offered for deposits of similar remaining
maturities.
ADVANCES FROM THE FHLB AND
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
The fair values of advances from the Federal Home Loan Bank of Dallas and
securities sold under agreements to repurchase are estimated based on quoted
market prices for similar agreements or current rates offered to Coastal for
borrowings with similar remaining maturities.
SENIOR NOTES PAYABLE
The fair value of Senior Notes payable is based on quoted market prices for
similar securities.
COMMITMENTS TO EXTEND CREDIT
The fair value of commitments to extend credit is estimated using current
interest rates and committed interest rates.
(20) FEDERAL INCOME TAXES
The acquisition of the Acquired Associations on May 13, 1988 qualified for
tax-free reorganization status under Section 368(a)(3)(D) of the Internal
Revenue Code of 1986 ("IRC"). Accordingly, the tax bases of assets of the
Acquired Associations carried over to Coastal. In connection with the
acquisition of the Acquired Associations, as discussed in Note 3 and pursuant
to the Assistance Agreement discussed therein, the FSLIC Resolution Fund
retained all of the future federal income tax benefits derived from the
federal income tax treatment of the payments of yield maintenance, interest on
the FSLIC Resolution Fund note receivable, built-in losses on Covered Assets,
and net operating loss carryovers. Coastal agreed to pay the FSLIC Resolution
Fund for these tax benefits when actually realized by Coastal. The provisions
for federal income taxes recorded for the years ended December 31, 1996, 1995
and 1994, represent the gross tax liability computed under the tax sharing
provisions of the Assistance Agreement with the FSLIC Resolution Fund before
reduction for actual federal taxes paid to the Internal Revenue Service.
Alternative minimum taxes paid with the federal return in 1996, 1995 and 1994
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 FSLIC Resolution Fund they will also be treated as tax benefit items.
IRC Section 382 imposes limitations on the availability of net operating loss
carryovers from taxable years prior to a tax-free reorganization to taxable
years after such reorganization. At December 31, 1996, Coastal had net
operating loss carryforwards acquired from the Acquired Associations. Under
the Assistance Agreement, the FSLIC Resolution Fund retained the tax benefits
of these net operating loss carryovers. When the losses are actually
utilized, Coastal is required to make a payment to the FSLIC Resolution Fund
in lieu of federal income taxes. Coastal therefore receives no benefit.
Although the termination of the Assistance Agreement was effective March 31,
1994, the FSLIC Resolution Fund will continue to receive the future federal
income tax benefits of the net operating loss carryforwards acquired from the
Acquired Associations.
In the first quarter of 1994, Coastal recorded a reversal of approximately
$2,023,000 of accrued federal income taxes due to the settlement of certain
tax issues with the FDIC. The reversal of this accrual reduced the 1994
provision for federal income taxes.
The components of the provision for federal income tax expense (benefit) for
the years ended December 31, 1996, 1995 and 1994 are as follows (in
thousands):
<TABLE>
<CAPTION>
1996 1995 1994
---------- ----
<S> <C> <C> <C> <C>
Current $ 5,920 $6,665 $ 5,181
Deferred (249) (188) 1,175
Reversal of accrued income taxes
due to settlement with the FDIC -- -- (2,023)
---------- ------- --------
$ 5,671 $6,477 $ 4,333
========== ======= ========
</TABLE>
A reconciliation of the expected federal income taxes using a corporate tax
rate of 35% for the years ended December 31, 1996, 1995 and 1994 is as follows
(in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
--------- ----
<S> <C> <C> <C> <C>
Computed expected tax provision $ 5,324 $6,162 $ 7,131
Reversal of accrued income taxes
due to settlement with the FDIC -- -- (2,023)
Change in estimate related to various
Assistance Agreement tax benefit items -- -- (620)
Net purchase accounting adjustments 287 104 77
Other, net 60 211 (232)
--------- ------ --------
$ 5,671 $6,477 $ 4,333
========= ====== ========
</TABLE>
<PAGE>
Significant temporary differences that give rise to the deferred tax assets
and liabilities as of December 31, 1996 and 1995 are as follows (in
thousands):
<TABLE>
<CAPTION>
1996 1995
----------------
<S> <C> <C>
Deferred tax assets:
Loans receivable, principally due to purchase accounting
discount and allowance for loan losses $ 1,247 $ 997
Property and equipment 100 144
Real estate owned, principally due to unrealized writedowns 320 342
Unrealized loss on securities available-for-sale 1,670 266
Goodwill 268 236
Other 163 290
3,768 2,275
--------- ------
Deferred tax liabilities:
Mortgage-backed securities, principally
due to deferred hedging losses 494 637
Other 47 64
--------- ------
541 701
--------- ------
Net deferred tax asset $ 3,227 $1,574
========= ======
</TABLE>
No valuation allowance on deferred tax assets has been established as
management believes that the existing deductible temporary differences will
reverse during periods in which Coastal generates net taxable income.
In years prior to 1996, Coastal was permitted under the IRC to deduct an
annual addition to a reserve for bad debts in determining taxable income.
This addition differs from the provision for loan losses for financial
reporting purposes. Due to recently enacted legislation, Coastal will no
longer be able to utilize a reserve method for determining the bad debt
deduction but will be allowed to deduct actual charge-offs. Further,
Coastal's post-1987 tax bad debt reserve will be required to be recaptured
into income beginning with fiscal 1996. The reserve will be recaptured over a
six year period with the opportunity to defer recapture by up to two years if
certain residential loan requirements are met. At December 31, 1996, Coastal
had approximately $3,950,000 of post-1987 tax bad debt reserves, for which
deferred taxes have been provided.
Coastal is not required to provide deferred taxes on its pre-1988 (base year)
tax bad debt reserve of $928,000. This reserve may be included in taxable
income in future years if the Bank pays dividends in excess of its accumulated
earnings and profits (as defined in the IRC) or in the event of a distribution
in partial or complete liquidation of the Bank.
(21) SAVINGS ASSOCIATION INSURANCE FUND ("SAIF") INSURANCE SPECIAL
ASSESSMENT
On September 30, 1996, Coastal recorded the one-time SAIF insurance
special assessment (the "special assessment") of $7,455,000 as a result of the
Deposit Insurance Funds Act of 1996 (the "Act") being signed into law. The
special assessment pursuant to the Act was 65.7 basis points on the SAIF
deposit assessment base as of March 31, 1995. Other provisions of the Act
provide for a future reduction of the SAIF insurance premium rate from the
current rate of 23 basis points to approximately 6.48 basis points beginning
in 1997.
<PAGE>
(22) STOCK COMPENSATION PROGRAMS
In December 1991, the Board of Directors adopted the 1991 Stock Compensation
Program ("the 1991 Program") for the benefit of officers and other selected
key employees of Coastal. Four kinds of rights, evidenced by four plans, are
contained in the Program and are available for grant: incentive stock
options, compensatory stock options, stock appreciation rights and performance
share awards. The maximum aggregate number of shares of Common Stock
available pursuant to the Program was equal to 10% of Coastal's issued and
outstanding shares of Common Stock. Coastal reserved the shares for future
issuance under the Program. The stock options were granted at a price not
less than the fair market value on the date of the grant, are exercisable
ratably over a four year period and may be outstanding for a period up to ten
years from the date of grant. Generally, no stock option may be exercised
until the employee has remained in the continuous employ of Coastal for six
months after the option was granted.
On March 23, 1995, the Board of Directors adopted the 1995 Stock Compensation
Program ("the New Program"). The New Program is substantially similar to the
1991 Program. The Board reserved 255,261 shares of Common Stock for issuance
under the New Program.
Coastal applies APB Opinion No. 25 and related interpretations in accounting
for its stock compensation programs. Accordingly, no compensation cost has
been recognized for its stock option rights. Had Coastal determined
compensation cost based on the fair value at the grant date for its stock
options under Statement 123, Coastal's net income after preferred stock
dividends and net earnings per share would have been reduced to the pro forma
amounts indicated below.
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------
1996 1995
-------------------------
<S> <C> <C>
Net income after preferred stock dividends (in thousands):
As reported $ 6,951 $8,542
Pro forma $ 6,739 $8,446
Net earnings per share:
As reported $ 1.38 $ 1.71
Pro forma $ 1.34 $ 1.69
</TABLE>
Pro forma net income and net earnings per share reflect only options granted
in 1996 and 1995. Therefore, the full impact of calculating compensation cost
for stock options under Statement 123 is not reflected in the pro forma net
income or net earnings per share amounts presented above because compensation
cost is reflected over the options' vesting period of 4 years and compensation
cost for options granted prior to January 1, 1995 is not considered.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Assumptions:
Expected annual dividends $0.40/share $0.32/share
Expected volatility 20.97% 23.24%
Risk-free interest rate 6.46% 6.38%
Expected life 10 years 10 years
</TABLE>
<PAGE>
A summary of the status of the stock options as of December 31, 1996, 1995 and
1994 and changes during the years then ended is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------- ---------- --------
Weighted- Weighted- Weighted-
Number Average Number Average Number Average
of Exercise of Exercise of Exercise
Shares Price Shares Price Shares
--------- ---------- --------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 242,907 $ 13.828 178,611 $ 13.084 132,182 $ 11.488
Granted 112,000 17.383 77,446 15.500 51,236 17.125
Exercised (9,071) 12.372 (5,249) 11.088 (2,732) 10.810
Forfeited (5,749) 16.733 (7,901) 15.214 (2,075) 14.175
Outstanding at end
of year 340,087 $ 14.989 242,907 $ 13.828 178,611 $ 13.084
========================================================================
Options exercisable at
end of year 209,999 151,141 96,025
=======================================================================
Weighted-Average fair
value of options
granted during the year
(per share) $ 6.56 $ 7.83 not applicable
========= =========
</TABLE>
The following table summarizes information about stock options
outstanding at December 31, 1996:
<TABLE>
<CAPTION>
Options outstanding Options exercisable
------------------- --------------------
Weighted-
Average Weighted- Weighted-
Range of Remaining Average Average
Exercise Prices Number Contractual Exercise Number Exercise
Life Price Exercisable Price
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
10.625 to $12.875 112,690 6.0 years $ 11.501 112,690 $ 11.501
15.500 to $18.750 227,397 8.7 years $ 16.717 97,309 $ 16.585
340,087 7.8 years $ 14.989 209,999 $ 13.857
===============================================================================
</TABLE>
(23) EMPLOYEE BENEFITS
Coastal maintains a 401(k) profit sharing plan. Coastal's contributions to
this plan were approximately $105,000, $94,000 and $77,000 for the years ended
December 31, 1996, 1995 and 1994, respectively. Pursuant to this plan,
employees can contribute up to 15% of their qualifying compensation into the
plan. Beginning January 1, 1990, Coastal has matched 25% of the employee
contributions up to 15% of qualifying compensation.
(24) COASTAL BANC SSB PREFERRED STOCK
On October 21, 1993, the Bank issued 1,150,000 shares of 9.0% Noncumulative
Preferred Stock, no par Series A, at a price of $25 per share to the public.
Dividends on the Preferred Stock are payable quarterly at the annual rate of
$2.25 per share, when, as and if declared by the Board of Directors of the
Bank. At any time on or after December 15, 1998, the Preferred Stock may be
redeemed in whole or in part only at the Bank's option at $25 per share plus
unpaid dividends (whether or not earned or declared) for the then current
dividend period to the date fixed for redemption.
<PAGE>
(25) COMMITMENTS AND CONTINGENCIES
Coastal is involved in various litigation arising from acquired entities as
well as in the normal course of business. In the opinion of management, the
ultimate liability, if any, from these actions will not be material to the
consolidated financial statements.
At December 31, 1996, the minimum rental commitments under all noncancelable
operating leases with initial or remaining terms of more than one year were as
follows (in thousands):
<TABLE>
<CAPTION>
Year ending
December 31,
- -------------------
<S> <C> <C>
1997 $ 1,462
1998 882
1999 756
2000 600
2001 562
2002 and thereafter 1,200
</TABLE>
Rent expense for the years ended December 31, 1996, 1995 and 1994 amounted to
approximately $2,000,000, $1,465,000 and $1,339,000, respectively.
(26) STOCKHOLDERS' EQUITY
On January 25, April 25, July 25, and October 24, 1996, Coastal declared a
dividend of $0.10 per share of Common Stock outstanding for the stockholders
of record of February 15, May 15, August 15, and November 15, 1996,
respectively.
On January 26, April 27, July 27, and October 26, 1995, Coastal declared a
dividend of $0.08 per share of Common Stock outstanding for the stockholders
of record on February 21, May 15, August 15, and November 15, 1995,
respectively.
On April 28, July 28 and October 27, 1994, Coastal declared a dividend of
$0.08 per share of Common Stock outstanding for the stockholders of record on
May 18, August 18, and November 15, 1994, respectively.
(27) REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements administered by
the Federal Deposit Insurance Corporation (FDIC). Failure to meet minimum
capital requirements can initiate certain mandatory--and possibly additional
discretionary--actions by regulators that, if undertaken, could have a direct
material effect on the Bank's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank
must meet specific capital guidelines that involve quantitative measures of
the Bank's assets, liabilities, and certain off-balance-sheet items as
calculated under regulatory accounting practices. The Bank's capital amounts
and classification are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (as defined in the
applicable regulations) of Tier 1 (core) capital to total assets, Tier 1
risk-based capital to risk weighted assets and total risk-based capital to
risk-weighted assets. Management believes, as of December 31, 1996, that the
Bank met capital adequacy requirements to which it is subject.
As of December 31, 1996, the most recent notification from the FDIC
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized the Bank must
maintain minimum Tier 1 (core), Tier 1 risk-based and total risk-based ratios
as set forth in the table below. There are no conditions or events since that
notification that management believes have changed the institution's category.
The Bank's regulatory capital amounts and ratios, as of December 31, 1996 and
1995, in relation to its existing regulatory capital requirements for capital
adequacy purposes as of such date are as follows (dollars in thousands):
<TABLE>
<CAPTION>
Minimum For Capital
ActualAdequacy Purposes
------------------------
Capital Requirement Amount Ratio Amount Ratio
- ------------------------- ------------------------ ------ ------
<S> <C> <C> <C> <C> <C>
As of December 31, 1996:
Tier 1 (core) $ 152,932 5.35% $114,377 4.00%
Tier 1 risk-based 152,932 11.77 51,970 4.00
Total risk-based 159,812 12.30 103,940 8.00
As of December 31, 1995:
Tier 1 (core) 146,869 5.30 110,892 4.00
Tier 1 risk-based 146,869 12.36 47,514 4.00
Total risk-based 152,572 12.84 95,027 8.00
</TABLE>
<PAGE>
(28) PARENT COMPANY FINANCIAL INFORMATION
Condensed financial information for Coastal Bancorp, Inc. is as follows (in
thousands):
Statements of Financial Condition
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Assets:
Cash and cash equivalents $ 871 $ 405
Investment in subsidiary 136,675 135,597
Mortgage-backed securities held-to-maturity 2,079 2,415
Other assets 5,125 3,262
-------- --------
Total assets $144,750 $141,679
======== ========
Liabilities and stockholders' equity:
Senior Notes payable $ 50,000 $ 50,000
Other liabilities 602 --
-------- --------
Total liabilities 50,602 50,000
Total stockholders' equity 94,148 91,679
-------- --------
Total liabilities and stockholders' equity $144,750 $141,679
======== ========
</TABLE>
Statements of Operations
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------
1996 1995 1994
------------------------- ---------
<S> <C> <C> <C>
Income:
Dividends from subsidiary $ 7,001 $ 4,093 $ 1,492
Equity in undistributed earnings of
subsidiary, net of income tax 6,274 8,920 14,552
Interest income 143 66 --
Total income 13,418 13,079 16,044
------------------------- --------- -------
Expense:
Interest expense 5,000 2,500 --
Noninterest expense 891 464 4
Total expense 5,891 2,964 4
------------------------- --------- -------
Federal income tax benefit 2,012 1,015 --
------------------------- --------- -------
Net income $ 9,539 $ 11,130 $16,040
========================= ========= =======
</TABLE>
<PAGE>
Statements of Cash Flows
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------
1996 1995 1994
-------------------------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 9,539 $ 11,130 $ 16,040
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in undistributed earnings of
subsidiary (6,274) (8,920) (14,552)
Net increase in other assets (1,262) (890) (8)
-------------------------------------------------
Net cash provided by operating
activities 2,003 1,320 1,480
-------------------------------------------------
Cash flows from investing activities:
Transfer of mortgage-backed securities
from subsidiary -- (2,517) --
Net decrease in mortgage-backed securities 336 102 --
Investment in subsidiary -- (44,930) --
----------------------------------------------
Net cash provided (used) by
investing activities 336 (47,345) --
-----------------------------------------------
Cash flows from financing activities:
Exercise of stock options for purchase of
common stock 112 58 30
Issuance of Senior Notes payable, net -- 47,635 --
Dividends paid (1,985) (1,585) (1,188)
Net cash provided (used) by financing
activities (1,873) 46,108 (1,158)
------------------------------------------------
Net increase in cash and cash
equivalents 466 83 322
Cash and cash equivalents at beginning of year 405 322 --
----------------------------------------------
Cash and cash equivalents at end of year $ 871 $ 405 $ 322
============================================
</TABLE>
<PAGE>
(29) SELECTED QUARTERLY FINANCIAL DATA
Selected quarterly financial data is presented in the following tables for the
years ended December 31, 1996 and 1995 (in thousands, except per share data):
<TABLE>
<CAPTION>
1996 Quarter Ended (unaudited)
-------------------------------
March 31, June 30, September 30, December 31,
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income $ 48,118 $ 47,763 $ 47,777 $ 49,161
Interest expense 34,707 33,902 34,228 35,348
---------------------------------------------------------------
Net interest income 13,411 13,861 13,549 13,813
Provision for loan losses 575 450 450 450
Gain on sale of branch -- 521 -- --
Noninterest income 2,141 2,130 2,223 2,334
Noninterest expense 9,550 10,301 9,932 9,610
SAIF insurance special
assessment -- -- 7,455 --
-------------------------------------------------------------
Income (loss) before provision
for federal income taxes 5,427 5,761 (2,065) 6,087
Federal income taxes 1,987 2,103 (636) 2,217
--------------------------------------------------------------
Net income (loss) $ 3,440 $ 3,658 $ (1,429) $ 3,870
==============================================================
Net earnings (loss) per share $0.56 $ 0.60 $ (0.42) $ 0.64
===============================================================
</TABLE>
<TABLE>
<CAPTION>
1995 Quarter Ended (unaudited)
-------------------------------
March 31, June 30, September 30, December 31,
-----------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income $ 38,197 $ 41,192 $ 43,296 $ 46,704
Interest expense 28,719 31,020 32,859 33,756
--------------------------------------------------------------------
Net interest income 9,478 10,172 10,437 12,948
Provision for loan losses 262 468 237 697
Gain on sales of mortgage-backed
securities available-for-sale -- -- -- 81
Noninterest income 1,854 1,738 1,816 2,116
Noninterest expense 7,084 7,491 7,800 8,994
---------------------------------------------------------------------
Income before provision
for federal income taxes 3,986 3,951 4,216 5,454
Federal income taxes 1,556 1,429 1,521 1,971
--------------------------------------------------------------------
Net income $ 2,430 $ 2,522 $ 2,695 $ 3,483
====================================================================
Net earnings per share $ 0.36 $ 0.37 $ 0.41 0.57
====================================================================
</TABLE>
STOCK PRICES AND DIVIDENDS
The following table sets forth the high and low price range by quarter for the
two years ended December 31, 1996 of the Common Stock of Bancorp ("CBSA") and
the Series A Preferred Stock of the Bank ("CBSAP") as listed and quoted on the
Nasdaq National Market System.
COASTAL BANCORP, INC. COMMON STOCK:
<TABLE>
<CAPTION>
1996 1995
------- ----------
High Low Dividends High Low Dividends
------- ------- ---------- ------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
First Quarter $18.750 $16.625 $ 0.100 $15.750 $14.000 $ 0.080
Second Quarter 18.875 17.000 0.100 16.500 14.250 0.080
Third Quarter 20.375 16.500 0.100 17.250 15.500 0.080
Fourth Quarter 24.750 19.875 0.100 17.500 15.875 0.080
</TABLE>
COASTAL BANC SSB PREFERRED STOCK, SERIES A:
<TABLE>
<CAPTION>
1996 1995
------- ----------
High Low Dividends High Low Dividends
------- ------- ---------- ------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
First Quarter $25.750 $24.750 $ 0.563 $24.625 $22.750 $ 0.563
Second Quarter 24.875 24.500 0.563 25.000 23.750 0.563
Third Quarter 25.250 24.625 0.563 25.125 23.500 0.563
Fourth Quarter 25.250 24.875 0.563 25.500 24.625 0.563
</TABLE>
Coastal Bancorp, Inc.
STOCKHOLDER INFORMATION
ANNUAL MEETING
The Annual Meeting of Stockholders of Coastal Bancorp, Inc. will be held at
the Renaissance Houston Hotel at 6 Greenway Plaza East, Plaza III, Houston,
Texas, 77046 on April 24, 1997 at 11:00 a.m.
TRANSFER AGENT AND REGISTRAR
ChaseMellon Shareholder Services
450 West 33rd St., 15th Floor
New York, NY 10001
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP
700 Louisiana Street, Suite 2700
Houston, Texas 77002
SPECIAL COUNSEL
Elias, Matz, Tiernan & Herrick L.L.P.
734 15th Street, N.W.
Washington, D.C. 20005
INQUIRIES, PUBLICATIONS AND FINANCIAL INFORMATION (INCLUDING COPIES OF THE
ANNUAL REPORT AND FORM 10-K)
Manuel J. Mehos
Chairman of the Board
and Chief Executive Officer
or
Catherine N. Wylie
Executive Vice President
and Chief Financial Officer
Coastal Bancorp, Inc.
Coastal Banc Tower
8 Greenway Plaza, Suite 1500
Houston, Texas 77046
(713) 623-2600
email: [email protected]
STOCK LISTING AND OTHER INFORMATION
The common stock of Coastal Bancorp, Inc. is listed on the
over-the-counter market and quoted on the NASDAQ National Market System under
the symbol "CBSA". As of February 27, 1997, there were 4,968,591 shares of
Common Stock of Coastal Bancorp, Inc. issued and outstanding and the
approximate number of stockholders of record was 58.
On March 25, 1992, Coastal Banc Savings Association (the "Association")
issued 2,061,384 shares of Common Stock at $12.50 per share in its initial
public offering. As of such date, the Common Stock of the Association became
registered under the Securities Exchange Act of 1934 and also became listed
for quotation on the NASDAQ National Market System. The Common Stock issued
by the Association became the Common Stock of Coastal Bancorp, Inc. on July
29, 1994, as a result of the holding company reorganization of the
Association.
On October 21, 1993, the Association issued 1,150,000 shares of 9.0%
Noncumulative Preferred Stock, Series A, at $25.00 per share. As of such
date, the Preferred Stock of the Association became registered under the
Securities Exchange Act of 1934. After the reorganization into a holding
company form of ownership and conversion of the Association to a
Texas-chartered savings bank, the Preferred Stock of the Association became
the Preferred Stock of Coastal Banc ssb (the "Bank"). The Preferred Stock is
redeemable at any time on or after December 15, 1998, only at the option of
the Bank, in whole or in part, at a redemption price of $25.00 per share plus
accrued and unpaid dividends. The Preferred Stock is listed and quoted on the
NASDAQ National Market System under the symbol "CBSAP." As of February 27,
1997, there were 1,150,000 shares of Preferred Stock issued and outstanding
and held by approximately 234 stockholders of record.
Coastal declared dividends on the Common Stock payable during 1996.
Quarterly dividends in the amount of $.10 per share were paid on March 15,
1996, June 15, 1996, September 15, 1996, December 15, 1996. On March 15,
1997, Coastal paid a quarterly dividend in the amount of $.10 per share on its
Common Stock. Coastal Bancorp, Inc. will continue to review its dividend
policy in view of the operating performance of the Bank, and may declare
dividends on the Common Stock in the future if such payments are deemed
appropriate and in compliance with applicable law and regulations. Prior to
the declaration of dividends, Coastal must notify the Office of Thrift
Supervision, the holding company's primary federal regulator, which may object
to the dividends on the basis of safety and soundness.
Change-In-Control
CHANGE-IN-CONTROL SEVERANCE AGREEMENT
THIS AGREEMENT is entered into and effective this 14th day of June, 1996,
("Effective Date") by and between Coastal Bancorp, Inc. (the "Company") and
Coastal Banc ssb (the "Bank") and Gary R. Garrett (the "Employee").
WHEREAS, the Employee had heretofore been employed by the Company and the
Bank as an executive officer, and the Company and the Bank deems it to be in
their best interest to enter into this Agreement as additional incentive to
the Employee to continue as an executive employee of the Company and the Bank;
and
WHEREAS, the parties desire by this writing to set forth their
understanding as to their respective rights and obligations in the event a
"change in control" (as defined herein) occurs with respect to the Bank or the
Company;
NOW, THEREFORE, the undersigned parties AGREE as follows:
1. Defined Terms
When used anywhere in the Agreement, the following terms shall have
the meaning set forth herein.
(a) "Change in Control" shall mean any one of the following
events: (i) where, during any period of two consecutive years, individuals
(the "Continuing Directors") who at the beginning of such period constitute
the Board of Directors of the Bank or the Company (the "Existing Board") cease
for any reason to constitute at least two-thirds thereof, provided that any
individual whose election or nomination for election as a member of the
Existing Board was approved by a vote of at least two-thirds of the Continuing
Directors then in office shall be considered a Continuing Director following:
(A) the acquisition by a person of ownership, holding or power to vote more
than 25% of the Bank's or the Company's voting stock, (B) the acquisition by
any person of the ability to control the election of a majority of any class
or classes of the Bank's or the Company's directors, or (C) the acquisition of
a controlling influence over the management or policies of the Bank or the
Company defined as set forth in 12 C.F.R. 574.4(b),(c) and (d) by any person
or to persons acting as a "group" (within the meaning of Section 13(d) of the
Securities Exchange Act of 1934), or (ii) the sale, exchange, lease, transfer
or other disposition (in one or more transactions) to any person of all or a
substantial part of the assets, liabilities or business of the Company or the
Bank, (iii) any merger or consolidation or share exchange of the Company or
the Bank with any other person which subsequent thereto the Company or the
Bank is not the surviving entity, or (iv) any change in business of the
Company or the Bank such that the Company does not own the voting stock of an
insured depository institution or the business of the Bank is not as an
insured depository institution. Notwithstanding the foregoing, in the case of
(i) or (ii) or (iii) hereof, change of ownership or control of the Bank by the
Company itself to or among direct or indirect wholly-owned subsidiaries of the
Company shall not constitute a Change in Control. For purposes of this
paragraph only, the term "person" refers to an individual or a corporation,
limited liability company, partnership, trust, association, joint venture,
pool, syndicate, sole proprietorship, unincorporated organization or any other
form of entity not specifically listed herein. The decision of the Bank's
non-employee directors as to whether or not a Change in Control, as defined
herein, has occurred, and the date of such occurrence, shall be conclusive and
binding.
(b) "Code" shall mean the Internal Revenue Code of 1986, as amended
from time to time, and as interpreted through applicable rulings and
regulations in effect from time to time.
(c) "Code 280G Maximum" shall mean product of 2.99 and the "base
amount" as defined in Code 280G(b)(3).
(d) "Good Reason" shall mean any of the following events, which has
not been consented to in advance by the Employee in writing: (i) the
requirement that the Employee move his personal residence, or perform his
principal executive functions, more than thirty (30) miles from his primary
office as of the date of the Change in Control; (ii) a material (defined to be
10% or more) reduction in the Employee's base compensation as in effect on the
date of the Change in Control or as the same may be increased from time to
time; (iii) a successor to the Company or the Bank fails or refuses to assume
the Company's and the Bank's obligations under this Agreement; (iv) the
Company, the Bank or successor thereto breaches any provision of this
Agreement; or (v) the Employee is terminated for other than just cause after
the Change in Control.
(e) "Just Cause" shall mean, in the good faith determination of the
Company's and the Bank's Boards of Directors, the Employee's personal
dishonesty, incompetence, willful misconduct, breach of fiduciary duty
involving personal profit, intentional failure to perform stated duties,
willful violation of any law, rule or regulation (other than traffic
violations or similar offenses) or final cease-and-desist order, or material
breach of any provision of this Agreement. The Employee shall have the right
to make a presentation to the Board of Directors with counsel prior to the
rendering of such determination by the Board. The Employee shall have no
right to receive compensation or other benefits for any period after
termination for Just Cause. No act, or failure to act, on the Employee's part
shall be considered "willful" unless he has acted, or failed to act, with an
absence of good faith and without a reasonable belief that his action or
failure to act was in the best interest of the Bank and the Company.
(f) "Protected Period" shall mean the period that begins on the date
six months before a Change in Control and ends on the later of the third
annual anniversary of the Change in Control or the expiration date of this
Agreement.
2. Trigger Events
The Employee shall be entitled to collect the severance benefits set
forth in Section 3 of this Agreement in the event that (a) a Change of Control
has occurred and the Employee voluntarily terminates his employment within the
30-day period beginning on the first anniversary of the date of the occurrence
of a Change in Control, (b) the Employee voluntarily terminates employment
within 90 days of an event that both occurs during the Protected Period and
constitutes Good Reason, or (c) the Bank, the Company, or their successor(s)
in interest terminate the Employee's employment for any reason other than Just
Cause during the Protected Period.
3. Amount of Severance Benefit
(a) If the Employee becomes entitled to collect severance benefits
pursuant to Section 2(a) hereof, the Company and/or the Bank shall pay
Employee one (1) times the annual salary and bonus or incentive compensation
(not including stock compensation plans) paid to Employee by the Company
and/or the Bank during the immediately preceding year of the term of
employment, such sum to be paid within five (5) days of the date that
Employee's employment actually ceases.
(b) If the Employee becomes entitled to collect severance benefits
pursuant to Section 2(b) or 2(c) hereof, the Company and/or the Bank shall pay
Employee 2.99 times the annual salary and bonus or incentive compensation (not
including stock compensation plans) paid to Employee by the Company and/or the
Bank during the immediately preceding year of the term of employment, such sum
to be paid within five (5) days of the date that Employee's employment
actually ceases.
(c) The provisions of this Agreement shall not reduce any amounts
otherwise payable to the Employee or in any way diminish the employee's
rights, whether existing now or hereafter under any benefit plan of the
Company or the Bank. The Employee shall not be obligated to mitigate any
payments entitled to be received hereunder.
(d) The foregoing payments and benefits shall be paid to the
Employee's beneficiaries by testate or intestate succession in the event of
Employee's death during the period during which such payments and benefits are
being provided.
(e) In the event that the Employee and the Company or the Bank, as
the case may be (hereinafter, in this Section 3(e), the "Company") agree that
the Employee has collected an amount exceeding the Code 280G Maximum, the
parties agree as follows:
(i) In the calendar year that the Employee is entitled to
receive a payment or benefits under the provisions of this Agreement, the
independent accountants of the Company shall determine if an excess parachute
payment (as defined in Section 4999 of the Code, as amended, and any successor
provision thereto) exists.
Such determination shall be made after taking any reductions
permitted pursuant to Section 280G of the Code and the regulations thereunder.
Any amount determined to be an excess parachute payment after taking into
account such reductions shall be hereafter referred to as the "Initial Excess
Parachute Payment". As soon as practicable after a Change in Control of the
Company or the Bank, the Initial Excess Parachute Payment shall be determined.
Immediately following a Change in Control of the Company or the Bank, the
Company or the Bank shall pay the Employee, subject to applicable withholding
requirements under applicable state or federal law an amount equal to:
(a) twenty (20) percent of the Initial Excess Parachute Payment (or such
other amount equal to the tax imposed under Section 4999 of the Code), and
(b) such additional amount (tax allowance) as may be necessary to
compensate the Employee for the payment by the Employee of state and federal
income and excise taxes on the payment provided under Clause (a) and on any
payments under this Clause (b). In computing such tax allowance, the payment
to be made under Clause (a) shall be multiplied by the "gross up percentage"
("GUP"). The GUP shall be determined as follows:
GUP = Tax Rate
1 - Tax Rate
The Tax Rate for purposes of computing the GUP shall be the highest marginal
federal and state income and employment-related tax rate, including any
applicable excise tax rate, applicable to the Employee in the year in which
the payment under Clause (a) is made.
(ii) Notwithstanding the foregoing, if it shall subsequently be
determined in a final judicial determination or a final administrative
settlement to which the Employee is a party that the excess parachute payment
is defined in Section 4999 of the Code, reduced as described above, is
different from the Initial Excess Parachute Payment (such different amount
being hereafter referred to as the "Determinative Excess Parachute Payment")
then the Company's independent accountants shall determine the amount (the
"Adjustment Amount") the Employee must pay to the Company or the Bank or the
Company or the Bank must pay to the Employee in order to put the Employee (or
the Company or the Bank, as the case may be) in the same position the Employee
(or the Company or the Bank, as the case may be) would have been if the
Initial Excess Parachute Payment had been equal to the Determinative Excess
Parachute Payment. In determining the Adjustment Amount, the independent
accountants shall take into account any and all taxes (including any penalties
and interest) paid by or for the Employee or refunded to the Employee or for
the Employee's benefit. As soon as practicable after the Adjustment Amount
has been so determined, the Company or the Bank shall pay the Adjustment
Amount to the Employee or the Employee shall repay the Adjustment Amount to
the Company or the Bank, as the case may be.
(iii) In any calendar year that the Employee receives payments of
benefits under this Agreement, the Employee shall report on his state and
federal income tax returns such information as is consistent with the
determination made by the independent accountants of the Company as described
above. The Company and the Bank shall indemnify and hold the Employee
harmless from any and all losses, costs and expenses (including without
limitation, reasonable attorney's fees, interest, fines and penalties) which
the Employee incurs as a result of so reporting such information. Employee
shall promptly notify the Company and the Bank in writing whenever the
Employee receives notice of the institution of a judicial or administrative
proceeding, formal or informal, in which the federal tax treatment under
Section 4999 of the Code of any amount paid or payable under this the
Employment Agreement is being reviewed or is in dispute. The Company or the
Bank shall assume control at its expense over all legal and accounting matters
pertaining to such federal tax treatment (except to the extent necessary or
appropriate for the Employee to resolve any such proceeding with respect to
any matter unrelated to amounts paid or payable pursuant to this contract) and
the Employee shall cooperate fully with the Company or the Bank in any such
proceeding. The Employee shall not enter into any compromise or settlement or
otherwise prejudice any rights the Company or the Bank may have in connection
therewith without prior consent of the Company.
4. Term of the Agreement
This Agreement shall remain in effect for the period commencing on the
Effective Date and ending on the earlier of (i) the date 36 months after the
Effective Date, and (ii) the date on which the Employee terminates employment
with the Company or the Bank; provided that the Employee's rights hereunder
shall continue following the termination of his employment with the Company or
the Bank under any of the circumstances described in Section 2 hereof.
5. Termination or Suspension Under Federal Law
Any payments made to the Employee pursuant to this Agreement, or
otherwise, are subject to and conditioned upon their compliance with 12 U.S.C.
1828(k) and any regulations promulgated thereunder.
6. Expense Reimbursement
In the event that any dispute arises between the Employee and the Company
or the Bank as to the terms or interpretations of this Agreement, whether
instituted by formal legal proceedings or otherwise, including any action that
the Employee takes to enforce the terms of this Agreement or to defend against
any action taken by the Company or the Bank, the Employee shall be reimbursed
for all costs and expenses, including reasonable attorneys' fees, arising from
such dispute, proceedings or actions, provided that the Employee shall obtain
a final judgment in favor of the Employee in a court or competent jurisdiction
or in binding arbitration under the rules of the American Arbitration
Association. Such reimbursement, which may be in advance of any final
judgment or determination in arbitration, if requested in writing by the
Employee, shall be paid within ten (10) days of Employee's furnishing to the
Company or the Bank written evidence, which may be in the form, among other
things, or a canceled check or receipt, of any costs or expenses incurred by
the Employee.
7. Successors and Assigns
(a) This Agreement shall inure to the benefit of and be binding upon
any corporate or other successor or assign of the Company or the Bank which
shall acquire, directly or indirectly, by merger, consolidation, purchase or
otherwise, all or substantially all of the assets or stock of the Bank or
Company. This Agreement shall inure to the benefit of and be enforceable by
the Employee's personal and legal representatives, executors, administrators,
successors, heirs, devisees and legatees. If the Employee should die while
any amounts are still payable to him/her hereunder, all such amounts shall be
paid in accordance with the terms of this Agreement to the Employee's devisee,
legatee or other designee, or if there be no such designee, to the Employee's
Estate.
(b) Since the Company and the Bank are contracting for the unique and
personal skills of the Employee, the Employee shall be precluded from
assigning or delegating his rights or duties hereunder without first obtaining
the written consent of the Company or the Bank.
8. Amendments
No amendments or additions to this Agreement shall be binding unless made
in writing and signed by all of the parties, except as herein otherwise
specifically provided. No waiver by either party hereto at any time of any
breach by the other party hereto, or of compliance with, any condition or
provision of this Agreement to be performed by such other party will be deemed
to be a waiver of similar or dissimilar provisions or conditions, at the same
or any prior or subsequent time.
9. Applicable Law
Except to the extent preempted by Federal law, the laws of the State of
Texas shall govern this Agreement in all respects, whether as to its validity,
construction, capacity, performance or otherwise.
10. Severability
The provisions of this Agreement shall be deemed severable and the
invalidity or unenforceability of any provision shall not affect the validity
or enforceability of the other provisions hereof.
11. Entire Agreement
This Agreement, together with any understanding or modifications thereof
as agreed to in writing by the parties, shall constitute the entire agreement
between the parties hereto.
12. Notices
For purposes of this Agreement, notices and other communications provided
for in this Agreement shall be in writing and shall be deemed to have been
duly given when delivered or mailed by U.S. registered or certified mail,
return receipt requested, postage prepaid, as follows: If to the Company or
the Bank: Chairman of the Board and Chief Executive Officer, Coastal Bancorp,
Inc., 8 Greenway Plaza, Suite 1500, Houston, Texas 77046. If to the Employee:
Gary R. Garrett
1231 Creekford
Sugarland, Texas 77478
ss# ###-##-####
Employee Name & Address
IN WITNESS WHEREOF, the parties have executed this Agreement on the day
and year first herein above written.
ATTEST: COASTAL BANCORP, INC.
/s/ Linda B. Frazier By: /s/ Manuel J. Mehos
Secretary Manuel J. Mehos,
Chairman of the Board
and Chief Executive Officer
ATTEST: COASTAL Banc ssb
/s/ Linda B. Frazier By: /s/ Manuel J. Mehos
Secretary Manuel J. Mehos,
Chairman of the Board
and Chief Executive Officer
WITNESS
/s/ Pamela S. Watkins /s/ Gary R. Garrett
Gary R. Garrett
<PAGE>
CHANGE-IN-CONTROL SEVERANCE AGREEMENT
THIS AGREEMENT is entered into and effective this 14th day of June, 1996,
("Effective Date") by and between Coastal Bancorp, Inc. (the "Company") and
Coastal Banc ssb (the "Bank") and Catherine N. Wylie (the "Employee").
WHEREAS, the Employee had heretofore been employed by the Company and the
Bank as an executive officer, and the Company and the Bank deems it to be in
their best interest to enter into this Agreement as additional incentive to
the Employee to continue as an executive employee of the Company and the Bank;
and
WHEREAS, the parties desire by this writing to set forth their
understanding as to their respective rights and obligations in the event a
"change in control" (as defined herein) occurs with respect to the Bank or the
Company;
NOW, THEREFORE, the undersigned parties AGREE as follows:
1. Defined Terms
When used anywhere in the Agreement, the following terms shall have
the meaning set forth herein.
(a) "Change in Control" shall mean any one of the following
events: (i) where, during any period of two consecutive years, individuals
(the "Continuing Directors") who at the beginning of such period constitute
the Board of Directors of the Bank or the Company (the "Existing Board") cease
for any reason to constitute at least two-thirds thereof, provided that any
individual whose election or nomination for election as a member of the
Existing Board was approved by a vote of at least two-thirds of the Continuing
Directors then in office shall be considered a Continuing Director following:
(A) the acquisition by a person of ownership, holding or power to vote more
than 25% of the Bank's or the Company's voting stock, (B) the acquisition by
any person of the ability to control the election of a majority of any class
or classes of the Bank's or the Company's directors, or (C) the acquisition of
a controlling influence over the management or policies of the Bank or the
Company defined as set forth in 12 C.F.R. 574.4(b),(c) and (d) by any person
or to persons acting as a "group" (within the meaning of Section 13(d) of the
Securities Exchange Act of 1934), or (ii) the sale, exchange, lease, transfer
or other disposition (in one or more transactions) to any person of all or a
substantial part of the assets, liabilities or business of the Company or the
Bank, (iii) any merger or consolidation or share exchange of the Company or
the Bank with any other person which subsequent thereto the Company or the
Bank is not the surviving entity, or (iv) any change in business of the
Company or the Bank such that the Company does not own the voting stock of an
insured depository institution or the business of the Bank is not as an
insured depository institution. Notwithstanding the foregoing, in the case of
(i) or (ii) or (iii) hereof, change of ownership or control of the Bank by the
Company itself to or among direct or indirect wholly-owned subsidiaries of the
Company shall not constitute a Change in Control. For purposes of this
paragraph only, the term "person" refers to an individual or a corporation,
limited liability company, partnership, trust, association, joint venture,
pool, syndicate, sole proprietorship, unincorporated organization or any other
form of entity not specifically listed herein. The decision of the Bank's
non-employee directors as to whether or not a Change in Control, as defined
herein, has occurred, and the date of such occurrence, shall be conclusive and
binding.
(b) "Code" shall mean the Internal Revenue Code of 1986, as amended
from time to time, and as interpreted through applicable rulings and
regulations in effect from time to time.
(c) "Code 280G Maximum" shall mean product of 2.99 and the "base
amount" as defined in Code 280G(b)(3).
(d) "Good Reason" shall mean any of the following events, which has
not been consented to in advance by the Employee in writing: (i) the
requirement that the Employee move his personal residence, or perform his
principal executive functions, more than thirty (30) miles from his primary
office as of the date of the Change in Control; (ii) a material (defined to be
10% or more) reduction in the Employee's base compensation as in effect on the
date of the Change in Control or as the same may be increased from time to
time; (iii) a successor to the Company or the Bank fails or refuses to assume
the Company's and the Bank's obligations under this Agreement; (iv) the
Company, the Bank or successor thereto breaches any provision of this
Agreement; or (v) the Employee is terminated for other than just cause after
the Change in Control.
(e) "Just Cause" shall mean, in the good faith determination of the
Company's and the Bank's Boards of Directors, the Employee's personal
dishonesty, incompetence, willful misconduct, breach of fiduciary duty
involving personal profit, intentional failure to perform stated duties,
willful violation of any law, rule or regulation (other than traffic
violations or similar offenses) or final cease-and-desist order, or material
breach of any provision of this Agreement. The Employee shall have the right
to make a presentation to the Board of Directors with counsel prior to the
rendering of such determination by the Board. The Employee shall have no
right to receive compensation or other benefits for any period after
termination for Just Cause. No act, or failure to act, on the Employee's part
shall be considered "willful" unless he has acted, or failed to act, with an
absence of good faith and without a reasonable belief that his action or
failure to act was in the best interest of the Bank and the Company.
(f) "Protected Period" shall mean the period that begins on the date
six months before a Change in Control and ends on the later of the third
annual anniversary of the Change in Control or the expiration date of this
Agreement.
2. Trigger Events
The Employee shall be entitled to collect the severance benefits set
forth in Section 3 of this Agreement in the event that (a) a Change of Control
has occurred and the Employee voluntarily terminates his employment within the
30-day period beginning on the first anniversary of the date of the occurrence
of a Change in Control, (b) the Employee voluntarily terminates employment
within 90 days of an event that both occurs during the Protected Period and
constitutes Good Reason, or (c) the Bank, the Company, or their successor(s)
in interest terminate the Employee's employment for any reason other than Just
Cause during the Protected Period.
3. Amount of Severance Benefit
(a) If the Employee becomes entitled to collect severance benefits
pursuant to Section 2(a) hereof, the Company and/or the Bank shall pay
Employee one (1) times the annual salary and bonus or incentive compensation
(not including stock compensation plans) paid to Employee by the Company
and/or the Bank during the immediately preceding year of the term of
employment, such sum to be paid within five (5) days of the date that
Employee's employment actually ceases.
(b) If the Employee becomes entitled to collect severance benefits
pursuant to Section 2(b) or 2(c) hereof, the Company and/or the Bank shall pay
Employee 2.99 times the annual salary and bonus or incentive compensation (not
including stock compensation plans) paid to Employee by the Company and/or the
Bank during the immediately preceding year of the term of employment, such sum
to be paid within five (5) days of the date that Employee's employment
actually ceases.
(c) The provisions of this Agreement shall not reduce any amounts
otherwise payable to the Employee or in any way diminish the employee's
rights, whether existing now or hereafter under any benefit plan of the
Company or the Bank. The Employee shall not be obligated to mitigate any
payments entitled to be received hereunder.
(d) The foregoing payments and benefits shall be paid to the
Employee's beneficiaries by testate or intestate succession in the event of
Employee's death during the period during which such payments and benefits are
being provided.
(e) In the event that the Employee and the Company or the Bank, as
the case may be (hereinafter, in this Section 3(e), the "Company") agree that
the Employee has collected an amount exceeding the Code 280G Maximum, the
parties agree as follows:
(i) In the calendar year that the Employee is entitled to
receive a payment or benefits under the provisions of this Agreement, the
independent accountants of the Company shall determine if an excess parachute
payment (as defined in Section 4999 of the Code, as amended, and any successor
provision thereto) exists.
Such determination shall be made after taking any reductions
permitted pursuant to Section 280G of the Code and the regulations thereunder.
Any amount determined to be an excess parachute payment after taking into
account such reductions shall be hereafter referred to as the "Initial Excess
Parachute Payment". As soon as practicable after a Change in Control of the
Company or the Bank, the Initial Excess Parachute Payment shall be determined.
Immediately following a Change in Control of the Company or the Bank, the
Company or the Bank shall pay the Employee, subject to applicable withholding
requirements under applicable state or federal law an amount equal to:
(a) twenty (20) percent of the Initial Excess Parachute Payment (or such
other amount equal to the tax imposed under Section 4999 of the Code), and
(b) such additional amount (tax allowance) as may be necessary to
compensate the Employee for the payment by the Employee of state and federal
income and excise taxes on the payment provided under Clause (a) and on any
payments under this Clause (b). In computing such tax allowance, the payment
to be made under Clause (a) shall be multiplied by the "gross up percentage"
("GUP"). The GUP shall be determined as follows:
GUP = Tax Rate
1 - Tax Rate
The Tax Rate for purposes of computing the GUP shall be the highest marginal
federal and state income and employment-related tax rate, including any
applicable excise tax rate, applicable to the Employee in the year in which
the payment under Clause (a) is made.
(ii) Notwithstanding the foregoing, if it shall subsequently be
determined in a final judicial determination or a final administrative
settlement to which the Employee is a party that the excess parachute payment
is defined in Section 4999 of the Code, reduced as described above, is
different from the Initial Excess Parachute Payment (such different amount
being hereafter referred to as the "Determinative Excess Parachute Payment")
then the Company's independent accountants shall determine the amount (the
"Adjustment Amount") the Employee must pay to the Company or the Bank or the
Company or the Bank must pay to the Employee in order to put the Employee (or
the Company or the Bank, as the case may be) in the same position the Employee
(or the Company or the Bank, as the case may be) would have been if the
Initial Excess Parachute Payment had been equal to the Determinative Excess
Parachute Payment. In determining the Adjustment Amount, the independent
accountants shall take into account any and all taxes (including any penalties
and interest) paid by or for the Employee or refunded to the Employee or for
the Employee's benefit. As soon as practicable after the Adjustment Amount
has been so determined, the Company or the Bank shall pay the Adjustment
Amount to the Employee or the Employee shall repay the Adjustment Amount to
the Company or the Bank, as the case may be.
(iii) In any calendar year that the Employee receives payments of
benefits under this Agreement, the Employee shall report on his state and
federal income tax returns such information as is consistent with the
determination made by the independent accountants of the Company as described
above. The Company and the Bank shall indemnify and hold the Employee
harmless from any and all losses, costs and expenses (including without
limitation, reasonable attorney's fees, interest, fines and penalties) which
the Employee incurs as a result of so reporting such information. Employee
shall promptly notify the Company and the Bank in writing whenever the
Employee receives notice of the institution of a judicial or administrative
proceeding, formal or informal, in which the federal tax treatment under
Section 4999 of the Code of any amount paid or payable under this the
Employment Agreement is being reviewed or is in dispute. The Company or the
Bank shall assume control at its expense over all legal and accounting matters
pertaining to such federal tax treatment (except to the extent necessary or
appropriate for the Employee to resolve any such proceeding with respect to
any matter unrelated to amounts paid or payable pursuant to this contract) and
the Employee shall cooperate fully with the Company or the Bank in any such
proceeding. The Employee shall not enter into any compromise or settlement or
otherwise prejudice any rights the Company or the Bank may have in connection
therewith without prior consent of the Company or the Bank.
4. Term of the Agreement
This Agreement shall remain in effect for the period commencing on the
Effective Date and ending on the earlier of (i) the date 36 months after the
Effective Date, and (ii) the date on which the Employee terminates employment
with the Company or the Bank; provided that the Employee's rights hereunder
shall continue following the termination of his employment with the Company or
the Bank under any of the circumstances described in Section 2 hereof.
5. Termination or Suspension Under Federal Law
Any payments made to the Employee pursuant to this Agreement, or
otherwise, are subject to and conditioned upon their compliance with 12 U.S.C.
1828(k) and any regulations promulgated thereunder.
6. Expense Reimbursement
In the event that any dispute arises between the Employee and the Company
or the Bank as to the terms or interpretations of this Agreement, whether
instituted by formal legal proceedings or otherwise, including any action that
the Employee takes to enforce the terms of this Agreement or to defend against
any action taken by the Company or the Bank, the Employee shall be reimbursed
for all costs and expenses, including reasonable attorneys' fees, arising from
such dispute, proceedings or actions, provided that the Employee shall obtain
a final judgment in favor of the Employee in a court or competent jurisdiction
or in binding arbitration under the rules of the American Arbitration
Association. Such reimbursement, which may be in advance of any final
judgment or determination in arbitration, if requested in writing by the
Employee, shall be paid within ten (10) days of Employee's furnishing to the
Company or the Bank written evidence, which may be in the form, among other
things, or a canceled check or receipt, of any costs or expenses incurred by
the Employee.
7. Successors and Assigns
(a) This Agreement shall inure to the benefit of and be binding upon
any corporate or other successor or assign of the Company or the Bank which
shall acquire, directly or indirectly, by merger, consolidation, purchase or
otherwise, all or substantially all of the assets or stock of the Bank or
Company. This Agreement shall inure to the benefit of and be enforceable by
the Employee's personal and legal representatives, executors, administrators,
successors, heirs, devisees and legatees. If the Employee should die while
any amounts are still payable to him/her hereunder, all such amounts shall be
paid in accordance with the terms of this Agreement to the Employee's devisee,
legatee or other designee, or if there be no such designee, to the Employee's
Estate.
(b) Since the Company and the Bank are contracting for the unique and
personal skills of the Employee, the Employee shall be precluded from
assigning or delegating his rights or duties hereunder without first obtaining
the written consent of the Company or the Bank.
8. Amendments
No amendments or additions to this Agreement shall be binding unless made
in writing and signed by all of the parties, except as herein otherwise
specifically provided. No waiver by either party hereto at any time of any
breach by the other party hereto, or of compliance with, any condition or
provision of this Agreement to be performed by such other party will be deemed
to be a waiver of similar or dissimilar provisions or conditions, at the same
or any prior or subsequent time.
9. Applicable Law
Except to the extent preempted by Federal law, the laws of the State of
Texas shall govern this Agreement in all respects, whether as to its validity,
construction, capacity, performance or otherwise.
10. Severability
The provisions of this Agreement shall be deemed severable and the
invalidity or unenforceability of any provision shall not affect the validity
or enforceability of the other provisions hereof.
11. Entire Agreement
This Agreement, together with any understanding or modifications thereof
as agreed to in writing by the parties, shall constitute the entire agreement
between the parties hereto.
12. Notices
For purposes of this Agreement, notices and other communications provided
for in this Agreement shall be in writing and shall be deemed to have been
duly given when delivered or mailed by U.S. registered or certified mail,
return receipt requested, postage prepaid, as follows: If to the Company or
the Bank: Chairman of the Board and Chief Executive Officer, Coastal Bancorp,
Inc., 8 Greenway Plaza, Suite 1500, Houston, Texas 77046. If to the Employee:
Catherine N. Wylie
3225 Bellefontaine
Houston, Texas 77025
ss# ###-##-####
Employee Name & Address
IN WITNESS WHEREOF, the parties have executed this Agreement on the day
and year first herein above written.
ATTEST: COASTAL BANCORP, INC.
/s/ Linda B. Frazier By: /s/ Manuel J. Mehos
Secretary Manuel J. Mehos,
Chairman of the Board
and Chief Executive Officer
ATTEST: COASTAL Banc ssb
/s/ Linda B. Frazier By: /s/ Manuel J. Mehos
Secretary Manuel J. Mehos,
Chairman of the Board
and Chief Executive Officer
WITNESS
/s/ Pamela S. Watkins /s/ Catherine N. Wylie
Catherine N. Wylie
March 24, 1997
Dear Stockholder:
You are cordially invited to attend the Annual Meeting of the
stockholders of Coastal Bancorp, Inc. (the "Company"). The meeting will be
held at the Renaissance Houston Hotel, the Plaza III Room, 6 Greenway Plaza
East, Houston, Texas on Thursday, April 24, 1997, at 11:00 a.m., Central Time.
The attached Notice of Annual Meeting and Proxy Statement describe the
formal business to be transacted at the meeting. Stockholders will vote to
elect directors and ratify the Company's independent auditors. The Company's
Board of Directors believes that these proposals are in the best interest of
the Company and its stockholders and recommends that stockholders vote "for"
them at the Annual Meeting. Directors and officers of the Company and
representatives of the Company's independent auditors will be present to
respond to any questions that our stockholders may have.
It is very important that you be represented at the Annual Meeting
regardless of the number of shares you own or whether you are able to attend
the meeting in person. Let me urge you to mark, sign and date your proxy card
today and return it in the postage paid envelope provided, even if you plan to
attend the Annual Meeting. This will not prevent you from voting in person,
but will ensure that your vote is counted if you are unable to attend.
Your continued support and interest in Coastal Bancorp, Inc. is
appreciated.
Sincerely,
/s/ Manuel J. Mehos
Manuel J. Mehos
Chairman of the Board, President
and Chief Executive Officer
<PAGE>
COASTAL BANCORP, INC.
COASTAL BANC TOWER
8 GREENWAY PLAZA, SUITE 1500
HOUSTON, TEXAS 77046
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD APRIL 24, 1997
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders ("Annual
Meeting") of Coastal Bancorp, Inc. (the "Company") will be held at the
Renaissance Houston Hotel, the Plaza III Room, 6 Greenway Plaza East, Houston,
Texas at 11:00 a.m., Central Time, on April 24, 1997 for the following
purposes, all of which are more completely set forth in the accompanying Proxy
Statement:
(1) To elect two directors of the Company to serve until the annual
meeting of stockholders in the year 2000 and until their successors are
elected and qualified;
(2) To ratify the appointment of KPMG Peat Marwick LLP as the
Company's independent auditors for the fiscal year ending December 31, 1997;
and,
(3) To transact such other business as may properly come before the
Annual Meeting, or any adjournment or postponement thereof. Except with
respect to procedural matters incident to the conduct of the Annual Meeting,
management of the Company is not aware of any matters other than those set
forth above which may properly come before the Annual Meeting.
The Board of Directors has fixed February 27, 1997 for the determination
of stockholders entitled to notice of, and to vote at, the Annual Meeting and
any adjournment or postponement thereof. Only those stockholders of record as
of the close of business on that date will be entitled to vote at the Annual
Meeting or at any such adjournment or postponement.
BY ORDER OF THE BOARD OF
DIRECTORS
/s/ Linda B. Frazier
Linda B. Frazier
Secretary
Houston, Texas
March 24, 1997
YOU ARE CORDIALLY INVITED TO ATTEND THE ANNUAL MEETING. IT IS IMPORTANT
THAT YOUR SHARES BE REPRESENTED REGARDLESS OF THE NUMBER YOU OWN. EVEN IF YOU
PLAN TO BE PRESENT, YOU ARE URGED TO COMPLETE, SIGN, DATE AND RETURN THE
ENCLOSED PROXY PROMPTLY IN THE ENVELOPE PROVIDED. IF YOU ATTEND THIS MEETING,
YOU MAY VOTE IN PERSON OR BY PROXY. ANY PROXY GIVEN MAY BE REVOKED BY YOU IN
WRITING OR IN PERSON AT ANY TIME PRIOR TO THE EXERCISE THEREOF.
25
COASTAL BANCORP, INC.
PROXY STATEMENT
ANNUAL MEETING OF STOCKHOLDERS
This Proxy Statement is furnished to the holders of the common stock,
$.01 par value per share (the "Common Stock") of Coastal Bancorp, Inc. (the
"Company") in connection with the solicitation of proxies on behalf of the
Board of Directors of the Company, to be used at the Annual Meeting of
Stockholders to be held at the Renaissance Houston Hotel, the Plaza III Room,
located at 6 Greenway Plaza East, Houston, Texas, at 11:00 a.m., Central Time,
on April 24, 1997 and at any adjournment or postponement thereof for the
purposes set forth in the Notice of Annual Meeting of Stockholders. This
Proxy Statement is expected to be mailed to stockholders on or about March 24,
1997.
Each proxy solicited hereby, if properly signed and returned to the
Company, will be voted in accordance with the instructions contained therein
if it is not revoked prior to its use. IF NO CONTRARY INSTRUCTIONS ARE GIVEN,
EACH PROXY RECEIVED WILL BE VOTED: (I) FOR THE ELECTION OF THE BOARD'S
NOMINEES AS DIRECTORS OF THE COMPANY; (II) FOR THE PROPOSAL TO RATIFY THE
APPOINTMENT OF KPMG PEAT MARWICK LLP AS THE COMPANY'S INDEPENDENT AUDITORS FOR
THE FISCAL YEAR ENDING DECEMBER 31, 1997; AND (III) UPON THE TRANSACTION OF
SUCH OTHER BUSINESS AS MAY PROPERLY COME BEFORE THE ANNUAL MEETING, IN
ACCORDANCE WITH THE BEST JUDGMENT OF THE PERSONS APPOINTED AS PROXIES. ANY
HOLDER OF COMMON STOCK WHO RETURNS A SIGNED PROXY BUT FAILS TO PROVIDE
INSTRUCTIONS AS TO THE MANNER IN WHICH SUCH SHARES ARE TO BE VOTED WILL BE
DEEMED TO HAVE VOTED IN FAVOR OF THE MATTERS SET FORTH IN THE PRECEDING
SENTENCE.
Any stockholder giving a proxy has the power to revoke it at any time
before it is exercised by (i) filing with the Secretary of the Company written
notice thereof (Linda B. Frazier, Coastal Bancorp, Inc., Coastal Banc Tower, 8
Greenway Plaza, Suite 1500, Houston, Texas 77046), (ii) submitting a duly
executed proxy bearing a later date; or (iii) by appearing at the Annual
Meeting and giving the Secretary notice of his or her intention to vote in
person. Proxies solicited hereby may be exercised only at the Annual Meeting
and any adjournment or postponement thereof and will not be used for any other
meeting.
<PAGE>
BACKGROUND INFORMATION
ON
COASTAL BANCORP, INC.
AND
SUBSIDIARIES
Coastal Bancorp, Inc. was incorporated in Texas in March 1994 in
connection with the reorganization of Coastal Banc Savings Association (the
"Association") into the holding company form of organization, which occurred
on July 29, 1994. In addition, effective July 29, 1994, the Association,
which had been a Texas-chartered savings and loan association, converted to a
Texas-chartered savings bank known as Coastal Banc ssb (the "Bank").
Effective November 30, 1996, the Bank engaged in a further holding company
reorganization whereby Coastal Banc Holding Company, Inc., a Delaware
corporation ("HoCo"), became a first-tier wholly-owned subsidiary of the
Company. As a result of these reorganizations, the Company owns 100% of the
voting stock of HoCo and HoCo owns 100% of the voting stock of the Bank. HoCo
has no operation other than the voting common stock of the Bank. The 9.0%
Noncumulative Preferred Stock, Series A, issued by the Association on October
21, 1993 continues to represent, on a share for share basis, the 9.0%
Noncumulative Preferred Stock, Series A, of the Bank. Coastal Bancorp, Inc.
is a registered savings and loan holding company regulated by the Office of
Thrift Supervision.
VOTING SECURITIES AND BENEFICIAL
OWNERSHIP THEREOF
Only holders of record of the Company's Common Stock at the close of
business on February 27, 1997 ("Record Date") will be entitled to notice of,
and to vote at, the Annual Meeting. On the Record Date, there were 4,967,241
shares of Common Stock outstanding and the Company had no other class of
equity securities outstanding. Only holders of Company Common Stock will be
entitled to vote at the Annual Meeting and each share of Common Stock will be
entitled to one vote on all matters properly presented. Stockholders of the
Company are not permitted to cumulate their votes for the election of
directors.
The presence in person or by proxy of at least a majority of the
outstanding shares of Common Stock entitled to vote is necessary to constitute
a quorum at the Annual Meeting. Directors will be elected by a plurality of
the votes cast at the Annual Meeting. The affirmative vote of a majority of
the total votes present at the Annual Meeting is required for approval of the
proposal to ratify the appointment of the Company's independent auditors.
Abstentions will be counted for purposes of determining the presence of a
quorum at the Annual Meeting. Because of the required votes, abstentions will
have the same effect as a vote against the proposal to ratify the appointment
of the Company's independent auditors, but will not be counted as votes cast
for the election of directors and, thus, will have no effect on the voting for
the election of directors. Under the applicable rules, all of the proposals
for consideration at the Annual Meeting are considered "discretionary" items
upon which brokerage firms may vote in their discretion on behalf of their
clients if such clients have not furnished voting instructions. Thus, there
are no proposals to be considered at the Annual Meeting which are considered
"non-discretionary" and for which there will be "broker non-votes".
At February 27, 1997, directors, executive officers and their affiliates
beneficially owned 1,151,394 shares of Common Stock or 22.53% of the total
shares of Common Stock outstanding on such date. It is anticipated that all
of such shares will be voted for the election of the nominees of the Company's
Board of Directors and in favor of all of the proposals of the Board described
herein.
The following table sets forth the beneficial ownership of the Common
Stock as of February 27, 1997, with respect to (i) any person or entity who is
known to the Company to be the beneficial owner of 5% or more of the Common
Stock; (ii) each nominee for director; (iii) each director of the Company;
(iv) each of the executive officers named in the summary compensation table
(see "Executive Compensation - Summary Compensation Table:) and (v) all
directors and executive officers of the Company and its subsidiary, Coastal
Banc ssb, as a group. The address for all directors and executive officers of
the Company and the Bank is Coastal Banc Tower, 8 Greenway Plaza, Suite 1500,
Houston, Texas 77046. Except as set forth below, as of February 27, 1997, the
Company was aware of no other person or entity unaffiliated with the Company
that was the beneficial owner of 5% or more of the Common Stock.
<PAGE>
<TABLE>
<CAPTION>
Amount of Shares of
Name Common Stock
(and Address)of Beneficially Owned
Beneficial Owner, as of February 27, Percent of
1997(1), Class
<S> <C> <C>
FMR Corp. 423,099(2) 8.28
82 Devonshire Street
Boston, MA 02104
First Manhattan Co. 481,235(2) 9.42
437 Madison Avenue
New York, NY 10022
Robert Edwin Allday, Director 0(3) *
Coastal Bancorp, Inc. and Coastal Banc ssb
D. Fort Flowers, Jr., Director 179,880(4) 3.52
Coastal Bancorp, Inc. and Coastal Banc ssb
Dennis S. Frank, Director 126,570 2.48
Coastal Bancorp, Inc. and Coastal Banc ssb
Robert E. Johnson, Jr., Director 12,880(5) *
Coastal Bancorp, Inc. and Coastal Banc ssb
Manuel J. Mehos, Chairman of the Board, 357,750(6) 7.00
President and Chief Executive Officer
Coastal Bancorp, Inc., Coastal Banc
Holding Company, Inc. and Coastal Banc ssb
James C. Niver, Director 368,952(7) 7.22
Coastal Bancorp, Inc. and Coastal Banc ssb
Clayton T. Stone, Director 600 *
Coastal Bancorp, Inc. and Coastal Banc ssb
John D. Bird, Executive Vice President, 20,922(6) *
Chief Administrative Officer and
Assistant Secretary
Coastal Banc ssb
Gary R. Garrett, Executive Vice President and 19,823(6) *
Chief Lending Officer
Coastal Banc ssb
David R. Graham, Executive Vice President - 18,584(6) *
Real Estate Lending
Coastal Banc ssb
Sandra S. Orr, Executive Vice President and 15,653(6) *
Chief Investment Officer
Coastal Banc ssb
Nancy S. Vadasz, Executive Vice President - 10,034(6) *
Market and Product Strategies
Coastal Banc ssb
Catherine N. Wylie, Executive Vice President and 19,746(6) *
Chief Financial Officer
Coastal Bancorp, Inc.,
Coastal Banc Holding Company, Inc. and
Coastal Banc ssb
All directors and executive officers of
the Company and the Bank as a group 1,151,394 22.53
(13 persons)
</TABLE>
* Represents less than 1.0% of the Common Stock outstanding.
(1) Based upon information furnished by the respective individuals and
filings pursuant to the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). The information is not necessarily indicative of beneficial
ownership for any other purpose. Under regulations promulgated pursuant to
the Exchange Act, shares are deemed to be beneficially owned by a person if he
or she directly or indirectly has or shares (i) voting power, which includes
the power to vote or to direct the voting of the shares, or (ii) investment
power, which includes the power to dispose or to direct the disposition of the
shares. Unless otherwise indicated, the named beneficial owner has sole
voting and dispositive power with respect to the shares.
(2) Based on a Schedule 13G filed under the Exchange Act.
(3) Mr. Allday is the beneficial owner of 2,000 shares of the Bank's 9.0%
Noncumulative Preferred Stock, Series A.
(4) Of such shares, 176,880 are owned by a trust over which Mr. Flowers
has shared voting and dispositive power with two other co-trustees.
(5) Shares are held in trust for his minor children for which Mr. Johnson
serves as trustee.
(6) Under applicable regulations, a person is deemed to have beneficial
ownership of any shares of Common Stock which may be acquired within 60 days
of the Record Date pursuant to the exercise of outstanding stock options.
Shares of Common Stock which are subject to stock options are deemed to be
outstanding for the purpose of computing the percentage of outstanding Common
Stock owned by such person or group but not deemed outstanding for the purpose
of computing the percentage of Common Stock owned by any other person or
group. The amounts set forth in the table include 19,422, 18,323, 18,584,
42,750, 15,653, 10,034 and 17,796 shares which may be received upon the
exercise of stock options by Messrs. Bird, Garrett, Graham and Mehos and Mmes.
Orr, Vadasz and Wylie, respectively, pursuant to stock options. For all
directors and executive officers as a group, the number of shares includes
142,562 shares of Common Stock subject to outstanding stock options.
(7) Mr. Niver is the co-trustee with his wife of a trust which holds such
shares for their benefit.
INFORMATION WITH RESPECT TO NOMINEES FOR DIRECTOR,
DIRECTORS WHOSE TERMS CONTINUE AND EXECUTIVE OFFICERS
ELECTION OF DIRECTORS
Coastal Bancorp, Inc. is a Texas corporation, formed pursuant to the
Texas Business Corporation Act which requires that the business and affairs of
the Company shall be managed by or under the direction of the Board of
Directors. The Company's Articles of Incorporation provide that the Company's
Board of Directors be divided into three classes as nearly equal in number as
possible, with one class to be elected annually, and the Bylaws state that
members of each class are to be elected for a term of office to expire at the
third succeeding annual meeting of stockholders and when their respective
successors have been elected and qualified. The number of directors is
determined from time to time by resolution of the Board. On July 27, 1995,
the Board of Directors voted to increase the size of the Board from seven to
eight members and expected Mr. Clayton T. Stone to fill such vacancy effective
August 24, 1995. Mr. Stone stood for election by the stockholders at the 1996
annual meeting and was elected to a three year term. Effective April 1, 1996,
Mr. Donald Bonham retired from the Board of Directors for personal reasons.
The Board of Directors has not nominated anyone to replace Mr. Bonham as of
the date hereof.
Two of the positions on the Board are to be elected in 1997. Each of the
nominees listed below has served as a director of the Company since its
inception and prior to the formation of the Company, these individuals served
as directors of the Association. The information set forth below relating to
their tenure as directors is as of the date they were first elected as
directors of the Association, where applicable. There are no arrangements or
understandings between the Company and any person pursuant to which such
person has been selected as a nominee, and no director is related to any other
director or executive officer of the Company or the Bank by blood, marriage or
adoption.
INFORMATION WITH RESPECT TO CONTINUING DIRECTORS AND NOMINEES FOR DIRECTORS
Information concerning those members of the Board whose terms do not
expire in 1997, including his age, tenure and principal position with the
Company and principal occupation during the past five years, as well as the
year his term will expire, is set forth below:
R. EDWIN ALLDAY. Age 46. Director since 1986. Mr. Allday is a private
investor and in September 1993 became a senior consultant with The Dini
Partners, Inc., Houston, Texas, a company that provides counseling in
philanthropy and non-profit company management. Mr. Allday was an independent
consultant for community relations for charitable organizations from March
1990 to June 1993. From August 1988 to March 1990, Mr. Allday was the Chief
Operating Officer of the American Leadership Forum, a non-profit organization
which teaches business leadership skills located in Houston, Texas. From
March 1982 to August 1988, Mr. Allday was the General Manager of Anglia
Companies, a family-owned investment management business in Houston, Texas.
His term as a director of the Company will expire in 1998.
D. FORT FLOWERS, JR. Age 35. Director since 1992. Mr. Flowers is the
Chairman of the Board of DIFCO, Inc., a railroad car engineering and
manufacturing company located in Houston, Texas. Mr. Flowers is also a
director of The Ohio Bank, Findlay, Ohio. His term as a director of the
Company will expire in 1998.
<PAGE>
DENNIS S. FRANK. Age 40. Director since 1988. Mr. Frank is the
Chairman of the Board, Chief Executive Officer and President of Silvergate
Thrift and Loan, La Mesa, California, a position he has held since December
1996. Additionally, he has been the President and Chief Executive Officer of
DSF Management Corp., a private investment company, located in Houston, Texas,
since March 1994. Prior to that, Mr. Frank was the Manager of the
Association's Capital Markets Division from July 1988 to April 1993 and a
consultant to the Association from April 1993 to April 1994. His term as a
director of the Company will expire in 1998.
ROBERT E. JOHNSON, JR. Age 43. Director since 1986. Mr. Johnson is a
partner in the law firm of Johnson & Johnson, Austin, Texas. His term as a
director of the Company will expire in 1999.
CLAYTON T. STONE. Age 62. Director since August 1995. Mr. Stone is an
Executive Vice President of Hines Interests Limited Partnership, Aspen,
Colorado. His term as a director of the Company will expire in 1999.
THE NOMINEES
Unless otherwise directed, each proxy executed and returned by a
stockholder will be voted "FOR" the election of each of the nominees listed
below. If any person named as a nominee should be unable or unwilling to
stand for election at the time of the Annual Meeting, the Board of Directors
will nominate, and the persons named as proxies will vote, for any replacement
nominee or nominees recommended by the Board of Directors. At this time, the
Board of Directors knows of no reason why any of the nominees listed below may
not be able to serve as a director if elected.
Information concerning the nominees for director, including his age,
tenure, principal position with the Company and principal occupation during
the past five years, as well as the year his term will expire, is set forth
below:
MANUEL J. MEHOS. Age 42. Director since 1986. Mr. Mehos is the
Chairman of the Board, President and Chief Executive Officer of the Company,
Coastal Banc Holding Company, Inc. and the Bank and also Chief Executive
Officer of CoastalBanc Financial Corp., a Bank subsidiary. He is also a
director of each of the Bank's subsidiaries and is the President of CBS Asset
Corp., CBS Builders, Inc. and CoastalBanc Investment Corporation, which are
wholly-owned subsidiaries of the Bank located in Houston, Texas. CBS Asset
Corp., CBS Builders, Inc. and CoastalBanc Investment Corporation are presently
inactive. Mr. Mehos also currently serves on the Finance Commission of Texas.
If elected, his term as a director of the Company will expire in 2000.
JAMES C. NIVER. Age 67. Director since 1986. Mr. Niver is retired and
was President of Century Land Company, Houston, Texas. If elected, his term
as a director of the Company will expire in 2000.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE ABOVE NOMINEES
BE ELECTED AS DIRECTORS OF THE COMPANY.
STOCKHOLDER NOMINATIONS
The Company's Articles of Incorporation govern nominations for election
to the Board of Directors and require that all nominations for election to the
Board of Directors other than those made by the Board, be made by a
stockholder who has complied with the notice provisions in the Articles.
Written notice of a stockholder's nomination must be communicated to the
attention of the Company's Secretary and either delivered to, or mailed and
received at, the principal executive offices of the Company not less than 60
days prior to the anniversary date of the mailing of the proxy materials by
the Company in connection with the immediately preceding annual meeting of
stockholders of the Company, and with respect to a special meeting of
stockholders for the election of directors, on the close of business on the
tenth day following the date on which notice of such meeting is first given to
stockholders. Such notice shall include specified matters as set forth in the
Articles of Incorporation. If the nomination is not made in accordance with
the requirements set forth in the Articles of Incorporation, the defective
nomination will be disregarded at the Annual Meeting. The Company did not
receive any nominations from stockholders for the Annual Meeting.
BOARD OF DIRECTORS MEETINGS AND COMMITTEES
OF COASTAL BANCORP, INC. AND COASTAL BANC SSB
Regular meetings of the Board of Directors of the Company are held
quarterly and special meetings may be called at any time as necessary. During
the year ended December 31, 1996, the Board of Directors of the Company held
twelve meetings. No incumbent director of the Company attended fewer than 75%
of the aggregate of the total number of Board meetings held during the period
in which he served as a director in 1996 except Mr. Bonham. Mr. Bonham was on
a medical leave of absence from August, 1995 until his board term ended in
April 1996. He did not attend any Board Meetings in 1996 and did not stand
for reelection.
<PAGE>
The Board of Directors is authorized by its Bylaws to elect members of
the Board to committees of the Board which may be necessary or appropriate for
the conduct of the business of the Company. At December 31, 1996, there were
no committees of the Board of the Company.
Regular meetings of the Board of Directors of the Bank are held monthly
and special meetings may be called at any time as necessary. During the year
ended December 31, 1996, the Board of Directors of the Bank held twelve
meetings. No incumbent director of the Bank attended fewer than 75% of the
aggregate of the total number of Board meetings held during the period in
which he served as a director and the total number of meetings held by
committees of the Board of Directors of the Bank on which he served in 1996,
except for Mr. Bonham who was on a medical leave of absence and did not attend
any such meetings prior to the expiration of his term in April 1996.
The Board of Directors of the Bank is authorized by its Bylaws to elect
members of the Board to committees of the Board which may be necessary or
appropriate for the conduct of the business of the Bank. At December 31,
1996, the Bank had an Audit, Compensation, Securities Investment, Directors'
Loan and a Community Reinvestment Act Committee of the Board.
The Audit Committee of the Bank's Board is responsible for reviewing the
reports of the independent auditors and examination reports of regulatory
authorities, monitoring the functions of the internal audit department, which
reports directly to this Committee, and generally overseeing compliance with
internal policies and procedures. The Audit Committee members are Messrs.
Niver (Chairman), Allday and Johnson. This Committee met eight times during
1996.
The Compensation Committee reviews the compensation of senior executive
officers and recommends to the Board adjustments in such compensation based on
a number of factors, including the profitability of the Bank. Messrs. Niver
(Chairman), Flowers and Johnson comprise the Compensation Committee, which met
four times during 1996. See "Executive Compensation - Report of the Board of
Directors on Compensation During Fiscal 1996."
The Securities Investment Committee met four times in 1996 to authorize
investment categories, overall investment limitations and brokers to be
utilized, to review trade recommendations and past trades of the Securities
Investment Subcommittee (composed of executive officers) and compliance of the
Bank's investment activities with the Bank's Securities Investment Policy and
with Board recommendations. The Committee also makes interest rate risk
assessments and formulates investment policy for the forthcoming quarterly
period. This Committee consists of Messrs. Frank (Chairman), Flowers, Mehos
and Stone.
The Directors' Loan Committee met twenty-six times in 1996 to approve
certain loan requests. The Committee can approve any class or type of loan
which is authorized for investment by the Board. Specified loan authority
limits are further delegated to the management loan committee, the management
construction loan committee or an individual officer of the Bank. The
Directors' Loan Committee consists of Messrs. Mehos (Chairman), Flowers,
Frank, Niver, and Stone.
The Community Reinvestment Act ("CRA") Committee was established to
monitor the Bank's efforts in serving the credit needs of the residents of the
communities in which it does business, including those credit-worthy persons
having low and moderate incomes. The CRA Committee has appointed a CRA
Officer who is responsible for developing and administering the Bank's CRA
program and for training the Bank's staff to comply with CRA regulations, and
Bank policies and procedures. The CRA Officer chairs a management CRA
Committee which works to oversee that the Bank meets the procedural
requirements of the CRA. The CRA Committee is composed of Messrs. Allday
(Chairman), Mehos and Johnson and met one time in 1996.
BOARD FEES
Through February 29, 1996, each non-employee director of the Company and
the Bank was paid a fee of $1,250 for each Board meeting attended and a fee of
$250 for each committee meeting attended. Effective March 1, 1996, those fees
were increased to $1,550 for each Board meeting and $300 for each committee
meeting. When Board and committee meetings of the Company are held on the
same day as meetings of the Board and committees of the Bank, only one fee is
paid for that date. No fees are paid for non-attendance; attendance by
conference telephone is similarly not compensated. Directors are also
reimbursed for reasonable travel expenses. Directors who are also employees
of the Company and the Bank receive no fees for attendance at Board or
committee meetings.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE OF THE EXCHANGE ACT
Section 16(a) of the Exchange Act requires the Company's officers and
directors of the Company to file reports to indicate ownership and changes in
ownership with the Securities and Exchange Commission and to furnish the
Company with copies of such reports.
Based upon a review of the copies of such forms, the Company believes
that during the year ended December 31, 1996, all Section 16(a) filing
requirements applicable to the Company's officers and directors of the Company
and/or the Bank were complied with, except that one Form 4 for two
transactions for Mr. Frank, a director of the Company, which occurred in
February 1996 was filed on February 11, 1997.
<PAGE>
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
The following table sets forth information concerning executive officers
of the Bank or its subsidiaries who do not serve on the Bank's Board of
Directors. All executive officers are elected by the Board of Directors of
the Bank or of the respective subsidiary and serve until their successors are
elected and qualified. No executive officer is related to any director or
other executive officer of the Bank or its subsidiaries by blood, marriage or
adoption, and there are no arrangements or understandings between a director
and any other person pursuant to which such person was elected an executive
officer.
Position with Bank and
Name Age Principal Occupation During Last Five Years
John D. Bird 53 Executive Vice President since August
1993, Chief Administrative Officer since June 1993, and Assistant Secretary
since March 1986; Chief Operations Officer from March 1986 to June 1993;
President and sole stockholder of Coastal Banc Insurance Agency, Inc., an
affiliate of the Bank, since May 1987.
Gary R. Garrett 50 Executive Vice President since
August 1993 and a director of each of the Bank's subsidiaries; Senior Vice
President--Mortgage Lending from October 1991 to August 1993; Chief Executive
Officer and President of CBS Mortgage Corp. since August 1993; Executive Vice
President, CBS Mortgage Corp. from January 1989 to August 1993.
David R. Graham 53 Executive Vice President since August
1993 and a director of each of the Bank's subsidiaries; Senior Vice
President--Real Estate Lending Division from May 1988 to August 1993. Senior
Vice President of CBS Asset Corp. since April 1993.
Sandra S. Orr 41 Executive Vice President since August of 1993
and Chief Investment Officer since March 1993; Senior Vice President--Capital
Markets Division from October 1989 to August 1993.
Nancy S. Vadasz 43 Executive Vice President since June
of 1994, Senior Vice President since September 1991. Prior thereto, Mrs.
Vadasz was a Vice President, Director of Marketing with San Jacinto Savings
Association, Houston, Texas.
Catherine N. Wylie 42 Executive Vice President of
Coastal Banc Holding Company, Inc. since November, 1996, of the Company since
July 1994 and of the Bank since August 1993 and a director of Coastal Banc
Holding Company, Inc., and of each of the Bank's subsidiaries; Chief Financial
Officer since October 1993; Controller from April 1989 to October 1993; also
Executive Vice President/Treasurer of each of the Bank's subsidiaries since
October 1990.
<PAGE>
EXECUTIVE COMPENSATION
REPORT OF THE BOARD OF DIRECTORS ON COMPENSATION DURING FISCAL 1996.
Officers of the Company do not receive compensation for their committee
services.
The Compensation Committee of the Board of Directors of the Bank (the
"Committee") is composed entirely of independent outside directors. See
"Information With Respect to Nominees for Director, Directors Whose Terms
Continue and Executive Officers - Board of Directors Meetings and Committees
of Coastal Bancorp, Inc. and Coastal Banc ssb." The Committee is responsible
for reviewing the compensation of executive officers of the Bank and
recommending executive compensation proposals to the Bank's Board of Directors
for approval.
The Board of Directors of the Bank has a compensation philosophy pursuant
to which executive compensation is designed to be at least comparable with
average executive compensation for the Bank's peers, which is generally
considered to be companies of approximately the same size and in the same
industry. Companies included are independent financial companies, banks and
savings and loan associations ranging from $900 million to $2.0 billion in
asset size. In May 1992, the Bank retained an executive compensation
consultant to review its executive compensation policies. The consultant
developed a compensation program for the Bank's executive officers which is a
combination of base salary plus incentive compensation linked to the Bank's
profitability.
The Committee evaluates the base salaries of the Bank's executive
officers annually. An executive officer's base salary is determined based
upon longevity with the Bank, the effectiveness of such individual in
performing his or her duties, peer averages at the position in question and
the Bank's overall performance. No particular weight is assigned to these
variables. The base salary component alone, while designed to be competitive
with peer group averages, is not designed to produce top levels of
compensation for the Bank's executive officers when compared to its peer
group. The incentive component, as described below, which requires the Bank
to achieve returns at a pre-specified level before additional compensation is
paid, is the element which is designed to make total compensation for each of
the Bank's executive officers comparable or better than the comparable
executive compensation for the executive officers in the Bank's peer group.
Based upon the foregoing, Mr. Mehos, the Chief Executive Officer, earned
$241,000 in base salary during 1996.
The amount of incentive compensation is related to the performance of the
Bank. No cash incentive compensation will be paid to the Bank's executive
officers unless the Committee determines the Bank is safe and sound in the
following areas: capital adequacy, earnings composition, earnings capability,
liquidity, risk management (classified assets), strategic planning, and
compliance with laws and regulations.
During 1996, the Board of Directors determined that no incentive awards
to its Executive Management would be paid unless a 7.5% return on average
equity ("ROE") was achieved. Any earnings from extraordinary items or unsound
practices are excluded from such calculations at the Board's discretion.
Gains on sales of securities from the investment account, net of losses of
sales from the investment account, are deducted from the earnings pool.
During 1996, the compensation committee calculated that the Bank achieved a
12.53% ROE before the SAIF insurance special assessment.
Accordingly, during 1996, a bonus pool of $418,228 in the aggregate was
established and incentive awards were paid to executive officers of the
Company or Bank. See "Summary Compensation Table."
By the Committee:
/s/ James C. Niver
James C. Niver (Chairman)
D. Fort Flowers, Jr.
Robert E. Johnson, Jr.
<PAGE>
SUMMARY COMPENSATION TABLE. To meet the goal of providing shareholders a
concise, comprehensive overview of compensation awarded, earned or paid in the
reporting period, the Summary Compensation Table is utilized by the Company.
The Summary Compensation Table includes individual compensation information
with respect to the Chief Executive Officer and the four other most highly
compensated executive officers of the Bank and its subsidiaries whose total
compensation exceeded $100,000 for services rendered in all capacities during
the fiscal years ended December 31, 1996, 1995 and 1994.
<TABLE>
<CAPTION>
ANNUAL ALL
NAME AND PRINCIPAL COMPENSATION AWARDS OTHER
POSITION (1) YEAR SALARY(2) BONUS(3) OPTIONS(4) COMPENSATION(5)
<S> <C> <C> <C> <C> <C>
Manuel J. Mehos
Chairman of the Board, 1996 $241,000 $131,228 30,000 $1,425
President and 1995 222,000 0 19,000 2,310
Chief Executive Officer 1994 216,000 141,827 13,000 2,310
John D. Bird 1996 121,000 40,000 5,000 7,425
Executive Vice President and 1995 111,565 0 4,448 8,310
Chief Administrative Officer 1994 108,315 30,000 2,530 8,310
Gary R. Garrett 1996 160,000 70,000 10,000 4,425
Executive Vice President and 1995 113,300 0 5,445 4,700
Chief Lending Officer 1994 110,500 60,000 2,453 2,310
David R. Graham 1996 121,000 40,000 7,500 1,425
Executive Vice President 1995 110,335 0 4,881 2,310
Real Estate Lending Division 1994 107,120 45,000 2,502 2,310
Catherine N. Wylie 1996 160,000 70,000 10,000 4,425
Executive Vice President and 1995 113,300 0 5,445 4,060
Chief Financial Officer 1994 107,500 60,000 2,453 2,310
</TABLE>
(1) Principal positions are for fiscal 1996.
(2) Does not include amounts attributable to miscellaneous benefits
received by executive officers of the Bank, including use of Bank owned
vehicles. In the opinion of management of the Company, the costs to the
Company of providing such benefits to any individual executive officer during
the year ended December 31, 1996, did not exceed the lesser of $50,000 or 10%
of the total of annual salary and bonus reported for the individual.
(3) Includes lump sum cash bonuses earned for the fiscal year stated and
paid in some cases the subsequent year.
(4) Free standing stock options; see "- Option Grants in Last Fiscal
Year."
(5) Includes for the named individuals employer matching contributions
accrued pursuant to the Company's Profit Sharing (401k) Plan and any car
allowances.
EXECUTIVE SEVERANCE AGREEMENTS
On May 23, 1996, the Company entered into executive severance agreements
(the "Executive Severance Agreements") with Mr. Garrett and Ms. Wylie (the
"Employees"). The Executive Severance Agreements provide for the payment of
certain severance benefits to Mr. Garrett and Ms. Wylie in the event of a
trigger event under the Executive Severance Agreements, which means (i) the
occurrence of a change in control of the Company as defined below, or (ii) the
voluntary termination within 90 days of an event which occurs during the
"Protected Period" (i.e., the period six months before and three years after a
change of control or after the expiration of the Executive Severance
Agreement) and constitutes "Good Reason" (as defined below), or (iii)
termination for any reason other than "Just Cause" during the Protected
Period. If a trigger event occurs, the Employees will be entitled to (x)
payment by the Company or the Bank of one times the annual salary and bonus
for incentive compensation (not including stock compensation plans) paid to
the Employee during his or her immediately preceding year of employment or (y)
the payment by the Company or the Bank of an amount equal to 2.99 times their
annual salary plus bonuses paid during the immediately preceding year; and (z)
the Company will cause any and all outstanding options to purchase stock of
the Company held by each executive to become immediately exercisable in full.
The Executive Severance Agreement also provides that the Company will
reimburse the Executive for all costs and expenses, including reasonable
attorney's fees incurred by the executive to enforce rights or benefits under
such agreements.
Under the Executive Severance Agreements, a "Change In Control" of the
Company would be deemed to occur if, (i) the Company is not the surviving
entity in any merger, consolidation, or other reorganization (ii) the sale,
exchange, lease, transfer or other disposition to any person of all or a
substantial part of the assets, liabilities, or business of the Company or the
Bank, (iii) any change in business of the Company or the Bank such that the
Company does not own the voting stock of the Bank or the business of the Bank
is not as an insured depository institution, (iv) any person or entity
including a "group" as contemplated by Section 13(d)(3) of the Exchange Act
acquires or gains ownership or control (including, without limitation, power
to vote) of more than 25% of the outstanding shares of the Bank's or the
Company's voting stock, or (v) as a result of or in connection with a
contested election of directors, the persons who were directors of the Bank or
the Company before such election cease to constitute at least two-thirds of
the Board of Directors other than the foregoing, the Company has not entered
into any employment contracts with any of its officers.
Under the Executive Severance Agreements, (a) "Good Reason" means any of
the following events, which has not been consented to in advance by the
Employee in writing: (i) the requirement that the Employee move his or her
personal residence, or perform his or her principal executive functions, more
than thirty (30) miles from his or her primary office as of the date of the
Change in Control; (ii) a material (defined to be 10% or more) reduction in
the Employee's base compensation as in effect on the date of the Change in
Control or as the same may be increased from time to time; (iii) a successor
to the Company or the Bank fails or refuses to assume the Company's and the
Bank's obligations under this Agreement; (iv) the Company, the Bank or
successor thereto breaches any provision of this Agreement; or (v) the
Employee is terminated for other than Just Cause after the Change in Control;
and (b) "Just Cause" means, in the good faith determination of the Company's
and the Bank's Boards of Directors, the Employee's personal dishonesty,
incompetence, willful misconduct, breach of fiduciary duty involving personal
profit, intentional failure to perform stated duties, willful violation of any
law, rule or regulation (other than traffic violations or similar offenses) or
final cease-and-desist order, or material breach of any provision of this
Agreement. The Employee shall have the right to make a presentation to the
Board of Directors with counsel prior to rendering of such determination by
the Board. The Employee shall have no right to receive compensation or other
benefits for any period after termination for Just Cause. No act, or failure
to act, on the Employee's part shall be considered "willful" unless he has
acted, or failed to act, with the absence of good faith an without a
reasonable belief that his action or failure to act was in the best interest
of the Bank and the Company.
In the event that the Employee and the Company or the Bank agree that the
Employee will be paid an amount under the Executive Severance Agreement which
triggers the requirement to pay the excise tax required under Section 280G of
the Internal Revenue Code of 1986, as amended, the Company or the Bank will
reimburse the Employee for all such excise taxes.
The Executive Severance Agreement remains in effect for the period
commencing on May 23, 1996 (the "Effective Date") and ending on the earlier of
(i) the date 36 months after the Effective Date, and (ii) the date on which
the Employee terminates his or her employment with the Company or the Bank.
Any payments made to the Employee pursuant to the Executive Severance
Agreement, or otherwise, are subject to and conditioned upon their compliance
with the Federal Deposit Insurance Act and any regulations promulgated by the
Federal Deposit Insurance Corporation thereunder.
OPTION GRANTS IN LAST FISCAL YEAR
On March 23, 1995, the Board of Directors adopted the 1995 Stock
Compensation Program (the "New Program"). Stockholders of the Company
approved the New Program at the April 27, 1995 annual meeting. The New
Program is substantially similar to the 1991 Program, as described below. The
Board reserved 255,261 shares of common stock for issuance under the New
Program at the time of adoption. There were 112,000 shares issued under the
New Program in 1996.
The Board of Directors adopted the 1991 Program for the benefit of
officers and other selected key employees of the Company and the Bank who were
deemed to be responsible for the future growth of the Company. Stockholders
of the Company approved the program at a Special Meeting of Stockholders held
in December 1991. In connection with the reorganization of the Association in
1994, the Program was adopted by the Company, and approved by stockholders for
the benefit of officers and key employees of the Company and the Bank and its
subsidiaries.
An aggregate of 241,001 shares of authorized but unissued shares of
company common stock were originally reserved for future issuance under the
1991 Program. All shares of the 1991 Program have been issued. Shares
issuable under the New Program and the 1991 Program (collectively, the
"Programs") pursuant to the exercise of stock options and/or the granting of
stock appreciation rights and performance shares, are subject to modification
or adjustment to reflect changes in the Company's capitalization.
Of the shares reserved for issuance under the Programs, 138,476 shares
are not currently subject to option. The Programs will remain in effect for a
term of ten years from the date of adoption unless sooner terminated in
accordance with the provisions of the Programs. Four kinds of rights,
evidenced by four plans, are contained in the Programs and are available for
grant: (i) incentive stock options; (ii) compensatory stock options; (iii)
stock appreciation rights; and (iv) performance share awards.
The Programs are administered by Messrs. Niver, Flowers and Johnson (the
"Program Administrators"). The Program Administrators are given absolute
discretion under each Program to select the persons to whom options, rights
and awards will be granted and to determine the number of shares subject to
each option, right or award. Only regular, full-time employees of the Company
or the Bank, or any subsidiary of the Company or the Bank are eligible for
selection by the Program Administrators to participate in the Programs.
Non-employee directors are not eligible to receive awards under the Programs.
The option prices per share for incentive stock options granted under the
Programs may not be less than the fair market value of the Company's Common
Stock on the date of the grant; provided, however, that if any employee owns
more than 10% of the combined voting power of all classes of stock of the
Company, the purchase price for shares acquired pursuant to the exercise of an
option shall not be less than 110% of the fair market value of the Common
Stock. The per share exercise price for compensatory options granted under the
Programs may be equal to or less than the fair market value on the date of
grant. The purchase price for shares of Common Stock subject to incentive or
compensatory options may be paid in cash, by check, or if permitted by the
Program Administrators at the time the option is granted, by shares of Common
Stock, or by a combination thereof.
In the event of a change in control of the Company, as defined, all
incentive and compensatory stock options previously granted may become
immediately exercisable notwithstanding any existing installment limitation
which may be established by the Program Administrators, provided that the
exercisability of an option may not be accelerated prior to the six month
anniversary of the date the option is granted.
<PAGE>
AGGREGATE OPTIONS GRANTED IN LAST FISCAL YEAR
The following table sets forth individual grants of options that were
made during the last fiscal year to the executive officers named in the
Summary Compensation Table. This table is intended to allow stockholders to
ascertain the number and size of option grants made during the fiscal year,
the expiration date of the grants and the potential realizable present value
of such options under specified assumptions.
<TABLE>
<CAPTION>
PERCENT OF
OPTIONS TOTAL OPTIONS
GRANTED GRANTED TO EXERCISE GRANT DATE
(NO. OF EMPLOYEES PRICE EXPIRATION PRESENT
NAME SHARES)(1) IN FISCAL YEAR PER SHARE DATE VALUE(2)
<S> <C> <C> <C> <C> <C>
Manuel J. Mehos 30,000 26.79% $17.00 3/28/06 $189,930
John D. Bird 5,000 4.46 $17.00 3/28/06 31,655
Gary R. Garrett 10,000 8.93 $17.00 3/28/06 63,310
David R. Graham 7,500 6.70 $17.00 3/28/06 47,483
Catherine N. Wylie 10,000 8.93 $17.00 3/28/06 63,310
</TABLE>
(1) The options vest 25% during the first year and an additional 25% for
each of the next three years.
(2) The potential realizable value of the grant of options is the present
value of the grant at the date of grant using a variation of the Black-Scholes
option pricing model. Assumptions used to calculate the present value of the
options were as follows: an expected volatility rate of 20.93%, a risk free
rate of return of 6.40%, a dividend yield of $.40 per share per year and the
expiration date of March 28, 2006.
<PAGE>
AGGREGATE OPTIONS EXERCISED IN LAST YEAR AND FISCAL YEAR-END OPTION VALUES
The following table sets forth, with respect to the executive officers
named in the Summary Compensation Table, information with respect to the
aggregate amount of options exercised during the last fiscal year, any value
realized thereon, the number of unexercised options at the end of the fiscal
year (exercisable and unexercisable) and the value with respect thereto.
<TABLE>
<CAPTION>
Value of Unexercised
Shares Number of Unexercised in-the-Money Options at
Acquired on Value Options at Fiscal Year-End Fiscal Year-End(1)
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
<S> <C> <C> <C> <C> <C> <C>
Manuel J. Mehos -- -- 42,750 35,250 $330,188 $220,938
John D. Bird -- -- 19,422 6,606 200,336 42,070
Gary R. Garrett -- -- 18,323 10,836 177,176 67,667
David R. Graham -- -- 18,584 8,691 185,306 54,642
Catherine N. Wylie -- -- 17,796 10,836 170,903 67,667
</TABLE>
(1) Based upon a closing market price for the Company's Common Stock as of
December 31, 1996 of $22.875.
COMPARATIVE STOCK PERFORMANCE GRAPH
The stock performance graph below compares the cumulative total
stockholder return of the Company's Common Stock from March 25, 1992 (the
effective date of the Company's public offering) to December 31, 1996 with the
cumulative total return of the National Association of Securities Dealers
Automated Quotations ("NASDAQ") Market Index and certain SNL thrift
institutions traded on the NASDAQ, as compiled by SNL Securities, L.P. in its
OTC Thrift Index, assuming an investment of $100 on March 25, 1992 and the
reinvestment of all dividends. The Company did not pay dividends on the
Company's Common Stock during 1992 or 1993. In 1994, the Company paid its
first dividend of $.08 per share on June 15, 1994. Quarterly dividends of the
same amount were paid on September 15, 1994, December 15, 1994, March 15,
1995, June 15, 1995, September 15, 1995, and December 15, 1995. The Board of
Directors voted at the January 25, 1996 regularly scheduled Board Meeting to
increase the dividend for the fourth quarter of 1995 from $.08 per share to
$.10 per share. Quarterly dividends of $.10 per share were paid on March 15,
1996, June 15, 1996, September 15, 1996 and December 15, 1996.
<PAGE>
Comparison of Five Year-Cumulative Total Return Performance
<TABLE>
<CAPTION>
Period Ending
Index 3/25/92 12/31/92 12/31/93 12/31/94 12/31/95 12/31/96
<S> <C> <C> <C> <C> <C> <C>
Coastal Bancorp, Inc. 100.00 106.25 110.42 121.46 150.91 201.51
NASDAQ - Total US 100.00 109.87 126.12 123.28 174.34 214.45
OTC Thrifts 100.00 143.05 198.18 199.86 303.90 395.36
</TABLE>
Notes:
A. Initial Public Offering
B. Each index is weighted for all companies that fit the criteria of
that particular index. The index is calculated to exclude companies as they
are acquired, and add them to the index calculation as they become publicly
traded companies. All companies in existence at a certain time are included
in the calculations.
C. Each index value measures dividend re-investment by assuming
dividends are received in cash on the ex-date and re-invested back into the
company stock paying the dividend on the same day. The stock price on the
ex-date is used to calculate how many shares can be bought with the dividend.
Prepared by SNL Securities LP
Charlottesville, VA 22902
CERTAIN TRANSACTIONS
The Company may make home mortgage or consumer loans to directors,
officers and employees. Any such loan will be made in the ordinary course of
business and on the same terms and conditions, including interest rates and
collateral, as those prevailing for comparable transactions at that time with
non-affiliated parties. The Company had no loans to directors or executive
officers outstanding at the year ended 1996. However, Ms. Vadasz had a loan
collateralized by a certificate of deposit that was paid off in the first
quarter of 1996. As a result of the enactment of the Financial Institutions
Reform, Recovery, and Enforcement Act of 1989 ("FIRREA") on August 9, 1989,
Section 22(h) of the Federal Reserve Act became applicable to a savings
institution, such as the Bank. This law generally provides that any credit
extended by a savings institution to its executive officers, directors and, to
the extent otherwise permitted, principal stockholder(s), or any related
interest of the foregoing, must (i) be on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions by the savings association with non-affiliated
parties; (ii) be pursuant to underwriting standards that are no less stringent
than those applicable to comparable transactions with non-affiliated parties;
(iii) not involve more than the normal risk of repayment or present other
unfavorable features; and (iv) not exceed, in the aggregate, the institution's
unimpaired capital and surplus, as defined.
In 1987, the Bank entered into an Administrative Services Agreement with
Coastal Banc Insurance Agency, Inc. ("CBIA"), a Texas business corporation
licensed under Texas law to act as a life insurance agent. CBIA is
wholly-owned by an executive officer of the Bank who receives no salary or
dividends from CBIA. CBIA has granted to the Bank the legal ownership of all
of its books and records and the stockholder of CBIA has granted to the Bank
the right to assign all of its stock in CBIA to any other properly licensed
life insurance agent in the Bank's sole discretion. The Bank has agreed to
provide to CBIA certain services, including but not limited to employee
training, office space, furniture, fixtures, equipment, clerical services,
data processing and other services as well as marketing leads and information
to assist CBIA in the sale of annuities underwritten by an independent annuity
company to the Bank's deposit and loan customers. In consideration for such
services, CBIA has agreed to pay the Bank a flat fee which is subject to
renegotiation on a quarterly basis. The fee payable to the Bank was last
negotiated on December 16, 1996, and was $230,000 for the year ended December
31, 1996. Such fee represented substantially all of CBIA's net income for the
year then ended.
RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS
The Board of Directors of the Company has appointed KPMG Peat Marwick LLP
as independent auditors for the Company for the year ending December 31, 1997,
and has further directed that the selection of auditors be submitted for
ratification by the stockholders at the Annual Meeting. The Company has been
advised by KPMG Peat Marwick LLP that neither the firm nor any of its
associates has any relationship with the Company or its subsidiaries other
than the usual relationship that exists between independent public accountants
and clients. KPMG Peat Marwick LLP will have one or more representatives at
the Annual Meeting who will have an opportunity to make a statement, if he or
she so desires, and will be available to respond to appropriate questions.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" RATIFICATION OF THE
APPOINTMENT OF KPMG PEAT MARWICK LLP AS INDEPENDENT AUDITORS FOR FISCAL 1997.
STOCKHOLDER PROPOSALS
Any proposal which a stockholder wishes to have presented at the next
Annual Meeting of Stockholders of the Company and included in the proxy
materials used by the Company in connection with such meeting must be received
at the corporate headquarters office of the Company at Coastal Banc Tower, 8
Greenway Plaza, Suite 1500, Houston, Texas 77046, no later than November 25,
1997. If such proposal is in compliance with all of the requirements of Rule
14a-8 promulgated under the Exchange Act, it will be included in the Proxy
Statement and set forth on the form of proxy issued for the next Annual
Meeting of Stockholders. It is urged that any such proposals be sent by
certified mail, return receipt requested.
Stockholder proposals which are not submitted for inclusion in the
Company's proxy materials pursuant to Rule 14a-8 under the Exchange Act may be
brought before an annual meeting pursuant to the Company's Articles of
Incorporation, which provides that business must be properly brought before
the meeting by or at the direction of the Board of Directors, or otherwise
properly brought before the meeting by a stockholder. For business to be
properly brought before an annual meeting by a stockholder, the stockholder
must have given timely notice thereof in writing to the Secretary of the
Company. To be timely, a stockholder's notice must be delivered to, or mailed
and received at, the principal executive offices of the Company not less than
60 days prior to the anniversary date of the mailing of proxy materials by the
Company in connection with the immediately preceding annual meeting of
stockholders of the Company. A stockholder's notice shall set forth as to
each matter the stockholder proposes to bring before an annual meeting such
information specified in the Company's Articles of Incorporation. If the
proposal is not made in accordance with the terms of the Articles of
Incorporation, such proposal will not be acted upon at the Annual Meeting. No
stockholder proposals were received by the Company in connection with the
Annual Meeting.
OTHER MATTERS
Management is not aware of any business to come before the Annual Meeting
other than those matters described above in this Proxy Statement and possibly,
procedural matters incident to the conduct of the meeting. However, if any
other matters should properly come before the meeting, it is intended that the
proxies solicited hereby will be voted with respect to those other matters in
accordance with the judgment of the persons voting the proxies.
The cost of the solicitation of proxies will be borne by the Company.
The Company will reimburse brokerage firms and other custodians, nominees and
fiduciaries for reasonable expenses incurred by them in sending proxy
materials to the beneficial owners of the Company's Common Stock. In addition
to solicitations by mail, directors, officers and employees of the Company or
its subsidiary may solicit proxies personally or by telephone without
additional compensation.
ANNUAL REPORT AND FINANCIAL STATEMENTS
A copy of the Company's Annual Report for the year ended December 31,
1996 ("Annual Report") accompanies this Proxy Statement. The Annual Report is
not a part of the proxy solicitation materials.
UPON RECEIPT OF A WRITTEN REQUEST, THE COMPANY WILL FURNISH TO ANY
STOCKHOLDER, WITHOUT CHARGE, A COPY OF THE COMPANY'S ANNUAL REPORT ON FORM
10-K FOR THE YEAR ENDED DECEMBER 31, 1996, AND ANY EXHIBITS THERETO REQUIRED
TO BE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION UNDER THE EXCHANGE
ACT. SUCH WRITTEN REQUEST SHOULD BE DIRECTED TO CATHERINE N. WYLIE, CHIEF
FINANCIAL OFFICER, COASTAL BANCORP, INC., COASTAL BANC TOWER, 8 GREENWAY
PLAZA, SUITE 1500, HOUSTON, TEXAS 77046. THE FORM 10-K IS NOT A PART OF THE
PROXY SOLICITATION MATERIALS.
By Order of the Board of Directors
/s/ Linda B. Frazier
Linda B. Frazier
Secretary
March 24, 1997
