UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1998
-----------------
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 (IRS Employer
incorporation or organization) Identification No.)
5718 Westheimer, Suite 600
Houston, Texas 77057
--------------------
(Address of principal executive office)
(713) 435-5000
--------------
(Registrant's telephone number)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
N/A N/A
Securities registered pursuant to section 12(g) of the Act:
Common Stock, $0.00667 par value per share
------------------------------------------
(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 10, 1999, the aggregate market value of the 5,048,421 shares of
Common Stock of the Registrant issued and outstanding on such date, excluding
1,360,943 shares held by all directors and executive officers of the Registrant
as a group, was $82,983,420. This figure is based on the closing sale price of
$16.4375 per share of the Company's Common Stock on March 10, 1999, as reported
in The Wall Street Journal on March 11, 1999.
Number of shares of Common Stock outstanding as of March 10, 1999: 6,409,364
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents incorporated by reference and the
Part of Form 10-K into which the document is incorporated:
(1) Portions of the Registrant's Annual Report to Stockholders for the
fiscal year ended December 31, 1998, are incorporated into Part II, Items 5-8 of
this Form 10-K.
(2) Portions of the Registrant's definitive proxy statement for its 1999
Annual Meeting of Stockholders ("Proxy Statement") are incorporated into Part
III, Items 10-13 of this Form 10-K.
PART I.
ITEM 1. BUSINESS
- ------------------
COASTAL BANCORP, INC.
Coastal Bancorp, Inc. (the "Company") is engaged primarily in the business
of serving as the parent holding company for Coastal Banc ssb (the "Bank"). The
Company was incorporated in March 1994 in connection with the reorganization of
Coastal Banc Savings Association, a Texas-chartered thrift institution (the
"Association") into the holding company form of organization. In connection
with the reorganization, which was completed in July 1994, the Association
concurrently converted into a Texas-chartered savings bank and took its present
name. In November 1996, in order to minimize state taxes, the Company's
corporate structure was again reorganized by forming Coastal Banc Holding
Company, Inc. ("HoCo") as a Delaware holding company. HoCo became a
wholly-owned subsidiary of the Company and the Bank became a wholly-owned
subsidiary of HoCo. Each of these reorganizations was treated as combinations
similar to a pooling-of-interests. The financial information and references
presented herein have been restated to give effect where appropriate to the
reorganizations as if they had occurred at the earliest date presented. In
October 1997, the Company formed Coastal Banc Capital Corp. ("CBCC") as a
wholly-owned subsidiary of HoCo. CBCC is a registered broker-dealer, and was
formed to trade packages of whole loan assets, primarily for the Bank and for
other institutional investors.
At December 31, 1998, the Company had total consolidated assets of $3.0
billion, total deposits of $1.7 billion, $28.8 million in Series A Preferred
Stock of the Bank and stockholders' equity of $112.8 million.
The Company is subject to examination and regulation by the Office of
Thrift Supervision (the "OTS") and the Company and the Bank are subject to
examination and regulation by the Texas Savings and Loan Department (the
"Department"). The Company is also subject to various reporting and other
requirements of the Securities and Exchange Commission (the "SEC").
The Company's executive offices are located at Coastal Banc Plaza, 5718
Westheimer, Suite 600, Houston, Texas 77057, and its telephone number is (713)
435-5000.
COASTAL BANC ssb
The Bank is a Texas-chartered, Federally insured state savings bank. It is
headquartered in Houston, Texas and operates through 49 branch offices in
metropolitan Houston, Austin, Corpus Christi, the Rio Grande Valley and small
cities in the southeast quadrant of Texas.
The Bank, which was originally organized in 1954, was acquired in 1986 by
an investor group (which includes a majority of the current members of the Board
of Directors and the present Chairman of the Board, President and Chief
Executive Officer of the Company) as a vehicle to take advantage of the failures
and consolidation in the Texas banking and thrift industries. At February 28,
1986 (the date of change in ownership), the Bank had one full service office and
total assets of approximately $10.7 million. Since then, the Bank has acquired
deposits and branch offices in transactions with the Federal government and
other private institutions, and, in 1995, acquired an independent national bank.
By December 31, 1998, the Bank's total assets had increased to $3.0 billion,
total deposits were $1.7 billion and stockholders' equity totaled $187.9
million.
The Bank attempts to maximize profitability through the generation of net
interest income and fee income. To meet this objective, the Bank has
implemented a strategy of building its core deposit base while deploying its
funds in assets which provide an attractive return with acceptable credit risk.
In carrying out this strategy, and to ultimately provide an attractive rate of
return to the Company's shareholders, the Bank adheres to four operating
principles: (i) continuing to expand its low cost core deposit base; (ii)
minimizing interest rate risk; (iii) minimizing credit risk, while increasing
the emphasis on commercial business lending; and (iv) maintaining a low level of
general overhead expense relative to its peers. These operating principles are
briefly discussed below.
CORE DEPOSITS. The Bank began to implement the first operating principle,
developing and expanding a core deposit base, in 1988 through a series of
transactions with the Federal government and competitively priced transactions
with private sector financial institutions. In 1988, the Bank became the first
acquiror of failed or failing savings institutions under the Federal
government's "Southwest Plan." In this transaction (the "Southwest Plan
Acquisition"), the Bank acquired from the Federal Savings and Loan Insurance
Corporation ("FSLIC"), as receiver for four insolvent savings associations (the
"Acquired Associations"), approximately $543.4 million of assets and assumed
approximately $543.4 million of deposits and other liabilities. The Bank
acquired an aggregate of 14 branch offices from the Acquired Associations in new
and existing markets in southwest Houston, west of Houston along the Houston-San
Antonio corridor and in the Rio Grande Valley. See "The Southwest Plan
Acquisition."
Since completion of the Southwest Plan Acquisition, the Bank has entered
into nine branch office transactions (including two disposition transactions)
acquisitions and one whole bank acquisition: two with an instrumentality of the
Federal government (acting as the receiver of insolvent financial institutions)
and eight with other private institutions. All of these transactions resulted
in the net assumption of $1.9 billion of deposits and the net acquisition of 58
branch offices. The Bank has also opened six de novo branches in the Houston
metropolitan area since its inception. The Bank will continue to pursue fairly
priced acquisitions in Texas as a vehicle for growth, although there can be no
assurance that the Bank will be able to continue to do so in the future.
INTEREST RATE RISK. The Bank has implemented its second operating
principle, minimizing interest rate risk, by matching, to the extent possible,
the repricing or maturity of its interest-earning assets to its interest-bearing
liabilities. The Bank also tries to match the basis or index (for example, the
London Interbank Offered Rate ("LIBOR") or the 11th District Federal Home Loan
Bank cost of funds index ("COFI")) upon which these assets and liabilities
reprice. Generally this is achieved through management of the composition of
the Bank's assets and liabilities. The Bank also attempts to achieve an
acceptable interest rate spread between interest-earning assets and
interest-bearing liabilities by altering the Bank's cost of funds, or, at times,
the yield on certain assets in its portfolio. To accomplish this, the Bank
purchases interest rate swaps and caps. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Asset and Liability
Management" set forth in Item 7 hereof.
The Bank attempts to originate and purchase for retention in its portfolio
only those loans and investments which provide a positive interest rate spread
over funding liabilities matched with similar maturities. Consistent with this
philosophy, a significant portion of the Bank's assets have been invested in
adjustable-rate high quality mortgage-backed securities. At December 31, 1998,
of the Company's $1.3 billion of mortgage-backed securities, $1.1 billion or
89.0%, were adjustable rate mortgage-backed securities. To a lesser extent, the
Bank has purchased first lien mortgages on single-family residences, the
majority of which are adjustable rate mortgages. At December 31, 1998, $511.2
million, or 33.2% of the Company's loans receivable portfolio was comprised of
adjustable rate first lien single-family residential mortgage loans.
CREDIT RISK. The Bank has implemented the third operating principle,
minimizing credit risk, while increasing the emphasis on commercial business
lending, by (i) holding a substantial portion of its assets in mortgage-backed
securities, and (ii) taking a cautious approach to its direct lending
operations, including the development of commercial business lending. At
December 31, 1998, of the Company's $3.0 billion in total assets, $1.3 billion
or 41.9% of total assets consisted of mortgage-backed securities. At December
31, 1998, the Company's total loans receivable portfolio amounted to $1.5
billion or 51.6% of total assets, $690.5 million of which were comprised of
first lien residential mortgage loans. The Bank's commercial loans represented
16.3% of the Company's total loans receivable portfolio at December 31, 1998.
NONINTEREST EXPENSE. The Bank has implemented the fourth operating
principle, maintaining a low level of general overhead expense relative to its
peers, by operating an efficiently staffed branch office system which is able to
administer and deliver its products and services in an economical manner. The
Bank believes that it has significant operating leverage, and that continued
incremental growth will not cause its overhead expenses to increase by a
corresponding amount. The growth achieved from the Bank's acquisitions has
facilitated reduced overhead levels as a proportion of assets and a lower cost
of funds from a more meaningful market share of core deposits. The Company's
ratio of noninterest expense to average total assets on a consolidated basis
increased only 0.47% from December 31, 1994 to December 31, 1998, while total
assets grew 29.7% over the same period.
The Bank is subject to regulation by the Department, as its chartering
authority and by the Federal Deposit Insurance Corporation ("FDIC"), which
regulates the Bank and insures its deposits to the fullest extent provided by
law. The Bank also is subject to certain regulation by the Board of Governors
of the Federal Reserve System (the "Federal Reserve Board") and is a member of
the Federal Home Loan Bank of Dallas (the "FHLB"), one of the 12 regional banks
which comprise the Federal Home Loan Bank System.
LENDING ACTIVITIES
GENERAL. Since 1995, the Bank has attempted to re-align its lending
products to compete with commercial banks in an effort to increase its net
interest margin while at the same time minimizing credit risk. In order to
avoid incurring undue credit risk, the Bank historically invested a significant
percentage of its assets in alternative financial instruments, particularly
mortgage-backed securities, most of which have certain repayments guaranteed by
the United States government or Government Sponsored Enterprises ("GSEs"). See
"Mortgage-Backed Securities." In addition, the Bank has originated and
purchased for retention in its portfolio only those loans determined by
management to have an acceptable credit risk and which provide a positive
interest rate spread over funding liabilities matched with similar maturities.
This strategy is designed to achieve an acceptable risk adjusted rate of return,
as determined and continuously evaluated by the Board of Directors and
management.
The Bank has taken a cautious approach to the development and growth of its
direct lending operations in order to minimize credit risk. In November 1995,
the Bank acquired its first commercial bank, Texas Capital Bancshares, Inc.
("Texas Capital"). The $103.3 million in loans acquired from Texas Capital
included first lien residential, multifamily and commercial real estate,
residential construction, real estate acquisition and development, commercial,
financial and industrial and consumer loans. In 1998, the Bank acquired twelve
commercial bank branches and established them as the foundation for the Bank's
Business Banking Centers, which focus on the Bank's commercial banking
customers. In an effort to enhance its ability to service its commercial
customers, during the fourth quarter of 1997, the Bank implemented a new process
for originating, underwriting and approving all loans over $1.0 million. The
staff of the Portfolio Control Center ("PCC"), manages this process, and applies
Internet and network computer technology to take a loan from application to
closing in less time and incorporating more comprehensive credit information.
The PCC is also responsible for monitoring and managing the Bank's assets and
liabilities.
The following table sets forth information concerning the composition of
the Bank's net loans receivable portfolio by type of loan at the dates
indicated.
<TABLE>
<CAPTION>
At December 31,
<S> <C> <C> <C> <C> <C> <C>
1998 1997 1996
--------------------- ---------------------- --------------------
Amount Percent Amount Percent Amount Percent
-------- -------- --------- -------- --------- --------
(Dollars in thousands)
Real-estate mortgage loans:
First lien residential $ 690,510 41.87% $ 689,767 52.33% $ 791,337 61.96%
Multifamily 119,447 7.24 131,454 9.97 139,486 10.92
Residential construction 115,714 7.02 83,359 6.33 77,146 6.04
Acquisition and development 75,932 4.61 31,619 2.40 26,132 2.05
Commercial 257,723 15.63 181,315 13.76 119,004 9.32
Commercial construction 40,344 2.45 14,506 1.10 3,963 0.31
Commercial secured by residential
mortgage loans held for sale
("Warehouse") 173,124 10.50 98,679 7.49 53,573 4.19
Commercial secured by mortgage
servicing rights ("MSR") 3,867 0.23 32,685 2.48 21,380 1.67
Commercial, financial and industrial 92,218 5.59 30,877 2.34 21,965 1.72
Loans secured by savings deposits 13,164 0.80 8,695 0.66 8,849 0.69
Consumer and other 66,989 4.06 15,030 1.14 14,400 1.13
---------------- -------- ------------ -------- ------------ --------
Total loans 1,649,032 100.00% 1,317,986 100.00% 1,277,235 100.00%
--------------- ======== ------------ ======== ------------ ========
Loans in process (99,790) (47,893) (38,742)
Allowance for loan losses (11,358) (7,412) (6,880)
Unearned interest and loan fees (3,493) (2,926) (2,344)
Premium on purchased loans, net 3,758 1,680 479
--------------- ------------ ------------
Total loans receivable, net $ 1,538,149 $ 1,261,435 $ 1,229,748
=============== ============ ============
</TABLE>
<PAGE>
SCHEDULED MATURITIES. The following table sets forth certain
information at December 31, 1998 regarding the principal amount of loans
maturing in the Bank's loans receivable portfolio based on their contractual
terms to maturity. Demand loans, loans having no stated schedule of repayments
and no stated maturity are reported as due in one year or less. First lien
residential mortgage, multifamily mortgage and commercial real estate loans are
based on their contractual terms to maturity assuming no periodic amortization
of principal.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1998
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
More than More than More than More than Over
One year one year to three years five years to ten years to twenty
or less three years to five years ten years twenty years years Total
--------- ------------ -------------- -------------- ------------- -------- ----------
First lien residential mortgage $ 7,595 $ 13,818 $ 33,229 $ 32,270 $ 184,050 $419,080 $ 690,042
Multifamily mortgage 44,726 54,539 16,464 2,364 399 -- 118,492
Residential construction 63,216 1,273 1,721 662 -- -- 66,872
Real estate acquisition
and development 8,929 31,168 586 -- 1,310 -- 41,993
Commercial real estate 50,105 107,961 37,336 20,104 38,673 -- 254,179
Commercial construction 8,077 3,659 5,652 379 3,112 -- 20,879
Commercial, other 220,834 20,468 21,551 3,620 130 -- 266,603
Consumer and other 19,527 14,738 28,795 12,515 3,514 -- 79,089
--------- ------------ -------------- -------------- ------------- -------- ----------
Total loans $ 423,009 $ 247,624 $ 145,334 $ 71,914 $ 231,188 $419,080 $1,538,149
========= ============ ============== ============== ============= ======== ==========
</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 current
mortgages are substantially lower than existing mortgage loan rates (due to
refinancings or adjustable-rate and fixed-rate loans at lower rates). Under the
latter circumstances, the weighted average yield on loans decreases as higher
yielding loans are repaid or refinanced at lower rates.
<PAGE>
The following table sets forth the amount of loans due after one year from
December 31, 1998 by category and which have fixed or adjustable rates.
<TABLE>
<CAPTION>
Interest-Rate
-------------
<S> <C> <C> <C>
Fixed Adjustable Total
--------------- ----------- ----------
(In thousands)
First lien residential mortgage $ 174,226 $ 508,221 $ 682,447
Multifamily mortgage 10,047 63,719 73,766
Residential construction 2,440 1,216 3,656
Real estate acquisition and development 377 32,687 33,064
Commercial real estate 78,953 125,121 204,074
Commercial construction 6,579 6,223 12,802
Commercial, other 17,118 28,651 45,769
Consumer and other 58,851 711 59,562
----------- ----------- ----------
Total $ 348,591 $ 766,549 $1,115,140
=========== =========== ==========
</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 servicing mortgage loans
for other institutions, GSEs or entities during the periods presented. See
"Mortgage Loan Servicing."
<TABLE>
<CAPTION>
Year Ended December 31,
<S> <C> <C> <C>
1998 1997 1996
--------------- ----------- -----------
(In thousands)
First lien mortgage loan originations:
Adjustable rate $ 725 $ 1,458 $ 3,542
Fixed rate 15,470 4,849 5,471
Adjustable rate by correspondent lenders 1,426 26,220 67,461
Fixed rate by correspondent lenders -- 686 4,058
Home equity 7,022 -- --
Residential construction and acquisition
and development loan originations 189,686 145,727 154,182
Warehouse loan originations 1,642,445 1,174,639 887,252
MSR loan originations 7,554 55,259 69,172
Multifamily loan originations 228,553 81,148 67,657
Commercial real estate loan originations 126,916 171,497 41,170
Commercial construction originations 15,543 12,222 3,806
Commercial, financial and industrial loan originations 107,890 43,497 30,080
Consumer loan originations 38,002 18,679 22,256
--------------- ----------- -----------
Total loan originations 2,381,232 1,735,881 1,356,107
Purchase of residential mortgage loans
(net of repurchases by investors) 293,023 108,226 115,928
Loans acquired (net of loans sold) in connection
with acquisition and disposition transactions 176,158 -- 1,018
Purchase of multifamily and commercial
real estate loans -- -- 4,604
Purchase of automobile loans 34,609 70 --
--------------- ----------- -----------
Total loan originations and purchases 2,885,022 1,844,177 1,477,657
--------------- ----------- -----------
Foreclosures 4,178 4,226 4,363
Principal repayments and reductions to
principal balance 2,587,252 1,790,790 1,339,691
Residential loans sold 10,663 12,855 --
--------------- ----------- -----------
Total foreclosures, repayments and sales of loans 2,602,093 1,807,871 1,344,054
--------------- ----------- -----------
Amortization of premiums, discounts and fees on loans (3,115) (2,819) (485)
Provision for loan losses (3,100) (1,800) (1,925)
--------------- ----------- -----------
Net increase in loans receivable $ 276,714 $ 31,687 $ 131,193
=============== =========== ===========
</TABLE>
<PAGE>
FIRST LIEN MORTGAGE LOAN ORIGINATIONS, PURCHASES AND SALES. The Bank
originates and purchases for its own portfolio loans secured by first lien
mortgages on completed single family residences. The Bank originates these
loans primarily in the Houston metropolitan area and in geographic areas
surrounding the Bank's branch locations. During 1998, 1997 and 1996, the Bank
originated residential real estate loans for portfolio totaling $16.2 million,
$6.3 million and $9.0 million, respectively. The majority of the Bank's
residential loans have been acquired through bulk purchases in the traditional
secondary market. During 1998, 1997 and 1996, the Bank purchased $293.6
million, $107.9 million and $112.4 million of such loans, respectively.
The Bank offers, but does not actively solicit, a variety of mortgage
products designed to respond to consumer needs and competitive factors.
Conventional conforming loans that are secured by first liens on completed
residential real estate are generally originated for amounts up to 95% of the
appraised value or selling price of the mortgaged property, whichever is less.
All loans with loan-to-value ratios in excess of 80% generally require the
borrower to purchase private mortgage insurance from approved third party
insurers. The Bank also originates conventional non-conforming mortgage loans
(i.e., loans for single family homes with an original balance in excess of the
maximum loan balance amount set by the Federal National Mortgage Association
("FNMA") or the Federal Home Loan Mortgage Corporation ("FHLMC"), which is
presently $240,000, or loans that do not otherwise meet the criteria established
by FNMA or FHLMC). Such loans are originated based on underwriting guidelines
or standards required by the Secondary Market Investors ("SMI") to whom such
loans are intended to be sold. During 1998, fewer than 10% of the mortgage
loans originated by the Bank were non-conforming mortgage loans.
In addition to 15-year and 30-year conventional mortgages, the Bank offers
special products designed to provide to its customers lower rates of interest or
lower principal and interest payments. Borrowers may choose from a wide variety
of combinations of interest rates and points on many products so that they may
elect to pay higher points at closing and lower interest over the life of the
loan, or pay a higher interest rate and reduce the points payable at closing.
In addition, from time to time mortgages are offered in the following
categories: those which allow the borrower to make lower monthly payments for
the first one, two or three years of the loan; fixed rate mortgages; and
adjustable rate mortgages having interest rate adjustments every one, five or
seven years based upon a specified independent index.
Borrower demand for adjustable rate mortgage loans compared to fixed rate
mortgage loans is a function of interest rate levels, consumer expectations for
changes in interest rate levels and the difference between interest rates and
loan fees offered for fixed rate mortgage loans and for adjustable rate mortgage
loans. The Bank's loan origination volume has been subject to some minor
seasonal variations, with the heaviest demand in the late spring and summer
months. Loan demand is also affected by the general interest rate environment
and, to a large measure, by the general state of the local economy.
During times of relatively lower market interest rates, demand by previous
borrowers for refinancings increases. Refinancings are not solicited by the
Bank. However, if a request for a refinancing is received, borrowers are
offered current mortgage loan products. Refinancings are generally processed in
a manner identical to original originations and charged the same fees.
The Bank has also acquired residential real estate loans for its portfolio
through purchases from correspondent lenders and through bulk purchases when the
prices of these purchases are considered to be favorable.
Beginning in 1994, the Bank began originating residential mortgage loans
through selected correspondent lenders who would originate then immediately sell
the loans to the Bank. All such loans were underwritten in accordance with the
Bank's policies and procedures. During 1998, 1997 and 1996, the Bank originated
$1.4 million, $26.9 million and $71.5 million, respectively, through these
correspondent lenders. The use of correspondent lenders was essentially
discontinued during 1997, with the focus of acquiring loans turning to bulk
purchases.
The acquisition of residential real estate loans has primarily been
accomplished through bulk purchases in the traditional secondary market (from
mortgage companies, financial institutions, investment banks and CBCC beginning
in 1997). Bulk purchases allow the Bank to obtain residential real estate
mortgage loans without the cost of origination activities. Personnel from the
Bank generally analyze loan bid packages, as they become available from CBCC and
from third parties, and the PCC reviews the information in the loan packages to
determine whether to bid (or make an offer) on a package and the price of such
bid (or offer). The bid price with respect to such loan packages is based on a
number of factors, including the ability to create spread income with a funding
source of comparable maturity, the pricing of alternative investments,
particularly mortgage-backed securities, which offer little or no credit risk,
and the credit risk profile of the portfolio offered. The Bank analyzes credit
risk in a whole loan package through its due diligence investigation, which is
designed to provide management with basic underwriting information on each loan
or group of loans, including loan-to-value, payment history, insurance and other
documentation. Because the Bank is purchasing loans in bulk, the Bank prices the
loan packages to take into consideration, among other things, delinquency and
foreclosure assumptions based on the risk characteristics of the loan packages.
The Bank intends to continue to make competitive bids on loan portfolios that
meet the Bank's purchase criteria.
The Bank sells mortgage loans and mortgage loan servicing from time to time
in order to replace the loans and servicing with instruments which have higher
credit quality and less interest rate risk. During 1998, the Bank did not
originate or purchase any loans with the intent to sell them to SMIs, but did
sell $10.7 million of single family residential loans to SMIs. During the years
ended 1997 and 1996, the Bank originated or purchased with the intent to sell
$4.1 million and $11.2 million, respectively, of single family residential
mortgage loans and sold $4.4 million and $11.7 million, respectively, of such
loans to SMIs.
While the Bank has the general authority to originate and purchase loans
secured by real estate located anywhere in the United States, the largest
concentration of its residential first lien mortgage and construction loan
portfolios is secured by realty located in Texas.
RESIDENTIAL CONSTRUCTION LENDING. The Bank initiated a construction
lending program with local builders in the latter part of 1989 which has grown
considerably since its inception. At the initiation of the program, management
of the Bank surveyed the members of the residential construction industry in the
Bank's Houston market area and targeted those companies, and, in the ensuing
years, others that management believed, based upon its market research, to be
financially strong and reputable. Loans are made primarily to fund residential
construction. Construction loans are made on pre-sold and speculative
residential homes only in well located, viable subdivisions and planned unit
developments.
The builders with whom the Bank does business generally apply for either a
non-binding short-term line of credit or for an annual line of credit (subject
to covenants) from the Bank for a maximum amount of borrowing to be outstanding
at any one time. Upon approval of the line of credit, the Bank issues a letter
which indicates to the builder the maximum amount which will be available under
the line, the term of the line of credit (which is generally 90 days to one
year), the interest rate of the loans to be offered under the line (which is
generally set at a rate above The Wall Street Journal prime rate or LIBOR on the
outstanding monthly loan balance) and the loan fees payable. When the builder
desires to draw upon a short-term line of credit, a separate loan application
must be made under the line for a specific loan amount. Each loan commitment
under a short-term line of credit is separately underwritten and approved after
the builder's master file is updated and reviewed.
The terms of the Bank's construction loans are generally for nine months or
less, unless extended by the Bank. If a construction loan is extended, the
borrower is generally charged a loan fee for each 90 day extension period. The
Bank reserves the right to extend any loan term, but generally does not permit
the original term and all extensions to exceed 24 months without amortization of
principal either in monthly increments or a lump sum.
The loan-to-value ratio (applied to the underlying property that
collateralizes the loan) of any residential construction loan may not exceed the
lesser of 85% of appraised value or 100% of the actual cost. All individual
loans are limited in dollar amount based upon the project proposed by the
builder. Draws for lot purchases are generally limited to the contracted sales
price of the lot (to include escalations) not to exceed 100% of the lot's
appraised value. Other special conditions which the Bank attaches to its
construction loans include a requirement that limits the number and dollar
amount of loans which may be made based upon unsold inventory. The Bank may
also, in its sole discretion, discontinue making any further loans if the
builder's unsold inventory exceeds a certain level from all lending sources or
if the builder fails to pay its suppliers or subcontractors in a timely manner.
The Bank provides construction financing for homes that generally are
priced below $450,000, with most homes priced between $125,000 and $300,000. In
this price range, the Bank has experienced the shortest duration of term, the
highest annualized yield and the least likelihood of defaults because of the
generally high number of pre-completion sales. The Bank will also make
individual construction loans to builders or individuals on single homes or a
panel of homes on substantially the same terms and conditions as loans granted
under the Bank's line of credit program.
At December 31, 1998, the Bank had $67.5 million in outstanding residential
construction loans (net of loans in process of $48.2 million) of which $192,000
were on nonaccrual status. At the present time, the Bank has approved builders
domiciled in the Houston, Dallas, and Austin metropolitan areas and is
selectively soliciting new builders for its residential construction lending
program. Of the approved builders, two of the builders domiciled in Houston are
authorized for the funding of loans outside the state of Texas. At December
31, 1998, there were loans totaling $519,000 for these builders in the state of
Arizona. The Bank intends to continue to do business with the companies
involved in its line of credit program and believes that it will continue to
have construction loan demand from the builders with whom it currently has an
established lending relationship.
Construction financing is generally considered to involve a higher degree
of risk than long-term financing on improved, occupied residential real estate,
due to the lender's reliance on the borrower to add to the estimated value of
the property through construction within the budget set forth in the loan
application. The Bank attempts to limit its risk exposure by, among other
things: limiting the number of borrowers to whom it lends and establishing
specific qualification requirements for borrowers generally; continually
monitoring the general economic conditions in the market, recent housing starts
and sales; continually monitoring the financial position of its borrowers
throughout the term of the loan through periodic builder reports and inquiries
to the builder's suppliers and subcontractors; continually monitoring the
progress of the development through site inspections prior to loan
disbursements; utilizing only qualified, approved appraisers; and requiring that
the builder maintain a pre-approved ratio (generally not greater than 50%) of
speculative to pre-sold homes in the development.
COMMERCIAL REAL ESTATE AND MULTIFAMILY MORTGAGE LENDING. The Bank
initiated a program in 1993 to actively seek loans secured by commercial or
multifamily properties. Commercial real estate and multifamily mortgage loans
typically involve higher principal amounts and repayment of the loans generally
depends, in large part, on sufficient cash flow being generated by the
underlying properties to cover operating expenses and loan repayments. Market
values may vary as a result of economic events or governmental regulations which
are outside the control of the borrower or lender and which can affect the
future cash flow of the properties. The loans are for a short to medium term of
between one to seven years, and have floating rates or fixed rates based on a
spread over similarly fixed borrowings from the FHLB. The properties securing
the loans originated by the Bank are primarily located in Texas. The Bank
attempts to limit its risk exposure by, among other things: lending to proven
developers/owners, only considering properties with existing operating
performance which can be analyzed, requiring conservative debt coverage ratios,
and continually monitoring the operation and physical condition of the
collateral. At December 31, 1998, commercial real estate loans totaling $257.7
million and multifamily mortgage loans of $119.4 million were outstanding. At
December 31, 1998, the Bank had commercial real estate loans totaling
approximately $149,000 that were on nonaccrual status and no multifamily
mortgage loans on nonaccrual status.
The Bank began originating commercial real estate and multifamily
construction loans in 1996. The Bank generally underwrites these loans in the
same way it underwrites its multifamily mortgage loans and attempts to manage
the risk of such loans by requiring that the builders provide more equity in the
project than is required in refinancings, lending to builders with strong
financial statements and requiring that borrowers purchase, if required by the
movement of general market interest rates, interest rate caps for their loans.
At December 31, 1998, commercial and multifamily construction loans totaling
$21.3 million (net of loans in process of $19.0 million) were outstanding, none
of which were on nonaccrual status.
WAREHOUSE LENDING. Since 1992, the Bank has provided or participated in
lines of credit to mortgage companies generally for their origination of single
family residential loans which are generally sold no more than 90 days from
origination to FNMA, FHLMC, the Government National Mortgage Association
("GNMA") or to private investors. The lines of credit are generally renewable
annually. Borrowers pay interest on funds drawn at a floating rate. In
addition, the Bank usually receives a fee for each loan file processed. The
Bank (or the lead lender in a participation) holds the original mortgage loan
notes and other documentation as collateral until repayment of the related lines
of credit, except when a third party bank is acting as the lead bank in the
lending relationship.
Warehouse loans are underwritten in accordance with Bank policies and
procedures. Interested loan originators who contact or are contacted by the
Bank are asked to prepare a loan application which seeks detailed information on
the originator's business. After evaluating the application and independently
verifying the applicant's credit history, if the originator appears to be a
likely candidate for approval, Bank personnel will visit the originator and
review, among other things, its business organization, management, quality
control, funding sources, risk management, loan volume and historical
delinquency rate, financial condition, contingent obligations and regulatory
compliance. The originator pays a fee for this review to offset a portion of
the Bank's expense; this amount is deducted from the origination fee if the line
of credit is approved. If the originator meets the established criteria, its
application is submitted for approval. It is the policy of the Bank to apply
substantially the same underwriting standards to loan participations as are
applied to loans with similar characteristics originated directly by the Bank.
Bank personnel attempt to minimize the risk of making Warehouse loans
(excluding participations in loans where a third party bank is acting as the
lead bank) by, among other things, (i) taking physical possession of the
originator's collateral, (ii) directly receiving payment from secondary market
investors when the loans are sold and remitting any balance to the borrower
after deducting the amount borrowed for that particular loan, (iii) visiting the
originator's office from time to time to review its financial and other records
and (iv) monitoring each originator: (a) by periodically reviewing each
originator's financial statements, loan production delinquency and commitment
reports; and, (b) on an annual basis, by reviewing the originator's audited
financial statements and the auditor's letter to the originator's board of
directors. In particpations in loans where a third party bank is acting as the
lead bank, the Bank relies on the lead bank to perform substantially the same
procedures as noted above.
During 1998, the Bank originated $1.6 billion of Warehouse loans and had
Warehouse loans outstanding of $173.1 million at December 31, 1998. At December
31, 1998, there were two Warehouse loans, totaling $10.0 million, on nonaccrual
status, one of which is described below.
On August 11, 1998, the Bank approved the purchase of a $10.0 million
participation in a warehouse loan aggregating $25.0 million to MCA Financial
Corp., and certain of its affiliates, of Southfield, Michigan (collectively the
"Mortgage Banker"). The lead lender ("Lead Lender") in this facility is a major
commercial bank and the loan is secured by subprime residential loans. In late
January 1999, due to a lack of liquidity, the Mortgage Banker ceased operations
and shortly thereafter was seized by the Michigan Bureau of Financial
Institutions. A conservator was appointed to take control of the Mortgage
Banker's books and records, marshal that company's assets and continue its loan
servicing operations. A voluntary petition under Chapter 11 of the U.S.
Bankruptcy Code was filed in the U.S. Bankruptcy Court for the Eastern District
of Michigan for the Mortgage Banker on or about February 11, 1999, by the
conservator, who has been appointed the "debtor-in-possession", to allow the
conservator time to develop a plan of reorganization while protecting the assets
of the Mortgage Banker.
The Bank has hired special bankruptcy counsel to represent it in this
situation and has been involved in discussions with the Lead Lender regarding
the status of the loan. Although the Bank has been informed by the Lead Lender
that the Bank's loan is collateralized by residential loans, the Bank, as of the
date hereof, has been unable to verify the extent to which the collateral, if
any, is sufficient to prevent the Bank from incurring a loss. Effective
December 31, 1998, the Bank put this loan on nonaccrual and has allocated $1.5
million of the general reserve to this loan. The Bank is continuing to monitor
this situation and will make additions to the overall allowance for loan losses
as considered necessary based on its existing policy. At this time, the Bank is
unable to determine the timing, probability, or the amount of any loss which
might result from the default by the Mortgage Banker.
MSR LENDING. Since 1992, the Bank has loaned funds to mortgage companies
for their purchase of mortgage servicing rights or to finance the mortgage
companies' ongoing operations to originate and retain mortgage servicing. The
mortgage companies receive fees for servicing mortgage loans which include
collecting and remitting loan payments to FNMA, FHLMC and other investors. Loans
of this nature generally have terms of one to five years, and are generally
limited to 70.0% of the price paid by the mortgage company for servicing rights,
or of the value of the originated servicing rights (subject to the regulatory
maximum for loans to one borrower). MSR loans are made at adjustable rates of
interest tied to LIBOR or the Bank's borrowing rate plus a spread and a
commitment fee. MSR loans are collateralized by purchased or originated
mortgage servicing rights to the remaining cash flows after remittance of
payments to FNMA, FHLMC or other investors on the servicing portfolio. MSR
loans are underwritten in substantially the same manner as Warehouse loans.
Bank personnel closely monitor MSR borrowers by, among other things, reviewing
the borrower's financial condition and operations in the same manner as they do
for Warehouse loans and by examining the value of the borrower's MSR portfolio
(through evaluation of the estimated future net cash flows from the servicing
rights) in order to ensure that the loan-to-value ratio does not exceed 75.0%
during the life of the loan. If the continuing loan-to-value ratio exceeds that
amount, the borrower is asked to repay a portion of the principal balance to
maintain the ratio limit. At December 31, 1998, the Bank had $3.9 million in
outstanding MSR loans and had discontinued soliciting MSR financing during the
year. At December 31, 1998, there were no MSR loans on nonaccrual status.
REAL ESTATE ACQUISITION AND DEVELOPMENT LENDING. The Bank originates loans
to residential real estate builders and developers for the acquisition and/or
development of vacant land. The proceeds of the loans are generally used to
acquire the land and make the site improvements necessary to develop the land
into saleable lots. The Bank generally lends only to major developers with good
track records and strong financial capacity and on property where substantially
all of the lots to be developed are pre-sold. The term of the loans have
generally been from 18 to 24 months at a spread over the prime rate, plus an
origination fee. Repayment on the loans is generally made as the lots are sold
to builders. Land acquisition and development loans involve additional risks
when compared to loans on existing residential properties. These loans
typically involve relatively large loan balances to single borrowers, and the
repayment experience is dependent upon the successful development of the land
and the resale of the lots. These risks can be significantly impacted by supply
and demand conditions and the general economic conditions in the local market
area. At December 31, 1998, the Bank had $43.3 million (net of loans in process
of $32.6 million) of real estate acquisition and development loans outstanding.
At December 31, 1998, there were no real estate acquisition and development
loans on nonaccrual status.
COMMERCIAL BUSINESS LENDING. Development of a commercial business lending
program is a strategic goal of Bank management. The Texas Capital acquisition
provided the Bank with an established commercial business lending program to
small and medium sized companies primarily in the Houston and Austin
metropolitan areas. In 1997 and 1998, management continued to develop the
infrastructure for commercial business lending in most of the Bank's major
markets by developing the PCC and adding business banking loan officers. In
1998, the Bank acquired twelve commercial bank branches and significantly
increased the Bank's commercial business loan origination capacity. The
commercial, financial and industrial loans ("Commercial Business loans") are
generally made to provide working capital financing or asset acquisition
financing to businesses and are generally secured by the borrower's working
capital assets (i.e., accounts receivable, inventory, etc.) or assets purchased
by the borrower (i.e., operating assets, equipment, etc.). Commercial Business
loans generally have shorter terms (one to five years) at a spread over prime
rate or LIBOR and are of greater risk than real estate secured loans because of
the type and nature of the collateral. In addition, Commercial Business loan
collections are more dependent on the continuing financial stability of the
borrower. The Bank intends to continue to expand the acquired commercial
business lending program, while managing the associated credit risk by
continually monitoring borrowers' financial position and underlying collateral
securing the loans. At December 31, 1998, Commercial Business loans outstanding
totaled $92.2 million, of which $496,000 of such loans were on nonaccrual
status.
<PAGE>
CONSUMER LENDING. The Bank makes available traditional consumer loans,
such as home improvement, home equity, new and used car financing, new and used
boat and recreational vehicle financing and loans secured by savings deposits to
consumers in the markets served by its retail branches and business banking
centers. The interest rate on loans secured by savings deposits is typically
set at a rate above that paid on the underlying account and adjusts if the rate
on the account changes. At December 31, 1998, the Bank had $67.0 million in
consumer and other loans outstanding and $13.2 million in loans secured by
savings deposits.
Consumer loans (other than savings deposit secured loans) generally have
shorter terms and higher interest rates than mortgage loans but usually involve
greater credit risk than mortgage loans because of the type and nature of the
collateral. In addition, consumer lending collections are dependent on the
borrower's continuing financial stability, and are thus likely to be adversely
affected by job loss, marital status, illness and personal bankruptcy. In many
cases, repossessed collateral for a defaulted consumer loan will not provide an
adequate source of repayment of the outstanding loan balance because of
depreciation of the underlying collateral. The Bank believes that the generally
higher yields earned on consumer loans compensate for the increased credit risk
associated with such loans and that consumer loans are important to its efforts
to serve the credit needs of the communities that it serves.
The Bank has a lending agreement to purchase loans through a correspondent
to refinance new and used automobiles. During 1998, the Bank purchased a total
of $34.6 million automobile loans under this agreement, of which $29.6 million,
included in total consumer and other loans, were outstanding at December 31,
1998. At December 31, 1998, $75,000 of these loans were on nonaccrual status
and as of December 31, 1998, only $160,000 of these loans had been repossessed
or charged off.
ASSET QUALITY. The Bank, like all financial institutions, is exposed to
certain credit risks related to the value of the collateral which secures loans
held in its portfolio and the ability of borrowers to repay their loans during
the term thereof. Management of the Bank closely monitors the loan portfolio
and the Bank's real estate acquired as a result of foreclosure ("REO") for
potential problems on a weekly basis and reports to the Board of Directors on a
monthly basis. When a borrower fails to make a required loan payment or other
weaknesses are detected in a borrower's financial condition, the Bank attempts
to determine an appropriate course of action by contacting the borrower.
Delinquencies are cured promptly in most cases. If the delinquency on a
mortgage loan exceeds 90 days and is not cured through the Bank's normal
collection procedures, or an acceptable arrangement is not worked out with the
borrower, the Bank will institute measures to remedy the default, including
commencing a foreclosure action. As a matter of policy, the Bank generally does
not accept from the mortgagor a voluntary deed of the secured property in lieu
of foreclosure. If foreclosure is effected, the property is sold at a public
auction in which the Bank may participate as a bidder. If the Bank is the
successful bidder, the foreclosed real estate is then included in the Bank's REO
portfolio until it is sold.
Upon acquisition, REO is recorded at the lower of unpaid principal balance
adjusted for any remaining acquisition premiums or discounts less any applicable
valuation allowance or estimated fair value, based on an appraisal, less
estimated selling costs. All costs incurred from the date of acquisition
forward relating to maintaining the property are recorded as a current expense.
It is the Bank's general policy not to recognize interest income on loans
past due 90 days or more. When a loan is placed on nonaccrual status,
previously accrued but unpaid interest is reversed against current interest
income. On a loan-by-loan basis, Bank management may continue to accrue
interest on loans that are past due more than 90 days, particularly if
management believes that the individual loan is in the process of collection and
the interest is fully collectible.
The following table sets forth information regarding the Bank's
nonperforming assets of the dates shown.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
At December 31,
1998 1997 1996
----------- -------- --------
(Dollars in thousands)
Nonaccrual loans:
First lien single family mortgage $ 11,883 $15,591 $12,238
Residential construction 192 -- --
Commercial real estate 149 322 32
Commercial construction -- 900 --
Commercial, Warehouse 10,042 -- --
Commercial, financial and industrial 496 485 496
Consumer and other 75 53 73
----------- -------- --------
Total nonaccrual loans 22,837 17,351 12,839
----------- -------- --------
Loans greater than 90 days delinquent
and still accruing:
First lien single family mortgage 189 -- 106
Multifamily mortgage 190 -- --
Residential construction -- 79 52
Commercial real estate 293 91 881
Commercial, financial and industrial 808 120 14
Consumer and other 224 50 142
Total loans greater than 90 days
delinquent and still accruing 1,704 340 1,195
----------- -------- --------
Total nonperforming loans 24,541 17,691 14,034
----------- -------- --------
Total REO and repossessed assets 4,927 3,198 3,161
----------- -------- --------
Total nonperforming assets $ 29,468 $20,889 $17,195
=========== ======= =======
Ratio of nonperforming
assets to total assets 0.99% 0.72% 0.60%
=========== ======= =======
Ratio of nonaccrual loans to total
loans receivable 1.48% 1.38% 1.04%
=========== ======== ========
Ratio of nonperforming loans to total
loans receivable 1.60% 1.40% 1.14%
=========== ======== ========
</TABLE>
<PAGE>
At December 31, 1998, approximately $835,000 in additional interest income
would have been recorded in the year then ended on the above loans accounted for
on a nonaccrual basis if such loans had been current in accordance with their
original terms and had been outstanding throughout the period or since
origination if held for part of the period. For the year ended December 31,
1998, $480,000 in interest income was included in net income for these same
loans prior to the time they were placed on nonaccrual status.
At December 31, 1998, the Bank had 173 first lien single family residential
mortgage loans on nonaccrual status, aggregating $11.9 million, with an average
balance of approximately $69,000. A total of 151 of these loans, with an
aggregate balance of $9.7 million, were acquired through bulk loan purchases and
7 of these loans, with an aggregate balance of $294,000, were acquired in
acquisitions. Of the 151 residential mortgage loans acquired through bulk
purchases, at December 31, 1998, 30 of such loans totaling $1.5 million were
being serviced by other institutions, which constituted 1.0% of the $154.6
million of aggregate loans serviced by others.
At December 31, 1998, the Bank had 2 warehouse loans totaling $10.0 million
on nonaccrual status. See "Warehouse Lending."
At December 31, 1998, nonperforming assets included REO with an aggregate
book value of $4.9 million and repossessed assets of $2,000. At such date, the
Bank's REO consisted of 24 single family residential properties totaling $2.1
million, 11 commercial properties totaling $2.7 million and 2 residential
construction properties totaling $104,000.
At December 31, 1998, in addition to the loans on nonaccrual status, the
Bank had $9.7 million in loans classified as substandard, $83,000 classified as
doubtful, $9,000 classified as loss and $9.7 million of loans designated as
"special mention" for regulatory purposes. Loans designated as "special
mention" are not currently required to be classified for regulatory purposes but
have potential weaknesses or risk characteristics that could result in future
problems.
The Bank considers a loan to be impaired when, based upon current
information and events, it is probable that the Bank will be unable to collect
all amounts due according to the contractual terms of the loan agreement. In
determining impairment, the Bank considers, among other things, large
non-homogeneous loans which may include nonaccrual loans or troubled debt
restructurings, and performing loans which exhibit, among other characteristics,
high loan-to-value ratios, low debt coverage ratios, or indications that the
borrowers are experiencing increased levels of financial difficulty. The Bank
bases the measurements of collateral-dependent impaired loans on the fair value
of their collateral. The amount by which the recorded investment in the loan
exceeds the measure of the fair value of the collateral securing the loan is
recognized by recording a valuation allowance. At December 31, 1998, the
carrying value of impaired loans totaled approximately $1.7 million and the
related allowance for loan losses on those impaired loans totaled $880,000. The
average balance of impaired loans during the year ended December 31, 1998 was
approximately $1.7 million. For the year ended December 31, 1998, the Bank did
not recognize interest income on loans considered impaired.
The Bank had loaned $115.7 million at December 31, 1998, under its
residential construction lending program to multiple borrowers who are engaged
in similar activities. These borrowers could be similarly impacted by economic
conditions in the Houston metropolitan area. See "Residential Construction
Lending." Except for concentrations in its Warehouse lending lines, the Bank
had no other loan concentrations. At December 31, 1998, the Bank had $173.1
million of Warehouse loans outstanding. See "Warehouse Lending."
ALLOWANCE FOR LOAN LOSSES. The Bank maintains loan loss allowances to
absorb future losses that may be realized on its loans receivable portfolio.
The following table summarizes activity in the Bank's allowance for loan losses
during the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
<S> <C> <C> <C> <C> <C> <C>
1998 1997 1996 1995 1994
--------- -------- ------- ------- -------
(Dollars in thousands)
Balance at beginning of year $ 7,412 $ 6,880 $5,703 $2,158 $1,527
Charge-offs(1) (1,693) (1,416) (851) (404) (329)
Recoveries 282 148 103 17 26
Provision for loan losses 3,100 1,800 1,925 1,664 934
Allowance of acquired entities(2) 2,257 -- -- 2,268 --
--------- -------- ------- ------- -------
Balance at end of the year $ 11,358 $ 7,412 $6,880 $5,703 $2,158
========= ======== ======= ======= =======
Ratio of net charge-offs during the
period to average net loans
outstanding during the period 0.10% 0.10% 0.06% 0.05% 0.06%
========= ======== ======= ======= =======
</TABLE>
________________________
(1)In 1998, $544,000 of the charge-offs were attributable to single family
residential loans, $648,000 to Commercial Business loans, $477,000 to consumer
and other loans and $24,000 to commercial real estate loans. In 1997, $591,000
of the charge-offs were attributable to single family residential loans,
$472,000 to Commercial Business loans, $349,000 to consumer and other loans and
$4,000 to commercial real estate loans. In 1996, $651,000 of the charge-offs
were attributable to single family residential loans, $142,000 to consumer and
other loans and $58,000 to Commercial Business loans. In 1995, $359,000 of the
charge-offs were attributable to single family residential loans and $45,000 to
consumer and other loans. In 1994, the charge-offs were fully attributable to
single family residential loans.
(2)The allowance of acquired entities in 1998 represents the allowance for loan
losses recorded in connection with the loans acquired in the 1998 branch
acquisition. The amount in 1995 represents the allowance for loan losses
recorded in connection with (i) a bulk loan package acquired and (ii) the loans
acquired in the Texas Capital acquisition.
<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>
<S> <C> <C> <C> <C> <C> <C>
At December 31,
1998 1997 1996 1995 1994
-------- ------- ------- ------- -------
(In thousands)
First lien residential mortgage $ 3,238 $ 2,566 $ 2,217 $ 2,992 $ 1,191
Multifamily mortgage 383 511 369 249 188
Residential construction 343 251 223 307 278
Real estate acquisition and development 759 316 261 130 142
Commercial real estate 2,112 1,468 1,151 1,072 152
Commercial construction 225 203 20 -- --
Commercial, Warehouse and MSR 1,722 494 361 230 98
Commercial, financial and industrial 1,750 1,008 985 395 --
Consumer and other 826 233 374 177 109
Unallocated -- 362 919 151 --
-------- ------- ------- ------- -------
$ $ 11,358 $ 7,412 $ 6,880 $ 5,703 $ 2,158
======== ======= ======= ======= =======
</TABLE>
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>
<S> <C> <C> <C> <C> <C> <C>
Year Ended December 31,
1998 1997 1996 1995 1994
-------- -------- -------- -------- ------
(In thousands)
First lien residential mortgage $ 1,142 $ 908 $ (180) $ 1,032 $ 743
Multifamily mortgage (184) 142 120 23 60
Residential construction 55 28 (84) (67) (174)
Real estate acquisition and development 443 55 131 (25) 106
Commercial real estate 82 321 79 479 128
Commercial construction (36) 183 20 -- --
Commercial, Warehouse and MSR 1,228 133 131 132 (49)
Commercial, financial and industrial 240 416 618 -- --
Consumer and other 846 171 322 90 120
Unallocated (716) (557) 768 -- --
-------- -------- ------- ------- ------
$ 3,100 $ 1,800 $ 1,925 $ 1,664 $ 934
======== ======== ======== ======== ======
</TABLE>
Provisions for loan losses are charged to earnings to bring the total
allowance to a level deemed appropriate by management based on such factors as
historical loss experience, the volume and type of lending conducted by the
Bank, identification of adverse situations which may affect the ability of
borrowers to repay, the amount of nonperforming assets, industry standards,
regulatory policies, generally accepted accounting principles, general economic
conditions, particularly as they relate to the Bank's lending area, and other
factors related to the collectibility of the Bank's loan portfolio. During the
year ended December 31, 1998, the increased provision for loan losses was
recorded due to the continuing change in the composition of the loans receivable
portfolio from more traditional residential real estate type loans to commercial
type loans. At December 31, 1998, single family mortgage and residential
construction loans made up approximately 49% of the loans receivable portfolio
as compared to 58% at December 31, 1997, a decrease of 9%. This change
occurred, and is expected to continue to occur, as a result of management's
emphasis on commercial business lending and the loans acquired in 1998.
The Board of Directors of the Bank reviews its Asset Classification and
Allowance Policy ("ACAP") at least annually. As a result of a comprehensive
revision of such policy in 1996, the Bank changed its method of assessing the
adequacy of the allowance for loan losses. The revised policy provides that the
Bank will annually establish a monthly provision amount to be added to the
allowance for loan losses and the resultant allowance will be "tested" monthly
for adequacy based on the allocation methodology described below. The minimum
allowance allocation to first lien residential mortgage loans greater than 90
days delinquent is a general allocation of 5% of the aggregate net book value.
All other first lien residential mortgage loans are allocated a general
allowance of 0.10% of the aggregate net book value. The Bank generally
allocates the allowance to multifamily, residential construction, commercial
construction, real estate acquisition and development, commercial real estate,
Warehouse, MSR, Commercial Business and consumer and other loans in the
following percentages of outstanding principal amounts: 0.25%, 0.25%, 0.50%,
1.0%, 0.50%, 0.25%, 0.50%, 1.0% and 1.0%. In addition, a general allowance
allocation is calculated on unfunded commitments and letters of credit using the
general allowance percentages described above for the applicable loan type.
Specific allocations of the general allowance are established by management on
specific loans or groups of loans as considered necessary.
The Bank's management believes that its present allowance for loan losses
is adequate based upon, among other considerations, the factors discussed above,
its low level of nonperforming loans and its historical loss experience.
Management continues to review its loan portfolio to determine whether its ACAP
should be altered in light of current conditions and to make any additional
provisions which may be deemed necessary. While management uses the best
information available to make such determinations, additional provisions for
loan losses may be required to be established in the future should economic or
other conditions change substantially. In addition, the FDIC and the
Department, as an integral part of their examination processes, periodically
review the Bank's loan loss allowances. These agencies may require the Bank to
establish additional loan loss allowances, based on their respective judgments
of the information available at the time of the examinations.
As noted previously, on August 11, 1998, the Bank approved the purchase of
a $10.0 million participation in a warehouse loan. In late January 1999, due to
a lack of liquidity, the Mortgage Banker ceased operations and shortly
thereafter was seized by the Michigan Bureau of Financial Institutions. A
conservator was appointed to take control of the Mortgage Banker's operations
and has also been appointed "debtor-in-possession" under a voluntary petition
under Chapter 11 of the U.S. Bankruptcy Code.
The Bank has hired special bankruptcy counsel to represent it in this
situation and has been involved in discussions with the Lead Lender regarding
the status of the loan. Although the Bank has been informed by the Lead Lender
that the Bank's loan is collateralized by residential loans, the Bank, as of the
date hereof, has been unable to verify the extent to which the collateral, if
any, is sufficient to prevent the Bank from incurring a loss. Effective
December 31, 1998, the Bank put this loan on nonaccrual and has allocated $1.5
million of the general reserve to this loan. The Bank is continuing to monitor
this situation and will make additions to the overall allowance for loan losses
as considered necessary based on its existing policy. At this time, the Bank is
unable to determine the timing, probability, or the amount of any loss which
might result from a default by the Mortgage Banker.
MORTGAGE LOAN SERVICING. The Bank services residential real estate loans
for its own portfolio as well as for others, including FNMA, FHLMC and other
private mortgage investors through CBS Mortgage, a division of the Bank ("CBS
Mortgage"). Loan servicing includes collecting and remitting loan payments,
accounting for principal and interest, making advances to cover delinquent
payments, making inspections as required of mortgaged premises, contacting
delinquent mortgagors, supervising foreclosures and property dispositions in the
event of unremedied defaults and generally administering the loans. Funds that
have been escrowed by borrowers for the payment of mortgage related expenses,
such as property taxes and hazard and mortgage insurance premiums, are
maintained in non-interest-bearing accounts at the Bank. At December 31, 1998,
the Bank had $5.0 million deposited in such escrow accounts.
CBS Mortgage receives fees for servicing mortgage loans, which generally
range from 0.250% to 0.375% per annum on the declining principal balance of
fixed rate mortgage loans and from 0.375% to 0.500% per annum on the declining
principal balance of adjustable rate mortgage loans. Such fees serve to
compensate CBS Mortgage for the costs of performing the servicing function.
Other sources of loan servicing revenues include late charges and other
ancillary fees. For the years ended 1998, 1997 and 1996, CBS Mortgage earned
$642,000, $1.4 million and $1.6 million, respectively, in conjunction with its
loan servicing. Servicing fees are collected out of the monthly mortgage
payments made by borrowers and are net of the amortization of mortgage servicing
rights.
CBS Mortgage's servicing portfolio is subject to reduction by normal
amortization, by prepayment or by foreclosure of outstanding loans. At December
31, 1998, 1997 and 1996, CBS Mortgage had an aggregate loan servicing portfolio
of $1.2 billion, $1.6 billion and $1.7 billion, respectively. Of these amounts
at such respective dates, CBS Mortgage serviced loans for the Bank's portfolio
aggregating $707.0 million, $890.3 million and $958.4 million and serviced loans
for others aggregating $519.2 million, $675.7 million and $776.7 million. At
December 31, 1998, 57.7% of the dollar value of loans being serviced by CBS
Mortgage was for the Bank's portfolio, 13.6% was being serviced for FHLMC, 27.0%
was being serviced for FNMA and 1.7% was being serviced for others.
No servicing rights were purchased by CBS Mortgage in 1998, 1997 or 1996.
As of December 31, 1998, an aggregate of $519.2 million of CBS Mortgage's $1.2
billion servicing portfolio, or 42.3%, was loans serviced for others. At
December 31, 1998, CBS Mortgage had no commitments for further purchases of
mortgage servicing rights.
The amount, if any, by which purchased mortgage servicing rights exceed the
lower of 90% of determinable fair market value, 90% of origination cost or
current amortized book value must be deducted from capital in calculating
regulatory capital. See "Regulation - Regulatory Capital Requirements." At
December 31, 1998, there were no deductions from the Bank's capital for
purchased mortgage servicing rights valuation adjustments.
The following table sets forth certain information regarding CBS Mortgage's
servicing portfolio of mortgage loans for the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
<S> <C> <C> <C> <C>
1998 1997 1996
----------- ----------- -----------
(In thousands)
Beginning servicing portfolio $ 1,566,004 $ 1,735,089 $ 1,725,400
----------- ----------- -----------
Bank loan originations 127,620 140,673 104,023
Bank whole loans acquired 93,170 126,864 185,176
----------- ----------- -----------
Total servicing originated
and acquired 220,790 267,537 289,199
----------- ----------- -----------
Loans sold servicing released 764 -- 47
Amortization and payoffs 554,603 430,373 273,219
Foreclosures 5,189 6,249 6,244
----------- ----------- -----------
Total servicing reductions 560,556 436,622 279,510
----------- ---------- -----------
Ending servicing portfolio $ 1,226,238 $ 1,566,004 $ 1,735,089
=========== =========== ===========
</TABLE>
MORTGAGE-BACKED SECURITIES
The Bank maintains a significant portfolio of mortgage-backed securities as
a means of investing in housing-related mortgage instruments without the costs
associated with originating mortgage loans for portfolio retention. At December
31, 1998, the Company's mortgage-backed securities portfolio (including $96.6
million of mortgage-backed securities available-for-sale), net of unamortized
premiums and unearned discounts, amounted to $1.3 billion, or 41.9%, of total
assets. When investing in mortgage-backed securities, management seeks to
achieve a positive spread over the cost of funds used to purchase these
securities. At December 31, 1998, the Company's net mortgage-backed securities
had an aggregate market value of $1.2 billion.
<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,
<S> <C> <C> <C> <C> <C> <C>
1998 1997 1996
----------------------- ---------------------- -----------------------
Amount Percent Amount Percent Amount Percent
------------ -------- ---------- -------- ---------- ---------
(Dollars in thousands)
Held-to-maturity:
REMICS $ 1,059,924 91.82% $ 1,232,219 91.59% $ 1,213,849 90.25%
FNMA certificates 61,590 5.34 69,906 5.20 77,324 5.75
GNMA certificates 21,235 1.84 28,701 2.13 33,900 2.52
Non-agency certificates 11,530 1.00 14,586 1.08 19,826 1.48
Interest-only securities 1 -- 20 -- 38 --
------------ -------- ------------ -------- ------------ --------
1,154,280 100.00% 1,345,432 100.00% 1,344,937 100.00%
======== ======== ========
Unamortized premium 2,100 2,831 3,153
Unearned discount (2,264) (3,173) (3,503)
----------- ------------ ------------
Total held-to-maturity $ 1,154,116 $ 1,345,090 $ 1,344,587
============ ============ ============
Available-for-sale:
REMICS $ 98,892 $ 173,717 $ 185,651
Unamortized premium 8 25 33
Unearned discount (168) (247) (255)
Net unrealized loss (2,123) (3,498) (4,773)
----------- ------------ ------------
Total available-for-sale $ 96,609 $ 169,997 $ 180,656
============ ============ ============
Total mortgage-backed
securities $ 1,250,725 $ 1,515,087 $ 1,525,243
============ ============ ============
</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 IO
securities held at December 31, 1998 were purchased in 1990 and have a net book
value of only $1,000. The Company has not purchased IO securities since 1990.
The FNMA, FHLMC and GNMA certificates are modified pass-through mortgage-backed
securities, which represent undivided interests in underlying pools of
fixed-rate, or certain types of adjustable rate, single family residential
mortgages issued by these quasi-governmental (GNMA) and private (FNMA and FHLMC)
corporations. FNMA and GNMA provide to the certificate holder a guarantee
(which is backed by the full faith and credit of the U.S. government in the case
of GNMA certificates) of timely payments of interest and scheduled principal
payments, whether or not they have been collected. FHLMC guarantees the timely
payment of interest and the full (though not necessarily timely) payment of
principal. The guarantees of FNMA and FHLMC are not backed by the full faith
and credit of the U.S. government. The mortgage-backed securities acquired by
the Bank that have been pooled and sold by private issuers, generally large
investment banking firms, provide for the timely payments of principal and
interest either through insurance issued by a reputable insurer or the right to
receive certain payments thereunder is subordinated in a manner which is
sufficient to have such mortgage-backed securities generally earn a credit
rating of "A" or better from one or more of the national securities rating
agencies.
A CMO is a special type of pay-through debt obligation in which the stream
of principal and interest payments on the underlying mortgages or
mortgage-backed securities is used to create classes with different maturities
and, in some cases, amortization schedules and a residual class of the CMO
security being sold, with each such class possessing different risk
characteristics. The residual interest sold represents any residual cash flows
which result from the excess of the monthly receipts generated by principal and
interest payments on the underlying mortgage collateral and any reinvestment
earnings thereon, less the cash payments to the CMO holders and any
administrative expenses. As a matter of policy, due to the risk associated with
residual interests, the Bank has never invested in, and does not intend to
invest in, residual interests in CMOs.
Mortgage-backed securities generally yield less than the loans which
underlie such securities because of their payment guarantees or credit
enhancements which reduce credit risk. In addition, mortgage-backed securities
are more liquid than individual mortgage loans and may be used to collateralize
obligations of the Bank. Mortgage-backed securities issued or guaranteed by
FNMA or FHLMC (except IO securities or the residual interests in CMOs) are
weighted at no more than 20% for risk-based capital purposes, compared to a
weight of 50% to 100% for residential loans. See "Regulation - Regulatory
Capital Requirements."
The FDIC has issued a statement of policy which states, among other things,
that mortgage derivative products (including CMOs and CMO residuals and stripped
mortgage-backed securities such as IOs) which possess average life or price
volatility in excess of a benchmark fixed rate 30 year mortgage-backed
pass-through security are "high-risk mortgage securities," are not suitable
investments for depository institutions, and if considered "high risk" at
purchase must be carried in the institution's trading account or as assets held
for sale, and must be marked to market on a regular basis. In addition, if a
security was not considered "high risk" at purchase but was later found to be
"high risk" based on the tests, the security may remain in the held-to-maturity
portfolio as long as the institution has the positive intent to hold the
security to maturity and has a documented plan in place to manage the higher
risk. At December 31, 1998, the Bank had mortgage-backed securities considered
"high risk" with a recorded booked value of approximately $9.9 million. These
securities were not considered "high risk" at purchase, but were later found to
be "high risk" based on the results of the required tests. The Bank has the
positive intent to hold these securities to maturity and has documented the
Bank's plan to manage the higher risk of these securities. If the Bank should
elect to consider a new type of security for its portfolio, the Bank intends to
ascertain in advance that the security does not fail any of the tests that will
qualify it as a "high risk mortgage security." The Bank will not purchase any
security that fails such tests unless it has in place a documented plan to
manage the higher risk of that security and has approval from the Board of
Directors.
<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,
<S> <C> <C> <C> <C>
1998 1997 1996
---------- --------- ---------
(In thousands)
Mortgage-backed securities
held-to-maturity purchased $ 8,203 $ 56,136 $ --
Mortgage-backed securities
available-for-sale sold (48,550) (11,308) (864)
Amortization of premiums,
net of discount accretion (132) (83) (552)
Change in unrealized loss on
mortgage-backed securities
available-for-sale 1,375 1,275 (4,013)
Principal repayments on
mortgage-backed securities (225,258) (56,176) (51,495)
---------- --------- ---------
Net decrease in
mortgage-backed securities $(264,362) $(10,156) $(56,924)
========== ========= =========
</TABLE>
The Company classifies securities as either held-to-maturity or
available-for-sale. Securities are classified as held-to-maturity when the
Company has the positive intent and ability to hold such securities to maturity.
Securities held-to-maturity are recorded at amortized cost. Permanent declines
in the value of held-to-maturity securities are charged to earnings in the
periods in which the declines are determined. Securities available-for-sale are
securities other than those held-to-maturity or for trading purposes and are
recorded at fair value, with unrealized gains and losses excluded from earnings
and recorded net of tax as other comprehensive income (loss) in stockholders'
equity until realized. Realized gains and losses on securities are recorded in
earnings in the year of sale based on the specific identification of each
individual security sold. Premiums and discounts on mortgage-backed securities
are amortized or accreted as a yield adjustment over the life of the securities
using the interest method, with the amortization or accretion being adjusted
when the prepayments are received.
INVESTMENT ACTIVITIES
Under the Texas Savings Bank Act (the "Act"), the Bank is permitted to
invest in obligations of, or guaranteed as to principal and interest by, the
United States or the State of Texas, in the stock or in any obligations or
consolidated obligations of the FHLB, and in various other specified
instruments. The Bank holds investment securities from time to time to help
meet its liquidity requirements and as temporary investments until funds can be
utilized to purchase mortgage-backed securities, residential mortgage loans or
to originate other loans for the Bank's portfolio. See Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of
Operations-Liquidity and Capital Resources."
SOURCES OF FUNDS
GENERAL. Advances from the FHLB, deposits, sales of securities under
agreements to repurchase and maturities and principal repayments on loans and
mortgage-backed securities have been the major sources of funds for use in the
Bank's lending and investments, and for other general business purposes.
Management of the Bank closely monitors rates and terms of competing sources of
funds on at least a weekly basis and utilizes the source which is the more cost
effective.
DEPOSITS. The Bank attracts a majority of its deposits through its 49
branch offices in metropolitan Houston, Austin, Corpus Christi, the Rio Grande
Valley and small cities in the southeast quadrant of Texas. The Bank also
obtains deposits through acquisitions. In 1998, the Bank assumed approximately
$355.4 million in deposits in an acquisition of twelve commercial bank branches.
The Bank offers a variety of traditional deposit products which currently
includes interest-bearing checking, noninterest-bearing checking, savings, money
market demand accounts and certificates of deposit which generally range in
terms from three to 60 months. Included among these deposit products are
individual retirement account certificates. Beginning in 1995 with the
acquisition of Texas Capital, the Bank's management has pursued its commercial
banking strategy related to deposits designed to increase the level of lower
cost transaction and commercial deposit accounts. During 1996 and early in
1997, the Bank began to offer a range of products for commercial businesses
including Small Business Checking, Business Interest Checking, Analysis Checking
and Commercial Money Market Accounts. The acquisitions and marketing efforts
have resulted in the outstanding balances of demand deposit accounts increasing
to 32.1% of total deposits at December 31, 1998 from 26.4% at December 31, 1997.
<PAGE>
The following table shows the distribution of and certain other information
relating to the Company's deposits by type at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
-----------------
<S> <C> <C> <C> <C> <C> <C>
1998(1) 1997(2) 1996(3)
Percent Percent Percent
of of of
Amount Deposits Amount Deposits Amount Deposits
------------ --------- ----------- --------- ----------- ---------
(Dollars in Thousands)
Demand deposit accounts:
Noninterest-bearing checking(4) $ 95,398 5.60% $ 101,782 7.40% $ 85,259 6.50%
Interest-bearing checking(4) 63,067 3.70 69,972 5.09 56,862 4.34
Savings 48,571 2.85 25,555 1.86 22,135 1.69
Money market demand(4) 339,481 19.91 165,986 12.07 151,046 11.52
------------ --------- ----------- --------- ----------- ---------
Total demand deposit accounts 546,517 32.06 363,295 26.42 315,302 24.05
------------ --------- ----------- --------- ----------- ---------
Certificate accounts:
Within 1 year 965,443 56.64 781,455 56.83 772,690 58.94
1-2 years 148,049 8.69 186,734 13.58 158,583 12.10
2-3 years 22,347 1.31 30,028 2.18 40,961 3.12
3-4 years 11,833 0.69 7,292 0.53 18,268 1.39
4-5 years 10,176 0.60 6,153 0.45 5,064 0.39
Over 5 years 240 0.01 178 0.01 165 0.01
------------ --------- ----------- --------- ----------- ---------
Total certificate accounts 1,158,088 67.94 1,011,840 73.58 995,731 75.95
------------ --------- ----------- --------- ----------- --------
1,704,605 100.00% 1,375,135 100.00% 1,311,033 100.00%
========== ========= =========
Premium (discount) on purchased
savings deposits, net 399 (75) (198)
------------ ----------- -----------
Total $ 1,705,004 $1,375,060 $1,310,835
============ =========== ===========
</TABLE>
________________________
(1)In 1998, the Bank assumed approximately $355.4 in deposits in connection with
the acquisition of twelve branches of another financial institution.
(2)In 1997, the Bank assumed approximately $54.6 million in deposits in
connection with the acquisition of one branch office of another financial
institution.
(3)In 1996, the Bank assumed approximately $11.1 million in net deposits in
connection with the exchange of three branch offices for one and the sale of
another branch office.
(4)Effective January 1, 1998, the Bank implemented a software program which
performs calculations and reclassifies a portion of the balances in
noninterest-bearing and interest-bearing checking accounts to money market
demand accounts pursuant to deposit types under Federal Reserve Regulation D.
The amount of such reclassification was approximately $126.0 million ($55.8
million from noninterest-bearing checking and $70.2 million from
interest-bearing checking) at December 31, 1998.
<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,
<S> <C> <C> <C> <C> <C> <C>
1998 1997 1996
----------------------- ----------------------- ----------------------
(Dollars in Thousands)
Average Average Average Average Average Average
Balance Rate Paid Balance Rate Paid Balance Rate Paid
----------- ---------- ----------- ---------- ----------- ----------
Demand deposit accounts:
Noninterest-bearing checking $ 51,612 --% $ 91,293 --% $ 85,469 --%
Interest-bearing checking 20,628 2.18 61,392 1.78 49,181 2.07
Savings 35,162 2.20 23,912 2.29 22,104 2.32
Money market demand(1) 315,141 2.37 158,993 3.63 157,933 3.64
Certificate accounts 1,063,277 5.40 1,008,845 5.50 970,433 5.42
----------- ---------- ----------- ---------- ----------- ----------
Total deposits $ 1,485,820 4.45% $ 1,344,435 4.68% $ 1,285,120 4.66%
=========== ========== =========== ========== =========== ==========
</TABLE>
________________________
(1)Includes amounts reclassified from noninterest-bearing and interest-bearing
checking accounts pursuant to the Bank's program under Federal Reserve
Regulation D as follows:
Noninterest-bearing checking $ 63,130
Interest-bearing checking 67,778
----------
$130,908
==========
The following table presents by various interest rate categories the
amounts of certificate accounts at the dates indicated and the amounts of
certificate accounts at December 31, 1998, which mature during the periods
indicated.
<TABLE>
<CAPTION>
Amounts at December 31, 1998 Maturing
(In thousands)
One Year Greater than
Amounts at December 31, or Less Two Years Three Years Three Years
----------------------- ---------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
1998 1997
---------- ------------
Certificate accounts:
2.00% to 3.99% $ 45,152 $ 7,905 $ 43,174 $ 1,674 $ 28 $ 276
4.00% to 5.99% 1,019,910 899,205 860,538 118,799 20,636 19,937
6.00 to 7.99% 92,004 102,029 60,916 27,567 1,584 1,937
8.00 to 9.99% 1,004 2,701 806 -- 99 99
over 10.00% 18 -- 9 9 -- --
---------- ------------ -------- -------- ------- -------
Total $1,158,088 $ 1,011,840 $965,443 $148,049 $22,347 $22,249
========== ============ ======== ======== ======= =======
</TABLE>
Certificates maturing within one year consist primarily of six month and
one year certificates. Historically, a majority of such certificate holders roll
over their balances into new certificates with similar terms at the Bank's then
current interest rates. The Bank believes that it can continue to achieve
balance levels of deposits deemed appropriate by management on a continuing
basis through competitive pricing.
The following table sets forth the net deposit flows of the Bank during the
periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
<S> <C> <C> <C>
1998 1997 1996
----------- -------- ---------
(In thousands)
Net increase (decrease) before interest credited(1) $ 264,148 $ 2,383 $(34,707)
Interest credited 65,796 61,842 58,458
----------- -------- ---------
Net deposit increase $ 329,944 $ 64,225 $ 23,751
=========== ======== =========
</TABLE>
________________________
(1)For the years ended December 31, 1998, 1997 and 1996, reflects the effect of
the assumption of $355.4 million, $54.6 million and $11.1 million of net deposit
liabilities acquired in connection with branch office transactions in each
respective year. The net deposit outflow in each year (net of acquired
deposits) was primarily due to financial disintermediation as described below.
The following table sets forth the amount of the Bank's certificates of
deposits which are $100,000 or more by time remaining until maturity at December
31, 1998.
<TABLE>
<CAPTION>
At December 31, 1998
<S> <C> <C> <C>
Number of accounts Deposit Amount
------------------ ---------------
(Dollars in thousands)
Three months or less 784 $ 58,172
Over three through six months 440 49,140
Over six through twelve months 578 63,534
Over twelve months 261 28,153
---------------- ---------------
Total 2,063 $ 198,999
================ ===============
</TABLE>
The Bank's deposits are obtained primarily from residents of Houston,
Austin, Corpus Christi, the Rio Grande Valley and small cities in the southeast
quadrant of Texas. Currently, the principal methods used by the Bank to attract
and retain deposit accounts include competitive interest rates, having branch
locations in under-served markets and offering a variety of services for the
Bank's customers. The Bank uses traditional marketing methods to attract new
customers and savings deposits, including newspaper advertising. Through 1998,
except as noted below, the Bank has not solicited brokered deposit accounts and
generally has not negotiated rates on larger denomination (i.e., jumbo)
certificates of deposit. In early 1997, the Bank began the solicitation of
deposit accounts through a "money desk." Money desk rates are only offered to
institutions (primarily credit unions and municipal utility districts) and are
generally up to 50 basis points higher than on regular certificate of deposit
accounts.
<PAGE>
Management of the Bank intensified its deposit product marketing beginning
in 1993 in order to increase its share of core deposits in the markets in which
it operates. Management believes that the combination of the new packaged
deposit products (which generally have higher minimum balance requirements and
which provide value-added incentives to the customer, such as free traveler's
checks, reduced or waived monthly service charges and free money orders) plus
increased advertising, sales training, branch promotion and cross-selling of
products will help maintain the volume of the Bank's deposits and strengthen
customer relationships without requiring the Bank to alter its deposit pricing
strategy. The Bank's management also believes that such efforts will assist the
Bank in maintaining deposits, particularly during periods of relatively low
deposit rates, which might otherwise flow out of the institution due to
disintermediation (the movement of funds away from savings institutions and into
direct investment vehicles such as government and corporate securities and
mutual funds). Notwithstanding this plan, the ability of the Bank to attract
and maintain deposits and the Bank's cost of funds have been, and will continue
to be, significantly affected by general market rates of interest.
The Bank also provides its customers with the opportunity to invest in
noninsured mutual funds, including government bond funds, tax-free municipal
bond funds, growth funds, income growth funds, and sector funds specific to an
industry, which are provided through a third party arrangement with another
company, which maintains representatives at the Bank's branch offices. The Bank
earns a fee after the payment of all expenses, which was not material to the
Bank's results of operations for the years ended December 31, 1998, 1997 or
1996. See "Subsidiaries of the Bank - CoastalBanc Financial Corp".
<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,
<S> <C> <C> <C>
1998 1997 1996
----------- ----------- -----------
(Dollars in thousands)
FHLB advances:
Average balance outstanding $ 713,197 $ 368,896 $ 387,296
Maximum amount outstanding
at any month-end during the
period 969,036 540,475 491,930
Balance outstanding at end of
period 966,720 540,475 409,720
Average interest rate during the
period 5.55% 5.78% 5.62%
Average interest rate at end of
period 5.24% 5.95% 5.61%
Securities sold under agreements
to repurchase:
Average balance outstanding $ 579,561 $ 974,136 $ 930,706
Maximum amount outstanding
at any month-end during the
period 874,784 1,035,576 1,022,085
Balance outstanding at end of
period 100,000 791,760 966,987
Average interest rate during the
period 5.49% 5.66% 5.52%
Average interest rate at end of
period 4.93% 6.00% 5.55%
</TABLE>
Federal funds purchased averaged approximately $149,000 and $161,000 during
the years ended December 31, 1998 and 1997, respectively with an average
interest rate during the periods of 5.33% and 5.59%, respectively. There were
no federal funds purchased outstanding at any month-end during 1998 or 1997 and
there were no federal funds purchased outstanding during the year ended December
31, 1996.
The Bank obtains long term, fixed rate and short term, variable rate
advances from the FHLB upon the security of certain of its residential first
mortgage loans and mortgage-backed securities, provided certain standards
related to creditworthiness of the Bank have been met. FHLB advances are
generally available for general business purposes to expand lending and
investing activities. Borrowings have generally been used to fund the purchase
of loans receivable and mortgage-backed securities.
Advances from the FHLB are made pursuant to several different credit
programs, each of which has its own interest rate and range of maturities. The
programs of the FHLB currently utilized by the Bank include a $50.0 million
variable rate line of credit, various short-term, fixed rate advances and long
term, fixed and variable-rate advances. At December 31, 1998, the Bank had
total FHLB advances of $966.7 million at a weighted average interest rate of
5.24%. Of the advances outstanding at December 31, 1998, $389.2 million were
short-term advances with an original maturity of less than 60 days.
The Bank also obtains funds from the sales of securities to investment
dealers under agreements to repurchase ("reverse repurchase agreements"). In a
reverse repurchase agreement transaction, the Bank will generally sell a
mortgage-backed security agreeing to repurchase the same security on a specified
later date at an agreed upon price. The mortgage-backed securities underlying
the agreements are delivered to the dealers who arrange the transactions. The
dealers may loan the Bank's securities in the normal course of their operations;
however, such dealers or third party custodians safe-keep the securities which
are to be specifically repurchased by the Bank. Reverse repurchase agreements
represent a competitive cost funding source for the Bank; however, the Bank is
subject to the risk that the lender may default at maturity and not return the
collateral. In order to minimize this potential risk, the Bank only deals with
large, established investment brokerage firms when entering into these
transactions. At December 31, 1998, the Bank had $100.0 million in borrowings
under reverse repurchase agreements at a weighted average interest rate of
4.93%. At December 31, 1998, the Bank had amounts of securities at risk under
securities sold under agreements to repurchase with one individual counterparty.
The amount at risk with Salomon Smith Barney Inc. was $16.0 million with a
maturity of 3,295 days at December 31, 1998.
To a lesser extent, beginning in 1997, the Bank has utilized federal funds
purchased from a correspondent bank for overnight borrowing purposes.
The Asset/Liability Subcommittee of the Bank attempts to match the maturity
of reverse repurchase agreements with particular repricing dates of certain
assets in order to maintain a pre-determined interest rate spread. The Bank's
objective is to minimize the increase or decrease in the interest rate spread
during periods of fluctuating interest rates from that which was contemplated at
the time the assets and liabilities were first put on the Bank's books. The
Bank attempts to alter the interest rate risk associated with the reverse
repurchase agreements through the use of interest rate swaps and interest rate
caps purchased from certain large securities dealers. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations - Asset
and Liability Management" in Item 7 hereof.
SUBSIDIARIES OF THE BANK
GENERAL. The Bank is permitted to invest in the capital stock, obligations
and other securities of its service corporations in an aggregate amount not to
exceed 10% of the Bank's assets. In addition, the Bank may make conforming
loans in an amount not exceeding 50% of the Bank's regulatory capital to service
corporations of which the Bank owns more than 10% of the stock. At December 31,
1998, the Bank was authorized to have a maximum investment of approximately
$298.0 million in its subsidiaries.
At December 31, 1998, the Bank had one active wholly-owned subsidiary, the
activity of which is described below. At December 31, 1998, the Bank's
aggregate equity investment in its subsidiary was $131,000 and the Bank had a
receivable from such subsidiary totaling $26,000.
On December 30, 1998, CBS Mortgage Corp., a former subsidiary of the Bank,
was dissolved and merged into the Bank. The former CBS Mortgage Corp. is now
operated as CBS Mortgage, a division of the Bank.
COASTALBANC FINANCIAL CORP. CoastalBanc Financial Corp. ("Financial
Corp.") was formed in 1986 to act as an investment advisor to other insured
financial institutions. The Bank is the sole stockholder of Financial Corp.
Over the past four years, Financial Corp. has been inactive in its investment
advisory capacity. Financial Corp. became active during the last quarter of
1992 in connection with the sale of mutual funds through third party
intermediaries. Fees generated net of expenses, resulted in a net income of
$49,000, $35,000 and $40,000 for the years ended December 31, 1998, 1997 and
1996, respectively.
AFFILIATE OF THE BANK
COASTAL BANC CAPITAL CORP. CBCC is a direct subsidiary of HoCo and an
affiliate of the Bank. CBCC is engaged in the business of purchasing and
reselling packages of whole loan assets on behalf of the Bank and institutional
investors. The loan packages acquired by CBCC are offered to the Bank on the
same terms and at the same time that they are offered to other prospective
purchasers. During 1998, CBCC purchased whole loan assets totaling $316.3
million, $290.0 million of which were sold to the Bank and $26.3 million of
which were sold to third party investors. During the year ended December 31,
1998, CBCC recorded gains on the sale of loans to the Bank of $841,000 and gains
on the sale of loans to third party investors of $164,000. The $841,000 gain on
the sale of loans to the Bank was recorded on the Bank's financial statements as
a premium on purchased loans and is being amortized over the life of those
loans. All intercompany balances and transactions have been eliminated in
consolidation. At December 31, 1998, HoCo's unconsolidated equity investment in
CBCC was $351,000. CBCC had net income (before eliminations) of $275,000 for
the year ended December 31, 1998 and a net loss of $24,000 for the period ended
December 31, 1997.
Commissions received by CBCC from the Bank are calculated at a market rate
and are not greater than those paid to non-affiliates in similar transactions.
The Bank and CBCC have entered into a mortgage warehouse revolving loan
agreement pursuant to which the Bank has established a $17.0 million revolving
line of credit to be drawn upon from time to time by CBCC to finance the
acquisition of whole loan assets and the holding of such assets until they are
sold. The advances drawn by CBCC are collateralized by such assets purchased
and held by CBCC. There were no amounts outstanding on this line of credit at
December 31, 1998. All transactions between the Bank and CBCC are within
regulatory guidelines.
REGULATION
Set forth below is a brief description of certain laws and regulations
which relate to the regulation of the Company and the Bank. The description
does not purport to be complete and is qualified in its entirety by reference to
applicable laws and regulations.
THE COMPANY
REGULATIONS. The Company and HoCo are registered unitary savings and loan
holding companies and are subject to OTS and Department regulation, examination,
supervision and reporting requirements. In addition, because the capital stock
of the Company is registered under Section 12(g) of the Securities Exchange Act
of 1934, the Company is also subject to various reporting and other requirements
of the SEC. As a subsidiary of a savings and loan holding company, the Bank is
also subject to certain Federal and state restrictions in its dealings with the
Company and affiliates thereof.
FEDERAL ACTIVITIES RESTRICTIONS. There are generally no restrictions on
the activities of a savings and loan holding company which holds only one
subsidiary savings bank. However, if the Director of the OTS determines that
there is reasonable cause to believe that the continuation by a savings and loan
holding company of an activity constitutes a serious risk to the financial
safety, soundness or stability of its subsidiary savings institution (i.e., a
savings association or savings bank), the Director may impose such restrictions
as deemed necessary to address such risk, including limiting (i) payment of
dividends by the savings institution; (ii) transactions between the savings
institution and its affiliates; and (iii) any activities of the savings
institution that might create a serious risk that the liabilities of the holding
company and its affiliates may be imposed on the savings institution.
Notwithstanding the foregoing, if the savings institution subsidiary of such a
holding company fails to meet the Qualified Thrift Lender ("QTL") test, then
such unitary holding company also shall become subject to the activities
restrictions applicable to multiple savings and loan holding companies and,
unless the savings institution requalifies as a QTL within one year thereafter,
shall register as, and become subject to the restrictions applicable to, a bank
holding company. See "Regulation of The Bank - Qualified Thrift Lender Test."
If the Company were to acquire control of another savings institution,
other than through merger or other business combination with the Bank, the
Company would thereupon become a multiple savings and loan holding company.
Except where such acquisition is pursuant to the authority to approve emergency
thrift acquisitions and where each subsidiary savings institution meets the QTL
test, as set forth below, the activities of the Company and any of its
subsidiaries (other than the Bank or other subsidiary savings institutions)
would thereafter be subject to further restrictions. No multiple savings and
loan holding company or subsidiary thereof which is not a savings institution
shall commence or continue beyond a limited period of time after becoming a
multiple savings and loan holding company or subsidiary thereof any business
activity, other than: (i) furnishing or performing management services for a
subsidiary savings institution; (ii) conducting an insurance agency or escrow
business; (iii) holding, managing, or liquidating assets owned by or acquired
from a subsidiary savings institution; (iv) holding or managing properties used
or occupied by a subsidiary savings institution; (v) acting as trustee under
deeds of trust; (vi) those activities authorized by regulation as of March 5,
1987 to be engaged in by multiple savings and loan holding companies; or (vii)
unless the Director of the OTS by regulation prohibits or limits such activities
for savings and loan holding companies, those activities authorized by the
Federal Reserve Board as permissible for bank holding companies. The activities
described in (i) through (vi) above may be engaged in only after giving the OTS
prior notice and being informed that the OTS does not object to such activities.
In addition, the activities described in (vii) above also must be approved by
the Director of the OTS prior to being engaged in by a multiple savings and loan
holding company.
RESTRICTIONS ON ACQUISITIONS. Except under limited circumstances, savings
and loan holding companies are prohibited from acquiring, without prior approval
of the Director of the OTS, (i) control of any other savings institution or
savings and loan holding company or substantially all the assets thereof or (ii)
more than 5% of the voting shares of a savings institution or holding company
thereof which is not a subsidiary. Except with the prior approval of the
Director of the OTS, no director or officer of a savings and loan holding
company or person owning or controlling by proxy or otherwise more than 25% of
such company's stock, may acquire control of any savings institution, other than
a subsidiary savings institution, or of any other savings and loan holding
company.
The Director of the OTS may approve acquisitions resulting in the formation
of a multiple savings and loan holding company which controls savings
institutions in more than one state only if (i) the multiple savings and loan
holding company involved controls a savings institution which operated a home or
branch office located in the state of the association to be acquired as of March
5, 1987; (ii) the acquiror is authorized to acquire control of the savings
institution pursuant to the emergency acquisition provisions of the Federal
Deposit Insurance Act ("FDIA"), or (iii) the statutes of the state in which the
institution to be acquired is located specifically permit institutions to be
acquired by the state-chartered institutions or savings and loan holding
companies located in the state where the acquiring entity is located (or by a
holding company that controls such state-chartered savings institutions).
TEXAS REGULATIONS. Under the Texas Savings Bank Act ("TSBA"), each
registered holding company, such as the Company, is required to file reports
with the Department as required by the Texas Savings and Loan Commissioner
("Commissioner") and is subject to such examination as the Commissioner may
prescribe.
REGULATION OF THE BANK
The Bank is required to file reports with the Department and the FDIC
concerning its activities and financial condition, in addition to obtaining
regulatory approvals prior to entering into certain transactions, such as any
merger or acquisition with another institution. The regulatory system to which
the Bank is subject is intended primarily for the protection of the deposit
insurance fund and depositors, not stockholders. The regulatory structure also
provides the Department and the FDIC with substantial discretion in connection
with their supervisory and enforcement functions. The Department and the FDIC
conduct periodic examinations of the Bank in order to assess its compliance with
federal and state regulatory requirements. As a result of such examinations,
the Department and the FDIC may require various corrective actions.
Virtually every aspect of the Bank's business is subject to numerous
federal and/or state regulatory requirements and restrictions with respect to
such matters as, for example, the nature and amounts of loans and investments
that may be made, the issuance of securities, the amount of reserves that must
be established against deposits, the establishment of branches, mergers,
non-banking activities and other operations. Numerous laws and regulations also
set forth special restrictions and procedural requirements with respect to the
extension of credit, credit practices, the disclosure of credit terms and
discrimination in credit transactions.
LIMITATIONS ON TRANSACTIONS WITH AFFILIATES. Transactions between savings
institutions and any affiliate are governed by Sections 23A and 23B of the
Federal Reserve Act. An affiliate of a savings institution is any company or
entity which controls, is controlled by or is under common control with the
savings institution. In a holding company context, the parent holding company
of a savings institution (such as the Company) and any companies which are
controlled by such parent holding company are affiliates of the savings
institution. Generally, Sections 23A and 23B (i) limit the extent to which the
savings institution or its subsidiaries may engage in "covered transactions"
with any one affiliate to an amount equal to 10% of such institution's capital
stock and surplus, and contain an aggregate limit on all such transactions with
all affiliates to an amount equal to 20% of such capital stock and surplus and
(ii) require that all such transactions be on terms substantially the same, or
at least as favorable to the institution or subsidiary, as those provided to a
non-affiliate. The term "covered transaction" includes the making of loans,
purchase of assets, issuance of a guarantee and similar transactions. In
addition to the restrictions imposed by Sections 23A and 23B, no savings
institution may (i) loan or otherwise extend credit to an affiliate, except for
any affiliate which engages only in activities which are permissible for bank
holding companies, or (ii) purchase or invest in any stocks, bonds, debentures,
notes or similar obligations of any affiliate, except for affiliates which are
subsidiaries of the savings institution.
In addition, Sections 22(h) and (g) of the Federal Reserve Act place
restrictions on loans to executive officers, directors and principal
stockholders. Under Section 22(h), loans to a director, an executive officer
and to a greater than 10% stockholder of a savings institution (a "principal
stockholder"), and certain affiliated interests of each of them, may not exceed,
together with all other outstanding loans to such person and affiliated
interests, the savings institution's loans to one borrower limit (generally
equal to 15% of the institution's unimpaired capital and surplus). Section 22(h)
also requires that loans to directors, executive officers and principal
stockholders be made on terms substantially the same as offered in comparable
transactions to other persons and also requires prior Board approval for certain
loans. In addition, the aggregate amount of extensions of credit by a savings
institution to all insiders cannot exceed the institution's unimpaired capital
and surplus. Furthermore, Section 22(g) places additional restrictions on loans
to executive officers. At December 31, 1998, the Bank was in compliance with
the above restrictions.
REGULATORY CAPITAL REQUIREMENTS. Federally-insured state-chartered banks
are required to maintain minimum levels of regulatory capital. These standards
generally must be as stringent as the comparable capital requirements imposed on
national banks. The FDIC also is authorized to impose capital requirements in
excess of these standards on individual banks on a case-by-case basis.
Under current FDIC regulations, the Bank is required to comply with three
separate minimum capital requirements: a "Tier 1 capital ratio" and two
"risk-based" capital requirements. "Tier 1 capital" generally includes common
stockholders' equity (including retained earnings), qualifying noncumulative
perpetual preferred stock and any related surplus, and minority interests in the
equity accounts of fully consolidated subsidiaries, minus intangible assets,
other than properly valued mortgage servicing assets, nonmortgage servicing
assets and purchased credit card relationships up to certain specified limits
and minus net deferred tax assets in excess of certain specified limits. At
December 31, 1998, the Bank did not have any net deferred tax assets in excess
of the specified limits.
TIER 1 CAPITAL RATIO. FDIC regulations establish a minimum 3.0% ratio of
Tier 1 capital to total assets for the most highly-rated state-chartered,
FDIC-supervised banks and for all other state-chartered, FDIC-supervised banks,
the minimum Tier 1 capital ratio shall not be less than 4.0%. Under FDIC
regulations, highly-rated banks are those that the FDIC determines are not
anticipating or experiencing significant growth and have well diversified risk,
including no undue interest rate risk exposure, excellent asset quality, high
liquidity and good earnings. At December 31, 1998, the required Tier 1 capital
ratio for the Bank was 4.0% and its actual Tier 1 capital ratio was 5.25%.
RISK-BASED CAPITAL REQUIREMENTS. The risk-based capital requirements
contained in FDIC regulations generally require the Bank to maintain a ratio of
Tier 1 capital to risk-weighted assets of at least 4.00% and a ratio of total
risk-based capital to risk-weighted assets of at least 8.00%. To calculate the
amount of capital required, assets are placed in one of four categories and
given a percentage weight (0%, 20%, 50% or 100%) based on the relative risk of
the category. For example, U.S. Treasury Bills and GNMA securities are placed
in the 0% risk category. FNMA and FHLMC securities are placed in the 20% risk
category, loans secured by one-to-four family residential properties and certain
privately-issued mortgage-backed securities are generally placed in the 50% risk
category and commercial and consumer loans and other assets are generally placed
in the 100% risk category. In addition, certain off-balance sheet items are
converted to balance sheet credit equivalent amounts and each amount is then
assigned to one of the four categories.
For purposes of the risk-based capital requirements, "total capital" means
Tier 1 capital plus supplementary or Tier 2 capital, so long as the amount of
supplementary or Tier 2 capital that is used to satisfy the requirement does not
exceed the amount of Tier 1 capital. Supplementary or Tier 2 capital includes,
among other things, so-called permanent capital instruments (cumulative or other
perpetual preferred stock, mandatory convertible subordinated debt and perpetual
subordinated debt), so-called maturing capital instruments (mandatorily
redeemable preferred stock, intermediate-term preferred stock, mandatory
convertible subordinated debt and subordinated debt), and a certain portion of
the allowance for loan losses up to a maximum of 1.25% of risk-weighted assets.
At December 31, 1998, the Bank's Tier 1 capital to risk-weighted assets
ratio was 9.54% and its total risk-based capital to risk weighted assets ratio
was 10.23%.
The following table sets forth information with respect to each of the
Bank's capital requirements at the dates shown.
<TABLE>
<CAPTION>
At December 31,
1998 1997 1996
------- ------- -------
Actual Required Actual Required Actual Required
------- --------- ------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Tier 1 capital to total assets 5.25% 4.00% 5.52% 4.00% 5.35% 4.00%
Tier 1 risk-based capital
to risk weighted assets 9.54 4.00 11.46 4.00 11.77 4.00
Total risk-based capital
risk to risk weighted assets 10.23 8.00 11.98 8.00 12.30 8.00
</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, 1998.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Tier 1 Total
Tier 1 Risk-based Risk-based
Capital Capital Capital
-------------- ------------ ------------
(Dollars in thousands)
Total stockholders' equity $ 187,919 $ 187,919 $ 187,919
Unrealized loss on securities
available-for-sale 1,374 1,374 1,374
Less nonallowable assets:
Goodwill (30,687) (30,687) (30,687)
Plus allowances for loan
and lease losses -- -- 11,358
----------- ------------ ------------
Total regulatory capital 158,606 158,606 169,964
Minimum required capital 120,935 66,467 132,935
----------- ------------ ------------
Excess regulatory capital $ 37,671 $ 92,139 $ 37,029
=========== ============ ============
Bank's regulatory capital
percentage (1) 5.25% 9.54% 10.23%
Minimum regulatory capital
required percentage 4.00% 4.00% 8.00%
- --------- ------------ ------------
Bank's regulatory capital
percentage in excess of
requirement 1.25% 5.54% 2.23%
=========== ============ ============
</TABLE>
________________________
(1)Tier 1 capital is computed as a percentage of total assets of $3.0 billion.
Risk-based capital is computed as a percentage of adjusted risk-weighted assets
of $1.7 billion.
The FDIA requires the Federal banking agencies to revise their risk-based
capital guidelines to, among other things, take adequate account of interest
rate risk. The Federal banking agencies continue to consider modification of
the capital requirements applicable to banking organizations. In August 1995,
the Federal banking agencies amended their risk-based capital guidelines to
provide that the banking agencies will include in their evaluations of a bank's
capital adequacy an assessment of the bank's exposure to declines in the
economic value of the bank's capital due to changes in interest rates. The
agencies also issued a proposed policy statement that describes the process that
the agencies will use to measure and assess the exposure of a bank's capital to
changes in interest rates. The agencies stated that after they and the banking
industry gain sufficient experience with the measurement process, the agencies
would issue proposed regulations for establishing explicit charges against
capital to account for interest rate risk.
The FDIA also requires the FDIC and the other Federal banking agencies to
revise their risk-based capital standards, with appropriate transition rules, to
ensure that they take into account concentration of credit risk and the risks of
non-traditional activities and to ensure that such standards reflect the "actual
performance and expected risk of loss of multifamily mortgages," of which the
Bank had $119.4 million at December 31, 1998. See "Business - Lending
Activities." In December 1995, the FDIC and the other Federal banking agencies
promulgated final amendments to their respective risk-based capital requirements
which would explicitly identify concentration of credit risk and certain risks
arising from nontraditional activities, and the management of such risks as
important factors to consider in assessing an institution's overall capital
adequacy. The FDIC may now require higher minimum capital ratios based on
certain circumstances, including where the institution has significant risks
from concentration of credit or certain risks arising from non-traditional
activities.
The Federal banking agencies have agreed to adopt for regulatory purposes
Statement of Financial Accounting Standards No. 115, which, among other things,
generally adds a new element to stockholders' equity under generally accepted
accounting principles by including net unrealized gains and losses on certain
securities. In December 1994, the FDIC issued final amendments to its
regulatory capital requirements which would require that the net amount of
unrealized losses from available-for-sale equity securities with readily
determinable fair values be deducted for purposes of calculating the Tier 1
capital ratio. All other net unrealized holding gains (losses) on
available-for-sale securities are excluded from the definition of Tier 1
capital. At December 31, 1998, the Bank had $98.6 million of securities
available-for-sale with $2.1 million of aggregate net unrealized losses thereon.
FDIC INSURANCE PREMIUMS. The deposits of the Bank are insured to the
maximum extent permitted by the SAIF and the Bank Insurance Fund (the "BIF"),
both of which are administered by the FDIC, and are backed by the full faith and
credit of the U.S. government. As the insurer, the FDIC is authorized to
conduct examinations of, and to require reporting by, FDIC-insured institutions.
It also may prohibit any FDIC-insured institution from engaging in any activity
the FDIC determines by regulation or order to pose a serious threat to the FDIC.
The FDIC also has the authority to initiate enforcement actions against savings
institutions.
The Bank currently pays deposit insurance premiums to the FDIC based on a
risk-based assessment system established by the FDIC for all SAIF-member
institutions. In addition, the Bank has acquired deposits of approximately
$291.6 million for which deposit insurance premiums are calculated at the BIF
premium rate. Under applicable regulations, institutions are assigned to one of
three capital groups based solely on the level of an institution's capital -
"well capitalized," "adequately capitalized" and "undercapitalized" - which are
defined in the same manner as the regulations establishing the prompt corrective
action system under Section 38 of the FDIA. These three groups are then divided
into three subgroups which reflect varying levels of supervisory concern, from
those which are considered to be healthy to those which are considered to be of
substantial supervisory concern. The matrix so created results in nine
assessment risk classifications, with rates, prior to the FDIA, as amended,
being signed into law, ranging from .23% for well capitalized, healthy
SAIF-member institutions to .31% for undercapitalized SAIF-member institutions
with substantial supervisory concerns. On November 14, 1995, the FDIC adopted a
new assessment rate schedule of zero to 27 basis points (subject to a $2,000
minimum) for BIF members (or institutions, like the Bank, having BIF deposits)
while retaining the existing assessment rate schedule for SAIF-member
institutions.
On September 30, 1996, amendments to the FDIA were signed into law. The
FDIA and implementing regulations provided that all SAIF-member institutions
would pay a special one time assessment of 65.7 basis points on the SAIF
assessment base as of March 31, 1995 to recapitalize the SAIF, which in the
aggregate, would be sufficient to bring the reserve ratio in the SAIF to 1.25%
of insured deposits. The Bank's special assessment amounted to $7.5 million
($4.8 million after applicable income taxes) pursuant to the FDIA. In addition
to the recapitalization provisions, the FDIA equalized the rate schedule for
SAIF and BIF institutions with the rates ranging from zero to 27 basis points
beginning October 1, 1996. At December 31, 1998, the Bank was categorized as
well capitalized.
The FDIA provided for Financing Corporation ("FICO") debt sharing by banks
and thrifts with proration sharing in the year 2000. Prior to the year 2000,
SAIF insured institutions will pay approximately 6.5 basis points for FICO,
while BIF insured institutions will pay approximately 1.3 basis points. The
FICO provisions of the FDIA also prohibit deposit migration strategies to avoid
SAIF premiums. Starting in the year 2000, BIF and SAIF institutions will begin
sharing the FICO burden on a pro rata basis until termination of the FICO
obligation in 2017.
Under Section 593 of the Internal Revenue Code, thrift institutions such as
the Bank, which meet certain definitional tests primarily relating to their
assets and the nature of their business, are permitted to establish a tax
reserve for bad debts and to make annual additions thereto, which additions may,
within specified limitations, be deducted in arriving at their taxable income.
The Bank's deduction with respect to "qualifying loans" which are generally
loans secured by certain interests in real property, prior to 1996, could be
computed using an amount based on the Bank's actual loss experience (the
"experience method") or a percentage of taxable income, computed without regard
to this deduction, and with additional modifications and reduced by the amount
of any permitted addition to the non-qualifying reserve. See "Taxation-Federal
Taxation."
After January 1, 1996, the Bank is unable to make additions to its tax bad
debt reserve, is permitted to deduct bad debts only as they occur and is
additionally required to recapture (i.e. take into taxable income) over a six
year period, beginning January 1, 1998, the excess of the balance of its bad
debt reserve as of December 31, 1995 over the balance of such reserve as of
December 31, 1987. At December 31, 1998, the Bank had approximately $3.1
million of post-1987 tax bad debt reserves, for which deferred taxes have been
provided.
SAFETY AND SOUNDNESS STANDARDS. Each Federal banking agency is required to
prescribe, for all insured depository institutions and their holding companies,
standards relating to internal controls, information systems and internal audit
systems, loan documentation, credit underwriting, interest rate exposure, asset
growth, compensation, fees and benefits and such other operational and
managerial standards as the agency deems appropriate. The compensation
standards would prohibit employment contracts or other compensatory arrangements
that provide excess compensation, fees or benefits or could lead to material
financial loss to the institution. In addition, each Federal banking agency
also is required to adopt for all insured depository institutions and their
holding companies standards that specify (i) a maximum ratio of classified
assets to capital, (ii) minimum earnings sufficient to absorb losses without
impairing capital, (iii) to the extent feasible, a minimum ratio of market value
to book value for publicly-traded shares of the institution or holding company,
and (iv) such other standards relating to asset quality, earnings and valuation
as the agency deems appropriate. On July 10, 1995, the Federal banking
agencies, including the FDIC, adopted final rules and proposed guidelines
concerning safety and soundness required to be prescribed by regulations
pursuant to Section 39 of the FDIA. In general, the standards relate to
operational and managerial matters, asset quality and earnings and compensation.
The operational and managerial standards cover internal controls and information
systems, internal audit systems, loan documentation, credit underwriting,
interest rate exposure, asset growth, and compensation, fees and benefits.
Under the asset quality and earnings standards, which were adopted by the
Federal banking agencies in October 1996, the Bank is required to establish and
maintain systems to identify problem assets and prevent deterioration in those
assets and evaluate and monitor earnings to ensure that earnings are sufficient
to maintain adequate capital reserves. If an insured institution fails to meet
any of the standards promulgated by the regulators, then such institution will
be required to submit a plan within 30 days to the FDIC specifying the steps
that it will take to correct the deficiency. In the event that an insured
institution fails to submit or fails in any material respect to implement a
compliance plan within the time allowed by the FDIC, Section 39 of the FDIA
provides that the FDIC must order the institution to correct the deficiency and
may restrict asset growth, require the savings institution to increase its ratio
of tangible equity to assets, restrict the rates of interest that the
institution may pay or take any other action that would better carry out the
purpose of prompt corrective action. The Bank believes that it has been and at
December 31, 1998 was in compliance with each of the standards as they have been
adopted by the FDIC.
Finally, each Federal banking agency is required to prescribe standards for
the employment contracts and other compensation arrangements of executive
officers, employees, directors and principal stockholders of insured depository
institutions that would prohibit compensation and benefits and arrangements that
are excessive or that could lead to a material financial loss for the
institution. In February 1996, the FDIC adopted final regulations regarding the
payment of severance and indemnification to management officials and other
affiliates of insured institutions (institution affiliated parties or "IAPs").
The limitations on severance or "golden parachute" payments apply to "troubled"
institutions which seek to enter into contracts with IAPs. A golden parachute
payment is generally considered to be any payment to an IAP which is contingent
on the termination of that person's employment and is received when the insured
institution is in a troubled condition. The definition of golden parachute
payment does not include payment pursuant to qualified retirement plans,
non-qualified bona fide deferred compensation plans, nondiscriminatory severance
pay plans, other types of common benefit plans, state statutes and death
benefits. Certain limited exceptions to the golden parachute payment
prohibition are provided for in cases involving the hiring of an outside
executive, unassisted changes of control and where the FDIC provides written
permission to make such payment. The limitations on indemnification payments
apply to all insured institutions, their subsidiaries and affiliated holding
companies. Generally, this provision prohibits such entities from indemnifying
an IAP for that portion of the costs sustained with regard to a civil or
administrative enforcement action commenced by any Federal banking agency which
results in a final order or settlement pursuant to which the IAP is assessed a
civil monetary penalty, removed from office, prohibited from participating in
the affairs of an insured institution or required to cease and desist from
taking certain affirmative actions. Nevertheless, institutions or holding
companies may purchase commercial insurance to cover such expenses (except for
judgments or penalties) and the institutions or holding company may advance
legal expenses to the IAP if its board of directors makes certain specific
findings and the IAP agrees in writing to reimburse the institution if it is
ultimately determined that the IAP violated a law, regulation or other fiduciary
duty.
ACTIVITIES AND INVESTMENTS OF INSURED STATE-CHARTERED BANKS. The activities
and equity investments of FDIC-insured, state-chartered banks are limited by
Federal law to those that are permissible for national banks. An insured state
bank generally may not acquire or retain any equity investment of a type, or in
an amount, that is not permissible for a national bank. An insured state bank
is not prohibited from, among other things, (i) acquiring or retaining a
majority interest in a subsidiary, (ii) investing as a limited partner in a
partnership the sole purpose of which is direct or indirect investment in the
acquisition, rehabilitation or new construction of a qualified housing project,
provided that such limited partnership investments may not exceed 2% of the
bank's assets, (iii) acquiring up to 10% of the voting stock of a company that
solely provides or reinsures directors' and officers' liability insurance, and
(iv) acquiring or retaining the voting shares of a depository institution if
certain requirements are met.
COMMUNITY REINVESTMENT ACT. Under the Community Reinvestment Act ("CRA"),
as implemented by FDIC regulations, a financial institution has a continuing and
affirmative obligation consistent with its safe and sound operation to help meet
the credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the CRA. The CRA
requires the FDIC, in connection with its examination of a financial
institution, to assess the institution's record of meeting the credit needs of
its community and to take such record into account in its evaluation of certain
applications by such institution. As of the date of its most recent regulatory
examination, the Bank was rated "satisfactory" with respect to its CRA
compliance.
In May 1995, the FDIC and other Federal banking agencies promulgated final
revisions to their regulations concerning the CRA. The revised regulations
generally are intended to provide clearer guidance to financial institutions on
the nature and extent of their obligations under the CRA and the methods by
which the obligations will be assessed and enforced. Among other things, the
revised regulations substitute for the current process-based assessment factors
a new evaluation system that rates institutions based on their actual
performance in meeting community credit needs. In particular, the revised
system evaluates the degree to which an institution is performing under tests
and standards judged in the context of information about the institution, its
community, its competitors and its peers with respect to (i) lending, (ii)
service delivery systems and (iii) community development. The revised
regulations also specify that an institution's CRA performance will be
considered in an institution's expansion (e.g., branching) proposals and may be
the basis for approving, denying or conditioning the approval of an application.
Management of the Bank is unable to predict the effects of the current CRA
regulations.
QUALIFIED THRIFT LENDER TEST. All savings institutions, including the
Bank, are required to meet a QTL test set forth under Section 10(m) of the Home
Owners Loan Act, as amended, ("HOLA") to avoid certain restrictions on their
operations. Under Section 2303 of the Economic Growth and Regulatory Paperwork
Reduction Act of 1996, a savings institution can comply with the QTL test set
forth in the HOLA and implementing regulations or by qualifying as a domestic
building and loan association as defined in Section 7701(a)(19) of the Code.
The QTL test set forth in HOLA requires that a depository institution must have
at least 65% of its portfolio assets (which consist of total assets less
intangibles, properties used to conduct the savings institution's business and
liquid assets not exceeding 20% of total assets) in qualified thrift investments
on a monthly average basis in nine of every 12 months. Loans and
mortgage-backed securities secured by domestic residential housing, as well as
certain obligations of the FDIC and certain other related entities may be
included in qualifying thrift investments without limit. Certain other
housing-related and non-residential real estate loans and investments, including
loans to develop churches, nursing homes, hospitals and schools, and consumer
loans and investments in subsidiaries engaged in housing-related activities may
also be included. Qualifying assets for the QTL test include investments related
to domestic residential real estate or manufactured housing, the book value of
property used by an institution or its subsidiaries for the conduct of its
business, an amount of residential mortgage loans that the institution or its
subsidiaries sold within 90 days of origination, shares of stock issued by any
FHLB and shares of stock issued by the FHLMC or the FNMA. The Bank was in
compliance with the QTL test as of December 31, 1998, with 80.4% of its assets
invested in qualified thrift investments.
RESTRICTIONS ON CAPITAL DISTRIBUTIONS. The Bank is required to provide to
the OTS not less than 30 days' advance notice of the proposed declaration by its
board of directors of any dividend on its capital stock. The OTS may object to
the payment of the dividend on safety and soundness grounds. The FDIA prohibits
an insured depository institution from paying dividends on its capital stock or
interest on its capital notes or debentures (if such interest is required to be
paid only out of net profits) or distribute any of its capital assets while it
remains in default in the payment of any assessment due the FDIC. Texas law
permits the Bank to pay dividends out of current or retained income in cash or
additional stock.
LEGISLATIVE AND REGULATORY PROPOSALS. Proposals to change the laws and
regulations governing the operations and taxation of, and federal insurance
premiums paid by, savings banks and other financial institutions and companies
that control such institutions are frequently raised in Congress, state
legislatures and before the FDIC and other bank regulatory authorities. The
likelihood of any major changes in the future and the impact such changes might
have on the Bank are impossible to determine. Similarly, proposals to change
the accounting treatment applicable to savings banks and other depository
institutions are frequently raised by the SEC, the FDIC, the IRS and other
appropriate authorities, including, among others, proposals relating to fair
market value accounting for certain classes of assets and liabilities. The
likelihood and impact of any additional future accounting rule changes and the
impact such changes might have on the Bank are impossible to determine.
FEDERAL HOME LOAN BANK SYSTEM. The Bank is a member of the FHLB of Dallas,
which is one of 12 regional FHLBs that administer the home financing credit
function of savings institutions and commercial banks. Each FHLB serves as a
source of liquidity for its members within its assigned region. It is funded
primarily from proceeds derived from the sale of consolidated obligations of the
FHLB System. It makes loans to members (i.e., advances) in accordance with
policies and procedures established by its Board of Directors. As of December
31, 1998, the Bank's advances from the FHLB of Dallas amounted to $966.7 million
or 32.4% of its total assets.
As a member, the Bank is required to purchase and maintain stock in the
FHLB of Dallas in an amount equal to the greater of 1% of its aggregate unpaid
residential mortgage loans, home purchase contracts or similar obligations at
the beginning of each year or 5% of total advances. At December 31, 1998, the
Bank had $49.8 million in FHLB stock, which was in compliance with this
requirement.
The FHLBs are required to provide funds for the resolution of troubled
savings associations and to contribute to affordable housing programs through
direct loans or interest subsidies on advances targeted for community investment
and low- and moderate-income housing projects. These contributions have
adversely affected the level of FHLB dividends paid and could continue to do so
in the future. These contributions also could have an adverse effect on the
value of FHLB stock in the future. For the year ended December 31, 1998,
dividends paid by the FHLB of Dallas to the Bank totaled $2.2 million.
FEDERAL RESERVE SYSTEM. The Federal Reserve Board requires all depository
institutions to maintain reserves against their transaction accounts (primarily
checking accounts) and non-personal time deposits. At December 31, 1998, the
Bank was in compliance with such requirements.
The balances maintained to meet the reserve requirements imposed by the
Federal Reserve Board may be used to satisfy applicable liquidity requirements.
Because required reserves must be maintained in the form of vault cash or a
noninterest-bearing account at a Federal Reserve Bank, the effect of this
reserve requirement is to reduce a bank's earning assets. The amount of funds
necessary to satisfy this requirement has not had a material affect on the
Bank's operations.
TEXAS SAVINGS BANK LAW. As a Texas chartered savings bank, the Bank is
subject to regulation and supervision by the Department under the TSBA. The
TSBA contains provisions governing the incorporation and organization, location
of offices, rights and responsibilities of directors and officers as well as the
corporate powers, savings, lending, capital and investment requirements and
other aspects of the Bank and its affairs. In addition, the Department is given
extensive rulemaking power and administrative discretion under the TSBA,
including authority to enact and enforce rules and regulations.
The Bank is required under the TSBA to comply with certain capital
requirements established by the Department. The TSBA also restricts the amount
the Bank can lend to one borrower to that permitted to national banks, which is
generally not more than 15% of the Bank's unimpaired capital and unimpaired
surplus and, if such loans are fully secured by readily marketable collateral,
an additional 10% of unimpaired capital and unimpaired surplus. The Department
generally examines the Bank once every year and the current practice is for the
Department to conduct a joint examination with the FDIC. The Department
monitors the extraordinary activities of the Bank by requiring that the Bank
seek the Department's approval for certain transactions such as the
establishment of additional offices, a reorganization, merger or purchase and
assumption transaction, changes of control, or the issuance of capital
obligations. The Department may intervene in the affairs of a savings bank if
the savings bank, or its director, officer or agent has: engaged in an unsafe
and unsound practice, violated the savings bank's articles of incorporation,
violated a statute or regulation, filed materially false or misleading
information, committed a criminal act or a breach of fiduciary duty, or if the
savings bank is, or is in imminent danger of becoming, insolvent.
TAXATION
FEDERAL TAXATION. The Company, the Bank and its subsidiaries file a
consolidated Federal income tax return on a calendar year basis using the
accrual method. Savings banks are subject to provisions of the Internal Revenue
Code ("Code") in the same general manner as other corporations. However, prior
to 1996, institutions such as the Bank which met certain definitional tests and
other conditions prescribed by the Code, benefited from certain favorable
provisions regarding their deductions from taxable income for annual additions
to their bad debt reserve. In years prior to 1996, the Bank was permitted under
the Code to deduct an annual addition to the reserve for bad debts in
determining taxable income based on the experience method or the percentage of
taxable income method. Due to 1996 legislation, the Bank no longer is able to
utilize a reserve method for determining the bad debt deduction, but is allowed
to deduct actual net charge-offs. Further, the Bank's post-1987 tax bad debt
reserve will be recaptured into income over a six year period. At December 31,
1998, the Bank had approximately $3.1 million of post-1987 tax bad debt
reserves, for which deferred taxes have been provided.
The Bank is not required to provide deferred taxes on its pre-1988 (base
year) tax bad debt reserve of approximately $900,000. This reserve may be
included in taxable income in future years if the Bank makes distributions to
stockholders (including distributions in redemption, dissolution or liquidation)
that are considered to result in withdrawals from that excess bad debt reserve,
then the amounts considered withdrawn will be included in the savings bank's
taxable income. The amount that would be deemed withdrawn from such reserves
upon such distribution and which would be subject to taxation at the savings
bank level at the normal corporate tax rate would be an amount that, after taxes
on such amount, would equal the amount actually distributed plus the amount
necessary to pay the tax with respect to the withdrawal. Dividends paid out of
a savings bank's current or accumulated earnings and profits as calculated for
Federal income tax purposes, however, will not be considered to result in
withdrawals from its bad debt reserves to the extent of such earnings and
profits, but shall be regarded as taken from such reserves only upon exhaustion
of the earnings and profits accounts; however, distributions in redemption of
stock, and distributions in partial or complete liquidation of a savings bank
will be considered to come first from its loss reserve. The Bank has not
conducted a study to determine with certainty the amount of its accumulated
earnings and profits for Federal income tax purposes.
In addition to regular income taxes, corporations are subject to an
alternative minimum tax which is generally equal to 20% of alternative minimum
taxable income (taxable income, increased by tax preference items and adjusted
for certain regular tax items). Payment of alternative minimum tax gives rise
to alternative minimum tax credit carryovers which may be carried forward
indefinitely. These credits may be used to offset future regular tax liability
to the extent the regular tax liability exceeds future alternative minimum tax.
In connection with the Southwest Plan Acquisition, the FSLIC Resolution
Fund ("FRF") retained all of the future federal income tax benefits (as defined)
derived from the federal income tax treatment of certain items, in addition to
net operating loss carryforwards, related to the Southwest Plan Acquisition for
which the Bank agreed to pay the FRF when actually realized. The provisions for
federal income taxes recorded for the years ended December 31, 1998, 1997 and
1996, represent the gross tax liability computed under these tax sharing
provisions before reduction for actual federal taxes paid to the Internal
Revenue Service. Alternative minimum taxes paid with the federal return in
1998, 1997 and 1996 will be available as credit carryforwards to reduce regular
federal tax liabilities in future years, over an indefinite period. To the
extent these credits were generated due to the utilization of other tax benefits
retained by the FRF, they will also be treated as tax benefit items. Although
the termination of the assistance agreement related to the Southwest Plan
Acquisition was effective March 31, 1994, the FRF will continue to receive the
related future net tax benefits as defined.
The Company's Federal income tax returns have not yet been audited by the
United States Internal Revenue Service. The tax returns of the Company since
1988 are subject to review by the Internal Revenue Service.
STATE TAXATION
The Company pays an annual franchise tax equal to the greater of $2.50 per
$1,000 of taxable capital apportioned to Texas, or $4.50 per $100 of net taxable
earned surplus apportioned to Texas. Taxable earned surplus is the Company's
Federal taxable income with certain modifications, such as the exclusion of
interest earned on Federal obligations.
ITEM 2. PROPERTIES
----------
The Company's business is conducted from 49 offices in Texas. The
following table sets forth the location of the offices of the Company, as well
as certain additional information relating to these offices as of December 31,
1998.
<TABLE>
<CAPTION>
Net Book
Value of
Property
Owned/Leased or Percent of
(with Lease Expiration Leasehold Total
Location Date) Improvements Deposits Deposits
- ----------------------------- ----------------------- ----------------------- --------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
BRANCH OFFICES:
- -----------------------------
1329 North Virginia Owned
Port Lavaca, Texas 77979 $ 152 $ 28,476 1.67%
- -----------------------------
8 Greenway Plaza, Suite 100 Leased;
Houston, Texas 77046 February 28, 1999 -- 17,946 1.05
- -----------------------------
8 Braeswood Square Leased;
Houston, Texas 77096 December 31, 2006 442 60,820 3.57
- -----------------------------
408 Walnut Owned
Columbus, Texas 78934 255 55,041 3.23
- -----------------------------
870 S. Mason, #100 Leased;
Katy, Texas 77450 August 31, 2003 30 25,109 1.47
- -----------------------------
602 Lyons Owned
Schulenburg, Texas 78956 89 30,793 1.81
- -----------------------------
325 Meyer Street Owned
Sealy, Texas 77474 557 41,206 2.42
- -----------------------------
116 E. Post Office Owned
Weimar, Texas 78962 36 26,476 1.55
- -----------------------------
323 Boling Road Owned
Wharton, Texas 77488 121 44,792 2.63
- -----------------------------
1621 Pine Drive Leased;
Dickinson, Texas 77539 September 30, 2000 -- 41,425 2.43
- -----------------------------
300 S. Cage Owned
Pharr, Texas 78577 184 16,811 0.99
- -----------------------------
295 West Highway 77 Owned
San Benito, Texas 78586 226 21,068 1.24
- -----------------------------
1260 Blalock, Suite 100 Leased;
Houston, Texas 77055 January 20, 2004 2 54,880 3.22
- -----------------------------
620 W. Main Owned
Tomball, Texas 77375 117 25,314 1.48
- -----------------------------
915-H North Shepherd Leased;
Houston, Texas 77008 October 31, 2001 135 31,745 1.86
- -----------------------------
6810 FM 1960 West Leased;
Houston, Texas 77069 September 30, 2000 -- 27,682 1.62
- -----------------------------
7602 N. Navarro Owned
Victoria, Texas 77904 200 77,327 4.54
- -----------------------------
2308 So. 77 Sunshine Strip Leased;
Harlingen, Texas 78550 May 31, 1999 -- 16,743 0.98
- -----------------------------
4900 N. 10th St., G-1 Leased;
McAllen, Texas 78504 August 14, 2001 117 15,016 0.88
- -----------------------------
10838 Leopard Street, Suite B Leased;
Corpus Christi, Texas 78410 December 31, 1999 1 41,107 2.41
(continued)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
(continued from previous page)
Net Book
Value of
Property
Owned/Leased or Percent of
(with Lease Expiration Leasehold Total
Location Date) Improvements Deposits Deposits
- ---------------------------------- ----------------------- ----------------------- --------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
4060 Weber Road Leased;
Corpus Christi, Texas 78411 April 30, 2004 $ 1 $ 58,793 3.45%
- -----------------------------
301 E. Main Street Owned
Brenham, Texas 77833 157 63,014 3.70
- -----------------------------
1192 W. Dallas Leased;
Conroe, Texas 77301 December 31, 2003 -- 48,027 2.82
- -----------------------------
2353 T own Center Dr. Owned
Sugar Land, Texas 77478 1,087 20,466 1.20
- -----------------------------
1629 S. Voss Owned
Houston, Texas 77057 1,451 22,820 1.34
- -----------------------------
531-A Highway 1431 Leased;
Kingsland, Texas 78639 December 31, 2003 -- 20,200 1.18
- -----------------------------
204 Westmoreland Owned
Mason, Texas 76856 50 17,431 1.02
- -----------------------------
904 Highway 281 North Owned
Marble Falls, Texas 78654 173 11,824 0.69
- -----------------------------
101 East Polk Owned
Burnet, Texas 78611 96 20,453 1.20
- -----------------------------
907 Ford Owned
Llano, Texas 78643 168 17,075 1.00
- -----------------------------
708 East Austin Owned
Giddings, Texas 78942 257 23,863 1.40
- -----------------------------
5718 Westheimer, Suite 100 Leased;
Houston, Texas 77057 July 31, 2012 112 54,387 3.19
- -----------------------------
8080 Parkwood Circle Drive Owned
Houston, Texas 77036 283 11,035 0.65
- -----------------------------
1250 Pin Oak Road Owned
Katy, Texas 77494 1,171 15,823 0.93
- -----------------------------
2120 Thompson Highway Owned
Richmond, Texas 77469 469 47,611 2.79
- -----------------------------
7200 North Mopac Leased;
Austin, Texas 78731 December 31, 2002 6 38,352 2.25
- -----------------------------
1112 Seventh Street Leased;
Bay City, Texas 77414 April 30, 2002 -- 69,347 4.07
- -----------------------------
441 Austin Avenue Owned
Port Arthur, Texas 77640 644 43,449 2.55
- -----------------------------
1114 Lost Creek Blvd., Suite 100 Leased;
Austin, Texas 78746 December 31, 2003 -- -- --
- -----------------------------
3302 Boca Chica Leased;
Brownsville, Texas 78521 December 14, 1999 14 9,606 0.56
- -----------------------------
744 S. East Elizabeth Leased;
Brownsville, Texas 78520 March 31, 2003 294 20,617 1.21
- -----------------------------
1603 Price Road Owned
Brownsville, Texas 78521 291 12,311 0.72
- -----------------------------
700 Padre Blvd., Suite A Leased;
South Padre Island, Texas 78597 May 31, 2000 5 5,894 0.35
- -----------------------------
2000 N. Conway Owned
Mission, Texas 78572 1,254 22,866 1.34
(continued)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
(continued from previous page)
Net Book
Value of
Property
Owned/Leased or Percent of
(with Lease Expiration Leasehold Total
Location Date) Improvements Deposits Deposits
- ------------------------------ ----------------------- ----------------------- ---------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
- ------------------------------
509 South Main Leased;
McAllen, Texas 78501 December 22, 2002 $ 1 $ 43,100 2.53%
- ------------------------------
198 South Sam Houston Owned
San Benito, Texas 78586 1,139 68,168 4.00
- ------------------------------
502 S. Dixieland Road Owned
Harlingen, Texas 78552 350 19,297 1.13
- ------------------------------
200 Sugar Road Owned
Edinburg, Texas 78539 166 8,083 0.47
- ------------------------------
300 S. Closner Owned
Edinburg, Texas 78539 887 42,607 2.50
- ------------------------------
221 East Van Buren Owned
Harlingen, Texas 78550 3,877 88,345 5.18
- ------------------------------
3207 Westpark Drive Under Construction
Houston, Texas 77027 1,887 -- --
- ------------------------------
1410 Ed Carey Under Construction
Harlingen, Texas 78554 810 -- --
- ------------------------------
ADMINISTRATIVE OFFICE(1)
- ------------------------------
Coastal Banc Plaza Leased;
5718 Westheimer, Suite 600 July 31, 2012 2,917 60,363 3.53
Houston, Texas 77057
- ------------------------------
RECORDS & RETENTION OFFICE:
- ------------------------------
227 Meyer St. Owned
Sealy, Texas 77474 62 -- -
------------- ---------- -----------
Total $ 22,743 $1,705,004 100.00%
============= ========== ===========
</TABLE>
______________________
(1)Includes location of administrative, primary lending and mortgage servicing
offices.
The net book value of the Company's investment in premises and equipment totaled
$33.1 million at December 31, 1998. At December 31, 1998, the net book value of
the Company's electronic data processing equipment, which includes its in-house
computer system, local area network and twenty-five automatic teller machines,
was $4.2 million.
ITEM 3. LEGAL PROCEEDINGS
------------------
The Company is involved from time to time in routine legal proceedings
occurring in the ordinary course of business which, in the aggregate, are
believed by management to be immaterial to the financial condition of the
Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
-----------------------------------------------------------
Not applicable.
PART II
- --------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
--------------------------------------------------------------
MATTERS
-
The information required herein is incorporated by reference from page 51
of the Company's printed Annual Report to Stockholders for fiscal 1998 ("Annual
Report"), which is included herein as Exhibit 13.
ITEM 6. SELECTED FINANCIAL DATA
-------------------------
The information required herein is incorporated by reference from pages 6
through 9 of the Annual Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS
-------------------
The information required herein is incorporated by reference on pages 9
through 21 of the Annual Report.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
-------------------------------------------------------------
The information required herein is incorporated by reference from pages 16
through 17 of the Annual Report. The Company's principal market risk exposure
is to interest rates.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-----------------------------------------------
The financial statements and supplementary data required herein are
incorporated by reference from pages 23 through 50 of the Annual Report.
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
---------------------------------------------------------------
FINANCIAL DISCLOSURE
-----------------
Not applicable.
PART III
- ---------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------------
The information required herein is incorporated by reference from the
definitive Proxy Statement filed with the Securities and Exchange Commission.
Otherwise, the requirements of this Item 10 are not applicable.
ITEM 11. EXECUTIVE COMPENSATION
-----------------------
The information required herein is incorporated by reference from the
definitive Proxy Statement filed with the Securities and Exchange Commission.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
The information required herein is incorporated by reference from the
definitive Proxy Statement filed with the Securities and Exchange Commission.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
--------------------------------------------------
The information required herein is incorporated by reference from the
definitive Proxy Statement filed with the Securities and Exchange Commission.
PART IV
- --------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
---------------------------------------------------------------
(a)(1) The following financial statements are incorporated herein by
reference from pages 23 through 50 of the Annual Report.
Report of Independent Certified Public Accountants.
Consolidated Statements of Financial Condition as of December 31, 1998
and 1997.
Consolidated Statements of Operations for each of the years in the
three-year period ended December 31, 1998.
Consolidated Statements of Comprehensive Income for each of the years
in the three-year period ended December 31, 1998.
Consolidated Statements of Stockholders' Equity for each of the years
in the three-year period ended December 31, 1998.
Consolidated Statements of Cash Flows for each of the years in the
three-year period ended December 31, 1998.
Notes to Consolidated Financial Statements.
(a)(2) There are no financial statement schedules filed herewith.
(a)(3) The following exhibits are filed as part of this report.
<TABLE>
<CAPTION>
Page in
Manually signed
report
Exhibit No.
<C> <S> <C>
<C> <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) The Company filed no reports on Form 8-K during the last quarter
of fiscal 1998.
(c) See (a)(3) above for all exhibits filed herewith and Exhibit Index.
(d) All schedules are omitted as the required information is not
applicable or the information is presented in the consolidated financial
statements or related notes.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
COASTAL BANCORP, INC.
Date: March 23, 1999 By: /s/ Manuel J. Mehos
-------------------
Manuel J. Mehos,
Chairman of the Board and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report is signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
/s/ Manuel J. Mehos Date: March 23, 1999
- ----------------------
Manuel J. Mehos, Chairman of the
Board and Chief Executive Officer
/s/ R. Edwin Allday Date: March 23, 1999
- ----------------------
R. Edwin Allday, Director
/s/ D. Fort Flowers, Jr. Date: March 23, 1999
- -------------------------
D. Fort Flowers, Jr., Director
/s/ Dennis S. Frank Date: March 23, 1999
- ----------------------
Dennis S. Frank, Director
/s/ Robert E. Johnson, Jr. Date: March 23, 1999
- -----------------------------
Robert E. Johnson, Jr., Director
<PAGE>
/s/ James C. Niver Date: March 23, 1999
- ---------------------
James C. Niver, Director
/s/ Paul W. Hobby Date: March 23, 1999
- --------------------
Paul W. Hobby, Director
/s/ Catherine N. Wylie Date: March 23, 1999
- -------------------------
Catherine N. Wylie, Chief Financial
Officer (principal financial and
accounting officer)
\\enterprise\data\acctexe\watkins\word\form-10k\edgared10k.txt
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated statement of financial condition, the consolidated statement of
operations and notes thereto found in exhibit 13 of the Company's Form 10-K for
the year ended December 31, 1998 and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 45,453
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 98,625
<INVESTMENTS-CARRYING> 1,154,116
<INVESTMENTS-MARKET> 1,145,369
<LOANS> 1,538,149
<ALLOWANCE> 11,358
<TOTAL-ASSETS> 2,982,161
<DEPOSITS> 1,705,004
<SHORT-TERM> 805,753
<LIABILITIES-OTHER> 47,673
<LONG-TERM> 310,967
0
0
<COMMON> 50
<OTHER-SE> 114,088
<TOTAL-LIABILITIES-AND-EQUITY> 2,982,161
<INTEREST-LOAN> 120,281
<INTEREST-INVEST> 87,596
<INTEREST-OTHER> 2,937
<INTEREST-TOTAL> 210,814
<INTEREST-DEPOSIT> 66,128
<INTEREST-EXPENSE> 143,404
<INTEREST-INCOME-NET> 67,410
<LOAN-LOSSES> 3,100
<SECURITIES-GAINS> 1
<EXPENSE-OTHER> 50,971
<INCOME-PRETAX> 20,211
<INCOME-PRE-EXTRAORDINARY> 16,668
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,668
<EPS-PRIMARY> 2.24
<EPS-DILUTED> 2.18
<YIELD-ACTUAL> 2.31
<LOANS-NON> 22,837
<LOANS-PAST> 1,704
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 7,412
<CHARGE-OFFS> 1,693
<RECOVERIES> 282
<ALLOWANCE-CLOSE> 11,358
<ALLOWANCE-DOMESTIC> 11,358
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
COASTAL BANCORP, INC.
AND SUBSIDIARIES
FINANCIAL HIGHLIGHTS
DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
December 31,
--------------
(dollars in thousands, except per share data) 1998 1997 1996
- ----------------------------------------------------- -------------- ----------- -----------
<S> <C> <C> <C>
<C> . . . . . . . . . . . . . . . . . . . . . . . . <C> <C>
FOR THE YEAR ENDED
Net interest income. . . . . . . . . . . . . . . . . $ 67,410 $ 56,933 $ 56,426
Provision for loan losses. . . . . . . . . . . . . . 3,100 1,800 1,925
Noninterest income . . . . . . . . . . . . . . . . . 6,872 6,384 6,091
SAIF insurance special assessment (1). . . . . . . . -- -- 7,455
Other noninterest expense. . . . . . . . . . . . . . 48,383 39,544 37,927
Reversal of accrued income taxes (3) . . . . . . . . 3,679 -- --
Net income available to common stockholders. . . . . 16,668 11,563 6,951
Diluted earnings per share before the 1996 SAIF
insurance special assessment (2) . . . . . . . . . 2.18 1.50 1.56
Diluted earnings per share . . . . . . . . . . . . . 2.18 1.50 0.92
- ----------------------------------------------------- -------------- ----------- -----------
AT YEAR END
Total assets . . . . . . . . . . . . . . . . . . . . $ 2,982,161 $2,911,410 $2,875,907
Loans receivable . . . . . . . . . . . . . . . . . . 1,538,149 1,261,435 1,229,748
Mortgage-backed securities held-to-maturity. . . . . 1,154,116 1,345,090 1,344,587
Mortgage-backed securities available-for-sale. . . . 96,609 169,997 180,656
Savings deposits . . . . . . . . . . . . . . . . . . 1,705,004 1,375,060 1,310,835
Borrowed funds . . . . . . . . . . . . . . . . . . . 1,066,720 1,332,235 1,376,707
Senior Notes payable . . . . . . . . . . . . . . . . 50,000 50,000 50,000
Preferred Stock of the Bank. . . . . . . . . . . . . 28,750 28,750 28,750
Stockholders' equity . . . . . . . . . . . . . . . . 112,764 104,830 94,148
Book value per common share. . . . . . . . . . . . . 15.71 13.78 12.47
Tangible book value per common share . . . . . . . . 11.75 11.83 10.47
- ----------------------------------------------------- -------------- ----------- -----------
SIGNIFICANT RATIOS FOR THE YEAR ENDED
Return on average assets before the 1996 SAIF
insurance special assessment (2) . . . . . . . . . 0.64% 0.49% 0.51%
Return on average equity before the 1996 SAIF
insurance special assessment (2) . . . . . . . . . 14.96 11.68 12.53
Interest rate spread including noninterest-bearing
savings deposits . . . . . . . . . . . . . . . . . 2.17 1.85 1.89
Interest rate spread . . . . . . . . . . . . . . . . 1.96 1.67 1.72
Net interest margin. . . . . . . . . . . . . . . . . 2.31 2.02 2.06
Average equity to average total assets . . . . . . . 3.71 3.41 3.30
Noninterest expense to average total
assets before the 1996 SAIF insurance
special assessment (2) . . . . . . . . . . . . . . . 1.61 1.36 1.35
- ----------------------------------------------------- -------------- ----------- -----------
ASSET QUALITY RATIOS AT YEAR END
Nonperforming assets to total assets . . . . . . . . 0.99% 0.72% 0.60%
Nonperforming loans to total loans receivable. . . . 1.60 1.40 1.14
Allowance for loan losses to nonperforming loans . . 46.28 41.90 49.02
Allowance for loan losses to total loans receivable. 0.74 0.59 0.56
- ----------------------------------------------------- -------------- ----------- -----------
</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.
(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.
(3) In March 1998, Coastal announced that it had successfully resolved an
outstanding tax benefit issue with the Federal Deposit Insurance Corporation
("FDIC") as Manager of the Federal Savings and Loan Insurance Corporation
Resolution Fund ("FRF"). The resolution of the issue resulted in a $3.7 million
reversal of accrued income taxes during 1998.
CORPORATE PROFILE
Coastal Bancorp, Inc., a Texas corporation, 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 49
branch offices in metropolitan Houston, Austin, Corpus Christi, the Rio Grande
Valley and small cities in the southeast quadrant of Texas. At December 31,
1998, Coastal Banc ssb had $3.0 billion in assets and met the regulatory
requirements to be a "well capitalized" institution according to Federal Deposit
Insurance Corporation ("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 . . . 6
Management's Discussion and Analysis . . . . . . . . 9
Independent Auditors' Report . . . . . . . . . . . . 31
Consolidated Financial Statements. . . . . . . . . . 32
Notes to Consolidated Financial Statements . . . . . 38
Stock Prices and Dividends . . . . . . . . . . . . . 68
Stockholder Information. . . . . . . . . . . . . . . 69
</TABLE>
CHAIRMAN'S LETTER
Sometimes the stock market works in mysterious ways. One year, a company's
annual earnings are disappointing and its stock price rises by a record annual
percentage. The next year, the same company has record high core earnings, and
its stock price drops by a record annual percentage. Okay, so it doesn't always
work that way, but that's the way it worked for Coastal Banc (Coastal) in 1997
and 1998. Coastal's common stock price was up 52% during 1997, yet during that
same year Coastal had no earnings growth from the prior year and earnings were
short of management's expectations by roughly 25 cents per share. Conversely,
during 1998, Coastal's common stock dropped by approximately 25%, yet Coastal
had record growth in core earnings during 1998 that increased by 22% over 1997
core earnings. Go figure.
But record core earnings is not the whole story for 1998. More importantly, the
strategic shift to commercial banking, initiated four years ago, began having a
significant positive impact on Coastal's financial results in 1998. During the
year, commercial loans and commercial deposits grew to record levels, causing
loan yields to increase and deposit costs to decrease. The result was a record
net interest margin that was still climbing at the end of the year and record
core earnings for 1998. The strategy worked, but we're just getting started.
I'll fill you in on how we are executing our business strategy and how we plan
to expand it, but first a snapshot of Coastal's financial results for 1998.
1998 EARNINGS
Earnings for 1998 were $16.7 million or $2.18 per share, a 44.5% increase
from 1997 earnings of $11.6 million or $1.50 per share. However, for 1998,
earnings from ongoing core operations were $14.1 million or $1.84 per share and
earnings from nonrecurring items were $2.6 million or $.34 per share. During
the first quarter of 1998, Coastal resolved an outstanding tax benefit issue
with the Federal Deposit Insurance Corporation for $3.7 million, which was
somewhat offset by the recording of an additional provision for loan losses of
$1.0 million and a writedown of purchased mortgage loan premium of $709,000.
Nevertheless, core earnings for 1998 increased by 21.9% over 1997 core earnings.
On April 23, 1998, Coastal declared a 3:2 stock split that was paid on June 15,
1998 to stockholders of record on May 15, 1998. Accordingly, all common stock
share data presented have been adjusted to include the effect of the stock
split.
Coastal's two principal sources of revenue, net interest income and fee income,
grew to record levels in 1998. Net interest income after provision for loan
losses reached $64.3 million during 1998, compared to $55.1 million in 1997, and
loan fees, service charges on deposit accounts and loan servicing income reached
$6.4 million during 1998, compared to $5.4 million in 1997. Noninterest
expenses reached $48.4 million during 1998, compared to $39.5 million in 1997.
At December 31, 1998, Coastal had total assets of $3.0 billion, total deposits
of $1.7 billion in 49 branch offices and common stockholders' equity of $112.8
million.
COASTAL BANC IS A COMMERCIAL BANK - WE HAVE THE FINANCIAL STATEMENTS TO PROVE
IT.
In my letter to you last year I pointed out changing components in Coastal's
balance sheet that revealed tangible results of our commercial banking strategy.
Coastal's loan portfolio was becoming more heavily weighted towards commercial
loans, and transaction accounts had substantially increased. At that time,
clear evidence of the benefits of that strategy had not yet materialized in our
net interest margin or core earnings, but based on balance sheet changes alone
Coastal was clearly knocking on the door of successful commercial banking.
In 1998, we kicked the door down (under the circumstances, I couldn't resist the
metaphor). Net interest margin was up to 2.31% for 1998, compared to 2.02% for
1997. By the fourth quarter of 1998, net interest margin had reached 2.57%,
compared to 1.95% for the fourth quarter of 1997. But to really see how far
we've come, look at the difference in the mix of Coastal's assets and
liabilities between today and the end of 1994 when we launched Coastal's
commercial banking strategy.
At the end of 1994, the commercial-type loans in Coastal's loan portfolio
(excluding single family mortgage loans and residential construction loans)
totaled $148 million compared to $781 million at the end of 1998. At the end of
1994, Coastal had $40 million in noninterest-bearing demand accounts, primarily
mortgage escrow accounts. At the end of 1998, Coastal had $151 million in
noninterest-bearing demand accounts, only $5 million of which were mortgage
escrow accounts. At the end of 1994, Coastal had no business banking loan
officers. At the end of 1998, we had sixteen.
Looks like a commercial bank to me.
WE CHANGED THINGS AND BOUGHT THINGS TO PUT US OVER THE TOP
Coastal's arrival in 1998 as a full service "commercial bank" was the result of
a four-year work in progress. We launched the strategy in 1995 by acquiring a
local Houston commercial bank to serve as a platform. Then we changed Coastal's
data processing system to a commercially friendly system. Over the ensuing
years we hired additional commercial loan officers and introduced a full menu of
commercial deposit accounts and cash management products. Building a new
business-banking platform during a period of emerging network and Internet
technology worked to our advantage. Coastal's Portfolio Control Center,
developed in 1997, provided us with tools to redefine the commercial lending
process and establish new standards in commercial loan velocity.
By early 1998, business banking had achieved the momentum Coastal needed to fuel
future profitability growth. In the meantime, retail deposits continued to be a
crucial funding component of the balance sheet. During this period, Coastal
introduced new pricing strategies for certificates of deposit that resulted in
significant reductions in Coastal's cost of retail deposits. So in order to
allow both business banking and retail banking the opportunity to pursue
separate but complementary strategies, Coastal created a new category of
branches called Business Banking Centers. These new Business Banking Centers
have a principally commercial customer base and are designed to better
accommodate commercial accounts and products.
Coastal's transformation to commercial banking was completed in 1998 the same
way it started in 1995: The acquisition of a commercial bank. On August 14,
1998, Coastal completed the purchase of The San Benito Bank & Trust Company
("SBBT") from its owner, Pacific Southwest Bank. At closing, SBBT had deposits
of approximately $355 million in twelve branches located in the Rio Grande
Valley of Texas and approximately $176 million in loans. The transaction
increased Coastal's profitability, number of Business Banking Centers to
eighteen, lowered the cost of deposits, and significantly increased its
commercial loan origination capacity, all without having to raise new capital.
COASTAL SHAKES THINGS UP WITH SPEED AND A NEW LOOK
This is just the beginning. Now that the products and people are in place, it's
time to win the market. After all these years, Texas still has only a handful
of locally managed business banks. Almost all of the large commercial banks in
Texas are managed elsewhere. In response, Coastal's entire strategy is geared
towards pressing the local advantage with speed, accuracy and execution.
Businesses in Texas demand the highest level of sophistication in financial
services and products. But many are growing weary of dealing with non-locals.
That may sound provincial, but there's a reason for it. Execution from afar
just doesn't cut it. Coastal will win many of these customers because it has
local decision-makers using groundbreaking delivery systems to execute the
customers' needs.
Coastal can achieve prominent presence in the local business market when we add
the only missing service on Coastal's menu: investment banking. In my letter to
you last year, I explained that the traditional banking model is obsolete.
Banks today should provide financing for the entire balance sheet, not just the
north side (loans and deposits). Coastal's goal is soon to provide our business
banking customers investment-banking services such as capital raising mechanisms
and alternative financing alongside our traditional portfolio lending and
deposit services.
On the national and international level, combining commercial banking and
investment banking is the current trend. But most of the combinations are
having difficulty merging the cultures and achieving synergies due to their
sheer size and geographical dispersion. We believe that success can be achieved
faster and better in a geographically confined market such as Coastal's. In the
near future, it will become more difficult to compete as a local stand-alone
investment bank or a local stand-alone commercial bank. A combination of the
two, though, can win the local market. We intend to do that.
CAPITAL MANAGEMENT
Since Coastal was founded in 1986, acquisition of whole banks and bank branches
has been the best use of Coastal's excess capital. The industry has been
consolidating since the 1980's, and gaining market share has been cheaper and
faster through acquisitions than through internal growth. Coastal has
successfully employed a strategy that combines acquisitions with internal
development of new business lines. As the industry continues to consolidate,
that strategy will continue to be the foundation of Coastal's growth. However,
from time to time the best use of Coastal's excess capital is the repurchase of
its own common stock.
During the collapse in stock prices that occurred in the third quarter of 1998,
Coastal's stock price dropped to a 1998 low of $14.00 per share from a high in
the second quarter of approximately $26.50 per share. With the stock trading at
a price below the book value per share and in the midst of a year of record core
earnings, Coastal announced a common stock repurchase plan of approximately
500,000 shares. The repurchase of 499,600 shares was completed in 1998 at an
average price of $15.57 per share and the Board of Directors has granted the
authorization to repurchase an additional 500,000 shares, as market conditions
warrant.
During that same collapse in stock prices, Coastal was not alone. Most bank
stock prices dropped by roughly 25% to 50%. Since then the stock market has
recovered, but bank stocks have only partially recovered. 1999 may provide more
acquisition opportunities than were available when bank stocks were trading at
prohibitively high prices. So there is a silver lining in most business cycles.
We certainly don't like to see Coastal's stock price decline, but we do like to
buy it cheap and have more opportunities to buy other banks cheap.
A CAUTIOUS APPROACH TO 1999
Following the 1998 stock market decline, Texas was hit with another challenge:
the oil price collapse. By the end of 1998, crude oil had traded down to
approximately $10 per barrel. Since the last Texas economic recovery began in
1987, about the same time oil prices bottomed below $10 per barrel, the price of
oil has enjoyed a slow, steady ten-year recovery. The Texas economy recovered
during that same period into a much stronger and more diversified economy.
Today we are revisiting a similar price decline. Diversification and a stronger
consolidated oil industry have given hope that Texas will weather this storm
much better than in 1987.
At the end of 1998, there were few signs that the Texas economy was suffering
from the oil price decline - yet. Many Texas economists are cautiously
optimistic that Texas will make it through this crisis with only a slowdown in
job growth, but not with the magnitude of collapse witnessed in the 1980's.
Much will depend on the length and depth of the oil price decline. Coastal has
already begun to exercise a more cautious approach to lending in markets with
energy industry concentrations, such as Houston, until a clearer picture evolves
of the effects on the economy from the oil price decline.
THIS ONE'S FOR YOU - AGAIN
In the first quarter of 1999, we are launching Coastal's new "X-Banking"
campaign. X-Banking is short for execution banking. The promotional concept is
designed to inform the local Texas business community that successful business
banking is all about EXECUTION. We're saying that in today's banking world of
technology based products, everyone sells pretty much the same products. It's
the delivery, follow-up, and responsiveness that separate the winners and
losers. The X-Banking campaign is a challenge to our non-local competitors to
respond to local businesses as fast as Coastal. We intend to win that race.
The X-Banking campaign is part of an overall strategy designed to fulfill
Coastal's Vision and Mission Statement. The vision part is what I have been
discussing throughout this letter: Become a dominant Texas regional bank that
provides commercial services - including investment banking services as well as
competitive retail products - to local business customers. Coastal will achieve
that vision through a combined strategy of acquisitions while executing more
efficiently and better than non-locals will.
Over the years, I have written to you about Coastal's successful strategic
formula for building a bank from scratch: Acquire low cost deposits, maintain
low interest rate risk, low overhead risk, and low credit risk. This attitude
remains embedded in Coastal's system and will continue to be the foundation of
our management culture. Even though our growth strategy has evolved from simply
acquiring low cost deposits to acquiring whole commercial banks, we still
approach everything with Coastal's traditional goals of doing it as cheaply and
safely as possible. In other words, the overall vision has changed, but the
attitude remains intact.
The ultimate mission, however, has not changed one bit: Maximize shareholder
return.
/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 except per share data and Selected Ratios) 1998 1997 1996 1995 1994
----------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data
Total assets. . . . . . . . . . . . . . . . . . . . . . $ 2,982,161 $2,911,410 $2,875,907 $2,786,528 $2,299,769
Loans receivable (1). . . . . . . . . . . . . . . . . . 1,538,149 1,261,435 1,229,748 1,098,555 587,032
Mortgage-backed securities held-to-maturity (1) . . . . 1,154,116 1,345,090 1,344,587 1,395,753 1,605,839
Mortgage-backed securities available-for-sale . . . . . 96,609 169,997 180,656 186,414 32,249
Savings deposits. . . . . . . . . . . . . . . . . . . . 1,705,004 1,375,060 1,310,835 1,287,084 1,139,622
Advances from the Federal Home Loan Bank of
Dallas ("FHLB") . . . . . . . . . . . . . . . . . . . 966,720 540,475 409,720 312,186 386,036
Securities sold under agreements to repurchase. . . . . 100,000 791,760 966,987 993,832 645,379
Senior Notes payable. . . . . . . . . . . . . . . . . . 50,000 50,000 50,000 50,000 --
Preferred Stock of the Bank . . . . . . . . . . . . . . 28,750 28,750 28,750 28,750 28,750
Stockholders' equity. . . . . . . . . . . . . . . . . . 112,764 104,830 94,148 91,679 84,680
For the Year Ended December 31,
---------------------------------------------------------------------
1998 1997 1996 1995 1994
----------------- ----------- ----------- ----------- -----------
Operating Data (10)
Interest income . . . . . . . . . . . . . . . . . . . . $ 210,814 $ 201,356 $ 194,611 $ 170,286 $ 129,037
Interest expense. . . . . . . . . . . . . . . . . . . . 143,404 144,423 138,185 126,354 88,519
----------------- ----------- ----------- ----------- -----------
Net interest income . . . . . . . . . . . . . . . . . . 67,410 56,933 56,426 43,932 40,518
Provision for loan losses . . . . . . . . . . . . . . . 3,100 1,800 1,925 1,664 934
----------------- ----------- ----------- ----------- -----------
Net interest income after provision for loan losses . . 64,310 55,133 54,501 42,268 39,584
Writedown of purchased mortgage loan premium. . . . . . (709) -- -- -- --
Gain (loss) on sales of mortgage-backed securities
available-for-sale, net . . . . . . . . . . . . . . . 1 237 (4) 81 192
Gain on sale of branch office . . . . . . . . . . . . . -- -- 521 -- --
Other noninterest income. . . . . . . . . . . . . . . . 7,580 6,147 5,574 5,081 6,539
SAIF insurance special assessment (2) . . . . . . . . . -- -- (7,455) -- --
Other noninterest expense . . . . . . . . . . . . . . . (48,383) (39,544) (37,927) (29,823) (25,731)
----------------- ----------- ----------- ----------- -----------
Income before provision for Federal income taxes
and minority interest . . . . . . . . . . . . . . . . 22,799 21,973 15,210 17,607 20,584
Provision for Federal income taxes (3). . . . . . . . . (3,543) (7,822) (5,671) (6,477) (4,333)
Minority interest in income of consolidated
subsidiary. . . . . . . . . . . . . . . . . . . . . . -- -- -- -- (211)
----------------- ----------- ----------- ----------- -----------
Net income before preferred stock dividends . . . . . . 19,256 14,151 9,539 11,130 16,040
Preferred stock dividends of the Bank . . . . . . . . . (2,588) (2,588) (2,588) (2,588) (2,588)
----------------- ----------- ----------- ----------- -----------
Net income available to common stockholders . . . . . . 16,668 11,563 $ 6,951 $ 8,542 $ 13,452
================= =========== =========== =========== ===========
Basic earnings per share (4). . . . . . . . . . . . . . $ 2.24 $ 1.55 $ 0.93 $ 1.15 $ 1.81
================= =========== =========== =========== ===========
Diluted earnings per share (4). . . . . . . . . . . . . $ 2.18 $ 1.50 $ 0.92 $ 1.14 $ 1.76
================= =========== =========== =========== ===========
</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,
--------------------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Selected Ratios
Performance Ratios (5) (10):
Return on average assets before the 1996 SAIF insurance
special assessment (6) . . . . . . . . . . . . . . . . . . . . 0.64% 0.49% 0.51%
Return on average assets after the 1996 SAIF insurance special
assessment . . . . . . . . . . . . . . . . . . . . . . . . . . 0.64 0.49 0.34
Return on average equity before the 1996 SAIF insurance
special assessment (6) . . . . . . . . . . . . . . . . . . . . 14.96 11.68 12.53
Return on average equity after the 1996 SAIF insurance special
assessment . . . . . . . . . . . . . . . . . . . . . . . . . . 14.96 11.68 7.50
Dividend payout ratio before the 1996 SAIF insurance special
assessment (6) . . . . . . . . . . . . . . . . . . . . . . . . 14.35 19.83 16.82
Dividend payout ratio after the 1996 SAIF insurance special
assessment . . . . . . . . . . . . . . . . . . . . . . . . . . 14.35 19.83 28.55
Average equity to average total assets . . . . . . . . . . . . . 3.71 3.41 3.30
Net interest margin (7). . . . . . . . . . . . . . . . . . . . . 2.31 2.02 2.06
Interest rate spread including noninterest-bearing savings
deposits (7) . . . . . . . . . . . . . . . . . . . . . . . . . 2.17 1.85 1.89
Interest rate spread (7) . . . . . . . . . . . . . . . . . . . . 1.96 1.67 1.72
Noninterest expense to average total assets before the 1996
SAIF insurance special assessment (6). . . . . . . . . . . . . 1.61 1.36 1.35
Noninterest expense to average total assets after the 1996 SAIF
insurance special assessment . . . . . . . . . . . . . . . . . 1.61 1.36 1.61
Average interest-earning assets to average interest-bearing
liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . 107.33 106.72 106.75
Ratio of earnings to combined fixed charges and preferred
stock dividends before the 1996 SAIF insurance special
assessment (6):
Excluding interest on deposits . . . . . . . . . . . . . . . . 1.25X 1.23X 1.25X
Including interest on deposits . . . . . . . . . . . . . . . . 1.14 1.13 1.14
Ratio of earnings to combined fixed charges and preferred
stock dividends after the 1996 SAIF insurance special
assessment:
Excluding interest on deposits . . . . . . . . . . . . . . . . 1.25 1.23 1.15
Including interest on deposits . . . . . . . . . . . . . . . . 1.14 1.13 1.09
Asset Quality Ratios:
Nonperforming assets to total assets (8) . . . . . . . . . . . . 0.99% 0.72% 0.60%
Nonperforming loans to total loans receivable. . . . . . . . . . 1.60 1.40 1.14
Allowance for loan losses to nonperforming loans . . . . . . . . 46.28 41.90 49.02
Allowance for loan losses to total loans receivable. . . . . . . 0.74 0.59 0.56
Bank Regulatory Capital Ratios (9):
Tier 1 capital to total assets . . . . . . . . . . . . . . . . . 5.25 5.52 5.35
Tier 1 risk-based capital to risk-weighted assets. . . . . . . . 9.54 11.46 11.77
Total risk-based capital to risk-weighted assets . . . . . . . . 10.23 11.98 12.30
Other Data:
Full-time employee equivalents . . . . . . . . . . . . . . . . . 653 451 433
Number of full service offices . . . . . . . . . . . . . . . . . 49 37 37
1995 1994
------- -------
<S> <C> <C>
<C> . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . <C>
Selected Ratios
Performance Ratios (5) (10):
Return on average assets before the 1996 SAIF insurance
special assessment (6) . . . . . . . . . . . . . . . . . . . . 0.45% 0.71%
Return on average assets after the 1996 SAIF insurance special
assessment . . . . . . . . . . . . . . . . . . . . . . . . . . 0.45 0.71
Return on average equity before the 1996 SAIF insurance
special assessment (6) . . . . . . . . . . . . . . . . . . . . 9.71 16.57
Return on average equity after the 1996 SAIF insurance special
assessment . . . . . . . . . . . . . . . . . . . . . . . . . . 9.71 16.57
Dividend payout ratio before the 1996 SAIF insurance special
assessment (6) . . . . . . . . . . . . . . . . . . . . . . . . 18.56 8.83
Dividend payout ratio after the 1996 SAIF insurance special
assessment . . . . . . . . . . . . . . . . . . . . . . . . . . 18.56 8.83
Average equity to average total assets . . . . . . . . . . . . . 3.56 3.59
Net interest margin (7). . . . . . . . . . . . . . . . . . . . . 1.82 1.84
Interest rate spread including noninterest-bearing savings
deposits (7) . . . . . . . . . . . . . . . . . . . . . . . . . 1.61 1.68
Interest rate spread (7) . . . . . . . . . . . . . . . . . . . . 1.46 1.57
Noninterest expense to average total assets before the 1996
SAIF insurance special assessment (6). . . . . . . . . . . . . 1.21 1.14
Noninterest expense to average total assets after the 1996 SAIF
insurance special assessment . . . . . . . . . . . . . . . . . 1.21 1.14
Average interest-earning assets to average interest-bearing
liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . 106.78 106.71
Ratio of earnings to combined fixed charges and preferred
stock dividends before the 1996 SAIF insurance special
assessment (6):
Excluding interest on deposits . . . . . . . . . . . . . . . . 1.21X 1.33X
Including interest on deposits . . . . . . . . . . . . . . . . 1.12 1.19
Ratio of earnings to combined fixed charges and preferred
stock dividends after the 1996 SAIF insurance special
assessment:
Excluding interest on deposits . . . . . . . . . . . . . . . . 1.21 1.33
Including interest on deposits . . . . . . . . . . . . . . . . 1.12 1.19
Asset Quality Ratios:
Nonperforming assets to total assets (8) . . . . . . . . . . . . 0.68% 0.30%
Nonperforming loans to total loans receivable. . . . . . . . . . 1.35 1.04
Allowance for loan losses to nonperforming loans . . . . . . . . 38.40 35.37
Allowance for loan losses to total loans receivable. . . . . . . 0.52 0.37
Bank Regulatory Capital Ratios (9):
Tier 1 capital to total assets . . . . . . . . . . . . . . . . . 5.30 4.54
Tier 1 risk-based capital to risk-weighted assets. . . . . . . . 12.36 12.37
Total risk-based capital to risk-weighted assets . . . . . . . . 12.84 12.63
Other Data:
Full-time employee equivalents . . . . . . . . . . . . . . . . . 390 298
Number of full service offices . . . . . . . . . . . . . . . . . 40 34
</TABLE>
(Footnotes appear on page 8)
<PAGE>
Footnotes for pages 6 through 7:
(1) Mortgage-backed securities held-to-maturity are net of premiums and
discounts. Loans receivable are net of loans in process, premiums, discounts,
unearned interest and loan fees and the allowance for loan losses.
(2) On September 30, 1996, Coastal recorded the special assessment of $7.5
million as a result of the Act being signed into law. See Note 18 of the Notes
to Consolidated Financial Statements.
(3) In March 1998, Coastal announced that it had successfully resolved an
outstanding tax benefit issue with the FDIC as Manager of the FRF. The
resolution of the issue resulted in a $3.7 million reversal of accrued income
taxes during 1998.
(4) On April 23, 1998, Coastal declared a 3:2 stock split that was paid on
June 15, 1998 to stockholders of record on May 15, 1998. Accordingly, all
common stock share data have been adjusted to include the effect of the stock
split.
(5) Ratio, yield and rate information are based on year-to-date average
balances.
(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 18 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, loans greater than 90
days delinquent and still accruing, real estate acquired by foreclosure and
repossessed assets.
(9) 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.
(10) Certain 1997, 1996, 1995 and 1994 balances have been reclassified to
conform to the 1998 presentation. Such reclassifications had no effect on net
income or total stockholders' equity.
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 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 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 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 pursuant to which, 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 provided for a reduction of the SAIF deposit insurance
premium rates beginning in the fourth quarter of 1996.
On April 23, 1998, the Board of Directors declared a 3:2 stock split on the
common stock of Bancorp payable on June 15, 1998 to the stockholders of record
at the close of business on May 15, 1998. Accordingly, all common stock share
data have been adjusted to include the effect of the stock split for all periods
presented.
On September 1, 1998, Bancorp announced that the Board of Directors had
authorized the repurchase of up to 6.6% (approximately 500,000 shares) of the
outstanding shares of common stock. As of December 31, 1998, 499,600 shares had
been repurchased at a cost of $7.8 million. On December 21, 1998, the Board of
Directors authorized an additional repurchase plan for up to 500,000 shares of
the outstanding shares of common stock through an open market repurchase program
and privately negotiated repurchases. The timing and volume of the repurchase
transactions will depend on market conditions.
FINANCIAL CONDITION
On August 14, 1998, Coastal completed the acquisition of the Valley
branches of Pacific Southwest Bank, also known as The San Benito Bank and Trust
Company, a unit of Pacific Southwest Bank (the "Valley Acquisition"). This
acquisition added twelve branches, approximately $176.2 million in loans
receivable and $355.4 million in deposits to Coastal's existing organization.
Total assets increased 2.43% or $70.8 million from December 31, 1997 to
December 31, 1998. The net increase resulted primarily from the increase in
loans receivable of $276.7 million, a $22.0 million increase in stock in the
Federal Home Loan Bank of Dallas ("FHLB"), an increase in cash and cash
equivalents of $8.4 million, a $15.0 million increase in goodwill and an
increase in property and equipment of $10.9 million offset by decreases of
$191.0 million and $73.4 million in mortgage-backed securities held-to-maturity
and mortgage-backed securities available-for-sale, respectively. The increase
in loans receivable was primarily due to bulk residential mortgage loan
purchases of $293.6 million, $176.2 million in loans acquired in the Valley
Acquisition (net of the $2.3 million allowance for loan losses recorded at
acquisition) and $34.6 million of consumer loan purchases from correspondent
lenders, in addition to an increase of $74.4 million in commercial loans,
secured by residential mortgage loans held for sale. These increases were
somewhat offset by principal payments received. The increase in FHLB stock was
due to the increased amounts required to be maintained based on the level of
FHLB advances outstanding. The increase in goodwill was due to $17.3 million of
goodwill recorded due to the Valley Acquisition offset by current year
amortization. The increase in property and equipment was due primarily due to
the Valley Acquisition. The decrease in mortgage-backed securities was due to
principal payments received and the sale of $48.6 million of mortgage-backed
securities available-for-sale. At December 31, 1998, loans receivable as a
percentage of total assets increased to 51.6% as compared to 43.3% at December
31, 1997 reaching management's 1998 goal of increasing the loans receivable
portfolio to approximately 50% of total assets.
Savings deposits increased 24.0% or $329.9 million from December 31, 1997
to December 31, 1998. This increase was primarily due to the $355.4 million of
deposits acquired in the Valley Acquisition offset by decreases in existing
deposits. Advances from the FHLB increased by 78.9% or $426.2 million and
securities sold under agreements to repurchase decreased 87.4% or $691.8 million
from December 31, 1997 to December 31, 1998 due to a reallocation of borrowings
to take advantage of more favorable interest rates.
Common stockholders' equity increased 7.6% or $7.9 million from December
31, 1997 to December 31, 1998 due to 1998 net income available to common
stockholders of $16.7 million and a $900,000 decrease in accumulated other
comprehensive income (loss), offset by common stock dividends declared of $2.4
million and treasury stock acquired of $7.8 million.
RESULTS OF OPERATIONS FOR THE THREE YEARS ENDED DECEMBER 31, 1998
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 loans
receivable, mortgage-backed securities and other investments. Coastal's
interest-bearing liabilities consist primarily of savings deposits, advances
from the FHLB, securities sold under agreements to repurchase, federal funds
purchased and its Senior Notes payable. Coastal's net income is also affected
by its level of noninterest income, including loan fees and service charges on
deposit accounts, loan servicing income, 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>
<S> <C> <C> <C> <C>
At Year Ended December 31, 1998
December 31, 1998 Average Yield/
Yield/Rate Balance Interest Rate
----------------------- ------------------------------ ---------- ------
(Dollars in thousands)
ASSETS
Interest-earning assets:
Loans receivable (2) . . . . . . . . . . . . . . . . 8.55% $ 1,430,584 $ 120,281 8.41%
Mortgage-backed securities . . . . . . . . . . . . . 6.00 1,431,105 87,596 6.12
U.S. Treasury securities . . . . . . . . . . . . . . 5.40 2,141 109 5.09
Securities purchased under agreements to resell
and federal funds sold. . . . . . . . . . . . . . . -- 7,991 430 5.38
FHLB stock . . . . . . . . . . . . . . . . . . . . . 5.75 38,036 2,251 5.92
Interest-earning deposits in other depository
institutions. . . . . . . . . . . . . . . . . . . . 4.26 3,133 147 4.69
-----------------------------------------------------------------------------
Total interest-earning assets . . . . . . . . . . 7.37 2,912,990 210,814 7.24
-----------------------------------------------------------------------------
Noninterest-earning assets (1) . . . . . . . . . . . 94,857
-----------------------------------------------------------------------------
Total assets. . . . . . . . . . . . . . . . . . . $ 3,007,847
=============================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing savings deposits. . . . . . . . . . 4.52% $ 1,371,078 $ 66,128 4.82%
Advances from the FHLB . . . . . . . . . . . . . . . 5.24 713,197 39,553 5.55
Securities sold under agreements to repurchase
and federal funds purchased . . . . . . . . . . . . 4.93 579,711 32,723 5.64
Senior Notes payable . . . . . . . . . . . . . . . . 10.00 50,000 5,000 10.00
-----------------------------------------------------------------------------
Total interest-bearing liabilities. . . . . . . . 4.90 2,713,986 143,404 5.28
-----------------------------------------------------------------------------
Noninterest-bearing liabilities. . . . . . . . . . . 153,663
-----------------------------------------------------------------------------
Total liabilities . . . . . . . . . . . . . . . . 2,867,649
Preferred Stock of the Bank. . . . . . . . . . . . . 28,750
Stockholders' equity . . . . . . . . . . . . . . . . 111,448
-----------------------------------------------------------------------------
Total liabilities and stockholders' equity. . . . $ 3,007,847
=============================================================================
Net interest income; interest rate spread. . . . . . 2.47% $ 67,410 1.96%
=============================================================================
Net interest-earning assets; net interest yield on
interest-earning assets . . . . . . . . . . . . . . 199,004 2.31%
=============================================================================
Ratio of average interest-earning assets to average
interest-bearing liabilities. . . . . . . . . . . . 1.07x
=============================================================================
</TABLE>
_______________
(1) Includes goodwill, accrued interest receivable, property and equipment,
cash, mortgage servicing rights, prepaid expenses and other assets.
(2) Nonaccruing loans are included in total loans, but are immaterial.
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31, 1997
<S> <C> <C> <C>
Average Yield/
Balance Interest Rate
--------------- ---------- --------
(Dollars in thousands)
ASSETS
Interest-earning assets:
Loans receivable (2). . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,281,493 $ 106,962 8.35%
Mortgage-backed securities. . . . . . . . . . . . . . . . . . . . . . . . . 1,514,541 92,755 6.12
U.S. Treasury securities. . . . . . . . . . . . . . . . . . . . . . . . . . 3 -- --
Securities purchased under agreements to resell and federal funds sold
4,024 251 6.24
FHLB stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,663 1,292 5.96
Interest-earning deposits in other depository
institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,416 96 3.97
------------------------------------
Total interest-earning assets. . . . . . . . . . . . . . . . . . . . . . 2,824,140 201,356 7.13
------------------------------------
Noninterest-earning assets (1). . . . . . . . . . . . . . . . . . . . . . . 81,400
------------------------------------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,905,540
====================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing savings deposits . . . . . . . . . . . . . . . . . . . . . $ 1,253,142 $ 62,912 5.02%
Advances from the FHLB. . . . . . . . . . . . . . . . . . . . . . . . . . . 368,896 21,322 5.78
Securities sold under agreements to repurchase and federal funds purchased
974,297 55,189 5.66
Senior Notes payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,000 5,000 10.00
------------------------------------
Total interest-bearing liabilities . . . . . . . . . . . . . . . . . . . 2,646,335 144,423 5.46
------------------------------------
Noninterest-bearing liabilities . . . . . . . . . . . . . . . . . . . . . . 131,431
------------------------------------
Total liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,777,766
Preferred Stock of the Bank . . . . . . . . . . . . . . . . . . . . . . . . 28,750
Stockholders' equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . 99,024
-------------------------------------
Total liabilities and stockholders' equity . . . . . . . . . . . . . . . $ 2,905,540
====================================
Net interest income; interest rate spread . . . . . . . . . . . . . . . . . 56,933 1.67%
====================================
Net interest-earning assets; net interest yield on
interest-earning assets. . . . . . . . . . . . . . . . . . . . . . . . . . $ 177,805 2.02%
====================================
Ratio of average interest-earning assets to average
interest-bearing liabilities . . . . . . . . . . . . . . . . . . . . . . . 1.07x
====================================
</TABLE>
_______________
(1) Includes goodwill, accrued interest receivable, property and equipment,
cash, mortgage servicing rights, prepaid expenses and other assets.
(2) Nonaccruing loans are included in total loans, but are immaterial.
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31, 1996
<S> <C> <C> <C>
Average Yield/
Balance Interest Rate
------------- ---------- ------
(Dollars in thousands)
ASSETS
Interest-earning assets:
Loans receivable (2) . . . . . . . . . . . . . . . . $ 1,156,933 $ 97,935 8.47%
Mortgage-backed securities . . . . . . . . . . . . . 1,556,966 95,155 6.11
U.S. Treasury securities . . . . . . . . . . . . . . 1,002 54 5.39
Securities purchased under agreements to resell
and federal funds sold. . . . . . . . . . . . . . . -- -- --
FHLB stock . . . . . . . . . . . . . . . . . . . . . 21,853 1,288 5.89
Interest-earning deposits in other depository
institutions. . . . . . . . . . . . . . . . . . . . 4,149 179 4.31
--------------------------------
Total interest-earning assets . . . . . . . . . . 2,740,903 194,611 7.10
--------------------------------
Noninterest-earning assets (1) . . . . . . . . . . . 71,344
Total assets. . . . . . . . . . . . . . . . . . . $ 2,812,247
================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing savings deposits. . . . . . . . . . $ 1,199,651 $ 60,076 5.01%
Advances from the FHLB . . . . . . . . . . . . . . . 387,296 21,749 5.62
Securities sold under agreements to repurchase
and federal funds purchased . . . . . . . . . . . . 930,706 51,360 5.52
Senior Notes payable . . . . . . . . . . . . . . . . 50,000 5,000 10.00
--------------------------------
Total interest-bearing liabilities. . . . . . . . 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. . . . . . 56,426 1.72%
================================
Net interest-earning assets; net interest yield on
interest-earning assets . . . . . . . . . . . . . . $ 173,250 2.06%
===========================================
Ratio of average interest-earning assets to average
interest-bearing liabilities. . . . . . . . . . . . 1.07x
===========================================
</TABLE>
_______________
(1) Includes goodwill, accrued interest receivable, property and equipment,
cash, mortgage servicing rights, prepaid expenses and other assets.
(2) Nonaccruing loans are included in total loans, 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>
<S> <C> <C> <C> <C> <C> <C>
Year Ended December 31,
1998 vs 1997 1997 vs 1996
Increase (Decrease) Due To Increase (Decrease) Due To
Volume Rate Net Volume Rate Net
-------- ------- --------- ------- -------- ---------
(In thousands)
INTEREST INCOME
Loans receivable . . . . . . . . . . . . . . . . . . . . . . . . . $ 12,544 $ 775 $ 13,319 $10,431 $ (1,404) $ 9,027
Mortgage-backed securities . . . . . . . . . . . . . . . . . . . . (5,159) -- (5,159) (2,558) 158 (2,400)
U.S. Treasury securities . . . . . . . . . . . . . . . . . . . . . -- 109 109 (27) (27) (54)
Securities purchased under
agreements to resell and federal
funds sold . . . . . . . . . . . . . . . . . . . . . . . . . . . 218 (39) 179 126 125 251
FHLB stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . 968 (9) 959 (11) 15 4
Interest-earning deposits in
other depository institutions. . . . . . . . . . . . . . . . . . 32 19 51 (70) (13) (83)
--------- -------- --------- -------- --------- --------
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,603 855 9,458 7,891 (1,146) 6,745
--------- -------- --------- -------- --------- --------
INTEREST EXPENSE
Interest-bearing savings deposits. . . . . . . . . . . . . . . . . 5,781 (2,565) 3,216 2,714 122 2,836
Securities sold under agreements to repurchase and federal funds
purchased
(22,272) (194) (22,466) 2,484 1,345 3,829
Advances from the FHLB . . . . . . . . . . . . . . . . . . . . . . 19,113 (882) 18,231 (1,042) 615 (427)
--------- -------- --------- -------- --------- --------
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,622 (3,641) (1,019) 4,156 2,082 6,238
--------- -------- --------- -------- --------- --------
Net change in net interest income. . . . . . . . . . . . . . . . . $ 5,981 $ 4,496 $ 10,477 $ 3,735 $ (3,228) $ 507
========= ======== ========= ======== ========= ========
</TABLE>
NET INCOME
Coastal reported net income available to common stockholders of $16.7
million for the year ended December 31, 1998, $11.6 million for the year ended
December 31, 1997 and $11.8 million for the year ended December 31, 1996, before
the after-tax effect of the 1996 special assessment, respectively, an increase
of $5.1 million or 44.2% in 1998 and a decrease of $234,000 or 2.0% in 1997, in
each case in comparison to the prior year. The $5.1 million increase in 1998
was due to several factors. From the year ended December 31, 1997 to 1998,
there was a $10.5 million increase in net interest income, a $1.2 million
increase in noninterest income (excluding the writedown of purchased mortgage
loan premium) offset by the $709,000 writedown of purchased mortgage loan
premium and an $8.8 million increase in noninterest expense. The increase in
net interest income was primarily due to an increase in net interest margin from
2.02% in 1997 to 2.31% in 1998. The increase in noninterest income was due to a
$1.7 million increase in loan fees and service charges on deposit accounts
offset by a $236,000 decrease in the gain on sales of mortgage-backed securities
available-for-sale and a $764,000 decrease in loan servicing income. The $8.8
million increase in noninterest expense was primarily due to the staffing and
occupancy increases related to the expansion of the loan product base and the
continuing development of commercial business lending programs, the acquisition
of assets and other expenses related to the relocation of Coastal's corporate
headquarters in the third quarter of 1997 and the staffing and occupancy
expenses related to the Valley Acquisition.
The increase in net income was also affected by nonrecurring items recorded
in the first quarter of 1998. In 1998, Coastal recorded a one-time benefit due
to the resolution of an outstanding tax benefit issue with the FDIC as Manager
of the Federal Savings and Loan Insurance Corporation Resolution Fund. The
resolution of the issue resulted in Coastal recording a $3.7 million, or 48
cents per diluted share, reversal of accrued income taxes. The resolution of
the tax benefit issue is also contributing an ongoing quarterly tax benefit of
$226,000 or approximately 3 cents per diluted share (as of December 31, 1998).
This tax benefit is estimated to continue until the second quarter of 2001.
This one-time positive effect on net income was somewhat offset by the recording
of an additional provision for loan losses of $1.0 million (above the then
current quarterly provision of $450,000) and a writedown of purchased mortgage
loan premium of $709,000. The additional provision for loan losses of $1.0
million, or 8 cents per diluted share after tax, was recorded to increase the
allowance for loan losses due to the continuing change in the composition of the
loans receivable portfolio as a result of management's goal to increase business
lending. The writedown of the purchased mortgage loan premium of $709,000, or 6
cents per diluted share after tax, was related to an adjustable rate whole loan
package purchased in the second quarter of 1997 on which Coastal experienced
high prepayments during 1997 and through the first quarter of 1998, resulting
from a comparatively lower current interest rate environment.
The provision for federal income taxes (excluding the one-time effect of
the $3.7 million reversal of accrued income taxes) decreased by $600,000 from
1997 to 1998 due to the ongoing quarterly benefit attributable to the tax
benefit issue and the tax effect of the recording of the additional provision
for loan losses and the writedown of the purchased mortgage loan premium.
The $234,000 decrease in net income available to common stockholders in
1997 was primarily due to a $507,000 increase in net interest income, a $125,000
decrease in the provision for loan losses and a $293,000 increase in noninterest
income offset by a $1.6 million increase in noninterest expense (excluding the
1996 special assessment). The increase in noninterest income is due to a
$568,000 increase in loan fees and service charges on deposit accounts, a
$237,000 gain on sales of mortgage-backed securities available-for-sale in 1997
and a $164,000 increase in other noninterest income, offset by a $159,000
decrease in loan servicing income and the $521,000 gain on the sale of a branch
office recognized in 1996. The $1.6 million increase in noninterest expense
(excluding the 1996 special assessment) was primarily due to the overall
compensation and occupancy expenses related to an increase in personnel hired
for the expansion of the loan products offered and the continuing development of
commercial business lending programs. In addition, occupancy expenses also
increased due to the acquisition of assets and other expenses related to the
relocation of Coastal's corporate headquarters and consolidation of its
administrative, primary lending and mortgage servicing offices in the third
quarter of 1997. These increases were somewhat offset by the $1.1 million
decrease in insurance premiums (primarily deposit insurance premiums). In
addition, other noninterest expense and data processing expense decreased
$646,000 and $202,000, respectively.
NET INTEREST INCOME
Net interest income amounted to $67.4 million in 1998, a $10.5 million or
18.4% increase over 1997. The increase in net interest income was due to an
increase in net interest margin from 2.02% in 1997 to 2.31% in 1998, an increase
in average net interest-earning assets of $21.2 million, and an increase in
interest rate spread, defined to exclude noninterest-bearing deposits, from
1.67% in 1997 to 1.96% in 1998. Management also calculates an alternative net
interest spread which includes noninterest-bearing deposits. Under this
calculation, the net interest spreads for 1998 and 1997 were 2.17% and 1.85%,
respectively. Net interest margin and net interest rate spread are affected by
the changes in the amount and composition of interest-earning assets and
interest-bearing liabilities. The overall increase in net interest spread was
due to an 11 basis point increase in the average yield on interest-earning
assets and a decrease in the average rate paid on interest-bearing liabilities
of 18 basis points. The decrease in the average rate paid on interest-bearing
liabilities was due primarily to the overall decrease in wholesale funding
costs.
Net interest income amounted to $56.9 million in 1997, a $507,000, or 0.9%
increase over 1996. The increase in net interest income was due to a slight
increase in average net interest-earning assets of $4.6 million offset by the
overall decrease in net interest margin from 2.06% in 1996 to 2.02% in 1997 and
in interest rate spread, defined to exclude noninterest-bearing deposits, from
1.72% in 1996 to 1.67% in 1997. The net interest spreads including
noninterest-bearing deposits for 1997 and 1996 were 1.85% and 1.89%,
respectively. The decrease in the net interest spread in 1997 was primarily due
to the increase in the average yield on interest-earning assets from 7.10% in
1996 to 7.13% in 1997, offset by the increase in the average interest rates on
interest-bearing liabilities from 5.38% in 1996 to 5.46% in 1997. During 1997,
Coastal experienced a tightening in net interest income due primarily to higher
borrowing costs and the anomaly that the spread between the London Interbank
Offered Rate ("LIBOR") and the Treasury rate (the "TED" spread) had been much
wider than usual. The TED spread historically (6 year average) had been 40
basis points, but for 1997 was 56 basis points, which would have equated to an
additional $1.4 million in net income or $0.18 per share (after tax) for the
year had the spread been consistent with the 6 year average. In addition,
interest income for the last six months of 1997 was reduced by the additional
amortization of premium on purchased mortgage loans of approximately $1.3
million. This amortization was attributable to prepayments related to the
adjustable rate whole loan package purchased in the second quarter of 1997.
Total interest income amounted to $210.8 million during 1998, a $9.5
million, or 4.70% increase from 1997. A $13.3 million, or 12.5% increase in
interest earned on loans receivable during 1998 resulted from a $149.1 million,
or 11.6%, increase in the average balance of loans receivable and an increase of
6 basis points in the yield earned compared to 1997. A $5.2 million, or 5.6%,
decrease in interest earned on mortgage-backed securities during 1998 was due to
a $83.4 million, or 5.5%, decrease in the average balance of mortgage-backed
securities due to principal payments received and the sale of $48.6 million of
mortgage-backed securities available-for-sale. In addition, interest earned on
FHLB stock, federal funds sold and other interest-earning assets increased by
$1.3 million, or 79.2%, due primarily to the increase in the average balance of
such assets, through internal growth and the Valley Acquisition, of $23.2
million during 1998.
Total interest income amounted to $201.4 million during 1997, a $6.7
million, or 3.5% increase from 1996. A $9.0 million, or 9.2%, increase in
interest earned on loans receivable during 1997 resulted from a $124.6 million,
or 10.8%, increase in the average balance of loans receivable offset partially
by a decrease of 12 basis points in the yield earned compared to 1996. A $2.4
million, or 2.5%, decrease in interest earned on mortgage-backed securities
during 1997 was due to a $42.4 million, or 2.7%, decrease in the average balance
of mortgage-backed securities due to principal payments received and the sale of
$11.3 million of mortgage-backed securities available-for-sale. In addition,
interest earned on FHLB stock, federal funds sold and other interest-earning
assets increased slightly by $118,000, or 7.8%, due primarily to the increase in
the average balance of such assets, through internal growth and the branch
acquisition, of $1.1 million during 1997.
Total interest expense amounted to $143.4 million in 1998, a $1.0 million,
or 0.7%, decrease from 1997. Interest expense on savings deposits increased
$3.2 million, or 5.1%, due to the $117.9 million, or 9.4%, increase in the
average balance of savings deposits offset by a decrease in the average rate
paid of 20 basis points. Interest expense on advances from the FHLB increased
$18.2 million, or 85.5%, due to the increase in average balance of advances from
the FHLB of $344.3 million or 93.3%, offset by a 23 basis point decrease in the
average rates paid. Interest expense on other borrowed money decreased $22.5
million, or 40.7%, due to the $394.6 million, or 40.5%, decrease in average
balance of securities sold under agreements to repurchase and federal funds
purchased and a 2 basis point decrease in the interest rates paid.
Total interest expense amounted to $144.4 million in 1997, a $6.2 million,
or 4.5%, increase from 1996. Interest expense on other borrowed money increased
$3.8 million, or 7.5%, due to the $43.6 million, or 4.7%, increase in the
average balance of securities sold under agreements to repurchase and federal
funds purchased and a 14 basis point increase in the interest rates paid. A
$2.8 million, or 4.7%, increase in interest on savings deposits was primarily
due to a $53.5 million, or 4.5%, increase in the average balance of
interest-bearing savings deposits. Interest expense on advances from the FHLB
decreased $427,000, or 2.0%, due to the decrease in the average balance of
advances from the FHLB of $18.4 million, or 4.8%, offset by a 16 basis point
increase in the average rates paid.
PROVISION FOR LOAN LOSSES
Management established provisions for loan losses of $3.1 million, $1.8
million and $1.9 million for the years ended December 31, 1998, 1997 and 1996,
respectively. Provisions for loan losses are charged to earnings to bring the
total allowance for loan losses to a level deemed appropriate by management
based on such factors as historical loss experience, the volume and type of
lending conducted by 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. During the year ended December 31, 1998, the increased provision for
loan losses was recorded due to the continuing change in the composition of the
loans receivable portfolio from more traditional residential real estate type
loans to commercial type loans. At December 31, 1998, single family mortgage
and residential construction loans made up approximately 49% of the loans
receivable portfolio as compared to 58% at December 31, 1997, a decrease of 9%.
This change is occurring as a result of management's emphasis on commercial
business lending and the loans acquired in the Valley Acquisition.
Coastal's asset quality ratios have remained relatively consistent from
December 31, 1996 to December 31, 1998. Nonperforming loans as a percentage of
total loans receivable was 1.6%, 1.4% and 1.1% at December 31, 1998, 1997 and
1996, respectively. The allowance for loan losses as a percentage of
nonperforming loans was 46.3%, 41.9% and 49.0% at December 31, 1998, 1997 and
1996, respectively. The allowance for loan losses as a percentage of total
loans receivable was 0.7%, 0.6% and 0.6% at December 31, 1998, 1997 and 1996,
respectively. During 1998, the activity in the allowance for loan losses
included the $2.3 million acquisition allowance adjustment as a result of the
loans acquired in the Valley Acquisition, of which approximately 58% were
commercial real estate and commercial, financial and industrial loans.
Although no assurance can be given, Coastal's management believes that its
present allowance for loan losses is adequate, based upon, among other factors,
the changing composition of the loans receivable portfolio, historical loss
experience, delinquency trends and current economic conditions. Management will
continue to review its loan loss policy as Coastal's loan portfolio grows and
diversifies to determine if changes to the policy and the resulting allowance
for loan losses are necessary.
NONINTEREST INCOME
Total noninterest income (excluding the writedown of purchased mortgage
loan premium) amounted to $7.6 million during 1998, an increase of $1.2 million,
or 18.8%, over 1997. The increase in noninterest income was primarily due to an
increase of $1.7 million in loan fees and service charges on deposit accounts
and a $463,000 increase in other noninterest income. The increase in loan fees
and service charges on deposit accounts consisted of a $292,000 increase in loan
fees and a $1.4 million increase in service charges on deposit accounts due to
the increase in transaction type deposit accounts, including the transaction
type deposit accounts acquired in the Valley Acquisition. These increases were
somewhat offset by a $764,000 decrease in loan servicing income due to the
declining loan servicing portfolio and a $236,000 decrease in the gain on sales
of mortgage-backed securities available-for-sale. In addition, as discussed
previously, Coastal recorded a writedown of purchased mortgage loan premium of
$709,000 during 1998.
Total noninterest income amounted to $6.4 million during 1997, an
increase of $293,000, or 4.8%, over 1996. The increase in noninterest income
is primarily due to an increase of $568,000 in loan fees and service
charges on deposit accounts, a $237,000 gain on sales of mortgage-backed
securities available-for-sale in 1997 and a $164,000 increase in other
noninterest income, offset by the decrease of $159,000 in loan servicing
income, due to the declining loan servicing portfolio, and the $521,000
gain on the sale of a branch office recorded in 1996. The increase in loan fees
and service charges on deposit accounts consisted of an increase of
$87,000 in loan fees and a $481,000 increase in service charges on deposit
accounts, primarily due to the increase in transaction type deposit accounts
from 1996 to 1997 and the 1997 branch acquisition which consisted of 53.5%
transaction type deposit accounts. The gain on the sales of mortgage-backed
securities available-for-sale was the result of the sale of securities with a
book value of $11.3 million during 1997.
NONINTEREST EXPENSE
Total noninterest expense amounted to $48.4 million during 1998, an
increase of $8.8 million, or 22.4%, over 1997. Compensation, payroll taxes and
other benefits increased $4.3 million from 1997 to 1998, primarily due to the
staffing increases related to the expansion of the loan product base and the
continuing development of commercial business lending programs, in addition to
the staffing expenses related to the Valley Acquisition. Office occupancy
expense increased $2.0 million from 1997 to 1998 due to the acquisition of
assets and other expenses related to the relocation of Coastal's corporate
headquarters in the third quarter of 1997 and the acquisition of the twelve
branches in the Valley Acquisition. In addition, data processing expenses and
the amortization of goodwill increased $450,000 and $444,000, respectively,
primarily due to the Valley Acquisition. Other changes included a $357,000
increase in insurance premiums (which includes deposit insurance premiums) and a
$1.3 million increase in other operating expenses. During the year ended
December 31, 1998, noninterest expense included approximately $257,000 in
nonrecurring expenses incurred due to the Valley Acquisition.
Total noninterest expense amounted to $39.5 million during 1997, an
increase of $1.6 million, or 4.3%, over 1996 before the effect of the 1996
special assessment. Compensation, payroll taxes and other benefits and office
occupancy increased $2.2 million and $1.3 million, respectively, primarily due
to the overall increase in personnel hired for the expansion of the loan
products offered and the continuing development of the commercial business
lending programs. In addition, occupancy expenses also increased due to the
acquisition of assets and other expenses related to the relocation of Coastal's
corporate headquarters and consolidation of its administrative, primary lending
and mortgage servicing offices in the third quarter of 1997. Of the $1.3
million increase in occupancy expenses, approximately $128,000 were nonrecurring
expenses incurred due to the relocation. The amortization of goodwill increased
$56,000 during 1997 due primarily to a branch acquisition and the related
goodwill recorded. These increases were somewhat offset by decreases of $1.1
million, $646,000 and $202,000 in insurance premiums, other noninterest expenses
and data processing expense, respectively. The decrease in insurance premiums
was due to the decrease in deposit insurance premiums pursuant to the reduced
assessment rates applicable to Coastal as a result of the passage of the Act in
1996. The decrease in data processing expenses was primarily due to the
expenses incurred in 1996 related to the May 1996 bank data processing
conversion and the conversion in June of 1996 of the five locations acquired in
1995 to the new data processing system.
PROVISION FOR FEDERAL INCOME TAXES
Coastal generated no regular Federal taxable income in 1998, 1997 or 1996
primarily due to the utilization of the net operating loss carryovers acquired
in May 1988 from the associations obtained in connection with the Federal
Savings and Loan Insurance Corporation's Southwest Plan (the "Southwest Plan
Acquisition") and because payments to Coastal pursuant to the related assistance
agreement in prior years were excludable from taxable income, which resulted in
Coastal reporting losses each year for tax purposes. However, pursuant to the
terms of the Southwest Plan Acquisition 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 the FRF 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 the FRF 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.
As discussed previously, during 1998, Coastal completed the resolution of
an outstanding tax benefit issue with the Federal Deposit Insurance Corporation
as Manager of the FRF. The resolution of the issue resulted in Coastal
recording a $3.7 million reversal of accrued income taxes. The resolution of
the tax benefit issue is also contributing an ongoing quarterly tax benefit of
$226,000 which is estimated to continue until the second quarter of 2001.
The provisions for Federal income taxes were $7.2 million (excluding the
one-time effect of the $3.7 million reversal of accrued income taxes) in 1998,
$7.8 million in 1997 and $5.7 million in 1996. 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
Coastal's asset and liability management process is utilized to measure and
manage its interest rate risk exposure, which is Coastal's primary market risk.
Interest rate risk can be defined as the exposure of Coastal's net interest
income to adverse movements in interest rates. 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 achieve 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, 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 Asset/Liability Committee of the Board of Directors of the Bank
(the "Board"). The Board's written policies and procedures are implemented by
the Asset/Liability Subcommittee (the "Subcommittee"), a management-staffed
committee composed of the Chief Executive and Chief Lending Officers of the
Bank, in addition to members of the Bank's Portfolio Control Center. The
Subcommittee meets regularly 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 purchase and
sale activity and maturities of investments and borrowings. A representative of
the Subcommittee also meets with members of Coastal's banking, treasury and
marketing areas to participate in 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, interest rate matching, core deposit
activity, current market conditions and interest rates on both a local and
national level.
To effectively measure and manage interest rate risk, the Asset/Liability
Committee of the Board 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 economic value of equity ("EVE"), which is defined as
the difference between the market value of Coastal's existing assets and
liabilities, including the effects of off-balance sheet instruments, and by
evaluating such impact against the guidelines established by the Board for
allowable changes in net interest income and EVE. Coastal utilizes the
market-value analysis to address the change in the equity value of Coastal's
balance sheet arising from movements in interest rates by computing the net
present value of Coastal's assets, liabilities and off-balance sheet instruments
using selected interest rate scenarios. 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. Economic 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.
From these analyses, interest rate risk is quantified and appropriate
strategies are formulated and implemented on an ongoing basis. Based on
Coastal's December 31, 1998 interest rate sensitivity position, management
believes that at December 31, 1998 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 presents an analysis of the sensitivity in Coastal's
net interest income over a four-quarter period and the EVE based on the
indicated changes in interest rates at December 31, 1998 and 1997. The interest
rate scenarios presented in the table include interest rates at December 31,
1998 and 1997 and, for the net interest income calculation, as adjusted by the
indicated changes in interest rates over a four-quarter period, and for the EVE
calculation, as adjusted by instantaneous and parallel changes in interest rates
of upward and downward of up to 200 basis points. Each rate scenario reflects
unique prepayment and repricing assumptions.
<TABLE>
<CAPTION>
Estimated Change In
Change Net Interest Income EVE
In Interest Rates December 31, December 31,
(in basis points) 1998 1997 1998 1997
- -------------------- -------- ----------- ------ ---------
<S> <C> <C> <C> <C>
+200 (8.56)% (7.41)% (6.41)% (21.07)%
+100 (4.05). (3.76) (0.66) (6.52)
0 -- -- -- --
- -100 4.77 3.52 (2.09) 0.18
- -200 9.10 7.25 (5.32) (6.54)
</TABLE>
There are limitations inherent in any methodology used to estimate the
exposure to changes in market interest rates. Therefore, this analysis is not
intended to be a forecast of the actual effect of a change in market interest
rates on Coastal. 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 take into account historical 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 EVE 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 EVE is significantly impacted by the estimated effect of prepayment
risk on the value of mortgage-backed securities, loans receivable and mortgage
servicing rights as market interest rates change. 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 asset. 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 mortgage 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.
A more conventional but limited asset and liability monitoring tool
involves analyzing 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 based on this "gap" analysis, 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 deposit, 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.
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, 1998. 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.
<TABLE>
<CAPTION>
As of December 31, 1998
<S> <C> <C> <C>
More than More than More than
Three months three months one year to
or less to one year three years
(Dollars in thousands)
INTEREST-SENSITIVE ASSETS
Loans, net (1)(2):
First lien mortgage-single family fixed rate. . . . . . $ 1,504 $ 3,125 $ 11,395
First lien mortgage-single family adjustable
rate. . . . . . . . . . . . . . . . . . . . . . . . . 48,326 401,175 57,551
First lien mortgage-multifamily fixed rate. . . . . . . 5,285 1,970 5,487
First lien mortgage-multifamily variable rate . . . . . 101,190 -- --
Construction and acquisition and
development, net of loans in process. . . . . . . . . 117,839 2,509 1,694
Commercial real estate. . . . . . . . . . . . . . . . . 169,216 6,010 21,366
Commercial. . . . . . . . . . . . . . . . . . . . . . . 243,337 6,177 9,293
Consumer and other. . . . . . . . . . . . . . . . . . . 9,506 10,707 14,574
Mortgage-backed securities held-to-maturity(1)(2) . . . . 1,016,361 -- 1
Securities available-for-sale (1)(2). . . . . . . . . . . 96,609 2,016 --
Other interest-earning assets (3) . . . . . . . . . . . . 52,921 -- --
----------- -------------- -------------
Total interest-sensitive assets . . . . . . . . . . . 1,862,094 433,689 121,361
----------- -------------- -------------
Noninterest-sensitive assets
Total assets
INTEREST-SENSITIVE LIABILITIES:
Savings deposits (4):
Interest-bearing checking accounts. . . . . . . . . . . $ 63,067 $ -- $ --
Savings accounts. . . . . . . . . . . . . . . . . . . . 48,571 -- --
Money market accounts . . . . . . . . . . . . . . . . . 283,695 -- --
Certificate accounts (including premium). . . . . . . . 289,462 676,191 170,543
Securities sold under agreements to repurchase. . . . . . -- -- --
Advances from the FHLB. . . . . . . . . . . . . . . . . . 762,300 111,054 15,309
Senior Notes payable. . . . . . . . . . . . . . . . . . . -- -- --
-------------- -------------- -------------
Total interest-sensitive liabilities. . . . . . . . . 1,447,095 787,245 185,852
-------------- -------------- -------------
Noninterest-sensitive liabilities
Total liabilities
Preferred Stock of the Bank
Common stockholders' equity
Total liabilities and stockholders'
equity
Gap during the period. . . . . . . . . . . . . . . . . . . $ 414,999 $ (353,556) $ (64,491)
Effect of interest rate swaps and caps(5). . . . . . . . . 38,005 (14,600) (7,180)
----------- -------------- -------------
Cumulative gap after effect of interest rate swaps
and caps. . . . . . . . . . . . . . . . . . . . . . . . . $ 453,004 $ 84,848 $ 13,177
========== ============== =============
Interest-sensitive assets as a % of interest-sensitive
liabilities (cumulative). . . . . . . . . . . . . . . . . 128.68% 102.75% 99.87%
Interest-sensitive assets as a % of total
assets (cumulative) . . . . . . . . . . . . . . . . . . . 62.44 76.98 81.05
Ratio of gap after effect of interest rate swaps and caps
to total assets . . . . . . . . . . . . . . . . . . . . . 15.19 (12.35) (2.40)
Ratio of cumulative gap after effect of interest rate
swaps and caps to total assets. . . . . . . . . . . . . . 15.19 2.85 0.44
<S> <C> <C> <C> <C>
More than More than
three years to five years to ten years to Over
five years ten years twenty years twenty years
INTEREST-SENSITIVE ASSETS
Loans, net (1)(2):
First lien mortgage-single family fixed rate. . . . . . $ 29,857 $ 21,762 $ 55,930 $ 55,282
First lien mortgage-single family adjustable
rate. . . . . . . . . . . . . . . . . . . . . . . . . 4,135 -- -- --
First lien mortgage-multifamily fixed rate. . . . . . . 3,119 1,042 399 --
First lien mortgage-multifamily variable rate . . . . . -- -- -- --
Construction and acquisition and
development, net of loans in process. . . . . . . . . 5,523 1,002 1,177 --
Commercial real estate. . . . . . . . . . . . . . . . . 19,286 11,594 26,707 --
Commercial. . . . . . . . . . . . . . . . . . . . . . . 6,894 902 -- --
Consumer and other. . . . . . . . . . . . . . . . . . . 28,284 12,505 3,513 --
Mortgage-backed securities held-to-maturity(1)(2) . . . . -- 41 8,315 129,398
Securities available-for-sale (1)(2). . . . . . . . . . . -- -- -- --
Other interest-earning assets (3) . . . . . . . . . . . . -- -- -- --
---------- --------------- -------------- --------------
Total interest-sensitive assets . . . . . . . . . . . 97,098 48,848 96,041 184,680
---------- --------------- -------------- --------------
Noninterest-sensitive assets
Total assets
INTEREST-SENSITIVE LIABILITIES:
Savings deposits (4):
Interest-bearing checking accounts. . . . . . . . . . . $ -- $ -- $ -- $ --
Savings accounts. . . . . . . . . . . . . . . . . . . . -- -- -- --
Money market accounts . . . . . . . . . . . . . . . . . -- -- -- --
Certificate accounts (including premium). . . . . . . . 22,051 145 5 90
Securities sold under agreements to repurchase. . . . . . -- 100,000 -- --
Advances from the FHLB. . . . . . . . . . . . . . . . . . 2,834 59,914 15,309 --
Senior Notes payable. . . . . . . . . . . . . . . . . . . 50,000 -- -- --
---------- --------------- -------------- --------------
Total interest-sensitive liabilities. . . . . . . . . 74,885 160,059 15,314 90
---------- --------------- -------------- --------------
Noninterest-sensitive liabilities
Total liabilities
Preferred Stock of the Bank
Common stockholders' equity
Total liabilities and stockholders'
equity
Gap during the period. . . . . . . . . . . . . . . . . . . $ 22,213 $ (111,211) $ 80,727 $ 184,590
Effect of interest rate swaps and caps(5). . . . . . . . . -- (16,225) -- --
---------- --------------- -------------- --------------
Cumulative gap after effect of interest rate swaps
and caps. . . . . . . . . . . . . . . . . . . . . . . . . $ 35,390 $ (92,046) $ (11,319) $ 173,271
========== =============== ============== ==============
Interest-sensitive assets as a % of interest-sensitive
liabilities (cumulative). . . . . . . . . . . . . . . . . 100.77% 96.53% 99.58% 106.49%
Interest-sensitive assets as a % of total
assets (cumulative) . . . . . . . . . . . . . . . . . . . 84.31 85.95 89.17 95.36
Ratio of gap after effect of interest rate swaps and caps
to total assets . . . . . . . . . . . . . . . . . . . . . 0.74 (4.27) 2.71 6.19
Ratio of cumulative gap after effect of interest rate
swaps and caps to total assets. . . . . . . . . . . . . . 1.19 (3.09) (0.38) 5.81
<S> <C>
Totals
INTEREST-SENSITIVE ASSETS
Loans, net (1)(2):
First lien mortgage-single family fixed rate. . . . . . $ 178,855
First lien mortgage-single family adjustable
rate. . . . . . . . . . . . . . . . . . . . . . . . . 511,187
First lien mortgage-multifamily fixed rate. . . . . . . 17,302
First lien mortgage-multifamily variable rate . . . . . 101,190
Construction and acquisition and
development, net of loans in process. . . . . . . . . 129,744
Commercial real estate. . . . . . . . . . . . . . . . . 254,179
Commercial. . . . . . . . . . . . . . . . . . . . . . . 266,603
Consumer and other. . . . . . . . . . . . . . . . . . . 79,089
Mortgage-backed securities held-to-maturity(1)(2) . . . . 1,154,116
Securities available-for-sale (1)(2). . . . . . . . . . . 98,625
Other interest-earning assets (3) . . . . . . . . . . . . 52,921
-----------
Total interest-sensitive assets . . . . . . . . . . . 2,843,811
------------
Noninterest-sensitive assets. . . . . . . . . . . . . . . 138,350
------------
Total assets. . . . . . . . . . . . . . . . . . . . . $ 2,982,161
============
INTEREST-SENSITIVE LIABILITIES:
Savings deposits (4):
Interest-bearing checking accounts. . . . . . . . . . . $ 63,067
Savings accounts. . . . . . . . . . . . . . . . . . . . 48,571
Money market accounts . . . . . . . . . . . . . . . . . 283,695
Certificate accounts (including premium). . . . . . . . 1,158,487
Securities sold under agreements to repurchase. . . . . . 100,000
Advances from the FHLB. . . . . . . . . . . . . . . . . . 966,720
Senior Notes payable. . . . . . . . . . . . . . . . . . . 50,000
------------
Total interest-sensitive liabilities. . . . . . . . . 2,670,540
------------
Non-interest-sensitive liabilities . . . . . . . . . . . . 170,107
------------
Total liabilities . . . . . . . . . . . . . . . . . . 2,840,647
Preferred Stock of the Bank . . . . . . . . . . . . . . . 28,750
Common stockholders' equity . . . . . . . . . . . . . . . 112,764
-------------
Total liabilities and stockholders'
equity. . . . . . . . . . . . . . . . . . . . . . . . 2,982,161
=============
</TABLE>
_______________
Footnotes:
(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 interest-bearing deposit accounts, FHLB stock and other
investments.
(4) Includes checking accounts, savings accounts and money market accounts
that are interest-bearing. Effective January 1, 1998, Coastal implemented a
program whereby a portion of the balances in noninterest-bearing and
interest-bearing checking accounts is reclassified to money market demand
accounts under Federal Reserve Regulation D. Fixed-rate certificate accounts
are based on contractual maturities.
(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") 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 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, 1998, Coastal was a party to interest rate swap agreements
which have an aggregate notional amount of $38.0 million and expire from 1999 to
2005. At December 31, 1998, the fair value of the interest rate swap agreements
was estimated to be a loss of $1.1 million. With respect to such agreements,
Coastal makes weighted-average fixed interest payments ranging from 6.00% to
6.93%, and receives payments based on the floating 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 years ended December 31, 1998, 1997
and 1996 was to increase interest expense by approximately $377,000, $431,000
and $593,000, respectively. See Note 15 of the Notes to Consolidated Financial
Statements.
An interest rate cap is a guarantee given by one party, referred to as the
issuer (the 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 predetermined 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 mortgage-backed securities and loans receivable 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, 1998,
Coastal had interest rate cap agreements, which expire from 1999 to 2003,
covering an aggregate notional amount of $209.5 million, of which $110.5 million
were covering certain of Coastal's loans receivable, and are triggered,
depending on the particular contract, whenever the defined floating rate exceeds
7.0% to 11.0%. 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. The unamortized portion of the purchase price was
approximately $115,000 at December 31, 1998 with an estimated fair value of
$888,000. For the years ended December 31, 1998, 1997 and 1996, the interest
rate caps resulted in an overall decrease in interest income of approximately
$53,000, $218,000 and $518,000, respectively. See Note 15 of the Notes to
Consolidated Financial Statements.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Coastal's assets approximated $3.0 billion at December 31, 1998 and $2.9
billion at December 31, 1997. Stockholders' equity amounted to $112.8 million
at December 31, 1998, after the treasury stock purchases during 1998 at a cost
of $7.8 million. The regulatory capital of Coastal's subsidiary, Coastal Banc
ssb, exceeded all three of the Bank's regulatory capital requirements at
December 31, 1998. At December 31, 1998, the Bank's core capital amounted to
5.25% of adjusted total assets, compared to the requirement of 4.0%, its Tier 1
risk-based capital amounted to 9.54% of risk-adjusted assets as compared to the
requirement of 4.0% and its total risk-based capital amounted to 10.23% 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, advances from the FHLB, securities sold under
agreements to repurchase and federal funds purchased and principal and interest
payments on loans receivable and mortgage-backed securities. In addition, on
August 14, 1998, Coastal completed the Valley Acquisition which resulted in the
assumption of $120.1 million in net liabilities. Coastal uses its funding
resources principally to meet its ongoing commitments to fund maturing deposits
and deposit withdrawals, repay borrowings, purchase loans receivable and
mortgage-backed securities, fund existing and continuing loan commitments,
maintain its liquidity, meet operating expenses and fund acquisitions of other
banks and thrifts, either on a branch office or whole bank acquisition basis, in
addition to purchasing treasury stock. At December 31, 1998, Coastal had
binding commitments to originate or purchase loans totaling approximately $142.1
million and had $99.8 million of undisbursed loans in process. In addition, at
December 31, 1998, Coastal had commitments under lines of credit to originate
primarily construction and other loans of approximately $124.0 million and
letters of credit outstanding of $4.5 million. Scheduled maturities of
certificates of deposit during the twelve months following December 31, 1998
totaled $965.4 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.
YEAR 2000
Many existing computer programs, including many utilized by Coastal, use
only two digits to identify a year in the date field. These programs were
designed and developed without considering the impact of the upcoming change in
the century. Because of the year 2000 implications, Coastal formally initiated
a project during the first quarter of 1997 to ensure that its operational and
financial systems will not be adversely affected by year 2000 software problems.
The year 2000 project team, which includes all levels of management, is
identifying the computer applications which could fail or create erroneous
results because of the year 2000, and is developing alternate ("contingent")
operating systems for these applications. Coastal has included in its year 2000
project the following phases:
inventory and assessment;
renovation, which includes the repair or replacement;
validation, which includes the testing of computer systems and Coastal's
connections with other computer systems and service bureaus;
due diligence of third-party servicers;
development of contingency plans.
Regular year 2000 progress reports have been and will continue to be made to
Coastal's Board of Directors.
An inventory of all core systems and products that could be affected by the
year 2000 date change has been developed by Coastal. The software for Coastal's
systems is primarily provided through third party service bureaus and software
vendors. Coastal is requiring its third party service bureaus, software
providers and vendors to demonstrate and represent that the products provided
are or will be year 2000 compliant. Coastal has an internal compliance testing
program in place for testing with the external service bureaus and other
software providers, as well as testing other internally used systems. Coastal
expects to complete its testing and remediation by June 1999.
While Coastal does not believe that the process of making its computer
systems year 2000 ready will result in an adverse material impact on its
operations or liquidity, a substantial amount of management and staff time has
been and will continue to be devoted to the year 2000 project. The direct costs
associated with the year 2000 issues are estimated not to exceed $300,000 in the
aggregate. A portion of such costs representing hardware and software purchases
will be capitalized and amortized over an estimated three to five year period.
Planning and testing will not ensure that any organization will be able to
conduct business around and after the year 2000. Testing does not ensure that
our customers and other business partners will be able to conduct business. The
failure of Coastal, its customers and its other business partners to address the
year 2000 software problems could have a material adverse effect on Coastal's
financial condition, results of operations or liquidity. Coastal is performing
due diligence on its customers and other business partners by the implementation
and continuous monitoring of processes for evaluating its customers' and
business partners' readiness for the year 2000.
Coastal has implemented procedures and continues to refine its processes
for evaluating its business readiness in addition to developing contingency
plans to ensure that alternate operating systems are available in the event of
unforeseen problems. The effect of many business disruptions at the same time
may impact Coastal. Coastal will continue to review its contingency plans to
reasonably address these incidents. While Coastal will have contingency plans
in place to address a temporary disruption in services, there can be no
assurance that any disruption or failure will be only temporary, that Coastal's
contingency plans will function as anticipated, or that the results of
operations, financial condition, or liquidity of Coastal will not be adversely
affected in the event of a prolonged disruption or failure.
RECENT ACCOUNTING STANDARDS
A discussion of recently issued accounting pronouncements and their impact
on the Consolidated Financial Statements is provided in Note 2 to the
Consolidated Financial Statements.
<PAGE>
FORWARD-LOOKING INFORMATION
"Safe Harbor" Statement under the Private Securities Litigation Reform Act
of 1995: The statements contained in this Annual Report to stockholders which
are not historical facts contain forward looking information with respect to
plans, projections or future performance of Coastal, the occurrence of which
involve certain risks and uncertainties detailed in Coastal's filings with the
Securities and Exchange Commission ("SEC").
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 the 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; risks involved in Coastal's ability to
quickly and efficiently integrate the operations of acquired entities with those
of Coastal; 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 real estate, commercial business,
warehouse and mortgage servicing rights loans); and changes in business
strategies and other factors as discussed in Coastal's Annual Report on Form
10-K as filed with the SEC.
<PAGE>
Coastal Bancorp, Inc. and Subsidiaries
DIRECTORS AND OFFICERS
BOARD OF DIRECTORS OF COASTAL BANCORP, INC., COASTAL BANC SSB AND SUBSIDIARY (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 of Coastal Banc Capital Corp.,
a wholly-owned subsidiary 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 Chief Executive Officer of
CoastalBanc Financial Corp., a wholly-owned subsidiary of the Bank, Houston,
Texas
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.
President of Sentinel Trust Company, a Texas Limited Banking Association,
providing fiduciary and investment management services to affluent families,
their closely held corporations and foundations, Houston, Texas
DENNIS S. FRANK
Chief Executive Officer and President of Silvergate Bancorp, a thrift and
loan holding company, and of Silvergate Thrift and Loan, La Mesa, California,
and President and Chief Executive Officer of DSF Management Corp., a private
investment company, Houston, Texas
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
CORPORATE OFFICERS OF COASTAL BANCORP, INC.
MANUEL J. MEHOS
Chairman of the Board, President and Chief Executive Officer
CATHERINE N. WYLIE
Executive Vice President, Chief Financial Officer and Treasurer
LINDA B. FRAZIER
Senior 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
Director, Executive Vice President, Chief Financial Officer and Treasurer
LINDA B. FRAZIER
Director, Senior Vice President and Secretary
LINDA S. BUBACZ
Director, Assistant Treasurer and Assistant Secretary
<PAGE>
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
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 1998, Coastal entered into seven branch
acquisitions and one whole bank acquisition: two with an instrumentality of the
Federal government and six 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 $1.9 billion of deposits and the
net acquisition of 58 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 16 branch offices and
transferring the deposits to other offices located in the same market area.
At December 31, 1998, Coastal had total assets of approximately $3.0
billion and total deposits of approximately $1.7 billion with 49 branch offices
in metropolitan Houston, Austin, Corpus Christi, the Rio Grande Valley and small
cities in the southeast quadrant of Texas.
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, 1998 and
1997 and the related consolidated statements of operations, comprehensive
income, stockholders' equity and cash flows for each of the years in the
three-year period ended December 31, 1998. 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, 1998 and 1997 and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1998 in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
- --------------
January 19, 1999, except as to Note 6, which is as of February 11, 1999
Houston, Texas
<TABLE>
<CAPTION>
COASTAL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1998 AND 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS 1998 1997
- ----------------------------------------------------------------- ---------- ----------
<S> <C> <C>
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . $ 45,453 $ 37,096
Loans receivable (Notes 6 and 11) . . . . . . . . . . . . . . . . 1,538,149 1,261,435
Mortgage-backed securities held-to-maturity (market value of
$1,145,369 in 1998 and $1,324,968 in 1997)
(Notes 5, 11, 12, 14 and 15) . . . . . . . . . . . . . . . . . . 1,154,116 1,345,090
Mortgage-backed securities available-for-sale, at market value
(Notes 5, 11, 12, 14 and 15) . . . . . . . . . . . . . . . . . . 96,609 169,997
U.S. Treasury security available-for-sale, at market value. . . . 2,016 --
Accrued interest receivable (Note 7). . . . . . . . . . . . . . . 15,518 14,813
Property and equipment (net of accumulated depreciation and
amortization of $11,925 in 1998 and $8,100 in 1997). . . . . . . 33,116 22,250
Stock in the Federal Home Loan Bank of Dallas ("FHLB"). . . . . . 49,819 27,801
Goodwill (net of accumulated amortization of $13,554 in 1998 and
$11,270 in 1997) . . . . . . . . . . . . . . . . . . . . . . . . 30,687 15,717
Mortgage servicing rights (Note 8). . . . . . . . . . . . . . . . 4,049 5,653
Prepaid expenses and other assets (Notes 9, 15 and 17). . . . . . 12,629 11,558
---------- ----------
$2,982,161 $2,911,410
========== ==========
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
---------------------------------------
<S> <C> <C>
Liabilities:
Savings deposits (Note 10). . . . . . . . . . . . . . . . . . . $1,705,004 $1,375,060
Advances from the FHLB (Note 11). . . . . . . . . . . . . . . . 966,720 540,475
Securities sold under agreements to repurchase (Note 12). . . . 100,000 791,760
Senior Notes payable (Note 13). . . . . . . . . . . . . . . . . 50,000 50,000
Advances from borrowers for taxes and insurance . . . . . . . . 3,340 3,975
Other liabilities and accrued expenses. . . . . . . . . . . . . 15,583 16,560
Total liabilities . . . . . . . . . . . . . . . . . . . . . . 2,840,647 2,777,830
----------- -----------
9.0% noncumulative preferred stock of Coastal Banc ssb
(Note 21) . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,750 28,750
Commitments and contingencies (Notes 6, 15, 19 and 24)
Stockholders' equity (Notes 5, 19, 22 and 23):
Preferred Stock, no par value; authorized shares 5,000,000;
no shares issued. . . . . . . . . . . . . . . . . . . . . . . -- --
Common Stock, $.00667 par value; authorized shares 45,000,000;
7,568,255 and 7,513,389 shares issued in 1998 and 1997. . . . 50 50
Additional paid-in capital. . . . . . . . . . . . . . . . . . . 33,722 33,186
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . 88,144 73,868
Accumulated other comprehensive loss -
unrealized loss on securities available-for-sale. . . . . . . (1,374) (2,274)
Treasury stock, at cost (499,600 shares in 1998). . . . . . . . (7,778) --
----------- -----------
Total stockholders' equity. . . . . . . . . . . . . . . . . . 112,764 104,830
----------- -----------
$2,982,161 $2,911,410
=========== ===========
</TABLE>
See accompanying notes to Consolidated Financial Statements.
<TABLE>
<CAPTION>
COASTAL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<C> <C> <C>
<S> <C> <C> <C>
1998 1997 1996
--------- -------- ---------
Interest income:
Loans receivable. . . . . . . . . . . . . . . . . . . . . . . . . $120,281 $106,962 $ 97,935
Mortgage-backed securities. . . . . . . . . . . . . . . . . . . . 87,596 92,755 95,155
FHLB stock, federal funds sold and other interest-earning assets. 2,937 1,639 1,521
210,814 201,356 194,611
--------- -------- ---------
Interest expense:
Savings deposits. . . . . . . . . . . . . . . . . . . . . . . . . 66,128 62,912 60,076
Other borrowed money. . . . . . . . . . . . . . . . . . . . . . . 32,723 55,189 51,360
Senior Notes payable. . . . . . . . . . . . . . . . . . . . . . . 5,000 5,000 5,000
Advances from the FHLB:
Short-term. . . . . . . . . . . . . . . . . . . . . . . . . . . 16,042 8,562 6,622
Long-term . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,511 12,760 15,127
--------- -------- ---------
143,404 144,423 138,185
--------- -------- ---------
Net interest income . . . . . . . . . . . . . . . . . . . . . . 67,410 56,933 56,426
Provision for loan losses (Note 6) . . . . . . . . . . . . . . . . 3,100 1,800 1,925
Net interest income after provision for loan losses . . . . . . 64,310 55,133 54,501
--------- -------- ---------
Noninterest income:
Loan fees and service charges on deposit accounts . . . . . . . . 5,752 4,018 3,450
Loan servicing income, net. . . . . . . . . . . . . . . . . . . . 642 1,406 1,565
Gain on sale of branch office (Note 3). . . . . . . . . . . . . . -- -- 521
Gain (loss) on sales of mortgage-backed securities
available-for-sale, net . . . . . . . . . . . . . . . . . . . . 1 237 (4)
Writedown of purchased mortgage loan premium. . . . . . . . . . . (709) -- --
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,186 723 559
--------- -------- ---------
6,872 6,384 6,091
--------- -------- ---------
Noninterest expense:
Compensation, payroll taxes and other benefits. . . . . . . . . . 23,072 18,754 16,547
Office occupancy. . . . . . . . . . . . . . . . . . . . . . . . . 9,320 7,312 6,002
Data processing . . . . . . . . . . . . . . . . . . . . . . . . . 2,695 2,245 2,447
Amortization of goodwill. . . . . . . . . . . . . . . . . . . . . 2,284 1,840 1,784
Insurance premiums. . . . . . . . . . . . . . . . . . . . . . . . 1,448 1,091 2,199
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,564 8,302 8,948
SAIF insurance special assessment (Note 18) . . . . . . . . . . . -- -- 7,455
--------- -------- ---------
48,383 39,544 45,382
--------- -------- ---------
Income before provision for Federal income taxes. . . . . . . 22,799 21,973 15,210
Provision for Federal income taxes (Note 17) . . . . . . . . . . . 3,543 7,822 5,671
--------- -------- ---------
Net income before preferred stock dividends . . . . . . . . . 19,256 14,151 9,539
Preferred stock dividends of Coastal Banc ssb. . . . . . . . . . . 2,588 2,588 2,588
--------- -------- ---------
Net income available to common stockholders . . . . . . . . . $ 16,668 $ 11,563 $ 6,951
========= ======== =========
Basic earnings per share (Note 23) . . . . . . . . . . . . . . . . $ 2.24 $ 1.55 $ 0.93
========= ======== =========
Diluted earnings per share (Note 23) . . . . . . . . . . . . . . . $ 2.18 $ 1.50 $ 0.92
========= ======== =========
</TABLE>
See accompanying notes to Consolidated Financial Statements.
<PAGE>
COASTAL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1998 1997 1996
------- ------- --------
Net income available to common stockholders. . . . . $16,668 $11,563 $ 6,951
Other comprehensive income (loss), net of tax:
Unrealized holding gains (losses) on securities
available-for-sale arising during period (Note 5) 900 829 (2,609)
------- ------- --------
Comprehensive income . . . . . . . . . . . . . . . . $17,568 $12,392 $ 4,342
======= ======= ========
</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, 1998, 1997 AND 1996
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Accumulated
Additional other
Common paid-in Retained comprehensive Treasury
Stock capital earnings loss stock Total
------------ -------- ---------- --------------- ---------- ---------
Balance - December 31, 1995. . . . . . . . . . . . . . $ 50 $ 32,492 $ 59,631 $ (494) $ -- $ 91,679
Dividends on Common Stock. . . . . . . . . . . . . . . -- -- (1,985) -- -- (1,985)
Exercise of stock options
(Note 19) . . . . . . . . . . . . . . . . . . . . . . -- 112 -- -- -- 112
Change in net unrealized holding
gain (loss) on securities available-for-sale (Note 5)
-- -- -- (2,609) -- (2,609)
Net income for 1996. . . . . . . . . . . . . . . . . . -- -- 6,951 -- -- 6,951
------------ -------- ---------- ------------- ---------- ---------
Balance - December 31, 1996. . . . . . . . . . . . . . 50 32,604 64,597 (3,103) -- 94,148
Dividends on Common Stock. . . . . . . . . . . . . . . -- -- (2,292) -- -- (2,292)
Exercise of stock options
(Note 19) . . . . . . . . . . . . . . . . . . . . . . -- 582 -- -- -- 582
Change in net unrealized holding
gain (loss) on securities available-for-sale (Note 5)
-- -- -- 829 -- 829
Net income for 1997. . . . . . . . . . . . . . . . . . -- -- 11,563 -- -- 11,563
------------ -------- ---------- ------------- ---------- ---------
Balance - December 31, 1997. . . . . . . . . . . . . . 50 33,186 73,868 (2,274) -- 104,830
Dividends on Common Stock. . . . . . . . . . . . . . . -- -- (2,392) -- -- (2,392)
Exercise of stock options
(Note 19) . . . . . . . . . . . . . . . . . . . . . . -- 536 -- -- -- 536
Purchase of treasury stock at cost . . . . . . . . . . -- -- -- -- (7,778) (7,778)
Change in net unrealized holding
gain (loss) on securities available-for-sale (Note 5)
-- -- -- 900 -- 900
Net income for 1998. . . . . . . . . . . . . . . . . . -- -- 16,668 -- -- 16,668
------------ -------- ---------- ------------- ---------- ---------
Balance - December 31, 1998. . . . . . . . . . . . . . $ 50 $ 33,722 $ 88,144 $ (1,374) $ (7,778) $112,764
============ ======== ========== ============= ========== =========
</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, 1998, 1997 AND 1996
(IN THOUSANDS)
<S> <C> <C> <C>
1998 1997 1996
---------- ---------- ----------
Cash flows from operating activities:
Net income available to common stockholders. . . . . . . . $ 16,668 $ 11,563 $ 6,951
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization of property and equipment,
mortgage servicing rights and prepaid expenses
and other assets . . . . . . . . . . . . . . . . . . . . 9,099 7,485 6,098
Net premium amortization . . . . . . . . . . . . . . . . . 3,101 3,025 1,146
Provision for loan losses. . . . . . . . . . . . . . . . . 3,100 1,800 1,925
Amortization of goodwill . . . . . . . . . . . . . . . . . 2,284 1,840 1,784
Originations and purchases of mortgage loans held for sale (26,536) (8,063) (19,739)
Sales of mortgage loans held for sale. . . . . . . . . . . 26,287 8,361 20,158
(Gain) loss on sales of mortgage-backed securities
available-for-sale . . . . . . . . . . . . . . . . . . . (1) (237) 4
Gain on sale of branch office. . . . . . . . . . . . . . . -- -- (521)
Decrease (increase) in:
Accrued interest receivable. . . . . . . . . . . . . . . 1,863 (123) 853
Other, net . . . . . . . . . . . . . . . . . . . . . . . 104 9,668 (3,024)
Stock dividends from the FHLB. . . . . . . . . . . . . . . (2,247) (1,287) (1,288)
---------- ---------- ----------
Net cash provided by operating activities. . . . . . . . 33,722 34,032 14,347
---------- ---------- ----------
Cash flows from investing activities:
Purchases of mortgage-backed securities held-to-maturity . (8,203) (56,136) --
Purchase of U.S. Treasury security available-for-sale. . . -- -- (11)
Principal repayments on mortgage-backed securities . . . . 199,052 55,549 50,616
held-to-maturity
Principal repayments on mortgage-backed securities
available-for-sale . . . . . . . . . . . . . . . . . . . 26,206 627 879
Proceeds from maturity of U.S. Treasury securities . . . . 25,000 11 4,000
available-for-sale
Proceeds from sales of mortgage-backed securities. . . . . 48,551 11,545 860
available-for-sale
Purchases of loans receivable. . . . . . . . . . . . . . . (329,058) (135,202) (190,612)
Net decrease in loans receivable . . . . . . . . . . . . . 218,357 94,670 53,678
Purchases of property and equipment, net . . . . . . . . . (4,401) (9,825) (4,273)
Purchase of FHLB stock . . . . . . . . . . . . . . . . . . (19,771) (9,543) (7,924)
Proceeds from sales of FHLB stock. . . . . . . . . . . . . -- 9,000 5,000
Capitalization of mortgage servicing rights. . . . . . . . -- (116) --
Cash and cash equivalents received in business combination
transactions, net of disposition transaction in 1996 . . 120,085 52,093 11,652
---------- ---------- ----------
Net cash provided (used) by investing activities . . . . 275,818 12,673 (76,135)
---------- ---------- ----------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
COASTAL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(IN THOUSANDS)
<S> <C> <C> <C>
1998 1997 1996
------------ ------------- ------------
Cash flows from financing activities:
Net decrease (increase) in savings deposits. . . . . . . . . . . . . $ (25,399) $ 9,539 $ 12,497
Advances from the FHLB . . . . . . . . . . . . . . . . . . . . . . . 4,297,136 3,560,603 3,629,022
Principal payments on advances from the FHLB . . . . . . . . . . . . (3,870,891) (3,429,848) (3,531,488)
Proceeds from securities sold under agreements to repurchase
and federal funds purchased. . . . . . . . . . . . . . . . . . . 3,958,111 9,834,639 9,276,713
Repayments of securities sold under agreements to repurchase
and federal funds purchased. . . . . . . . . . . . . . . . . . . . (4,649,871) (10,009,866) (9,303,558)
Exercise of stock options for purchase of common stock, net. . . . . 536 582 112
Purchase of treasury stock . . . . . . . . . . . . . . . . . . . . . (7,778) -- --
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,392) (2,292) (1,985)
Net decrease in advances from borrowers for taxes and insurance. . . (635) (701) (1,834)
Net cash provided (used) by financing activities . . . . . . . . . (301,183) (37,344) 79,479
------------ ------------- ------------
Net increase in cash and cash equivalents. . . . . . . . . . . . . 8,357 9,361 17,691
Cash and cash equivalents at beginning of year . . . . . . . . . . . 37,096 27,735 10,044
------------ ------------- ------------
Cash and cash equivalents at end of year . . . . . . . . . . . . . . $ 45,453 $ 37,096 $ 27,735
============ ============= ============
Supplemental schedule of cash flows:
Interest paid. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 140,620 $ 142,532 $ 139,926
Income taxes paid. . . . . . . . . . . . . . . . . . . . . . . . . 6,980 2,466 6,451
============ ============= ============
Supplemental schedule of noncash investing and financing activities:
Foreclosures of loans receivable . . . . . . . . . . . . . . . . . $ 4,178 $ 4,226 $ 4,363
============ ============= ============
</TABLE>
See accompanying notes to Consolidated Financial Statements.
COASTAL BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
(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.
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, Coastal Banc ssb 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
Coastal Banc ssb 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. Coastal Banc ssb acquired deposits in transactions with the federal
government and other private institutions as a base for developing an ongoing
thrift and banking business. Coastal Banc ssb's first acquisition was in 1988
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 (the
"Acquired Associations").
Coastal Banc ssb is a broad-based financial services provider to consumers and
businesses. At December 31, 1998, Coastal Banc ssb operated 49 branch offices
in metropolitan Houston, Austin, Corpus Christi, the Rio Grande Valley and small
cities in the southeast quadrant of Texas.
(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 consolidated financial statements.
BASIS OF CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements include the accounts of Coastal Bancorp,
Inc., its wholly-owned subsidiary, HoCo and its wholly-owned subsidiaries,
Coastal Banc ssb and subsidiary, CoastalBanc Financial Corp. (collectively, the
"Bank"), and Coastal Banc Capital Corp. (collectively, "Coastal"). All
significant intercompany balances and transactions have been eliminated in
consolidation.
On April 23, 1998, Coastal declared a 3:2 stock split that was paid on June 15,
1998 to stockholders of record on May 15, 1998. Accordingly, all common stock
share data have been adjusted to include the effect of the stock split.
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.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents are comprised primarily of cash on hand and
interest-earning and noninterest-earning deposits in other banks.
LOANS RECEIVABLE
Loans receivable are stated at the principal balance outstanding adjusted for
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 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 more than
90 days as to principal and interest. When a loan is placed on nonaccrual, any
interest previously accrued but not collected is reversed against current
interest income.
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 loans receivable portfolio
and its consideration of such factors as historical loss experience, the volume
and type of lending conducted by Coastal, identification of adverse situations
which may affect the ability of borrowers to repay, assessment of current and
future economic conditions 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
paid off or sold, the remaining loan fees are recognized as income in that
period.
INVESTMENT AND MORTGAGE-BACKED SECURITIES
Coastal classifies securities as either held-to-maturity, available-for-sale or
trading. 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
net of tax as other comprehensive income (loss) in stockholders' equity until
realized. 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, 1998 or
1997.
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.
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.
<PAGE>
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.
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 eliminated the
accounting distinction between rights to service mortgage loans for others that
are acquired through loan origination activities and those acquired through
purchase transactions. On January 1, 1997, Coastal adopted Financial Accounting
Standards Board's Statement No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities," which supersedes Statement
122, and requires, among other things, that the book value of loans be allocated
between mortgage servicing rights and the related loans at the time of the loan
sale or securitization, if servicing is retained.
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. This
method of valuation incorporates assumptions that market participants would use
in their estimate of future servicing income and expense, including assumptions
about prepayments, defaults and interest rates. For purposes of measuring
impairment, the loans underlying the mortgage servicing rights are stratified on
the basis of interest rate and type (fixed or adjustable). The amount of
impairment is the amount by which the mortgage servicing rights, net of
accumulated amortization, exceed their fair value by strata. Impairment, if
any, is recognized through a valuation allowance and a charge to current
operations.
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
Bancorp files a consolidated federal income tax return with HoCo, Coastal Banc
Capital Corp., the Bank and its wholly-owned subsidiary. 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 on the date of grant of all stock-based awards. 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.
EARNINGS PER SHARE
Statement of Financial Accounting Standards No. 128, "Earnings per Share"
("Statement 128") was issued in February 1997. Statement 128 establishes
standards for computing and presenting earnings per share ("EPS") and replaces
the presentation of primary EPS with a presentation of basic EPS. Statement 128
also requires dual presentation of basic and diluted EPS for entities with
complex capital structures as well as a reconciliation of the basic EPS
computation to the diluted EPS computation. Statement 128 is effective for
financial statements issued for periods ending after December 15, 1997,
including interim periods. Coastal adopted Statement 128 in 1997, accordingly,
all prior period EPS data presented in the accompanying consolidated financial
statements has been restated to conform to the requirements of Statement 128.
Basic EPS is calculated by dividing net income available to common stockholders,
by the weighted average number of common shares outstanding. The computation of
diluted EPS assumes the issuance of common shares for all dilutive-potential
common shares outstanding during the reporting period. The dilutive effect of
stock options is considered in earnings per share calculations if dilutive,
using the treasury stock method.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For purposes of reporting cash flows, cash and cash equivalents include cash and
amounts due from depository institutions.
RECENT ACCOUNTING PRONOUNCEMENTS
As of January 1, 1998, Coastal adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("Statement 130") which
requires that all components of comprehensive income and total comprehensive
income be reported on one of the following: (1) the statement of operations,
(2) the statement of stockholders' equity, or (3) a separate statement of
comprehensive income. Comprehensive income is comprised of net income and all
changes to stockholders' equity, except those due to investments by owners
(changes in paid-in capital) and distributions to owners (dividends). These
amounts have been disclosed on the consolidated statements of comprehensive
income. Statement 130 did not change the current accounting treatment for
components of other comprehensive income (i.e. changes in unrealized gain (loss)
on securities available-for-sale).
As of January 1, 1998, Coastal adopted Statement of Financial Accounting
Standards No. 131, "Disclosure About Segments of an Enterprise and Related
Information" ("Statement 131") which requires public companies to report certain
information about their operating segments in their annual financial statements
and quarterly reports issued to shareholders. It also requires public companies
to report certain information about their products and services, the geographic
areas in which they operate, and their major customers. The implementation of
Statement 131 did not have a material effect on Coastal's Consolidated Financial
Statements. Coastal did not identify any reportable operating segments based on
the requirements of Statement 131.
The Financial Accounting Standards Board's Statement No. 133 ("Statement 133"),
"Accounting for Derivative Instruments and for Hedging Activities," was issued
in June 1998. Statement 133 requires companies to recognize all derivatives as
either assets or liabilities in the statement of financial condition and measure
those instruments at fair value. Statement 133 requires that changes in fair
value of a derivative be recognized currently in earnings unless specific hedge
accounting criteria are met. Statement 133 is effective for fiscal years
beginning after June 15, 1999. Coastal is evaluating the impact Statement 133
may have on its future consolidated financial statements.
(3) ACQUISITION AND DISPOSITION TRANSACTIONS
VALLEY BRANCH ACQUISITION
On August 14, 1998, Coastal completed the acquisition of the Valley
branches of Pacific Southwest Bank, also known as The San Benito Bank and Trust
Company, a unit of Pacific Southwest Bank ("Valley Branches"). Twelve branches
located in Harlingen, San Benito, Mission, Pharr, Edinburg, Brownsville, McAllen
and South Padre Island were acquired in this transaction. Summarized below are
the assets and liabilities recorded at fair value at the date of acquisition (in
thousands):
<TABLE>
<CAPTION>
<S> <C>
Cash and cash equivalents . . . . . . . . . $120,085
Loans receivable. . . . . . . . . . . . . . 176,157
U.S. Treasury securities available-for-sale 26,942
Goodwill. . . . . . . . . . . . . . . . . . 17,254
Property and equipment. . . . . . . . . . . 10,743
Other assets. . . . . . . . . . . . . . . . 5,438
--------
Total assets. . . . . . . . . . . . . . . $356,619
========
Savings deposits. . . . . . . . . . . . . . $355,425
Other liabilities and accrued expenses. . . 1,194
--------
Total liabilities . . . . . . . . . . . . $356,619
========
</TABLE>
<PAGE>
PORT ARTHUR BRANCH ACQUISITION
On June 21, 1997, Coastal consummated the purchase of the Port Arthur, Texas
branch of Wells Fargo Bank (Texas). 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. . . . . . . $52,093
Goodwill . . . . . . . . . . . . . . . 1,961
Property and equipment . . . . . . . . 693
-------
Total assets . . . . . . . . . . . . $54,747
=======
Savings deposits . . . . . . . . . . . 54,563
Other liabilities and accrued expenses 184
-------
Total liabilities. . . . . . . . . . $54,747
=======
</TABLE>
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
--------
Total assets . . . . . . . . . . . . $26,421
========
Savings deposits . . . . . . . . . . . 25,992
Other liabilities and accrued expenses 429
--------
Total liabilities. . . . . . . . . . $26,421
========
</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.
<PAGE>
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
Other liabilities and accrued expenses sold 69
Loans receivable sold . . . . . . . . . . . 155
Property and equipment sold . . . . . . . . 438
Reduction of goodwill . . . . . . . . . . . 179
</TABLE>
The transactions described above are not material to the consolidated financial
position or results of operations of Coastal; therefore pro forma information is
not presented.
(4) SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL AND FEDERAL FUNDS
SOLD
An analysis of securities purchased under agreements to resell ("repurchase
agreements") and federal funds sold for the years ended December 31, 1998 and
1997 is as follows (dollars in thousands):
<TABLE>
<CAPTION>
<S> <C> <C>
1998 1997
Repurchase agreements:
Balance outstanding at December 31,. $ -- $ --
Maximum outstanding at any month-end -- --
Average balance outstanding. . . . . 671 1,973
Average interest rate. . . . . . . . 5.66% 6.89%
Federal funds sold:
Balance outstanding at December 31,. $ -- $ --
Maximum outstanding at any month-end 28,500 10,500
Average balance outstanding. . . . . 7,320 2,051
Average interest rate. . . . . . . . 5.36% 5.61%
</TABLE>
The securities underlying the repurchase agreements 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 repurchase agreements or federal funds sold outstanding during
1996.
<PAGE>
(5) MORTGAGE-BACKED SECURITIES
Mortgage-backed securities at December 31, 1998 are as follows (in
thousands):
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ----------- ------------ ----------
Held-to-maturity:
REMICS - Agency. . . . . $ 839,593 $ 3,770 $ (10,349) $ 833,014
REMICS - Non-agency. . . 218,500 598 (2,186) 216,912
FNMA certificates. . . . 63,199 147 (810) 62,536
GNMA certificates. . . . 21,311 16 (23) 21,304
Non-agency securities. . 11,512 113 (23) 11,602
Interest-only securities 1 -- -- 1
---------- ----------- ------------ ----------
$1,154,116 $ 4,644 $ (13,391) $1,145,369
========== =========== ============ ==========
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Available-for-sale:
REMICS - Agency . . $97,695 $ -- $ (2,115) $95,580
REMICS - Non-agency 1,037 -- (8) 1,029
------- ---------- ---------- -------
$98,732 $ -- $ (2,123) $96,609
======= ========== ========== =======
</TABLE>
Mortgage-backed securities at December 31, 1997 are as follows (in
thousands):
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ----------- ------------ ----------
Held-to-maturity:
REMICS - Agency. . . . . $ 950,689 $ 5,022 $ (20,478) $ 935,233
REMICS - Non-agency. . . 279,131 701 (5,610) 274,222
FNMA certificates. . . . 71,887 144 (683) 71,348
GNMA certificates. . . . 28,808 566 -- 29,374
Non-agency securities. . 14,555 239 (23) 14,771
Interest-only securities 20 -- -- 20
---------- ----------- ------------ ----------
$1,345,090 $ 6,672 $ (26,794) $1,324,968
========== =========== ============ ==========
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Available-for-sale:
REMICS - Agency . . $171,167 $579 $(4,044) $ 167,702
REMICS - Non-agency 2,328 -- (33) 2,295
---------- ----------- ------------ ----------
$173,495 $579 $(4,077) $169,997
========== =========== ============ ==========
</TABLE>
Proceeds from sales of mortgage-backed securities available-for-sale during
1998, 1997 and 1996 were approximately $48.6 million, $11.5 million and
$860,000, respectively. Gross gains of approximately $26,000 and $237,000 were
realized on these sales in 1998 and 1997 and gross losses of approximately
$25,000 and $4,000 were realized on these sales in 1998 and 1996.
<PAGE>
(6) LOANS RECEIVABLE
Loans receivable at December 31, 1998 and 1997 are as follows (in
thousands):
<TABLE>
<CAPTION>
<S> <C> <C>
1998 1997
----------- -----------
Real estate mortgage loans:
First lien mortgage, primarily residential. . . . . . $ 690,510 $ 689,767
Multifamily . . . . . . . . . . . . . . . . . . . . . 119,447 131,454
Residential construction. . . . . . . . . . . . . . . 115,714 83,359
Acquisition and development . . . . . . . . . . . . . 75,932 31,619
Commercial. . . . . . . . . . . . . . . . . . . . . . 257,723 181,315
Commercial construction . . . . . . . . . . . . . . . 40,344 14,506
Commercial loans, secured by residential mortgage
loans held for sale . . . . . . . . . . . . . . . . . 173,124 98,679
Commercial loans, secured by mortgage servicing rights 3,867 32,685
Commercial, financial and industrial . . . . . . . . . 92,218 30,877
Loans secured by savings deposits. . . . . . . . . . . 13,164 8,695
Consumer and other loans . . . . . . . . . . . . . . . 66,989 15,030
----------- -----------
1,649,032 1,317,986
Loans in process . . . . . . . . . . . . . . . . . . . (99,790) (47,893)
Allowance for loan losses. . . . . . . . . . . . . . . (11,358) (7,412)
Unearned interest and loan fees. . . . . . . . . . . . (3,493) (2,926)
Premium on purchased loans, net. . . . . . . . . . . . 3,758 1,680
----------- -----------
$1,538,149 $1,261,435
=========== ===========
Weighted average yield . . . . . . . . . . . . . . . . 8.55% 8.30%
=========== ===========
</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.
At December 31, 1998, Coastal had outstanding commitments to originate or
purchase approximately $142.1 million of first lien mortgage and other loans and
had commitments under lines of credit to originate primarily construction and
other loans of approximately $124.0 million. In addition, at December 31, 1998,
Coastal had letters of credit of approximately $4.5 million outstanding.
A portion of Coastal's first lien mortgage loan portfolio is pledged as
collateral to secure advances from the FHLB (Note 11).
Included in loans receivable at December 31, 1998 and 1997 are loans totaling
approximately $22.8 million and $17.4 million, 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, 1998, 1997 and 1996, Coastal recognized interest income on these nonaccrual
loans (outstanding as of the period end) of approximately $480,000, $827,000,
and $507,000, respectively, whereas approximately $835,000, $925,000, and
$816,000, respectively, in additional interest income would have been recorded
if such loans had been performing in accordance with their original terms.
At December 31, 1998 and 1997, the carrying value of impaired loans was
approximately $1.7 million and $2.0 million, respectively, and the related
allowance for loan losses on those impaired loans totaled $880,000 and $1.1
million, respectively. The average recorded investment in impaired loans during
the years ended December 31, 1998, 1997 and 1996 was approximately $1.7 million,
$897,000, and $846,000, respectively. For the years ended December 31, 1998,
1997 and 1996, 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,
<S> <C> <C> <C>
1998 1997 1996
-------- -------- -------
Balance, beginning of year . . $ 7,412 $ 6,880 $5,703
Provision for loan losses. . . 3,100 1,800 1,925
Charge-offs. . . . . . . . . . (1,693) (1,416) (851)
Recoveries . . . . . . . . . . 282 148 103
Allowance of acquired entities 2,257 -- --
-------- -------- -------
Balance, end of year . . . . . $11,358 $ 7,412 $6,880
======== ======== =======
</TABLE>
On August 11, 1998, Coastal approved the purchase of a $10.0 million
participation in a warehouse loan aggregating $25.0 million to MCA Financial
Corp., and certain of its affiliates, of Southfield, Michigan (collectively the
"Mortgage Banker"). The lead lender ("Lead Lender") in this facility is a major
commercial bank and the loan is secured by subprime residential loans. In late
January 1999, due to a lack of liquidity, the Mortgage Banker ceased operations
and shortly thereafter was seized by the Michigan Bureau of Financial
Institutions. A conservator was appointed to take control of the Mortgage
Banker's books and records, marshal that company's assets and continue its loan
servicing operations. A voluntary petition under Chapter 11 of the U.S.
Bankruptcy Code was filed in the U.S. Bankruptcy Court for the Eastern District
of Michigan for the Mortgage Banker on or about February 11, 1999, by the
conservator, who has been appointed the "debtor-in-possession", to allow the
conservator time to develop a plan of reorganization while protecting the assets
of the Mortgage Banker.
Coastal has hired special bankruptcy counsel to represent it in this situation
and has been involved in discussions with the Lead Lender regarding the status
of the loan. Although Coastal has been informed by the Lead Lender that
Coastal's loan is collateralized by residential loans, Coastal, as of the date
hereof, has been unable to verify the extent to which the collateral, if any, is
sufficient to prevent Coastal from incurring a loss. Effective December 31,
1998, Coastal put this loan on nonaccrual and allocated $1.5 million of the
general reserve of $1.5 million to this loan. Coastal is continuing to monitor
this situation and will make additions to the overall allowance for loan losses
as considered necessary based on its existing policy. At this time, Coastal is
unable to determine the timing, probability, or the amount of any loss which
might result from the default by the Mortgage Banker.
(7) ACCRUED INTEREST RECEIVABLE
Accrued interest receivable at December 31, 1998 and 1997 is as follows (in
thousands):
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Loans receivable. . . . . . . . . . . . $10,088 $ 8,124
Mortgage-backed securities. . . . . . . 5,383 6,684
FHLB stock, federal fund sold and other
interest-earning assets . . . . . . . 47 5
------- -------
$15,518 $14,813
======= =======
</TABLE>
(8) MORTGAGE SERVICING RIGHTS
Coastal services loans receivable for others which are not included in the
consolidated financial statements. The total amounts of such loans were
approximately $519.2 million, $675.7 million and $776.7 million at December 31,
1998, 1997 and 1996, respectively. At December 31, 1998 and 1997, Coastal
serviced approximately $1.4 million and $2.2 million of loans sold with
recourse, respectively.
<PAGE>
An analysis of activity of mortgage servicing rights for the years ended
December 31, 1998, 1997 and 1996 is as follows (in thousands):
<TABLE>
<CAPTION>
Years ended December 31,
<S> <C> <C> <C>
1998 1997 1996
-------- -------- --------
Balance, beginning of year $ 5,653 $ 6,810 $ 8,323
Additions. . . . . . . . . -- 116 --
Amortization . . . . . . . (1,604) (1,273) (1,513)
-------- -------- --------
Balance, end of year . . . $ 4,049 $ 5,653 $ 6,810
======== ======== ========
</TABLE>
At December 31, 1998, the estimated fair value of Coastal's recognized mortgage
servicing rights was $5.1 million and no valuation allowance for impairment was
considered necessary.
(9) REAL ESTATE OWNED
Included in prepaid expenses and other assets is real estate owned at December
31, 1998 and 1997 of approximately $4.9 million and $3.2 million, respectively.
(10) SAVINGS DEPOSITS
Savings deposits and the related weighted average interest rates at December 31,
1998 and 1997 are summarized as follows (dollars in thousands):
<TABLE>
<CAPTION>
1998 1997
------------------------------ ---------------------------
Stated Rate Amount Stated Rate Amount
- ------------------------------- --------------- ------------- -------------- -----------
<S> <C> <C> <C> <C>
Noninterest-bearing checking. . 0.00% $ 95,398 0.00% $101,782
Interest-bearing checking . . . 1.00 - 2.00 63,067 1.49 - 2.00 69,972
Savings accounts. . . . . . . . 1.98 - 2.75 48,571 2.18 - 2.75 25,555
Money market demand accounts. . 0.00 - 4.51 339,481 2.96 - 4.51 165,986
------------- --------
546,517 363,295
------------- --------
Certificate accounts. . . . . . 2.00 - 2.99 6,538 2.00 - 2.99 5,142
3.00 - 3.99 38,614 3.00 - 3.99 2,763
4.00 - 4.99 272,325 4.00 - 4.99 64,478
5.00 - 5.99 747,585 5.00 - 5.99 834,727
6.00 - 6.99 83,277 6.00 - 6.99 94,405
7.00 - 7.99 8,727 7.00 - 7.99 7,624
8.00 - 8.99 699 8.00 - 8.99 1,854
9.00 - 9.99 305 9.00 - 9.99 847
over 10.00 18 over 10.00 --
------------- ---------
1,158,088 1,011,840
------------- ---------
Premium (discount) on purchased
savings deposits, net. . . . . 399 (75)
------------- ---------
$ 1,705,004 $ 1,375,060
============= =========
Weighted average rate . . . . . 4.11% 4.67%
============= =========
</TABLE>
Effective January 1, 1998, Coastal implemented a program whereby a portion
of the balances in noninterest-bearing and interest-bearing checking accounts is
reclassified to money market demand accounts under Federal Reserve Regulation D.
The amount of such reclassification was approximately $126.0 million at December
31, 1998.
The scheduled maturities of certificate accounts outstanding at December
31, 1998 were as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
- ------------------------
<S> <C>
1999. . . . . . . . . . $965,443
2000. . . . . . . . . . 148,049
2001. . . . . . . . . . 22,347
2002. . . . . . . . . . 11,833
2003. . . . . . . . . . 10,176
Subsequent years . . . . 240
--------
1,158,088
=========
</TABLE>
The aggregate amount of certificate accounts with balances of $100,000 or
more was approximately $199.0 million and $122.6 million at December 31, 1998
and 1997, respectively.
(11) ADVANCES FROM THE FEDERAL HOME LOAN BANK OF DALLAS
Advances from the FHLB for the years ended December 31, 1998, 1997 and 1996 are
summarized as follows (dollars in thousands):
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
1998 1997 1996
--------- --------- --------
Balance outstanding at end of year. . $ 966,720 $540,475 $409,720
Average balance outstanding . . . . . 713,197 368,896 387,296
Maximum outstanding at any month-end. 969,036 540,475 491,930
Average interest rate during the year 5.55% 5.78% 5.62%
Average interest rate at end of year. 5.24% 5.95% 5.61%
</TABLE>
<PAGE>
The scheduled maturities and related weighted average interest rates on advances
from the FHLB at December 31, 1998 are summarized as follows (dollars in
thousands):
<TABLE>
<CAPTION>
Due during the year Weighted Average
ended December 31, Interest Rate Amount
- -------------------- ------------------ --------
<S> <C> <C>
1999 . . . . . . . . 5.21% $805,753
2000 . . . . . . . . 5.93 6,768
2001 . . . . . . . . 6.22 8,541
2002 . . . . . . . . 5.49 69,633
2003 . . . . . . . . 5.22 801
2004 . . . . . . . . 6.48 2,604
2005 . . . . . . . . 5.57 129
2006 . . . . . . . . 6.85 3,199
2007 . . . . . . . . 6.65 1,160
2008 . . . . . . . . 4.72 52,822
2009 . . . . . . . . 8.15 4,413
2010 . . . . . . . . 5.66 187
2011 . . . . . . . . 6.63 1,426
2012 . . . . . . . . 5.68 217
2013 . . . . . . . . 5.71 6,861
2018 . . . . . . . . 5.28 2,206
------------------ ----------
5.24% $ 966,720
================== ==========
</TABLE>
At December 31, 1998, Coastal had a $50.0 million unused line of credit with the
FHLB. The FHLB advances are secured by certain first lien mortgage loans and
mortgage-backed securities with an aggregate carrying value of approximately
$966.7 million at December 31, 1998.
<PAGE>
(12) SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND FEDERAL FUNDS
PURCHASED
Securities sold under agreements to repurchase at December 31, 1998 and 1997 are
as follows (dollars in thousands):
<TABLE>
<CAPTION>
Repurchase Repurchase Repurchase
Liability Liability Liability
Maturing Maturing Maturing in
in up to 30 days in 30 to 90 days over 90 days Total
------------------ ----------------- ------------- --------
<S> <C> <C> <C> <C>
December 31, 1998:
- -------------------------------
Book value of mortgage-backed
securities sold. . . . . . . . $ -- $ -- $ 115,951 $115,951
Market value of mortgage-backed
securities sold. . . . . . . . -- -- 115,747 115,747
Repurchase liability. . . . . . -- -- 100,000 100,000
Weighted average interest rate. 4.93%
Weighted average maturity . . . 3,295 days
December 31, 1997:
- -------------------------------
Book value of mortgage-backed
securities sold. . . . . . . . $ 693,058 $ -- $ 157,530 $850,588
Market value of mortgage-backed
securities sold. . . . . . . . 682,669 -- 154,427 837,096
Repurchase liability. . . . . . 647,048 -- 144,712 791,760
Weighted average interest rate. 6.00%
Weighted average maturity . . . 75 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, 1998 and 1997, the agreements outstanding relating to the
mortgage-backed securities were agreements to repurchase the same securities.
The securities sold under agreements to repurchase at December 31, 1998 were
with one individual counterparty, Salomon Smith Barney Inc., and mature in 2008.
Securities sold under agreements to repurchase averaged approximately $579.6
million, $974.1 million and $930.7 million during 1998, 1997 and 1996,
respectively, and the maximum outstanding amounts at any month-end during 1998,
1997 and 1996 were approximately $874.8 million, $1.0 billion and $1.0 billion,
respectively.
Federal funds purchased averaged approximately $149,000 and $161,000 during the
years ended December 31, 1998 and 1997, respectively. There were no federal
funds purchased outstanding at any month-end during 1998 or 1997 and there were
no federal funds purchased outstanding during the year ended December 31, 1996.
<PAGE>
(13) 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. On January
28, 1999, the Board of Directors authorized the repurchase, on an unsolicited
basis, of the Senior Notes in an amount and on such terms considered appropriate
by management.
(14) 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.
(15) 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, 1998, Coastal had interest
rate swap and cap agreements on notional amounts totaling $38.0 million and
$209.5 million, 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 5.77% in 1998 and 5.76% in 1997. The
weighted average interest rate of payments made on all of the interest rate swap
agreements was approximately 6.60% in 1998 and 6.51% in 1997. 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 net interest expense related to these agreements
was approximately $377,000, $431,000 and $593,000, for the years ended December
31, 1998, 1997 and 1996, respectively. Coastal had pledged approximately $6.6
million and $6.4 million of mortgage-backed securities to secure interest rate
swap agreements at December 31, 1998 and 1997, respectively.
<PAGE>
The terms of the interest rate swap agreements outstanding at December 31, 1998
and 1997 are summarized as follows (dollars in thousands):
<TABLE>
<CAPTION>
Floating Rate Fair Value at
Notional LIBOR Fixed at End of Period
Maturity Amount Index Rate End of Period gain (loss)
- ---------------------- --------------- --------------------- ------ -------------- ------------
<S> <C> <C> <C> <C> <C>
At December 31, 1998:
1999 . . . . . . . . . $ 14,600 Three-month 6.926% 5.399% $ (218)
2000 . . . . . . . . . 4,800 Three-month 6.170 5.226 (164)
2000 . . . . . . . . . 2,380 Three-month 6.000 5.281 (38)
2005 . . . . . . . . . 16,225 Three-month 6.500 5.261 (707)
--------------- ------------
38,005 $ (1,127)
============== ============
At December 31, 1997:
1998 . . . . . . . . . $ 4,400 Three-month 6.709% 5.875% $ (28)
1999 . . . . . . . . . 14,600 Three-month 6.926 5.875 (239)
2000 . . . . . . . . . 4,800 Three-month 6.170 5.906 (99)
2000 . . . . . . . . . 2,520 Three-month 6.000 5.906 --
2005 . . . . . . . . . 19,527 Three-month 6.500 5.879 (230)
--------------- ------------
$ 45,847 $ (596)
============== ============
</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 7.00% to 11.00%, 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 interest rate cap agreements was approximately $115,000 and
$286,000 at December 31, 1998 and 1997, respectively, with the estimated fair
value of the agreements being $888,000 and $300,000 at December 31, 1998 and
1997, 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 decrease in interest income related to the interest rate
cap agreements was approximately $53,000, $218,000 and $518,000 for the years
ended December 31, 1998, 1997, and 1996, respectively.
<PAGE>
Interest rate cap agreements outstanding at December 31, 1998 expire as
follows (dollars in thousands):
<TABLE>
<CAPTION>
Year of Strike rate Notional
expiration range amount
- ----------- ----------------- ---------
<S> <C> <C>
1999. . . . 7.25 - 11.00% $ 63,564
2000. . . . 8.50 - 9.50 11,620
2001. . . . 7.00 - 9.00 35,322
2003. . . . 8.00 - 8.50 99,000
---------
209,506
=========
</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 200 basis points on a quarterly basis. This process 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 $767,000 and
$1.2 million at December 31, 1998 and 1997, respectively. The amortization of
the contract losses on closed positions for the years ended December 31, 1998,
1997 and 1996 was approximately $440,000, $203,000 and $409,000, respectively.
(16) FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments", requires that Coastal disclose estimated fair
values for its financial instruments. The fair value estimates presented herein
are based on relevant information available to management as of December 31,
1998 and 1997. Because the reporting requirements exclude certain financial
instruments and all nonfinancial instruments, the aggregate fair value amounts
presented herein do not represent management's estimate of the underlying value
of Coastal. The fair value estimates, methods and assumptions used are set
forth below for Coastal's financial instruments (in thousands):
<PAGE>
<TABLE>
<CAPTION>
At At
December 31, 1998 December 31, 1997
-------------------------------------- ---------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
------------------ ------------------- ---------- ----------------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents. . . . $ 45,453 $ 45,453 $ 37,096 $ 37,096
Loans receivable . . . . . . . . 1,538,149 1,557,654 1,261,435 1,283,023
Mortgage-backed securities
held-to-maturity . . . . . . . 1,154,116 1,145,369 1,345,090 1,324,968
Securities available-for-sale. . 98,625 98,625 169,997 169,997
Stock in the FHLB. . . . . . . . 49,819 49,819 27,801 27,801
Interest rate cap agreements . . 115 888 286 300
Financial liabilities:
Savings deposits . . . . . . . . 1,705,004 1,711,699 1,375,060 1,377,431
Advances from the FHLB . . . . . 966,720 970,638 540,475 541,645
Securities sold under agreements
to repurchase. . . . . . . . . 100,000 106,148 791,760 791,742
Senior Notes payable . . . . . . 50,000 51,007 50,000 50,750
Off-balance sheet instruments:
Interest rate swap agreements. . -- (1,127) -- (596)
Commitments to extend credit . . -- 270,602 -- 171,193
</TABLE>
CASH AND CASH EQUIVALENTS
Carrying value approximates fair value because of the short maturity of these
instruments and absence of any 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 and other securities are estimated based on
published market prices or 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.
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, interest-bearing checking, savings accounts and
money market demand accounts is equal to the amounts payable as of December 31,
1998 and 1997. The fair value of certificate accounts 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.
(17) FEDERAL INCOME TAXES
The acquisition of the Acquired Associations under the FSLIC's Southwest Plan on
May 13, 1988 qualified for tax-free reorganization status under Section
368(a)(3)(D) of the Internal Revenue Code of 1986 as amended ("IRC").
Accordingly, the tax bases of assets of the Acquired Associations carried over
to Coastal. In connection with this acquisition, the FSLIC Resolution Fund
("FRF") retained all of the future federal income tax benefits derived from the
federal income tax treatment of certain items, in addition to net operating loss
carryforwards related to the acquisition for which Coastal agreed to pay the FRF
when actually realized. The provisions for federal income taxes recorded for
the years ended December 31, 1998, 1997 and 1996, represent the gross tax
liability computed under these tax sharing provisions before reduction for
actual federal taxes paid to the Internal Revenue Service. Alternative minimum
taxes paid with the federal return in 1998, 1997 and 1996 will be available as
credit carryforwards to reduce regular federal tax liabilities in future years,
over an indefinite period. To the extent these credits were generated due to
the utilization of other tax benefits retained by the FRF, they will also be
treated as tax benefit items. Although the termination of the Assistance
Agreement was effective March 31, 1994, the FRF will continue to receive the
future federal income tax benefits from the net operating loss carryforwards
acquired from the Acquired Associations.
In March 1998, Coastal announced that it had successfully resolved an
outstanding tax benefit issue with the FDIC as Manager of the Federal Savings
and Loan Insurance Corporation Resolution Fund. The resolution of the issue
resulted in Coastal recording a $3.7 million reversal of accrued income taxes
during the year ended December 31, 1998; resulting in a one-time positive effect
on net income. The resolution of the tax benefit issue also contributes an
ongoing quarterly tax benefit of $226,000, as of December 31, 1998. This tax
benefit is estimated to continue until the second quarter of 2001.
<PAGE>
The components of the provision for federal income tax expense (benefit) for the
years ended December 31, 1998, 1997 and 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------ ------- -------
<S> <C> <C> <C>
Current $3,046 $7,831 $5,920
Deferred 497 (9) (249)
------ ------- -------
$3,543 $7,822 $5,671
====== ======= =======
</TABLE>
A reconciliation of the expected federal income taxes using a corporate tax rate
of 35% for the years ended December 31, 1998, 1997 and 1996 is as follows (in
thousands):
<TABLE>
<CAPTION>
1998 1997 1996
-------- ------- ------
<S> <C> <C> <C>
Computed expected tax provision. . . . . . . . . . $ 7,980 $7,691 $5,324
Reversal of accrued income taxes due to resolution
of tax benefit issue with FDIC. . . . . . . . . . (3,679) -- --
FDIC tax benefit . . . . . . . . . . . . . . . . . (906) -- --
Net purchase accounting adjustments. . . . . . . . 282 282 287
Other, net . . . . . . . . . . . . . . . . . . . . (134) (151) 60
-------- ------- ------
$ 3,543 $7,822 $5,671
======== ======= ======
</TABLE>
Significant temporary differences that give rise to the deferred tax assets and
liabilities as of December 31, 1998 and 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
Deferred tax assets:
Loans receivable, principally due to purchase accounting
discount and allowance for loan losses . . . . . . . . . . $2,050 $1,277
Unrealized loss on securities available-for-sale. . . . . . 740 1,224
Goodwill. . . . . . . . . . . . . . . . . . . . . . . . . . 497 383
Property and equipment. . . . . . . . . . . . . . . . . . . 297 134
Real estate owned, principally due to unrealized writedowns 276 331
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 256 208
4,116 3,557
------ ------
Deferred tax liabilities:
FHLB stock. . . . . . . . . . . . . . . . . . . . . . . . . 1,490 703
Mortgage-backed securities, principally
due to deferred hedging losses . . . . . . . . . . . . . . 268 422
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 111
------ ------
1,782 1,236
------ ------
Net deferred tax asset. . . . . . . . . . . . . . . . . . . . $2,334 $2,321
====== ======
</TABLE>
No valuation allowance on deferred tax assets has been established as management
believes that it is more likely than not 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 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 recaptured into income. The reserve will be recaptured over a six year
period. At December 31, 1998, Coastal had approximately $3.1 million 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.
(18) 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 $7.5 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 deposit
assessment base as of March 31, 1995.
(19) 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. The 1991 Program was approved by stockholders in December
1991. 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 and was approved by stockholders in April 1995. The Board reserved
382,892 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 available to common stockholders and diluted
earnings per share would have been reduced to the pro forma amounts indicated
below.
<PAGE>
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------------------------
1998 1997 1996
-------------- --------- --------
<S> <C> <C> <C>
Net income available to common
stockholders (in thousands):
As reported. . . . . . . . . $ 16,668 $11,563 $6,951
Pro forma. . . . . . . . . . $ 16,193 $11,169 $6,739
Diluted earnings per share:
As reported. . . . . . . . . $ 2.18 $ 1.50 $ 0.92
Pro forma. . . . . . . . . . $ 2.11 $ 1.45 $ 0.89
</TABLE>
Pro forma net income and diluted earnings per share reflect only options granted
in 1998, 1997, 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 diluted 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 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ --------------
<S> <C> <C> <C> <C>
Assumptions:
Expected annual dividends $0.32/share $0.32/share $0.27/share
Expected volatility 25.49% 22.30% 20.97%
Risk-free interest rate 5.47% 6.87% 6.46%
Expected life . . . . . . 10 years 10 years 10 years
</TABLE>
<PAGE>
A summary of the status of the stock options as of December 31, 1998, 1997 and
1996 and changes during the years then ended is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------------------- --------------------- ----------------------
Weighted- Weighted- Weighted-
Number Average Number Average Number Average
of Exercise of Exercise of Exercise
Shares Price Shares Price Shares Price
- ------------------------- ----------- ---------- ---------- --------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year. . . . . . . . . 619,345 $ 11.706 510,130 $ 9.993 364,360 $ 9.219
Granted . . . . . . . . . 47,500 25.125 188,100 15.684 168,000 11.589
Exercised . . . . . . . . (54,885) 9.792 (62,978) 9.246 (13,607) 8.248
Forfeited/cancelled . . . (14,041) 13.313 (15,907) 13.527 (8,623) 11.155
Outstanding at end
of year. . . . . . . . . 597,919 $ 12.910 619,345 $11.706 510,130 $ 9.993
=========== ========== ===============
Options exercisable at
end of year. . . . . . . 430,569 380,791 314,998
=========== ========== ===============
Weighted-Average fair
value of options
granted during the year
(per share). . . . . . . $ 11.388 $ 6.187 $ 4.373
=========== ========== ===============
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Options outstanding Options exercisable
---------------------------------------------------------- ------------------------------
Weighted-Average
Number Remaining Weighted-average Number Weighted-Average
Range of Exercise Prices. Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- ------------------------- ------------------- ------------------- ---------------- ------------- ---------------
7.083 to $8.583. . . . . 109,943 4.0 years $ 7.755 109,943 $ 7.755
10.333 to $12.500. . . . 273,600 6.7 years $ 11.129 233,254 $11.059
15.167 to $25.125. . . . 214,376 8.7 years $ 17.827 87,372 $16.872
------------------- -------------
597,919 6.9 years $ 12.910 430,569 $11.395
=================== ==============
</TABLE>
(20) EMPLOYEE BENEFITS
Coastal maintains a 401(k) profit sharing plan. Coastal's contributions to this
plan were approximately $309,000, $157,000 and $105,000 for the years ended
December 31, 1998, 1997 and 1996, respectively. Pursuant to this plan,
employees can contribute up to 15% of their qualifying compensation into the
plan. Beginning January 1, 1990, Coastal matched 25% of the employee
contributions up to 15% of their qualifying compensation. Beginning July 1,
1998, Coastal has matched 50% of the employee contributions up to 6% of their
qualifying compensation and 25% of the employee contributions from 7% to 15% of
their qualifying compensation.
<PAGE>
(21) 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.
(22) STOCKHOLDERS' EQUITY
DIVIDENDS
On January 22, April 23, July 23 and October 22, 1998, Coastal declared a
dividend of $0.08 per share of Common Stock outstanding for the stockholders of
record of February 15, May 15, August 15 and November 15, 1998, respectively.
On April 24, July 24 and October 23, 1997, Coastal declared a dividend of $0.08
per share of Common Stock outstanding for the stockholders of record of May 15,
August 15, and November 15, 1997, respectively. Prior to April 24, 1997,
Coastal declared a dividend of $0.067 per share of Common Stock outstanding for
the stockholders of record of February 15, 1997.
On January 25, April 25, July 25, and October 24, 1996, Coastal declared a
dividend of $0.067 per share of Common Stock outstanding for the stockholders of
record of February 15, May 15, August 15, and November 15, 1996, respectively.
STOCK SPLIT
On April 23, 1998, Coastal declared a 3:2 stock split that was paid on June 15,
1998 to stockholders of record on May 15, 1998. Accordingly, all common stock
share data have been adjusted to include the effect of the stock split.
TREASURY STOCK
On September 1, 1998, Coastal announced that the Board of Directors had
authorized the repurchase of up to 6.6% of the outstanding shares of common
stock. As of December 31, 1998, 499,600 shares had been repurchased at a cost
of $7.8 million under this plan.
On December 21, 1998, the Board of Directors authorized an additional repurchase
plan for up to 500,000 shares of the outstanding shares of common stock through
an open-market repurchase program and privately negotiated repurchases, if any.
The timing and volume of the repurchase transactions will depend on market
conditions. As of December 31, 1998, there have been no shares repurchased
under this additional plan.
<PAGE>
(23) EARNINGS PER SHARE
The following summarizes information related to the computation of basic and
diluted EPS for the years ended December 31, 1998, 1997 and 1996 (dollars in
thousands, except per share data).
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1998 1997 1996
---------- ---------- ----------
Net income available to common stockholders. . . . . . . . . . . . . . . . . . . . . . $ 16,668 $ 11,563 $ 6,951
========== ========== ==========
Weighted average number of common shares
outstanding used in basic EPS calculation . . . . . . . . . . . . . . . . . . . . . . 7,432,598 7,475,991 7,443,684
Add assumed exercise of outstanding stock
options as adjustments for dilutive securities. . . . . . . . . . . . . . . . . . . . 224,092 246,654 113,192
---------- ---------- ----------
Weighted average number of common shares outstanding used in diluted EPS calculation
7,656,690 7,722,645 7,556,876
========== ========== ==========
Basic EPS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2.24 $ 1.55 $ 0.93
========== ========== ==========
Diluted EPS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2.18 $ 1.50 $ 0.92
========== ========== ==========
</TABLE>
(24) 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 should not be material to the consolidated
financial statements.
At December 31, 1998, 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, Amount
- ------------------- -------
<S> <C>
1999. . . . . . . . $ 2,658
2000. . . . . . . . 2,595
2001. . . . . . . . 2,519
2002. . . . . . . . 2,406
2003 and thereafter 16,604
</TABLE>
Rent expense for the years ended December 31, 1998, 1997 and 1996 amounted to
approximately $2.6 million, $2.3 million and $2.0 million, respectively.
(25) 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, 1998, that the
Bank met capital adequacy requirements to which it is subject.
As of December 31, 1998, 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, 1998 and
1997, in relation to its existing regulatory capital requirements for capital
adequacy purposes as of such dates are as follows (dollars in thousands):
<TABLE>
<CAPTION>
Minimum For Capital Well-Capitalized
Actual Adequacy Purposes Requirements
Capital Requirement Amount Ratio Amount Ratio Amount Ratio
- ------------------------- -------------------- ------------------ ---------- ------ -------- ------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998:
Tier 1 (core). . . . . . $ 158,606 5.25% $ 120,935 4.00% $151,169 5.00%
Tier 1 risk-based. . . . 158,606 9.54 66,467 4.00 99,701 6.00
Total risk-based . . . . 169,964 10.23 132,935 8.00 166,169 10.00
As of December 31, 1997:
Tier 1 (core). . . . . . $ 160,781 5.52% $ 116,570 4.00% $145,713 5.00%
Tier 1 risk-based. . . . 160,781 11.46 56,136 4.00 84,204 6.00
Total risk-based . . . . 168,193 11.98 112,271 8.00 140,339 10.00
</TABLE>
<PAGE>
(26) PARENT COMPANY FINANCIAL INFORMATION
Condensed financial information for Coastal Bancorp, Inc. is as follows (in
thousands):
Coastal Bancorp, Inc.
Statements of Financial Condition
---------------------------------
<TABLE>
<CAPTION>
December 31,
---------------- -------------
1998 1997
------------- --------
<S> <C> <C>
Assets:
Cash and cash equivalents . . . . . . . . . $ 22 $ 1,570
Investment in subsidiary. . . . . . . . . . 159,174 145,550
Mortgage-backed securities held-to-maturity 1,303 1,761
Other assets. . . . . . . . . . . . . . . . 3,345 6,731
------------- --------
$ 163,844 $155,612
============= ========
Liabilities and stockholders' equity:
Senior Notes payable. . . . . . . . . . . . $ 50,000 $ 50,000
Other liabilities . . . . . . . . . . . . . 1,080 782
------------- --------
Total liabilities . . . . . . . . . . 51,080 50,782
Total stockholders' equity. . . . . . 112,764 104,830
------------- --------
$ 163,844 $155,612
============= ========
</TABLE>
Coastal Bancorp, Inc.
Statements of Operations
------------------------
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------
1998 1997 1996
---------------- ------- -------
<S> <C> <C> <C>
Income:
Dividends from subsidiary . . . . . . . . . . . . $ 7,593 $ 7,293 $ 7,001
Equity in undistributed earnings of
subsidiary, net of income tax. . . . . . . . . . 12,724 7,946 3,686
Interest income . . . . . . . . . . . . . . . . . 103 131 143
--------------- ------- -------
20,420 15,370 10,830
--------------- ------- -------
Expense:
Interest expense. . . . . . . . . . . . . . . . . 5,000 5,000 5,000
Noninterest expense . . . . . . . . . . . . . . . 717 786 891
--------------- ------- -------
5,717 5,786 5,891
--------------- ------- -------
Federal income tax benefit. . . . . . . . . . . . 1,965 1,979 2,012
--------------- ------- -------
Net income available to common stockholders $ 16,668 $11,563 $ 6,951
=============== ======= =======
</TABLE>
<PAGE>
Coastal Bancorp, Inc.
Statements of Cash Flows
------------------------
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------
1998 1997 1996
----------------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income available to common stockholders . . . . . . . . . . . $ 16,668 $11,563 $ 6,951
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in undistributed earnings of subsidiary. . . . . . . . (12,724) (7,946) (3,686)
Net (increase) decrease in other assets and other liabilities 3,684 (1,426) (1,262)
---------------- -------- --------
Net cash provided by operating activities . . . . . . . . 7,628 2,191 2,003
---------------- -------- --------
Cash flows from investing activities:
Net decrease in mortgage-backed securities. . . . . . . . . . . . 458 318 336
Investment in subsidiary. . . . . . . . . . . . . . . . . . . . . -- (100) --
---------------- -------- --------
Net cash provided by investing activities . . . . . . . . 458 218 336
---------------- -------- --------
Cash flows from financing activities:
Exercise of stock options for purchase of
common stock. . . . . . . . . . . . . . . . . . . . . . . . . . 536 582 112
Purchase of treasury stock. . . . . . . . . . . . . . . . . . . . (7,778) -- --
Dividends paid. . . . . . . . . . . . . . . . . . . . . . . . . . (2,392) (2,292) (1,985)
Net cash used by financing activities . . . . . . . . . . (9,634) (1,710) (1,873)
----------------- -------- --------
Net increase (decrease) in cash and cash equivalents. . . (1,548) 699 466
Cash and cash equivalents at beginning of year. . . . . . . . . . . 1,570 871 405
----------------- -------- --------
Cash and cash equivalents at end of year. . . . . . . . . . . . . . $ 22 $ 1,570 $ 871
================= ======== ========
</TABLE>
<PAGE>
(27) SELECTED QUARTERLY FINANCIAL DATA
Selected quarterly financial data is presented in the following tables for the
years ended December 31, 1998 and 1997 (in thousands, except per share data):
<TABLE>
<CAPTION>
1998 Quarter Ended (unaudited)
--------------------------------
March 31, June 30, September 30, December 31,
- -------------------------------- ---------- -------------- ------------- ------------
<S> <C> <C> <C> <C>
Interest income. . . . . . . . . $ 50,888 $ 52,373 $ 54,179 $53,374
Interest expense . . . . . . . . 35,888 36,091 36,924 34,501
---------- -------------- ------------- ------------
Net interest income. . . . . . . 15,000 16,282 17,255 18,873
Provision for loan losses. . . . 1,450 450 450 750
Writedown of purchased mortgage
loan premium. . . . . . . . . . (709) -- -- --
Other noninterest income . . . . 1,756 1,653 2,052 2,120
Noninterest expense. . . . . . . 10,335 10,583 12,475 14,990
---------- -------------- ------------- ------------
Income before provision
for Federal income taxes. . . . 4,262 6,902 6,382 5,253
Provision (benefit) for Federal
income taxes. . . . . . . . . . (2,326) 2,276 1,994 1,599
Preferred stock dividends of
Coastal Banc ssb. . . . . . . . 647 647 647 647
---------- -------------- ------------- ------------
Net income available to common
stockholders. . . . . . . . . . $ 5,941 $ 3,979 $ 3,741 $ 3,007
========== ============== ============= ============
Basic earnings per share . . . . $ 0.79 $ 0.53 $ 0.50 $ 0.42
========== ============== ============= ============
Diluted earnings per share . . . $ 0.76 $ 0.51 $ 0.48 $ 0.41
========== ============== ============= ============
</TABLE>
<TABLE>
<CAPTION>
1997 Quarter Ended (unaudited)
-----------------------------------
March 31, June 30, September 30, December 31,
- ----------------------------------- --------- -------------- ------------- ------------
<S> <C> <C> <C> <C>
Interest income . . . . . . . . . . $ 49,604 $ 49,898 $ 51,251 $50,603
Interest expense. . . . . . . . . . 34,956 35,634 37,052 36,781
--------- -------------- ------------- -----------
Net interest income . . . . . . . . 14,648 14,264 14,199 13,822
Provision for loan losses . . . . . 450 450 450 450
Gain on sales of mortgage-backed
securities available-for-sale. . . -- -- 237 --
Noninterest income. . . . . . . . . 1,469 1,550 1,506 1,622
Noninterest expense . . . . . . . . 9,557 9,894 10,175 9,918
--------- -------------- ------------- -----------
Income before provision
for Federal income taxes . . . . . 6,110 5,470 5,317 5,076
Provision for Federal income taxes. 2,225 2,004 1,953 1,640
Preferred stock dividends of
Coastal Banc ssb . . . . . . . . . 647 647 647 647
--------- -------------- ------------- -----------
Net income available to common
stockholders . . . . . . . . . . . $ 3,238 $ 2,819 $ 2,717 $ 2,789
========= ============== ============= ===========
Basic earnings per share. . . . . . $ 0.43 $ 0.38 $ 0.36 $ 0.37
========= ============== ============= ===========
Diluted earnings per share. . . . . $ 0.42 $ 0.37 $ 0.35 $ 0.36
========= ============== ============= ===========
</TABLE>
COASTAL BANCORP, INC. AND SUBSIDIARIES
STOCK PRICES AND DIVIDENDS
The following table sets forth the high and low price range and dividends by
quarter for the two years ended December 31, 1998 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>
1998 1997
---------------------------------------- -----------------------------------------
High Low Dividends High Low Dividends
------- ---------- -------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
First Quarter $23.672 $ 20.422 $0.080 $18.833 $ 14.917 $0.067
Second Quarter 26.672 22.578 0.080 19.833 15.167 0.080
Third Quarter 25.750 15.000 0.080 22.167 19.333 0.080
Fourth Quarter 20.500 14.000 0.080 23.333 18.750 0.080
</TABLE>
COASTAL BANC SSB PREFERRED STOCK, SERIES A:
<TABLE>
<CAPTION>
1998 1997
------------------------------------- --------------------------------------
High Low Dividends High Low Dividends
-------- ---------- --------- -------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
First Quarter $26.000 $ 25.250 $0.563 $25.500 $ 25.000 $0.563
Second Quarter 25.625 25.000 0.563 25.500 24.875 0.563
Third Quarter 25.375 24.938 0.563 26.000 25.125 0.563
Fourth Quarter 25.250 24.625 0.563 25.625 25.000 0.563
</TABLE>
Coastal Bancorp, Inc.
STOCKHOLDER INFORMATION
ANNUAL MEETING
The Annual Meeting of Stockholders of Coastal Bancorp, Inc. will be held at the
corporate offices of Coastal Bancorp, Inc. at 5718 Westheimer, Houston, Texas in
the Coastal Banc auditorium, Suite 1101, on April 22, 1999 at 11:00 a.m.
TRANSFER AGENT AND REGISTRAR
ChaseMellon Shareholder Services, L.L.C.
Overpeck Centre
85 Challenger Road
Ridgefield Park, New Jersey 07660
(800) 851-9677
www.chasemellon.com
INDEPENDENT AUDITORS
KPMG LLP
700 Louisiana Street
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 Plaza
5718 Westheimer, Suite 600
Houston, Texas 77057
(713) 435-5000
www.coastalbanc.com
<PAGE>
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 25, 1999, there were 6,880,964 shares of Common Stock of Coastal
Bancorp, Inc. issued and outstanding and the approximate number of registered
stockholders was 45, representing approximately 1,400 beneficial stockholders at
such record date.
On March 25, 1992, Coastal Banc Savings Association (the "Association")
issued 3,092,076 shares of Common Stock at $8.33 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 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 25, 1999, there were 1,150,000 shares of Preferred
Stock issued and outstanding and held by approximately 164 registered
stockholders, representing approximately 1,800 beneficial stockholders at such
record date.
Coastal declared dividends on the Common Stock payable during 1998.
Quarterly dividends in the amount of $0.08 per share were paid on March 15, June
15, September 15 and December 15, 1998. On March 15, 1999, Coastal paid a
quarterly dividend in the amount of $0.08 per share on its Common Stock.
Coastal 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.
EXHIBIT 10.3
EXECUTIVE SEVERANCE AGREEMENT
THIS AGREEMENT is entered into and effective this 25th day of June, 1998,
("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.
<PAGE>
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., 5718
Westheimer, Suite 600, Houston, Texas 77057. If to the Employee:
Gary R. Garrett
1231 Creekford
Sugarland, Texas 77478
Signature Page to Follow
<PAGE>
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
By: /s/ James C. Niver
---------------------
James C. Niver
Chairman, Compensation Committee
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
By: /s/ James C. Niver
---------------------
James C. Niver
Chairman, Compensation Committee
WITNESS:
/s/ Pamela S. Watkins By: /s/ Gary R. Garrett
- ------------------------ -------------------
Pamela S. Watkins Gary R. Garrett
Executive Vice President/
Chief Lending Officer
<PAGE>
EXHIBIT 10.3
EXECUTIVE SEVERANCE AGREEMENT
THIS AGREEMENT is entered into and effective this 25th day of June, 1998,
("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.
<PAGE>
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., 5718
Westheimer, Suite 600, Houston, Texas 77057. If to the Employee:
Catherine N. Wylie
3225 Bellefontaine
Houston, Texas 77025
Signature Page to Follow
<PAGE>
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
By: /s/ James C. Niver
---------------------
James C. Niver
Chairman, Compensation Committee
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
By: /s/ James C. Niver
---------------------
James C. Niver
Chairman, Compensation Committee
WITNESS:
/s/ Pamela S. Watkins By: /s/ Catherine N. Wylie
- ------------------------ ----------------------
Pamela S. Watkins Catherine N. Wylie
Executive Vice President/
Chief Financial Officer
f:\acctexe\watkins\word\cwcorres\execagmts\ex-10.3exeagree.txt
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. ____________)
FILED BY THE REGISTRANT
FILED BY A PARTY OTHER THAN THE REGISTRANT
CHECK THE APPROPRIATE BOX:
PRELIMINARY PROXY STATEMENT
CONFIDENTIAL, FOR USE OF THE COMMISSION ONLY (AS PERMITTED BY RULE
14A-6(E)(2))
DEFINITIVE PROXY STATEMENT
DEFINITIVE ADDITIONAL MATERIALS
SOLICITING MATERIAL PURSUANT TO RULE 14A-11(C) OR RULE 14A-12
COASTAL BANCORP, INC.
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
(NAME OF PERSON(S) FILING PROXY STATEMENT, IF OTHER THAN THE REGISTRANT))
PAYMENT OF FILING FEE (CHECK THE APPROPRIATE BOX):
NO FEE REQUIRED.
FEE COMPUTED ON TABLE BELOW PER EXCHANGE ACT RULES 14A-6(I)(1) AND 0-11.
(1) TITLE OF EACH CLASS OF SECURITIES TO WHICH TRANSACTION APPLIES:
___________________________________
(2) AGGREGATE NUMBER OF SECURITIES TO WHICH TRANSACTION APPLIES:
___________________________________
(3) PER UNIT PRICE OR OTHER UNDERLYING VALUE OF TRANSACTION COMPUTED
PURSUANT TO EXCHANGE
ACT RULE 0-11: (SET FORTH THE AMOUNT ON WHICH THE FILING FEE IS
CALCULATED AND STATE HOW IT WAS DETERMINED):
___________________________________
(4) PROPOSED MAXIMUM AGGREGATE VALUE OF TRANSACTION:
___________________________________
(5) TOTAL FEE PAID:
___________________________________
FEE PAID PREVIOUSLY WITH PRELIMINARY MATERIALS:
CHECK BOX IF ANY PART OF THE FEE IS OFFSET AS PROVIDED BY EXCHANGE ACT RULE
0-11(A)(2) AND IDENTIFY THE FILING FOR WHICH THE OFFSETTING FEE WAS PAID
PREVIOUSLY. IDENTIFY THE PREVIOUS FILING BY REGISTRATION STATEMENT NUMBER, OR
THE FORM OR SCHEDULE AND THE DATE OF ITS FILING.
(1) AMOUNT PREVIOUSLY PAID:
___________________________________
(2) FORM, SCHEDULE OR REGISTRATION STATEMENT NO.:
___________________________________
(3) FILING PARTY:
___________________________________
(4) DATE FILED:
___________________________________
<PAGE>
March 23, 1999
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
corporate offices of Coastal Bancorp, Inc., at 5718 Westheimer, Houston, Texas
in the Coastal Banc auditorium, Suite 1101, on Thursday, April 22, 1999, 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, act on the Company's 1999 Stock Compensation Program, act on an
adjournment of the Annual Meeting, if necessary, 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 of 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 PLAZA
5718 WESTHEIMER, SUITE 600
HOUSTON, TEXAS 77057
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD APRIL 22, 1999
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders ("Annual
Meeting") of Coastal Bancorp, Inc. (the "Company") will be held at the corporate
offices of Coastal Bancorp, Inc., at 5718 Westheimer, Suite 1101, Houston, Texas
at 11:00 a.m., Central Time, on April 22, 1999 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 2002 and until their successors are elected
and qualified;
(2) To consider and act upon a proposal to adopt the 1999 Stock
Compensation Program for the Company and its subsidiaries;
(3) To vote on a proposal to approve an adjournment of the Annual
Meeting to another date and time for the purpose of soliciting additional
proxies if there are not sufficient votes at the time of the Annual Meeting to
approve the proposal relating to the 1999 Stock Compensation Program;
(4) To ratify the appointment of KPMG LLP as the Company's independent
auditors for the fiscal year ending December 31, 1999; and,
(5) 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 25, 1999 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 23, 1999
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.
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 corporate offices of Coastal Bancorp, Inc., at 5718 Westheimer,
Houston, Texas in the Coastal Banc auditorium, Suite 1101, at 11:00 a.m.,
Central Time, on April 22, 1999 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
23, 1999.
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 CONSIDER AND ACT UPON A
PROPOSAL TO ADOPT THE 1999 STOCK COMPENSATION PROGRAM FOR THE COMPANY AND ITS
SUBSIDIARIES; (III) FOR THE PROPOSAL TO APPROVE AN ADJOURNMENT OF THE ANNUAL
MEETING TO ANOTHER DATE AND TIME FOR THE PURPOSE OF SOLICITING ADDITIONAL
PROXIES IF THERE ARE NOT SUFFICIENT VOTES AT THE TIME OF THE ANNUAL MEETING TO
APPROVE THE PROPOSAL RELATING TO THE 1999 STOCK COMPENSATION PROGRAM; (IV) FOR
THE PROPOSAL TO RATIFY THE APPOINTMENT OF KPMG LLP AS THE COMPANY'S INDEPENDENT
AUDITORS FOR THE FISCAL YEAR ENDING DECEMBER 31, 1999; AND (V) 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 of revocation thereof (Linda B. Frazier, Coastal Bancorp, Inc., Coastal
Banc Plaza, 5718 Westheimer, Suite 600, Houston, Texas 77057), (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. (the "Company") is engaged primarily in the business
of serving as the parent holding company for Coastal Banc ssb (the "Bank"). The
Company was incorporated in March 1994 in connection with the reorganization of
Coastal Banc Savings Association, a Texas-chartered thrift institution (the
"Association") into the holding company form of organization. In connection
with the reorganization, which was completed in July 1994, the Association
concurrently converted into a Texas-chartered savings bank and took its present
name. In November 1996, in order to minimize state taxes, the Company's
corporate structure was again reorganized by forming Coastal Banc Holding
Company, Inc. ("HoCo") as a Delaware holding company. HoCo became a
wholly-owned subsidiary of the Company and the Bank became a wholly-owned
subsidiary of HoCo. Coastal Bancorp, Inc. is a registered unitary 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 25, 1999 ("Record Date") will be entitled to notice of, and
to vote at, the Annual Meeting. On the Record Date, there were 6,880,964 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. All share
balances set forth herein have been adjusted to reflect the 3:2 stock split that
was paid on June 15, 1998.
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 cast at the Annual Meeting is required for the approval of the 1999
Stock Compensation Program, to adjourn the Annual Meeting, if necessary, and to
approve 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 approve the 1999 Stock
Compensation Program, against the proposal to adjourn the Annual Meeting, if
necessary, and 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 25, 1999, directors, executive officers and their affiliates
beneficially owned 1,360,943 shares of Common Stock or 20.28% 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 25, 1999, 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 Plaza, 5718 Westheimer, Suite 600, Houston, Texas 77057. Except as
set forth below, as of February 25, 1999, 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
Common Stock
Name Beneficially Owned
(and Address) of as of February 25, Percent of
Beneficial Owner 1999(1) Class
- ------------------------------------------ -------------------- -----------
<S> <C> <C>
First Manhattan Co.. . . . . . . . . . . . 728,988(2) 10.60%
437 Madison Avenue
New York, New York 10022
Thomson Horstmann & Bryant, Inc. . . . . . 665,300(2) 9.67
Park 80 West, Plaza II
Saddle Brook, New Jersey 07662
Dimensional Fund Advisors, Inc.. . . . . . 438,150(2) 6.37
1299 Ocean Avenue, 11th Floor
Santa Monica, California 90401
Weiss Peck & Greer, L.L.C. . . . . . . . . 376,850(2) 5.48
One New York Plaza, 30th Floor
New York, New York 10004
Friedman Billings Ramsey & Co., Inc. . . . 232,437(2) 3.38
1001 19th Street North
Arlington, Virginia 22209-1710
Robert Edwin Allday, Director. . . . . . . 0(3) *
Coastal Bancorp, Inc. and Coastal Banc ssb
D. Fort Flowers, Jr., Director . . . . . . 274,020(4) 3.98
Coastal Bancorp, Inc. and Coastal Banc ssb
Dennis S. Frank, Director. . . . . . . . . 2,700 *
Coastal Bancorp, Inc. and Coastal Banc ssb
Robert E. Johnson, Jr., Director . . . . . 19,320 *
Coastal Bancorp, Inc. and Coastal Banc ssb
Manuel J. Mehos, Chairman of the Board,. . 568,250(5)(6) 8.26
President and Chief Executive Officer
Coastal Bancorp, Inc., Coastal Banc
Holding Company, Inc. and
Coastal Banc ssb
</TABLE>
<PAGE>
- ------
<TABLE>
<CAPTION>
Amount of Shares of
Common Stock
Name Beneficially Owned
(and Address) of as of February 25, Percent of
Beneficial Owner 1999(1) Class
- --------------------------------------------- -------------------- -----------
<S> <C> <C>
James C. Niver, Director. . . . . . . . . . . 553,428(6) 8.04%
Coastal Bancorp, Inc. and Coastal Banc ssb
John D. Bird, Executive Vice President, . . . 42,416(5) *
Chief Administrative Officer and
Assistant Secretary
Coastal Banc ssb
Gary R. Garrett, Executive Vice President . . 47,206(5) *
and Chief Lending Officer
Coastal Banc ssb
David R. Graham, Executive Vice President - . 21,764(5) *
Real Estate Lending
Coastal Banc ssb
Nancy S. Vadasz, Executive Vice President - . 26,844(5) *
Market and Product Strategies
Coastal Banc ssb
Catherine N. Wylie, Executive Vice President. 46,447(5) *
and Chief Financial Officer
Coastal Bancorp, Inc., Coastal Banc Holding
Company, Inc. and Coastal Banc ssb
All directors and executive officers of the . 1,360,943(5) 20.28
Company and the Bank as a group
(11 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, 269,520 are owned by a trust over which Mr. Flowers has
shared voting and dispositive power with two other co-trustees.
(5) 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 41,416, 46,706, 21,764, 124,750, 26,844 and 42,522
shares which may be received upon the exercise of stock options by Messrs. Bird,
Garrett, Graham and Mehos and Mmes. Vadasz and Wylie, respectively, pursuant to
stock options. For all directors and executive officers as a group, the number
of shares includes 304,002 shares of Common Stock subject to outstanding stock
options.
(6) 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. Mr. Stone, effective November 24, 1998, resigned
from the Board of Directors for personal reasons. On January 28, 1999, the
Board of Directors nominated and approved Mr. Paul W. Hobby to replace Mr.
Stone.
Two directors are to be elected at this Annual Meeting to hold office until
the Annual Meeting in 2002 or until their successors are elected and qualified.
The information set forth below relating to a director's tenure is as of the
date he was first elected as director of either the Association or the Company,
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
Information concerning those members of the Board whose terms do not expire
in 1999, including 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:
MANUEL J. MEHOS. Age 44. Director since 1986. Mr. Mehos is the Chairman
of the Board, President and Chief Executive Officer of the Company, Coastal Banc
Holding Company, Inc., Coastal Banc Capital Corp., 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, all of which are 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. His term as a director of the Company will expire
in 2000.
JAMES C. NIVER. Age 69. Director since 1986. Mr. Niver is retired and
from 1972 until 1995 was employed by Century Land Company, Houston, Texas,
retiring as its President. His term as a director of the Company will expire in
2000.
R. EDWIN ALLDAY. Age 48. 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 2001.
D. FORT FLOWERS, JR. Age 37. Director since 1992. Mr. Flowers is the
President of Sentinel Trust Company, a Texas Limited Banking Association,
Houston, Texas, providing fiduciary and investment management services to
affluent families, their closely held corporations and foundations, a position
he has held since January 1997. Mr. Flowers was Chairman of the Board of DIFCO,
Inc., a railroad car engineering and manufacturing company from before the time
he became a director until August, 1997 when that company was sold. His term as
a director of the Company will expire in 2001.
<PAGE>
DENNIS S. FRANK. Age 42. Director since 1988. Mr. Frank is the Chairman
of the Board, Chief Executive Officer and President of Silvergate Bancorp, 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 2001.
INFORMATION WITH RESPECT TO NOMINEES FOR DIRECTOR
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 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:
ROBERT E. JOHNSON, JR. Age 45. Director since 1986. Mr. Johnson is a
partner in the law firm of Johnson & Johnson, Austin, Texas. If elected, his
term as a director of the Company will expire in 2002.
PAUL W. HOBBY. Age 38. Director since January, 1999. Mr. Hobby is
Chairman and Chief Executive Officer of Hobby Media Services, Inc., Houston,
Texas, a Houston based corporation which invests in traditional and new media
services. Mr. Hobby also serves on the board of directors of various civic,
charitable and professional associations. If elected, his term as a director of
the Company will expire in 2002.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE ABOVE
NOMINEES BE ELECTED AS DIRECTORS OF THE COMPANY.
<PAGE>
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 at least
quarterly and special meetings may be called at any time as necessary. During
the year ended December 31, 1998, the Board of Directors of the Company held
eleven meetings. No incumbent director of the Company attended fewer than 75%
of the Board meetings held during the period in which he served as a director in
1998.
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, 1998, 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, 1998, 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 1998.
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, 1998,
the Bank had an Audit, Compensation, Asset/Liability, Directors' Loan Review,
Community Reinvestment Act Committee and an Investment Banking Committee.
<PAGE>
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 six times during 1998.
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
two times during 1998. See "Executive Compensation - Report of the Board of
Directors on Compensation During Fiscal 1998."
The Asset/Liability Committee met four times in 1998 to authorize
investment categories, overall investment limitations and brokers to be
utilized, to review trade recommendations and past trades of the Asset/Liability
Subcommittee (composed of certain officers) and compliance of the Bank's
investment activities with the Bank's Investment and Interest Rate Risk Policies
and with Board recommendations. The Committee also makes interest rate risk
assessments and formulates asset/liability management policy for the forthcoming
quarterly period. This Committee consists of Messrs. Frank (Chairman), Flowers,
Mehos and Hobby.
The Directors' Loan Review Committee met twelve times in 1998 to approve
and/or review certain loans. 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 Review 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), Frank, Mehos and Johnson and
met two times in 1998.
The Investment Banking Committee was established in 1998 to review and
recommend to the Board possible acquisitions of investment banking firms. The
committee is composed of Messrs. Mehos, Flowers and Stone, prior to his
resignation met two times during 1998. Mr. Hobby will be serving as a member of
this committee in 1999.
<PAGE>
BOARD FEES
Through October 22, 1998, each non-employee director of the Company and the
Bank was paid a fee of $1,550 for attendance at Board meetings and a fee of $300
for each committee meeting attended. Directors who were members of the Loan
Review Committee or who attended any ad hoc Portfolio Control Center ("PCC")
meetings were paid a maximum of $600 per month for all such meetings. From
November, 1998, each non-employee director of the Company and the Bank was paid
a fee of $2,000 for attendance at Board meetings, $400 for each committee
meeting attended and $800 for all Loan Review Committee/PCC meetings attended.
When the Board of the Company meets on the same day as the Board of the Bank,
only one attendance 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,
directors and beneficial owners of more than 10% of any class of equity
securities 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, 1998, all Section 16(a) filing requirements
applicable to the Company's officers and directors of the Company and/or the
Bank were complied with. However, the Company believes that First Manhattan Co.
did not file the required reports.
<PAGE>
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
The following table sets forth information concerning executive officers of
the Company, the Bank or other subsidiaries who do not serve on the Company's
Board of Directors. All executive officers are elected by the Board of
Directors of the Company or the Bank or of the respective subsidiary and serve
until their successors are elected and qualified. No such executive officer is
related to any director or other executive officer of the Company or 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.
<TABLE>
<CAPTION>
Position with the Company and/or
the Bank and other subsidiaries
Name Age Principal Occupation During Last Five Years
--------- ------ -------------------------------------------
<S> <C> <C>
John D. Bird 55 Executive Vice President of the Bank since August 1993,
Chief Administrative Officer since June 1993, and
Assistant Secretary of the Bank since March 1986;
Chief Operations Officer of the Bank 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 52 Executive Vice President of the Bank since August 1993
and a director of each of the Bank's subsidiaries;
Chief Lending Officer of the Company and the since
1995; Senior Vice President- Mortgage Lending of
the Bank 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.
Director and Executive Vice President of Coastal Banc
Capital Corp., an affiliate of the Bank, since August 1997.
David R. Graham 55 Executive Vice President of the Bank since August 1993
and a director of each of the Bank's subsidiaries; Senior
Vice President-Real Estate Lending Division of the
Bank from May 1988 to August 1993. Senior Vice
President of CBS Asset Corp. since April 1993.
Nancy S. Vadasz 45 Executive Vice President of the Bank since June of 1994,
Senior Vice President since September 1991. Ms.
Vadasz is responsible for Market and Product Strategies.
Catherine N. Wylie 44 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 of
of the Company and the Bank since October 1993; Controller
of the Bank from April 1989 to October 1993; also Executive
Vice President/Treasurer of each of the Bank's subsidiaries
since October 1990. Director and Executive Vice President
of Coastal Banc Capital Corp., an affiliate of the Bank
since August 1997.
</TABLE>
<PAGE>
EXECUTIVE COMPENSATION
REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS ON
COMPENSATION DURING FISCAL 1998. Officers of the Company do not receive
compensation for their 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 are 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 $4.0 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 $269,900 in base salary during 1998.
The amount of incentive compensation is related to the financial
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.
<PAGE>
During 1998, 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 1998, the
Committee calculated that the Company achieved a 14.96% ROE.
Accordingly, during 1998, a bonus pool of $348,697 in the aggregate was
established and incentive awards were paid to the three top executive officers,
Mehos, Garrett and Wylie, of the Bank. See "Summary Compensation Table."
By the Committee:
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, 1998, 1997 and 1996.
<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, 1998 $269,900 $174,899 10,000 $ 2,000
President and 1997 264,000 127,900 22,000 2,000
Chief Executive Officer 1996 241,000 131,228 30,000 1,425
John D. Bird 1998 128,369 27,000 2,000 8,000
Executive Vice President and 1997 124,630 30,000 5,000 8,000
Chief Administrative Officer 1996 121,000 40,000 5,000 7,425
Gary R. Garrett 1998 179,900 87,149 3,000 5,669
Executive Vice President and 1997 164,800 64,000 11,000 5,000
Chief Lending Officer 1996 160,000 70,000 10,000 4,425
David R. Graham 1998 131,071 34,291 2,000 2,000
Executive Vice President 1997 124,630 32,895 8,000 2,000
Real Estate Lending Division 1996 121,000 40,000 7,500 1,425
Catherine N. Wylie 1998 179,900 87,149 3,000 26,120
Executive Vice President and 1997 164,800 64,000 11,000 5,000
Chief Financial Officer 1996 160,000 70,000 10,000 4,425
</TABLE>
(1) Principal positions are for fiscal 1998.
(2) Does not include amounts attributable to miscellaneous benefits received
by executive officers of the Bank, including use of Bank-owned vehicles and
reimbursement of educational expenses. 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, 1998 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 casesin 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 (401(k)) Plan, any car
allowances and educational reimbursements.
<PAGE>
EXECUTIVE SEVERANCE AGREEMENTS
On June 25, 1998, the Company and the Bank extended the term of the
executive severance agreements (the "Executive Severance Agreements") with Mr.
Garrett and Ms. Wylie (the "Employees" or "Employee") out one year to expire
June 25, 2001. 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 of the
Employee's employment 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 Employee to become immediately exercisable in full. The
Executive Severance Agreement also provides that the Company will reimburse the
Employee for all costs and expenses, including reasonable attorney's fees
incurred by the Employee to enforce rights or benefits under such agreements.
Other than the foregoing, the Company has not entered into any employment
contracts with any of its officers.
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.
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
the Executive Severance Agreement; (iv) the Company, the Bank or successor
thereto breaches any provision of the Executive Severance 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 the
Executive Severance 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 and
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 modified period
commencing on June 25, 1998 (the "Effective Date") and ending on the earlier of
(i) June 25, 2001, or (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 "1995 Program"). Stockholders of the Company approved
the 1995 Program at the April 27, 1995 annual meeting. The Board reserved
255,261 shares of Common Stock for issuance under the 1995 Program at the time
of adoption. There were 47,500 options issued under the 1995 Program in 1998.
The 1995 Program is substantially similar to the 1991 Program, as described
below.
The Board of Directors adopted the 1991 Stock Compensation Program (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 1991 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.
Of the shares reserved for issuance under both the 1995 Program and the
1991 Program (the "Programs"), 2,842 shares are not currently subject to option
at February 25, 1999. 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. Shares issuable under 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.
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 10,000 21.05% $25.13 6/25/08 $113,880
John D. Bird 2,000 4.21 25.13 6/25/08 22,776
Gary R. Garrett 3,000 6.32 25.13 6/25/08 34,164
David R. Graham 2,000 4.21 25.13 6/25/08 22,776
Catherine N. Wylie 3,000 6.32 25.13 6/25/08 34,164
</TABLE>
______________
(1) Total options granted in 1998 were 47,500 shares. 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 granted on June 25, 1998, respectively, were as follows: an expected
volatility rate of 25.49%, a risk free rate of return of 5.47%, a dividend yield
of $.32 per share per year and the expiration date of June 25, 2008,
respectively.
<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 -- -- 124,750 35,250 $767,940 $92,130
John D. Bird -- -- 41,416 7,125 327,515 20,306
Gary R. Garrett -- -- 46,706 16,530 512,346 46,799
David R. Graham -- -- 21,764 10,807 162,208 31,872
Catherine N. Wylie -- -- 42,522 19,924 499,748 69,545
</TABLE>
______________
(1) Based upon a closing market price for the Company's Common Stock as of
December 31, 1998 of $17.50.
COMPARATIVE STOCK PERFORMANCE GRAPH
The stock performance graph below compares the cumulative total stockholder
return of the Company's Common Stock from December 31, 1993 to December 31, 1998
with the cumulative total return of the National Association of Securities
Dealers Automated Quotations ("NASDAQ") Market Index and certain thrift
institutions traded on the NASDAQ, as compiled by SNL Securities, L.P. in its
OTC Thrift Index, assuming an investment of $100 on December 31, 1993 and the
reinvestment of all dividends. The Company did not pay dividends on the
Company's Common Stock during 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. During 1997 the Company paid
quarterly dividends in the amount of $.10 per share on March 15, 1997 and
quarterly dividends of $.12 per share on June 15, 1997, September 15, 1997 and
December 15, 1997. In 1998 the Company split the stock 3:2 at which time the
$.12 per share dividend, adjusted for the split was $.08 per share. During
1998, the Company paid quarterly dividends in the amount of $.08 per share, as
adjusted for the stock split, on March 15, 1998, June 15, 1998, September 15,
1998 and December 15, 1998.
<PAGE>
COMPARISON OF FIVE YEAR-CUMULATIVE TOTAL RETURN PERFORMANCE
<TABLE>
<CAPTION>
PERIOD ENDING
--------------
INDEX 12/31/93 12/31/94 12/31/95 12/31/96 12/31/97 12/31/98
<S> <C> <C> <C> <C> <C> <C>
Coastal Bancorp, Inc 100.00 110.00 136.68 182.51 282.89 216.13
NASDAQ - Total US Index 100.00 97.75 138.26 170.01 208.58 293.21
SNL OTC Thrift Index 100.00 100.85 153.34 199.50 324.02 283.31
</TABLE>
______________
Notes:
A. 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 the particular Index that were in existence at
December 31, 1998 are included in the calculations.
B. 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.
<PAGE>
CERTAIN TRANSACTIONS
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. The Company had no loans to principal shareholders, directors or
executive officers outstanding at the year ended December 31, 1998. In 1998,
the Company voted to make loans available to employees starting in the last
quarter of 1998 under the same terms as those offered to the public. The
Directors and Executive Officers of the Company and the Bank are excluded from
this program.
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 28, 1998,
and was $260,000 for the year ended December 31, 1998. Such fee represented
substantially all of CBIA's net income for the year then ended.
PROPOSAL TO ADOPT THE
1999 STOCK COMPENSATION PROGRAM
The Board of Directors of the Company has approved the adoption of a new
stock compensation program for officers and employees of the Company and its
subsidiaries. The Coastal Bancorp, Inc. 1999 Stock Compensation Program (the
"1999 Program") is substantially similar to the Company's 1991 and 1995 Stock
Compensation Programs. The Board of Directors believes that the 1999 Program is
necessary primarily because there are no shares remaining under the 1991 Program
and only 2,842 shares currently remaining and reserved for issuance under the
1995 Program. The Board of Directors believes that it is in the best interests
of the Company and its stockholders to ensure stock ownership for certain
individuals who are key to the success of the Company and who will be
responsible for its future growth. Like the 1991 and 1995 Programs, the 1999
Program is designed to help the Company attract and retain superior personnel
for, and in positions of, substantial responsibility with the Company and to
provide them with a stock-based incentive. The Board believes that stock
options, stock appreciation rights and performance share grants should be an
integral part of certain individuals' compensation package and desires the
ability to continue to provide such awards on terms and conditions substantially
similar to the terms and conditions set forth under the 1991 and 1995 Programs
which have been in effect for the past eight years. The Board has reserved
340,000 shares of Common Stock (or 4.94% of the 6,880,964 shares of Common Stock
issued and outstanding as of the Record Date) for issuance under the 1999
Program.
Accordingly, the stockholders of the Company are being requested at the
Annual Meeting to consider and approve the adoption of the 1999 Program. The
1999 Program must be approved by the affirmative vote of a majority of the
shares of Common Stock entitled to vote and cast on this matter and represented
in person or by proxy at the Annual Meeting. The following is a summary of the
1999 Program which does not purport to be complete.
GENERAL
Four kinds of rights, evidenced by four plans, are contained in the 1999
Program and will be available for grant: incentive stock options ("Plan I"),
compensatory stock options ("Plan II"), stock appreciation rights ("Plan III")
and performance share awards ("Plan IV"). An aggregate of 340,000 shares of
authorized but unissued Common Stock has been reserved for issuance pursuant to
the 1999 Program, subject to modification or adjustment to reflect changes in
the Company's capitalization, as discussed below. See "- Adjustments to Number
and Purchase Price of Shares." No options, stock appreciation rights or
performance shares have been granted under the 1999 Program as of the date
hereof and the Board of Directors does not anticipate making any such grants
until after the 1999 Program has been approved by the stockholders of the
Company. Therefore, the amount of options, stock appreciation rights or
performance share awards are not currently determinable and may not be
determined with respect to the last completed fiscal year as if the 1999 Program
had been in effect. Upon approval of the 1999 Program by stockholders of the
Company, the Company will register the securities of the 1999 Program under the
Securities Act of 1933 and any applicable state securities laws.
PURPOSE
As noted above, the purpose of the 1999 Program is to advance the interests
of the Company and its stockholders by enabling the Company, the Bank and any
other subsidiaries or affiliates thereof (which are collectively referred to
herein, unless the context otherwise requires, as the "Company") to attract and
retain superior personnel for positions of substantial responsibility and to
provide key employees with an additional incentive to contribute to the success
of the Company. The successful conduct of the Company's business is largely
dependent upon the judgment, initiative and efforts of the Company's officers
and other key employees, and the Program provides such persons with an
opportunity to receive greater rewards for their efforts and the incentive
advantages inherent in ownership of the Company's Common Stock.
<PAGE>
ADMINISTRATION
The 1999 Program is to be administered by not less than three disinterested
outside directors of the Company as determined by the Board of Directors of the
Company ("Program Administrators"). The Program Administrators serve as such
until they resign or are replaced by the Board of Directors of the Company.
Each Program Administrator must be a "disinterested person" as defined by Rule
16b-3(d)(3) of the Securities Exchange Act. A "disinterested person" means an
administrator of a plan who is not at the time he exercises discretion in
administering the plan eligible, and has not at any time within one year prior
thereto, been eligible for selection as a person to whom stock may be allocated
or to whom stock options or stock appreciation rights may be granted pursuant to
the plan or any other plan of the Company or its affiliates. The Program
Administrators have absolute discretion to determine the employees to whom stock
options, stock appreciation rights or performance shares will be granted under
the 1999 Program and to determine the number of shares subject to each stock
option, stock appreciation right or performance share. Subject to the
provisions of the 1999 Program, the Program Administrators also have absolute
discretion to determine the terms on which such options, appreciation rights and
performance shares are to be granted, to interpret the 1999 Program, and to make
all other determinations necessary or advisable for the administration of the
1999 Program. No Program Administrator shall be liable for any action or
determination made in good faith with respect to the 1999 Program or to any
option, stock appreciation right or performance share granted thereunder and the
Company will indemnify the Program Administrators against proceedings brought by
reason of actions or omissions by any Program Administrator in his capacity as
such under or with respect to the 1999 Program. As of the date of this Proxy
Statement, the Board of Directors has appointedJames C. Niver (Chairman), Robert
Edwin Allday and D. Fort Flowers, Jr., to serve as the Program Administrators of
the 1999 Program.
ELIGIBILITY
All regular full-time employees, including officers, of the Company or any
subsidiary thereof, approximately 655 individuals, are eligible to be granted
stock options, stock appreciation rights and performance share awards under the
1999 Program. Stock options, stock appreciation rights and performance share
awards may be granted to those employees who, in the determination of the
Program Administrators, are largely responsible through their judgment, ability
and special efforts for the successful conduct of the operation of the Company.
Directors of the Company, unless they are also employees, are not eligible to
participate in the 1999 Program. Each employee who receives an option may be
requested to agree in writing, as a condition of the receipt of such option to
remain in the employ of the Company, or the applicable subsidiary, for a period
not in excess of three years. However, nothing in the 1999 Program confers upon
any employee any right to continued employment by the Company or any subsidiary
thereof or limits in any way the right of the Company to terminate or alter the
terms of such employment. In addition, the Program Administrators may revoke,
rescind and terminate any option, or portion thereof which has not yet vested,
or any stock appreciation right to the extent not yet exercised, which has been
previously granted under the 1999 Program to an employee who is discharged from
the employ of the Company or any subsidiary thereof for certain acts such as
conviction of a felony for misappropriating Company assets or which results in a
threat to the Company's reputation or for willful failure to perform his or her
duties and responsibilities. An employee who receives options will have no
voting, dividend or other rights as a stockholder of the Company with respect to
the shares of Common Stock under option until such option is properly exercised
(which includes full payment for such shares).
STOCK OPTIONS (PLANS I AND II)
Options granted under Plan I of the 1999 Program are intended to qualify as
"incentive stock options" as defined in Section 422 of the Internal Revenue Code
of 1986, as amended ("Code"). Options granted under Plan II of the 1999 Program
are nonstatutory or compensatory stock options ("non-qualified options"). The
tax treatment differs with respect to the two types of options. See "- Federal
Income Tax Consequences."
An incentive stock option is defined in the Code as an option to purchase
Common Stock of the Company and granted to an employee in connection with his or
her employment which satisfies certain conditions. An incentive stock option
must be granted pursuant to a plan specifying the aggregate number of shares
which may be issued under the Plan and the employees, or class of employees,
eligible to receive such options. The incentive stock option plan must be
approved by the stockholders of the granting corporation within 12 months of the
date of its adoption. (The 1999 Program was adopted by the Board of Directors
at a meeting of the Board on January 28, 1999.) The per share exercise price of
an incentive stock option may not be less than the fair market value of the
Common Stock at the date of the grant, and incentive stock options must be
granted within 10 years from the date of adoption of the Plan. By its terms, an
incentive stock option must not be exercisable after 10 years from the date it
is granted. However, if an employee of the Company owns, directly or
indirectly, more than 10% of the total combined voting power of all classes of
stock issued to stockholders of the Company or any subsidiary at the time an
incentive stock option is granted to him or her, the exercise price of incentive
stock options granted to him or her may be no less than 110% of the fair market
value of a share of Common Stock at the time of the grant and the option may not
be exercisable beyond five years from the date of grant. Finally, the Code
currently requires that the aggregate fair market value (determined at the time
the options are granted) of the Common Stock with respect to which incentive
stock options are first exercisable by any optionee during any calendar year may
not exceed $100,000. The terms of Plan I of the 1999 Program comply with the
above-stated requirements of the Code.
Incentive stock options under Plan I and non-qualified stock options under
Plan II become vested and are exercisable during the period specified in each
option agreement as determined by the Program Administrators; however, no
expiration date may be later than the tenth anniversary (the fifth anniversary
for a greater than 10% stockholder of the Company) of the date on which an
incentive stock option was granted and, with respect to a non-qualified stock
option, no later than ten years and one month. Options may be exercisable in
installments pursuant to a schedule designated by the Program Administrators
and, to the extent not exercised, will accumulate unless otherwise specified.
If (i) a "change in control" or "threatened change in control" of the Company
occurs, as determined in accordance with the 1999 Program, or (ii) the Company
or its stockholders enter into an agreement to dispose of all or substantially
all of the assets or stock of the Company (or of the Bank) by means of a sale,
merger or other reorganization or liquidation where the stockholders of the
Company will not own at least 50% of the voting stock of any surviving entity,
all options previously granted may become immediately exercisable
notwithstanding any existing installment limitation. The term "control" is
defined in the 1999 Program to mean the acquisition of 10% or more of the voting
securities of the Company by any person or group of persons; provided, that for
purposes of the 1999 Program, no change in control or threatened change in
control will be deemed to have occurred if prior to the acquisition of, or offer
to acquire, 10% or more of the Company's voting securities, the full Board of
Directors of the Company adopts by not less than a two-thirds vote a resolution
specifically approving such acquisition or offer for the specific purpose of
preventing the acceleration of the vesting of such options. These provisions of
the 1999 Program may have certain antitakeover effects, including, among others:
(i) increasing the cost to a potential acquiror by increasing the possible
number of shares of Common Stock outstanding; (ii) increasing the number of
shares of Common Stock in the hands of management of the Company who might vote
such shares in a manner contrary to that desired by other non-management
stockholders; and (iii) increasing the total number of shares of Common Stock
which are issued and outstanding which could dilute the stock ownership of a
potential acquiror. Such provisions could result in causing the potential
acquiror to negotiate with the Board of Directors, and perhaps with certain
option holders, regarding such options in conjunction with any offer to acquire
control of the Company. As a consequence, these provisions might have the
effect of discouraging an attempt by another person or entity from seeking to
acquire control of the Company. The Board of Directors is not aware of any
effort by any person to gain control of the Company. Notwithstanding the above,
the Board believes that this aspect of the 1999 Program is far outweighed by the
benefits of the 1999 Program, as described herein.
If employment is terminated due to disability (as defined by the Code) or
retirement, the Program Administrators may allow the options to be exercised
within one year after the date of such termination due to disability or
retirement to the extent exercisable on the date of termination of employment.
If employment is terminated by reason of death or if the optionee dies within
three months after leaving the employ of the Company or any subsidiary thereof,
the person or persons to whom the optionee's rights under the option pass by
will or by the laws of descent and distribution will also have one year to
exercise the options to the extent exercisable on the date of termination of
employment. However, in order for the option to be treated under the Code as an
incentive stock option, the option must be exercised within three months after
the date of termination of employment. If the employment of an optionee
terminates for any other reason, his or her options will expire upon such
termination, except that in the discretion of the Program Administrators, such
options may be exercised for a period of between three months and five years
following termination to the extent exercisable on the date of termination of
employment. In no event, however, will the exercise period for any option
extend beyond the original expiration date of the option.
The option exercise price per share for incentive stock options granted
under the 1999 Program may not be less than the fair market value of the Common
Stock (as defined by the 1999 Program) on the date of the grant (or 110% of the
fair market value in the case of an incentive stock option granted to a greater
than 10% stockholder of the Company's Common Stock). The option exercise price
per share for compensatory stock options can be equal to or less than the fair
market value of the shares at the time of grant, as determined by the Program
Administrators at the time of grant, but in no event will such price be less
than the par value of the Common Stock. Neither incentive nor compensatory
stock options granted under the 1999 Program are transferable or assignable
other than by will or by the laws of descent and distribution and may be
exercised during the lifetime of an optionee only by the optionee.
Payment for shares purchased under the 1999 Program through the exercise of
stock options may be made either in cash or check or, by exchanging shares of
Common Stock of the Company (including shares acquired pursuant to the exercise
of an option) or by withholding some of the shares of Common Stock which are
being purchased thereby, or in other property, if permitted by the Program
Administrators, having a fair market value equal to the option exercise price,
or a combination thereof. If the fair market value of a share of Common Stock
at the time of exercise is greater than the exercise price per share, permitting
the optionee to use previously acquired shares or to withhold some of the shares
being acquired, would enable the optionee to acquire a number of shares of
Common Stock upon exercise of the option which is greater than the number of
shares delivered as payment for the exercise price. In addition, if permitted
by the Program Administrators, an optionee could partially exercise his or her
option and then deliver the shares acquired upon such exercise as payment for
the exercise price of the remaining options. Again, if the fair market value of
a share of Common Stock at the time of exercise is greater than the exercise
price per share, this feature would enable the optionee to either (1) reduce the
amount of cash required to receive a fixed number of shares upon exercise of the
option or (2) receive a greater number of shares upon exercise of the option for
the same amount of cash that otherwise would have been used. Because options
may be exercised in part from time to time, the ability to deliver Common Stock
as payment of the exercise price would enable the optionee to turn a relatively
small number of shares into a larger number of shares. In the case of any
incentive stock options exercisable within the first six months following the
date of grant, the shares of Common Stock received upon the exercise of such
option may not be sold or disposed of by the optionee for the first six months
following the date of grant.
STOCK APPRECIATION RIGHTS (PLAN III)
Under Plan III of the 1999 Program, the Program Administrators may, in
their sole discretion, grant rights to optionees to surrender exercisable
options granted under Plan I or Plan II, or any portion thereof, in return for
the payment by the Company to the optionee of cash or, subject to certain
conditions, Common Stock of the Company in an amount equal to the excess of the
fair market value of the shares of Common Stock subject to the option at the
time over the exercise price of the option with respect to such shares, or a
combination of cash and Common Stock. An optionee may exercise such stock
appreciation rights only during the period beginning on the third business day
following the release of certain quarterly or annual financial information of
the Company and ending on the twelfth business day following such date.
Upon the exercise of a stock appreciation right, the stock option to which
it relates terminates with respect to the number of shares as to which the right
is so exercised. Conversely, upon the exercise of a stock option, any related
stock appreciation right terminates as to any number of shares subject to the
right that exceeds the total number of shares for which the stock option remains
unexercised. With respect to incentive stock options, stock appreciation rights
must be granted concurrently with the incentive stock options to which they
relate. With respect to non-qualified stock options, stock appreciation rights
may be granted concurrently or at any time thereafter prior to the exercise or
expiration of such options. The holder of a stock appreciation right may not
transfer or assign the right other than by will or by the laws of descent and
distribution. In the event of an employee's termination of employment with the
Company, a stock appreciation right may be exercised only within the period, if
any, in which the option to which it relates may be exercised.
Whenever an incentive stock option and a stock appreciation right are
granted together and the exercise of one affects the right to exercise the
other, the stock appreciation right will expire no later than the expiration of
the underlying incentive stock option and the stock appreciation right may be
for no more than the difference between the exercise price of the underlying
incentive option and the market price of the Common Stock subject to the
underlying incentive option at the time the stock appreciation right is
exercised. In addition, the stock appreciation right is transferable only when
the underlying incentive stock option is transferable and under the same
conditions, the stock appreciation right may be exercised only when the
underlying incentive stock option is eligible to be exercised, and the stock
appreciation right may be exercised only when the market price of the Common
Stock subject to the incentive option exceeds the exercise price of the Common
Stock subject to the option.
In addition, Plan III of the 1999 Program contains a provision giving the
Program Administrators discretion to grant "limited stock appreciation rights"
in tandem with incentive stock options in the event there is an "Offer." An
"Offer" is defined to mean a tender offer or exchange offer for shares of the
Company's capital stock, provided that the person making the Offer acquires
shares of the Company's capital stock pursuant to such Offer. The limited stock
appreciation right would be exercisable between the first and the thirtieth day
following the expiration date of the Offer. In general, with respect to
determining the value of the limited stock appreciation right, the fair market
value of the shares to which the right relates is determined to be the highest
price per share paid in any Offer that is in effect at any time during the
period beginning on the sixtieth day prior to the date on which the limited
stock appreciation right is exercised and ending on such exercise date. The
limited stock appreciation rights may have anti-takeover effects similar to
those of the options, described above under "- Stock Options (Plans I and II)."
The Program Administrators are also authorized to grant stock appreciation
rights which are not linked to options ("Naked Rights"). Employees may be
awarded Naked Rights for a period of between six months and five years which are
payable in cash or in shares of Common Stock as determined by the Program
Administrators. For purposes of determining the amount of the Naked Rights
award, the Program Administrators, based on factors they deem appropriate, will
determine the difference between the market value of such right at the date of
grant and the market value at the end of the designated period. The Naked
Rights are to be used solely as a device to determine the amount to be paid to
participants under Plan III and will not constitute or be treated as property or
a trust fund of any kind. As set forth in Plans I and II, if there is a sale,
merger or other reorganization of the Company (or of the Bank) where the
stockholders of the Company will not own at least 50% of the voting stock of any
surviving entity or if there is a "change in control" or "threatened change in
control" of the Company, all Naked Rights will become immediately exercisable.
Such an event may have certain antitakeover effects similar to those discussed
above regarding stock options, under "- Stock Options (Plans I and II)."
Holders of Naked Rights may be requested to agree to remain in the employ of the
Company, or an applicable subsidiary, for a period of up to three years. If a
Naked Rights holder ceases to be employed for any reason other than death,
disability or retirement, his or her Naked Rights will immediately terminate
unless the Program Administrators, at the time of the granting of the Naked
Rights, permit it to be exercised within three months after the date of such
termination. A holder who becomes disabled or retires may exercise such rights
at any time within one year from the date of termination. If such holder dies
during his term of employment or within three months thereafter, the Naked Right
will expire one year after the date of death, unless it expires sooner.
<PAGE>
PERFORMANCE SHARES (PLAN IV)
Employees of the Company also may receive performance share awards pursuant
to Plan IV of the 1999 Program. The granting of performance shares gives the
recipient thereof the right to receive a specified number of shares of Common
Stock of the Company contingent upon the achievement of specified performance
objectives within a specified award period. Any performance shares granted
under the 1999 Program constitute an unfunded promise to make future payments to
the employee upon the completion of the specified objectives. The grant of an
opportunity to receive performance shares does not entitle the affected employee
to any rights to specified funds or assets of the Company. In lieu of some or
all of the shares earned by achievement of the specified performance objectives
within the specified period, the Program Administrators may distribute cash in
an amount equal to the fair market value thereof. The duration of the award
period is determined by the Program Administrators but cannot be less than one
year nor more than five years. If the participating individual dies or
terminates his or her position with the Company prior to the close of an award
period, any performance share granted to him or her for the period is forfeited.
A participating employee may not transfer or assign a performance share award.
ADJUSTMENTS TO NUMBER AND PURCHASE PRICE OF SHARES
In the event of a merger, reorganization, stock dividend, stock split or
any other transaction affecting the number or kind of outstanding shares of
Common Stock of the Company, the number and kind of shares allocated to
unexercised stock options, stock appreciation rights and performance shares will
also be appropriately and proportionately adjusted, as will the maximum number
and kind of shares which may be granted under the 1999 Program. Corresponding
adjustments will be made in the exercise price per share for shares covered by
outstanding stock options, stock appreciation rights and performance shares, or
portions thereof. If, upon a merger, consolidation, reorganization or the like,
the shares of the Company's Common Stock are exchanged for other securities of
the Company or another corporation, each recipient of an option, stock
appreciation right or performance share will be entitled to purchase or acquire
such number of shares of the securities as were exchangeable for the number of
shares of Common Stock of the Company which the optionees would have been
entitled to purchase, with appropriate adjustments to be made to the per share
exercise price of the outstanding options or stock appreciation rights.
FEDERAL INCOME TAX CONSEQUENCES
INCENTIVE STOCK OPTIONS. The grant of an incentive stock option under the
1999 Program will not result in taxable income to the recipient either at the
date of grant or at the date of its timely exercise. However, the excess of the
fair market value of the Common Stock received upon exercise of an incentive
stock option over the option exercise price is an item of tax preference income
potentially subject to the alternative minimum tax. Upon disposition of the
Common Stock acquired upon exercise of an incentive stock option, long-term
capital gain or loss is recognized in an amount equal to the difference between
the sale price and the option exercise price, provided that the option holder
has not disposed of the stock within two years from the date of grant or within
one year from the date of exercise. If the option holder disposes of the
acquired Common Stock without complying with both holding period requirements (a
"Disqualifying Disposition"), the option holder will recognize ordinary income
at the time of such Disqualifying Disposition in an amount equal to the
difference between (i) the lesser of the fair market value of the Common Stock
on the date the incentive stock option is exercised (the value at a later date
may govern in the case of an optionee whose sale of stock at a profit could
subject him or her to suit under Section 16(b) of the Exchange Act) or the
amount realized on such Disqualifying Disposition, and (ii) the exercise price
paid for the Common Stock. Any remaining gain or loss will generally be treated
as a short-term capital gain or loss, depending upon how long the Common Stock
is held. In the event of a Disqualifying Disposition, the incentive stock
option tax preference described above does not apply. Where the Disqualifying
Disposition occurs subsequent to the year in which the option is exercised, it
may be necessary for the option holder to amend his or her return to eliminate
the tax preference item previously reported. Unlike the case when a
non-qualified stock option is exercised, the Company and its subsidiary are not
entitled to a tax deduction upon either the exercise of an incentive stock
option or the disposition of Common Stock acquired pursuant to such an exercise,
except to the extent that the option holder recognizes ordinary income in a
Disqualifying Disposition.
If a holder of an incentive stock option pays the exercise price, in full
or in part, with shares of previously acquired Common Stock, the exchange should
not affect the incentive stock option tax treatment of the exercise. Upon such
an exchange, and except as otherwise provided herein, no gain or loss is
recognized upon the disposition of the previously owned shares, and the shares
of Common Stock received by the option holder, equal in number to the previously
owned shares exchanged therefor, will have the same basis and holding period as
the previously owned shares. Holders will not, however, be able to utilize the
holding period for purposes of satisfying the incentive stock option statutory
holding period requirements. Shares of Common Stock received by the option
holder, in excess of the number of previously owned shares, will have a basis of
zero and a holding period which commences as of the date the shares are
transferred upon exercise of the incentive stock option. However, if such an
exercise is effected using shares of Common Stock acquired upon exercise of an
incentive stock option, the exchange of these previously owned shares will be
considered a disposition of such shares for the purpose of determining whether a
Disqualifying Disposition has occurred.
NON-QUALIFIED STOCK OPTIONS. Under present federal regulations, the grant
of a non-qualified stock option under the 1999 Program does not result in
taxable income to the recipient at the time of grant, assuming that the option
does not have a readily ascertainable fair market value at the time it is
granted. However, the optionee must recognize ordinary income at the time of
exercise of the non-qualified stock option in the amount by which the fair
market value of the Common Stock received upon exercise of the non-qualified
stock option at the time of exercise exceeds the exercise price. However, if an
optionee is subject to the restrictions on resale of the Common Stock under
Section 16 of the Exchange Act, such person must generally recognize ordinary
income at a date six months after exercise of the option in an amount equal to
the difference between the option exercise price and the fair market value of
the Common Stock at such later date. Nevertheless, the optionee may elect
within 30 days after the date of exercise to recognize ordinary income as of the
date of exercise. The amount of ordinary income recognized by the optionee is
deductible by the Company or a subsidiary in the year that the income is
recognized and will be subject to withholding.
If a holder of a non-qualified stock option pays the option exercise price
solely in cash, his or her basis in such shares is equal to the fair market
value of the Common Stock on the date ordinary income is recognized and, upon
subsequent disposition, any further gain or loss is taxable either as short-term
or long-term capital gain or loss, depending upon how long the shares are held.
The holding period for such shares commences as of the date ordinary income is
recognized.
If a holder of a non-qualified stock option pays the option exercise price
by delivering already owned Common Stock in lieu of cash, the optionee will
recognize ordinary income to the extent the fair market value of the shares
received exceeds the option exercise price. If a holder of a non-qualified
stock option pays the exercise price, in full or in part, with shares of
previously acquired Common Stock, no gain or loss is recognized upon the
disposition of such previously owned shares. Shares of Common Stock received by
the option holder equal in number to the previously owned shares exchanged
therefor will have the same basis and holding period as such previously owned
shares. Shares of Common Stock received by the option holder in excess of the
number of previously acquired shares will have a basis equal to the fair market
value of such additional shares as of the date ordinary income is recognized
which, except with respect to recipients subject to Section 16 of the Exchange
Act, is the date the option is exercised. The holding period for such
additional shares commences as of the date ordinary income is recognized.
STOCK APPRECIATION RIGHTS. A recipient of a stock appreciation right under
the 1999 Program is not taxed upon the grant of the stock appreciation right.
Upon the exercise of a stock appreciation right, the holder generally is taxed
at ordinary income tax rates on the amount of cash received and the fair market
value of any shares of Common Stock received. If a recipient receiving shares
of Common Stock is subject to the restrictions on resale of the Common Stock
under Section 16 of the Exchange Act, such person generally recognizes ordinary
income at the time that the six-month restriction lapses in an amount equal to
the fair market value of the Common Stock on the date of lapse. Nevertheless,
such recipient may elect within 30 days of the date of exercise to recognize
ordinary income as of the date of exercise. The amount of ordinary income
recognized by the recipient is deductible by the Company in the year that income
is recognized and will be subject to withholding. The recipient's basis in any
shares acquired is equal to the amount of ordinary income recognized with
respect to such shares, and, upon subsequent disposition, any further gain or
loss is taxable either as short-term or long-term capital gain or loss,
depending on how long the shares are held. The holding period for such shares
commences as of the date ordinary income is recognized.
PERFORMANCE SHARE AWARDS. Generally, stock grants which are subject to a
substantial risk of forfeiture and which are not freely transferable within the
meaning of Section 83 of the Code will give rise to taxable ordinary income (and
a deduction to the Company) when the restrictions lapse or the stock becomes
freely transferable, unless the recipient elects under Section 83(b) of the Code
to recognize income as of the date of transfer, as discussed below.
PERSONS SUBJECT TO SECTION 16 OF THE EXCHANGE ACT. Under the Code, shares
acquired pursuant to the 1999 Program by an officer or director of the Company
or by a person who within six months thereafter becomes an officer or director
are considered subject to a substantial risk of forfeiture so long as their sale
at a profit could subject such person to suit under Section 16(b) of the
Exchange Act. Thus, if a participant acquires shares upon the exercise of a
non-qualified stock option or a related stock appreciation right or pursuant to
a performance share grant, he or she must recognize ordinary income as described
above but at such time as the sale of such shares at a profit would no longer
subject such person to suit under Section 16(b) of the Exchange Act and based on
the fair market value of the shares at that time. Similarly, if a participant
acquires shares upon the exercise of an incentive stock option but disposes of
the shares in a Disqualifying Disposition, he or she must recognize ordinary
income as described above at the time of such disposition but based on the fair
market value of the shares at the first time that their sale at a profit would
no longer have subjected such person to suit under Section 16(b) of the Exchange
Act.
A participant who receives, upon exercise of a non-qualified stock option
or a related stock appreciation right or pursuant to a performance share award,
shares subject to a substantial risk of forfeiture may elect, notwithstanding
such substantial risk of forfeiture, to include in income at the time the shares
are transferred to him or her the excess, if any, of the fair market value at
the time the shares are received over the amount paid for them (if any). The
election is made by filing a written statement with the Internal Revenue Service
and must be made within 30 days after receipt of the shares. Such an election
is irrevocable without consent of the Secretary of the Treasury. In the event
that such an election is made, and the shares involved are forfeited, no
deduction will be allowed to the participant in respect of such forfeiture.
ACCOUNTING TREATMENT
Generally accepted accounting principles require, in most cases, that the
estimated cost of stock appreciation rights be charged to the Company's earnings
based on the change in the market price of the Common Stock at the beginning (or
grant date if granted during the period) and end of each accounting period if it
is higher than the exercise price. In the event of a decline in the market
price of the Company's Common Stock subsequent to a charge against earnings
related to the estimated costs of stock appreciation rights, a reversal of prior
charges is made in the amount of such decline (but not to exceed aggregate prior
charges). Performance share awards are treated in the same manner as stock
appreciation rights when it becomes likely that the shares will be awarded.
Neither the grant nor the exercise of an incentive stock option or a
non-qualified stock option under the 1999 Program currently requires any charge
against earnings under generally accepted accounting principles. In certain
circumstances, shares issuable pursuant to outstanding stock options under the
1999 Program might be considered outstanding for purposes of calculating
earnings per share of the Company.
In June 1993, the Financial Accounting Standards Board ("FASB") issued an
exposure draft proposing that companies be required to recognize an expense for
all stock-based compensation awards, including stock options. However, in
December 1994, the FASB agreed to work toward improving disclosures about
employee stock options and related arrangements in the notes to financial
statements rather than requiring the previously proposed expense charge for all
options. The FASB expects to encourage, rather than require, companies to adopt
a new method that accounts for stock compensation awards based on their
estimated fair market value at the date they are granted. Companies would be
permitted, however, to continue accounting under the present requirements,
which, as stated above, do not require an expense charge for most options.
ERISA AND OTHER QUALIFICATION
The 1999 Program will not be subject to the participation, vesting and
funding requirements of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), and is not qualified under Section 401(a) of the Code.
AMENDMENT OR TERMINATION OF THE 1999 PROGRAM
The 1999 Program will terminate 10 years from the date it was adopted by
the Board of Directors of the Company, which was January 28, 1999, and no stock
options, stock appreciation rights or performance shares shall be granted under
the 1999 Program after that date. The Board of Directors may amend, suspend or
terminate the 1999 Program or any portion thereof at any time, except that it
may not amend the 1999 Program without stockholder approval where the absence of
such approval would cause the 1999 Program to fail to comply with Rule 16b-3
under the Exchange Act, Section 422 of the Code, the requirements of any
securities exchange or national quotation system or any other requirement of law
or regulation. The Program Administrators may at any time amend or revise the
terms of the 1999 Program, provided that no amendment or revision shall (i)
increase the maximum aggregate number of shares covered by the 1999 Program,
except to the extent described under "- Adjustments to Number and Purchase
Price of Shares," above; (ii) change the minimum exercise price of any option
granted under the terms of Plan I and II, except to the extent described under
"- Adjustments to Number and Purchase Price of Shares," above; (iii) increase
the stated maximum term for any option, stock appreciation right or performance
share; or (iv) expand the class of persons eligible to participate in the 1999
Program. In addition, no amendment, suspension or termination of the 1999
Program shall, without the consent of the person who has received a stock
option, stock appreciation right or performance share, alter or impair any of
that person's rights or obligations under any stock option, stock appreciation
right or performance share granted under the 1999 Program prior to such
amendment, suspension or termination.
RESTRICTIONS ON RESALES
Upon the registration of the shares underlying the 1999 Program, persons
who are not deemed to be "affiliates" of the Company at the time of resale will
be free to resell any shares of Common Stock of the Company issued to them upon
the grant of stock awards or the exercise of stock options and stock
appreciation rights granted under the 1999 Program either publicly or privately,
without regard to the registration and prospectus delivery requirements of the
Securities Act of 1933, as amended (the "Securities Act") or compliance with the
restrictions and conditions contained in the exemptive rules thereunder. An
"affiliate" of a person is someone who directly or indirectly, through one or
more intermediaries, controls, is controlled by, or is under common control
with, that person. Normally, a director, principal officer or major stockholder
of a corporation may be deemed to be an "affiliate" of that corporation. A
person who may be deemed an "affiliate" of the Company at the time of a proposed
resale will be permitted to make public resales of the Company's shares only
pursuant to a "reoffer" prospectus or in accordance with the restrictions and
conditions contained in Rule 144 under the Securities Act or some other
exemption from registration. In general, the amount of the Company's shares
which any such affiliate may publicly resell pursuant to Rule 144 in any
three-month period may not exceed one percent of the Company's shares then
outstanding, such sales may be made only through brokers without solicitation
and only at a time when the Company is current in filing the reports required of
it under the Exchange Act, and certain notice filings must be made with the
Securities and Exchange Commission.
<PAGE>
BOARD RECOMMENDATION
The Board of Directors has unanimously approved and adopted the 1999
Program and recommends that stockholders of the Company vote "FOR" the 1999
Program.
THE BOARD OF DIRECTORS RECOMMENDS
A VOTE "FOR" THE 1999 PROGRAM
PROPOSAL TO APPROVE THE ADJOURNMENT OF THE
ANNUAL MEETING, IF NECESSARY
Each proxy solicited hereby by the Company requests authority to vote for
an adjournment of the Annual Meeting if an adjournment of such meeting is deemed
to be necessary. The Company may seek an adjournment of the Annual Meeting for
not more than 120 days in order to enable it to solicit additional votes in
favor of the 1999 Stock Compensation Program in the event that such proposal has
not received the requisite vote of Stockholders at the Annual Meeting.
If the Company desires to adjourn the Annual Meeting with respect to the
foregoing proposal, it will request a motion that the Annual Meeting be
adjourned for up to 120 days with respect to such proposal, and no vote will be
taken on such proposal at the originally scheduled meeting. Each proxy
solicited hereby, if properly signed and returned to the Company and not revoked
prior to its use, will be voted on any such motion for adjournment in accordance
with the instructions contained therein. If no contrary instructions are given,
each proxy received will be voted in favor of any motion by the Company to
adjourn the Annual Meeting. Unless revoked prior to its use, any proxy
solicited for the Annual Meeting will continue to be valid for any adjournment
of such meeting, and will be voted in accordance with the instructions contained
therein, and if no contrary instructions are given, for the 1999 Stock
Compensation Program.
Any adjournment will permit the Company to solicit additional proxies and
will permit a greater expression of the Stockholders' views with respect to such
proposal. Such an adjournment would be disadvantageous to Stockholders who are
against the 1999 Stock Compensation Program because an adjournment will give the
Company additional time to solicit favorable votes and thus increase the chances
of approving such proposal.
If a quorum is not present at the Annual Meeting, no proposal will be acted
upon and the Company will adjourn the Annual Meeting to an alternative date in
order to solicit additional proxies on each of the proposals being submitted to
Stockholders.
An adjournment for up to 120 days may require the setting of a new record
date and, if so required, notice of the adjourned meeting will be provided to
Stockholders as in the case of an original meeting. The Company does not have
any reason to believe that an adjournment of the Annual Meeting will be
necessary at this time.
BECAUSE THE BOARD OF DIRECTORS OF THE COMPANY RECOMMENDS STOCKHOLDERS VOTE
"FOR" THE 1999 STOCK COMPENSATION PROGRAM, AS DISCUSSED ABOVE, THE BOARD OF
DIRECTORS OF THE COMPANY ALSO RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" THE
POSSIBLE ADJOURNMENT OF THE ANNUAL MEETING ON SUCH PROPOSAL.
PROPOSAL TO RATIFY THE APPOINTMENT OF INDEPENDENT AUDITORS
The Board of Directors of the Company has appointed KPMG LLP as independent
auditors for the Company for the year ending December 31, 1999, 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 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 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 LLP AS INDEPENDENT AUDITORS FOR FISCAL 1999.
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 Plaza, 5718
Westheimer, Suite 600, Houston, Texas 77057, no later than November 24, 1999.
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 provide 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 1999 Annual Meeting.
<PAGE>
PROXY SOLICITATION
The Company has retained Corporate Investor Communications, Inc. ("CIC"),
111 Commerce Road, Carlstadt, New Jersey 07072, a professional proxy
solicitation firm, to assist in the solicitation of proxies and for related
services. The Company will pay CIC a fee of $5,000 and has agreed to reimburse
it for its reasonable out-of-pocket expenses.
OTHER MATTERS
Management is not aware of any business to come before the 1999 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, 1998
("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, 1998, 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 PLAZA, 5718 WESTHEIMER, SUITE 600,
HOUSTON, TEXAS 77057. 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 23, 1999
EXHIBIT A
1999 Stock Compensation Program
<PAGE>
COASTAL BANCORP, INC.
1999 STOCK COMPENSATION PROGRAM
1. PURPOSE. This Coastal Bancorp, Inc. 1999 Stock Compensation Program
-------
("Program") is intended to secure for Coastal Bancorp, Inc. (the "Company"), any
Subsidiaries thereof and its stockholders the benefits arising from ownership of
the Company's Common Stock, par value $.01 per share ("Common Stock"), by those
selected Officers and other key Employees of the Company and any Subsidiary
thereof who will be responsible for its future growth. The Program is designed
to help attract and retain superior personnel for positions of substantial
responsibility with the Company and to provide key Employees with an additional
incentive to contribute to the success of the Company. All Incentive Stock
Options issued under the Incentive Plan are intended to comply with the
requirements of Section 422 of the Code, and the regulations thereunder, and all
provisions under the Incentive Plan shall be read, interpreted and applied with
that purpose in mind. Capitalized terms are defined in Article 15 of the
General Provisions of the Stock Compensation Program.
2. ELEMENTS OF THE PROGRAM. In order to maintain flexibility in the
--------------------------
award of stock benefits, the Program is comprised of four parts. The first part
is the Incentive Stock Option Plan ("Incentive Plan"). The second part is the
Compensatory Stock Option Plan ("Compensatory Plan"). The third part is the
Stock Appreciation Rights Plan ("S.A.R. Plan"). The fourth part is the
Performance Share Plan ("Performance Plan"). Copies of the Incentive Plan,
Compensatory Plan, S.A.R. Plan and Performance Plan are attached hereto as Part
I, Part II, Part III and Part IV, respectively, and are collectively referred to
herein as the "Plans" or the "Program." The grant of an Option, Stock
Appreciation Right or Performance Share under one of the Plans shall not be
construed to prohibit the grant of an Option, Stock Appreciation Right or
Performance Share under any of the other Plans.
3. APPLICABILITY OF GENERAL PROVISIONS. Unless any Plan specifically
-------------------------------------
indicates to the contrary, all Plans shall be subject to the General Provisions
of the Stock Compensation Program set forth below.
4. ADMINISTRATION OF THE PLANS. The Plans shall be administered,
------------------------------
construed, governed and amended in accordance with the General Provisions of the
Stock Compensation Program and their respective terms.
GENERAL PROVISIONS OF THE STOCK COMPENSATION PROGRAM
ARTICLE 1. ADMINISTRATION. The Program shall be administered by a
--------------
committee appointed by the Board of Directors of the Company and composed of not
less than three directors of the Company, none of whom is an Officer or Employee
of the Company or any Subsidiary thereof. The Board of Directors may, from time
to time, remove members from, or add members to this Committee, provided that
the Committee shall continue to consist of three or more members of the Board,
none of whom is an Officer or Employee of the Company or any Subsidiary thereof,
and each of whom shall be a "disinterested person" within the meaning of Rule
16b-3 under the Exchange Act. The Committee, when acting to administer the
Program, is referred to herein as the "Program Administrators." Any action of
the Program Administrators shall be taken by majority vote or the written
consent of a majority of the Program Administrators. Subject to the express
provisions and limitations of the Program, this Committee may adopt such rules,
regulations and procedures as it deems appropriate for the conduct of its
affairs. It may appoint one of its members to be chairman, and any person,
whether or not a member of this Committee, to be its secretary or agent. This
Committee shall report its actions and decisions to the Board of Directors at
appropriate times, but in no event less than one time per calendar year. No
Program Administrator or member of the Board of Directors of the Company, shall
be liable for any action or determination made in good faith with respect to the
Program or to any Option, Stock Appreciation Right, or Performance Share granted
thereunder. If a Program Administrator is a party or is threatened to be made a
party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative, by reason of anything
done or not done by him or her in such capacity under or with respect to the
Program, the Company shall, subject to the requirements of applicable laws and
regulations, indemnify such member against all liabilities and expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him or her in connection with such action,
suit or proceeding if he or she acted in good faith and in a manner he or she
reasonably believed to be in the best interests of the Company and any of its
Subsidiaries and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful.
ARTICLE 2. AUTHORITY OF PROGRAM ADMINISTRATORS. Subject to the other
--------------------------------------
provisions of this Program, and with a view to effecting its purpose, the
Program Administrators shall have sole authority in their absolute discretion:
(a) to construe and interpret the Program; (b) to define the terms used herein;
(c) to prescribe, amend and rescind rules, regulations and procedures relating
to the Program, including, without limitation, rules, regulations and procedures
which (i) deal with satisfaction of an Employee's tax withholding obligation
pursuant to Article 11 hereof, (ii) include arrangements to facilitate the
Employee's ability to borrow funds for payment of the exercise or purchase price
of an Award, if applicable, from securities brokers and dealers, and (iii)
include arrangements which provide for the payment of some or all of such
exercise or purchase price by delivery of previously-owned shares of Common
Stock or other property and/or by withholding some of the shares of Common Stock
which are being acquired; (d) to determine the Employees to whom Awards shall be
granted under the Program; (e) to determine the time or times at which Awards
shall be granted under the Program; (f) to determine the number of shares
subject to any Option or Stock Appreciation Right under the Program and the
number of shares to be awarded as Performance Shares under the Program as well
as the option exercise price, and the duration of each Award, and any other
terms and conditions of Awards; (g) to terminate the Program; and (h) to make
any other determinations necessary or advisable for the administration of the
Program and to do everything necessary or appropriate to administer the Program.
All decisions, determinations and interpretations made by the Program
Administrators shall be final, binding and conclusive on all participants in the
Program and on their legal representatives, heirs and beneficiaries.
ARTICLE 3. MAXIMUM NUMBER OF SHARES SUBJECT TO THE PROGRAM. The aggregate
-----------------------------------------------
number of shares of Common Stock available to be issued pursuant to the Plans,
subject to adjustment as provided in Article 6 hereof, shall be equal to 340,000
shares of the Company's Common Stock. If any of the Options granted under this
Program are surrendered before exercise (including surrender in connection with
the exercise of a Stock Appreciation Right), expire or terminate for any reason
before they have been exercised in full, the unpurchased shares subject to those
surrendered, expired or terminated Options shall again be available for the
purposes of the Program as if no Awards had been previously granted with respect
to such shares. If the performance objectives associated with the grant of any
Performance Share(s) are not achieved within the specified performance period or
if the Performance Share grant terminates for any reason before the performance
objective date arrives, the shares of Common Stock associated with such
Performance Shares shall again be available for the purposes of the Program.
The shares of Common Stock issued under the Program may be authorized but
unissued shares, treasury shares or shares purchased by the Company on the open
market or from private sources for use under the Program.
ARTICLE 4. ELIGIBILITY AND PARTICIPATION. Only regular full-time
-------------------------------
Employees of the Company or any Subsidiary thereof, including Officers whether
or not directors of the Company, or of any Subsidiary, shall be eligible for
selection by the Program Administrators to participate in the Program.
Directors of the Company shall not be eligible to participate in the Program.
ARTICLE 5. EFFECTIVE DATE AND TERM OF PROGRAM. The Program shall become
-----------------------------------
effective upon its adoption by the Board of Directors of the Company and
subsequent approval of the Program by the affirmative vote of the holders of a
majority of the shares entitled to vote thereon at a meeting of stockholders of
the Company and represented in person or by proxy at such meeting at which a
quorum is present, which vote shall be taken within 12 months of adoption of the
Program by the Company's Board of Directors; provided, however, that Awards may
be granted under this Program prior to obtaining stockholder approval of the
Program, except that any such Awards shall be contingent upon such stockholder
approval being obtained and may not be exercised prior to such approval. The
Program shall continue in effect for a term of ten years unless sooner
terminated under Article 2 or Article 7 of the General Provisions. Termination
of the Program shall not affect any Awards previously granted and such Awards
shall remain valid and in effect until they have been fully exercised or earned,
are surrendered or by their terms expire or are forfeited.
ARTICLE 6. ADJUSTMENTS. If the shares of Common Stock of the Company as a
-----------
whole are increased, decreased, changed into or exchanged for a different number
or kind of shares or securities through merger, consolidation, combination,
exchange of shares, other reorganization, recapitalization, reclassification,
stock dividend, stock split or reverse stock split, an appropriate and
proportionate adjustment shall be made in the maximum number and kind of shares
as to which Awards may be granted under this Program. A corresponding
proportionate adjustment of the exercise price of any Option or Stock
Appreciation Right and of the number or kind of shares allocated to unexercised
Options, Stock Appreciation Rights, Performance Shares or portions thereof,
which shall have been granted prior to any such change, shall likewise be made.
In making any adjustment pursuant to this Article 6, any fractional shares shall
be rounded in the discretion of the Program Administrators. If, upon a merger,
consolidation, reorganization, liquidation, recapitalization or the like of the
Company, the shares of the Company's Common Stock shall be exchanged for other
securities of the Company or of another corporation, each recipient of an Award
shall be entitled, subject to the conditions herein stated, to purchase or
acquire such number of shares of Common Stock or amount of other securities of
the Company or such other corporation as were exchangeable for the number of
shares of Common Stock of the Company which such Optionees would have been
entitled to purchase or acquire except for such action, and appropriate
adjustments shall be made to the per share exercise price of outstanding Options
and Stock Appreciation Rights.
ARTICLE 7. TERMINATION AND AMENDMENT OF PROGRAM. The Program shall
----------------------------------------
terminate no later than ten years from the date such Program is adopted by the
Board of Directors or the date such Program is approved by the stockholders,
whichever is earlier. No Awards shall be granted under the Program after that
date. The Board of Directors may amend, suspend or terminate the Program or any
portion thereof at any time, except that it may not amend the Program without
stockholder approval where the absence of such approval would cause the Program
to fail to comply with Rule 16b-3 under the Exchange Act, Section 422 of the
Code, the requirements of any securities exchange or national quotation system
on which the shares of Common Stock are then listed or traded, or any other
requirement of applicable law or regulation. Subject to the limitation
contained in Article 8 of the General Provisions, the Program Administrators may
at any time amend or revise the terms of the Program, including the form and
substance of the Option, Stock Appreciation Right, and Performance Share
agreements to be used hereunder; provided that no amendment or revision shall
(a) increase the maximum aggregate number of shares that may be sold,
appreciated or distributed pursuant to Options, Stock Appreciation Rights or
Performance Shares granted under this Program, except as permitted under Article
6 of the General Provisions; (b) change the minimum purchase price for shares
under Section 4 of Plans I and II, except as permitted under Article 6 of the
General Provisions; (c) increase the maximum term established under the Plans
for any Option, Stock Appreciation Right or Performance Share; or (d) permit the
granting of an Option, Stock Appreciation Right or Performance Share to anyone
other than as provided in Article 4 of the General Provisions.
ARTICLE 8. PRIOR RIGHTS AND OBLIGATIONS. No amendment, suspension or
-------------------------------
termination of the Program shall, without the consent of an Employee who has
received an Award, alter or impair any of that Employee's rights or obligations
under any Award granted under the Program prior to such amendment, suspension or
termination.
ARTICLE 9. PRIVILEGES OF STOCK OWNERSHIP. Notwithstanding the exercise of
-----------------------------
any Options or Stock Appreciation Rights granted pursuant to the terms of this
Program or the achievement of any performance objective specified in any
Performance Share granted pursuant to the terms of this Program, no Employee
shall have any of the rights or privileges of a stockholder of the Company in
respect of any shares of stock issuable upon the exercise of his or her Option
or achievement of his or her performance goal until certificates representing
the shares have been issued and delivered. No shares shall be required to be
issued and delivered upon exercise of any Option or achievement of any
performance goal as specified in a Performance Share unless and until all of the
requirements of law and of all regulatory agencies having jurisdiction over the
issuance and delivery of the securities shall have been fully complied with. No
adjustment shall be made for dividends or any other distributions for which the
record date is prior to the date on which such stock certificate is issued.
ARTICLE 10. RESERVATION OF SHARES OF COMMON STOCK. The Company, during
---------------------------------------
the term of this Program, will at all times reserve and keep available such
number of shares of its Common Stock as shall be sufficient to satisfy the
requirements of the Program. All Awards granted hereunder shall be subject to
all applicable federal and state laws, rules and regulations and to such
approval by any governmental or regulatory agency as may be required. The
Company will from time to time, as is necessary to accomplish the purposes of
this Program, seek to obtain all necessary and appropriate approvals from any
governmental authority or regulatory agency having jurisdiction any requisite
authority in order to issue and sell shares of Common Stock hereunder. The
inability of the Company to obtain from any regulatory agency having
jurisdiction the authority deemed by the Company's counsel to be necessary for
the lawful issuance and sale of any shares of its stock hereunder shall relieve
the Company of any liability in respect of the non-issuance or sale of the stock
as to which the requisite authority shall not have been obtained.
ARTICLE 11. TAX WITHHOLDING. The exercise of any Award granted under the
---------------
Program is subject to the condition that if at any time the Company shall
determine, in its discretion, that the satisfaction of withholding tax or other
withholding liabilities under any state or federal law is necessary or desirable
as a condition of, or in any connection with, such exercise or the delivery or
purchase of shares pursuant thereto, then in such event, the exercise of the
Option, Stock Appreciation Right or Performance Share shall not be effective
unless such withholding tax or other withholding liabilities shall have been
satisfied in a manner acceptable to the Company. The Company may withhold from
any cash payment made under this Program sufficient amounts to cover any
applicable withholding and employment taxes, and if the amount of such cash
payment is insufficient, the Company may require the Optionee to pay to the
Company the amount required to be withheld as a condition to delivering the
shares acquired pursuant to an Award. The Company also may withhold or collect
amounts with respect to a disqualifying disposition of shares of Common Stock
acquired pursuant to exercise of an Incentive Stock Option, as provided in
Section 16 of the Incentive Stock Option Plan. The Program Administrators are
authorized to adopt rules, regulations, or procedures which provide for the
satisfaction of an Employee's tax withholding obligation by, among other things,
the retention of shares of Common Stock to which the Employee would otherwise be
entitled pursuant to an Award and/or by the Employee's delivery of
previously-owned shares of Common Stock or other property.
ARTICLE 12. EMPLOYMENT. Nothing in the Program or in any Option, Stock
----------
Appreciation Right, or Performance Share award, shall confer upon any eligible
Employee any right to continued employment by the Company or any Subsidiary
thereof, or limit in any way the right of the Company or any Subsidiary thereof,
at any time to terminate or alter the terms of that employment.
ARTICLE 13. REVOCATION FOR MISCONDUCT. The Program Administrators may by
-------------------------
resolution immediately revoke, rescind and terminate any Option, or portion
thereof, to the extent not yet vested, or any Stock Appreciation Right, to the
extent not yet exercised, previously granted or awarded under this Program to an
Employee who is discharged from the employ of the Company or any Subsidiary
thereof for cause, which, for purposes hereof, shall mean termination for: (i)
conviction of a felony involving the misappropriation of the Company's or any
Subsidiaries assets or a conviction of a felony which results in a substantial,
demonstrable threat to the Company's or any Subsidiaries reputation, or (ii)
gross and willful failure to perform a substantial portion of the Employee's
duties and responsibilities as an Employee.
ARTICLE 14. RESTRICTIONS ON TRANSFER. The Company may place a legend upon
------------------------
any certificate representing shares acquired pursuant to an Award granted
hereunder noting that the transfer of such shares may be restricted by
applicable laws and regulations.
ARTICLE 15. DEFINITIONS.
-----------
(a) "Award" means an Option, Stock Appreciation Right or Performance
Share granted pursuant to the terms of this Program.
(b) "Board" means the Board of Directors of the Company.
(c) "Code" means the Internal Revenue Code of 1986, as amended.
(d) "Committee" means a Committee of three or more directors
appointed by the Board pursuant to Article 1 of the General Provisions hereof,
none of whom shall be an Officer or Employee of the Company or any Subsidiary,
and each of whom shall be a "disinterested person" within the meaning of Rule
16b-3 under the Exchange Act.
(e) "Common Stock" means shares of the common stock, $.01 par value
per share, of the Company.
(f) "Disability" means any disability which makes a person unable to
engage in any substantial gainful activity by reason of any medically
determinable physical or mental impairment as defined in Section 22(e)(3) of the
Code.
(g) "Employee" means any person who is employed full time by the
Company or any Subsidiary, or is an Officer of the Company or any Subsidiary,
but not including directors who are not also Officers of, or otherwise employed
by, the Company or any Subsidiary.
(h) "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
(i) "Fair Market Value" shall be equal to the fair market value per
share of the Company's Common Stock on the date an Award is granted. For
purposes hereof, the Fair Market Value of a share of Common Stock shall be the
closing sale price of a share of Common Stock on the date in question (or, if
such day is not a trading day in the U.S. markets, on the nearest preceding
trading day), as reported with respect to the principal market (or the composite
of the markets, if more than one) or national quotation system in which such
shares are then traded, or if no such closing prices are reported, the mean
between the high bid and low asked prices that day on the principal market or
national quotation system then in use, or if no such quotations are available,
the price furnished by a professional securities dealer making a market in such
shares selected by the Committee.
(j) "Incentive Stock Option" means any Option granted under this
Program which the Board intends (at the time it is granted) to be an Incentive
Stock Option within the meaning of Section 422 of the Code.
(k) "Non-Qualified Option" means any Option granted under this Plan
which is not an Incentive Stock Option.
(l) "Officer" means an Employee whose position in the Company or any
Subsidiary thereof is that of a corporate officer, as determined by the Board.
(m) "Option" means a right granted under this Program to purchase
Common Stock.
(n) "Optionee" means an Employee or former Employee to whom an
Option, Stock Appreciation Right, or Performance Share, as appropriate, is
granted under the Program.
(o) "Performance Shares" means a specified number of shares of Common
Stock granted to an Employee, as provided in the discretion of the Program
Administrators in accordance with Performance Share Plan.
(p) "Retirement" means a termination of employment which constitutes
a "retirement" pursuant to the personnel policies of the Company or any
Subsidiary thereof or under any applicable qualified pension benefit plan
maintained by the Company or any Subsidiary thereof.
(q) "Stock Appreciation Right" means a right to surrender an Option
in consideration for a payment by the Company in cash and/or Common Stock, as
provided in the discretion of the Program Administrators in accordance with the
Stock Appreciation Rights Plan.
(r) "Subsidiary" or "Subsidiaries" means those subsidiaries of the
Company, including Coastal Banc ssb, which meet the definition of "Subsidiary
corporations" set forth in Section 424(f) of the Code, at the time of granting
of the Award in question.
(s) "Termination Date" means the date the employee is effectively no
longer an employee. This does not cover time paid for severance.
(t) Other terms are defined as set forth in the General Provisions
and the respective Plans.
ARTICLE 16. STOCK OPTION AGREEMENT. The proper Officers, on behalf of the
----------------------
Company, and each Optionee shall execute a Stock Option Agreement which shall
set forth the total number of shares of Common Stock to which it pertains, the
exercise price, whether it is a Non-Qualified Option or an Incentive Stock
Option, and such other terms, conditions, restrictions and privileges as the
Program Administrators in each instance shall deem appropriate. Each Optionee
shall receive a copy of his or her executed Stock Option Agreement.
ARTICLE 17. GOVERNING LAW. To the extent not superseded by federal law,
--------------
the provisions of the Program shall be governed by and interpreted in accordance
with the laws of the State of Texas.
<PAGE>
COASTAL BANCORP, INC.
1999 STOCK COMPENSATION PROGRAM
PLAN I - INCENTIVE STOCK OPTION PLAN
SECTION 1. PURPOSE. The purpose of this Coastal Bancorp, Inc. Incentive
-------
Stock Option Plan ("Incentive Plan") is to promote the growth and general
prosperity of the Company by permitting the Company to grant Options to purchase
shares of its Common Stock. The Incentive Plan is designed to help attract and
retain superior personnel for positions of responsibility with the Company, or
of any Subsidiary, and to provide key Employees with an additional incentive to
contribute to the success of the Company. The Company intends that Options
granted pursuant to the provisions of the Incentive Plan will qualify and will
be identified as "incentive stock options" within the meaning of Section 422 of
the Code. This Incentive Plan is Part I of the Coastal Bancorp, Inc. 1999 Stock
Compensation Program. Unless any provision herein indicates to the contrary,
this Incentive Plan shall be subject to the General Provisions of the Program.
SECTION 2. OPTION TERMS AND CONDITIONS. The terms and conditions of
------------------------------
Options granted under the Incentive Plan may differ from one another as the
Program Administrators shall, in their sole discretion, determine, as long as
all Options granted under the Incentive Plan satisfy the requirements of the
Incentive Plan.
SECTION 3. DURATION OF OPTIONS. Each Option and all rights thereunder
---------------------
granted pursuant to the terms of the Incentive Plan shall be exercisable at any
time on or after it vests and becomes exercisable and shall expire on the date
determined by the Program Administrators, but in no event shall any Option
granted under the Incentive Plan expire later than ten years from the date on
which the Option is granted, except that any Employee who owns more than 10% of
the combined voting power of all classes of stock of the Company, or of any
Subsidiary thereof, must exercise any Options within five years from the date of
grant. In addition, each Option shall be subject to early termination as
provided in the Incentive Plan.
SECTION 4. PURCHASE PRICE. The purchase price for shares acquired
---------------
pursuant to the exercise, in whole or in part, of any Incentive Stock Option
shall not be less than one hundred percent (100%) of the Fair Market Value of a
share of Common Stock at the time of the grant of the Option; except that for
any Employee who owns more than 10% of the combined voting power of all classes
of stock of the Company, or of any Subsidiary, the purchase price shall not be
less than one hundred and ten percent (110%) of the Fair Market Value of a share
of Common Stock. All shares sold under the Incentive Plan shall be fully paid
and non-assessable.
SECTION 5. MAXIMUM AMOUNT OF OPTIONS IN ANY CALENDAR YEAR. The aggregate
----------------------------------------------
Fair Market Value (determined as of the time the Option is granted) of the
Common Stock with respect to which Incentive Stock Options, as defined in Code
Section 422(b), are exercisable for the first time by any Employee during any
calendar year (under the terms of this Plan and all such plans of the Company
and any Subsidiary thereof) shall not exceed $100,000. Any Option in excess of
the foregoing limitations shall be pursuant to the Company's Compensatory Stock
Option Plan (Plan II) and shall be clearly and specifically designated as not
being an Incentive Stock Option.
SECTION 6. EXERCISE OF INCENTIVE STOCK OPTIONS. Each Incentive Stock
---------------------------------------
Option shall become vested and exercisable in one or more installments during
its term, and the right to exercise may be cumulative as determined by the
Program Administrators; provided, however, that in the case of any Incentive
Stock Options exercisable within the first six months following the date the
Incentive Stock Option is granted, the shares of Common Stock received upon the
exercise of such Option may not be sold or disposed of by the Optionee for the
first six months following the date of grant, provided further, however, that in
the case of any Incentive Stock Option granted prior to the date that the
Program is approved by the requisite vote of the stockholders of the Company,
the shares of Common Stock received upon the exercise of such Option may not be
sold or disposed of by the Optionee for the first six months following the date
stockholder approval is received. In determining the number of shares of Common
Stock with respect to which Incentive Stock Options are vested and/or
exercisable, fractional shares will be rounded up to the nearest whole number if
the fraction is 0.5 or higher, and down if it is less. The purchase price of
any shares purchased shall be paid in full in cash or by certified or cashier's
check payable to the order of the Company or by shares of Common Stock
(including shares acquired pursuant to the exercise of an Option) or other
property, or by withholding some of the shares of Common Stock which are being
purchased upon exercise of an Option, if permitted by the Program
Administrators, or by a combination of cash, check or shares of Common Stock or
other property equal in Fair Market Value to the purchase price of the shares to
be acquired pursuant to the Option, at the time of exercise of the Option.
SECTION 7. ACCELERATION OF RIGHT OF EXERCISE OF INSTALLMENTS.
-------------------------------------------------------
Notwithstanding the first sentence of Section 6 of this Incentive Plan, in the
event the Company or its stockholders enter into an agreement to dispose of all
or substantially all of the assets or stock of the Company (or of Coastal Banc
ssb) by means of a sale, merger or other reorganization, liquidation or
otherwise, any Option granted pursuant to the terms of the Incentive Plan shall
become immediately exercisable with respect to the full number of shares subject
to that Option during the period commencing as of the date of the agreement to
dispose of all or substantially all of the assets or stock of the Company and
ending when the disposition of assets or stock contemplated by that agreement is
terminated or the Option is otherwise terminated in accordance with its
provisions or the provisions of this Incentive Plan, whichever occurs first;
provided, however, that no Option shall be immediately exercisable under this
Section 7 on account of any agreement to dispose of all or substantially all of
the assets or stock of the Company (or of Coastal Banc ssb) by means of a sale,
merger or other reorganization, liquidation or otherwise where the stockholders
of the Company immediately before the consummation of the transaction will own
at least 50% of the total combined voting power of all classes of stock entitled
to vote of the surviving entity, whether the Company or some other entity,
immediately after the consummation of the transaction. In the event the
transaction contemplated by the agreement referred to in this Section 7 is not
consummated, but rather is terminated, cancelled or expires, the Options granted
pursuant to the Incentive Plan shall thereafter be treated as if that agreement
had never been entered into.
Notwithstanding the first sentence of Section 6 of this Incentive Plan, in
the event of a change in control of the Company or threatened change in control
of the Company as determined by a vote of not less than a majority of the Whole
Board of Directors and a majority of the Continuing Directors of the Company, as
such terms are defined in the Company's Articles of Incorporation, all Incentive
Stock Options granted prior to such change in control or threatened change of
control shall become immediately exercisable. The term "control" for purposes
of this Section shall refer to the acquisition (subsequent to the approval of
the Program by the stockholders of the Company) of 10% or more of the voting
securities of the Company by any person or by persons acting as a group within
the meaning of Section 13(d) of the Exchange Act; provided, however, that for
purposes of this Incentive Plan, no change in control or threatened change in
control shall be deemed to have occurred if prior to the acquisition of, or
offer to acquire, 10% or more of the voting securities of the Company, the Whole
Board of Directors of the Company shall have adopted by not less than a
two-thirds vote a resolution specifically approving such acquisition or offer
for the specific purpose of preventing the acceleration of the vesting of such
Options. The term "person" for purposes of this Section refers to an individual
or a corporation, partnership, trust, association, joint venture, pool,
syndicate, sole proprietorship, unincorporated organization or any other form of
entity not specifically listed herein.
SECTION 8. WRITTEN NOTICE REQUIRED. Any Option granted pursuant to the
-------------------------
terms of the Incentive Plan shall be exercised when written notice of that
exercise has been given to the Company at its principal office by the person
entitled to exercise the Option and full payment for the shares with respect to
which the Option is exercised has been received by the Company.
SECTION 9. COMPLIANCE WITH SECURITIES LAWS. Shares of Common Stock shall
-------------------------------
not be issued with respect to any Option granted under the Incentive Plan unless
the exercise of that Option and the issuance and delivery of those shares
pursuant to that exercise shall comply with all relevant provisions of state and
federal law including, without limitation, the Securities Act of 1933, as
amended, the rules and regulations promulgated thereunder, and the requirements
of any stock exchange or national quotation system upon which the shares may
then be listed, and shall be further subject to the approval of counsel for the
Company with respect to such compliance. The Program Administrators may also
require an Optionee to whom an Option has been granted under the Incentive Plan
to furnish evidence satisfactory to the Company, including a written and signed
representation letter and consent to be bound by any transfer restriction
imposed by law, legend, condition or otherwise, that the shares are being
purchased only for investment and without any present intention to sell or
distribute the shares in violation of any state or federal law, rule or
regulation. Further, each Optionee shall consent to the imposition of a legend
on the shares of Common Stock subject to his or her Option restricting their
transferability as required by law or by this Section 9.
SECTION 10. EMPLOYMENT OF OPTIONEE. Each Optionee, if requested by the
------------------------
Program Administrators when the Option is granted, must agree in writing as a
condition of receiving his or her Option, that he or she will remain in the
employ of the Company, or any parent or Subsidiary of the Company (or a
corporation or a parent or Subsidiary of such corporation issuing or assuming a
stock option in a transaction to which Section 424(a) of the Code applies), as
the case may be, following the date of the granting of that Option for a period
specified by the Program Administrators, which period shall in no event exceed
three years. Nothing in the Plan or in any Option granted hereunder shall
confer upon any Optionee any right to continued employment by the Company, or
any Subsidiary thereof, or limit in any way the right of the Company or any
Subsidiary thereof, at any time to terminate or alter the terms of that
employment.
SECTION 11. OPTION RIGHTS UPON TERMINATION OF EMPLOYMENT. If an Optionee
--------------------------------------------
ceases to be employed by the Company, or any Subsidiary thereof (or a
corporation or a parent or Subsidiary of such corporation issuing or assuming a
stock option in a transaction to which Section 424(a) of the Code applies), for
any reason other than death, Disability or Retirement, his or her Option shall
immediately terminate. Should an employee be re-hired within the mandatory 30
day exercise window, they will be allowed to not exercise their previously
granted options at their discretion.
SECTION 12. OPTION RIGHTS UPON DISABILITY OR RETIREMENT. If an Optionee
--------------------------------------------
becomes disabled within the meaning of Section 22(e)(3) of the Code while
employed by the Company or any Subsidiary thereof (or a corporation or a parent
or Subsidiary of such corporation issuing or assuming a stock option in a
transaction to which Section 424(a) of the Code applies) or ceases to be
employed thereby due to his Retirement, the Option may be exercised, to the
extent exercisable on the date of termination of employment, at any time within
one year after the date of termination of employment due to Disability or
Retirement, unless either the Option or this Incentive Plan otherwise provides
for earlier termination.
SECTION 13. OPTION RIGHTS UPON DEATH OF OPTIONEE. Except as otherwise
---------------------------------------
limited by the Program Administrators at the time of the grant of an Option, if
an Optionee dies while employed by the Company or any Subsidiary thereof (or a
corporation or a Subsidiary of such corporation issuing or assuming a stock
option in a transaction to which Section 424(a) of the Code applies), or within
three months after ceasing to be an Employee thereof, his or her Option shall
expire one year after the date of death unless by its term it expires sooner.
During this one year or shorter period, the Option may be exercised, to the
extent that it remains unexercised on the date of death, by the person or
persons to whom the Optionee's rights under the Option shall pass by will or by
the laws of descent and distribution, but only to the extent that the Optionee
is entitled to exercise the Option at the date of death. However, in order for
the Option to continue to be treated as an Incentive Stock Option under Section
422 of the Code, the Option must be exercised no later than three months after
the date of termination of employment.
SECTION 14. OPTIONS NOT TRANSFERABLE. Options granted pursuant to the
--------------------------
terms of this Incentive Plan may not be sold, pledged, hypothecated, assigned or
transferred in any manner otherwise than by will or the laws of descent or
distribution and may be exercised during the lifetime of an Optionee only by
that Optionee.
SECTION 15. ADJUSTMENTS TO NUMBER AND PURCHASE PRICE OF OPTIONED SHARES.
------------------------------------------------------------
All Options granted pursuant to the terms of this Incentive Plan shall be
adjusted in the manner prescribed by Article 6 of the General Provisions of this
Program.
SECTION 16. NOTICE OF DISPOSITION; WITHHOLDING; ESCROW. An Optionee shall
------------------------------------------
immediately notify the Company in writing of any sale, transfer, assignment or
other disposition (or action constituting a disqualifying disposition within the
meaning of Section 421 of the Code) of any shares of Common Stock acquired
through exercise of an Incentive Stock Option, within two years after the grant
of such Incentive Stock Option or within one year after the acquisition of such
shares, setting forth the date and manner of disposition, the number of shares
disposed of and the price at which such shares were disposed of. The Company
shall be entitled to withhold from any compensation or other payments then or
thereafter due to the Optionee such amounts as may be necessary to satisfy any
withholding requirements of Federal or state law or regulation and, further, to
collect from the Optionee any additional amounts which may be required for such
purpose. The Program Administrators may, in their discretion, require shares of
Common Stock acquired by an Optionee upon exercise of an Incentive Stock Option
to be held in an escrow arrangement for the purpose of enabling compliance with
the provisions of this Section 16.
<PAGE>
COASTAL BANCORP, INC.
1999 STOCK COMPENSATION PROGRAM
PLAN II - COMPENSATORY STOCK OPTION PLAN
SECTION 1. PURPOSE. The purpose of this Coastal Bancorp, Inc.
-------
Compensatory Stock Option Plan ("Compensatory Plan") is to permit the Company to
grant Options to purchase shares of its Common Stock to selected Officers and
full-time, key Employees of the Company, or any Subsidiary thereof. The
Compensatory Plan is designed to help attract and retain superior personnel for
positions of substantial responsibility with the Company and its Subsidiaries
and to provide key Employees with an additional incentive to contribute to the
success of the Company. Any Option granted pursuant to this Compensatory Plan
shall be clearly and specifically designated as not being an Incentive Stock
Option, as defined in Section 422(b) of the Code. This Compensatory Plan is
Part II of the Company's 1999 Stock Compensation Program. Unless any provision
herein indicates to the contrary, this Compensatory Plan shall be subject to the
General Provisions of the Program.
SECTION 2. OPTION TERMS AND CONDITIONS. The terms and conditions of
------------------------------
Options granted under this Compensatory Plan may differ from one another as the
Program Administrators shall, in their discretion, determine as long as all
Options granted under the Compensatory Plan satisfy the requirements of the
Compensatory Plan.
SECTION 3. DURATION OF OPTIONS. Each Option and all rights thereunder
---------------------
granted pursuant to the terms of this Compensatory Plan shall expire on the date
determined by the Program Administrators, but in no event shall any Option
granted under the Compensatory Plan expire later than ten years and one month
from the date on which the Option is granted. In addition, each Option shall be
subject to early termination as provided in the Compensatory Plan.
SECTION 4. PURCHASE PRICE. The purchase price for shares acquired
---------------
pursuant to the exercise, in whole or in part, of any Non-Qualified Option shall
be established by the Program Administrators at the time of grant, but in no
event shall be less than the par value of the Common Stock at the time of the
grant of the Option.
SECTION 5. EXERCISE OF OPTIONS. Each Non-Qualified Option shall become
-------------------
vested and exercisable in one or more installments during its term and the right
to exercise may be cumulative as determined by the Program Administrators,
provided, however, that in the case of any Non-Qualified Option exercisable
within the first six months following the date such Option is granted, the
shares of Common Stock received upon the exercise of such Option may not be sold
or disposed of by the Optionee for the first six months following the date of
grant, provided further, however, that in the case of any Option granted prior
to the date that this Program is approved by the requisite vote of the
stockholders of the Company, the shares of Common Stock received upon the
exercise of such Option may not be sold or disposed of by the Optionee for the
first six months following the date stockholder approval is received. In
determining the number of shares of Common Stock with respect to which Options
are vested and/or exercisable, fractional shares will be rounded up to the
nearest whole number if the fraction is 0.5 or higher, and down if it is less.
The purchase price of any shares purchased shall be paid in full in cash or by
certified or cashier's check payable to the order of the Company or by shares of
Common Stock (including shares acquired pursuant to the exercise of an Option)
or other property or by withholding some of the shares of Common Stock which are
being purchased upon exercise of an Option, if permitted by the Program
Administrators, or by a combination of cash, check or shares of Common Stock or
other property equal in Fair Market Value to the purchase price of the shares to
be acquired pursuant to the Option, at the time of exercise of the Option.
SECTION 6. ACCELERATION OF RIGHT OF EXERCISE OF INSTALLMENTS.
-------------------------------------------------------
Notwithstanding the first sentence of Section 5 of this Compensatory Plan, if
the Company or its stockholders enter into an agreement to dispose of all or
substantially all of the assets or stock of the Company (or of Coastal Banc ssb)
by means of a sale, merger or other reorganization, liquidation, or otherwise,
any Option granted pursuant to the terms of this Compensatory Plan shall become
immediately exercisable with respect to the full number of shares subject to
that Option during the period commencing as of the date of the agreement to
dispose of all or substantially all of the assets or stock of the Company (or of
Coastal Banc ssb) and ending when that agreement is terminated, or the Option is
otherwise terminated in accordance with its provisions or the provisions of this
Compensatory Plan, whichever occurs first; provided, however, that no Option
shall be immediately exercisable under this Section 6 on account of any
agreement to dispose of all or substantially all of the assets or stock of the
Company by means of a sale, merger or other reorganization, liquidation or
otherwise where the stockholders of the Company immediately before the
consummation of the transaction will own at least 50% of the total combined
voting power of all classes of stock entitled to vote of the surviving entity,
whether the Company or some other entity, immediately after the consummation of
the transaction. In the event the transaction contemplated by the agreement
referred to in this Section 6 is not consummated but rather is terminated,
cancelled or expires, the Options granted pursuant to this Compensatory Plan
shall thereafter be treated as if that agreement had never been entered into.
Notwithstanding the first sentence of Section 5 of this Compensatory Plan,
in the event of a change in control of the Company, or threatened change in
control of the Company as determined by a vote of not less than a majority of
the Whole Board of Directors and a majority of the Continuing Directors of the
Company, as such terms are defined in the Company's Articles of Incorporation,
all Non-Qualified Options granted prior to such change in control or threatened
change in control shall become immediately exercisable. The term "control" for
purposes of this Section shall refer to the acquisition (subsequent to the
approval of the Program by the stockholders of the Company) of 10% or more of
the voting securities of the Company by any person or by persons acting as a
group within the meaning of Section 13(d) of the Exchange Act; provided,
however, that for purposes of this Compensatory Plan, no change in control or
threatened change in control shall be deemed to have occurred if prior to the
acquisition of, or offer to acquire, 10% or more of the voting securities of the
Company, the Whole Board of Directors of the Company shall have adopted by not
less than a two-thirds vote a resolution specifically approving such acquisition
or offer for the specific purpose of preventing the acceleration of the vesting
of such Options. The term "person" for purposes of this Section refers to an
individual or a corporation, partnership, trust, association, joint venture,
pool, syndicate, sole proprietorship, unincorporated organization or any other
form of entity not specifically listed herein.
SECTION 7. WRITTEN NOTICE REQUIRED. Any Option pursuant to the terms of
------------------------
this Compensatory Plan shall be exercised when written notice of that exercise
has been given to the Company at its principal office by the person entitled to
exercise the Option and full payment for the shares with respect to which the
Option is exercised has been received by the Company.
SECTION 8. COMPLIANCE WITH SECURITIES LAWS. Shares shall not be issued
---------------------------------
with respect to any Option granted under the Compensatory Plan unless the
exercise of that Option and the issuance and delivery of the shares pursuant
thereto shall comply with all relevant provisions of state and federal law,
including, without limitation, the Securities Act of 1933, as amended, the rules
and regulations promulgated thereunder, and the requirements of any stock
exchange or national quotation system upon which the shares may then be listed,
and shall be further subject to the approval of counsel for the Company with
respect to such compliance. The Program Administrators may also require an
Optionee to whom an Option has been granted to furnish evidence satisfactory to
the Company, including a written and signed representation letter and consent to
be bound by any transfer restrictions imposed by law, legend, condition or
otherwise, that the shares are being purchased only for investment purposes and
without any present intention to sell or distribute the shares in violation of
any state or federal law, rule or regulation. Further, each Optionee shall
consent to the imposition of a legend on the shares of Common Stock subject to
his or her Option restricting their transferability as required by law or by
this Section 8.
SECTION 9. EMPLOYMENT OF OPTIONEE. Each Optionee, if requested by the
------------------------
Program Administrators, must agree in writing as a condition of the granting of
his or her Option, to remain in the employ of the Company or any Subsidiary
thereof (or a corporation or a parent or Subsidiary of such corporation issuing
or assuming a stock option in a transaction to which Section 424(a) of the Code
applies), following the date of the granting of that Option for a period
specified by the Program Administrators, which period shall in no event exceed
three years. Nothing in this Compensatory Plan or in any Option granted
hereunder shall confer upon any Optionee any right to continued employment by
the Company or any Subsidiary thereof, or limit in any way the right of the
Company or any Subsidiary at any time to terminate or alter the terms of that
employment.
SECTION 10. OPTION RIGHTS UPON TERMINATION OF EMPLOYMENT. If any Optionee
--------------------------------------------
under this Compensatory Plan ceases to be employed by the Company, or any
Subsidiary (or a corporation or a parent or Subsidiary of such corporation
issuing or assuming a stock option in a transaction to which Section 424(a) of
the Code applies), for any reason other than Disability, death or Retirement,
his or her Option shall immediately terminate, provided, however, that the
Program Administrators may, in their discretion, allow the Option to be
exercised, to the extent exercisable on the date of termination of employment,
at any time within a period of between three months and five years after the
date of termination of employment, unless either the Option or this Compensatory
Plan otherwise provides for earlier termination. Should an employee be re-hired
within the mandatory 30 day exercise window, they will be allowed to not
exercise their previously granted options at their discretion.
SECTION 11. OPTION RIGHTS UPON DISABILITY OR RETIREMENT. If an Optionee
--------------------------------------------
becomes disabled within the meaning of Section 22(e)(3) of the Code while
employed by the Company, or any Subsidiary thereof (or a corporation or a parent
or Subsidiary of such corporation issuing or assuming a stock option in a
transaction to which Section 424(a) of the Code applies) or ceases to be
employed thereby due to his Retirement, the Program Administrators, in their
discretion, may allow the Option to be exercised, to the extent exercisable on
the date of termination of employment, at any time within one year after the
date of termination of employment due to Disability or Retirement, unless either
the Option or this Compensatory Plan otherwise provides for earlier termination.
SECTION 12. OPTION RIGHTS UPON DEATH OF OPTIONEE. Except as otherwise
---------------------------------------
limited by the Program Administrators at the time of the grant of an Option, if
an Optionee dies while employed by the Company, or any Subsidiary thereof, (or a
corporation or a parent or Subsidiary of such corporation issuing or assuming a
stock option in a transaction to which Section 424(a) of the Code applies), his
or her Option shall expire one year after the date of death unless by its terms
it expires sooner. During this one year or shorter period, the Option may be
exercised, to the extent that it remains unexercised on the date of death, by
the person or persons to whom the Optionee's rights under the Option shall pass
by will or by the laws of descent and distribution, but only to the extent that
the Optionee is entitled to exercise the Option at the date of death.
SECTION 13. OPTIONS NOT TRANSFERABLE. Options granted pursuant to the
--------------------------
terms of this Compensatory Plan may not be sold, pledged, hypothecated, assigned
or transferred in any manner otherwise than by will or the laws of descent or
distribution and may be exercised during the lifetime of an Optionee only by
that Optionee.
SECTION 14. ADJUSTMENTS TO NUMBER AND PURCHASE PRICE OF OPTIONED SHARES.
------------------------------------------------------------
All Options granted pursuant to the terms of this Compensatory Plan shall be
adjusted in a manner prescribed by Article 6 of the General Provisions of the
Program.
<PAGE>
COASTAL BANCORP, INC.
1999 STOCK COMPENSATION PROGRAM
PLAN III - STOCK APPRECIATION RIGHTS PLAN
SECTION 1. PURPOSE. The purpose of this Coastal Bancorp, Inc. Stock
-------
Appreciation Rights Plan ("S.A.R. Plan") is to permit the Company to grant Stock
Appreciation Rights for its Common Stock to its full-time, key Employees. The
S.A.R. Plan is designed to help attract and retain superior personnel for
positions of substantial responsibility with the Company and any Subsidiary
thereof and to provide key Employees with an additional incentive to contribute
to the success of the Company. This S.A.R. Plan is Part III of the Coastal
Bancorp, Inc. 1999 Stock Compensation Program.
SECTION 2. TERMS AND CONDITIONS. The Program Administrators may, but
----------------------
shall not be obligated to, authorize, on such terms and conditions as they deem
appropriate in each case, the Company to grant rights to Optionees to surrender
an exercisable Option granted under Plan I or Plan II or any portion thereof, in
consideration for the payment by the Company of an amount equal to the excess of
the Fair Market Value of the shares of Common Stock subject to such Option, or
any portion thereof, surrendered, over the exercise price of the Option with
respect to such shares. Such payment, at the discretion of the Program
Administrators, may be made in shares of Common Stock valued at the then Fair
Market Value thereof, or in cash or partly in cash and partly in shares of
Common Stock; provided that with respect to rights granted in tandem with
Incentive Stock Options, the Program Administrators shall establish the form(s)
of payment allowed the Optionee at the date of grant. The Program
Administrators shall not be authorized to make payment to any Optionee in shares
of the Company's Common Stock unless Section 83 of the Code would apply to the
Common Stock transferred to the Optionee. The Program Administrators may, but
shall not be obligated to, also authorize naked Stock Appreciation Rights in
accordance with Section 9 hereof. Notwithstanding the foregoing, the Company
may not permit the exercise and cancellation of a Stock Appreciation Right
issued pursuant to this S.A.R. Plan until the Company has been subject to the
reporting requirements of Section 13 of the Exchange Act, for a period of at
least one year prior to the exercise and cancellation of any such Stock
Appreciation Right.
SECTION 3. TIME LIMITATIONS. Any election by an Optionee to exercise the
----------------
Stock Appreciation Rights provided in this S.A.R. Plan shall be made during the
period beginning on the third business day following the release for publication
of quarterly or annual financial information required to be prepared and
disseminated by the Company pursuant to the requirements of the Exchange Act and
ending on the twelfth business day following such date. The required release of
information shall be deemed to have been satisfied when the specified financial
data appears on or in a wire service, financial news service or newspaper of
general circulation or is otherwise first made publicly available.
SECTION 4. EXERCISE OF STOCK APPRECIATION RIGHTS: EFFECT ON STOCK OPTIONS
---------------------------------------------------------------
AND VICE VERSA. Upon the exercise of a Stock Appreciation Right, the number of
- ---------------
shares of Common Stock available under the Option to which it relates shall
decrease by a number equal to the number of shares for which the Stock
Appreciation Right was exercised. Upon the exercise of an Option, any related
Stock Appreciation Right shall terminate as to any number of shares subject to
the right that exceeds the total number of shares for which the Option remains
unexercised.
<PAGE>
SECTION 5. TIME OF GRANT. With respect to Options granted under Plan I,
--------------
Stock Appreciation Rights must be granted concurrently with the Incentive Stock
Options to which they relate; with respect to Options granted under Plan II,
Stock Appreciation Rights may be granted concurrently or at any time thereafter
prior to the exercise or expiration of such Non-Qualified Options.
SECTION 6. NON-TRANSFERABLE. The holder of a Stock Appreciation Right may
----------------
not transfer or assign the right otherwise than by will or in accordance with
the laws of descent and distribution. Furthermore, in the event of the
termination of his or her service with the Company as an Officer and/or
Employee, the right may be exercised only within the period, if any, which the
Option to which it relates may be exercised.
SECTION 7. TANDEM INCENTIVE STOCK OPTION - STOCK APPRECIATION RIGHT.
-------------------------------------------------------------
Whenever an Incentive Stock Option authorized pursuant to Plan I and a Stock
Appreciation Right authorized hereunder are granted together and the exercise of
one affects the right to exercise the other, the following requirements shall
apply:
(a) The Stock Appreciation Right will expire no later than the
expiration of the underlying Incentive Stock Option;
(b) The Stock Appreciation Right may be for no more than the difference
between the exercise price of the underlying Option and the market price of the
stock subject to the underlying Option at the time the Stock Appreciation Right
is exercised;
(c) The Stock Appreciation Right is transferable only when the
underlying Incentive Stock Option is transferable and under the same conditions;
(d) The Stock Appreciation Right may be exercised only when the
underlying Incentive Stock Option is eligible to be exercised; and
(e) The Stock Appreciation Right may be exercised only when the market
price of the stock subject to the Option exceeds the exercise price of the stock
subject to the Option.
SECTION 8. TANDEM STOCK OPTION - LIMITED STOCK APPRECIATION RIGHT. The
--------------------------------------------------------
Program Administrators may provide that any tandem Stock Appreciation Right
granted pursuant to this Section 8 shall be a limited Stock Appreciation Right
("Limited Stock Appreciation Right"), in which event:
(a) The Limited Stock Appreciation Right shall be exercisable during
the period beginning on the first day following the expiration of an Offer (as
defined below) and ending on the thirtieth day following such date;
(b) Neither the Option tandem to the Limited Stock Appreciation Right
nor any other Stock Appreciation Right tandem to such Option may be exercised at
any time that the Limited Stock Appreciation Right may be exercised, provided
that this requirement shall not apply in the case of an Incentive Stock Option
tandem to a Limited Stock Appreciation Right if and to the extent that the
Program Administrators determine that such requirement is not consistent with
applicable statutory provisions regarding Incentive Stock Options and the
regulations issued thereunder;
(c) Upon exercise of the Limited Stock Appreciation Right, the Fair
Market Value of the shares to which the right relates shall be determined as the
highest price per share paid in any Offer that is in effect at any time during
the period beginning on the sixtieth day prior to the date on which the Limited
Stock Appreciation Right is exercised and ending on such exercise date;
provided, however, with respect to a Limited Stock Appreciation Right tandem to
an Incentive Stock Option, the Program Administrators shall determine Fair
Market Value of such shares in a different manner if and to the extent that the
Program Administrators deem necessary or desirable to conform with applicable
statutory provisions regarding Incentive Stock Options and the regulations
issued thereunder.
The term "Offer" shall mean any tender offer or exchange offer for shares
of the Company, provided that the person making the offer acquires shares of the
Company's capital stock pursuant to such offer.
SECTION 9. NAKED STOCK APPRECIATION RIGHT. The Program Administrators may
------------------------------
provide that any Stock Appreciation Right granted pursuant to this Section 9
shall be a naked Stock Appreciation Right ("Naked Right"), in which event:
(a) Participants shall be awarded Naked Rights for a period of up to
five years or such shorter period which shall not be less than six months, as
may be determined by the Program Administrators. Such designated period may
vary as among participants and as among awards to a participant. Subject to
compliance with Section 3 hereof, at the end of such designated period with
respect to a participant, such participant shall receive an amount equal to the
appreciation in market value of his or her Naked Rights as determined in
subparagraph (b) of this Section 9 (the "Right Award"). The Right Award shall
be payable in cash or in shares of Common Stock, as may be determined by the
Program Administrators. A participant may receive as many awards of Naked
Rights at various times as may be determined to be appropriate by the Program
Administrators.
(b) For purposes of determining the amount of a Right Award, the
Program Administrators shall determine the market value of Naked Rights held by
such participant at the end of the designated period for which such Naked Rights
have been held ("Valuation Period") and subtract therefrom the market value of
the same Naked Rights on the date awarded to such participant. The market value
of one Naked Right on a valuation date shall be determined by the Program
Administrators on the basis of such factors as they deem appropriate; and shall
be determined without regard to any restriction other than a restriction which,
by its terms, will never lapse. The Fair Market Value of shares of the Common
Stock shall be the Fair Market Value as set forth in Article 15(i) of the
General Provisions and shall be used to determine the market value of one Naked
Right. The market value of Naked Rights held by a participant on a valuation
date shall be determined by multiplying the number of Naked Rights held by such
participant by the market value of one Naked Right on such valuation date. The
measurement of appreciation shall be made separately with respect to each
separate award of Naked Rights.
(c) The Naked Rights shall be used solely as a device for the
measurement and determination of the amount to be paid to participants
hereunder. The Naked Rights shall not constitute or be treated as property or
as a trust fund of any kind. All amounts at any time attributable to the Naked
Rights shall be and remain the sole property of the Company and the
participants' rights hereunder are limited to the right to receive cash and
shares of Common Stock as herein provided.
(d) Notwithstanding the first sentence of subparagraph (a) of this
Section 9, in the event the Company or its stockholders enter into an agreement
to dispose of all or substantially all of the assets or stock of the Company or
of Coastal Banc ssb by means of a sale, merger or other reorganization,
liquidation or otherwise, any Naked Right granted pursuant to subparagraph (a)
of this Section 9 shall become immediately exercisable during the period
commencing as of the date of the agreement to dispose of all or substantially
all of the assets or stock of the Company or of Coastal Banc ssb and ending when
the disposition of assets or stock contemplated by that agreement is terminated
or the Naked Right is otherwise terminated in accordance with its provisions or
the provisions of this S.A.R. Plan, whichever occurs first; provided, however,
that no Naked Right shall be immediately exercisable under this subparagraph (d)
on account of any agreement to dispose of all or substantially all of the assets
or stock of the Company by means of a sale, merger or other reorganization,
liquidation or otherwise where the stockholders of the Company immediately
before the consummation of the transaction will own at least 50% of the total
combined voting power of all classes of stock entitled to vote of the surviving
entity, whether the Company or some other entity, immediately after the
consummation of the transaction. In the event the transaction contemplated by
the agreement referred to in this subparagraph (d) is not consummated, but
rather is terminated, cancelled or expires, the Naked Rights granted pursuant to
subparagraph (a) of this Section 9 shall thereafter be treated as if that
agreement had never been entered into.
Notwithstanding the first sentence of subparagraph (a) of this Section 9,
in the event of a change in control of the Company or threatened change in
control of the Company as determined by a vote of not less than a majority of
the Whole Board of Directors and a majority of the Continuing Directors of the
Company, as such terms are defined in the Company's Articles of Incorporation,
all Naked Rights granted prior to such change in control or threatened change of
control shall become immediately exercisable. The term "control" for purposes
of this Section shall refer to the acquisition (subsequent to the approval of
the Program by the stockholders of the Company) of 10% or more of the voting
securities of the Company by any person or by persons acting as a group within
the meaning of Section 13(d) of the Exchange Act; provided, however, no change
in control or threatened change in control shall be deemed to have occurred if
prior to the acquisition of, or offer to acquire, 10% or more of the voting
securities of the Company, the Whole Board of Directors of the Company shall
have adopted by not less than a two-thirds vote a resolution specifically
approving such acquisition or offer for the specific purpose of preventing the
acceleration of the vesting of such Naked Rights. The term "person" for
purposes of this paragraph refers to an individual or a corporation,
partnership, trust, association, joint venture, pool, syndicate, sole
proprietorship, unincorporated organization or any other form of entity not
specifically listed herein.
(e) Any Naked Rights granted pursuant to subparagraph (a) of this
Section 9 shall be exercised when written notice of that exercise has been given
to the Company at its principal office by the person entitled to exercise the
Naked Right.
(f) Shares of Common Stock shall not be issued with respect to any
Naked Right granted under subparagraph (a) of this Section 9 unless the exercise
of that Naked Right and the issuance and delivery of those shares pursuant to
that exercise shall comply with all relevant provisions of state and federal law
including, if applicable, the Securities Act of 1933, as amended, the rules and
regulations promulgated thereunder, and the requirements of any stock exchange
or national quotation system upon which the shares may then be listed, and shall
be further subject to the approval of counsel for the Company with respect to
such compliance. The Program Administrators may also require an Employee to
whom a right has been granted under subparagraph (a) of this Section 9 ("Right
Holder") to furnish evidence satisfactory to the Company, including a written
and signed representation letter and consent to be bound by any transfer
restriction imposed by law, legend, condition or otherwise, that the shares are
being acquired without any present intention to sell or distribute the shares in
violation of any state or federal law, rule or regulation. Further, each Right
Holder shall consent to the imposition of a legend on any shares of Common Stock
so acquired restricting their transferability as required by law or by this
subparagraph (f).
(g) Each Right Holder, if requested by the Program Administrators when
a Naked Right is granted, must agree in writing as a condition of receiving his
or her Naked Right, that he or she will remain in the employ of the Company, or
any Subsidiary of the Company (or a corporation or a parent or Subsidiary of
such corporation issuing or assuming a Naked Right), as the case may be,
following the date of the granting of that Naked Right for a period specified by
the Program Administrators, which period shall in no event exceed three years.
Nothing in this Section 9 or in any Naked Right granted hereunder shall confer
upon any Right Holder any right to continued employment by the Company, or any
Subsidiary thereof, or limit in any way the right of the Company or any
Subsidiary thereof at any time to terminate or alter the terms of that
employment.
(h) If a Right Holder ceases to be employed by the Company, or any
Subsidiary thereof (or a corporation or a parent or Subsidiary of such
corporation issuing or assuming a Naked Right), for any reason other than death,
Disability or Retirement, his or her Naked Right shall immediately terminate;
provided, however, that the Program Administrators may, at the time a Naked
Right is granted, in their discretion, allow such Naked Right to be exercised to
the extent exercisable on the date of termination of employment at any time
within three months after the date of termination of employment, unless either
the Naked Right or this Section 9 otherwise provides for earlier termination.
(i) If a Right Holder becomes disabled within the meaning of Section
22(e)(3) of the Code while employed by the Company of any Subsidiary thereof (or
a corporation or a parent or Subsidiary of such corporation issuing or assuming
a Naked Right) or ceases to be employed thereby due to Retirement, his or her
Naked Rights may be exercised, to the extent exercisable on the date of
termination of employment, at any time within one year after the date of
termination of employment due to Disability or Retirement, unless either the
Naked Right or this Section 9 otherwise provides for earlier termination.
(j) Except as otherwise limited by the Program Administrators at the time
of the grant of a Naked Right, if a Right Holder dies while employed by the
Company or any Subsidiary thereof (or a corporation or a parent or Subsidiary of
such corporation issuing or assuming a Naked Right), or within three months
after ceasing to be an Employee thereof, his or her Naked Right shall expire one
year after the date of death unless by its term it expires sooner. During this
one year or shorter period, the Naked Right may be exercised, to the extent that
it remains unexercised on the date of death, by the person or persons to whom
the Right Holder's Naked Rights shall pass by will or by the laws of descent and
distribution, but only to the extent that the Right Holder is entitled to
exercise the Naked Right at the date of death.
<PAGE>
(k) Naked Rights granted pursuant to the terms of this Section 9 may not
be sold, pledged, hypothecated, assigned or transferred in any manner otherwise
than by will or the laws of descent or distribution and may be exercised during
the lifetime of a Right Holder only by that Right Holder.
(l) All Naked Rights granted pursuant to the terms of this Section 9 shall
be adjusted in the manner prescribed by Article 6 of the General Provisions of
this Program.
<PAGE>
COASTAL BANCORP, INC.
1999 STOCK COMPENSATION PROGRAM
PLAN IV - PERFORMANCE SHARE PLAN
SECTION 1. PURPOSE. The purpose of this Coastal Bancorp, Inc. Performance
--------
Share Plan ("Performance Plan") is to promote the growth and general prosperity
of the Company by permitting the Company to grant Performance Shares to help
attract and retain superior personnel for positions of substantial
responsibility with the Company and any Subsidiary and to provide key Employees
with an additional incentive to contribute to the success of the Company. This
Performance Plan is Part IV of the Coastal Bancorp, Inc. 1999 Stock Compensation
Program.
SECTION 2. TERMS AND CONDITIONS. The Program Administrators may grant
-----------------------
Performance Shares to any Employee eligible under Article 4 of the General
Provisions. Each Performance Share grant confers upon the recipient thereof the
right to receive a specified number of shares of Common Stock of the Company
contingent upon the achievement of specified performance objectives within a
specified period. The Program Administrators shall specify the performance
objective and the period of duration of the Performance Share grant at the time
that such Performance Share is granted. Any Performance Shares granted under
this Plan shall constitute an unfunded promise to make future payments to the
affected Employee upon the completion of specified conditions. The grant of an
opportunity to receive Performance Shares shall not entitle the affected
Employee to any rights to specific fund(s) or assets of the Company, or any
parent or Subsidiary thereof.
SECTION 3. CASH IN LIEU OF STOCK. In lieu of some or all of the shares of
----------------------
Common Stock earned by achievement of the specified performance objectives
within the specified period, the Program Administrators may distribute cash in
an amount equal to the Fair Market Value of the Common Stock at the time that
the Employee achieves the performance objective within the specified period.
Such Fair Market Value shall be determined by Article 15(i) of the General
Provisions, on the business day next preceding the date of payment. The Program
Administrators shall be authorized to make payment in shares of Common Stock
only if Section 83 of the Code would apply to the transfer of Common Stock to
the Employee.
SECTION 4. PERFORMANCE OBJECTIVE PERIOD. The duration of the period
-------------------------------
within which to achieve the performance objectives is to be determined by the
Program Administrators. The period may not be less than one year nor more than
five years from the date the performance share is granted.
SECTION 5. NON-TRANSFERABLE. A participating Employee may not transfer or
-----------------
assign a performance share.
SECTION 6. PERFORMANCE SHARE RIGHTS UPON DEATH OR TERMINATION OF
------------------------------------------------------------
EMPLOYMENT. If a participating Employee dies or terminates service with the
--
Company, or any Subsidiary thereof (or a corporation or a parent or Subsidiary
of such corporation issuing or assuming a Performance Share in a transaction to
which Section 424(a) of the Code applies,) prior to the expiration of the
performance objective period, any Performance Shares granted to him or her
during that period are terminated.
END OF 1999 STOCK COMPENSATION PROGRAM
template1
