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, 1999
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OR
[ ] Transition Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the Transition Period from _________ to _________
Commission File Number: 0-24526
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COASTAL BANCORP, INC.
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(Exact name of Registrant as specified in its charter)
Texas 76-0428727
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
5718 Westheimer, Suite 600
Houston, Texas 77057
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(Address of principal executive office)
(713) 435-5000
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(Registrant's telephone number)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
N/A N/A
Securities registered pursuant to section 12(g) of the Act:
Common Stock, $0.01 par value per share
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(Title of Class)
9 1/2% Series A Cumulative Preferred Stock
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months and (2) has been subject to such filing requirements for the
past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of March 17, 2000, the aggregate market value of the 5,055,794 shares of
Common Stock of the Registrant issued and outstanding on such date, excluding
1,298,393 shares held by all directors and executive officers of the Registrant
as a group, was $84,052,575. This figure is based on the closing sale price of
$16.625 per share of the Company's Common Stock on March 17, 2000, as reported
in The Wall Street Journal on March 20, 2000.
Number of shares of Common Stock outstanding as of March 17, 2000: 6,354,187
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, 1999, are incorporated into Part II, Items 5-8 of
this Form 10-K.
(2) Portions of the Registrant's definitive proxy statement for its 2000
Annual Meeting of Stockholders ("Proxy Statement") are incorporated into Part
III, Items 10-13 of this Form 10-K.
<PAGE>
PART I.
ITEM 1. BUSINESS
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COASTAL BANCORP, INC.
In addition to historical information, this Annual Report on Form 10-K
includes certain "forward-looking statements," as defined in the Securities Act
of 1933 and the Securities Exchange Act of 1934, based on current management
expectations. The Company's actual results could differ materially from those
management expectations. Such forward-looking statements include statements
regarding the Company's intentions, beliefs or current expectations as well as
the assumptions on which such statements are based. Stockholders and potential
stockholders are cautioned that any such forward-looking statements are not
guarantees of future performance and involve risks and uncertainties, and that
actual results may differ materially from those contemplated by such
forward-looking statements. Factors that could cause future results to vary
from current management expectations include, but are not limited to, general
economic conditions, legislative and regulatory changes, monetary and fiscal
policies of the federal government, changes in tax policies, rates and
regulations of federal, state and local tax authorities, changes in interest
rates, deposit flows, the cost of funds, demand for loan products, demand for
financial services, competition, changes in the quality or composition of the
Company's loan and investment portfolios, changes in accounting principles,
policies or guidelines, and other economic, competitive, governmental and
technological factors affecting the Company's operations, markets, products,
services and fees. The Company undertakes no obligation to update or revise any
forward-looking statements to reflect changed assumptions, the occurrence of
unanticipated events or changes to future operating results over time.
Coastal Bancorp, Inc. (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, 1999, the Company had total consolidated assets of $2.9
billion, total deposits of $1.6 billion, $28.8 million in Series A Preferred
Stock of the Bank, 9 1/2% Series A Cumulative Preferred Stock of $27.5 million
and common stockholders' equity of $106.0 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"). See
"Regulation - The Company."
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 50 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, 1999, the Bank's total assets had increased to $2.9 billion,
total deposits were $1.6 billion and stockholders' equity totaled $194.0
million.
The Bank attempts to maximize profitability through the generation of net
interest income and fee income. To meet this objective, the Bank has
implemented a strategy of building its core deposit base while deploying its
funds in assets which provide an attractive return with acceptable credit risk.
In carrying out this strategy, and to ultimately provide an attractive rate of
return to the Company's shareholders, the Bank adheres to four operating
principles: (i) continuing to expand its low cost core deposit base; (ii)
minimizing interest rate risk; (iii) controlling credit risk, while increasing
the emphasis on commercial business lending; and (iv) maintaining a low level of
general overhead expense relative to its peers. These operating principles are
briefly discussed below.
CORE DEPOSITS. The Bank began to implement the first operating principle,
developing and expanding a core deposit base, in 1988 through a series of
transactions with the Federal government and competitively priced transactions
with private sector financial institutions. In 1988, the Bank became the first
acquiror of failed or failing savings institutions under the Federal
government's "Southwest Plan." In this transaction (the "Southwest Plan
Acquisition"), the Bank acquired from the Federal Savings and Loan Insurance
Corporation ("FSLIC"), as receiver for four insolvent savings associations (the
"Acquired Associations"), approximately $543.4 million of assets and assumed
approximately $543.4 million of deposits and other liabilities. The Bank
acquired an aggregate of 14 branch offices from the Acquired Associations in new
and existing markets in southwest Houston, west of Houston along the Houston-San
Antonio corridor and in the Rio Grande Valley.
Since completion of the Southwest Plan Acquisition, the Bank has entered
into a series of branch office transactions (including two disposition
transactions) and one whole bank acquisition. All of these transactions
resulted in the net assumption of $1.9 billion of primarily retail deposits and
58 branch offices (16 of which were subsequently closed or sold). The Bank has
also opened seven de novo branches since its inception, six in the Houston
metropolitan area and one in Austin. The Bank will continue to pursue 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 the expected terms
of its interest-bearing liabilities. The Bank also tries to match the basis or
index (for example, the London Interbank Offered Rate ("LIBOR") or the 11th
District Federal Home Loan Bank cost of funds index ("COFI")) upon which these
assets and liabilities reprice. Generally this is achieved through management
of the composition of the Bank's assets and liabilities. The Bank also attempts
to reduce its exposure to fluctuations in interest rates by using interest rate
swap and cap agreements on certain assets and liabilities. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations - Asset
and Liability Management" set forth in Item 7 hereof.
CREDIT RISK. The Bank has implemented the third operating principle,
controlling credit risk, while increasing the emphasis on commercial business
lending, by (i) holding a substantial portion of its assets in primarily
adjustable rate mortgage-backed securities and first lien single family
residential mortgage loans, and (ii) taking a cautious approach to its direct
lending operations, including the development of commercial business lending.
At December 31, 1999, of the Company's $2.9 billion in total assets, $1.0
billion or 34.5% of total assets consisted of mortgage-backed securities. At
December 31, 1999, the Company's total loans receivable portfolio amounted to
$1.7 billion or 58.9% of total assets, $836.0 million of which were comprised of
first lien residential mortgage loans.
NONINTEREST EXPENSE. The Bank has implemented the fourth operating
principle, maintaining a low level of general overhead expense relative to its
peers, by operating an efficiently staffed operations and branch office system
which is able to administer and deliver its products and services in an
economical manner. Currently, the Bank believes that it has the infrastructure
in place to handle more commercial customers, and that continued incremental
growth in its customer base will not cause its overhead expenses to increase by
a corresponding amount. The Company's ratio of noninterest expense to average
total assets on a consolidated basis was 1.98% for the year ended December 31,
1999.
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. See "Regulation - Regulation
of the Bank."
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 controlling 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 its efforts to control 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 (the "1998 Branch Acquisition") 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 than previously reviewed by the Bank. 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>
1999 1998 1997
----------------------- ----------------- ------------------
Amount Percent Amount Percent Amount Percent
---------- -------- ------- ------- ------- --------
(Dollars in thousands)
Real estate mortgage loans:
First lien residential $ 836,005 45.04% $ 690,510 41.87% $ 689,767 52.33%
Multifamily 163,059 8.78 119,447 7.24 131,454 9.97
Residential construction 136,675 7.36 115,714 7.02 83,359 6.33
Acquisition and development 103,357 5.57 75,932 4.61 31,619 2.40
Commercial 314,292 16.93 257,723 15.63 181,315 13.76
Commercial construction 65,934 3.55 40,344 2.45 14,506 1.10
Commercial secured by residential
mortgage loans held for sale
("Warehouse") 60,372 3.25 173,124 10.50 98,679 7.49
Commercial secured by mortgage
servicing rights ("MSR") -- -- 3,867 0.23 32,685 2.48
Commercial, financial and industrial 100,195 5.40 92,218 5.59 30,877 2.34
Loans secured by deposits 13,094 0.71 13,164 0.80 8,695 0.66
Consumer and other 63,383 3.41 66,989 4.06 15,030 1.14
----------- -------- ----------- ------- ----------- -------
Total loans 1,856,366 100.00% 1,649,032 100.00% 1,317,986 100.00%
----------- ======== ------------ ======= ---------- ========
Loans in process (108,561) (99,790) (47,893)
Allowance for loan losses (10,493) (11,358) (7,412)
Unearned interest and loan fees (2,947) (3,493) (2,926)
Premium on purchased loans, net 716 3,758 1,680
----------- ------------ ------------
Total loans receivable, net $ 1,735,081 $ 1,538,149 $ 1,261,435
=========== ============ ============
</TABLE>
<PAGE>
SCHEDULED MATURITIES. The following table sets forth certain
information at December 31, 1999 regarding the principal amount of loans
maturing in the Bank's net 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, 1999
(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 $ 7,463 $ 23,317 $ 39,842 $ 59,113 $ 257,235 $447,268 $ 834,238
Multifamily mortgage 31,706 107,816 13,666 8,410 388 -- 161,986
Residential construction 77,219 7,848 949 686 20 -- 86,722
Real estate acquisition
and development 17,990 41,757 449 -- -- -- 60,196
Commercial real estate 85,968 103,777 59,458 23,568 38,382 -- 311,153
Commercial construction 8,168 24,419 620 8,417 5,272 -- 46,896
Commercial, other 108,074 25,636 23,671 3,662 147 -- 161,190
Consumer and other 18,644 15,349 30,037 5,459 3,211 -- 72,700
--------- --------- -------------- -------- --------- --------- ----------
Total loans $ 355,232 $ 349,919 $ 168,692 $ 109,315 $ 304,655 $447,268 $1,735,081
========= ========= ========= ========= ========== ======== ==========
</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 of adjustable-rate and fixed-rate loans at lower rates). Under the
latter circumstances, the weighted average yield on loans decreases as higher
yielding loans are repaid or refinanced at lower rates.
<PAGE>
The following table sets forth the amount of loans due after one year from
December 31, 1999 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 $ 343,990 $ 482,785 $ 826,775
Multifamily mortgage 14,342 115,938 130,280
Residential construction 1,376 8,127 9,503
Real estate acquisition and development 449 41,757 42,206
Commercial real estate 79,732 145,453 225,185
Commercial construction 6,270 32,458 38,728
Commercial, other 28,201 24,915 53,116
Consumer and other 53,738 318 54,056
---------- --------- ----------
Total $ 528,098 $ 851,751 $1,379,849
========== ========= ==========
</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>
1999 1998 1997
---------- ----------- -----------
(In thousands)
First lien residential mortgage loan originations:
Adjustable rate $ 688 $ 725 $ 1,458
Fixed rate 25,354 15,470 4,849
Adjustable rate by correspondent lenders -- 1,426 26,220
Fixed rate by correspondent lenders -- -- 686
Home equity 4,520 7,022 --
Residential construction and acquisition
and development loan originations 255,732 189,686 145,727
Warehouse loan originations 1,366,880 1,642,445 1,174,639
MSR loan originations 5,134 7,554 55,259
Multifamily loan originations 103,718 228,553 81,148
Commercial real estate loan originations 179,196 126,916 171,497
Commercial construction originations 52,718 15,543 12,222
Commercial, financial and industrial loan originations 161,776 107,890 43,497
Consumer loan originations 43,298 38,002 18,679
---------- ----------- -----------
Total loan originations 2,199,014 2,381,232 1,735,881
Purchase of residential mortgage loans
(net of repurchases by investors) 365,951 293,024 108,226
Loans acquired (net of loans sold) in connection
with acquisition and disposition transactions -- 176,157 --
Purchase of residential construction loans 11,077 -- --
Purchase of automobile loans 10,176 34,609 70
--------- ----------- -----------
Total loan originations and purchases 2,586,218 2,885,022 1,844,177
--------- ----------- -----------
Foreclosures 4,398 4,178 4,226
Principal repayments and reductions to
principal balance 2,372,243 2,587,252 1,790,790
Residential loans sold -- 10,663 12,855
--------- ----------- -----------
Total foreclosures, repayments and sales of loans 2,376,641 2,602,093 1,807,871
--------- ----------- -----------
Amortization of premiums, discounts and fees on loans (2,070) (3,115) (2,819)
Provision for loan losses (10,575) (3,100) (1,800)
--------- ----------- -----------
Net increase in loans receivable $ 196,932 $ 276,714 $ 31,687
=========== =========== ===========
</TABLE>
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 other geographic areas
surrounding the Bank's branch locations. During 1999, 1998 and 1997, the Bank
originated residential real estate loans for portfolio totaling $26.0 million,
$16.2 million and $6.3 million, respectively. The majority of the Bank's
residential loans have been acquired through bulk purchases in the traditional
secondary market. During 1999, 1998 and 1997, the Bank purchased $366.0
million, $293.6 million and $107.9 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 $252,700, or loans that do not otherwise meet the criteria established
by FNMA or FHLMC). Such loans conform to underwriting guidelines or standards
required by the Secondary Market Investors ("SMI") to whom such loans are
intended to be sold. During 1999, 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 also acquires residential real estate loans for its portfolio
through bulk purchases when the prices of these purchases are considered to be
favorable. 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 1999 or 1998, the Bank did
not originate or purchase any loans with the intent to sell them to SMIs.
During the year ended 1997, the Bank originated or purchased with the intent to
sell $4.1 million of single family residential mortgage loans. During 1998 and
1997, the Bank sold $10.7 million and $4.4 million, respectively, of loans to
SMIs. No loans were sold in 1999.
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 considered by management to be 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
groups of homes on substantially the same terms and conditions as loans granted
under the Bank's line of credit program.
At December 31, 1999, the Bank had $87.4 million in outstanding residential
construction loans (net of loans in process of $49.3 million) of which $184,000
were on nonaccrual status. At the present time, the Bank has approved builders
primarily 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, 1999, there were loans totaling $2.7 million 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, 1999, commercial real estate loans totaling $314.3
million and multifamily mortgage loans of $163.1 million were outstanding. At
December 31, 1999, the Bank had commercial real estate loans totaling
approximately $104,000 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, 1999, commercial and multifamily construction loans totaling
$48.2 million (net of loans in process of $17.7 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.
In 1999, the Bank began to decrease its emphasis on Warehouse lending.
During the year ended December 31, 1999, the Bank originated $1.4 billion of
Warehouse loans and had Warehouse loans outstanding of $60.4 million at December
31, 1999. At December 31, 1999, there were no Warehouse loans on nonaccrual
status.
During 1999, the Bank experienced significant loan losses in Warehouse and
MSR loans due to the default of two borrowers. The first loss was connected to
the $10.0 million participation purchased in 1998 in a Warehouse loan
aggregating $25.0 million to MCA Financial Corp., and certain of its affiliates,
of Southfield, Michigan (collectively "MCA"). In late January 1999, due to a
lack of liquidity, MCA ceased operations and shortly thereafter was seized by
the Michigan Bureau of Financial Institutions. A conservator was appointed to
take control of MCA's books and records, marshal its assets and continue its
loan servicing operations. A voluntary petition under Chapter 11 of the U.S.
Bankruptcy Code was filed in the U.S. Bankruptcy Court for the Eastern District
of Michigan for MCA on or about February 10, 1999, by the conservator.
Throughout 1999, the Bank worked with the lead lender and the bankruptcy
trustee to determine the value of, and sell, the underlying collateral. As of
December 31, 1999, the Bank had received only $1.1 million in proceeds for the
MCA loan. In addition, on January 12, 2000, the Bank filed a lawsuit against
the lead lender in the participation seeking to recover losses incurred as a
result of actions or omissions of the lead lender related to the loan to MCA.
Due to the uncertainty of the value of the remaining collateral, its
marketability and the timing of recovery, if any, from the lawsuit, the Bank
charged-off the remaining $8.9 million balance of this loan resulting in the
additional provision for loan losses of $6.8 million during the year. The Bank
will continue to work with the bankruptcy trustee to recover any funds, if
possible, from the collateral or MCA. On January 12, 2000, the Bank filed a
lawsuit against the lead lender seeking recovery of certain losses related to
this loan. See Item 3, "Legal Proceedings."
In the second situation, during 1999, the Bank purchased approximately
$10.1 million of the underlying loans securing a $13.2 million Warehouse and
servicing rights line of credit due to default by the borrower. The remaining
outstanding balance on this Warehouse and servicing rights line of $990,000 was
charged-off during 1999.
MSR LENDING. Although the Bank discontinued this type of lending in 1999,
beginning in 1992, the Bank loaned funds to mortgage companies for their
purchase of mortgage servicing rights or to finance the mortgage companies'
ongoing operations to originate and retain mortgage servicing. Loans of this
nature generally had terms of one to five years, and were generally limited to
70.0% of the price paid by the mortgage company for servicing rights, or of the
value of the originated servicing rights (subject to the regulatory maximum for
loans to one borrower). MSR loans were made at adjustable rates of interest
tied to LIBOR or the Bank's borrowing rate plus a spread and a commitment fee.
MSR loans were collateralized by purchased or originated mortgage servicing
rights to the remaining cash flows after remittance of payments to FNMA, FHLMC
or other investors on the servicing portfolio. MSR loans were underwritten in
substantially the same manner as Warehouse loans, where Bank personnel closely
monitors 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. As of December 31, 1999, the Bank did not have any remaining
MSR loans. During 1999, the Bank incurred a loss on a Warehouse and servicing
rights line of credit due to default of the borrower as discussed previously.
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, 1999, the Bank had $61.8 million (net of loans in process
of $41.6 million) of real estate acquisition and development loans outstanding.
At December 31, 1999, there were no real estate acquisition and development
loans on nonaccrual status.
COMMERCIAL BUSINESS LENDING. Development of a commercial business lending
program continues to be 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. Over the past three years, 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 in the 1998 Branch
Acquisition and significantly increased the Bank's commercial business loan
origination capacity. The commercial, financial and industrial loans
("Commercial Business loans") are 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 programs, while managing the
associated credit risk by continually monitoring borrowers' financial position
and underlying collateral securing the loans. At December 31, 1999, Commercial
Business loans outstanding totaled $100.2 million, of which $694,000 of such
loans were on nonaccrual status.
CONSUMER LENDING. The Bank makes available traditional consumer loans,
such as home improvement, home equity, new and used car financing, new and used
boat and recreational vehicle financing and loans secured by savings deposits to
consumers in the markets served by its retail branches and business banking
centers. The interest rate on loans secured by savings deposits is typically
set at a rate above that paid on the underlying account and adjusts if the rate
on the account changes. At December 31, 1999, the Bank had $63.4 million in
consumer and other loans outstanding and $13.1 million in loans secured by
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.
Through May 1999, the Bank had a lending agreement to purchase loans
through a correspondent to refinance new and used automobiles, which has since
been terminated. During 1999, the Bank purchased $10.2 million in automobile
loans under this agreement. As of December 31, 1999, a total of $27.2 million
of these automobile loans were included in total consumer and other loans, of
which $300,000 were on nonaccrual status.
ASSET QUALITY. The Bank, like all financial institutions, is exposed to
certain credit risks related to the value of the collateral which secures loans
held in its portfolio and the ability of borrowers to repay their loans during
the term thereof. Management of the Bank monitors the loan portfolio and the
Bank's real estate acquired as a result of foreclosure ("REO") for potential
problems on a weekly basis and reports to the Board of Directors on a monthly
basis. When a borrower fails to make a required loan payment or other weaknesses
are detected in a borrower's financial condition, the Bank 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 generally reversed against current
interest income. On a loan-by-loan basis, Bank management may continue to
accrue interest on loans that are past due more than 90 days, particularly if
management believes that the individual loan is in the process of collection and
the interest is fully collectible.
<PAGE>
The following table sets forth information regarding the Bank's
nonperforming assets as of the dates shown.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
At December 31,
1999 1998 1997
--------- -------- ---------
(Dollars in thousands)
Nonaccrual loans:
First lien residential mortgage $ 13,344 $11,883 $15,591
Residential construction 184 192 --
Commercial real estate 104 149 322
Commercial construction -- -- 900
Commercial, Warehouse -- 10,042 --
Commercial, financial and industrial 694 496 485
Consumer and other 340 75 53
---------- -------- --------
Total nonaccrual loans 14,666 22,837 17,351
---------- -------- --------
Loans greater than 90 days delinquent
and still accruing:
First lien residential mortgage 1,137 189 --
Multifamily mortgage -- 190 --
Residential construction -- -- 79
Commercial real estate 690 293 91
Commercial, financial and industrial 531 808 120
Consumer and other 94 224 50
---------- -------- --------
Total loans greater than 90 days
delinquent and still accruing 2,452 1,704 340
---------- -------- --------
Total nonperforming loans 17,118 24,541 17,691
---------- -------- --------
Total REO and repossessed assets 4,531 4,927 3,198
---------- -------- --------
Total nonperforming assets $ 21,649 $29,468 $20,889
========= ======= ========
Ratio of nonperforming
assets to total assets 0.73% 0.99% 0.72%
========= ======== ========
Ratio of nonaccrual loans to total
loans receivable 0.85% 1.48% 1.38%
========= ======== ========
Ratio of nonperforming loans to total
loans receivable 0.99% 1.60% 1.40%
========= ======== ========
</TABLE>
For the year ended December 31, 1999, approximately $778,000 in additional
interest income would have been recorded on the above loans accounted for on a
nonaccrual basis if such loans had been current in accordance with their
original terms and had been outstanding throughout the period or since
origination if held for part of the period. Net income for 1999 included
$571,000 in interest income for these same loans prior to the time they were
placed on nonaccrual status.
At December 31, 1999, the Bank had 170 first lien residential mortgage
loans on nonaccrual status, aggregating $13.3 million, with an average balance
of approximately $78,500. A total of 146 of these loans, with an aggregate
balance of $10.6 million, were acquired through loan purchases and 7 of these
loans, with an aggregate balance of $526,000, were acquired in branch or whole
bank acquisitions. Of the 146 nonaccrual residential mortgage loans acquired
through loan purchases, at December 31, 1999, 38 of such loans totaling $3.9
million were being serviced by other institutions, which constituted 1.1% of the
$369.8 million of aggregate loans serviced by others.
At December 31, 1999, nonperforming assets included REO with an aggregate
book value of $4.3 million and repossessed assets of $193,000. At such date,
the Bank's REO consisted of 23 single family residential properties totaling
$2.1 million, 9 commercial properties totaling $1.8 million, 3 residential
construction properties totaling $223,000 and 1 multi-family property with a
book value of $188,000.
At December 31, 1999, in addition to the loans on nonaccrual status, the
Bank had $23.2 million in loans classified as substandard, $41,000 classified as
doubtful, $7,000 classified as loss and $13.1 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 outstanding balance of loans classified as substandard has
increased from December 31, 1998 to December 31, 1999 by approximately $13.5
million. This increase is primarily due to the addition of 6 borrowers to the
classified asset list, with loans in the commercial real estate, multifamily
mortgage and commercial business categories, none of which were greater than 89
days past due as of December 31, 1999. Lending management is working with these
six borrowers and monitoring the performance of these loans closely.
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, 1999, the
carrying value of impaired loans totaled approximately $2.0 million and the
related allowance for loan losses on those impaired loans totaled $778,000. The
average balance of impaired loans during the year ended December 31, 1999 was
approximately $10.6 million. For the year ended December 31, 1999, the Bank did
not recognize interest income on loans considered impaired.
The Bank had loaned $136.7 million at December 31, 1999, under its
residential construction lending program to multiple borrowers who are engaged
in similar activities. Certain of these borrowers could be similarly impacted
by economic conditions in the Houston metropolitan area. See "Residential
Construction Lending." Except for concentrations in its Warehouse lending
lines, the Bank had no other loan concentrations. At December 31, 1999, the
Bank had $60.4 million of Warehouse loans outstanding. See "Warehouse Lending."
<PAGE>
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>
1999 1998 1997 1996 1995
--------- -------- -------- ------- -------
(Dollars in thousands)
Balance at beginning of year $ 11,358 $ 7,412 $ 6,880 $5,703 $2,158
Charge-offs(1) (11,830) (1,693) (1,416) (851) (404)
Recoveries 390 282 148 103 17
Provision for loan losses 10,575 3,100 1,800 1,925 1,664
Allowance of acquired entities(2) -- 2,257 -- -- 2,268
-------- -------- ------- ------- -------
Balance at end of the year $ 10,493 $11,358 $ 7,412 $6,880 $5,703
======== ======== ======= ======= =======
Ratio of net charge-offs during the
period to average net loans
outstanding during the period 0.69% 0.10% 0.10% 0.06% 0.05%
========= ======== ======== ======= =======
</TABLE>
________________________
(1)Charge-offs during the periods indicated were as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998 1997 1996 1995
--------- -------- -------- ------- -------
(In thousands)
<S> <C> <C> <C> <C> <C>
First lien residential mortgage $ 331 $ 544 $ 591 $ 651 $ 359
Residential construction 26 -- -- -- --
Commercial real estate 10 24 4 -- --
Commercial, Warehouse and MSR 9,924 -- -- -- --
Commercial, financial and industrial 829 648 472 58 --
Consumer and other 710 477 349 142 45
-------- ------ ------ ----- -----
Total charge-offs $ 11,830 $1,693 $1,416 $ 851 $ 404
======== ====== ====== ===== =====
</TABLE>
(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>
At December 31,
1999 1998 1997 1996 1995
-------- -------- ------- ------- -------
(In thousands)
First lien residential mortgage $ 2,529 $ 3,238 $ 2,566 $ 2,217 $ 2,992
Multifamily mortgage 442 383 511 369 249
Residential construction 384 343 251 223 307
Real estate acquisition and development 1,034 759 316 261 130
Commercial real estate 2,221 2,112 1,468 1,151 1,072
Commercial construction 972 225 203 20 --
Commercial, Warehouse and MSR 256 1,722 494 361 230
Commercial, financial and industrial 1,650 1,750 1,008 985 395
Consumer and other 992 826 233 374 177
Unallocated 13 -- 362 919 151
-------- -------- ------- ------- -------
$ $ 10,493 $ 11,358 $ 7,412 $ 6,880 $ 5,703
======== ======== ======= ======= =======
</TABLE>
The following table sets forth the allocation of the provision or the
reduction of allowance for loan losses by loan type during the periods
indicated.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Year Ended December 31,
1999 1998 1997 1996 1995
--------- -------- -------- -------- --------
(In thousands)
First lien residential mortgage $ (446) $ 1,142 $ 908 $ (180) $ 1,032
Multifamily mortgage 59 (184) 142 120 23
Residential construction 67 55 28 (84) (67)
Real estate acquisition and development 275 443 55 131 (25)
Commercial real estate 119 82 321 79 479
Commercial construction 747 (36) 183 20 --
Commercial, Warehouse and MSR 8,456 1,228 133 131 132
Commercial, financial and industrial 561 240 416 618 --
Consumer and other 724 846 171 322 90
Unallocated 13 (716) (557) 768 --
--------- -------- -------- -------- --------
$ $ 10,575 $ 3,100 $ 1,800 $ 1,925 $ 1,664
========= ======== ======== ======== ========
</TABLE>
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 the Bank, identification of adverse situations which may affect the
ability of borrowers to repay, the existing 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. As discussed earlier, during the year ended December 31, 1999, $6.8
million of the increase in the provision for loan losses was specific to the MCA
loan. The remainder of the increase was due to the charge-off of $990,000 on
another warehouse borrower due to bankruptcy, as well as other changes in the
composition of and growth in the Bank's loan portfolio, including the commercial
type loans acquired in the 1998 Branch Acquisition.
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 current 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.
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, 1999,
the Bank had $4.2 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 1999, 1998 and 1997, CBS Mortgage earned
servicing fees of $680,000, $642,000 and $1.4 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, 1999, 1998 and 1997, CBS Mortgage had an aggregate loan servicing portfolio
of $1.1 billion, $1.2 billion and $1.6 billion, respectively. Of these amounts
at such respective dates, CBS Mortgage serviced loans for the Bank's portfolio
aggregating $666.5 million, $707.0 million and $890.3 million and serviced loans
for others aggregating $407.9 million, $519.2 million and $675.7 million. At
December 31, 1999, 62.0% of the dollar value of loans being serviced by CBS
Mortgage was for the Bank's portfolio, 11.9% was being serviced for FHLMC, 24.8%
was being serviced for FNMA and 1.3% was being serviced for others.
No servicing rights were purchased by CBS Mortgage in 1999, 1998 or 1997.
As of December 31, 1999, an aggregate of $407.9 million of CBS Mortgage's $1.1
billion servicing portfolio, or 38.0%, was loans serviced for others. At
December 31, 1999, 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, 1999, 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>
1999 1998 1997
----------- ----------- -------------
(In thousands)
Beginning servicing portfolio $ 1,226,238 $ 1,566,004 $ 1,735,089
----------- ----------- -----------
Bank loan originations 149,874 127,620 140,673
Bank whole loans acquired 28,251 93,170 126,864
----------- ----------- -----------
Total servicing originated
and acquired 178,125 220,790 267,537
----------- ----------- -----------
Loans sold servicing released -- 764 --
Amortization and payoffs 325,641 554,603 430,373
Foreclosures 4,264 5,189 6,249
----------- ----------- -----------
Total servicing reductions 329,905 560,556 436,622
----------- ----------- -----------
Ending servicing portfolio $ 1,074,458 $ 1,226,238 $ 1,566,004
=========== =========== ===========
</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, 1999, the Company's mortgage-backed securities portfolio (including $99.7
million of mortgage-backed securities available-for-sale), net of unamortized
premiums and unearned discounts, amounted to $1.0 billion, or 34.5%, 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, 1999, the Company's net mortgage-backed securities
had an aggregate market value of $999.6 million.
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> <C>
1999 1998 1997
--------------------- ----------------------- ----------------------
Amount Percent Amount Percent Amount Percent
------------ -------- ------------ -------- ------------ --------
(Dollars in thousands)
Held-to-maturity:
REMICS $ 838,499 91.45% $ 1,059,924 91.82% $ 1,232,219 91.59%
FNMA certificates 54,749 5.97 61,590 5.34 69,906 5.20
GNMA certificates 16,074 1.75 21,235 1.84 28,701 2.13
Non-agency certificates 7,537 0.83 11,530 1.00 14,586 1.08
Interest-only securities -- -- 1 -- 20 --
---------------------- ---------------------- ----------------------
916,859 100.00% 1,154,280 100.00% 1,345,432 100.00%
======== ======== ========
Unamortized premium 1,703 2,100 2,831
Unearned discount (1,350) (2,264) (3,173)
----------- ----------- ------------
Total held-to-maturity $ 917,212 $ 1,154,116 $ 1,345,090
============ ============ ============
Available-for-sale:
REMICS $ 77,861 $ 98,892 $ 173,717
GNMA certificates 24,615 -- --
------------ ------------ ------------
102,476 98,892 173,717
Unamortized premium 180 8 25
Unearned discount (149) (168) (247)
Net unrealized loss (2,842) (2,123) (3,498)
------------ ------------ ------------
Total available-for-sale $ 99,665 $ 96,609 $ 169,997
============ ============ ============
Total mortgage-backed
securities $ 1,016,877 $ 1,250,725 $ 1,515,087
============ ============ ============
</TABLE>
The mortgage-backed securities which the Bank purchases and maintains in
portfolio can include FNMA, FHLMC and GNMA certificates, certain privately
issued, credit-enhanced mortgage-backed securities which are rated "A" or better
by the national securities rating agencies, certain types of collateralized
mortgage obligations ("CMOs") and interest-only ("IO") certificates. The FNMA,
FHLMC and GNMA certificates are modified pass-through mortgage-backed
securities, which represent undivided interests in underlying pools of
fixed-rate, or certain types of adjustable rate, single family residential
mortgages issued by these quasi-governmental (GNMA) and private (FNMA and FHLMC)
corporations. FNMA and GNMA provide to the certificate holder a guarantee
(which is backed by the full faith and credit of the U.S. government in the case
of GNMA certificates) of timely payments of interest and scheduled principal
payments, whether or not they have been collected. FHLMC guarantees the timely
payment of interest and the full (though not necessarily timely) payment of
principal. The guarantees of FNMA and FHLMC are not backed by the full faith
and credit of the U.S. government. The mortgage-backed securities acquired by
the Bank that have been pooled and sold by private issuers, generally large
investment banking firms, provide for the timely payments of principal and
interest either through insurance issued by a reputable insurer or the right to
receive certain payments thereunder is subordinated in a manner which is
sufficient to have such mortgage-backed securities 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, 1999, the Bank had mortgage-backed securities considered
"high risk" with a recorded booked value of approximately $4.5 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>
1999 1998 1997
---------- ---------- ---------
(In thousands)
Mortgage-backed securities
held-to-maturity purchased $ 3,080 $ 8,203 $ 56,136
Mortgage-backed securities
available-for-sale purchased 26,489 -- --
Mortgage-backed securities
available-for-sale sold -- (48,550) (11,308)
Discount accretion (premium
amortization) net 430 (132) (83)
Change in unrealized loss on
mortgage-backed securities
available-for-sale (719) 1,375 1,275
Principal repayments on
mortgage-backed securities (263,128) (225,258) (56,176)
---------- ---------- ---------
Net decrease in
mortgage-backed securities $(233,848) $(264,362) $(10,156)
========== ========== =========
</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 50
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 33.2% of total deposits at December 31, 1999 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> <C>
1999 1998(1) 1997(2)
Percent Percent Percent
of of of
Amount Deposits Amount Deposits Amount Deposits
------------------------ ---------- --------- ------- ----------
(Dollars in thousands)
Demand deposit accounts:
Noninterest-bearing checking(3) $ 97,146 5.98% $ 95,398 5.60% $ 101,782 7.40%
Interest-bearing checking(3) 65,229 4.02 63,067 3.70 69,972 5.09
Savings 46,011 2.83 48,571 2.85 25,555 1.86
Money market demand(3) 331,082 20.39 339,481 19.91 165,986 12.07
------------- --------- ---------- --------- ----------- ---------
Total demand deposit accounts 539,468 33.22 546,517 32.06 363,295 26.42
------------- --------- ---------- --------- ----------- ---------
Certificate accounts:
Maturing within 1 year 968,838 59.66 965,443 56.64 781,455 56.83
1-2 years 82,705 5.09 148,049 8.69 186,734 13.58
2-3 years 17,020 1.05 22,347 1.31 30,028 2.18
3-4 years 10,772 0.66 11,833 0.69 7,292 0.53
4-5 years 4,917 0.30 10,176 0.60 6,153 0.45
Over 5 years 380 0.02 240 0.01 178 0.01
------------- --------- ---------- --------- ----------- ---------
Total certificate accounts 1,084,632 66.78 1,158,088 67.94 1,011,840 73.58
------------- --------- ---------- --------- ----------- ---------
1,624,100 100.00% 1,704,605 100.00% 1,375,135 100.00%
========= ======== =========
Premium (discount) on purchased
deposits, net 189 399 (75)
------------- ---------- ----------
Total $ 1,624,289 $1,705,004 $1,375,060
============= ========== ===========
</TABLE>
________________________
(1)In 1998, the Bank assumed approximately $355.4 million 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)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 $117.7 million ($56.3
million from noninterest-bearing checking and $61.4 million from
interest-bearing checking) at December 31, 1999. 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>
1999 1998 1997
(Dollars in thousands)
Average Average Average Average Average Average
Balance Rate Paid Balance Rate Paid Balance Rate Paid
----------------------------------------------------------------------------
Demand deposit accounts:
Noninterest-bearing checking $ 80,367 --% $ 51,612 --% $ 91,293 --%
Interest-bearing checking 49,588 1.96 20,628 2.18 61,392 1.78
Savings 50,805 1.99 35,162 2.20 23,912 2.29
Money market demand(1) 356,860 2.27 315,141 2.37 158,993 3.63
Certificate accounts 1,104,378 4.95 1,063,277 5.40 1,008,845 5.50
----------- ---------- ----------- ---------- ----------- ----------
Total deposits $ 1,641,998 3.94% $ 1,485,820 4.45% $ 1,344,435 4.68%
=========== ========== =========== ========== =========== ==========
</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:
<TABLE>
<CAPTION>
<S> <C> <C>
1999 1998
---------- --------
(In thousands)
Noninterest-bearing checking $ 70,780 $ 63,130
Interest-bearing checking 68,486 67,778
---------- --------
$ 139,266 $130,908
========== ========
</TABLE>
The following table presents by various interest rate categories the
amounts of certificate accounts at the dates indicated and the amounts of
certificate accounts at December 31, 1999, which mature during the periods
indicated.
<TABLE>
<CAPTION>
Amounts at December 31, 1999 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>
1999 1998
---------- ------------
Certificate accounts:
2.00% to 3.99% $ 23,749 $ 45,152 $ 23,609 $ 41 $ 29 $ 70
4.00% to 5.99% 990,726 1,019,910 887,283 73,563 14,298 15,582
6.00 to 7.99% 69,943 92,004 57,934 9,002 2,693 314
8.00 to 9.99% 202 1,004 -- 99 -- 103
over 10.00% 12 18 12 -- -- --
---------- ------------ -------- -------- ------- --------
Total $1,084,632 $ 1,158,088 $968,838 $ 82,705 $17,020 $ 16,069
========== ============ ======== ======== ======= ========
</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>
1999 1998 1997
------------ --------- --------
(In thousands)
Net increase (decrease) before interest credited(1) $ (145,219) $ 264,148 $ 2,383
Interest credited 64,504 65,796 61,842
----------- --------- --------
Net deposit increase (decrease) $ (80,715) $ 329,944 $ 64,225
=========== ========= ========
</TABLE>
________________________
(1)For the years ended December 31, 1998 and 1997, reflects the effect of the
assumption of $355.4 million and $54.6 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, 1999.
<TABLE>
<CAPTION>
At December 31, 1999
<S> <C> <C>
Number of accounts Deposit Amount
------------------ ---------------
(Dollars in thousands)
Three months or less 402 $ 52,744
Over three through six months 413 45,324
Over six through twelve months 757 84,217
Over twelve months 163 18,982
------- ----------
Total 1,735 $ 201,267
======= ==========
</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 1999,
except as noted below, the Bank has not solicited brokered deposit accounts and
generally has not negotiated rates on larger denomination (i.e., jumbo)
certificates of deposit. In early 1997, the Bank began the solicitation of
deposit accounts through a "money desk." Money desk rates are only offered to
institutions (primarily credit unions and municipal utility districts) and are
generally up to 50 basis points higher than on regular certificate of deposit
accounts.
Management of the Bank intensified its deposit product marketing beginning
in 1993 in order to increase its share of core deposits in the markets in which
it operates. Management believes that the combination of the new packaged
deposit products (which generally have higher minimum balance requirements and
which provide value-added incentives to the customer, such as free traveler's
checks, reduced or waived monthly service charges and free money orders) plus
increased advertising, sales training, branch promotion and cross-selling of
products will help maintain the volume of the Bank's deposits and strengthen
customer relationships without requiring the Bank to alter its deposit pricing
strategy. The Bank's management also believes that such efforts will assist the
Bank in maintaining deposits, particularly during periods of relatively low
deposit rates, which might otherwise flow out of the institution due to
disintermediation (the movement of funds away from savings institutions and into
direct investment vehicles such as government and corporate securities and
mutual funds). Notwithstanding this plan, the ability of the Bank to attract
and maintain deposits and the Bank's cost of funds have been, and will continue
to be, significantly affected by general market rates of interest.
The Bank also provides its customers with the opportunity to invest in
noninsured mutual funds, including government bond funds, tax-free municipal
bond funds, growth funds, income growth funds, and sector funds specific to an
industry, which are provided through a third party arrangement with another
company, which maintains representatives at the Bank's branch offices. The Bank
earns a fee after the payment of all expenses, which was not material to the
Bank's results of operations for the years ended December 31, 1999, 1998 or
1997. 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>
1999 1998 1997
----------- -------- -----------
(Dollars in thousands)
FHLB advances:
Average balance outstanding $ 951,953 $713,197 $ 368,896
Maximum amount outstanding
at any month-end during the
period 1,115,713 969,036 540,475
Balance outstanding at end of
period 1,096,931 966,720 540,475
Average interest rate during the
period 5.31% 5.55% 5.78%
Average interest rate at end of
period 5.72% 5.24% 5.95%
Securities sold under agreements
to repurchase:
Average balance outstanding $ 103,211 $579,561 $ 974,136
Maximum amount outstanding
at any month-end during the
period 271,103 874,784 1,035,576
Balance outstanding at end of
period -- 100,000 791,760
Average interest rate during the
period 5.44% 5.49% 5.66%
Average interest rate at end of
period -- 4.93% 6.00%
</TABLE>
Federal funds purchased averaged approximately $19,000, $149,000 and
$161,000 during the years ended December 31, 1999, 1998 and 1997, respectively
with an average interest rate during the periods of 5.26%, 5.33% and 5.59%,
respectively. There were no federal funds purchased outstanding at any
month-end during 1999, 1998 or 1997.
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, 1999, the Bank had
total FHLB advances of $1.1 billion at a weighted average interest rate of
5.72%. Of the advances outstanding at December 31, 1999, $198.1 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, 1999, the Bank did not have any borrowings under
reverse repurchase agreements.
To a lesser extent, beginning in 1997, the Bank has utilized federal funds
purchased from a correspondent bank for overnight borrowing purposes.
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,
1999, the Bank was authorized to have a maximum investment of approximately
$294.7 million in its subsidiaries.
At December 31, 1999, the Bank had one active wholly-owned subsidiary, the
activity of which is described below. At December 31, 1999, the Bank's
aggregate equity investment in its subsidiary was $182,000.
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 five 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
$51,000, $49,000 and $35,000 for the years ended December 31, 1999, 1998 and
1997, 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 1999, CBCC purchased whole loan assets totaling $370.8
million and sold whole loans (including purchase premium) totalling $363.8
million to the Bank and $8.2 million to third party investors. During the year
ended December 31, 1999, CBCC recorded gains on the sale of loans to the Bank of
$1.5 million and gains on the sale of loans to third party investors of $57,000.
The $1.5 million gain on the sale of loans to the Bank was recorded on the
Bank's financial statements as a premium on purchased loans and is being
amortized over the life of those loans. All significant intercompany balances
and transactions have been eliminated in consolidation. At December 31, 1999,
HoCo's unconsolidated equity investment in CBCC was $943,000. CBCC had net
income (before eliminations) of $592,000 and $275,000 for the years ended
December 31, 1999 and 1998, respectively.
Commissions received by CBCC from the Bank are calculated at a market rate
and are not greater than those paid to non-affiliates in similar transactions.
The Bank and CBCC have entered into a mortgage warehouse revolving loan
agreement pursuant to which the Bank has established a $17.0 million revolving
line of credit to be drawn upon from time to time by CBCC to finance the
acquisition of whole loan assets and the holding of such assets until they are
sold. The advances drawn by CBCC are collateralized by such assets purchased
and held by CBCC. There were no amounts outstanding on this line of credit at
December 31, 1999. 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. Certain federal banking laws have been
recently amended. See "Regulation - The Company-Financial Modernization."
THE COMPANY
REGULATIONS. The Company and HoCo are registered unitary savings and loan
holding companies and are subject to OTS and Department regulation, examination,
supervision and reporting requirements. In addition, because the capital stock
of the Company is registered under Section 12(g) of the Securities Exchange Act
of 1934, the Company is also subject to various reporting and other requirements
of the SEC. As a subsidiary of a savings and loan holding company, the Bank is
also subject to certain Federal and state restrictions in its dealings with the
Company and affiliates thereof.
FEDERAL ACTIVITIES RESTRICTIONS. There are generally no restrictions on
the activities of a savings and loan holding company which holds only one
subsidiary savings bank. 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).
FINANCIAL MODERNIZATION. Under the Gramm-Leach-Bliley Act enacted into law
on November 12, 1999, no company may acquire control of a savings and loan
holding company after May 4, 1999, unless the company is engaged only in
activities traditionally permitted to a multiple savings and loan holding
company or newly permitted to a financial holding company under Section 4(k) of
the Bank Holding Company Act. Existing savings and loan holding companies and
those formed pursuant to an application filed with the OTS before May 4, 1999,
may engage in any activity including non-financial or commercial activities
provided such companies control only one savings and loan association that meets
the Qualified Thrift Lender test. Corporate reorganizations are permitted, but
the transfer of grandfathered unitary thrift holding company status through
acquisition is not permitted.
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, 1999, 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, 1999, 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, 1999, the required Tier 1 capital
ratio for the Bank was 4.0% and its actual Tier 1 capital ratio was 5.76%.
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, 1999, the Bank's Tier 1 capital to risk-weighted assets
ratio was 9.68% and its total risk-based capital to risk weighted assets ratio
was 10.29%.
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,
1999 1998 1997
------- ------- -------
Actual Required Actual Required Actual Required
------- --------- ------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Tier 1 capital to total assets 5.76% 4.00% 5.25% 4.00% 5.52% 4.00%
Tier 1 risk-based capital
to risk weighted assets 9.68 4.00 9.54 4.00 11.46 4.00
Total risk-based capital
risk to risk weighted assets 10.29 8.00 10.23 8.00 11.98 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, 1999.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Tier 1 Total
Tier 1 Risk-based Risk-based
Capital Capital Capital
-------- ------------ -----------
(Dollars in thousands)
Total stockholders' equity $ 193,950 $ 193,950 $ 193,950
Unrealized loss on securities
available-for-sale 1,848 1,848 1,848
Less nonallowable assets:
Goodwill (27,636) (27,636) (27,636)
Plus allowances for loan
and lease losses -- -- 10,493
---------- ----------- -----------
Total regulatory capital 168,162 168,162 178,655
Minimum required capital 116,762 69,482 138,963
---------- ----------- -----------
Excess regulatory capital $ 51,400 $ 98,680 $ 39,692
========== =========== ===========
Bank's regulatory capital
percentage (1) 5.76% 9.68% 10.29%
Minimum regulatory capital
required percentage 4.00% 4.00% 8.00%
---------- ------------ ------------
Bank's regulatory capital
percentage in excess of
requirement 1.76% 5.68% 2.29%
=========== ============ ============
</TABLE>
________________________
(1)Tier 1 capital is computed as a percentage of adjusted average total assets
of $2.9 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 $163.1 million at December 31, 1999. 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, 1999, the Bank had $102.5 million of securities
available-for-sale with $2.8 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 bank and thrift
institutions. Under applicable regulations, institutions are assigned to one of
three capital groups based solely on the level of an institution's capital -
"well capitalized," "adequately capitalized" and "undercapitalized" - which are
defined in the same manner as the regulations establishing the prompt corrective
action system under Section 38 of the FDIA. These three groups are then divided
into three subgroups which reflect varying levels of supervisory concern, from
those which are considered to be healthy to those which are considered to be of
substantial supervisory concern. The matrix so created results in nine
assessment risk classifications.
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, 1999, 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.
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, 1999 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, 1999, with 81.0% 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, 1999, the Bank's advances from the FHLB of Dallas amounted to $1.1 billion
or 37.2% of its total assets.
As a member, the Bank is required to purchase and maintain stock in the
FHLB of Dallas in an amount equal to the greater of 1% of its aggregate unpaid
residential mortgage loans, home purchase contracts or similar obligations at
the beginning of each year or 5% of total advances. At December 31, 1999, the
Bank had $56.8 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, 1999,
dividends paid by the FHLB of Dallas to the Bank totaled $2.8 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, 1999, 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 is being recaptured into income over a six year period. At December 31,
1999, the Bank had approximately $2.5 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, 1999, 1998 and
1997, 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
1999, 1998 and 1997 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.
<PAGE>
ITEM 2. PROPERTIES
----------
The Company's business is conducted from 50 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,
1999.
<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
Port Lavaca, Texas 77979 Owned $ 140 $ 25,795 1.59%
3207 Westpark Drive
Houston, Texas 77005 Owned 2,446 20,803 1.28
8 Braeswood Square Leased;
Houston, Texas 77096 December 31, 2006 386 58,634 3.61
408 Walnut
Columbus, Texas 78934 Owned 210 55,924 3.44
870 S. Mason, #100 Leased;
Katy, Texas 77450 August 31, 2003 23 24,408 1.50
602 Lyons
Schulenburg, Texas 78956 Owned 79 30,000 1.85
325 Meyer Street
Sealy, Texas 77474 Owned 517 43,272 2.66
116 E. Post Office
Weimar, Texas 78962 Owned 29 25,370 1.56
323 Boling Road
Wharton, Texas 77488 Owned 112 40,246 2.48
1621 Pine Drive Leased;
Dickinson, Texas 77539 September 30, 2000 -- 36,917 2.27
300 S. Cage
Pharr, Texas 78577 Owned 176 14,170 0.87
295 West Highway 77
San Benito, Texas 78586 Owned 224 20,833 1.28
1260 Blalock, Suite 100 Leased;
Houston, Texas 77055 January 20, 2004 -- 50,984 3.14
14011 Park Drive, Suite 115 Leased;
Tomball, Texas 77375 March 14, 2004 10 24,737 1.52
915-H North Shepherd Leased;
Houston, Texas 77008 October 31, 2001 87 33,505 2.06
6810 FM 1960 West Leased;
Houston, Texas 77069 September 30, 2000 -- 26,307 1.62
7602 N. Navarro
Victoria, Texas 77904 Owned 712 71,591 4.41
1410 Ed Carey
Harlingen, Texas 78550 Owned 1,467 13,072 0.80
4900 N. 10th St., G-1 Leased;
McAllen, Texas 78504 August 14, 2001 75 13,885 0.85
10838 Leopard Street, Suite A Leased;
Corpus Christi, Texas 78410 December 31, 2002 1 36,205 2.23
(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 $ -- $ 52,331 3.22%
301 E. Main Street
Brenham, Texas 77833 Owned 138 63,025 3.88
1192 W. Dallas Leased;
Conroe, Texas 77301 December 31, 2003 -- 38,522 2.37
2353 Town Center Dr. Owned
Sugar Land, Texas 77478 1,062 24,228 1.49
1629 S. Voss Owned
Houston, Texas 77057 1,429 21,945 1.35
531-A Highway 1431 Leased;
Kingsland, Texas 78639 December 31, 2003 -- 19,436 1.20
204 Westmoreland Owned
Mason, Texas 76856 47 16,552 1.02
904 Highway 281 North
Marble Falls, Texas 78654 Owned 167 11,375 0.70
101 East Polk
Burnet, Texas 78611 Owned 93 20,544 1.26
907 Ford
Llano, Texas 78643 Owned 155 16,686 1.03
708 East Austin
Giddings, Texas 78942 Owned 234 24,767 1.52
5718 Westheimer, Suite 100 Leased;
Houston, Texas 77057 July 31, 2012 89 56,529 3.48
8080 Parkwood Circle Drive Owned
Houston, Texas 77036 264 9,970 0.61
1250 Pin Oak Road
Katy, Texas 77494 Owned 1,146 14,113 0.87
2120 Thompson Highway
Richmond, Texas 77469 Owned 442 51,861 3.19
7200 North Mopac Leased;
Austin, Texas 78731 December 31, 2002 6 47,367 2.92
1112 Seventh Street Leased;
Bay City, Texas 77414 April 30, 2002 -- 62,850 3.87
441 Austin Avenue
Port Arthur, Texas 77640 Owned 619 39,038 2.40
1114 Lost Creek Blvd., Suite 100 Leased;
Austin, Texas 78746 December 31, 2003 25 3,703 0.23
3302 Boca Chica Leased;
Brownsville, Texas 78521 December 14, 2004 -- 9,132 0.56
744 S. East Elizabeth Leased;
Brownsville, Texas 78520 March 31, 2003 225 19,102 1.18
1603 Price Road Owned
Brownsville, Texas 78521 284 14,975 0.92
700 Padre Blvd., Suite A Leased;
South Padre Island, Texas 78597 May 31, 2000 2 5,526 0.34
2000 N. Conway
Mission, Texas 78572 Owned 1,180 22,047 1.36
(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 $ 6 $ 39,848 2.45%
198 South Sam Houston
San Benito, Texas 78586 Owned 1,078 60,896 3.75
502 S. Dixieland Road
Harlingen, Texas 78552 Owned 334 14,362 0.88
200 Sugar Road
Edinburg, Texas 78539 Owned 159 7,809 0.48
300 S. Closner
Edinburg, Texas 78539 Owned 837 36,903 2.27
221 East Van Buren
Harlingen, Texas 78550 Owned 3,738 87,197 5.37
ADMINISTRATIVE OFFICE(1)
Coastal Banc Plaza
5718 Westheimer, Suite 600 Leased;
Houston, Texas 77057 July 31, 2012 2,707 44,992 2.81
RECORDS & RETENTION OFFICE:
227 Meyer St.
Sealy, Texas 77474 Owned 60 -- --
-------- ---------- -----------
Total $ 23,220 $1,624,289 100.00%
======== ========== ===========
</TABLE>
______________________
(1)Includes location of administrative, primary lending and mortgage servicing
offices.
<PAGE>
The net book value of the Company's investment in premises and equipment totaled
$30.7 million at December 31, 1999. At December 31, 1999, the net book value of
the Company's electronic data processing equipment, which includes its in-house
computer system, local area network and twenty-seven automatic teller machines,
was $2.9 million.
ITEM 3. LEGAL PROCEEDINGS
------------------
In January 2000, the Company, through its subsidiary, the Bank,
filed a lawsuit against the lead lender on a $25.0 million
loan in which the Bank purchased a 40% participation interest.
Such lawsuit is described more fully in the Company's Current
Report on Form 8-K (No. 000-24526) filed on January 12, 2000, which
is incorporated herein by reference.
In addition to the above, 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 1999 ("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.
<PAGE>
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,
1999 and 1998.
Consolidated Statements of Operations for each of the years
in the three-year period ended December 31, 1999.
Consolidated Statements of Comprehensive Income for each of the
years in the three-year period ended December 31, 1999.
Consolidated Statements of Stockholders' Equity for each of the
years in the three-year period ended December 31, 1999.
Consolidated Statements of Cash Flows for each of the years
in the three-year period ended December 31, 1999.
Notes to Consolidated Financial Statements.
(a)(2) There are no financial statement schedules filed herewith.
(a)(3) The following exhibits are filed as part of this report.
Exhibit No.
------------
3.1 Articles of Incorporation of the Company (Incorporated by reference
to the Company's Registration Statement on Form S-4 (No. 33-75952)
filed on March 2, 1994).
3.2 Bylaws of Company (Incorporated by reference to the Company's
Registration Statement on Form S-4 (No. 33-75952) filed on
March 2, 1994).
4 Form of Company common stock certificate (Incorporated by reference
to the Company's Registration Statement on Form S-4 (No. 33-75952)
filed on March 2, 1994).
4.1 Form of Indenture dated as of June 30, 1995, with respect to the
Company's 10% Notes, due 2002 (Incorporated by reference to
the Company's Registration Statement on Amendment No. 6 to
Form S-1 (No. 33-91206) filed on June 16, 1995).
4.2 Certificate of Designations, 9 1/2% Series A Cumulative Preferred
Stock (Incorporated by reference to the Company's Registration
Statement on Form S-3 (No. 333-75983) filed on April 9, 1999).
10.1 1991 Stock Compensation Program (Incorporated by reference to the
Company's Registration Statement on Form S-4 (No. 33-75952) filed
on March 2, 1994).
10.2 1995 Stock Compensation Program (Incorporated by reference to the
Company's Registration Statement Form S-1 (No. 33-91206) filed
on April 14, 1995).
10.3 1999 Stock Compensation Program (Incorporated by reference to the
Company's Registration Statement on Form S-8 (No. 333-80877) filed
on June 17, 1999).
10.4 Change-In-Control Severance Agreements (Incorporated by reference
to the Company's 1998 Annual Report on Form 10-K (No. 000-24526)
filed on March 23, 1999).
10.5 Amendment No. 1 to Change-In-Control Severance Agreements
12 Ratio of earnings to combined fixed charges and preferred stock
dividends (See Exhibit 13)
13 Annual Report to Stockholders
27 Financial Data Schedule (electronically filed)
28 Form of proxy mailed to stockholders of the Company
__________________
(b) The Company filed no reports on Form 8-K during the last
quarter of fiscal 1999.
(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.
<PAGE>
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, 2000 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, 2000
- ----------------------
Manuel J. Mehos, Chairman of the
Board and Chief Executive Officer
/s/ R. Edwin Allday Date: March 23, 2000
- ----------------------
R. Edwin Allday, Director
/s/ D. Fort Flowers, Jr. Date: March 23, 2000
- -------------------------
D. Fort Flowers, Jr., Director
/s/ Dennis S. Frank Date: March 23, 2000
- ----------------------
Dennis S. Frank, Director
/s/ Paul W. Hobby Date: March 23, 2000
- --------------------
Paul W. Hobby, Director
/s/ Robert E. Johnson, Jr. Date: March 23, 2000
- -----------------------------
Robert E. Johnson, Jr., Director
/s/ James C. Niver Date: March 23, 2000
- ---------------------
James C. Niver, Director
/s/ Catherine N. Wylie Date: March 23, 2000
- -------------------------
Catherine N. Wylie, Chief Financial
Officer (principal financial and
accounting officer)
AMENDMENT NO. 1
TO
CHANGE-IN-CONTROL SEVERANCE AGREEMENT AMONG
COASTAL BANCORP, INC.
COASTAL BANC SSB
AND
GARY R. GARRETT
AMENDMENT, dated as of May 31, 1999, by and among Coastal Bancorp, Inc.,
(the "Corporation"), Coastal Banc ssb, a wholly owned subsidiary of the
Corporation (the "Bank") and Gary R. Garrett (the "Executive") to the Change-
In-Control Severance Agreement (the "Agreement"), dated as of June 25, 1998.
Hereinafter, the Corporation and the Bank are referred to collectively as the
"Employers."
WHEREAS, in accordance with Section 8 of the Agreement, the Executive and
the Employers desire to revise the Agreement to provide for an extension and
automatic renewal feature.
NOW, THEREFORE, in consideration of the foregoing, and intending to be
legally bound hereby, the Executive and the Employers hereto agree as follows:
The "Effective Date" of the Agreement, as amended hereby, shall be May 31,
1999.
Section 4 is hereby amended in its entirety to read as follows:
4. Term of Agreement
-------------------
The term of this Agreement shall be to and through May 31, 2002, subject to
earlier termination as provided herein. Beginning on June 1, 1999, and on each
day thereafter, the term of this Agreement shall be extended for a period of one
day in addition to the then-remaining term, provided that the Employers have not
given notice to the Executive in writing at least 30 days prior to such day that
the term of this Agreement shall not be extended further. Reference herein to
the term of this Agreement shall refer to both such initial term and such
extended terms. The Board of Directors of the Corporation shall review on a
periodic basis (and no less frequently than annually) whether to permit further
extensions of the term of this Agreement. As part of such review, the Board of
Directors shall consider all relevant factors, including the Executive's
performance hereunder, and shall either expressly approve further extensions of
the time of this Agreement or decide to provide notice to the contrary."
<PAGE>
IN WITNESS WHEREOF, this Amendment has been executed by the Executive and
the Employers' respective officers thereunto duly authorized as of the date
first above written.
Attest: COASTAL BANCORP, INC.
/s/Linda B. Frazier By:/s/Manuel J. Mehos
- --------------------- --------------------
Secretary Name: Manuel J. Mehos
Title: Chairman of the Board and
Chief Executive Officer
By:/s/James C. Niver
-------------------
Name: James C. Niver
Title: Chairman, Compensation Committee
Attest: COASTAL BANC SSB
/s/Linda B. Frazier By:/s/Manuel J. Mehos
- --------------------- --------------------
Secretary Name: Manuel J. Mehos
Title: Chairman of the Board and
Chief Executive Officer
By:/s/James C. Niver
-------------------
Name: James C. Niver
Title: Chairman, Compensation Committee
Witness: EXECUTIVE
/s/Pamela S. Watkins /s/Gary R. Garrett
- ---------------------- --------------------
Pamela S. Watkins Gary R. Garrett
Sr. Executive Vice President/
Chief Lending Officer
<PAGE>
AMENDMENT NO. 1
TO
CHANGE-IN-CONTROL SEVERANCE AGREEMENT AMONG
COASTAL BANCORP, INC.
COASTAL BANC SSB
AND
CATHERINE N. WYLIE
AMENDMENT, dated as of May 31, 1999, by and among Coastal Bancorp, Inc.,
(the "Corporation"), Coastal Banc ssb, a wholly owned subsidiary of the
Corporation (the "Bank") and Gary R. Garrett (the "Executive") to the Change-
In-Control Severance Agreement (the "Agreement"), dated as of June 25, 1998.
Hereinafter, the Corporation and the Bank are referred to collectively as the
"Employers."
WHEREAS, in accordance with Section 8 of the Agreement, the Executive and
the Employers desire to revise the Agreement to provide for an extension and
automatic renewal feature.
NOW, THEREFORE, in consideration of the foregoing, and intending to be
legally bound hereby, the Executive and the Employers hereto agree as follows:
The "Effective Date" of the Agreement, as amended hereby, shall be May 31,
1999.
Section 4 is hereby amended in its entirety to read as follows:
4. Term of Agreement
-------------------
The term of this Agreement shall be to and through May 31, 2002, subject to
earlier termination as provided herein. Beginning on June 1, 1999, and on each
day thereafter, the term of this Agreement shall be extended for a period of one
day in addition to the then-remaining term, provided that the Employers have not
given notice to the Executive in writing at least 30 days prior to such day that
the term of this Agreement shall not be extended further. Reference herein to
the term of this Agreement shall refer to both such initial term and such
extended terms. The Board of Directors of the Corporation shall review on a
periodic basis (and no less frequently than annually) whether to permit further
extensions of the term of this Agreement. As part of such review, the Board of
Directors shall consider all relevant factors, including the Executive's
performance hereunder, and shall either expressly approve further extensions of
the time of this Agreement or decide to provide notice to the contrary."
<PAGE>
F:\ACCTEXE\WATKINS\WORD\CWCORRES\EXECAGMTS\AMEND1GARY.DOC
IN WITNESS WHEREOF, this Amendment has been executed by the Executive and
the Employers' respective officers thereunto duly authorized as of the date
first above written.
Attest: COASTAL BANCORP, INC.
/s/Linda B. Frazier By:/s/Manuel J. Mehos
- --------------------- --------------------
Secretary Name: Manuel J. Mehos
Title: Chairman of the Board and
Chief Executive Officer
By:/s/James C. Niver
-------------------
Name: James C. Niver
Title: Chairman, Compensation Committee
Attest: COASTAL BANC SSB
/s/Linda B. Frazier By:/s/Manuel J. Mehos
- --------------------- --------------------
Secretary Name: Manuel J. Mehos
Title: Chairman of the Board and
Chief Executive Officer
By:/s/James C. Niver
-------------------
Name: James C. Niver
Title: Chairman, Compensation Committee
Witness: EXECUTIVE
/s/Pamela S. Watkins /s/Catherine N. Wylie
- ---------------------- -----------------------
Pamela S. Watkins Catherine N. Wylie
Sr. Executive Vice President/
Chief Financial Officer
COASTAL BANCORP, INC.
AND SUBSIDIARIES
FINANCIAL HIGHLIGHTS
DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
December 31,
--------------
(dollars in thousands, except per share data) 1999 1998 1997
- ----------------------------------------------------- -------------- ----------- -----------
<S> <C> <C> <C>
FOR THE YEAR ENDED
Net interest income $ 77,286 $ 67,410 $ 56,933
Provision for loan losses (1) 10,575 3,100 1,800
Noninterest income 10,372 6,872 6,384
Noninterest expense 57,810 48,383 39,544
Reversal of accrued income taxes (2) -- 3,679 --
Net income 11,026 16,668 11,563
Diluted earnings per share 1.42 2.18 1.50
- ----------------------------------------------------- -------------- ----------- -----------
AT YEAR END
Total assets $ 2,947,952 $2,982,161 $2,911,410
Loans receivable 1,735,081 1,538,149 1,261,435
Mortgage-backed securities held-to-maturity 917,212 1,154,116 1,345,090
Mortgage-backed securities available-for-sale 99,665 96,609 169,997
Deposits 1,624,289 1,705,004 1,375,060
Borrowed funds 1,096,931 1,066,720 1,332,235
Senior Notes payable 46,900 50,000 50,000
Minority interest - preferred stock of Coastal
Banc ssb 28,750 28,750 28,750
Preferred stockholders' equity 27,500 -- --
Common stockholders' equity 105,956 112,764 104,830
Book value per common share 16.42 15.71 13.78
Tangible book value per common share 12.53 11.75 11.83
- ----------------------------------------------------- -------------- ----------- -----------
SIGNIFICANT RATIOS FOR THE YEAR ENDED
Return (before minority interest) on average assets 0.47% 0.64% 0.49%
Return on average common equity 8.83 14.96 11.68
Net interest margin 2.75 2.31 2.02
Interest rate spread including noninterest-bearing
deposits 2.65 2.17 1.85
Interest rate spread 2.39 1.96 1.67
Average common equity to average total assets 3.66 3.71 3.41
Noninterest expense to average total assets 1.98 1.61 1.36
- ----------------------------------------------------- -------------- ----------- -----------
ASSET QUALITY RATIOS AT YEAR END
Nonperforming assets to total assets 0.73% 0.99% 0.72%
Nonperforming loans to total loans receivable 0.99 1.60 1.40
Allowance for loan losses to nonperforming loans 61.30 46.28 41.90
Allowance for loan losses to total loans receivable 0.60 0.74 0.59
- ----------------------------------------------------- -------------- ----------- -----------
</TABLE>
(1) During 1999, Coastal recorded a $6.8 million provision for loan losses
specific to one loan to MCA Financial Corp., of Southfield, Michigan, and
certain of its affiliates (collectively "MCA"). See further discussion in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Net Income."
(2) 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.
<PAGE>
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 50
branch offices in metropolitan Houston, Austin, Corpus Christi, the Rio Grande
Valley and small cities in the southeast quadrant of Texas. At December 31,
1999, Coastal Banc ssb had $2.9 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>
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 23
Consolidated Financial Statements 24
Notes to Consolidated Financial Statements 29
Stock Prices and Dividends 51
Stockholder Information 52
</TABLE>
<PAGE>
CHAIRMAN'S LETTER
Coastal Bancorp, Inc. ("Coastal") achieved another record year of core earnings
in 1999. In each year since Coastal's strategic shift to commercial banking,
net interest margin and fee income have reached record levels. In 1999, net
interest margin grew by 19% to 2.75% and fee income grew by 34% to $8.6 million,
both record levels for Coastal. Growth in these two components of earnings was
an important goal of the 1995 shift to commercial banking. Our strategy is
working, but we believe we have only scratched the surface.
Now the bad news. During 1999, we wrote down to zero a $8.9 million mortgage
warehouse line of credit to MCA. It was the first significant loss on a
commercial loan made by Coastal since our founding in 1986. It clouded an
otherwise successful year and prevented us from recording net earnings that
would have exceeded expectations. We learned from our mistake and we have put
it behind us.
Due to this isolated blemish, net earnings for 1999 were a disappointment. I
will not ask you to ignore the loan loss because you shouldn't. It's part of
the banking business and part of Coastal's overall performance. However, I will
ask you to focus on the improvements in 1999, the 13% growth in adjusted
earnings per share during 1999 and the potential for continued growth in fee
income and net interest income. I will discuss all of this in more detail
later, including the $8.9 million writedown of the MCA loan. But first, some
details about Coastal's financial results in 1999.
1999 EARNINGS
Net income for 1999 before the provision for loan losses specific to the MCA
loan was $15.4 million, a $1.3 million or 9.6% increase over 1998 net income of
$14.1 million before one-time charges and credits. On a fully diluted earnings
per share basis, earnings for 1999 before the provision for loan losses specific
to the MCA loan were $2.08 per diluted share, a 13% increase over 1998 earnings
before one-time charges and credits of $1.84 per diluted share. Earnings per
diluted share incurred a higher percentage increase than net income in 1999 due
to Coastal's common stock repurchase activities during the year. The weighted
average common shares outstanding used in the diluted earnings per share
calculations were 6,661,308 for 1999 and 7,656,690 for 1998.
Net income (including the provision for loan losses specific to the MCA loan in
1999 and one-time charges and credits in 1998) was $11.0 million for the year
ended December 31, 1999, or $1.42 per diluted share, compared to $16.7 million,
or $2.18 per diluted share, for the year ended December 31, 1998.
Once again, Coastal's two principal sources of revenue reached record levels.
Net interest income, prior to the provision for loan losses, reached $77.3
million during 1999, compared to $67.4 million in 1998, and loan fees, service
charges on deposit accounts, and loan servicing income reached $8.6 million
during 1999, compared to $6.4 million in 1998. Noninterest expense increased to
$57.8 million during 1999, compared to $48.4 million in 1998. At December 31,
1999, Coastal had total assets of $2.9 billion, total deposits of $1.6 billion
in 50 branches, and common stockholders' equity of $106.0 million.
COMMERCIAL BANKING MOMENTUM CONTINUES
The real story here is all about the evolution of Coastal's operations into that
like a commercial bank and the profound effect it has had on Coastal's financial
statements. Look at the numbers; they tell the story. Net interest margin, as
stated previously, grew to 2.75% in 1999 and reached 2.89% by the fourth quarter
of 1999. To get a picture of how much and how fast this key ratio is changing,
look at prior years' numbers: In 1998 net interest margin was 2.31% and in the
prior year, 1997, net interest margin was only 2.02%. Now get this. From the
fourth quarter 1997 to the fourth quarter 1999, Coastal's net interest margin
increased 48%!
How and why has this happened? The reason, from a strategic viewpoint, is
Coastal's switch to commercial banking, which I have been discussing in this
letter for the last several years. The reason, from a financial statement
viewpoint, is the rapidly changing components of the balance sheet. For
instance, total loans grew by 13% in 1999 and have grown 38% over the last two
years. Commercial type loans, excluding mortgage warehouse loans, grew by $65
million in 1999. At the same time, total assets slightly decreased in 1999 due
to continued paydowns of lower yielding mortgage-backed securities. The result
is a shift in the asset side of the balance sheet to proportionally more loans
with higher yields that are tied to short-term floating rate indexes.
On the other side of the balance sheet, things also continue to change. By the
end of 1999, total transaction accounts, which are less costly than certificates
of deposit, comprised 33% of total deposits, as compared to 32% in 1998 and 26%
in 1997. Moreover, during 1999, Coastal completed a program to shift the
pricing of Coastal's certificate of deposit base down from the high tier of
competitive local rates to the middle tier. As a result, Coastal's cost of
deposits dropped 0.51% during 1999 while short-term capital market rates
increased. All these changes combined to provide an increase during 1999 of
$9.9 million in Coastal's number one revenue source, net interest income.
Coastal's number two revenue source, fee income from loan fees, service charges
on deposit accounts and loan servicing income, increased during 1999 by $2.2
million. The income from Coastal's growing commercial customer base coupled with
programs designed to improve retail customer fee income has exceeded
expectations. As a result, this category is growing proportionally faster than
net interest income. The total growth of these top two revenue sources provided
$12 million in additional revenue in 1999.
Of course, when you spend more money the revenue increases don't all drop
unimpeded to the bottom line. Noninterest expense increased by $9.4 million
during 1999. A principal part of this increase was due to 1999 being the first
full year of additional overhead attributable to the operation of the former San
Benito Bank & Trust purchased by Coastal in August of 1998. The rest of the
increase was simply attributable to the higher cost of commercial banking versus
the cost of doing business as a thrift (Coastal's former life). The growth in
revenue was further offset by a higher overall general allowance for loan losses
necessary due to Coastal's loan growth.
Nonetheless, the $12 million growth in revenues still exceeded the growth in
expenses and general allowance provisions. The excess was enough to increase
net income before the MCA loan loss provision by almost 10% and increase diluted
earnings per share before the MCA provision by 13%. This earnings growth was
achieved in a year that total assets actually declined. As the composition of
the assets changes, commercial business grows, and the increase in expenses
slows or stops, a larger portion of the new revenues will make their way to the
bottom line. I'll discuss how shortly, but first let's discuss the MCA loss.
MCA IS NOW BEHIND US
On November 3, 1998, Coastal purchased a $10 million participation in a $25
million mortgage warehouse line of credit to MCA, originated by the lead bank in
1997. By December 30, 1998, MCA was in default and in February of 1999, MCA
filed for bankruptcy. Since then, Coastal has worked with the lead bank, other
lenders, and the receiver to liquidate the underlying collateral. By December
31, 1999, Coastal had collected only $1.1 million from liquidations. In January
2000, Coastal filed a lawsuit against the lead lender seeking to recover losses
incurred as a result of acts or omissions of the lead bank.
Due to the uncertainty of the value and marketability of the remaining MCA
collateral and the timing of any recovery from the lawsuit, we decided to write
down the entire balance of the MCA line of credit in the fourth quarter of 1999.
Unfortunately, the writedown occurred during what would have been record fourth
quarter earnings. Earnings excluding the provision for loan losses specific to
the MCA loan in the fourth quarter were $.63 per diluted share.
We will be working hard to recover a meaningful portion of the writedown through
liquidations, the lawsuit, or both. Furthermore, we learned valuable lessons
from this significant credit loss that have already been incorporated into our
operating policies. But beginning in 2000, as far as future earnings are
concerned, MCA is now behind us. We enter 2000 on the heels of one of Coastal's
best ever quarters for core earnings, especially for net interest margin and fee
income. I will discuss how we can improve on that momentum during 2000 and
beyond, but first I want to briefly mention capital management during 1999.
<PAGE>
CAPITAL MANAGEMENT
Coastal started repurchasing its common stock in the third quarter of 1998,
following a collapse in the prices of bank stocks. During the fourth quarter of
1998, Coastal's stock had dropped to a low of $14 per share, well below book
value per share at the time. In August of 1998, the Board of Directors approved
the repurchase of 500,000 shares, and as of December 31, 1998, 499,600 shares
had been repurchased. Coastal's stock price closed at $17.50 per share on
December 31, 1998.
Subsequently, the Board of Directors authorized the repurchase of 1,000,000
additional shares, as market conditions warrant. During 1999, Coastal
repurchased 784,079 shares at an average price of $16.18 per share, below the
1999 average book value per share. We replaced the capital with the issuance of
$27.5 million of 9.12% preferred stock at an after tax cost to Coastal of below
6%. Since the common stock has a target return on equity above 12% and could be
purchased below book value, we reasoned it as a good tradeoff for 6% capital.
As a result of the repurchases during 1999, earnings per diluted share grew by
over three percentage points more than net income growth. As of the beginning
of 2000, 216,321 shares remained to be repurchased out of the amount authorized
by the Board of Directors.
On December 31, 1999, Coastal's stock price closed at $17.50, the same closing
price as the end of 1998, a year in which Coastal's stock price dropped from a
high of approximately $26.50 per share. During 1999, bank stock prices in
general continued to perform poorly, and Coastal's stock was no exception.
There was no stock price appreciation. That is not acceptable performance to
us, so we will continue to pursue initiatives that improve the stock price
performance. But the most reliable method is earnings growth. Here's what we
have planned.
2000 - A SIMPLE YEAR
Two things are happening to the banking business today that change our near term
planning. First, technology and deregulation have altered the banking landscape
so that most traditional bank products are the domain of specialists, some of
which are banks and some aren't. It's been happening for years, and banking
modernization legislation finally made it official in 1999. Now, the only banks
offering a wide range of financial products are very large supernational banks
and some community banks serving a small, defined geographical market. Those in
between must specialize in a smaller menu of profitable products. A decade ago
technology helped improve banking profits by lowering costs, now it is reducing
product profit margins. Thus, specialization is becoming the business model of
choice for supercommunity banks and small regional banks.
The second thing that is happening to the banking business today is record
setting economic expansion. That is a principal reason why the banking business
has had several consecutive years of record profitability and insignificant loan
losses. However, more and more financial services companies are crossing over
and chasing these profits, thus crowding the marketplace and lowering the profit
margins. In some cases, the low return does not justify the risk.
Coastal committed to local business banking as our specialization five years
ago. Since then Coastal has succeeded in transforming our core processes and
culture to commercial banking with an infrastructure that is capable of handling
significantly more commercial customers. Acquisitions are the best and most
economical source for commercial customer growth as evidenced by Coastal's
acquisition of San Benito Bank & Trust in 1998. But due to price constraints,
the acquisition market is not expected to be a viable source for growth in the
near future. Sound kind of dismal?
For us it's not. Here's the good part. In 2000, we don't plan on spending any
more money than we did in 1999. That's right, you heard correctly, a flat
expense budget during a record economic expansion. Why are we doing this? For
the time being, while margins are tight and acquisitions expensive, Coastal's
best operating strategy is to simply get better at our chosen specialization:
local business banking. The infrastructure is there, now we'll get better at it
and simply get more customers.
Coastal has all the necessary tools for maintaining the momentum we established
at the end of 1999. Remember, earnings (excluding the MCA effect) were at $.63
per share and net interest margin reached 2.89% in the fourth quarter of 1999.
Commercial business is growing but expenses are not. We have reached the point
where the operating leverage we have created over the last five years is now
expected to pay off. Continuing growth in transaction accounts and loans is
expected to provide further increases in fee income and net interest income.
But expenses are expected to stay about the same. That's our plan for earnings
growth in 2000. It's that simple: business banking grows, expenses don't.
IT'S ALL ABOUT THE STOCK PRICE
Coastal's long range goal to become a regional bank specializing in local
business banking has not changed. We're just softly applying the brakes in 2000
to allow the business to catch up with the potential of Coastal's
infrastructure. We will still search for acquisitions and combinations that
will accelerate Coastal's progress on that path. In the meantime, we will get
better at both business and retail banking while we improve the yield on the
resources already committed. The goal is to improve Coastal's earnings growth
rate and, in turn, significantly improve the performance of the stock. That is
what's most important.
/s/ Manuel J. Mehos
- ---------------------
Manuel J. Mehos
Chairman of the Board and
Chief Executive Officer
<PAGE>
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,
----------------------------------------
(Dollars in thousands, except per share data) 1999 1998 1997
------------- ---------- -----------
<S> <C> <C> <C>
Balance Sheet Data
Total assets. . . . . . . . . . . . . . . . . . . . . . . $ 2,947,952 $2,982,161 $2,911,410
Loans receivable (1). . . . . . . . . . . . . . . . . . . 1,735,081 1,538,149 1,261,435
Mortgage-backed securities held-to-maturity (1) . . . . . 917,212 1,154,116 1,345,090
Mortgage-backed securities available-for-sale . . . . . . 99,665 96,609 169,997
Deposits. . . . . . . . . . . . . . . . . . . . . . . . . 1,624,289 1,705,004 1,375,060
Advances from the Federal Home Loan Bank of
Dallas ("FHLB") . . . . . . . . . . . . . . . . . . . . 1,096,931 966,720 540,475
Securities sold under agreements to repurchase. . . . . . -- 100,000 791,760
Senior Notes payable. . . . . . . . . . . . . . . . . . . 46,900 50,000 50,000
Minority interest - preferred stock of Coastal Banc ssb . 28,750 28,750 28,750
Preferred stockholders' equity. . . . . . . . . . . . . . 27,500 -- --
Common stockholders' equity . . . . . . . . . . . . . . . 105,956 112,764 104,830
(Dollars in thousands, except per share data) 1996 1995
----------- -----------
<S> <C> <C>
Balance Sheet Data
Total assets. . . . . . . . . . . . . . . . . . . . . . . $2,875,907 $2,786,528
Loans receivable (1). . . . . . . . . . . . . . . . . . . 1,229,748 1,098,555
Mortgage-backed securities held-to-maturity (1) . . . . . 1,344,587 1,395,753
Mortgage-backed securities available-for-sale . . . . . . 180,656 186,414
Deposits. . . . . . . . . . . . . . . . . . . . . . . . . 1,310,835 1,287,084
Advances from the Federal Home Loan Bank of
Dallas ("FHLB") . . . . . . . . . . . . . . . . . . . . 409,720 312,186
Securities sold under agreements to repurchase. . . . . . 966,987 993,832
Senior Notes payable. . . . . . . . . . . . . . . . . . . 50,000 50,000
Minority interest - preferred stock of Coastal Banc ssb . 28,750 28,750
Preferred stockholders' equity. . . . . . . . . . . . . . -- --
Common stockholders' equity . . . . . . . . . . . . . . . 94,148 91,679
</TABLE>
(Footnotes appear on page 9)
<TABLE>
<CAPTION>
For the Year Ended December 31,
---------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Operating Data
Interest income . . . . . . . . . . . . . . . . . . . . . $ 202,943 $ 210,814 $ 201,356
Interest expense. . . . . . . . . . . . . . . . . . . . . 125,657 143,404 144,423
---------- ---------- ----------
Net interest income . . . . . . . . . . . . . . . . . . . 77,286 67,410 56,933
Provision for loan losses(2). . . . . . . . . . . . . . . 10,575 3,100 1,800
---------- ---------- ----------
Net interest income after provision for loan losses . . . 66,711 64,310 55,133
Writedown of purchased mortgage loan premium. . . . . . . -- (709) --
Gain (loss) on sales of mortgage-backed securities
available-for-sale, net . . . . . . . . . . . . . . . . -- 1 237
Gain on sale of branch office . . . . . . . . . . . . . . -- -- --
Other noninterest income. . . . . . . . . . . . . . . . . 10,372 7,580 6,147
SAIF insurance special assessment (3) . . . . . . . . . . -- -- --
Other noninterest expense . . . . . . . . . . . . . . . . (57,810) (48,383) (39,544)
---------- ---------- ----------
Income before provision for Federal income taxes
and minority interest . . . . . . . . . . . . . . . . . 19,273 22,799 21,973
Provision for Federal income taxes (4). . . . . . . . . . (5,659) (3,543) (7,822)
Minority interest - preferred stock dividends of Coastal
Banc ssb. . . . . . . . . . . . . . . . . . . . . . . . (2,588) (2,588) (2,588)
---------- ---------- ----------
Net income. . . . . . . . . . . . . . . . . . . . . . . . $ 11,026 $ 16,668 $ 11,563
========== ========== ===========
Net income available to common stockholders . . . . . . . $ 9,442 $ 16,668 $ 11,563
========== ========== ===========
Basic earnings per share (5). . . . . . . . . . . . . . . $ 1.45 $ 2.24 $ 1.55
========== ========== ===========
Diluted earnings per share (5). . . . . . . . . . . . . . $ 1.42 $ 2.18 $ 1.50
========== ========== ===========
</TABLE>
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Operating Data
Interest income . . . . . . . . . . . . . . . . . . . . . $ 194,611 $ 170,286
Interest expense. . . . . . . . . . . . . . . . . . . . . 138,185 126,354
----------- -----------
Net interest income . . . . . . . . . . . . . . . . . . . 56,426 43,932
Provision for loan losses(2). . . . . . . . . . . . . . . 1,925 1,664
----------- -----------
Net interest income after provision for loan losses . . . 54,501 42,268
Writedown of purchased mortgage loan premium. . . . . . . -- --
Gain (loss) on sales of mortgage-backed securities
available-for-sale, net . . . . . . . . . . . . . . . . (4) 81
Gain on sale of branch office . . . . . . . . . . . . . . 521 --
Other noninterest income. . . . . . . . . . . . . . . . . 5,574 5,081
SAIF insurance special assessment (3) . . . . . . . . . . (7,455) --
Other noninterest expense . . . . . . . . . . . . . . . . (37,927) (29,823)
----------- -----------
Income before provision for Federal income taxes
and minority interest . . . . . . . . . . . . . . . . . 15,210 17,607
Provision for Federal income taxes (4). . . . . . . . . . (5,671) (6,477)
Minority interest - preferred stock dividends of Coastal
Banc ssb. . . . . . . . . . . . . . . . . . . . . . . . (2,588) (2,588)
----------- -----------
Net income. . . . . . . . . . . . . . . . . . . . . . . . $ 6,951 $ 8,542
=========== ===========
Net income available to common stockholders . . . . . . . $ 6,951 $ 8,542
=========== ===========
Basic earnings per share (5). . . . . . . . . . . . . . . $ 0.93 $ 1.15
=========== ===========
Diluted earnings per share (5). . . . . . . . . . . . . . $ 0.92 $ 1.14
=========== ===========
</TABLE>
(Footnotes appear on page 9)
<PAGE>
COASTAL BANCORP, INC. AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
<TABLE>
<CAPTION>
At or For the Year Ended December 31,
--------------------------------------------
1999 1998 1997 1996 1995
------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C>
Selected Ratios
Performance Ratios (6):
Return (before minority interest)
on average assets . . . . . . . . . . . . . . . . 0.47% 0.64% 0.49% 0.34% 0.45%
Return on average common equity . . . . . . . . . . 8.83 14.96 11.68 7.50 9.71
Dividend payout ratio. . . . . . . . . . . . . . . . 22.11 14.35 19.83 28.55 18.56
Average common equity to average total assets . . . 3.66 3.71 3.41 3.30 3.56
Net interest margin (7). . . . . . . . . . . . . . . 2.75 2.31 2.02 2.06 1.82
Interest rate spread including
noninterest-bearing deposits (7). . . . . . . . . . 2.65 2.17 1.85 1.89 1.61
Interest rate spread (7) . . . . . . . . . . . . . . 2.39 1.96 1.67 1.72 1.46
Noninterest expense to average
total assets . . . . . . . . . . . . . . . . . . . 1.98 1.61 1.36 1.61 1.21
Average interest-earning assets to average
interest-bearing liabilities. . . . . . . . . . . . 108.22 107.33 106.72 106.75 106.78
Ratio of earnings to combined fixed charges
and preferred stock dividends:
Excluding interest on deposits . . . . . . . . . . 1.23X 1.25X 1.23X 1.15X 1.21X
Including interest on deposits . . . . . . . . . . 1.11 1.14 1.13 1.09 1.12
Asset Quality Ratios:
Nonperforming assets to total assets (8) . . . . . . 0.73% 0.99% 0.72% 0.60% 0.68%
Nonperforming loans to total loans receivable. . . . 0.99 1.60 1.40 1.14 1.35
Allowance for loan losses to nonperforming loans . . 61.30 46.28 41.90 49.02 38.40
Allowance for loan losses to total loans receivable. 0.60 0.74 0.59 0.56 0.52
Bank Regulatory Capital Ratios (9):
Tier 1 capital to total assets . . . . . . . . . . . 5.76 5.25 5.52 5.35 5.30
Tier 1 risk-based capital to risk-weighted assets. . 9.68 9.54 11.46 11.77 12.36
Total risk-based capital to risk-weighted assets . . 10.29 10.23 11.98 12.30 12.84
Other Data:
Full-time employee equivalents 666 653 451 433 390
Number of full service offices 50 49 37 37 40
</TABLE>
<TABLE>
<CAPTION>
At or For the Year Ended December 31,
--------------------------------------------
1999 1998 1997 1996 1995
------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C>
Certain Ratios and Other Data - Excluding Adjusting Items (10) (dollars in thousands, except per share data)
Adjusted net income . . . . . . . . . . . . . . . . $15,452 $14,099 $11,563 $11,797 $8,542
Adjusted diluted earnings per share . . . . . . . . 2.08 1.84 1.50 1.56 1.14
Adjusted return (before minority interest) on
average assets. . . . . . . . . . . . . . . . . . 0.62% 0.55% 0.49% 0.51% 0.45%
Adjusted return on average common equity. . . . . . 12.96 12.65 11.68 12.53 9.71
</TABLE>
(Footnotes appear on page 9)
<PAGE>
Footnotes for pages 6 through 8:
(1) Loans receivable are net of loans in process, premiums, discounts,
unearned interest and loan fees and the allowance for loan losses.
Mortgage-backed securities held-to-maturity are net of premiums and discounts.
(2) During 1999, Coastal recorded a $6.8 million provision for loan losses
specific to one loan to MCA. See further discussion in "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Net Income."
(3) On September 30, 1996, Coastal recorded the one-time Savings Association
Insurance Fund ("SAIF") insurance special assessment (the "special assessment")
of $7.5 million as a result of the Deposit Insurance Funds Act of 1996 being
signed into law.
(4) 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.
(5) 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. All common stock share
data has been adjusted to include the effect of the stock split.
(6) Ratio, yield and rate information are based on year-to-date average
balances.
(7) Net interest margin represents net interest income as a percentage of
average interest-earning assets. Interest rate spread including
noninterest-bearing 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 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 Coastal Banc ssb 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) Adjusting items are comprised of the following for 1999, 1998 and
1996:
1999 - The $4.4 million (after tax), or $0.66 per diluted share, effect of
the $6.8 million provision for loan losses specific to the
MCA loan.
1998 - The $2.6 million (after tax), or $0.34 per diluted share, net
benefit of (a) a reversal of $3.7 million in income taxes, (b) a
$1.0 million additional provision for loan losses, and (c) a
$709,000 writedown of purchased mortgage loan premium.
1996 - The SAIF insurance special assessment of $7.5 million, or $4.8
million after tax.
There were no adjusting items in 1997 or 1995.
<PAGE>
COASTAL BANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
GENERAL
Coastal Bancorp, Inc. ("Bancorp") through its wholly-owned subsidiary,
HoCo, owns 100 percent of the voting stock of Coastal Banc ssb, a
Texas-chartered, FDIC insured, state savings bank ("the Bank"). The
consolidated financial statements included herein include the accounts of
Bancorp, HoCo, the Bank and subsidiaries of both HoCo and the Bank (collectively
known as "Coastal").
On April 23, 1998, the Board of Directors declared a 3:2 stock split on the
common stock of Bancorp that was paid on June 15, 1998 to the stockholders of
record at the close of business on May 15, 1998. All common stock share data
has been adjusted to include the effect of the stock split for all periods
presented.
On August 27, 1998, December 21, 1998 and February 25, 1999, the Board of
Directors authorized three separate repurchase plans for up to 500,000 shares
each of the outstanding shares of common stock through an open market repurchase
program and privately negotiated repurchases, if any. As of December 31, 1999
and 1998, 1,283,679 and 499,600 shares had been repurchased at a cost of $20.5
million and $7.8 million, respectively.
On May 11, 1999, Bancorp issued 1,100,000 shares of 9.12% Series A
Cumulative Preferred Stock, no par value, to the public at a price of $25 per
share ("Bancorp Preferred Stock"). Dividends on the preferred stock are payable
quarterly at the annual rate of $2.28 per share. The preferred stock is
callable on May 15, 2003 at Bancorp's option. The $25.9 million net proceeds
has been used for repurchases in the open market of Bancorp's outstanding common
stock and of Bancorp's outstanding 10% Senior Notes, with the remaining being
invested on a short-term basis. Pursuant to Coastal's tax benefit agreement
with the FDIC, Coastal receives a tax benefit for dividends declared on this
preferred stock. The ongoing quarterly benefit will be approximately $219,000,
or 3 cents per diluted share, and is expected to continue through the end of
2002.
FINANCIAL CONDITION
Total assets decreased slightly by 1.2%, or $34.2 million, from December
31, 1998 to December 31, 1999. The change in total assets was primarily
comprised of an increase in loans receivable of $196.9 million, a $6.9 million
increase in stock in the FHLB, an increase of $3.1 million in mortgage-backed
securities available-for-sale and an increase in cash and cash equivalents of
$2.6 million, offset by a decrease of $236.9 million in mortgage-backed
securities held-to-maturity and decreases of $3.1 million and $2.4 million in
goodwill and property and equipment, respectively, due to 1999 amortization and
depreciation. The increase in loans receivable was primarily due to residential
mortgage loan purchases of $365.9 million, a $56.6 million increase in
commercial real estate loans and a $43.6 million increase in multifamily loans,
offset by principal payments received and a decrease of $112.8 million in
commercial loans secured by residential mortgage loans held for sale, because of
Coastal's decreased emphasis on this type of lending. 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 mortgage-backed securities
available-for-sale was due to the purchase of $26.5 million offset by principal
payments received. The decrease in mortgage-backed securities held-to-maturity
was due to principal payments received. At December 31, 1999, loans receivable
as a percentage of total assets increased to 58.9% as compared to 51.6% at
December 31, 1998.
Deposits decreased by 4.7%, or $80.7 million, from December 31, 1998 to
December 31, 1999. Advances from the FHLB increased by 13.5%, or $130.2
million, and securities sold under agreements to repurchase decreased from
$100.0 million at December 31, 1998 to zero at December 31, 1999 due to a
reallocation of borrowings to take advantage of more favorable interest rates.
During 1999, Senior Notes payable decreased by $3.1 million due to repurchases
by Coastal.
Stockholders' equity increased 18.4%, or $20.7 million, from December 31,
1998 to December 31, 1999 as a result of the $25.9 million in net proceeds
received from the issuance of the Bancorp Preferred Stock and 1999 net income of
$11.0 million, offset by common stock dividends declared of $2.1 million,
preferred stock dividends of $1.6 million, a $474,000 increase in accumulated
other comprehensive loss, and treasury stock acquired of $12.7 million.
RESULTS OF OPERATIONS FOR THE THREE YEARS ENDED DECEMBER 31, 1999
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 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.
<PAGE>
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, 1999
December 31, 1999 Average Yield/
Yield/Rate Balance Interest Rate
--------------- --------- --------- --------
(Dollars in thousands)
ASSETS
Interest-earning assets:
Loans receivable (1) 8.67% $ 1,647,535 $ 136,036 8.26%
Mortgage-backed securities 6.02 1,099,420 63,663 5.79
U.S. Treasury securities 5.42 1,439 78 5.42
Securities purchased under agreements to resell
and federal funds sold -- 5,353 270 5.04
FHLB stock 5.75 51,717 2,848 5.51
Interest-earning deposits in other depository
institutions 4.83 1,486 48 3.23
--------------- ------------ --------- ---------
Total interest-earning assets 7.65 2,806,950 202,943 7.23
--------------- --------- ---------
Noninterest-earning assets (2) 113,406
------------
Total assets $ 2,920,356
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing deposits 4.37% $ 1,490,851 $ 64,701 4.34%
Advances from the FHLB 5.72 951,953 50,569 5.31
Securities sold under agreements to repurchase
and federal funds purchased -- 103,230 5,614 5.44
Senior Notes payable 10.00 47,658 4,773 10.00
--------------- ------------ --------- ---------
Total interest-bearing liabilities 5.02 2,593,692 125,657 4.84
--------------- --------- ---------
Noninterest-bearing liabilities 173,990
------------
Total liabilities 2,767,682
Minority interest - preferred stock of Coastal
Banc ssb 28,750
Preferred stockholders' equity 16,923
Common stockholders' equity 107,001
------------
Total liabilities and stockholders' equity $ 2,920,356
============
Net interest income; interest rate spread 2.63% $ 77,286 2.39%
=============== ========= =========
Net interest-earning assets; net interest
yield on interest-earning assets $ 213,258 2.75%
============ =========
Ratio of average interest-earning assets
to average interest-bearing liabilities 1.08x
============
</TABLE>
_______________
(1) Nonaccruing loans are included in total loans, but are immaterial.
(2) Includes goodwill, accrued interest receivable, property and equipment,
cash, mortgage servicing rights, prepaid expenses and other assets.
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31, 1998
<S> <C> <C> <C>
Average Yield/
Balance Interest Rate
----------- --------- --------
(Dollars in thousands)
ASSETS
Interest-earning assets:
Loans receivable (1) $ 1,430,584 $ 120,281 8.41%
Mortgage-backed securities 1,431,105 87,596 6.12
U.S. Treasury securities 2,141 109 5.09
Securities purchased under agreements to resell
and federal funds sold 7,991 430 5.38
FHLB stock 38,036 2,251 5.92
Interest-earning deposits in other depository
institutions 3,133 147 4.69
------------ ---------- ------
Total interest-earning assets 2,912,990 210,814 7.24
---------- ------
Noninterest-earning assets (2) 94,857
------------
Total assets $3,007,847
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing deposits $ 1,371,078 $ 66,128 4.82%
Advances from the FHLB 713,197 39,553 5.55
Securities sold under agreements to repurchase
and federal funds purchased 579,711 32,723 5.64
Senior Notes payable 50,000 5,000 10.00
------------ ---------- ------
Total interest-bearing liabilities 2,713,986 143,404 5.28
---------- ------
Noninterest-bearing liabilities 153,663
------------
Total liabilities 2,867,649
Minority interest - preferred stock of Coastal
Banc ssb 28,750
Preferred stockholders' equity --
Common stockholders' equity 111,448
------------
Total liabilities and stockholders' equity $ 3,007,847
============
Net interest income; interest rate spread $ 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) Nonaccruing loans are included in total loans, but are immaterial.
(2) Includes goodwill, accrued interest receivable, property and equipment,
cash, mortgage servicing rights, prepaid expenses and other assets.
<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 (1) $ 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 (2) 81,400
------------
Total assets $ 2,905,540
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing 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
Minority interest - preferred stock of
Coastal Banc ssb 28,750
Preferred stockholders' equity --
Common 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) Nonaccruing loans are included in total loans, but are immaterial.
(2) Includes goodwill, accrued interest receivable, property and equipment,
cash, mortgage servicing rights, prepaid expenses and other assets.
<PAGE>
The following table analyzes net interest income in terms of changes in the
volume of interest-earning assets and interest-bearing liabilities and changes
in yields and rates. The table reflects the extent to which changes in
Coastal's interest income and interest expense are attributable to changes in
volume (change in volume multiplied by prior year rate) and changes in rate
(changes in rate multiplied by prior year volume). Changes attributable to the
combined impact of volume and rate have been allocated proportionately to
changes due to volume and changes due to rate.
<TABLE>
<CAPTION>
Year Ended December 31,
1999 vs 1998 1998 vs 1997
Increase (Decrease) Due To Increase (Decrease) Due To
Volume Rate Net Volume Rate Net
--------- -------- --------- --------- -------- ---------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME
Loans receivable $ 17,937 $(2,182) $ 15,755 $ 12,544 $ 775 $ 13,319
Mortgage-backed securities (19,416) (4,517) (23,933) (5,159) -- (5,159)
U.S. Treasury securities (38) 7 (31) -- 109 109
Securities purchased under
agreements to resell and federal
funds sold (134) (26) (160) 218 (39) 179
FHLB stock 762 (165) 597 968 (9) 959
Interest-earning deposits in
other depository institutions (62) (37) (99) 32 19 51
--------- -------- --------- --------- -------- ---------
Total (951) (6,920) (7,871) 8,603 855 9,458
--------- -------- --------- --------- -------- ---------
INTEREST EXPENSE
Interest-bearing deposits 5,484 (6,911) (1,427) 5,781 (2,565) 3,216
Securities sold under agreements to
repurchase and federal funds
purchased (25,988) (1,121) (27,109) (22,272) (194) (22,466)
Advances from the FHLB 12,788 (1,772) 11,016 19,113 (882) 18,231
Senior Notes payable (227) -- (227) -- -- --
--------- -------- --------- --------- -------- ---------
Total (7,943) (9,804) (17,747) 2,622 (3,641) (1,019)
--------- -------- --------- --------- -------- ---------
Net change in net interest income $ 6,992 $ 2,884 $ 9,876 $ 5,981 $ 4,496 $ 10,477
========= ======== ========= ========= ======== =========
</TABLE>
<PAGE>
NET INCOME
Coastal reported net income of $11.0 million for the year ended December
31, 1999, $16.7 million for the year ended December 31, 1998 and $11.6 million
for the year ended December 31, 1997, a decrease of $5.7 million, or 33.9% in
1999, and an increase of $5.1 million, or 44.2% in 1998, in each case in
comparison to the prior year. 1999 net income before the provision for loan
losses specific to the MCA loan (as described below) was $15.4 million compared
to 1998 net income before one-time charges and credits of $14.1 million. For
the year ended December 31, 1999, net income was negatively impacted by the
provision for loan losses specific to the MCA loan (as described below) of $4.4
million (net of tax effect). During 1999, based on updated information
received, management made the decision to provide for and charge-off the
remaining balance of the $10.0 million participation in the warehouse loan to
MCA Financial Corp., of Southfield, Michigan, and certain of its affiliates
(collectively "MCA"). During January 1999, this loan was placed on nonaccrual
effective December 31, 1998, due to the fact that MCA was placed in receivership
and subsequently filed for bankruptcy. Throughout 1999, Coastal worked with the
lead lender and the bankruptcy trustee to determine the value of, and sell, the
underlying collateral. As of December 31, 1999, Coastal had received only $1.1
million in proceeds from the MCA loan. In addition, on January 12, 2000,
Coastal filed a lawsuit against the lead lender in the participation seeking to
recover losses incurred as a result of actions or omissions of the lead lender
related to the loan to MCA. Due to the uncertainty of the value of the
remaining collateral, its marketability and the timing of recovery, if any, from
the lawsuit, Coastal charged-off the remaining $8.9 million balance of this loan
resulting in the additional provision for loan losses, net of tax, of $4.4
million during the year. Coastal will continue to work with the lead lender and
the bankruptcy trustee to recover any funds, if possible, from the collateral or
MCA.
Aside from the impact of the provision for loan losses specific to the MCA
loan on net income, throughout 1999, Coastal experienced net interest margin
growth, in addition to record growth of fee income, while general and
administrative expenses were below expectations. Comparing the year ended
December 31, 1999 to the same period in 1998 (before the provision for loan
losses specific to the MCA loan in 1999 and one-time charges and credits in
1998), net interest income increased $9.9 million and noninterest income
increased $2.8 million. These increases were offset by a $1.7 million increase
in the provision for loan losses, a $9.4 million increase in noninterest expense
and an increase of $221,000 in the provision for Federal income taxes. The
increase in net interest income was primarily due to an increase in net interest
margin to 2.75% in 1999 from 2.31% in 1998. The increase in noninterest income
was due primarily to a $2.1 million increase in loan fees and service charges on
deposit accounts and an increase in other noninterest income of $616,000. The
increase in the provision for loan losses was due to changes in the composition
of and growth in Coastal's loan portfolio. The increase in noninterest expense
was primarily due to staffing increases throughout 1998 related to the expansion
of the loan product base and the continuing development of commercial business
lending programs, in addition to a full year in 1999 of staffing, occupancy and
other expenses related to the operation of the 12 branches acquired from Pacific
Southwest Bank in August of 1998 (the "1998 Branch Acquisition"). The increase
in the provision for Federal income taxes (before the effect of the provision
for loan losses specific to the MCA loan in 1999 and the one-time charges and
credits in 1998) was due primarily to increased income before Federal income
taxes and minority interest.
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
operation of the 12 branches acquired in August of 1998.
The increase in net income from 1997 to 1998 was also affected by one-time
charges and credits 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 ("FRF"). The resolution of the issue resulted in
Coastal recording a $3.7 million, or 48 cents per diluted share, one-time tax
benefit. 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. This tax benefit is estimated to continue through the end of 2002. 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 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.
NET INTEREST INCOME
Net interest income amounted to $77.3 million in 1999, a $9.9 million or
14.7% increase over 1998. The increase in net interest income was due to the
increase in net interest margin from 2.31% in 1998 to 2.75% in 1999, an increase
in average net interest-earning assets of $14.3 million and an increase in
interest rate spread, defined to exclude noninterest-bearing deposits, from
1.96% in 1998 to 2.39% in 1999. Management also calculates an alternative net
interest spread which includes noninterest-bearing deposits. Under this
calculation, the net interest spreads for 1999 and 1998 were 2.65% and 2.17%,
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 margin and
spread was primarily due to an 0.44% decrease in the average rate paid on
interest-bearing liabilities. The decrease in the average rate paid on
interest-bearing liabilities was due primarily to the lower cost deposits
acquired in the 1998 Branch Acquisition, new pricing strategies for certificates
of deposit that reduced Coastal's cost of retail deposits and lower wholesale
funding costs.
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 a 0.11% increase in the average yield on interest-earning assets and a
decrease in the average rate paid on interest-bearing liabilities of 0.18%. The
decrease in the average rate paid on interest-bearing liabilities was due
primarily to the overall decrease in wholesale funding costs.
Total interest income amounted to $202.9 million during 1999, a $7.9
million, or 3.7%, decrease from 1998. A $15.8 million, or 13.1%, increase in
interest earned on loans receivable during 1999 resulted from a $217.0 million,
or 15.2%, increase in the average balance of loans receivable offset by a slight
decrease of 0.15% in the yield earned compared to 1998. A $23.9 million, or
27.3%, decrease in interest earned on mortgage-backed securities during 1999 was
due to a $331.7 million, or 23.2%, decrease in the average balance of
mortgage-backed securities due primarily to principal payments received. In
addition, interest earned on FHLB stock, federal funds sold and other
interest-earning assets increased by $307,000, or 10.5%, due primarily to the
increase in the average balance of such assets.
Total interest income amounted to $210.8 million during 1998, a $9.5
million, or 4.7%, 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
0.06% 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 1998 Branch Acquisition, of $23.2
million during 1998.
Total interest expense amounted to $125.7 million in 1999, a $17.7 million,
or 12.4%, decrease from 1998. Interest expense on deposits decreased $1.4
million, or 2.2%, due primarily to the decrease in the average rate paid of
0.48%. Interest expense on advances from the FHLB increased $11.0 million, or
27.9%, due to the increase in the average balance of advances from the FHLB of
$238.8 million, or 33.5%, offset by a 0.24% decrease in the average rates paid.
Interest expense on other borrowed money decreased $27.1 million, or 82.8%, due
to the $476.5 million, or 82.2%, decrease in the average balance of securities
sold under agreements to repurchase and federal funds purchased and a 0.20%
decrease in the interest rates paid. Interest expense on Senior Notes payable
decreased $227,000 due to a decrease in the average balance of $2.3 million.
Total interest expense amounted to $143.4 million in 1998, a $1.0 million,
or 0.7%, decrease from 1997. Interest expense on deposits increased $3.2
million, or 5.1%, due to the $117.9 million, or 9.4%, increase in the average
balance of deposits offset by a decrease in the average rate paid of 0.20%.
Interest expense on advances from the FHLB increased $18.2 million, or 85.5%,
due to the increase in the average balance of advances from the FHLB of $344.3
million or 93.3%, offset by a 0.23% 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 the average balance of securities
sold under agreements to repurchase and federal funds purchased and a 0.02%
decrease in the interest rates paid.
PROVISION FOR LOAN LOSSES
In 1999, management established a provision for loan losses of $10.6
million, $6.8 million of which was specific to the MCA loan as discussed
earlier. For the years ended December 31, 1998 and 1997, the provision for loan
losses was $3.1 million and $1.8 million, 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 existing
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. As discussed earlier, during the
year ended December 31, 1999, $6.8 million of the increase in the provision for
loan losses was specific to the MCA loan. The remainder of the increase is due
to the charge-off of $990,000 on another warehouse borrower due to bankruptcy,
as well as other changes in the composition of and growth in Coastal's loan
portfolio, including the commercial type loans acquired in the 1998 Branch
Acquisition. 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.
Coastal's asset quality ratios for the years ended December 31, 1999, 1998
and 1997 are as follows: nonperforming loans as a percentage of total loans
receivable were 1.0%, 1.6% and 1.4% at December 31, 1999, 1998 and 1997,
respectively, the allowance for loan losses as a percentage of nonperforming
loans was 61.3%, 46.3% and 41.9% at December 31, 1999, 1998 and 1997,
respectively, and the allowance for loan losses as a percentage of total loans
receivable was 0.6%, 0.7% and 0.6% at December 31, 1999, 1998 and 1997,
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 1998 Branch 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 the
allowance for loan losses at December 31, 1999 is adequate, considering the
changing composition of the loans receivable portfolio, the existing
nonperforming assets, 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 amounted to $10.4 million during 1999, an increase
of $2.8 million, or 36.8%, over 1998 (excluding the writedown of purchased
mortgage loan premium in 1998). The increase in noninterest income is primarily
due to an increase of $2.1 million in loan fees and service charges on deposit
accounts and a $616,000 increase in other noninterest income. The increase in
loan fees and service charges on deposit accounts consisted of a $2.5 million
increase in the service charges on deposit accounts due to the increase in
transaction type deposit accounts, including those acquired in the 1998 Branch
Acquisition, offset somewhat by a $405,000 decrease in loan fees.
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 1998 Branch 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, Coastal recorded
a writedown of purchased mortgage loan premium of $709,000 during 1998, as
discussed previously.
NONINTEREST EXPENSE
Total noninterest expense amounted to $57.8 million during 1999, an
increase of $9.4 million, or 19.5%, over 1998. Compensation, payroll taxes and
other benefits as well as office occupancy increased $5.7 million and $2.1
million, respectively, primarily due to the overall staffing increases related
to the expansion of the loan product base and the continuing development of the
commercial business lending programs, in addition to the staffing and occupancy
expenses related to the operation of the 12 branches acquired in the 1998 Branch
Acquisition. In addition, the amortization of goodwill increased $767,000 and
data processing expenses increased $721,000 primarily due to the effect of the
branches added in the 1998 Branch Acquisition. Other changes included a
$878,000 increase in other operating expenses, a $436,000 decrease in real
estate owned expenses and a $304,000 decrease in insurance premiums (which
includes deposit insurance premiums).
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 1998 Branch 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 12 branches
in the 1998 Branch Acquisition. In addition, data processing expenses and the
amortization of goodwill increased $450,000 and $444,000, respectively,
primarily due to the 1998 Branch 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 1998 Branch Acquisition.
PROVISION FOR FEDERAL INCOME TAXES
Coastal generated no regular Federal taxable income in 1999, 1998 or 1997
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 FDIC 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 through the end of 2002. In addition, pursuant to the tax benefit
agreement with the FDIC, Coastal receives a tax benefit for the dividends on the
Bancorp Preferred Stock issued in 1999. The ongoing quarterly tax benefit will
be approximately $219,000, or 3 cents per diluted share, and is also expected to
continue through the end of 2002.
The provisions for Federal income taxes were $5.7 million in 1999, $7.2
million (excluding the one-time effect of the $3.7 million reversal of accrued
income taxes) in 1998 and $7.8 million in 1997. 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 Officer, Chief Lending Officer, the
Senior Vice President of Retail Banking and the Treasury Manager, in addition to
members of the Bank's Portfolio Control Center. The Subcommittee meets monthly
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. 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 income,
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. 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 yield curve on 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, 1999 interest rate sensitivity position, management
believes that at December 31, 1999 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, 1999 and 1998. The interest
rate scenarios presented in the table include interest rates at December 31,
1999 and 1998 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) 1999 1998 1999 1998
------------------- --------------------- ----------------
<S> <C> <C> <C> <C>
+200 (13.42)% (8.56)% (24.22)% (6.41)%
+100 (6.93) (4.05) (10.79) (0.66)
0 -- -- -- --
-100 5.78 4.77 4.32 (2.09)
-200 12.04 9.10 1.53 (5.32)
</TABLE>
There are limitations inherent in any methodology used to estimate the
exposure to changes in interest rates. It is not possible to fully model the
market risk in instruments with leverage, option, or prepayment risks.
Therefore, this analysis is not intended to be a forecast of the actual effect
of a change in 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.
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, mortgage-related 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. There
is also a risk of an inverted yield curve. In this situation, assuming the
rates under one year would be inverted, Coastal's net interest income would be
negatively affected. As assets, primarily the one-year CMT securities and whole
loans, reprice at the lower one-year rate, the one-month borrowings would
reprice at the higher one-month LIBOR rate causing a decline in net interest
income. The magnitude of this risk depends on which part of the curve inverts
and the duration of the inverted curve.
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
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, 1999. The principal balance of adjustable rate assets is included in the
period in which they are first scheduled to adjust or could be adjusted rather
than in the period in which they mature. Coastal's one-year cumulative gap
position at December 31, 1999 was negative $230.6 million or 7.82% of total
assets. This is a one-day position that changes frequently and is not
indicative of Coastal's position at any other time. Other material assumptions
are set forth in the footnotes to the table.
<PAGE>
<TABLE>
<CAPTION>
As of December 31, 1999
<S> <C> <C> <C>
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 $ 1,049 $ 3,682 $ 21,052
First lien mortgage-single family adjustable
rate 84,073 327,011 58,409
First lien mortgage-multifamily fixed rate -- 1,778 7,772
First lien mortgage-multifamily variable rate 145,866 -- --
Construction and acquisition and
development, net of loans in process 182,206 3,422 4,901
Commercial real estate 222,262 9,159 14,627
Commercial 125,366 7,623 9,752
Consumer and other 8,734 10,222 15,103
Mortgage-backed securities held-to-maturity(1)(2) 809,531 16,129 --
Securities available-for-sale (1)(2) 75,312 24,353 --
U.S. Treasury securities held-to-maturity -- 299 --
Other interest-earning assets (3) 57,379 -- --
------------ ------------ -------------
Total interest-sensitive assets 1,711,778 403,678 131,616
------------ ------------ -------------
Noninterest-sensitive assets
Total assets
INTEREST-SENSITIVE LIABILITIES:
Interest-bearing deposits (4):
Interest-bearing checking accounts $ 65,229 $ -- $ --
Savings accounts 46,011 -- --
Money market demand accounts 274,763 -- --
Certificate accounts (including premium) 264,900 704,072 99,780
Advances from the FHLB 884,821 142,876 38,242
Senior Notes payable -- -- 46,900
------------ ------------ -------------
Total interest-sensitive liabilities 1,535,724 846,948 184,922
------------ ------------ -------------
Noninterest-sensitive liabilities
Total liabilities
Minority interest-preferred stock of
Coastal Banc ssb
Stockholders' equity
Total liabilities and stockholders' equity
Gap during the period $ 176,054 $ (443,270) $ (53,306)
Effect of interest rate swaps and caps(5) 43,612 (7,040) --
------------ ------------ -------------
Cumulative gap after effect of interest rate swaps
and caps $ 219,666 $ (230,644) $ (283,950)
=========== ============ ==============
Interest-sensitive assets as a % of interest-sensitive
liabilities (cumulative) 111.46% 88.79% 87.52%
Interest-sensitive assets as a % of total
assets (cumulative) 58.07 71.76 76.22
Ratio of gap after effect of interest rate swaps and caps
to total assets 7.45 (15.28) (1.81)
Ratio of cumulative gap after effect of interest rate
swaps and caps to total assets 7.45 (7.82) (9.63)
As of December 31, 1999
<S> <C> <C> <C> <C> <C>
More than More than More than
three years to five years to ten years to Over
five years ten years twenty years twenty years Totals
----------------- -------------- ------------- ------------ -----------
INTEREST-SENSITIVE ASSETS
Loans, net (1)(2):
First lien mortgage-single family fixed rate $ 36,268 $ 48,818 $ 98,867 $ 138,985 $ 348,721
First lien mortgage-single family adjustable
rate 3,264 196 12,564 -- 485,517
First lien mortgage-multifamily fixed rate 5,124 1,058 388 -- 16,120
First lien mortgage-multifamily variable rate -- -- -- -- 145,866
Construction and acquisition and
development, net of loans in process 820 1,061 1,404 -- 193,814
Commercial real estate 31,401 11,419 22,285 -- 311,153
Commercial 17,256 1,193 -- -- 161,190
Consumer and other 29,977 5,454 3,210 -- 72,700
Mortgage-backed securities held-to-maturity(1)(2) -- 27 11,229 80,296 917,212
Securities available-for-sale (1)(2) -- -- -- -- 99,665
U.S. Treasury securities held-to-maturity -- -- -- -- 299
Other interest-earning assets (3) -- -- -- -- 57,379
----------------- -------------- ------------- ------------ -----------
Total interest-sensitive assets 124,110 69,226 149,947 219,281 2,809,636
----------------- -------------- ------------- ------------
Noninterest-sensitive assets 138,316
-----------
Total assets $2,947,952
==========
INTEREST-SENSITIVE LIABILITIES:
Interest-bearing deposits (4):
Interest-bearing checking accounts $ -- $ -- $ -- $ -- $ 65,229
Savings accounts -- -- -- -- 46,011
Money market demand accounts -- -- -- -- 274,763
Certificate accounts (including premium) 15,689 189 29 162 1,084,821
Advances from the FHLB 6,575 10,314 14,103 -- 1,096,931
Senior Notes payable -- -- -- -- 46,900
----------------- -------------- ------------- ------------ -----------
Total interest-sensitive liabilities 22,264 10,503 14,132 162 2,614,655
----------------- -------------- ------------- ------------
Noninterest-sensitive liabilities 171,091
-----------
Total liabilities 2,785,746
Minority interest-preferred stock of
Coastal Banc ssb 28,750
Stockholders' equity 133,456
-----------
Total liabilities and stockholders' equity $2,947,952
==========
Gap during the period $ 101,846 $ 58,723 $ 135,815 $ 219,119
Effect of interest rate swaps and caps(5) (23,132) (13,440) -- --
----------------- -------------- ------------- ------------
Cumulative gap after effect of interest
rate swaps and caps $ (205,236) $(159,953) $ (24,138) $ 194,981
================ =============== ============== ==============
Interest-sensitive assets as a % of
interest-sensitive liabilities (cumulative) 91.56% 93.85% 99.08% 107.46%
Interest-sensitive assets as a % of total
assets (cumulative) 80.43 82.78 87.87 95.31
Ratio of gap after effect of interest rate
swaps and caps to total assets 2.67 1.54 4.61 7.43
Ratio of cumulative gap after effect of
interest rate swaps and caps to total assets (6.96) (5.43) (0.82) 6.61
</TABLE>
_______________
<PAGE>
Footnotes:
(1) Fixed-rate mortgage loans, consumer loans and fixed-rate 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 FHLB stock, federal funds sold and other interest-earning
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."
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, 1999, Coastal was a party to interest rate swap agreements
which have an aggregate notional amount of $43.6 million and expire from 2000 to
2005. At December 31, 1999, the fair value of the interest rate swap agreements
was estimated to be $563,000. With respect to such agreements, Coastal makes
weighted-average fixed interest payments ranging from 6.00% to 6.50%, and
receives payments based on the floating one- or 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, 1999, 1998
and 1997 was to increase interest expense by approximately $483,000, $377,000
and $431,000, 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, 1999,
Coastal had interest rate cap agreements, which expire from 2000 to 2003,
covering an aggregate notional amount of $163.5 million, of which $74.5 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 9.5%. The purchase price or premium of the interest rate cap agreements
paid by Coastal is capitalized and included in prepaid expenses and other assets
and is amortized over the life of the agreements using the straight-line method.
The unamortized portion of the purchase price was approximately $90,000 at
December 31, 1999 with an estimated fair value of $750,000. For the years ended
December 31, 1999, 1998 and 1997, the interest rate caps resulted in an overall
decrease in interest income of approximately $25,000, $53,000 and $218,000,
respectively. See Note 15 of the notes to Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
Coastal's assets approximated $2.9 billion at December 31, 1999 and $3.0 billion
at December 31, 1998. Preferred stockholders' equity amounted to $27.5 million
and common stockholders' equity was $106.0 million at December 31, 1999, after
treasury stock purchased of $20.5 million. The regulatory capital of Coastal's
subsidiary, Coastal Banc ssb, exceeded all three of the Bank's regulatory
capital requirements at December 31, 1999. At December 31, 1999, the Bank's
core capital amounted to 5.76% of adjusted total assets, compared to the
requirement of 4.0%, its Tier 1 risk-based capital amounted to 9.68% of
risk-adjusted assets as compared to the requirement of 4.0% and its total
risk-based capital amounted to 10.29% of risk-adjusted assets, compared to a
requirement of 8.0%.
Coastal's primary sources of funds consist of 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. 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, 1999, Coastal had
binding commitments to originate or purchase loans totaling approximately $106.6
million and had $108.6 million of undisbursed loans in process. In addition, at
December 31, 1999, Coastal had commitments under lines of credit to originate
primarily construction and other loans of approximately $146.6 million and
letters of credit outstanding of $7.2 million. Scheduled maturities of
certificates of deposit during the twelve months following December 31, 1999
totaled $968.8 million. Management believes that Coastal has adequate resources
to fund all its commitments.
YEAR 2000
We have not experienced any significant disruptions to our financial or
operating activities caused by failure of our computerized systems resulting
from Year 2000 issues. Management does not expect Year 2000 issues to have a
material adverse effect on Coastal's operations or financial results in 2000.
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.
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.
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 herein.
<PAGE>
<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
PAUL W. HOBBY
Chairman and Chief Executive officer of Hobby Media Services, Inc., a Houston
based corporation which invests in traditional and new media services, 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
Senior Executive Vice President, Chief Financial Officer, Chief Operations
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, Senior Executive Vice President, Chief Financial Officer, Chief
Operations 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
GARY R. GARRETT
Senior Executive Vice President - Chief Lending Officer
CATHERINE N. WYLIE
Senior Executive Vice President - Chief Financial Officer and Chief Operations
Officer
JOHN D. BIRD
Executive Vice President - Chief Administrative Officer (retired as of January
31, 2000)
DAVID R. GRAHAM
Executive Vice President - Real Estate Lending Group
NANCY S. VADASZ
Executive Vice President - Market and Product Strategies
<PAGE>
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 1999, 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 seven 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, 1999, Coastal had total assets of approximately $2.9
billion and total deposits of approximately $1.6 billion with 50 branch offices
in metropolitan Houston, Austin, Corpus Christi, the Rio Grande Valley and small
cities in the southeast quadrant of Texas.
<PAGE>
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, 1999 and
1998 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, 1999. 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, 1999 and 1998 and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1999 in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
- --------------
January 18, 2000
Houston, Texas
<PAGE>
<TABLE>
<CAPTION>
COASTAL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1999 AND 1998
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS 1999 1998
- ----------------------------------------------------------------- ---------- ----------
<S> <C> <C>
Cash and cash equivalents $ 48,098 $ 45,453
Loans receivable (Notes 6 and 11) 1,735,081 1,538,149
Mortgage-backed securities held-to-maturity (market value of
$899,934 in 1999 and $1,145,369 in 1998)
(Notes 5, 11, 12, 14 and 15) 917,212 1,154,116
Mortgage-backed securities available-for-sale, at market value
(Notes 5, 11, 12, 14 and 15) 99,665 96,609
U.S. Treasury security held-to-maturity 299 --
U.S. Treasury security available-for-sale, at market value -- 2,016
Accrued interest receivable (Note 7) 16,150 15,518
Property and equipment (net of accumulated depreciation and
amortization of $16,251 in 1999 and $11,925 in 1998) 30,708 33,116
Stock in the Federal Home Loan Bank of Dallas ("FHLB") 56,753 49,819
Goodwill (net of accumulated amortization of $16,605 in 1999 and
$13,554 in 1998) 27,636 30,687
Mortgage servicing rights (Note 8) 3,035 4,049
Prepaid expenses and other assets (Notes 9, 15 and 17) 13,315 12,629
---------- ----------
$2,947,952 $2,982,161
========== ==========
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
---------------------------------------
<S> <C> <C>
Liabilities:
Deposits (Note 10) $1,624,289 $1,705,004
Advances from the FHLB (Note 11) 1,096,931 966,720
Securities sold under agreements to repurchase (Note 12) -- 100,000
Senior Notes payable (Note 13) 46,900 50,000
Advances from borrowers for taxes and insurance 3,852 3,340
Other liabilities and accrued expenses 13,774 15,583
----------- -----------
Total liabilities 2,785,746 2,840,647
----------- -----------
Minority interest - 9.0% noncumulative preferred stock of
Coastal Banc ssb (Note 20) 28,750 28,750
Commitments and contingencies (Notes 6, 15, 18 and 23)
Stockholders' equity (Notes 5, 18, 21 and 22):
Preferred Stock, no par value; authorized shares 5,000,000;
9.12% Cumulative, Series A, 1,100,000 shares issued and
outstanding in 1999 27,500 --
Common Stock, $.01 par value; authorized shares 30,000,000;
7,616,227 and 7,568,255 shares issued in 1999 and 1998 76 76
Additional paid-in capital 32,683 33,696
Retained earnings 95,508 88,144
Accumulated other comprehensive loss -
net unrealized loss on securities available-for-sale (1,848) (1,374)
Treasury stock at cost (1,283,679 and 499,600 shares in 1999
and 1998) (20,463) (7,778)
----------- -----------
Total stockholders' equity 133,456 112,764
----------- -----------
$2,947,952 $2,982,161
=========== ===========
</TABLE>
See accompanying notes to Consolidated Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
COASTAL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
1999 1998 1997
-------- --------- --------
Interest income:
Loans receivable $136,036 $120,281 $106,962
Mortgage-backed securities 63,663 87,596 92,755
FHLB stock, federal funds sold and other interest-earning assets 3,244 2,937 1,639
-------- --------- --------
202,943 210,814 201,356
-------- --------- --------
Interest expense:
Deposits 64,701 66,128 62,912
Advances from the FHLB:
Short-term 15,560 16,042 8,562
Long-term 35,009 23,511 12,760
Other borrowed money 5,614 32,723 55,189
Senior Notes payable 4,773 5,000 5,000
-------- --------- --------
125,657 143,404 144,423
-------- --------- --------
Net interest income 77,286 67,410 56,933
Provision for loan losses (Note 6) 10,575 3,100 1,800
-------- --------- --------
Net interest income after provision for loan losses 66,711 64,310 55,133
-------- --------- --------
Noninterest income:
Loan fees and service charges on deposit accounts 7,890 5,752 4,018
Loan servicing income, net 680 642 1,406
Gain on sales of mortgage-backed securities available-for-sale, net -- 1 237
Writedown of purchased mortgage loan premium -- (709) --
Other 1,802 1,186 723
-------- --------- --------
10,372 6,872 6,384
-------- --------- --------
Noninterest expense:
Compensation, payroll taxes and other benefits 28,771 23,072 18,754
Office occupancy 11,422 9,320 7,312
Data processing 3,416 2,695 2,245
Amortization of goodwill 3,051 2,284 1,840
Insurance premiums 1,144 1,448 1,091
Other 10,006 9,564 8,302
-------- --------- --------
57,810 48,383 39,544
-------- --------- --------
Income before provision for Federal income taxes and minority
interest 19,273 22,799 21,973
Provision for Federal income taxes (Note 17) 5,659 3,543 7,822
-------- --------- --------
Income before minority interest 13,614 19,256 14,151
Minority interest - preferred stock dividends of Coastal Banc ssb
(Note 20) 2,588 2,588 2,588
-------- --------- --------
Net income $ 11,026 $ 16,668 $ 11,563
======== ========= ========
Net income available to common stockholders $ 9,442 $ 16,668 $ 11,563
======== ========= ========
Basic earnings per share (Note 22) $ 1.45 $ 2.24 $ 1.55
======== ========= ========
Diluted earnings per share (Note 22) $ 1.42 $ 2.18 $ 1.50
======== ========= ========
</TABLE>
See accompanying notes to Consolidated Financial Statements.
<PAGE>
COASTAL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1999 1998 1997
-------- ------- -------
Net income $11,026 $16,668 $11,563
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on securities available-for-sale
arising during period (Note 5) (474) 900 829
-------- ------- -------
Comprehensive income $10,552 $17,568 $12,392
======== ======= =======
</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, 1999, 1998 AND 1997
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Accumulated
Additional other
Preferred Common paid-in Retained comprehensive Treasury
Stock Stock capital earnings loss stock Total
---------- ------- ------------ ---------- --------------- ---------- ---------
Balance - December 31, 1996 $ -- $ 76 $ 32,578 $ 64,597 $ (3,103) $ -- $ 94,148
Dividends on Common Stock -- -- -- (2,292) -- -- (2,292)
Exercise of stock options
(Note 18) -- -- 582 -- -- -- 582
Change in net unrealized loss
on securities available-for-sale
(Note 5) -- -- -- -- 829 -- 829
Net income for 1997 -- -- -- 11,563 -- -- 11,563
---------- ------- ------------ ---------- --------------- ---------- ---------
Balance - December 31, 1997 -- 76 33,160 73,868 (2,274) -- 104,830
Dividends on Common Stock -- -- -- (2,392) -- -- (2,392)
Exercise of stock options
(Note 18) -- -- 536 -- -- -- 536
Purchase of treasury stock at cost -- -- -- -- -- (7,778) (7,778)
Change in net unrealized loss
on securities available-for-sale
(Note 5) -- -- -- -- 900 -- 900
Net income for 1998 -- -- -- 16,668 -- -- 16,668
---------- ------- ------------ ---------- --------------- ---------- ---------
Balance - December 31, 1998 -- 76 33,696 88,144 (1,374) (7,778) 112,764
Dividends on Preferred Stock -- -- -- (1,584) -- -- (1,584)
Dividends on Common Stock -- -- -- (2,078) -- -- (2,078)
Issuance of Preferred Stock
(net) (Note 21) 27,500 -- (1,558) -- -- -- 25,942
Exercise of stock options
(Note 18) -- -- 545 -- -- -- 545
Purchase of treasury stock at cost -- -- -- -- -- (12,685) (12,685)
Change in net unrealized loss on
securities available-for-sale
(Note 5) -- -- -- -- (474) -- (474)
Net income for 1999 -- -- -- 11,026 -- -- 11,026
---------- ------- ------------ ---------- --------------- ---------- ---------
Balance - December 31, 1999 $ 27,500 $ 76 $ 32,683 $ 95,508 $ (1,848) $ (20,463) $133,456
========== ======= ============ ========== =============== ========== =========
</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, 1999, 1998 AND 1997
(IN THOUSANDS)
<S> <C> <C> <C>
1999 1998 1997
---------- ---------- ----------
Cash flows from operating activities:
Net income $ 11,026 $ 16,668 $ 11,563
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 9,916 9,099 7,485
Net premium amortization 1,435 3,101 3,025
Provision for loan losses 10,575 3,100 1,800
Amortization of goodwill 3,051 2,284 1,840
Originations and purchases of mortgage loans held for sale (8,543) (26,536) (8,063)
Sales of mortgage loans held for sale 8,190 26,287 8,361
Gain on sales of mortgage-backed securities
available-for-sale -- (1) (237)
Decrease (increase) in:
Accrued interest receivable (632) 1,863 (123)
Other, net (1,661) 104 9,668
Stock dividends from the FHLB (2,847) (2,247) (1,287)
---------- ---------- ----------
Net cash provided by operating activities 30,510 33,722 34,032
---------- ---------- ----------
Cash flows from investing activities:
Purchases of mortgage-backed securities held-to-maturity (3,080) (8,203) (56,136)
Purchase of mortgage-backed securities available-for-sale (26,489) -- --
Purchase of U.S. Treasury security held-to-maturity (299) -- --
Principal repayments on mortgage-backed securities
held-to-maturity 240,417 199,052 55,549
Principal repayments on mortgage-backed securities
available-for-sale 22,711 26,206 627
Proceeds from maturity of U.S. Treasury securities
available-for-sale 2,000 25,000 11
Proceeds from sales of mortgage-backed securities
available-for-sale -- 48,551 11,545
Purchases of loans receivable (387,204) (329,058) (135,202)
Net decrease in loans receivable 173,582 218,357 94,670
Purchases of property and equipment, net (2,674) (4,401) (9,825)
Purchase of FHLB stock (5,779) (19,771) (9,543)
Proceeds from sales of FHLB stock 1,692 -- 9,000
Capitalization of mortgage servicing rights -- -- (116)
Cash and cash equivalents received in business combination
transactions -- 120,085 52,093
---------- ---------- ----------
Net cash provided by investing activities 14,877 275,818 12,673
---------- ---------- ----------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
COASTAL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(IN THOUSANDS)
<S> <C> <C> <C>
1999 1998 1997
------------ ------------ -------------
Cash flows from financing activities:
Net decrease (increase) in deposits $ (80,505) $ (25,399) $ 9,539
Advances from the FHLB 8,079,744 4,297,136 3,560,603
Principal payments on advances from the FHLB (7,949,533) (3,870,891) (3,429,848)
Proceeds from securities sold under agreements to repurchase
and federal funds purchased 319,340 3,958,111 9,834,639
Repayments of securities sold under agreements to repurchase
and federal funds purchased (419,340) (4,649,871) (10,009,866)
Proceeds from issuance of Preferred Stock, net 25,942 -- --
Exercise of stock options for purchase of Common Stock 545 536 582
Purchase of treasury stock (12,685) (7,778) --
Dividends paid (3,662) (2,392) (2,292)
Repurchase of Senior Notes payable (3,100) -- --
Net increase (decrease) in advances from borrowers for taxes
and insurance 512 (635) (701)
------------ ------------ -------------
Net cash used in financing activities (42,742) (301,183) (37,344)
------------ ------------ -------------
Net increase in cash and cash equivalents 2,645 8,357 9,361
Cash and cash equivalents at beginning of year 45,453 37,096 27,735
------------ ------------ -------------
Cash and cash equivalents at end of year $ 48,098 $ 45,453 $ 37,096
============ ============ =============
Supplemental schedule of cash flows:
Interest paid $ 126,069 $ 140,620 $ 142,532
Income taxes paid 7,812 6,980 2,466
============ ============ =============
Supplemental schedule of noncash investing and financing activities:
Foreclosures of loans receivable $ 4,398 $ 4,178 $ 4,226
============ ============ =============
</TABLE>
See accompanying notes to Consolidated Financial Statements.
<PAGE>
COASTAL BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
(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, 1999, Coastal Banc ssb operated 50 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 consol-idated financial statements.
<PAGE>
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. All common stock share data has
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 on purchased loans. Interest on loans receivable is primarily
computed on the outstanding principal balance at appropriate rates of interest.
The net premium on 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 probable 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, 1999 or
1998.
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
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 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. and the Bank. 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.
<PAGE>
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
Basic earnings per share ("EPS") is calculated by dividing net income available
to common stockholders, by the weighted average number of common shares
outstanding during the period. 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 ("FASB") Statement No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133, an Amendment of FASB Statement No.
133" ("Statement 137") was issued in June 1999. Statement 137 defers the
effective date of FASB Statement 133, "Accounting for Derivative Instruments and
Hedging Activities" ("Statement 133") for one year. Statement 133, as amended,
is now effective for all fiscal quarters of all fiscal years beginning after
June 15, 2000. Statement 133 generally requires that derivatives embedded in
hybrid instruments be separated from their host contracts and be accounted for
separately as derivative contracts. For instruments existing at the date of
adoption, Statement 133 provides an entity the option of not applying this
provision to such hybrid instruments entered into before January 1, 1998 and not
substantially modified thereafter. Consistent with the deferral of the
effective date for one year, Statement 137 provides an entity the option of not
applying this provision to hybrid instruments entered into before January 1,
1998 or 1999 and not substantially modified thereafter. Upon implementation of
Statement 133, hedging relationships may be redesignated and securities
held-to-maturity may be transferred to available-for-sale or trading. Coastal
is evaluating the impact, if any, Statement 133 may have on its future
consolidated financial statements.
(3) ACQUISITION TRANSACTIONS
1998 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. 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
========
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
=======
Deposits $54,563
Other liabilities and accrued expenses 184
-------
Total liabilities $54,747
=======
</TABLE>
The acquisitions described above have been accounted for as purchases and,
accordingly, all assets and liabilities acquired were adjusted to and recorded
at estimated fair values as of the acquisition dates.
The transactions described above are not material to the consolidated financial
position or results of operations of Coastal; therefore pro forma information is
not 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, 1999, 1998
and 1997 is as follows (dollars in thousands):
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1999 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 18,500 28,500 10,500
Average balance outstanding 5,353 7,320 2,051
Average interest rate 5.04% 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.
<PAGE>
(5) MORTGAGE-BACKED SECURITIES
Mortgage-backed securities at December 31, 1999 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 $ 657,305 $ 2,560 $ (13,224) $646,641
REMICS - Non-agency 180,163 41 (4,094) 176,110
FNMA certificates 56,068 9 (2,306) 53,771
GNMA certificates 16,129 -- (89) 16,040
Non-agency securities 7,547 -- (175) 7,372
---------- ----------- ------------ --------
$ 917,212 $ 2,610 $ (19,888) $899,934
========== =========== ============ ========
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Available-for-sale:
REMICS - Agency $ 77,343 $-- $(2,400) $74,943
REMICS - Non-agency 372 -- (4) 368
GNMA certificates 24,792 -- (438) 24,354
-------- ---------- -------- -------
$102,507 $-- $(2,842) $99,665
======== ========== ======== =======
</TABLE>
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>
Proceeds from sales of mortgage-backed securities available-for-sale during 1998
and 1997 were $48.6 million and $11.5 million, respectively. Gross gains of
$26,000 and $237,000 were realized on these sales in 1998 and 1997 and gross
losses of approximately $25,000 were realized on these sales in 1998. There
were no sales of mortgage-backed securities available-for-sale during 1999.
A portion of Coastal's mortgage-backed securities portfolio is pledged as
collateral to secure advances from the FHLB (Note 11).
<PAGE>
(6) LOANS RECEIVABLE
Loans receivable at December 31, 1999 and 1998 are as follows (in
thousands):
<TABLE>
<CAPTION>
<S> <C> <C>
1999 1998
----------- -----------
Real estate mortgage loans:
First lien mortgage, primarily residential $ 836,005 $ 690,510
Multifamily 163,059 119,447
Residential construction 136,675 115,714
Acquisition and development 103,357 75,932
Commercial 314,292 257,723
Commercial construction 65,934 40,344
Commercial loans, secured by residential mortgage
loans held for sale 60,372 173,124
Commercial loans, secured by mortgage servicing rights -- 3,867
Commercial, financial and industrial 100,195 92,218
Loans secured by savings deposits 13,094 13,164
Consumer and other loans 63,383 66,989
----------- -----------
1,856,366 1,649,032
Loans in process (108,561) (99,790)
Allowance for loan losses (10,493) (11,358)
Unearned interest and loan fees (2,947) (3,493)
Premium on purchased loans, net 716 3,758
----------- -----------
$1,735,081 $1,538,149
=========== ===========
Weighted average yield 8.67% 8.55%
=========== ===========
</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, 1999, Coastal had outstanding commitments to originate or
purchase approximately $106.6 million of first lien mortgage and other loans and
had commitments under lines of credit to originate primarily construction and
other loans of approximately $146.6 million. In addition, at December 31, 1999,
Coastal had letters of credit of approximately $7.2 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, 1999 and 1998 are loans totaling
approximately $14.7 million and $22.8 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, 1999, 1998 and 1997, Coastal recognized interest income on these nonaccrual
loans (outstanding as of the period end) of approximately $571,000, $480,000 and
$827,000, respectively, whereas approximately $778,000, $835,000 and $925,000,
respectively, in additional interest income would have been recorded if such
loans had been performing in accordance with their original terms.
At December 31, 1999 and 1998, the carrying value of impaired loans was
approximately $2.0 million and $1.7 million, respectively, and the related
allowance for loan losses on those impaired loans totaled $778,000 and $880,000,
respectively. The average recorded investment in impaired loans during the
years ended December 31, 1999, 1998 and 1997 was approximately $10.6 million,
$1.7 million and $897,000, respectively. For the years ended December 31, 1999,
1998 and 1997, 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>
1999 1998 1997
--------- -------- --------
Balance, beginning of year $ 11,358 $ 7,412 $ 6,880
Provision for loan losses 10,575 3,100 1,800
Charge-offs (11,830) (1,693) (1,416)
Recoveries 390 282 148
Allowance of acquired entities -- 2,257 --
--------- -------- --------
Balance, end of year $ 10,493 $11,358 $ 7,412
========= ======== ========
</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
"MCA"). 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, MCA ceased operations and shortly thereafter
was seized by the Michigan Bureau of Financial Institutions. A conservator was
appointed to take control of MCA's books and records, marshal its assets and
continue its loan servicing operations. A voluntary petition under Chapter 11
of the U.S. Bankruptcy Code was filed in the U.S. Bankruptcy Court for the
Eastern District of Michigan for MCA on or about February 10, 1999, by the
conservator, who has been appointed the "debtor-in-possession," to allow the
conservator time to develop a plan of reorganization while protecting the assets
of MCA.
Effective December 31, 1998, Coastal placed this loan on nonaccrual and had
allocated $1.5 million of the general allowance to this loan. During 1999,
based on updated information received, management made the decision to provide
for and charge-off the remaining balance of the loan. Throughout 1999, Coastal
worked with the Lead Lender and the bankruptcy trustee to determine the value of
and sell the underlying collateral. As of December 31, 1999, Coastal had
received only $1.1 million in proceeds from the MCA loan. In addition, on
January 12, 2000, Coastal filed a lawsuit against the Lead Lender in the
participation seeking to recover losses incurred as a result of actions or
omissions of the Lead Lender related to the loan to MCA. Due to the uncertainty
of the value of the remaining collateral, its marketability and the timing of
recovery, if any, from the lawsuit, Coastal charged-off the remaining $8.9
million balance of this loan in 1999. Coastal will continue to work with the
Lead Lender and the bankruptcy trustee to recover any funds, if possible, from
the collateral or MCA.
During 1999, Coastal purchased approximately $10.1 million of the underlying
loans securing a $13.2 million warehouse and servicing rights line of credit.
Coastal is currently servicing the purchased loans and has recorded these loans
as part of the loans receivable portfolio at December 31, 1999. The remaining
balance on this warehouse and servicing rights line of $990,000 was charged-off
in 1999.
(7) ACCRUED INTEREST RECEIVABLE
Accrued interest receivable at December 31, 1999 and 1998 is as follows (in
thousands):
<TABLE>
<CAPTION>
<S> <C> <C>
1999 1998
------- -------
Loans receivable $11,831 $10,088
Mortgage-backed securities 4,305 5,383
FHLB stock, federal fund sold and other
interest-earning assets 14 47
------- -------
$16,150 $15,518
======= =======
</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 $407.9 million, $519.2 million and $675.7 million at December 31,
1999, 1998 and 1997, respectively. At December 31, 1999 and 1998, Coastal
serviced approximately $988,000 and $1.4 million of loans sold with recourse,
respectively.
An analysis of activity of mortgage servicing rights for the years ended
December 31, 1999, 1998 and 1997 is as follows (in thousands):
<TABLE>
<CAPTION>
Years ended December 31,
<S> <C> <C> <C>
1999 1998 1997
-------- -------- --------
Balance, beginning of year $ 4,049 $ 5,653 $ 6,810
Additions -- -- 116
Amortization (1,014) (1,604) (1,273)
-------- -------- --------
Balance, end of year $ 3,035 $ 4,049 $ 5,653
======== ======== ========
</TABLE>
At December 31, 1999, the estimated fair value of Coastal's recognized mortgage
servicing rights was $5.5 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, 1999 and 1998 of approximately $4.3 million and $4.9 million, respectively.
<PAGE>
(10) DEPOSITS
Deposits and the related weighted average interest rates at December 31, 1999
and 1998 are summarized as follows (dollars in thousands):
<TABLE>
<CAPTION>
1999 1998
--------------------------- ---------------------------
Stated Rate Amount Stated Rate Amount
-------------- ----------- -------------- -----------
<S> <C> <C> <C> <C>
Noninterest-bearing checking 0.00% $ 97,146 0.00% $ 95,398
Interest-bearing checking 0.75 - 1.75 65,229 1.00 - 2.00 63,067
Savings accounts 1.49 - 2.75 46,011 1.98 - 2.75 48,571
Money market demand accounts 0.00 - 4.65 331,082 0.00 - 4.51 339,481
----------- -----------
539,468 546,517
----------- -----------
Certificate accounts 2.00 - 2.99 461 2.00 - 2.99 6,538
3.00 - 3.99 23,288 3.00 - 3.99 38,614
4.00 - 4.99 446,746 4.00 - 4.99 272,325
5.00 - 5.99 543,980 5.00 - 5.99 747,585
6.00 - 6.99 62,363 6.00 - 6.99 83,277
7.00 - 7.99 7,580 7.00 - 7.99 8,727
8.00 - 8.99 103 8.00 - 8.99 699
9.00 - 9.99 99 9.00 - 9.99 305
over 10.00 12 over 10.00 18
----------- -----------
1,084,632 1,158,088
----------- -----------
Premium on purchased deposits 189 399
----------- -----------
$1,624,289 $1,705,004
=========== ===========
Weighted average rate 3.96% 4.11%
=========== ===========
</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 $117.7 million and $126.0
million at December 31, 1999 and 1998, respectively.
The scheduled maturities of certificate accounts outstanding at December
31, 1999 were as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
- -----------------------
<S> <C>
2000 $ 968,838
2001 82,705
2002 17,020
2003 10,772
2004 4,917
Subsequent years 380
----------
$1,084,632
==========
</TABLE>
The aggregate amount of certificate accounts with balances of $100,000 or
more was approximately $201.3 million and $199.0 million at December 31, 1999
and 1998, respectively.
(11) ADVANCES FROM THE FEDERAL HOME LOAN BANK OF DALLAS
Advances from the FHLB for the years ended December 31, 1999, 1998 and 1997 are
summarized as follows (dollars in thousands):
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1999 1998 1997
----------- --------- ---------
Balance outstanding at end of year $1,096,931 $966,720 $540,475
Average balance outstanding 951,953 713,197 368,896
Maximum outstanding at any month-end 1,115,713 969,036 540,475
Average interest rate during the year 5.31% 5.55% 5.78%
Average interest rate at end of year 5.72% 5.24% 5.95%
</TABLE>
The scheduled maturities and related weighted average interest rates on advances
from the FHLB at December 31, 1999 are summarized as follows (dollars in
thousands):
<TABLE>
<CAPTION>
Due during the year Weighted Average
ended December 31, Interest Rate Amount
- ------------------- ----------------- ----------
<S> <C> <C>
2000 5.55% $ 765,096
2001 6.05 32,154
2002 6.11 268,689
2003 5.54 1,295
2004 5.75 5,280
2005 5.57 129
2006 6.85 3,139
2007 6.66 1,095
2008 5.51 1,789
2009 8.14 4,162
2010 5.66 187
2011 6.62 1,363
2012 5.68 217
2013 5.76 7,753
2014 5.43 2,967
2018 5.05 1,616
----------------- ------------
5.72% $1,096,931
================= ============
</TABLE>
At December 31, 1999, 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
$1.1 billion at December 31, 1999.
<PAGE>
(12) SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND
FEDERAL FUNDS PURCHASED
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.
Coastal did not have any securities sold under agreements to repurchase at
December 31, 1999. At December 31, 1998, securities sold under agreements to
repurchase were as follows (dollars in thousands):
<TABLE>
<CAPTION>
<S> <C>
Book value of mortgage-backed
securities sold $ 115,951
Market value of mortgage-backed
securities sold 115,747
Repurchase liability 100,000
Weighted average interest rate 4.93%
Weighted average maturity 3,295 days
</TABLE>
At December 31, 1998, 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 were scheduled to mature
in 2008, but were called prior to maturity during 1999. Securities sold under
agreements to repurchase averaged approximately $103.2 million, $579.6 million
and $974.1 million during 1999, 1998 and 1997, respectively, and the maximum
outstanding amounts at any month-end during 1999, 1998 and 1997 were
approximately $271.1 million, $874.8 million and $1.0 billion, respectively.
Federal funds purchased averaged approximately $19,000, $149,000 and $161,000
during the years ended December 31, 1999, 1998 and 1997, respectively. There
were no federal funds purchased outstanding at any month-end during 1999, 1998
or 1997.
(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. During 1999, Coastal, after receipt of unsolicited offers,
repurchased $3.1 million of the Senior Notes outstanding at par.
(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.
<PAGE>
(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, 1999, Coastal had interest
rate swap and cap agreements on notional amounts totaling $43.6 million and
$163.5 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 5.32% in 1999 and 5.77% in 1998. The
weighted average interest rate of payments made on all of the interest rate swap
agreements was approximately 6.20% in 1999 and 6.60% in 1998. 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 in the accompanying consolidated statements of operations. The
net interest expense related to these agreements was approximately $483,000,
$377,000 and $431,000, for the years ended December 31, 1999, 1998 and 1997,
respectively. Coastal had pledged approximately $963,000 and $6.6 million of
mortgage-backed securities to secure interest rate swap agreements at December
31, 1999 and 1998, respectively.
<PAGE>
The terms of the interest rate swap agreements outstanding at December 31, 1999
and 1998 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, 1999:
2000. . . . . . . . . $ 4,800 Three-month 6.170% 6.140% $ (70)
2000. . . . . . . . . 2,240 Three-month 6.000 6.184 10
2003. . . . . . . . . 19,290 One-month 5.345 6.476 248
2004. . . . . . . . . 3,842 One-month 5.635 6.463 160
2005. . . . . . . . . 13,440 Three-month 6.500 6.110 215
--------- ---------------
$ 43,612 $ 563
========= ===============
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)
========= ===============
</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 9.50%, depending on the
agreement. Payments on the interest rate cap agreements are based on the
notional principal amount of the agreements; no funds were actually borrowed or
are to be repaid. The purchase prices of the interest rate cap agreements are
capitalized and included in "prepaid expenses and other assets" in the
accompanying consolidated statements of financial condition and are amortized
over the life of the agreements using the straight-line method. The unamortized
portion of the interest rate cap agreements was approximately $90,000 and
$115,000 at December 31, 1999 and 1998, respectively, with the estimated fair
value of the agreements being $750,000 and $888,000 at December 31, 1999 and
1998, 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 $25,000, $53,000 and $218,000 for the years
ended December 31, 1999, 1998, and 1997, respectively.
<PAGE>
Interest rate cap agreements outstanding at December 31, 1999 expire as
follows (dollars in thousands):
<TABLE>
<CAPTION>
Year of Strike rate Notional
expiration range amount
- ---------- ---------------- ---------
<S> <C> <C>
2000 8.50 - 9.50% $ 11,620
2001 7.00 - 9.00 34,239
2002 8.75 - 9.00 18,625
2003 8.00 - 8.50 99,000
---------
$ 163,484
=========
</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 $563,000 and
$767,000 at December 31, 1999 and 1998, respectively. The amortization of the
contract losses on closed positions for the years ended December 31, 1999, 1998
and 1997 was approximately $204,000, $440,000 and $203,000, 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,
1999 and 1998. 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, 1999 December 31, 1998
------------------ ------------------
Carrying Fair Carrying Fair
Value Value Value Value
------------------ ------------------ ---------- -----------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 48,098 $ 48,098 $ 45,453 $ 45,453
Loans receivable 1,735,081 1,740,500 1,538,149 1,557,654
Mortgage-backed securities
held-to-maturity 917,212 899,934 1,154,116 1,145,369
U.S. Treasury securities
held-to-maturity 299 298 -- --
Securities available-for-sale 99,665 99,665 98,625 98,625
Stock in the FHLB 56,753 56,753 49,819 49,819
Interest rate cap agreements 90 750 115 888
Financial liabilities:
Deposits 1,624,289 1,622,219 1,705,004 1,711,699
Advances from the FHLB 1,096,931 1,095,295 966,720 970,638
Securities sold under agreements
to repurchase -- -- 100,000 106,148
Senior Notes payable 46,900 46,666 50,000 51,007
Off-balance sheet instruments:
Interest rate swap agreements -- 563 -- (1,127)
Commitments to extend credit -- 260,454 -- 270,602
</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.
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,
1999 and 1998. 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, 1999, 1998 and 1997, 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 1999, 1998 and 1997 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.
<PAGE>
The components of the provision for federal income tax expense (benefit) for the
years ended December 31, 1999, 1998 and 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
------- ------ -------
<S> <C> <C> <C>
Current $6,023 $3,046 $7,831
Deferred (364) 497 (9)
------- ------ -------
$5,659 $3,543 $7,822
======= ====== =======
</TABLE>
A reconciliation of the expected federal income taxes using a corporate tax rate
of 35% for the years ended December 31, 1999, 1998 and 1997 is as follows (in
thousands):
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- -------
<S> <C> <C> <C>
Computed expected tax provision $ 6,746 $ 7,980 $7,691
Reversal of accrued income taxes due to resolution
of tax benefit issue with FDIC -- (3,679) --
FDIC tax benefit of preferred stock dividends (1,460) (906) --
Net purchase accounting adjustments 282 282 282
Other, net 91 (134) (151)
-------- -------- -------
$ 5,659 $ 3,543 $7,822
======== ======== =======
</TABLE>
Significant temporary differences that give rise to the deferred tax assets and
liabilities as of December 31, 1999 and 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
------ ------
<S> <C> <C>
Deferred tax assets:
Loans receivable, principally due to allowance for loan losses $2,164 $2,050
Unrealized loss on securities available-for-sale 995 740
Goodwill 612 497
Property and equipment 620 297
Real estate owned, principally due to unrealized writedowns 244 276
Other 221 256
------ ------
4,856 4,116
------ ------
Deferred tax liabilities:
FHLB stock 2,417 1,490
Mortgage-backed securities, principally
due to deferred hedging losses 197 268
Other 17 24
------ ------
2,631 1,782
------ ------
Net deferred tax asset $2,225 $2,334
====== ======
</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, 1999, Coastal had approximately $2.5 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) 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 1991
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
1991 Program was equal to 10% of Coastal's issued and outstanding shares of
Common Stock at the date of adoption of the 1991 Program. Coastal reserved the
shares for future issuance under the 1991 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 employment of
Coastal for six months after the option was granted.
On March 23, 1995 and March 25, 1999, the Board of Directors adopted the 1995
and 1999 Stock Compensation Programs, respectively, ("the New Programs"). The
New Programs are substantially similar to the 1991 Program and were approved by
stockholders in April 1995 and April 1999, respectively. The Board reserved
382,891 and 340,000, respectively, shares of Common Stock for issuance under the
New Programs.
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.
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------
1999 1998 1997
--------- ------- -------
<S> <C> <C> <C>
Net income available to common
stockholders (in thousands):
As reported $ 9,442 $16,668 $11,563
Pro forma $ 8,823 $16,193 $11,169
Diluted earnings per share:
As reported $ 1.42 $ 2.18 $ 1.50
Pro forma $ 1.32 $ 2.11 $ 1.45
</TABLE>
Pro forma net income available to common stockholders and diluted earnings per
share reflect only options granted during the years 1995 through 1999.
Therefore, the full impact of calculating compensation cost for stock options
under Statement 123 is not reflected in the pro forma net income available to
common stockholders 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 1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Assumptions:
Expected annual dividends $0.32/share $0.32/share $0.32/share
Expected volatility 36.16% 25.49% 22.30%
Risk-free interest rate 5.63% 5.47% 6.87%
Expected life 10 years 10 years 10 years
</TABLE>
A summary of the status of the stock options as of December 31, 1999, 1998 and
1997 and changes during the years then ended is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
--------------------- --------------------- ------------------------
Weighted- Weighted-
Number Average Number Average Number Weighted-
of Exercise of Exercise of Average
Shares Price Shares Price Shares Exercise Price
--------- ---------- --------- ---------- --------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year 597,919 $ 12.910 619,345 $ 11.706 510,130 $ 9.993
Granted 184,800 16.000 47,500 25.125 188,100 15.684
Exercised (47,971) 11.362 (54,885) 9.792 (62,978) 9.246
Forfeited/cancelled (12,336) 17.373 (14,041) 13.313 (15,907) 13.527
--------- --------- ---------
Outstanding at end
of year 722,412 $ 13.726 597,919 $ 12.910 619,345 $ 11.706
========= ========= =========
Options exercisable at
end of year 522,056 430,569 380,791
========= ========= =========
Weighted-average fair
value of options
granted during the year
(per share) $ 8.116 $ 11.388 $ 6.187
========= ========= =========
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1999:
<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 99,355 3.0 years $ 7.757 99,355 $ 7.757
10.333 to $12.500 247,169 5.7 years $ 11.119 247,056 $ 11.119
15.167 to $25.125 375,888 8.4 years $ 13.449 175,645 $ 14.330
------------------- -----------
722,412 6.8 years $ 13.726 522,056 $ 12.448
=================== ===========
</TABLE>
(19) EMPLOYEE BENEFITS
Coastal maintains a 401(k) profit sharing plan. Coastal's contributions to this
plan were approximately $509,000, $309,000 and $157,000 for the years ended
December 31, 1999, 1998 and 1997, 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.
(20) 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 this 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, this 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. Pursuant to Coastal's tax benefit
agreement with the FDIC, Coastal receives a tax benefit for dividends on this
preferred stock. The ongoing quarterly benefit will be approximately $226,000,
or 3 cents per diluted share, and is expected to continue through the end of
2002.
(21) STOCKHOLDERS' EQUITY
COASTAL BANCORP, INC. PREFERRED STOCK
On May 11, 1999, Bancorp issued 1,100,000 shares of 9.12% Series A Cumulative
Preferred Stock, no par value, to the public at a price of $25 per share
("Bancorp Preferred Stock"). Dividends on the preferred stock are payable
quarterly at the annual rate of $2.28 per share. The preferred stock is
callable on May 15, 2003 at Bancorp's option. The $26.0 million net proceeds
has been used for repurchases in the open market of Bancorp's outstanding common
stock and of Bancorp's outstanding 10% Senior Notes, with the remaining being
invested on a short-term basis. Pursuant to Coastal's tax benefit agreement
with the FDIC, Coastal receives a tax benefit for dividends on this preferred
stock. The ongoing quarterly benefit will be approximately $219,000, or 3 cents
per diluted share, and is expected to continue through the end of 2002.
COMMON STOCK DIVIDENDS
On January 28, April 22, July 22 and October 28, 1999, 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, 1999, respectively.
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.
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. All common stock share data has
been adjusted to include the effect of the stock split.
TREASURY STOCK
On August 27, 1998, December 21, 1998 and February 25, 1999, the Board of
Directors authorized three separate repurchase plans for up to 500,000 shares
each of the outstanding shares of common stock through an open-market repurchase
program and privately negotiated repurchases, if any. As of December 31, 1999
and 1998, 1,283,679 and 499,600 shares had been repurchased at a cost of $20.5
million and $7.8 million, respectively.
(22) EARNINGS PER SHARE
The following summarizes information related to the computation of basic and
diluted EPS for the years ended December 31, 1999, 1998 and 1997 (dollars in
thousands, except per share data):
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1999 1998 1997
----------- ---------- ----------
Net income $ 11,026 $ 16,668 $ 11,563
Preferred Stock dividends (1,584) -- --
----------- ---------- -----------
Net income available to common
stockholders $ 9,442 $ 16,668 $ 11,563
=========== ========== ===========
Weighted average number of common shares
outstanding used in basic EPS calculation 6,494,330 7,432,598 7,475,991
Add assumed exercise of outstanding stock
options as adjustments for dilutive securities 166,978 224,092 246,654
----------- ---------- -----------
Weighted average number of common shares
outstanding used in diluted EPS calculation 6,661,308 7,656,690 7,722,645
=========== ========== =========
Basic EPS $ 1.45 $ 2.24 $ 1.55
=========== ========== =========
Diluted EPS $ 1.42 $ 2.18 $ 1.50
=========== ========== =========
</TABLE>
The weighted average number of common shares outstanding has been reduced by the
treasury stock held by Coastal. As of December 31, 1999 and 1998, Coastal had
1,283,679 and 499,600 common shares in treasury, respectively.
(23) 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, 1999, 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>
2000 $ 2,752
2001 2,675
2002 2,560
2003 2,140
2004 and thereafter 14,795
</TABLE>
Rent expense for the years ended December 31, 1999, 1998 and 1997 amounted to
approximately $2.9 million, $2.6 million and $2.3 million, respectively.
(24) 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, 1999, that the
Bank met capital adequacy requirements to which it is subject.
As of December 31, 1999, 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, 1999 and
1998, 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, 1999:
Tier 1 (core) $168,162 5.76% $ 116,762 4.00% $145,952 5.00%
Tier 1 risk-based 168,162 9.68 69,482 4.00 104,222 6.00
Total risk-based 178,655 10.29 138,963 8.00 173,704 10.00
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
</TABLE>
<PAGE>
(25) 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,
------------------------
1999 1998
------------- --------
<S> <C> <C>
Assets:
Cash and cash equivalents $ 453 $ 22
Investment in subsidiary 165,067 159,174
Receivable from the Bank 11,193 --
Mortgage-backed securities held-to-maturity 986 1,303
Other assets 3,175 3,345
------------- --------
$ 180,874 $163,844
============= ========
Liabilities and stockholders' equity:
Senior Notes payable $ 46,900 $ 50,000
Other liabilities 518 1,080
------------- --------
Total liabilities 47,418 51,080
Total stockholders' equity 133,456 112,764
------------- --------
$ 180,874 $163,844
============= ========
</TABLE>
Coastal Bancorp, Inc.
Statements of Operations
------------------------
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------
1999 1998 1997
------ ------ -------
<S> <C> <C> <C>
Income:
Dividends from subsidiary $ 7,239 $ 7,593 $ 7,293
Equity in undistributed earnings of
subsidiary, net of income tax 6,367 12,724 7,946
Interest income 707 103 131
--------- ------- --------
14,313 20,420 15,370
--------- ------- --------
Expense:
Interest expense 5,058 5,000 5,000
Noninterest expense 471 717 786
--------- ------- --------
5,529 5,717 5,786
--------- ------- --------
Federal income tax benefit 2,242 1,965 1,979
--------- ------- --------
Net income $ 11,026 $16,668 $11,563
========= ======= =======
</TABLE>
<PAGE>
Coastal Bancorp, Inc.
Statements of Cash Flows
------------------------
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------------------
1999 1998 1997
----------- ---------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 11,026 $ 16,668 $11,563
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in undistributed earnings of subsidiary (6,367) (12,724) (7,946)
Net (increase) decrease in other assets and other liabilities (11,585) 3,684 (1,426)
------------ ---------- --------
Net cash provided (used) by operating activities (6,926) 7,628 2,191
------------ ---------- --------
Cash flows from investing activities:
Net decrease in mortgage-backed securities 317 458 318
Investment in subsidiary -- -- (100)
------------ ---------- --------
Net cash provided by investing activities 317 458 218
------------ ---------- --------
Cash flows from financing activities:
Proceeds from issuance of Preferred Stock, net 25,942 -- --
Exercise of stock options for purchase of Common Stock 545 536 582
Purchase of treasury stock (12,685) (7,778) --
Repurchase of Senior Notes (3,100) -- --
Dividends paid (3,662) (2,392) (2,292)
------------ ---------- --------
Net cash provided (used) by financing activities 7,040 (9,634) (1,710)
------------ ---------- --------
Net increase (decrease) in cash and cash equivalents 431 (1,548) 699
Cash and cash equivalents at beginning of year 22 1,570 871
------------ ---------- --------
Cash and cash equivalents at end of year $ 453 $ 22 $ 1,570
============ ========== =========
</TABLE>
<PAGE>
(26) SELECTED QUARTERLY FINANCIAL DATA
Selected quarterly financial data is presented in the following tables for the
years ended December 31, 1999 and 1998 (in thousands, except per share data):
<TABLE>
<CAPTION>
1999 Quarter Ended (unaudited)
----------------------------------------------------------
March 31, June 30, September 30, December 31,
------------ ---------- ------------- ------------
<S> <C> <C> <C> <C>
Interest income $ 49,526 $ 49,351 $ 50,870 $ 53,196
Interest expense 31,110 30,504 31,309 32,734
----------- ---------- ------------ ------------
Net interest income 18,416 18,847 19,561 20,462
Provision for loan losses 2,331 675 1,360 6,209
Noninterest income 2,440 2,413 2,570 2,949
Noninterest expense 13,480 14,818 14,536 14,976
----------- ---------- ------------ ------------
Income before provision
for Federal income taxes and
minority interest 5,045 5,767 6,235 2,226
Provision for Federal income taxes 1,626 1,773 1,843 417
Minority interest - preferred stock
dividends of Coastal Banc ssb 647 647 647 647
----------- ---------- ------------ ------------
Net income $ 2,772 $ 3,347 $ 3,745 $ 1,162
=========== ========== ============ ============
Basic earnings per share $ 0.40 $ 0.47 $ 0.50 $ 0.08
=========== ========== ============ ============
Diluted earnings per share $ 0.40 $ 0.46 $ 0.48 $ 0.08
=========== ========== ============ ============
</TABLE>
<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 and
minority interest 4,262 6,902 6,382 5,253
Provision (benefit) for Federal
income taxes (2,326) 2,276 1,994 1,599
Minority interest - preferred stock
dividends of Coastal Banc ssb 647 647 647 647
------------ ---------- ------------- ------------
Net income $ 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>
<PAGE>
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, 1999 of the Common Stock of Bancorp
("CBSA"), Preferred Stock of Bancorp, ("CBSAO") and the Series A Preferred Stock
of the Bank ("CBSAP") as listed and quoted on The Nasdaq Stock Market :
COASTAL BANCORP, INC. COMMON STOCK:
<TABLE>
<CAPTION>
1999 1998
----------------------------------------------------------
High Low Dividends High Low Dividends
------- ------- ---------- ------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
First Quarter $19.500 $15.500 $ 0.080 $23.672 $20.422 $ 0.080
Second Quarter 18.500 16.000 0.080 26.672 22.578 0.080
Third Quarter 18.875 15.500 0.080 25.750 15.000 0.080
Fourth Quarter 20.125 17.250 0.080 20.500 14.000 0.080
</TABLE>
COASTAL BANCORP, INC. PREFERRED STOCK, SERIES A:
<TABLE>
<CAPTION>
1999 1998
------- ---------------------------------------------
High Low Dividends High Low Dividends
------- ------- ---------- ---- --- ---------
<S> <C> <C> <C> <C> <C> <C>
First Quarter -- -- -- -- -- --
Second Quarter $25.375 $24.750 $ 0.300 -- -- --
Third Quarter 25.000 23.125 0.570 -- -- --
Fourth Quarter 23.750 17.750 0.570 -- -- --
</TABLE>
COASTAL BANC SSB PREFERRED STOCK, SERIES A:
<TABLE>
<CAPTION>
1999 1998
-------------------------------------------------------------
High Low Dividends High Low Dividends
------- ------- ---------- ------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
First Quarter $25.250 $24.625 $ 0.563 $26.000 $25.250 $ 0.563
Second Quarter 25.063 24.500 0.563 25.625 25.000 0.563
Third Quarter 24.750 23.375 0.563 25.375 24.938 0.563
Fourth Quarter 23.375 20.750 0.563 25.250 24.625 0.563
</TABLE>
<PAGE>
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 27, 2000 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
Senior 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 Stock Market under the symbol "CBSA." As of
February 29, 2000, there were 6,354,187 shares of Common Stock of Coastal
Bancorp, Inc. issued and outstanding and the approximate number of registered
stockholders was 35, representing approximately 1,100 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 Stock Market . 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 Stock Market under the symbol "CBSAP."
As of February 29, 2000, there were 1,150,000 shares of Preferred Stock issued
and outstanding and held by approximately 152 registered stockholders,
representing approximately 1,900 beneficial stockholders at such record date.
On May 11, 1999, Coastal Bancorp, Inc. ("Bancorp") issued 1,100,000 shares
of 9.12% Series A Cumulative Preferred Stock, no par value, at $25 per share.
As of such date, the Preferred Stock of Bancorp became registered under the
Securities Act of 1934. The preferred stock is callable on May 15, 2003 at
Bancorp's option. The Bancorp Preferred Stock is listed and quoted on The
Nasdaq Stock Market under the symbol "CBSAO". As of February 29, 2000, there
were 1,100,000 shares of Preferred Stock issued and outstanding and held by
approximately 1 registered stockholder, representing approximately 1,300
beneficial stockholders at such record date.
Coastal declared dividends on the Common Stock payable during 1999.
Quarterly dividends in the amount of $0.08 per share were paid on March 15, June
15, September 15 and December 15, 1999. On March 15, 2000, 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.
<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, 1999 and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 48,098
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 99,665
<INVESTMENTS-CARRYING> 917,511
<INVESTMENTS-MARKET> 900,232
<LOANS> 1,735,081
<ALLOWANCE> 10,493
<TOTAL-ASSETS> 2,947,952
<DEPOSITS> 1,624,289
<SHORT-TERM> 765,096
<LIABILITIES-OTHER> 46,376
<LONG-TERM> 378,735
0
27,500
<COMMON> 76
<OTHER-SE> 105,880
<TOTAL-LIABILITIES-AND-EQUITY> 2,947,952
<INTEREST-LOAN> 136,036
<INTEREST-INVEST> 63,663
<INTEREST-OTHER> 3,244
<INTEREST-TOTAL> 202,943
<INTEREST-DEPOSIT> 64,701
<INTEREST-EXPENSE> 125,657
<INTEREST-INCOME-NET> 77,286
<LOAN-LOSSES> 10,575
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 60,398
<INCOME-PRETAX> 16,685
<INCOME-PRE-EXTRAORDINARY> 11,026
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,026
<EPS-BASIC> 1.45
<EPS-DILUTED> 1.42
<YIELD-ACTUAL> 2.75
<LOANS-NON> 14,666
<LOANS-PAST> 2,452
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 11,358
<CHARGE-OFFS> 11,830
<RECOVERIES> 390
<ALLOWANCE-CLOSE> 10,493
<ALLOWANCE-DOMESTIC> 10,493
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
March 28, 2000
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 27, 2000, at
11:00 a.m., Central Time.
The attached Notice of Annual Meeting and Proxy Statement describe the
formal business to be transacted at the meeting. Stockholders will vote to
elect directors and ratify the Company's independent auditors. The Company's
Board of Directors believes that these proposals are in the best interest of the
Company and its stockholders and recommends that stockholders vote "for" them at
the Annual Meeting. Directors and officers of the Company and representatives
of the Company's independent auditors will be present to respond to any
questions that our stockholders may have.
It is very important that you be represented at the Annual Meeting
regardless of the number of shares you own or whether you are able to attend the
meeting in person. Let me urge you to mark, sign and date your proxy card today
and return it in the postage paid envelope provided, even if you plan to attend
the Annual Meeting. This will not prevent you from voting in person, but will
ensure that your vote is counted if you are unable to attend.
Your continued support 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 27, 2000
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 27, 2000 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 2003 and until their successors are elected
and qualified;
(2) To ratify the appointment of KPMG LLP as the Company's independent
auditors for the fiscal year ending December 31, 2000; and,
(3) To transact such other business as may properly come before the
Annual Meeting, or any adjournment or postponement thereof. Except with respect
to procedural matters incident to the conduct of the Annual Meeting, management
of the Company is not aware of any matters other than those set forth above
which may properly come before the Annual Meeting.
The Board of Directors has fixed February 29, 2000 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 28, 2000
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.
<PAGE>
- ------
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 27, 2000 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
28, 2000.
Each proxy solicited hereby, if properly signed and returned to the
Company, will be voted in accordance with the instructions contained therein if
it is not revoked prior to its use. If no contrary instructions are given, each
proxy received will be voted: (i) for the election of the board's nominees as
directors of the company; (ii) for the proposal to ratify the appointment of
KPMG LLP as the company's independent auditors for the fiscal year ending
December 31, 2000; and (iii) upon the transaction of such other business as may
properly come before the annual meeting, in accordance with the best judgment of
the persons appointed as proxies. Any holder of common stock who returns a
signed proxy but fails to provide instructions as to the manner in which such
shares are to be voted will be deemed to have voted in favor of the matters set
forth in the preceding sentence.
Any stockholder giving a proxy has the power to revoke it at any time
before it is exercised by (i) filing with the Secretary of the Company written
notice 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 29, 2000 ("Record Date") will be entitled to notice of, and
to vote at, the Annual Meeting. On the Record Date, there were 6,354,187 shares
of Common Stock outstanding and the Company had no other class of voting equity
securities outstanding. Only holders of Company Common Stock will be entitled
to vote at the Annual Meeting and each share of Common Stock will be entitled to
one vote on all matters properly presented. Stockholders of the Company are not
permitted to cumulate their votes for the election of directors.
The presence in person or by proxy of at least a majority of the
outstanding shares of Common Stock entitled to vote is necessary to constitute a
quorum at the Annual Meeting. Directors will be elected by a plurality of the
votes cast at the Annual Meeting. The affirmative vote of a majority in
interest of those present (in person or by proxy) at the Annual Meeting is
required 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 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."
<PAGE>
At February 29, 2000, directors, executive officers and their affiliates
beneficially owned 1,636,960 shares of Common Stock or 24.46% 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 the proposal to ratify the selection of KPMG
LLP as the Company's independent auditors.
The following table sets forth the beneficial ownership of the Common Stock
as of February 29, 2000, 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 29, 2000, 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.
<TABLE>
<CAPTION>
Amount of Shares of
Common Stock
Name Beneficially Owned
(and Address) of as of February 29, Percent of
Beneficial Owner 2000(1) Class
- ------------------------------------------ ------------------------ -----------
<S> <C> <C>
First Manhattan Co.
437 Madison Avenue
New York, New York 10022 616,095(2) 9.21%
Thomson Horstmann & Bryant, Inc.
Park 80 West, Plaza II
Saddle Brook, New Jersey 07662 608,300(2) 9.09
Dimensional Fund Advisors, Inc.
1299 Ocean Avenue, 11th Floor
Santa Monica, California 90401 460,550(2) 6.88
Robert Edwin Allday, Director
Coastal Bancorp, Inc. and Coastal Banc ssb 0(3) *
D. Fort Flowers, Jr., Director
Coastal Bancorp, Inc. and Coastal Banc ssb 274,020(4) 4.09
Dennis S. Frank, Director *
Coastal Bancorp, Inc. and Coastal Banc ssb 2,700
Paul W. Hobby, Director
Coastal Bancorp, Inc. and Coastal Banc ssb 1,000 *
(continued on next page)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Amount of Shares of
Common Stock
Name Beneficially Owned
(and Address) of as of February 29, Percent of
Beneficial Owner 2000(1) Class
- ---------------------------------------------- -------------------- -----------
<S> <C> <C>
Robert E. Johnson, Jr., Director
Coastal Bancorp, Inc. and Coastal Banc ssb 19,320 *
Manuel J. Mehos, Chairman of the Board,
President and Chief Executive Officer
Coastal Bancorp, Inc., Coastal Banc Holding
Company, Inc. and Coastal Banc ssb 601,500(5) 8.99
James C. Niver, Director
Coastal Bancorp, Inc. and Coastal Banc ssb 553,428(6) 8.27%
Gary R. Garrett, Sr. Executive Vice President
and Chief Lending Officer 61,241(5)
Coastal Banc ssb *
David R. Graham, Executive Vice President
- -Real Estate Lending
Coastal Banc ssb 29,780(5) *
Nancy S. Vadasz, Executive Vice President
Market and Product Strategies
Coastal Banc ssb 29,094(5) *
Catherine N. Wylie, Sr. Executive Vice
President and Chief Financial Officer Coastal
Bancorp, Inc., Coastal Banc Holding
Company, Inc. and Coastal Banc ssb 64,877(5)(7) *
All directors and executive officers of the
Company and the Bank as a group (11 persons) 1,636,960(5) 24.46
</TABLE>
- ----------------------
(footnotes on next page)
* Represents less than 1.0% of the Common Stock beneficially owned.
<PAGE>
(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 60,741, 29,780, 158,000, 29,094 and 60,952 shares
which may be received upon the exercise of stock options by Messrs. 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 338,567 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.
(7) Ms. Wylie is the beneficial owner of 2,000 shares of the Bank's 9.12%
Cumulative Preferred Stock, Series A.
- ----------------------
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.
Two directors are to be elected at this Annual Meeting to hold office until
the Annual Meeting in 2003 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 2000, 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:
R. EDWIN ALLDAY. Age 49. 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 38. 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.
DENNIS S. FRANK. Age 43. 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.
<PAGE>
PAUL W. HOBBY. Age 39. 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. His term as a director of the Company
will expire in 2002.
ROBERT E. JOHNSON, JR. Age 46. Director since 1986. Mr. Johnson is a
partner in the law firm of Johnson & Johnson, Austin, Texas. His term as a
director of the Company will expire in 2002.
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 either 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:
MANUEL J. MEHOS. Age 45. 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. If elected, his term as a director of the Company
will expire in 2003.
JAMES C. NIVER. Age 70. Director since 1986. Mr. Niver is retired and
from 1972 until 1995 was employed by Century Land Company, Houston, Texas,
retiring as its President. If elected, his term as a director of the Company
will expire in 2003.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE ABOVE
NOMINEES BE ELECTED AS DIRECTORS OF THE COMPANY.
STOCKHOLDER NOMINATIONS
The Company's Articles of Incorporation govern nominations for election to
the Board of Directors and require that all nominations for election to the
Board of Directors other than those made by the Board, be made by a stockholder
who has complied with the notice provisions in the Articles. Written notice of
a stockholder's nomination must be communicated to the attention of the
Company's Secretary and either delivered to, or mailed and received at, the
principal executive offices of the Company not less than 60 days prior to the
anniversary date of the mailing of the proxy materials by the Company in
connection with the immediately preceding annual meeting of stockholders of the
Company, and with respect to a special meeting of stockholders for the election
of directors, on the close of business on the tenth day following the date on
which notice of such meeting is first given to stockholders. Such notice shall
include specified matters as set forth in the Articles of Incorporation. If the
nomination is not made in accordance with the requirements set forth in the
Articles of Incorporation, the defective nomination will be disregarded at the
Annual Meeting. The Company did not receive any nominations from stockholders
for the Annual Meeting.
BOARD OF DIRECTORS MEETINGS AND COMMITTEES
OF COASTAL BANCORP, INC. AND COASTAL BANC SSB
Regular meetings of the Board of Directors of the Company are held at least
quarterly and special meetings may be called at any time as necessary. During
the year ended December 31, 1999, 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
1999.
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.
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, 1999, 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 1999.
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, 1999,
the Bank had various committees, including an Audit, Compensation,
Asset/Liability, Directors' Loan Review and Community Reinvestment Act
Committee.
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 1999.
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
three times during 1999. See "Executive Compensation - Report of the Board of
Directors on Compensation During Fiscal 1999."
The Asset/Liability Committee met four times in 1999 to review and analyze
the investment securities portfolio, insure that the Bank's interest rate risk
policy is followed and to insure that policies and procedures for all investment
securities are adequate and appropriate. 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 1999 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
and Niver.
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 1999.
BOARD FEES
During 1999, 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 each Loan Review Committee meeting 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, 1999, all Section 16(a) filing requirements
applicable to the Company's officers and directors of the Company and/or the
Bank were complied with.
<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 56 Retired from the Bank on January 31, 2000; 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 53 Senior Executive Vice President of the Bank since July 1999 and
Executive Vice President of the Bank from August 1993 to July 1999 and
a director of each of the Bank's subsidiaries; Chief Lending Officer of the
Bank 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. from August 1993 through its dissolution into the
Bank in December 1998; 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 56 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 46 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 45 Senior Executive Vice President of the Company, Coastal Banc Holding
Company, Inc. and the Bank since July 1999 and a director of Coastal
Banc Holding Company, Inc., and of each of the Bank's subsidiaries;
Executive Vice President of Coastal Banc Holding Company, Inc. from
November 1996 to July 1999, of the Company from July 1994 to July
1999 and of the Bank from August 1993 to July 1999; Chief Financial
Officer 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 1999. Officers of the Company do not receive
separate compensation for their services to the Company.
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 senior executive officers of the Bank and
recommending senior 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 senior executive compensation policies. The consultant developed
a compensation program for the Bank's senior 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 senior executive
officers annually. A senior 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
senior 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 senior executive
officers comparable or better than the comparable executive compensation for the
senior executive officers in the Bank's peer group. Based upon the foregoing,
Mr. Mehos, the Chief Executive Officer, earned $303,500 in base salary during
1999.
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 senior executive officers unless the Committee determines the Bank is
safe and sound in the following areas: capital adequacy, earnings composition,
earnings capability, liquidity, risk management (classified assets), strategic
planning, and compliance with laws and regulations.
During 1999, the Board of Directors determined that no incentive awards to
its Senior Executive Management would be paid unless a 10.0% 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 1999, the
Committee calculated that the Company achieved a 8.83% ROE, therefore no
incentive awards were paid to senior executive officers of the Company or Bank.
During 1999, Ms. Wylie received a $100,000 bonus. 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, 1999, 1998 and 1997.
<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, 1999 $303,500 $ -- 45,000 $ 2,850
President and 1998 269,900 174,899 10,000 2,000
Chief Executive Officer 1997 264,000 127,900 22,000 2,000
John D. Bird 1999 132,500 -- 4,000 8,866
Executive Vice President and 1998 128,369 27,000 2,000 8,000
Chief Administrative Officer 1997 124,630 30,000 5,000 8,000
Gary R. Garrett 1999 210,000 -- 20,000 7,000
Sr. Executive Vice President 1998 179,900 87,149 3,000 5,669
and Chief Lending Officer 1997 164,800 64,000 11,000 5,000
David R. Graham 1999 137,700 29,500 6,000 3,203
Executive Vice President 1998 131,071 34,291 2,000 2,000
Real Estate Lending Division 1997 124,630 32,895 8,000 2,000
Catherine N. Wylie 1999 210,000 100,000 20,000 25,119
Sr. Executive Vice President 1998 179,900 87,149 3,000 26,120
and Chief Financial Officer 1997 164,800 64,000 11,000 5,000
</TABLE>
- ----------------------
(1) Principal positions are for fiscal 1999.
(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, 1999 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 May 27, 1999, 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") three years to expire on
May 31, 2003. 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 for a trigger event described in (i)
above 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 for a trigger event described in (ii) or (iii) above 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 May 31, 1999 (the "Effective Date") and ending on the earlier of
(i) May 31, 2003, 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.
<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 45,000 24.35% $16.00 5/27/09 $365,220
John D. Bird 4,000 2.16 16.00 5/27/09 32,464
Gary R. Garrett 20,000 10.82 16.00 5/27/09 162,320
David R. Graham 6,000 3.25 16.00 5/27/09 48,696
Catherine N. Wylie 20,000 10.82 16.00 5/27/09 162,320
</TABLE>
- ----------------------
(1) Total options granted in 1999 were 184,800 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 May 27, 1999, respectively, were as follows: an expected
volatility rate of 36.156%, a risk free rate of return of 5.628%, a dividend
yield of $.32 per share per year and the expiration date of May 27, 2009,
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 -- -- 158,000 47,000 $865,586 $61,984
John D. Bird 27,880 $169,792 18,786 5,875 176,410 8,869
Gary R. Garrett -- -- 60,741 22,495 377,086 34,721
David R. Graham -- -- 29,780 8,791 144,856 14,008
Catherine N. Wylie -- -- 60,952 21,494 369,614 34,136
</TABLE>
- ----------------------
(1) Based upon a closing market price for the Company's Common Stock as of
December 31, 1999 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, 1994 to December 31, 1999
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, 1994 and the
reinvestment of all dividends. 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
and 1999, 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, December 15, 1998, March 15, 1999, June 15, 1999, September 15, 1999 and
December 15, 1999.
<PAGE>
COMPARISON OF FIVE YEAR-CUMULATIVE TOTAL RETURN PERFORMANCE
<TABLE>
<CAPTION>
PERIOD ENDING
---------------------------------------------------------------
INDEX 12/31/94 12/31/95 12/31/96 12/31/97 12/31/98 12/31/99
<S> <C> <C> <C> <C> <C> <C>
Coastal Bancorp, Inc. 100.00 124.25 165.91 257.17 196.48 200.14
NASDAQ - Total US* 100.00 141.33 173.89 213.07 300.25 542.43
SNL OTC Thrift Index 100.00 152.05 197.81 321.29 280.92 241.62
SNL $1B-$5B Bank Index 100.00 134.48 174.33 290.73 290.06 266.58
SNL $1B-$5B Thrift Index 100.00 153.72 201.70 358.03 321.38 287.80
</TABLE>
SNL Securities LC (804) 977-1600
2000
* Source: CRSP, Center for Research in Security Prices, Graduate School of
Business, The University of Chicago 1999. Used with permission. All rights
reserved. crsp.com.
______________
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, 1999 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.
CERTAIN TRANSACTIONS
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 31, 1999,
and was $580,000 for the year ended December 31, 1999. Such fee represented
substantially all of CBIA's net income for the year then ended.
<PAGE>
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, 2000, 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 2000.
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 28, 2000.
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 2000 Annual Meeting.
PROXY SOLICITATION
The Company has not retained a professional proxy solicitation firm, to
assist in the solicitation of proxies or for related services.
<PAGE>
OTHER MATTERS
Management is not aware of any business to come before the 2000 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, 1999
("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, 1999, 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 28, 2000
