-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JlXWQp61NFU39hd4CZWuI6XEB/BkaU5c1S2Avis4iBuplcRxETuQrYFoGra1AUUW m3K0UeQPJZ92gfjbyFHGFA== 0000919805-00-000011.txt : 20000329 0000919805-00-000011.hdr.sgml : 20000329 ACCESSION NUMBER: 0000919805-00-000011 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000328 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COASTAL BANCORP INC CENTRAL INDEX KEY: 0000919805 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTIONS, NOT FEDERALLY CHARTERED [6036] IRS NUMBER: 760428727 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-24526 FILM NUMBER: 580671 BUSINESS ADDRESS: STREET 1: 5718 WESTHEIMER STREET 2: SUITE 600 CITY: HOUSTON STATE: TX ZIP: 77057 BUSINESS PHONE: 7134355000 MAIL ADDRESS: STREET 1: 5718 WESTHEIMER STREET 2: SUITE 600 CITY: HOUSTON STATE: TX ZIP: 77057 FORMER COMPANY: FORMER CONFORMED NAME: COASTAL BANC SAVINGS ASSOCIATION DATE OF NAME CHANGE: 19970110 FORMER COMPANY: FORMER CONFORMED NAME: COASTAL BANCORP INC/TX/ DATE OF NAME CHANGE: 19940718 10-K 1 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 ----------------- OR [ ] Transition Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 For the Transition Period from _________ to _________ Commission File Number: 0-24526 ------- COASTAL BANCORP, INC. --------------------- (Exact name of Registrant as specified in its charter) Texas 76-0428727 - --------------------- ---------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 5718 Westheimer, Suite 600 Houston, Texas 77057 -------------------- (Address of principal executive office) (713) 435-5000 -------------- (Registrant's telephone number) Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered N/A N/A Securities registered pursuant to section 12(g) of the Act: Common Stock, $0.01 par value per share --------------------------------------- (Title of Class) 9 1/2% Series A Cumulative Preferred Stock ------------------------------------------ (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] As of March 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. PART I. ITEM 1. BUSINESS - ------------------ 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.
At December 31, 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 =========== ============ ============
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.
AT DECEMBER 31, 1999 (In thousands) More than More than More than More than Over One year one year to three years five years to ten years to twenty or less three years to five years ten years twenty years years Total --------- ----------- -------------- ------------- ----------- -------- ---------- First lien residential mortgage $ 7,463 $ 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 ========= ========= ========= ========= ========== ======== ==========
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. 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.
Interest-Rate ------------- 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 ========== ========= ==========
ORIGINATION, PURCHASE AND SALE OF LOANS. The following table sets forth the loan origination, purchase and sale activity of the Bank during the periods indicated. The table does not reflect the activity of servicing mortgage loans for other institutions, GSEs or entities during the periods presented. See "Mortgage Loan Servicing."
Year Ended December 31, 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 =========== =========== ===========
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. The following table sets forth information regarding the Bank's nonperforming assets as of the dates shown.
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% ========= ======== ========
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." ALLOWANCE FOR LOAN LOSSES. The Bank maintains loan loss allowances to absorb future losses that may be realized on its loans receivable portfolio. The following table summarizes activity in the Bank's allowance for loan losses during the periods indicated.
Year Ended December 31, 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% ========= ======== ======== ======= =======
________________________ (1)Charge-offs during the periods indicated were as follows:
Year Ended December 31, 1999 1998 1997 1996 1995 --------- -------- -------- ------- ------- (In thousands) 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 ======== ====== ====== ===== =====
(2)The allowance of acquired entities in 1998 represents the allowance for loan losses recorded in connection with the loans acquired in the 1998 Branch Acquisition. The amount in 1995 represents the allowance for loan losses recorded in connection with (i) a bulk loan package acquired and (ii) the loans acquired in the Texas Capital acquisition. The following table sets forth the allocation of the allowance for loan losses by type of loan outstanding at the dates indicated.
At December 31, 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 ======== ======== ======= ======= =======
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.
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 ========= ======== ======== ======== ========
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.
Year Ended December 31, 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 =========== =========== ===========
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.
At December 31, 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 ============ ============ ============
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. The following table sets forth the Company's activities with respect to mortgage-backed securities (including held-to-maturity and available-for-sale) during the periods indicated.
Year Ended December 31, 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) ========== ========== =========
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. The following table shows the distribution of and certain other information relating to the Company's deposits by type at the dates indicated.
At December 31, ----------------- 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 ============= ========== ===========
________________________ (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. The following table sets forth the average balance of each deposit type and the average rate paid on each deposit type for the periods indicated.
Year Ended December 31, 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% =========== ========== =========== ========== =========== ==========
________________________ (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:
1999 1998 ---------- -------- (In thousands) Noninterest-bearing checking $ 70,780 $ 63,130 Interest-bearing checking 68,486 67,778 ---------- -------- $ 139,266 $130,908 ========== ========
The following table presents by various interest rate categories the amounts of certificate accounts at the dates indicated and the amounts of certificate accounts at December 31, 1999, which mature during the periods indicated.
Amounts at December 31, 1999 Maturing (In thousands) One Year Greater than Amounts at December 31, or Less Two Years Three Years Three Years --------------------------------- --------- ---------- ------------ ------------- 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 ========== ============ ======== ======== ======= ========
Certificates maturing within one year consist primarily of six month and one year certificates. Historically, a majority of such certificate holders roll over their balances into new certificates with similar terms at the Bank's then current interest rates. The Bank believes that it can continue to achieve balance levels of deposits deemed appropriate by management on a continuing basis through competitive pricing. The following table sets forth the net deposit flows of the Bank during the periods indicated.
Year Ended December 31, 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 =========== ========= ========
________________________ (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.
At December 31, 1999 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 ======= ==========
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". BORROWINGS. The following table sets forth certain information regarding the borrowings of the Bank at or for the dates indicated.
At or For the Year Ended December 31, 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%
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.
At December 31, 1999 1998 1997 ------- ------- ------- Actual Required Actual Required Actual Required ------- --------- ------- --------- ------- --------- 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
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.
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% =========== ============ ============
________________________ (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. 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.
Net Book Value of Property Owned/Leased or Percent of (with Lease Expiration Leasehold Total Location Date) Improvements Deposits Deposits - -------------------------------------------------------------------------------------------------- (Dollars in thousands) BRANCH OFFICES: 1329 North Virginia 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)
(continued from previous page) Net Book Value of Property Owned/Leased or Percent of (with Lease Expiration Leasehold Total Location Date) Improvements Deposits Deposits - -------------------------------------------------------------------------------------------------- (Dollars in thousands) 4060 Weber Road Leased; Corpus Christi, Texas 78411 April 30, 2004 $ -- $ 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)
(continued from previous page) Net Book Value of Property Owned/Leased or Percent of (with Lease Expiration Leasehold Total Location Date) Improvements Deposits Deposits - -------------------------------------------------------------------------------------------------- (Dollars in thousands) 509 South Main Leased; McAllen, Texas 78501 December 22, 2002 $ 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% ======== ========== ===========
______________________ (1)Includes location of administrative, primary lending and mortgage servicing offices. The net book value of the Company's investment in premises and equipment totaled $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. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND ------------------------------------------------------------------- FINANCIAL DISCLOSURE ----------------- Not applicable. PART III - --------- ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT -------------------------------------------------------- The information required herein is incorporated by reference from the definitive Proxy Statement filed with the Securities and Exchange Commission. Otherwise, the requirements of this Item 10 are not applicable. ITEM 11. EXECUTIVE COMPENSATION ----------------------- The information required herein is incorporated by reference from the definitive Proxy Statement filed with the Securities and Exchange Commission. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ------------------------------------------------------------------ The information required herein is incorporated by reference from the definitive Proxy Statement filed with the Securities and Exchange Commission. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS -------------------------------------------------- The information required herein is incorporated by reference from the definitive Proxy Statement filed with the Securities and Exchange Commission. PART IV - -------- ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K ---------------------------------------------------------------- (a)(1) The following financial statements are incorporated herein by reference from pages 23 through 50 of the Annual Report. Report of Independent Certified Public Accountants. Consolidated Statements of Financial Condition as of December 31, 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. 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) EX-10.5 2 AMEND TO CHANGE-IN-CONTROL SEVERANCE AGR 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." 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 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." 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 EX-13 3 1999 ANNUAL REPORT COASTAL BANCORP, INC. AND SUBSIDIARIES FINANCIAL HIGHLIGHTS DECEMBER 31, 1999, 1998 AND 1997
December 31, -------------- (dollars in thousands, except per share data) 1999 1998 1997 - ----------------------------------------------------- -------------- ----------- ----------- 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 - ----------------------------------------------------- -------------- ----------- -----------
(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. 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
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
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. 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 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.
At December 31, ---------------------------------------- (Dollars in thousands, except per share data) 1999 1998 1997 ------------- ---------- ----------- 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 ----------- ----------- 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
(Footnotes appear on page 9)
For the Year Ended December 31, --------------------------------- 1999 1998 1997 ---------- ---------- ---------- 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 ========== ========== ===========
1996 1995 ----------- ----------- 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 =========== ===========
(Footnotes appear on page 9) COASTAL BANCORP, INC. AND SUBSIDIARIES SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
At or For the Year Ended December 31, -------------------------------------------- 1999 1998 1997 1996 1995 ------- ------ ------- ------ ------- 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
At or For the Year Ended December 31, -------------------------------------------- 1999 1998 1997 1996 1995 ------- ------ ------- ------ ------- 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
(Footnotes appear on page 9) 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. 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. 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.
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 ============
_______________ (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.
Year Ended December 31, 1998 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 ============
_______________ (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.
Year Ended December 31, 1997 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 ============
_______________ (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. 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.
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) 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 ========= ======== ========= ========= ======== =========
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.
Estimated Change In Change Net Interest Income EVE In Interest Rates December 31, December 31, (in basis points) 1999 1998 1999 1998 ------------------- --------------------- ---------------- +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)
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.
As of December 31, 1999 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 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
_______________ 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. 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 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 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. 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
COASTAL BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION DECEMBER 31, 1999 AND 1998 (IN THOUSANDS, EXCEPT SHARE DATA) ASSETS 1999 1998 - ----------------------------------------------------------------- ---------- ---------- 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 ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY --------------------------------------- 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 =========== ===========
See accompanying notes to Consolidated Financial Statements.
COASTAL BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (IN THOUSANDS, EXCEPT PER SHARE DATA) 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 ======== ========= ========
See accompanying notes to Consolidated Financial Statements. COASTAL BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (IN THOUSANDS)
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 ======== ======= =======
See accompanying notes to Consolidated Financial Statements.
COASTAL BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (IN THOUSANDS) 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 ========== ======= ============ ========== =============== ========== =========
See accompanying notes to Consolidated Financial Statements.
COASTAL BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (IN THOUSANDS) 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 ---------- ---------- ----------
COASTAL BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED (IN THOUSANDS) 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 ============ ============ =============
See accompanying notes to Consolidated Financial Statements. 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. 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. 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. 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):
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 ========
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):
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 =======
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):
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%
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. (5) MORTGAGE-BACKED SECURITIES Mortgage-backed securities at December 31, 1999 are as follows (in thousands):
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 ========== =========== ============ ========
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 ======== ========== ======== =======
Mortgage-backed securities at December 31, 1998 are as follows (in thousands):
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 ========== =========== ============ ==========
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 ========== =========== ============ ==========
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). (6) LOANS RECEIVABLE Loans receivable at December 31, 1999 and 1998 are as follows (in thousands):
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% =========== ===========
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):
Years ended December 31, 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 ========= ======== ========
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):
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 ======= =======
(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):
Years ended December 31, 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 ======== ======== ========
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. (10) DEPOSITS Deposits and the related weighted average interest rates at December 31, 1999 and 1998 are summarized as follows (dollars in thousands):
1999 1998 --------------------------- --------------------------- Stated Rate Amount Stated Rate Amount -------------- ----------- -------------- ----------- 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% =========== ===========
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):
Year Ended December 31, - ----------------------- 2000 $ 968,838 2001 82,705 2002 17,020 2003 10,772 2004 4,917 Subsequent years 380 ---------- $1,084,632 ==========
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):
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%
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):
Due during the year Weighted Average ended December 31, Interest Rate Amount - ------------------- ----------------- ---------- 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 ================= ============
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. (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):
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
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. (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. The terms of the interest rate swap agreements outstanding at December 31, 1999 and 1998 are summarized as follows (dollars in thousands):
Floating Rate Fair Value at Notional LIBOR Fixed at End of Period Maturity Amount Index Rate End of Period (gain (loss)) - --------------------- --------- ----------- ------ -------------- --------------- 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) ========= ===============
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. Interest rate cap agreements outstanding at December 31, 1999 expire as follows (dollars in thousands):
Year of Strike rate Notional expiration range amount - ---------- ---------------- --------- 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 =========
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):
At At December 31, 1999 December 31, 1998 ------------------ ------------------ Carrying Fair Carrying Fair Value Value Value Value ------------------ ------------------ ---------- ----------- 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
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. 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):
1999 1998 1997 ------- ------ ------- Current $6,023 $3,046 $7,831 Deferred (364) 497 (9) ------- ------ ------- $5,659 $3,543 $7,822 ======= ====== =======
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):
1999 1998 1997 -------- -------- ------- 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 ======== ======== =======
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):
1999 1998 ------ ------ 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 ====== ======
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.
Years ended December 31, ------------------------- 1999 1998 1997 --------- ------- ------- 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
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:
1999 1998 1997 ------------ ------------ ------------ 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
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:
1999 1998 1997 --------------------- --------------------- ------------------------ Weighted- Weighted- Number Average Number Average Number Weighted- of Exercise of Exercise of Average Shares Price Shares Price Shares Exercise Price --------- ---------- --------- ---------- --------- --------------- 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 ========= ========= =========
The following table summarizes information about stock options outstanding at December 31, 1999:
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 =================== ===========
(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):
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 =========== ========== =========
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):
Year ending December 31, Amount - ------------------- ------- 2000 $ 2,752 2001 2,675 2002 2,560 2003 2,140 2004 and thereafter 14,795
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):
Minimum For Capital Well-Capitalized Actual Adequacy Purposes Requirements ------------------------- ----------------------- ---------------------- Capital Requirement Amount Ratio Amount Ratio Amount Ratio - ------------------------- -------- --------------- ----------------- ------ -------- ------ 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
(25) PARENT COMPANY FINANCIAL INFORMATION Condensed financial information for Coastal Bancorp, Inc. is as follows (in thousands): Coastal Bancorp, Inc. Statements of Financial Condition ---------------------------------
December 31, ------------------------ 1999 1998 ------------- -------- 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 ============= ========
Coastal Bancorp, Inc. Statements of Operations ------------------------
Years ended December 31, ------------------------- 1999 1998 1997 ------ ------ ------- 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 ========= ======= =======
Coastal Bancorp, Inc. Statements of Cash Flows ------------------------
Years ended December 31, ------------------------------------- 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: 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 ============ ========== =========
(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):
1999 Quarter Ended (unaudited) ---------------------------------------------------------- March 31, June 30, September 30, December 31, ------------ ---------- ------------- ------------ 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 =========== ========== ============ ============
1998 Quarter Ended (unaudited) ---------------------------------------------------------- March 31, June 30, September 30, December 31, ------------ ---------- ------------- ------------ 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 ============ ========== ============= ============
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:
1999 1998 ---------------------------------------------------------- High Low Dividends High Low Dividends ------- ------- ---------- ------- ------- ---------- 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
COASTAL BANCORP, INC. PREFERRED STOCK, SERIES A:
1999 1998 ------- --------------------------------------------- High Low Dividends High Low Dividends ------- ------- ---------- ---- --- --------- 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 -- -- --
COASTAL BANC SSB PREFERRED STOCK, SERIES A:
1999 1998 ------------------------------------------------------------- High Low Dividends High Low Dividends ------- ------- ---------- ------- ------- ---------- 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
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 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. EX-27 4 FINANCIAL DATA SCHEDULE
9 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. 12-MOS DEC-31-1999 DEC-31-1999 48,098 0 0 0 99,665 917,511 900,232 1,735,081 10,493 2,947,952 1,624,289 765,096 46,376 378,735 0 27,500 76 105,880 2,947,952 136,036 63,663 3,244 202,943 64,701 125,657 77,286 10,575 0 60,398 16,685 11,026 0 0 11,026 1.45 1.42 2.75 14,666 2,452 0 0 11,358 11,830 390 10,493 10,493 0 0
EX-28 5 PROXY STATEMENT 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 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. - ------ 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. 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." 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.
Amount of Shares of Common Stock Name Beneficially Owned (and Address) of as of February 29, Percent of Beneficial Owner 2000(1) Class - ------------------------------------------ ------------------------ ----------- 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)
Amount of Shares of Common Stock Name Beneficially Owned (and Address) of as of February 29, Percent of Beneficial Owner 2000(1) Class - ---------------------------------------------- -------------------- ----------- 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
- ---------------------- (footnotes on next page) * Represents less than 1.0% of the Common Stock beneficially owned. (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. 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. 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.
Position with the Company and/or the Bank and other subsidiaries Name Age Principal Occupation During Last Five Years - ---------------- ---- -------------------------------------------------------------------- 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.
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. 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.
ANNUAL ALL NAME AND PRINCIPAL COMPENSATION AWARDS OTHER POSITION(1) YEAR SALARY(2) BONUS(3) OPTIONS(4) COMPENSATION(5) - --------------------------------------------------------------------------------------------- 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
- ---------------------- (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. 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. 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.
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) - ------------------- ---------- -------------- --------- ---------- ------------ 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
- ---------------------- (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. 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.
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 - ----------------- ------------ -------- --------------------------- -------------------------- 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
- ---------------------- (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. COMPARISON OF FIVE YEAR-CUMULATIVE TOTAL RETURN PERFORMANCE
PERIOD ENDING --------------------------------------------------------------- INDEX 12/31/94 12/31/95 12/31/96 12/31/97 12/31/98 12/31/99 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
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. 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. 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 -----END PRIVACY-ENHANCED MESSAGE-----