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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2000
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OR
[ ] Transition Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the Transition Period from _________ to _________
Commission File Number: 0-24526
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COASTAL BANCORP, INC.
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(Exact name of Registrant as specified in its charter)
Texas 76-0428727
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
5718 Westheimer, Suite 600
Houston, Texas 77057
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(Address of principal executive office)
(713) 435-5000
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(Registrant's telephone number)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
N/A N/A
Securities registered pursuant to section 12(g) of the Act:
Common Stock, $0.01 par value per share
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(Title of Class)
9.12% Series A Cumulative Preferred Stock
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(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months and (2) has been subject to such filing requirements for the
past 90 days. Yes X No
---
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 16, 2001, the aggregate market value of the 5,737,376 shares of
Common Stock of the Registrant issued and outstanding on such date, excluding
1,675,183 shares held by all directors and executive officers of the Registrant
as a group, was $108,663,663. This figure is based on the closing sale price of
$26.75 per share of the Registrant's Common Stock on March 16, 2001, as reported
in The Wall Street Journal on March 19, 2001.
Number of shares of Common Stock outstanding as of March 16, 2001: 5,737,376
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, 2000, are incorporated into Part II, Items 5-8 of
this Form 10-K.
(2) Portions of the Registrant's definitive proxy statement for its 2001
Annual Meeting of Stockholders ("Proxy Statement") are incorporated into Part
III, Items 10-13 of this Form 10-K.
PART I.
ITEM 1. BUSINESS
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COASTAL BANCORP, INC.
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, as amended (the "Securities Act"), and the Securities Exchange Act of
1934, as amended (the "Exchange Act"), based on current management expectations.
Coastal Bancorp, Inc.'s (the "Company") 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. 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 subsidiary of HoCo. Each of these
reorganizations was treated for accounting purposes 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. In
June 2000, the Company acquired Coastal Banc Insurance Agency, Inc. ("CBIA") as
a wholly-owned subsidiary of the Bank. CBIA was a former affiliate of the Bank
and receives fees related to insurance and investment product sales to the
Bank's deposit and loan customers.
At December 31, 2000, the Company had total consolidated assets of $3.1
billion, total deposits of $1.7 billion, $28.8 million in Series A Preferred
Stock of the Bank, 9.12% Series A Cumulative Preferred Stock of $27.5 million
and common stockholders' equity of $111.0 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 77057-5745, 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, 2000, the Bank's total assets had increased to $3.1 billion,
total deposits were $1.7 billion and stockholders' equity totaled $209.0
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.
The Bank operates a website on the Internet for business and marketing
purposes at www.coastalbanc.com. (The website is not a part of this Form 10-K.)
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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
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 on an accretive basis
in the future, or at all.
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 repricing or
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 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. 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 its 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, 2000, of the Company's $3.1 billion in total assets,
$980.2 million or 31.7% of total assets consisted of mortgage-backed securities.
At December 31, 2000, the Company's total loans receivable portfolio amounted to
$1.9 billion or 61.3% of total assets, $908.8 million of which were comprised of
first lien single family 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 additional 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 1.91% for the year ended
December 31, 2000.
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. 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
and other characteristics. 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 designated 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 than before by incorporating more
comprehensive credit information than previously reviewed by the Bank. The PCC,
as part of the Bank's Asset/Liability Subcommittee, is also responsible for
monitoring and managing the Bank's assets and liabilities and their sensitivity
to interest rate changes.
The following table sets forth information concerning the composition of
the Company's net loans receivable portfolio by type of loan at the dates
indicated.
At December 31,
2000 1999 1998 1997 1996
--------------- ----------- ----------- ----------- -----------
(In thousands)
Real estate mortgage loans:
First lien residential $ 908,841 $ 836,005 $ 690,510 $ 689,767 $ 791,337
Multifamily 224,361 163,059 119,447 131,454 139,486
Residential construction 157,950 136,675 115,714 83,359 77,146
Acquisition and development 133,005 103,357 75,932 31,619 26,132
Commercial 347,921 314,292 257,723 181,315 119,004
Commercial construction 90,256 65,934 40,344 14,506 3,963
Commercial secured by residential
mortgage loans held for sale
("Warehouse") 8,518 60,372 173,124 98,679 53,573
Commercial secured by mortgage
servicing rights ("MSR") -- -- 3,867 32,685 21,380
Commercial, financial and industrial 120,420 100,195 92,218 30,877 21,965
Loans secured by deposits 13,681 13,094 13,164 8,695 8,849
Consumer and other 56,522 63,383 66,989 15,030 14,400
--------------- ----------- ----------- ----------- -----------
Total loans 2,061,475 1,856,366 1,649,032 1,317,986 1,277,235
--------------- ----------- ----------- ----------- -----------
Loans in process (142,451) (108,561) (99,790) (47,893) (38,742)
Allowance for loan losses (14,507) (10,493) (11,358) (7,412) (6,880)
Unearned interest and loan fees (3,864) (2,947) (3,493) (2,926) (2,344)
Net (discount) premium on
purchased loans (4,425) 716 3,758 1,680 479
--------------- ----------- ----------- ----------- -----------
Total loans receivable, net $ 1,896,228 $1,735,081 $1,538,149 $1,261,435 $1,229,748
=============== =========== =========== =========== ===========
SCHEDULED MATURITIES. The following table sets forth certain
information at December 31, 2000 regarding the principal amount of loans
maturing in the Company's net loans receivable portfolio based on their
contractual terms to maturity assuming no periodic amortization of principal.
Demand loans, loans having no stated schedule of repayments and no stated
maturity are reported as due in one year or less.
AT DECEMBER 31, 2000
(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 $ 12,663 $ 31,293 $ 48,711 $ 55,779 $ 409,702 $343,151 $ 901,299
Multifamily mortgage 78,536 122,319 12,067 8,173 1,829 -- 222,924
Residential construction 91,943 1,371 284 533 -- -- 94,131
Real estate acquisition
and development 36,329 45,854 3,280 -- -- -- 85,463
Commercial real estate 98,233 96,870 74,636 32,110 42,244 -- 344,093
Commercial construction 17,819 22,578 8,793 778 4,096 -- 54,064
Commercial, other 65,607 37,774 22,170 3,017 89 -- 128,657
Consumer and other 18,037 21,324 16,061 5,479 4,696 -- 65,597
--------- ------------ -------------- -------------- ------------- -------- ----------
Total loans $ 419,167 $ 379,383 $ 186,002 $ 105,869 $ 462,656 $343,151 $1,896,228
========= ============ ============== ============== ============= ======== ==========
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, 2000 by category and which have fixed or adjustable interest rates.
Interest Rate
--------------
Fixed Adjustable Total
----------- ------------- ----------
(In thousands)
First lien residential mortgage $ 324,374 $ 564,262 $ 888,636
Multifamily mortgage 7,359 137,029 144,388
Residential construction 1,267 921 2,188
Real estate acquisition and development 445 48,689 49,134
Commercial real estate 75,627 170,233 245,860
Commercial construction 6,706 29,539 36,245
Commercial, other 31,987 31,063 63,050
Consumer and other 47,351 209 47,560
----------- ----------- -----------
Total $ 495,116 $ 981,945 $ 1,477,061
=========== =========== ===========
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 mortgage loans serviced
for third party investors during the periods presented. See "Mortgage Loan
Servicing."
Year Ended December 31,
2000 1999 1998
---------- ----------- -----------
(In thousands)
Loan Originations:
First lien residential mortgage $ 40,957 $ 26,042 $ 16,195
First lien residential mortgage by correspondent
lenders -- -- 1,426
Home equity 6,406 4,520 7,022
Residential construction and acquisition
and development 302,839 255,732 189,686
Warehouse 359,270 1,366,880 1,642,445
MSR -- 5,134 7,554
Multifamily mortgage 86,404 103,718 228,553
Commercial real estate 130,581 179,196 126,916
Commercial construction 39,724 52,718 15,543
Commercial, financial and industrial 138,959 161,776 107,890
Consumer 46,057 43,298 38,002
------------ ----------- -----------
Total loan originations 1,151,197 2,199,014 2,381,232
Purchase of residential mortgage loans
(net of repurchases by investors) 236,362 365,951 293,024
Loans acquired in the 1998 Branch Acquisition -- -- 176,157
Purchase of residential construction loans 608 11,077 --
Purchase of automobile loans -- 10,176 34,609
------------ ----------- -----------
Total loan originations and purchases 1,388,167 2,586,218 2,885,022
------------ ----------- -----------
Foreclosures 3,672 4,398 4,178
Principal repayments and reductions to
principal balance 1,217,229 2,372,243 2,587,252
Residential loans sold -- -- 10,663
Total foreclosures, repayments and sales
of loans 1,220,901 2,376,641 2,602,093
------------ ----------- -----------
Amortization of premiums, discounts and fees on
loans (329) (2,070) (3,115)
Provision for loan losses (5,790) (10,575) (3,100)
------------ ----------- -----------
Net increase in loans receivable $ 161,147 $ 196,932 $ 276,714
============ =========== ===========
FIRST LIEN RESIDENTIAL 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 2000, 1999 and 1998, the Bank
originated residential mortgage loans for portfolio totaling $41.0 million,
$26.0 million and $16.2 million, respectively. The majority of the Bank's
residential mortgage loans have been acquired through bulk purchases in the
traditional secondary market and are secured by real estate located throughout
the United States. During 2000, 1999 and 1998, the Bank purchased $236.4
million, $366.0 million and $293.6 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 $275,000, or loans that do not otherwise meet the criteria established
by FNMA or FHLMC).
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 first lien residential mortgage loans for its
portfolio through bulk purchases when the prices of these purchases are
considered to be favorable. The acquisition of first lien residential mortgage
loans has been accomplished primarily through bulk purchases in the traditional
secondary market (from mortgage companies, financial institutions, investment
banks and, beginning in 1997, from CBCC). Bulk purchases allow the Bank to
obtain these residential 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 members of the
Bank's Asset/Liability Subcommittee review 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,
assumed prepayment speeds 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 has sold mortgage loans from time to time in order to replace the
loans with instruments which have higher credit quality and less interest rate
risk. During 2000, 1999 or 1998, the Bank did not originate or purchase any
loans with the intent to sell them to third party investors. During 1998, the
Bank sold $10.7 million of loans to third party investors. No loans were sold
in 2000 or 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 first lien residential mortgage and residential
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.
Most of 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, 2000, the Bank had $95.1 million in outstanding residential
construction loans (net of loans in process of $62.8 million) of which $390,000
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. In addition, the Bank participates in the funding of residential
construction loans with other institutions. Four of the Bank's approved
builders are authorized for the funding of loans on properties located outside
the state of Texas. At December 31, 2000, there were loans totaling $15.1
million for these builders in the states of Arizona, Illinois, New Mexico, North
Carolina and Ohio. 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; 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, 2000, commercial real estate loans totaling $347.9
million and multifamily mortgage loans of $224.4 million were outstanding. At
December 31, 2000, the Bank had commercial real estate loans totaling
approximately $1.1 million 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 each builder maintain a specified
amount of equity in the project and by monitoring other financial strength
requirements. At December 31, 2000, commercial and multifamily construction
loans totaling $56.2 million (net of loans in process of $34.1 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 typically 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 lender is acting as the lead lender 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 by periodically reviewing their financial
statements, loan production delinquency and commitment reports and, on an annual
basis, by reviewing their audited financial statements and auditor's letter to
its board of directors. In loan participations where a third party bank is
acting as the lead bank, the Bank relies on the lead bank to perform
substantially the same procedures as noted above.
During 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 from 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 in 1999 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. During the year ended December 31, 2000,
Coastal received $180,000 in proceeds from the MCA loan which was recorded as a
recovery in the allowance for loan losses during the period. In addition, the
lawsuit filed against the lead lender is currently scheduled for trial in late
June of 2001, or as soon thereafter as the court's docket will permit. 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.
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. During the year ended December 31, 2000, the Bank originated $359.3
million of Warehouse loans and had Warehouse loans outstanding to three
customers of $8.5 million at December 31, 2000. At December 31, 2000, there
were no Warehouse loans on nonaccrual status.
MSR LENDING. Beginning in 1992 and discontinued in 1999, 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 monitored MSR borrowers by, among
other things, reviewing the borrower's financial condition and operations in the
same manner as they did 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
did not exceed 75.0% during the life of the loan. 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. The Bank did not have any MSR
loans outstanding at December 31, 2000 or 1999.
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 developers with good track
records and strong financial capacity and on property where a substantial number
of the lots to be developed are pre-sold. The term of the loans have generally
been from 18 to 36 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,
2000, the Bank had $87.5 million (net of loans in process of $45.5 million) of
real estate acquisition and development loans outstanding. At December 31,
2000, 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, 2000, Commercial
Business loans outstanding totaled $120.4 million, with $1.2 million of such
loans 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, 2000, the Bank had $56.5 million in
consumer and other loans outstanding and $13.7 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, changes in 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. During 1999, the
Bank purchased $10.2 million in automobile loans under this agreement. During
2000, no loans were purchased under this agreement. As of December 31, 2000, a
total of $16.0 million of these automobile loans were included in total consumer
and other loans, of which $447,000 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. 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. All costs incurred from the date
of acquisition forward relating to maintaining the property are recorded as a
current period 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 or
renewal 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,
2000 1999 1998
------- -------- --------
(Dollars in thousands)
Nonaccrual loans:
First lien residential mortgage $16,062 $13,344 $11,883
Residential construction 390 184 192
Commercial real estate 1,134 104 149
Commercial, Warehouse -- -- 10,042
Commercial, financial and industrial 1,152 694 496
Consumer and other 496 340 75
------- -------- --------
Total nonaccrual loans 19,234 14,666 22,837
------- -------- --------
Loans greater than 90 days delinquent
and still accruing:
First lien residential mortgage 475 1,137 189
Multifamily mortgage -- -- 190
Commercial real estate 736 690 293
Commercial, financial and industrial 634 531 808
Consumer and other 153 94 224
Total loans greater than 90 days
delinquent and still accruing
interest 1,998 2,452 1,704
------- -------- --------
Total nonperforming loans 21,232 17,118 24,541
------- -------- --------
Total REO and repossessed assets 4,095 4,531 4,927
------- -------- --------
Total nonperforming assets $25,327 $21,649 $29,468
======== ======== ========
Ratio of nonaccrual loans to total
loans receivable 1.01% 0.85% 1.48%
======== ======== ========
Ratio of nonperforming loans to total
loans receivable 1.12% 0.99% 1.60%
======== ======== ========
Ratio of nonperforming
assets to total assets 0.82% 0.73% 0.99%
======== ======== ========
For the year ended December 31, 2000, approximately $1.2 million 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 2000 included
$706,000 in interest income for these same loans prior to the time they were
placed on nonaccrual status.
At December 31, 2000, the Bank had 198 first lien residential mortgage
loans on nonaccrual status, aggregating $16.1 million, with an average balance
of approximately $81,000. A total of 159 of these loans, with an aggregate
balance of $13.4 million, were acquired through loan purchases. Of the 159
nonaccrual residential mortgage loans acquired through loan purchases, at
December 31, 2000, 53 of such loans totaling $6.7 million were being serviced by
other institutions, which constituted 2.4% of the $277.3 million of aggregate
loans serviced by others.
At December 31, 2000, nonperforming assets included REO with an aggregate
book value of $4.0 million and repossessed assets of $49,000. At such date, the
Bank's REO consisted of 26 single family residential properties totaling $2.2
million, 6 commercial properties totaling $1.6 million, 1 residential
construction property totaling $72,000 and 1 multi-family property with a book
value of $188,000.
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, 2000, the
carrying value of impaired loans totaled approximately $4.4 million and the
related allowance for loan losses on those impaired loans totaled $1.6 million.
Of the impaired loans outstanding at December 31, 2000, one loan with a balance
of $650,000 did not have a specific portion of the allowance for loan losses
allocated to it at such date. The average balance of impaired loans during the
year ended December 31, 2000 was approximately $3.5 million. For the year ended
December 31, 2000, the Bank did not recognize interest income on loans
considered impaired.
The Bank had loaned $158.0 million at December 31, 2000, 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." The Bank had no other loan concentrations.
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,
2000 1999 1998 1997 1996
--------- --------- -------- -------- -------
(Dollars in thousands)
Balance at beginning of year $ 10,493 $ 11,358 $ 7,412 $ 6,880 $5,703
Charge-offs (2,174) (11,830) (1,693) (1,416) (851)
Recoveries 398 390 282 148 103
Provision for loan losses 5,790 10,575 3,100 1,800 1,925
Allowance of acquired entities(1) -- -- 2,257 -- --
--------- --------- -------- -------- -------
Balance at end of year $ 14,507 $ 10,493 $11,358 $ 7,412 $6,880
========= ========= ======== ======== =======
Ratio of net charge-offs during the
period to average net loans
outstanding during the period 0.09% 0.69% 0.10% 0.10% 0.06%
========= ========= ======== ======== =======
________________________
(1)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 following table sets forth the charge-offs by type of loan during the
periods indicated.
Year Ended December 31,
2000 1999 1998 1997 1996
------- -------- ------- ------- ------
(In thousands)
First lien residential mortgage $ 735 $ 331 $ 544 $ 591 $ 651
Residential construction -- 26 -- -- --
Commercial real estate 55 10 24 4 --
Commercial, Warehouse and MSR -- 9,924 -- -- --
Commercial, financial and industrial 763 829 648 472 58
Consumer and other 621 710 477 349 142
------- -------- ------- ------- ------
Total charge-offs $2,174 $11,830 $1,693 $1,416 $ 851
======= ======== ======= ======= ======
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,
2000 1999 1998 1997 1996
-------- -------- -------- ------- -------
(In thousands)
First lien residential mortgage $ 2,408 $ 2,529 $ 3,238 $ 2,566 $ 2,217
Multifamily mortgage 608 442 383 511 369
Residential construction 622 384 343 251 223
Real estate acquisition and development 1,330 1,034 759 316 261
Commercial real estate 2,574 2,221 2,112 1,468 1,151
Commercial construction 1,480 972 225 203 20
Commercial, Warehouse and MSR 45 256 1,722 494 361
Commercial, financial and industrial 2,611 1,650 1,750 1,008 985
Consumer and other 1,119 992 826 233 374
Unallocated 1,710 13 -- 362 919
-------- -------- -------- ------- -------
$ 14,507 $ 10,493 $ 11,358 $ 7,412 $ 6,880
======== ======== ======== ======= =======
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,
2000 1999 1998 1997 1996
-------- --------- -------- -------- --------
(In thousands)
First lien residential mortgage $ 573 $ (446) $ 1,142 $ 908 $ (180)
Multifamily mortgage 166 59 (184) 142 120
Residential construction 238 67 55 28 (84)
Real estate acquisition and development 296 275 443 55 131
Commercial real estate 406 119 82 321 79
Commercial construction 508 747 (36) 183 20
Commercial, Warehouse and MSR (397) 8,456 1,228 133 131
Commercial, financial and industrial 1,616 561 240 416 618
Consumer and other 687 724 846 171 322
Unallocated 1,697 13 (716) (557) 768
-------- --------- -------- -------- --------
$ 5,790 $ 10,575 $ 3,100 $ 1,800 $ 1,925
======== ========= ======== ======== ========
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, accounting principles generally accepted in the
United States of America, general economic conditions, particularly as they
relate to the Bank's lending area, and other factors related to the
collectibility of the Bank's loan portfolio. During 2000, Coastal's lending
continued to focus on increasing the size of Coastal's commercial loan
portfolio. As such, Coastal continued to execute on its plan to eventually
build the allowance for loan losses to a benchmark of approximately 100% of
nonperforming loans. As discussed above, 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. At December
31, 2000, the Bank's ratio of the allowance for loan losses to nonperforming
loans was 68.32% and the ratio of the allowance for loan losses to total loans
receivable was 0.77%.
The Board of Directors of the Bank reviews its Asset Classification and
Allowance Policy ("ACAP") at least annually. The 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 policy guidelines. Management maintains the allowance for
loan losses at levels considered adequate to cover probable losses on loans.
This allowance covers all loans, including loans deemed to be impaired, loans
not impaired, and loans excluded from the impairment test. The adequacy of the
allowance is based on management's periodic evaluation of the loan portfolio,
which considers 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, regulatory
policies and the estimated value of the underlying collateral, if any.
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 allowance for loan losses. These agencies may require the
Bank to increase the allowance for loan losses, based on their respective
judgments of the information available at the time of the examinations.
MORTGAGE LOAN SERVICING. Prior to the sale of its entire mortgage
servicing rights portfolio effective March 31, 2000, the Bank serviced
residential real estate loans for others, including FNMA, FHLMC and other
private investors. Loan servicing for others included 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.
Due to the Bank's declining servicing for others portfolio (with an average
remaining loan life of approximately seven years), management decided to sell
its entire servicing rights portfolio based on the current market conditions for
loan servicing rights and the expected declining income benefits of that
servicing portfolio on an ongoing basis. Effective March 31, 2000, the Bank
sold its rights to service approximately $389.1 million of mortgage loans for
third party investors, primarily FNMA and FHLMC, pursuant to a purchase and sale
agreement. The Bank subserviced those mortgage loans until the transfer to the
purchaser was completed in the second quarter of the year. The Bank recorded a
$2.2 million gain on the sale of the above mentioned mortgage servicing rights.
The Bank received fees for servicing mortgage loans for others, which
generally ranged 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 served
to compensate the Bank 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 2000, 1999 and 1998, the Bank earned
servicing fees of $244,000, $680,000 and $642,000, respectively, in conjunction
with its loan servicing. Servicing fees were collected out of the monthly
mortgage payments made by borrowers and were recorded net of the amortization of
mortgage servicing rights.
The Bank's servicing portfolio was subject to reduction by normal principal
amortization, by prepayment or by foreclosure of outstanding loans. The
following table sets forth certain information regarding the Bank's mortgage
loan servicing for others portfolio for the periods indicated.
Year Ended December 31,
2000 1999 1998
---------- ---------- ----------
(In thousands)
Beginning servicing portfolio $ 407,938 $ 519,237 $ 675,737
Servicing sold or transferred (382,658) -- --
Amortization and payoffs (25,005) (110,578) (155,059)
Foreclosures (275) (721) (1,441)
---------- ---------- ----------
Ending servicing portfolio $ -- $ 407,938 $ 519,237
========== ========== ==========
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, 2000, the Company's mortgage-backed securities portfolio (including $94.7
million of mortgage-backed securities available-for-sale), net of unamortized
premiums and unearned discounts, amounted to $980.2 million, or 31.7%, 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, 2000, the Company's net mortgage-backed securities
had an aggregate market value of $955.2 million.
The following table sets forth the composition of the Company's
mortgage-backed securities portfolio at the dates indicated.
At December 31,
2000 1999 1998
--------- -------- ----------------------- ----------------------
Amount Percent Amount Percent Amount Percent
--------- -------- ---------- --------- ---------- ----------
(Dollars in thousands)
Held-to-maturity:
REMICS $812,460 91.77% $ 838,499 91.45% $1,059,924 91.82%
FNMA certificates 49,013 5.54 54,749 5.97 61,590 5.34
GNMA certificates 17,582 1.99 16,074 1.75 21,235 1.84
Non-agency certificates 6,273 0.70 7,537 0.83 11,530 1.00
Interest-only securities -- -- -- -- 1 --
--------- -------- --------- -------- ----------- --------
885,328 100.00% 916,859 100.00% 1,154,280 100.00%
======== ======== ========
Unamortized premium 1,503 1,703 2,100
Unearned discount (1,266) (1,350) (2,264)
--------- --------- -----------
Total held-to-maturity $885,565 $ 917,212 $1,154,116
========= =========== ===========
Available-for-sale:
REMICS $ 77,590 $ 77,861 $ 98,892
GNMA certificates 19,946 24,615 --
--------- --------- -----------
97,536 102,476 98,892
Unamortized premium 149 180 8
Unearned discount (141) (149) (168)
Net unrealized loss (2,871) (2,842) (2,123)
--------- --------- -----------
Total available-for-sale $ 94,673 $ 99,665 $ 96,609
========= =========== ===========
Total mortgage-backed
securities $980,238 $1,016,877 $1,250,725
========= =========== ===========
The mortgage-backed securities which the Company 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 and certain types of collateralized
mortgage obligations ("CMOs"). 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 Company 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 interest-only 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) 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, 2000, the Bank had
mortgage-backed securities considered "high risk" with a recorded book value of
approximately $3.6 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,
2000 1999 1998
--------- ---------- ----------
(In thousands)
Mortgage-backed securities
held-to-maturity purchased $ 4,815 $ 3,080 $ 8,203
Mortgage-backed securities
available-for-sale purchased -- 26,489 --
Mortgage-backed securities
available-for-sale sold -- -- (48,550)
Discount accretion (premium
amortization), net (159) 430 (132)
Change in unrealized loss on
mortgage-backed securities
available-for-sale (29) (719) 1,375
Principal repayments on
mortgage-backed securities (41,266) (263,128) (225,258)
--------- ---------- ----------
Net decrease in
mortgage-backed securities $(36,639) $(233,848) $(264,362)
========= ========== ==========
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 residential mortgage loans, mortgage-backed securities 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, as well as maturities of 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
most 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 retail 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 a commercial
banking strategy related to deposits designed to increase the level of lower
cost transaction and commercial deposit accounts. The Bank offers 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 33.4% of total deposits at December 31,
2000 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,
-----------------
2000 1999 1998(1)
Percent Percent Percent
of of of
Amount Deposits Amount Deposits Amount Deposits
----------- --------- ---------- --------- ---------- ---------
(Dollars in thousands)
Demand deposit accounts:
Noninterest-bearing checking(2) $ 80,849 4.83% $ 97,146 5.98% $ 95,398 5.60%
Interest-bearing checking(2) 61,046 3.64 65,229 4.02 63,067 3.70
Savings 43,891 2.62 46,011 2.83 48,571 2.85
Money market demand(2) 374,210 22.34 331,082 20.39 339,481 19.91
Total demand deposit accounts 559,996 33.43 539,468 33.22 546,517 32.06
----------- --------- ---------- --------- ---------- ---------
Certificate accounts:
Maturing within 1 year 1,038,522 62.00 968,838 59.66 965,443 56.64
1-2 years 53,378 3.19 82,705 5.09 148,049 8.69
2-3 years 13,678 0.82 17,020 1.05 22,347 1.31
3-4 years 4,284 0.26 10,772 0.66 11,833 0.69
4-5 years 4,745 0.28 4,917 0.30 10,176 0.60
Over 5 years 323 0.02 380 0.02 240 0.01
Total certificate accounts 1,114,930 66.57 1,084,632 66.78 1,158,088 67.94
----------- --------- ---------- --------- ----------
1,674,926 100.00% 1,624,100 100.00% 1,704,605 100.00%
========= ======== =======
Premium on purchased
deposits, net 55 189 399
----------- ---------- ----------
Total $1,674,981 $1,624,289 $1,705,004
=========== ========== ==========
________________________
(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)The Bank 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. At December 31, 2000, the
amount of such reclassification was approximately $136.6 million ($68.1 million
from noninterest-bearing checking and $68.5 million from interest-bearing
checking). 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,
2000 1999 1998
------- ------ ------
(Dollars in thousands)
Average Average Average Average Average Average
Balance Rate Paid Balance Rate Paid Balance Rate Paid
----------- --------- ----------- ----------- ---------- -----------
Demand deposit accounts:
Noninterest-bearing checking $ 74,575 --% $ 80,367 --% $ 51,612 --%
Interest-bearing checking 50,622 2.00 49,588 1.96 20,628 2.18
Savings 47,950 2.15 50,805 1.99 35,162 2.20
Money market demand(1) 366,200 2.56 356,860 2.27 315,141 2.37
Certificate accounts 1,095,760 5.62 1,104,378 4.95 1,063,277 5.40
----------- --------- ----------- ---------- ----------- ----------
Total deposits $ 1,635,107 4.47% $ 1,641,998 3.94% $ 1,485,820 4.45%
=========== ========= =========== ========== =========== ==========
________________________
(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:
2000 1999 1998
-------- -------- --------
(In thousands)
Noninterest-bearing checking $ 71,053 $ 70,780 $ 63,130
Interest-bearing checking 69,523 68,486 67,778
-------- -------- --------
$140,576 $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, 2000 which mature during the periods
indicated.
Amounts at December 31, 2000 Maturing In
(In thousands)
One Year Greater than
Amounts at December 31, or Less Two Years Three Years Three Years
----------------------- ---------- --------- ------------ ------------
2000 1999
----------- ---------
Certificate accounts:
2.00% to 3.99% $ 586 $ 23,749 $ 504 $ 30 $ -- $ 52
4.00% to 5.99% 301,328 990,726 258,509 25,229 10,858 6,732
6.00 to 7.99% 812,850 69,943 779,410 28,119 2,753 2,568
8.00 to 9.99% 166 202 99 -- 67 --
over 10.00% -- 12 -- -- -- --
---------- ---------- ----------- -------- ------- ------
Total $1,114,930 $1,084,632 $1,038,522 $ 53,378 $13,678 $9,352
========== ========== ========== ======== ======= ======
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 attract these
levels of deposits 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,
2000 1999 1998
--------- --------- ---------
(In thousands)
Net increase (decrease) before interest credited(1) $ (20,970) $(145,219) $ 264,148
Interest credited 71,662 64,504 65,796
--------- --------- ---------
Net deposit increase (decrease) $ 50,692 $ (80,715) $ 329,944
========== ========== =========
________________________
(1)For the year ended December 31, 1998, reflects the effect of the assumption
of $355.4 million of net deposit liabilities acquired in connection with the
1998 Branch Acquisition. 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 at December 31, 2000 which are $100,000 or more by time remaining until
maturity.
At December 31, 2000
Number of accounts Deposit Amount
------------------ ---------------
(In thousands)
Three months or less 474 $ 66,653
Over three through six months 456 50,456
Over six through twelve months 954 107,674
Over twelve months 133 14,459
------------------ ---------------
Total 2,017 $ 239,242
================== ===============
The Bank's deposits are obtained primarily from businesses and 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 commercial business and retail customers. The Bank uses
traditional marketing methods to attract new customers and deposits, including
newspaper and radio advertising. Through 2000, 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.
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, 2000, 1999 or
1998. See "Subsidiaries of the Bank - CoastalBanc Financial Corp", and
"Subsidiaries of the Bank - Coastal Banc Insurance Agency, Inc."
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,
2000 1999 1998
---------- ----------- ---------
(Dollars in thousands)
FHLB advances:
Average balance outstanding $ 926,659 $ 951,953 $713,197
Maximum amount outstanding at any
month-end during the period 1,275,541 1,115,713 969,036
Balance outstanding at end of period 1,150,305 1,096,931 966,720
Average interest rate during the period 6.29% 5.31% 5.55%
Average interest rate at end of period 6.48% 5.72% 5.24%
Securities sold under agreements
to repurchase:
Average balance outstanding $ 249,655 $ 103,211 $579,561
Maximum amount outstanding at any
month-end during the period 605,214 271,103 874,784
Balance outstanding at end of period -- -- 100,000
Average interest rate during the period 6.68% 5.44% 5.49%
Average interest rate at end of period -- -- 4.93%
The Bank obtains long term, fixed rate and short term, variable rate
advances from the FHLB upon the security of certain of its first lien
residential and multifamily 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, 2000, the Bank had
total FHLB advances of $1.2 billion at a weighted average interest rate of
6.48%. Of the advances outstanding at December 31, 2000, $792.3 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 lend the Bank's securities to others 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, 2000, 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. Federal
funds purchased averaged approximately $18,000, $19,000 and $149,000 during the
years ended December 31, 2000, 1999 and 1998, respectively with an average
interest rate during the periods of 5.56%, 5.26% and 5.33%, respectively. There
were no federal funds purchased outstanding at any month-end during 2000, 1999
or 1998.
The Asset/Liability Subcommittee of the Bank attempts to match the maturity
of its borrowings 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 also
attempts to alter the interest rate risk associated with its borrowings through
the use of interest rate swaps and interest rate caps purchased from selected
securities brokers/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,
2000, the Bank was authorized to have a maximum investment of approximately
$309.2 million in its subsidiaries.
At December 31, 2000, the Bank had two active wholly-owned subsidiaries,
the activities of which are described below. At December 31, 2000, the Bank's
aggregate equity investment in its subsidiaries was $144,000.
On December 30, 1998, CBS Mortgage Corp., a former subsidiary of the Bank,
was merged into 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
$37,000, $51,000 and $49,000 for the years ended December 31, 2000, 1999 and
1998, respectively.
COASTAL BANC INSURANCE AGENCY, INC. In 1987, the Bank entered into an
Administrative Services Agreement with CBIA, a Texas business corporation
licensed under Texas law to act as a life insurance agent. Until June 22, 2000,
CBIA was wholly-owned by a former executive officer of the Bank. On June 22,
2000, CBIA became a subsidiary of the Bank. CBIA receives fees related to
insurance and investment product sales through third party intermediaries to the
Bank's deposit and loan customers. Fees generated, net of expenses, resulted in
net income of $74,000 for the period from June 22 to December 31, 2000.
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 2000, CBCC purchased whole loan assets totaling $264.7
million and sold whole loans (including purchase premium) totalling $239.5
million to the Bank and $25.6 million to third party investors. During the year
ended December 31, 2000, CBCC recorded gains on the sale of loans to the Bank of
$309,000 and gains on the sale of loans to third party investors of $157,000.
The $309,000 gain on the sale of loans to the Bank was recorded on the Bank's
financial statements as a premium on purchased loans and is being amortized over
the life of those loans. All significant intercompany balances and transactions
have been eliminated in consolidation. At December 31, 2000, HoCo's
unconsolidated equity investment in CBCC was $423,000. CBCC had net income
(loss) (before eliminations) of $(21,000), $592,000 and $275,000 for the years
ended December 31, 2000, 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, 2000. 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 provided that they meet the grandfather requirement
described below. See "The Company - Financial Modernization." 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