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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, 1996
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the Transition Period from _________ to
Commission File Number: 0-24526
COASTAL BANCORP, INC.
(Exact name of Registrant as specified in its charter)
Texas 76-0428727
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8 Greenway Plaza, Suite 1500
Houston, Texas 77046
(Address of principal executive office)
(713) 623-2600
(Registrant's telephone number)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
N/A N/A
Securities registered pursuant to section 12(g) of the Act:
Common Stock, $0.01 par value per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements
for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ ]
As of March 14, 1997, the aggregate market value of the 3,959,759 shares of
Common Stock of the Registrant issued and outstanding on such date, excluding
1,008,832 shares held by all directors and executive officers of the
Registrant as a group, was $108,893,372. This figure is based on the closing
sale price of $27.50 per share of the Company's Common Stock on March 14,
1997, as reported in The Wall Street Journal on March 17, 1997.
Number of shares of Common Stock outstanding as of March 14, 1997: 4,968,591
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents incorporated by reference and the
Part of Form 10-K into which the document is incorporated:
(1) Portions of the Registrant's Annual Report to Stockholders for the
fiscal year ended December 31, 1996, are incorporated into Part II, Items 5-8
of this Form 10-K.
(2) Portions of the Registrant's definitive proxy statement for its 1997
Annual Meeting of Stockholders are incorporated into Part III, Items 10-13 of
this Form 10-K.
48
PART I.
ITEM 1. BUSINESS
COASTAL BANCORP, INC.
Coastal Bancorp, Inc. (the "Company") is engaged primarily in the
business of serving as the ultimate holding company for Coastal Banc ssb (the
"Bank"). The Company was incorporated in March 1994 in connection with the
reorganization of Coastal Banc Savings Association (the "Association") into
the holding company form of organization. The reorganization occurred in July
1994. In addition, in July 1994, the Association converted to a
Texas-chartered savings bank operating under the name Coastal Banc ssb. On
November 30, 1996, Coastal Banc Holding Company, Inc. ("HoCo") was created as
a Delaware unitary savings bank holding company in accordance with the terms
of an agreement and plan of reorganization dated August 19, 1996 (the
"Agreement"). Pursuant to the terms of the Agreement, the Bank became a
wholly-owned subsidiary of HoCo and HoCo became a wholly-owned subsidiary of
the Company. The reorganizations were treated as combinations similar to a
pooling of interests. Accordingly, the financial information and references
presented herein have been restated to give effect where appropriate, as if
the reorganizations had occurred at the earliest date presented.
On June 30, 1995, the Company issued $50.0 million of 10.0% Senior Notes
due June 30, 2002 (the "Senior Notes"). The Senior Notes are redeemable at
the Company's option, in whole or in part, on or after June 30, 2000, at par,
plus accrued interest to the redemption date. Of the proceeds received from
the issuance of the Senior Notes, $44.9 million was used to purchase 11.13%
Noncumulative Preferred Stock, Series B, of the Bank (the "Series B Preferred
Stock") which is now owned by HoCo.
At December 31, 1996, the Company had total consolidated assets of $2.9
billion, total deposits of $1.3 billion, $28.8 million in Series A Preferred
Stock and stockholders' equity of $94.1 million.
The Company is subject to examination and regulation by the Office of
Thrift Supervision (the "OTS") and the Company and the Bank are subject to
examination and regulation by the Texas Savings and Loan Department (the
"Department"). The Company is also subject to various reporting and other
requirements of the Securities and Exchange Commission (the "SEC").
The Company's executive offices are located at Coastal Banc Tower, 8
Greenway Plaza, Suite 1500, Houston, Texas 77046, and its telephone number is
(713) 623-2600.
COASTAL BANC SSB
The Bank is a Texas-chartered, Federally insured state savings bank. It
is headquartered in Houston, Texas and operates through 37 branch offices in
metropolitan Houston, Corpus Christi, Austin and small cities in central and
south Texas.
The Bank was originally acquired by an investor group (which includes a
majority of the Board of Directors and the present Chairman of the Board,
President and Chief Executive Officer of the Company) in 1986 as a vehicle to
take advantage of the failures and consolidation in the Texas banking and
thrift industries. The Bank has acquired deposits and branch offices in
transactions with the Federal government and other private institutions, in
addition to acquiring an independent national bank in 1995, as a base for
developing an ongoing savings bank business. At February 28, 1986 (the date of
change in ownership), the Bank had one full service office and total assets of
approximately $10.7 million. Accordingly, although originally organized in
1954, the Bank in its current form effectively commenced operations with the
1986 change in control. By December 31, 1996, the Bank's total assets had
increased to $2.9 billion, total deposits were $1.3 billion and stockholders'
equity totaled $165.4 million.
The Bank attempts to maximize profitability through the generation of net
interest income and fee income. To meet this objective, the Bank has
implemented a strategy of building its core deposit base while deploying its
funds in assets which provide an attractive return with relatively low credit
risk. In carrying out this strategy and to ultimately provide a respectable
return to the Company's shareholders, the Bank adheres to four operating
principles: (i) continuing to expand its low cost core deposit base through
acquisitions; (ii) minimizing interest rate risk; (iii) minimizing credit
risk; and (iv) maintaining a low level of general overhead expense relative to
its peers. These operating principles are briefly discussed below.
CORE DEPOSITS. The Bank has implemented the first operating principle,
developing and expanding a core deposit base, beginning in 1988 through a
series of transactions with the Federal government and private sector
financial institutions, gaining in the process entry into additional markets
in Houston, Corpus Christi, Austin, San Antonio and south Texas.
In 1988, the Bank became the first acquiror of failed or failing savings
institutions under the Federal government's "Southwest Plan." In this
transaction (the "Southwest Plan Acquisition"), the Bank acquired from the
Federal Savings and Loan Insurance Corporation ("FSLIC"), as receiver for four
insolvent savings associations (the "Acquired Associations"), approximately
$543.4 million of assets and assumed approximately $543.4 million of deposits
and other liabilities. The Bank acquired an aggregate of 14 branch offices
from the Acquired Associations in new and existing markets in southwest
Houston, west of Houston along the Houston-San Antonio corridor and in the Rio
Grande Valley. See "The Southwest Plan Acquisition."
Since completion of the Southwest Plan Acquisition, the Bank has entered
into five branch office acquisitions and one whole bank acquisition: two with
an instrumentality of the Federal government (acting as the receiver of
insolvent financial institutions) and four with other private institutions.
In each, the Bank generally agreed to acquire certain assets in consideration
of the assumption of certain deposit and other liabilities with respect to
each institution. In addition, in 1996 the Bank chose to exit two Texas
cities, San Antonio and San Angelo. The Bank sold its San Angelo branch and
swapped its three San Antonio branches for one branch in Bay City, Texas.
In the first branch acquisition, completed in 1990, the Bank assumed
deposits of $151.1 million in connection with the acquisition of nine branch
offices, which are primarily located in the northwestern Houston metropolitan
area. The acquisition provided the Bank with further penetration in the
Houston market. In the second branch acquisition, completed in 1991, the Bank
assumed deposits of $71.4 million in connection with the acquisition of an
office located in Victoria, Texas. The acquisition of that office expanded
the Bank's presence in the small cities market southwest of Houston toward
Port Lavaca. In the third branch acquisition, completed in 1993, the Bank
assumed deposits of $386.4 million in connection with the acquisition of nine
branches located in Corpus Christi, San Antonio, Conroe, Brenham and Sealy.
The Corpus Christi and San Antonio branch acquisitions allowed the Bank to
enter new markets. In the fourth branch acquisition, also completed in 1993,
the Bank assumed deposits of $45.7 million and acquired two branches located
in Harlingen and McAllen, two small cities southwest of Houston in the Rio
Grande Valley (the "Valley"). As a result of this acquisition, the Bank
increased its presence in the Valley. In the fifth branch acquisition, which
was completed in December 1994, the Bank assumed deposits of $150.2 million
and acquired eight branches located in San Angelo, Marble Falls, Kingsland,
Llano, Giddings, Buchanan Dam, Mason and Burnet, which allowed the Bank to
enter new markets in central Texas.
In 1995, the Bank continued to expand its market presence by opening two
de novo branches in the Houston metropolitan area and by completing its first
whole bank acquisition. On November 1, 1995, the Bank consummated the
acquisition of all of the outstanding capital stock of Texas Capital
Bancshares, Inc. ("Texas Capital"). As a result of the acquisition of Texas
Capital, Texas Capital Bank, N.A., a national banking association, with five
branch offices, located in Houston, Katy, Richmond and Austin and total assets
of $170.7 million, was merged with and into the Bank.
In 1996, the Bank consummated the sale of its San Angelo location which
had $14.9 million in deposits and was acquired in the Bank's December 1994
branch acquisition. In connection with this sale, the Bank recorded a
$521,000 gain before applicable income taxes. On September 5, 1996, the Bank
consummated the exchange of its three San Antonio branches having deposits of
$53.8 million for a branch in Bay City, Texas having deposits of $79.8
million.
All of these transactions resulted in the net assumption of $1.5 billion
of deposits and the acquisition of 45 branch offices (after the San Angelo
branch sale and the swap of the San Antonio branches). The Bank has also
opened six de novo branches since inception. Since its first acquisition, the
Bank has been able to achieve operating economies and improve efficiency by
closing an aggregate of 15 branch offices and transferring the deposits to
other offices located in the same market areas.
The Bank will continue to pursue acquisitions as vehicles for growth,
although there can be no assurance that the Bank will be able to continue to
grow through acquisitions in the future. In the absence of any available,
cost-effective acquisitions, management will continue to focus on internally
generated earnings growth including further development of the Bank's
commercial lending and commercial business deposits.
INTEREST RATE RISK. The Bank has implemented the second operating
principle, minimizing interest rate risk, by matching, to the extent possible,
the repricing or maturity of its interest-earning assets to its
interest-earning liabilities as well as the basis or index (for example, the
London Interbank Offered Rate ("LIBOR") or the 11th District Federal Home Loan
Bank cost of funds index ("COFI")) upon which these assets and liabilities
reprice. Generally this is achieved through management of the composition of
its assets and liabilities. The Bank also undertakes to lock in an acceptable
interest rate spread between interest-earning assets and interest-bearing
liabilities by altering the Bank's cost of funds, or, at times, the yield on
certain assets in its portfolio. To accomplish this, the Bank has purchased
interest rate swaps and caps. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Asset and Liability
Management" set forth in Item 7 hereof.
The Bank will originate and purchase for retention in its portfolio only
those loans and investments which provide a positive interest rate spread over
funding liabilities matched with similar maturities. Consistent with this
philosophy, a significant portion of the Bank's assets have been invested in
adjustable-rate high quality mortgage-backed securities. At December 31,
1996, of the Bank's $1.5 billion of mortgage-backed securities, $1.3 billion
or 84.2%, were invested in adjustable rate mortgage-backed securities. To a
lesser extent, the Bank has purchased first lien mortgages on single-family
residences, the majority of which are adjustable rate mortgages. At December
31, 1996, $591.3 million, or 48.1% of the Bank's loans receivable portfolio,
net was comprised of such adjustable rate single-family residential mortgage
loans.
The Bank also originates and purchases fixed and adjustable rate
long-term, single-family residential loans primarily for sale into the
secondary market. Prior to 1996, this and certain other lending functions
were performed for the Bank by its wholly-owned mortgage banking subsidiary,
CBS Mortgage Corp. ("CBS Mortgage"). Beginning in 1996, the origination
function was performed by the Bank. By originating such loans for sale and
generally obtaining a commitment for the purchase of such loans at the time
that the loan applications are approved, the Bank avoids a significant portion
of the interest rate risk associated with holding fixed-rate mortgage loans.
CREDIT RISK. The Bank has implemented the third operating principle,
minimizing credit risk, by (i) investing a substantial portion of its assets
in cash and mortgage-backed securities, and (ii) taking a cautious approach to
the development of its direct lending operations. At December 31, 1996, of
the Company's $2.9 billion in total assets, $1.5 billion or 53.0% of total
assets consisted of mortgage-backed securities and $27.7 million or 1.0% of
total assets consisted of cash and cash equivalents. At December 31, 1996,
the Company's total net loans receivable portfolio amounted to $1.2 billion or
42.8% of total assets comprised primarily of $788.9 million of first lien
residential mortgage loans and $138.4 million of multifamily mortgage loans,
which constituted 64.2% and 11.3%, respectively, of the net loans receivable
portfolio. The balance of the net loans receivable portfolio, by dollar
amount and percent of the portfolio, was comprised of the following: $116.8
million (or 9.5%) of commercial real estate loans, $53.4 million (or 4.4%) of
warehouse loans to residential mortgage originators ("Warehouse loans"), $44.6
million (or 3.6%) of residential construction loans, $22.6 million (or 1.8%)
of consumer and other loans, $21.6 million (or 1.8%) of real estate
acquisition and development loans, $21.2 million (or 1.7%) of loans secured by
purchased mortgage servicing rights ("PMSR loans") and $20.7 million (or 1.7%)
of commercial, financial and industrial loans. The Company's non-accrual
loans as of such date were $12.8 million or 1.04% of total loans receivable,
and the Company's total nonperforming assets were $16.0 million, or 0.56% of
total assets.
The Bank will develop and seek to market loan products actively only when
and as management concludes that the Texas economy supports such steps without
the incidence of undue credit risk. This is consistent with the Bank's
approach in its lending activities. See "Lending Activities-General."
NONINTEREST EXPENSE. The Bank has implemented the fourth operating
principle, maintaining a low level of general overhead expense relative to its
peers by operating an efficiently staffed branch office system which is able
to administer and deliver its products and services in an economical manner.
The Bank believes that it has significant operating leverage, and that
continued incremental growth will not cause its overhead expenses to increase
by a corresponding amount. The growth achieved from the Bank's acquisitions
has facilitated reduced overhead levels as a proportion of assets and a lower
cost of funds from a more meaningful market share of core deposits. The
Company's ratio of noninterest expense to average total assets on a
consolidated basis has decreased, from 2.71% for the year ended December 31,
1988 to 1.40% for the year ended December 31, 1996, before the 1996 Savings
Association Insurance Fund ("SAIF") insurance special assessment. The Bank's
unconsolidated ratio of noninterest expense to average total assets was 1.36%
for the year ended December 31, 1996, before the 1996 SAIF insurance
assessment.
On September 30, 1996, the Bank recorded the one-time SAIF insurance
special assessment (the "Special Assessment") of $7.5 million ($4.8 million
after applicable income taxes) as a result of the Federal Deposit Insurance
Act, as amended (the "FDIA") being signed into law. The Special Assessment
pursuant to the FDIA was equal to 65.7 basis points on the SAIF assessment
base of deposits existing as of March 31, 1995.
The Bank is subject to regulation by the Department, as its chartering
authority and by the FDIC, which regulates the Bank and insures its deposits
to the fullest extent provided by law. The Bank also is subject to certain
regulation by the Board of Governors of the Federal Reserve System (the
"Federal Reserve Board") and is a member of the Federal Home Loan Bank of
Dallas (the "FHLB"), one of the 12 regional banks which comprise the Federal
Home Loan Bank System.
LENDING ACTIVITIES
GENERAL. The Bank has taken a cautious approach to the development and
growth of its direct lending operations to minimize credit risk. In order to
avoid incurring undue credit risk, the Bank historically invested a
significant percentage of its assets in alternative financial instruments,
particularly mortgage-backed securities, most of which have certain repayments
guaranteed by the government or Government Sponsored Enterprises ("GSEs").
See "Mortgage-Backed Securities." The Bank will originate and purchase for
retention in its portfolio only those loans determined by management to have
an acceptable credit risk and which provide a positive interest rate spread
over funding liabilities matched with similar maturities. This strategy is
designed to achieve an acceptable risk adjusted rate of return, as determined
and continuously evaluated by the Board of Directors.
Consistent with the Bank's lending strategy, the Bank originates and
purchases single-family residential loans for sale into the secondary market
and to retain in its portfolio. Through 1995, this and certain other lending
functions described herein were performed for the Bank by CBS Mortgage, its
wholly-owned mortgage banking subsidiary. Beginning in 1996, the Bank
performed these functions. By originating and purchasing such loans for sale
and generally obtaining a commitment for the purchase of such loans at the
time that the loan applications are approved or the purchase is approved, the
Bank believes that it avoids a significant amount of the interest rate risk
associated with holding fixed rate mortgage loans. Although the Bank and CBS
Mortgage have from time to time originated adjustable rate and short-term
fixed residential mortgage loans for the Bank's portfolio, the number of such
loans has been relatively small compared to the bulk loan purchases described
below.
In 1995, the Bank completed the acquisition of Texas Capital and its
$103.3 million in loans. The loans acquired from Texas Capital included first
lien residential, multifamily, commercial real estate, residential
construction, real estate acquisition and development, commercial, financial
and industrial and consumer loans. Utilizing this acquisition as a
springboard, the Bank implemented its strategic shift towards building a
commercial banking business.
The following table sets forth information concerning the composition of
the Bank's net loans receivable portfolio by type of loan at the dates
indicated. The table does not include loans which were subject to special
coverage by the Federal government in connection with the Southwest Plan
Acquisition.
At December 31,
-----------------------
1996 1995 1994
---------- ---------- ------
Amount Percent Amount Percent Amount
------------------ ---------- ------ -------- ----
(Dollars in thousands)
Real-estate mortgage loans:
First lien residential $ 791,337 61.96% $ 742,880 66.38% $428,237
Multifamily 139,486 10.92 95,297 8.52 75,142
Residential construction 77,146 6.04 33,935 3.03 27,777
Acquisition and development 26,132 2.05 15,517 1.39 14,119
Commercial 119,004 9.32 122,622 10.96 30,405
Commercial construction 3,963 0.31 -- -- --
Commercial, warehouse 53,573 4.19 48,822 4.36 15,724
Commercial, PMSR 21,380 1.67 21,548 1.93 11,625
Commercial, financial and industrial 21,965 1.72 19,860 1.77 --
Loans secured by savings deposits 8,849 0.69 8,292 0.74 5,141
Consumer and other 14,400 1.13 10,316 0.92 4,179
---------------------------------------------------------
Total loans 1,277,235 100.00% 1,119,089 100.00% 612,349
---------------==========--------------------------------
Loans in process (38,742) (11,526) (12,970)
Premium (discount) to record
purchased loans, net 479 (1,366) (8,925)
Unearned interest and loan fees (2,344) (1,939) (1,264)
Allowance for loan losses (6,880) (5,703) (2,158)
---------------------------------------------------------
Total loans receivable, net $ 1,229,748 $ 1,098,555 $587,032
=========================================================
At December 31,
---------------
1994
------
Percent
-------
Real-estate mortgage loans:
First lien residential 69.93%
Multifamily 12.27
Residential construction 4.54
Acquisition and development 2.30
Commercial 4.97
Commercial construction --
Commercial, warehouse 2.57
Commercial, PMSR 1.90
Commercial, financial and industrial --
Loans secured by savings deposits 0.84
Consumer and other 0.68
-------
Total loans 100.00%
-------
Loans in process
Premium (discount) to record
purchased loans, net
Unearned interest and loan fees
Allowance for loan losses
Total loans receivable, net
SCHEDULED MATURITIES. The following table sets forth certain
information at December 31, 1996 regarding the principal amount of loans
maturing in the Bank's loans receivable portfolio based on their contractual
terms to maturity. Demand loans, loans having no stated schedule of
repayments and no stated maturity are reported as due in one year or less.
First lien residential mortgage, multifamily mortgage and commercial real
estate loans are based on their contractual terms to maturity assuming no
periodic amortization of principal.
AT DECEMBER 31. 1996
----------------------
More than More than More than More than Over
One year one year to three years five years to ten years to twenty
or less three years to five years ten years twenty years years
- --------------------------------------------------------------------------------------------
(In thousands)
First lien residential mortgage $5,512 $6,755 $8,406 $33,918 $168,019 $568,727
Multifamily mortgage 31,207 88,450 16,864 508 2,457 --
Residential construction 35,957 9,028 -- -- -- --
Real estate acquisition and
development 5,184 16,919 -- -- -- --
Commercial real estate 15,301 39,837 23,700 14,275 25,891 --
Commercial construction 805 71 135 -- 400 --
Commercial, other 69,807 16,199 9,937 975 -- --
Consumer and other 11,343 5,923 4,279 906 798 --
-----------------------------------------------------------
Total loans $ 175,116 $ 183,182 $ 63,321 $50,582 $197,565 $568,727
===========================================================
Total
----------
First lien residential mortgage $ 791,337
Multifamily mortgage 139,486
Residential construction 44,985
Real estate acquisition and
development 22,103
Commercial real estate 119,004
Commercial construction 1,411
Commercial, other 96,918
Consumer and other 23,249
----------
Total loans $1,238,493
==========
The average maturity of loans is generally substantially less than their
average contractual terms because of prepayments and, in the case of
conventional mortgage loans, due-on-sale clauses, which generally give the
Bank the right to declare a loan immediately due and payable in the event,
among other things, that the borrower sells the real property subject to the
mortgage and the loan is not repaid. The average life of mortgage loans tends
to increase when current mortgage loan rates are substantially higher than
rates on existing mortgage loans and, conversely, decrease when rates on
existing mortgages are substantially lower than current mortgage loan rates
(due to refinancings or adjustable-rate and fixed-rate loans at lower rates).
Under the latter circumstances, the weighted average yield on loans decreases
as higher yielding loans are repaid or refinanced at lower rates.
The following table sets forth the amounts of loans due after one year
from December 31, 1996 by category and which have fixed or adjustable rates.
Interest-Rate
--------------
Fixed Adjustable Total
-------------- ---------- ----------
(In thousands)
First lien residential mortgage $ 195,298 $ 590,527 $ 785,825
Multifamily mortgage 20,545 87,734 108,279
Residential construction 8,628 400 9,028
Real estate acquisition and development -- 16,919 16,919
Commercial real estate 53,568 50,135 103,703
Commercial construction 400 206 606
Commercial, other 4,182 22,929 27,111
Consumer and other 11,344 562 11,906
-----------------------------------------
Total $ 293,965 $ 769,412 $1,063,377
=========================================
ORIGINATION, PURCHASE AND SALE OF LOANS. The following table sets forth
the loan origination, purchase and sale activity of the Bank during the
periods indicated. The table does not reflect the activity of CBS Mortgage
for other institutions, GSEs or entities during the periods presented. See
"Mortgage Banking Activities."
Year Ended December 31,
-------------------------
1996 1995 1994
-----------------------------
(In thousands)
First lien mortgage loan originations:
Adjustable rate $3,542 $985 $ 12,760
Fixed rate 5,471 746 5,269
Adjustable rate by correspondent lenders 67,461 92,911 4,842
Fixed rate by correspondent lenders 4,058 -- --
Residential construction and
acquisition and development loan originations 154,182 61,713 83,804
Warehouse loan originations 887,252 549,628 388,303
PMSR loan originations 69,172 67,578 41,084
Multifamily loan originations 67,657 42,366 26,013
Commercial real estate loan originations 41,170 29,595 26,756
Commercial construction originations 3,806 -- --
Commercial, financial and industrial loan originations 30,080 5,100 --
Consumer loan originations 22,256 12,429 7,236
-----------------------------------
Total loan originations 1,356,107 863,051 596,067
Purchase of residential mortgage loans 115,928 298,613 144,290
Loans acquired (net) in connection with
acquisition and disposition transactions 1,018 103,319 2,428
Purchase of multifamily and commercial real estate loans 4,604 25,045 --
Multifamily and commercial real estate
loans transferred from Covered Assets -- -- 6,671
----------------------------------
Total loan originations and purchases 1,477,657 1,290,028 749,456
------------------------------------
Foreclosures 4,363 3,394 2,386
Principal repayments and reductions to
principal balance 1,339,691 776,084 609,995
Residential loans sold -- 679 732
Total foreclosures, repayments and sales of loans 1,344,054 780,157 613,113
-------------------------------------
Amortization of premiums and discounts and
fees on loans (485) 3,316 1,519
Provision for loan losses (1,925) (1,664) (934)
-------------------------------------
Net increase in loans receivable $ 131,193 $ 511,523 $136,928
=====================================
The following table sets forth the number of bulk loan purchases and the
amount of first lien residential mortgage loans acquired by the Bank through
bulk purchases for the periods indicated.
Year Ended December 31,
-------------------------
1996 1995 1994
--------- -------- --------
(Dollars in thousands)
Amount purchased $ 112,395 $296,452 $141,775
Number of bulk
loan purchases 9 24 22
Personnel from the Bank generally analyze loan bid packages, as they
become available, and the Securities Investment Subcommittee of the Bank
reviews the information in the loan packages to determine whether to bid (or
make an offer) on a package and the price of such bid (or offer). The pricing
with respect to such loan packages is based on a number of factors, including
the ability to create spread income with a funding source of comparable
maturity, the pricing of alternative investments, particularly mortgage-backed
securities, which offer little or no credit risk, and the credit risk profile
of the portfolio offered. The Bank analyzes credit risk in a whole loan
package through its due diligence investigation, which is designed to provide
management with basic underwriting information on each loan or group of loans,
including loan-to-value, payment history, insurance and other documentation.
Because the Bank is purchasing loans in bulk, the Bank prices the loan
packages that it bids on to take into consideration, among other things,
delinquency and foreclosure assumptions based on the risk characteristics of
the loan packages. The Bank intends to continue to make competitive bids on
loan portfolios that meet the Bank's purchase criteria.
Beginning in 1994, the Bank has been originating adjustable rate
residential mortgage loans through approximately 18 correspondent lenders.
The correspondents originate and immediately sell such loans to the Bank. All
such loans are underwritten in accordance with the Bank's policies and
procedures. During 1996, loans purchased from the correspondent lenders
totaled $74.3 million.
The Bank will directly sell mortgage loans and mortgage loan servicing
from time to time in order to replace the loans and servicing with instruments
which have higher credit quality and which generate less interest rate risk.
While the Bank has the general authority to originate and purchase loans
secured by real estate located anywhere in the United States, the largest
concentration of its residential first lien mortgage and construction loan
portfolios is secured by realty located in Texas. Other than in Texas, there
are no other concentrations of ten percent or more.
RESIDENTIAL CONSTRUCTION LENDING. The Bank initiated a construction
lending program with local builders in the latter part of 1989 which has grown
considerably since its inception. At the time of initiation of the program,
management of the Bank surveyed the members of the residential construction
industry in the Bank's Houston market area and targeted those companies which
management believed, based upon its market research, to be financially strong
and reputable. Loans are made primarily to fund residential construction.
Construction loans are made on pre-sold and speculative residential homes only
in well located, viable subdivisions and planned unit developments.
The builders with whom the Bank does business generally apply for either
a non-binding short-term line of credit or for an annual line of credit
(subject to covenants) from the Bank for a maximum amount of borrowing to be
outstanding at any one time. The line of credit applications are processed by
the loan administration and credit departments and are underwritten by the
Lending Subcommittee. Loans to any one builder are limited to $5.0 million
for new lines and $12.0 million for increases or renewals of existing lines if
approved by this Committee, or up to the regulatory loans to one borrower
limit if approved by the Board of Directors' Loan Committee. Upon approval of
the line of credit, the Bank issues a letter which indicates to the builder
the maximum amount which will be available under the line, the term of the
line of credit, which is generally 90 days to one year, the interest rate of
the loans to be offered under the line, which is set at a rate above the local
prime rate or LIBOR on the outstanding monthly loan balance, and the loan fees
payable. When the builder desires to draw upon a short-term line of credit,
it must make a separate loan application under the line for a specific loan
amount. Each loan commitment under a short-term line of credit is separately
underwritten and approved by at least two members of the Lending Subcommittee
after the builder's master file is updated and reviewed. The Bank also funds
construction loans outstanding to builders or individuals under individual
construction loans.
The terms of the Bank's construction loans are generally for nine months
or less, unless extended by the Bank. If a construction loan is extended, the
borrower is generally charged a loan fee for each 90 day extension period.
The Bank reserves the right to extend any loan term, but generally does not
permit the original term and all extensions to exceed 24 months without
amortization of principal either in monthly increments or a lump sum.
The Bank generally requires that construction loans be personally
guaranteed by the borrower and its principals. The maximum loan-to-value
ratio of any construction loan may not exceed the lesser of 80% of the
appraised value of the collateral property, 80% of the proposed sale or
contract price or 100% of the actual cost. All individual loans are limited
in dollar amount based upon the project proposed by the builder. Draws for
lot purchases are generally limited to the contracted sales price of the lot
(to include escalations) not to exceed 100% of the lot's appraised value.
Other special conditions which the Bank attaches to its construction loans
include a requirement that limits the number and dollar amount of loans which
may be made based upon unsold inventory. The Bank may also, in its sole
discretion, discontinue making any further loans if the builder's unsold
inventory exceeds a certain level from all lending sources or if the builder
fails to pay its suppliers or subcontractors in a timely manner.
The Bank provides construction financing for homes that generally are
priced below $450,000, with most homes priced between $70,000 and $175,000.
In this price range, the Bank has experienced the shortest duration of term,
the highest annualized yield and the least likelihood of defaults because of
the generally high number of pre-completion sales. The Bank will also make
individual construction loans to builders or individuals on single homes or a
panel of homes on substantially the same terms and conditions as loans granted
under the Bank's line of credit program.
At December 31, 1996, the Bank had $45.0 million in outstanding
residential construction loans (net of loans in process). Of the construction
loans outstanding at December 31, 1996, $35.6 million were to 16 builders
originated under the Bank's line of credit program and $9.4 million were to
builders or individuals under individual construction loans. At the present
time, the Bank has approved builders in the Houston, Dallas, and Austin
metropolitan areas and is selectively soliciting new builders for its
residential construction lending program. The Bank intends to continue to do
business with the companies involved in its line of credit program and
believes that it will continue to have construction loan demand from the
builders with whom it currently has an established lending relationship. The
Bank does not otherwise actively solicit construction loans directly or
through the mass media.
Construction financing is generally considered to involve a higher degree
of risk than long-term financing on improved, occupied residential real
estate, due to the lender's reliance on the borrower to add to the estimated
value of the property through construction within the budget set forth in the
loan application. The Bank attempts to limit its risk exposure by, among
other things: limiting the number of borrowers to whom it lends and
establishing specific qualification requirements for borrowers generally;
continually monitoring the general economic conditions in the market, recent
housing starts and sales; continually monitoring the financial position of its
borrowers throughout the term of the loan through periodic builder reports and
inquiries to the builder's suppliers and subcontractors; continually
monitoring the progress of the development through site inspections prior to
loan disbursements; utilizing only qualified, approved appraisers; and
requiring that the builder maintain a pre-approved ratio (generally not
greater than 50%) of speculative to pre-sold homes in the development.
MULTIFAMILY MORTGAGE AND COMMERCIAL REAL ESTATE LENDING. Beginning in
1993, the Bank initiated a program to actively seek loans secured by
multifamily or commercial properties (primarily retail shopping centers).
Multifamily mortgage and commercial real estate loans typically involve higher
principal amounts and repayment of the loans generally is dependent, in large
part, on sufficient cash flow being generated by the underlying properties to
cover operating expenses and loan repayments. Market values may vary as a
result of economic events or governmental regulations which are outside the
control of the borrower or lender and which can affect the future cash flow of
the properties. The loans are for a short to medium term of between one to
seven years, and have floating rates or fixed rates based on a spread over
similarly fixed borrowings from the FHLB. The properties securing the loans
originated by the Bank are generally located in Texas. The Bank attempts to
limit its risk exposure by, among other things: lending to proven
developers/owners, only considering properties with existing operating
performance which can be analyzed, requiring conservative debt coverage
ratios, and continually monitoring the operation and physical condition of the
collateral. At December 31, 1996, multifamily mortgage loans totaling $139.5
million and commercial real estate loans of $119.0 million were outstanding.
The decision to increase commercial real estate lending resulted primarily
from the improvement in the local economies throughout Texas, which was caused
by improved occupancy in retail centers together with an improvement in the
quality of the borrowers seeking such loans. At December 31, 1996, the Bank
had outstanding commercial real estate loans (acquired from Texas Capital)
totaling approximately $32,000 that were on non-accrual status.
The Bank began seeking multifamily mortgage and commercial real estate
construction loans in 1996. The Bank will generally underwrite these loans,
with principal balances up to $5.0 million, in the same way it currently
underwrites its multifamily mortgage lending and will attempt to manage the
risk of such loans by requiring that the builders provide more equity in the
project than is required in refinancings, lending to those builders with
strong financial statements and requiring that borrowers purchase, if required
by the movement of general market interest rates, interest rate caps for their
loans. At December 31, 1996, commercial construction loans totaling $4.0
million were outstanding.
WAREHOUSE LENDING. Since 1992, the Bank has provided lines of credit to
mortgage companies generally for their origination of single family
residential loans which are normally sold no more than 90 days from
origination to the Federal National Mortgage Association (the "FNMA"), Federal
Home Loan Mortgage Corporation ("FHLMC"), Government National Mortgage
Association ("GNMA") or to private investors. The lines of credit are
generally renewable annually. Borrowers pay the Bank a commitment and/or
non-usage fee and pay interest on funds drawn at a floating rate. In
addition, the Bank receives a fee for each loan file processed. The Bank
holds the original mortgage loan notes and other documentation as collateral
until repayment of the related lines of credit. The lines of credit may be
drawn to the extent of 98.0% of the principal balance of the mortgages being
financed or to the lesser of 100% of the sale commitment amount or the note
amount of each mortgage being financed depending on the agreement. The Bank
generally will not accept any loan older than 60 days as collateral and
generally requires the originator to pay down the line for any loan held as
collateral which is 90 days or older from the date of its origination. Thus,
the overall security for the lines of credit is easily valued, highly liquid
and turns over rapidly.
Warehouse loans are underwritten in accordance with Bank policies and
procedures. Interested loan originators who contact or are contacted by the
Bank are asked to prepare a loan application which seeks detailed information
on the originator's business. After evaluating the application and
independently verifying the applicant's credit history, if the originator
appears to be a likely candidate for approval, Bank personnel will visit the
originator and review, among other things, its business organization,
management, quality control, funding sources, risk management, loan volume and
historical delinquency rate, financial condition, contingent obligations and
regulatory compliance. The originator pays a fee for this review to offset a
portion of the Bank's expense, which amount is deducted from the origination
fee if the line of credit is approved. If the originator meets the
established criteria, its application is submitted to the Lending Subcommittee
for review and if required, is thereafter referred to the Board of Directors'
Loan Committee.
Bank personnel attempt to minimize the risk of making Warehouse loans by,
among other things, (i) taking physical possession of the originator's
collateral, (ii) directly receiving payment from secondary market investors
when the loans are sold and remitting any balance to the borrower after
deducting the amount borrowed for that particular loan, (iii) visiting the
originator's office from time to time to review its financial and other
records and (iv) monitoring each originator: (a) by periodically reviewing
each originator's financial statements, loan production delinquency and
commitment reports; and, (b) on an annual basis, by reviewing the originator's
audited financial statements and the auditor's letter to the originator's
board of directors.
During 1996, the Bank originated $887.3 million of Warehouse loans and
had such loans outstanding of $53.6 million at December 31, 1996.
PMSR LENDING. Since 1992, the Bank has loaned funds to mortgage
companies for their purchase of mortgage servicing rights or to finance the
mortgage companies ongoing operations to originate and retain mortgage
servicing. The mortgage companies receive fees for servicing mortgage loans
which include collecting and remitting loan payments to FNMA, FHLMC and other
investors. Loans of this nature generally have terms of one to five years, and
are generally limited to the lesser of 65.0% of the price paid by the mortgage
company for servicing rights, or the value of the originated servicing rights
(subject to the regulatory maximum for loans to one borrower). PMSR loans are
made at adjustable rates of interest tied to LIBOR or the Bank's borrowing
rate plus a spread and a commitment or non-usage fee. PMSR loans are
collateralized by purchased or originated mortgage servicing rights to the
remaining cash flows after remittance of payments to FNMA, FHLMC or other
investors on the servicing portfolio. PMSR loans are underwritten in
substantially the same manner as Warehouse loans. Bank personnel closely
monitor PMSR borrowers on a semi-annual basis by, among other things,
reviewing the borrower's financial condition and operations in the same manner
as they do for Warehouse loans and by examining the value of the borrower's
PMSR portfolio (through evaluation of the estimated future net cash flows from
the servicing rights) in order to ensure that the loan-to-value ratio does not
exceed 70.0% during the life of the loan. If the continuing loan-to-value
ratio exceeds that amount, the borrower is asked to repay a portion of the
principal balance to maintain the ratio limit. At December 31, 1996, the Bank
had $21.4 million in outstanding PMSR loans.
REAL ESTATE ACQUISITION AND DEVELOPMENT LENDING. The Bank has increased
the number of loans originated to residential real estate builders and
developers for the acquisition and/or development of vacant land. The proceeds
of the loans are generally used to acquire the land and make the site
improvements necessary to develop the land into saleable lots. The Bank lends
only to the major developers in Houston with good track records and strong
financial capacity and on property where substantially all of the lots to be
developed are pre-sold. The term of the loans have generally been from 18 to
24 months at a spread over the prime rate, plus an origination fee. Repayment
on the loans is generally made as the lots are sold to builders. Land
acquisition and development loans involve additional risks when compared to
loans on existing residential properties. These loans typically involve
relatively large loan balances to single borrowers, and the repayment
experience is dependent upon the successful development of the land and the
resale of the lots. These risks can be significantly impacted by supply and
demand conditions and the general economic conditions in the local market
area. At December 31, 1996, the Bank had $26.1 million of real estate
acquisition and development loans outstanding.
COMMERCIAL BUSINESS LENDING. Development of a commercial business
lending program is a strategic goal of Bank management. The Texas Capital
acquisition provided the Bank with an established commercial business lending
program to small and medium sized companies primarily in the Houston and
Austin metropolitan areas. In 1996, management continued to develop the
infrastructure for commercial business lending in most of the Bank's major
markets. The commercial, financial and industrial loans ("Commercial Business
loans") are generally made to provide working capital financing or purchase
financing to businesses and are generally secured by the borrower's working
capital assets (i.e. accounts receivable, inventory, etc.) or assets purchased
by the borrower (i.e. operating assets, equipment, etc.). Commercial Business
loans generally have shorter terms (one to five years) at a spread over prime
rate and are of greater risk than real estate secured loans because of the
type and nature of the collateral. In addition, Commercial Business loan
collections are more dependent on the continuing financial stability of the
borrower. The Bank intends to expand the acquired commercial business lending
program, while managing the associated credit risk by monitoring borrowers'
financial position and underlying collateral securing the loans. At December
31, 1996, Commercial Business loans outstanding totaled $22.0 million, of
which $496,000 (acquired from Texas Capital) was on non-accrual status.
CONSUMER LENDING. The Bank makes available traditional consumer loans,
such as home improvement, new and used car financing, new and used boat and
recreational vehicle financing and loans secured by savings deposits. The
interest rate on loans secured by savings deposits is typically set at a rate
above that paid on the underlying account and adjusts if the rate on the
account changes. At December 31, 1996, the Bank had $23.2 million in consumer
loans outstanding, of which $8.8 million were savings deposit secured loans.
Consumer loans (other than savings deposit secured loans) generally have
shorter terms and higher interest rates than mortgage loans but usually
involve greater credit risk than mortgage loans because of the type and nature
of the collateral. In addition, consumer lending collections are dependent on
the borrower's continuing financial stability, and are thus likely to be
adversely affected by job loss, marital status, illness and personal
bankruptcy. In many cases, repossessed collateral for a defaulted consumer
loan will not provide an adequate source of repayment of the outstanding loan
balance because of depreciation of the underlying collateral. The Bank
believes that the generally higher yields earned on consumer loans compensate
for the increased credit risk associated with such loans and that consumer
loans are important to its efforts to serve the credit needs of the
communities that it serves.
The Bank's consumer loan lending territory approximates the markets
served by its retail branches. Persons desiring consumer loans are typically
individuals who have a pre-existing banking relationship with the Bank.
ASSET QUALITY. The Bank, like all financial institutions, is exposed to
certain credit risks related to the value of the collateral which secures
loans held in its portfolio and the ability of borrowers to repay their loans
during the term thereof. Management of the Bank closely monitors the loan
portfolio and the Bank's real estate acquired as a result of foreclosure
("REO") for potential problems on a weekly basis and reports to the Board of
Directors on a monthly basis. When a borrower fails to make a required loan
payment or other weaknesses are detected in a borrower's financial condition,
the Bank attempts to determine an appropriate course of action by contacting
the borrower. Delinquencies are cured promptly in most cases. If the
delinquency on a mortgage loan exceeds 90 days and is not cured through the
Bank's normal collection procedures, or an acceptable arrangement is not
worked out with the borrower, the Bank will institute measures to remedy the
default, including commencing a foreclosure action. As a matter of policy,
the Bank generally does not accept from the mortgagor a voluntary deed of the
secured property in lieu of foreclosure. If foreclosure is effected, the
property is sold at a public auction in which the Bank may participate as a
bidder. If the Bank is the successful bidder, the foreclosed real estate is
then included in the Bank's REO portfolio until it is sold.
Upon acquisition, REO is recorded at the lower of unpaid principal
balance adjusted for any remaining acquisition premiums or discounts less any
applicable valuation allowance or estimated fair value, based on an appraisal,
less estimated selling costs. All costs incurred from the date of acquisition
forward relating to maintaining the property are recorded as a current
expense.
It is the Bank's general policy not to recognize interest income on loans
past due 90 days or more. When a loan is placed on non-accrual status,
previously accrued but unpaid interest is reversed against current interest
income. On a loan-by-loan basis, Bank management may continue to accrue
interest on loans that are past due more than 90 days, primarily if management
believes that the individual loan is in the process of collection and the
interest is fully collectible. At December 31, 1996, 1995 and 1994, the Bank
had the following loans which were 90 days or more delinquent and were on
accrual status:
At December 31,
-----------------------
1996 1995 1994
-------------------------------------
(Dollars in thousands)
First lien single family mortgage $ 106 $ -- $ --
Residential construction 52 -- --
Commercial real estate 881 -- --
Commercial, financial and industrial 14 231 --
Consumer 142 -- --
=========================================
Total $ 1,195 $ 231 $ --
=========================================
The following table sets forth information regarding the Bank's non-accrual
loans and REO as of the dates shown.
At December 31,
----------------
1996 1995 1994
----------------------------------------------------
(Dollars in thousands)
Non-accrual loans:
First lien single family $ 12,238 $ 12,925 $ 6,077
mortgage
Residential construction -- 353 --
Commercial real estate 32 965 --
Commercial, financial and
industrial 496 337 --
Consumer 73 42 25
--------------------------------------------------
Total non-accrual loans 12,839 14,622 6,102
Total REO 3,161 4,216 781
-------------------------------------------------
Total nonperforming assets $ 16,000 $ 18,838 $ 6,883
=================================================
Ratio of nonperforming
assets to total assets 0.56% 0.68% 0.30%
Ratio of non-accrual loans to total
loans receivable 1.04% 1.33% 1.04%
==================================================
At December 31, 1996, approximately $816,000 in additional interest
income would have been recorded in the year then ended on the above loans
accounted for on a non-accrual basis if such loans had been current in
accordance with their original terms and had been outstanding throughout the
period or since origination if held for part of the period. For the year
ended December 31, 1996, $507,000 in interest income was included in net
income for these same loans prior to the time they were placed on non-accrual
status.
The increase in total nonperforming assets between 1994 and 1996 is
largely attributable to the growth in the Bank's single family residential
mortgage loan portfolio, which occurred primarily as a result of whole loan
acquisitions through bulk purchases, and due to the loans acquired in the
Texas Capital acquisition. At December 31, 1996, the Bank had 200 first lien
residential mortgage loans in non-accrual status, aggregating $12.2 million,
with an average balance of approximately $61,000. A total of 181 of these
loans, with an aggregate balance of $10.3 million, were acquired through bulk
loan purchases, 3 of these loans, with an aggregate balance of $26,000, were
acquired through the Southwest Plan Acquisition and 2 of these loans, with an
aggregate balance of $197,000, were acquired in the Texas Capital acquisition.
Of the 181 residential mortgage loans acquired through bulk purchases, at
December 31, 1996, 39 of such loans totaling $1.8 million were being serviced
by other institutions, which constituted 4.6% of the $38.2 million of
aggregate loans serviced by others.
The commercial real estate and commercial, financial and industrial loans
on non-accrual status at December 31, 1996 were acquired in the Texas Capital
acquisition.
At December 31, 1996, nonperforming assets included REO with an aggregate
book value of $3.2 million. At such date, the Bank's REO consisted of 36
single family residential properties and six commercial properties (also
acquired from Texas Capital).
At December 31, 1996, in addition to the loans in non-accrual status, the
Bank had $8.0 million in loans classified as substandard, $126,000 classified
as loss and $10.0 million of loans designated as "special mention" for
regulatory purposes. Of these loans, $2.5 million of the substandard loans
and $1.3 million of the "special mention" loans were acquired from Texas
Capital. The loans classified as loss at December 31, 1996 were consumer
loans specifically provided for in the allowance for loan losses allocation at
that date. Loans designated as "special mention" are not currently required
to be classified for regulatory purposes but have potential weaknesses or risk
characteristics that could result in future problems.
On January 1, 1995, the Bank adopted the Financial Accounting Standards
Board's (the "FASB") Statement of Financial Accounting Standards No. 114
(Statement 114), "Accounting by Creditors for Impairment of a Loan," as
amended by Statement 118. Under Statement 114, a loan is impaired when it is
"probable" that a creditor will be unable to collect all amounts due (i.e.,
both principal and interest) according to the contractual terms of the loan
agreement. Statement 114 requires that the measurement of impaired loans be
based on (i) the present value of the expected future cash flows discounted at
the loan's effective interest rate, (ii) the loan's observable market price,
or (iii) the fair value of the loan's collateral. Statement 114 does not
apply to large groups of smaller balance homogeneous loans that are
collectively evaluated for impairment. The Bank collectively reviews all
first-lien residential loans under $500,000 as a group and all consumer and
other loans as a group for impairment, excluding loans in which foreclosure is
probable. The adoption of Statement 114, as amended by Statement 118, had no
material impact on the Bank's consolidated financial statements as the Bank's
existing policy of measuring loan impairment was generally consistent with
methods prescribed in these standards.
The Bank considers a loan to be impaired when, based upon current
information and events, it is probable that the Bank will be unable to collect
all amounts due according to the contractual terms of the loan agreement. In
determining impairment, the Bank considers, among other things, large
non-homogeneous loans which may include nonaccrual loans or troubled debt
restructurings, and performing loans which exhibit, among other
characteristics, high loan-to-value ratios, low debt coverage ratios, or
indications that the borrowers are experiencing increased levels of financial
difficulty. The Bank bases the measurements of collateral-dependent impaired
loans on the fair value of their collateral. The amount by which the recorded
investment in the loan exceeds the measure of the fair value of the collateral
securing the loan is recognized by recording a valuation allowance. At
December 31, 1996, the carrying value of loans that are considered to be
impaired under Statement 114 totaled approximately $725,000 (all of which were
on non-accrual) and the related allowance for loan losses on those impaired
loans totaled $524,000. The average balance of impaired loans during the year
ended December 31, 1996 was approximately $846,000. For the year ended
December 31, 1996, the Bank did not recognize interest income on loans
considered impaired.
The Bank had loaned $77.1 million at December 31, 1996, under its
residential construction lending program to multiple borrowers who are engaged
in similar activities. These borrowers could be similarly impacted by
economic conditions in the Houston metropolitan area. See "Residential
Construction Lending." Except for concentrations in its Warehouse lending
lines, the Bank had no other loan concentrations. At December 31, 1996, the
Bank had $53.6 million of Warehouse loans outstanding. See "Warehouse
Lending."
ALLOWANCE FOR LOAN LOSSES. The Bank maintains loan loss allowances to absorb
future and known losses that may be realized on its loans receivable
portfolio. The following table summarizes activity in the Bank's allowance
for loan losses during the periods indicated.
Year Ended December 31,
-------------------------
1996 1995 1994
----------------------------------------
(Dollars in thousands)
Balance at beginning of year $ 5,703 $ 2,158 $ 1,527
Total charge-offs, net(1) (748) (387) (303)
Provisions for loan losses 1,925 1,664 934
Acquisition allowance adjustment(2) -- 2,268 --
------------------------------------
Balance at end of the year $ 6,880 $ 5,703 $ 2,158
====================================
Ratio of net charge-offs during the
period to average net loans
outstanding during the period 0.06% 0.05% 0.06%
====================================
1Net charge-offs in all years are fully attributable to single family
residential loans, except for $154,000 in 1996 and $45,000 in 1995, which are
attributable to consumer and other loans. Net charge-offs also include
recoveries of $103,000 in 1996, $17,000 in 1995 and $26,000 in 1994.
2The acquisition allowance adjustment in 1995 represents the amount allocated
to the allowance for loan losses during the year in connection with (i) a bulk
loan package acquired and (ii) the loans acquired in the Texas Capital
acquisition.
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,
----------------
1996 1995 1994
------- ----- -----
(In thousands)
First lien residential mortgage $ 2,217 $ 2,992 $ 1,191
Multifamily mortgage 369 249 188
Residential construction 223 307 278
Real estate acquisition and development 261 130 142
Commercial real estate 1,151 1,072 152
Commercial construction 20 -- --
Commercial, Warehouse and PMSR 361 230 98
Commercial, financial and industrial 985 395 --
Consumer and other 374 177 109
Unallocated 919 151 --
--------------------------------
$ 6,880 $ 5,703 $ 2,158
================================
The following table sets forth the allocation of the provision
(reduction of allowance)for loan losses by loan type during
the periods indicated.
At December 31,
----------------
1996 1995 1994
-------- ----- ------
(In thousands)
First lien residential mortgage $ (180) $ 1,032 $ 743
Multifamily mortgage 120 23 60
Residential construction (84) (67) (174)
Real estate acquisition and development 131 (25) 106
Commercial real estate 79 479 128
Commercial construction 20 -- --
Commercial, Warehouse and PMSR 131 132 (49)
Commercial, financial and industrial 618 -- --
Consumer and other 322 90 120
Unallocated 768 -- --
-------------------------------------
$ 1,925 $ 1,664 $ 934
=====================================
Provisions for loan losses, currently $450,000 per quarter, are charged
to earnings to bring the total allowance to a level deemed appropriate by
management based on such factors as historical experience, the volume and type
of lending conducted by the Bank, the amount of nonperforming assets, industry
standards, regulatory policies, generally accepted accounting principles,
general economic conditions, particularly as they relate to the Bank's lending
area, and other factors related to the collectibility of the Bank's loan
portfolio.
The Bank periodically reviews its loan loss allowance policy, at a
minimum, annually. As a result of a comprehensive revision of such policy in
1996, the Bank changed its method of assessing the adequacy of the allowance
for loan losses. The revised policy provides that the Bank will annually
establish a monthly provision amount to be added to the allowance for loan
losses and the resultant allowance will be "tested" monthly for adequacy based
on the allocation methodology described below. The policy provides that any
"excess" based on this calculation will be maintained in the allowance for
loan losses as "unallocated". The minimum allowance allocation to first lien
residential mortgage loans greater than 90 days delinquent is a general
allocation of 5% of the aggregate net book value. All other first lien
residential mortgage loans are allocated a general allowance of 0.10% of the
aggregate net book value. The Bank generally allocates the allowance to
multifamily, residential construction, commercial construction, real estate
acquisition and development, commercial real estate, Warehouse, PMSR,
Commercial Business and consumer and other loans in the following percentages
of outstanding principal amounts: 0.25%, 0.25%, 0.50%, 1.0%, 0.50%, 0.25%,
0.50%, 1.0-2.0% and 1.0%. In addition, a general allowance allocation is
calculated on unfunded commitments and letters of credit using the general
allowance percentages described above for the applicable loan type. Specific
allowances are established by management on specific loans as considered
necessary.
The Bank's management believes that its present allowance for loan losses
is adequate based upon, among other considerations, the factors discussed
above, its low level of nonperforming loans and its nominal loss experience.
Management continues to review its loan portfolio to determine whether its
loan loss allowance policy should be altered in light of current conditions
and to make any additional provisions which may be deemed necessary. While
management uses the best information available to make such determinations,
additional provisions for loan losses may be required to be established in the
future should economic or other conditions change substantially. In addition,
the FDIC and the Department, as an integral part of their examination
processes, periodically review the Bank's loan loss allowances. These
agencies may require the Bank to establish additional loan loss allowances,
based on their respective judgments of the information available at the time
of the examinations.
MORTGAGE BANKING ACTIVITIES
LOAN ORIGINATIONS AND SALES. Through 1995, the Bank's wholly-owned
subsidiary, CBS Mortgage, originated loans for the Bank and for others secured
by first lien mortgages on completed single family residences located
principally in the Houston metropolitan area and in geographic areas
surrounding the Bank's branch locations. Beginning on January 1, 1996, the
origination function was performed by the Bank, with CBS Mortgage's activities
then limited to primarily loan servicing. The Bank's present policy is to
originate and sell to third party investors residential mortgage loans
principally to generate fee income, while avoiding the interest rate and
credit risk associated with holding fixed rate mortgage loans in portfolio.
During the years ended 1996, 1995 and 1994, the Bank (in 1996) and CBS
Mortgage (in 1995 and 1994) originated or purchased with the intent to sell
$11.2 million, $8.8 million and $25.0 million, respectively, of single family
residential mortgage loans and sold $11.7 million, $8.3 million and $10.2
million, respectively, of such loans to secondary market investors ("SMI").
During 1996, 1995 and 1994, the Bank (in 1996) and CBS Mortgage (in 1995 and
1994) originated residential real estate loans for portfolio totaling $9.0
million, $1.7 million, and $18.0 million, respectively.
"Pipeline risk," which is inherent in mortgage lending operations, arises
when the originator of a loan makes an uncovered commitment to lend funds to a
borrower at a locked-in rate of interest over the period of time which is
required for the lender to close and/or sell the loan. The risk is that
market rates of interest will move higher in the period between the time of
commitment and the time of funding the loan, and the lender will thereafter
have difficulty finding a buyer for such loan at a break-even or better price.
Management of the Bank and of CBS Mortgage believes that its loan origination
strategy eliminates to a large extent any "pipeline risk." The majority of
applications taken are accepted on the basis that rates will be set
immediately prior to closing. Applications that carry a locked in rate are
covered for interest rate risk by the use of the forward sales of
mortgage-backed securities or by registering each loan with an investor that
offers loan-by-loan protection until closing and delivery to the investor.
Through 1995, CBS Mortgage made available a variety of mortgage products
designed to respond to consumer needs and competitive factors. Beginning on
January 1, 1996, with the transfer of the origination function, these mortgage
products were being made available from the Bank. Conventional conforming
loans that are secured by first liens on completed residential real estate are
originated for up to 95% of the appraised value or selling price of the
mortgaged property, whichever is less. All loans with loan-to-value ratios in
excess of 80% require the borrower to purchase private mortgage insurance from
approved third party insurers. Conventional non-conforming mortgage loans
(i.e., loans for single family homes with an original balance in excess of the
maximum loan balance amount set by FNMA or FHLMC, which is presently $203,150,
or loans that do not otherwise meet the criteria established by FNMA or FHLMC)
are also originated. Such loans are originated based on underwriting
guidelines or standards required by the SMI to whom such loans are intended to
be sold. During 1996, fewer than 10% of the mortgage loans originated by the
Bank were non-conforming mortgage loans.
In addition to 15-year and 30-year conventional mortgages, CBS Mortgage
offered, and now the Bank offers special products designed to provide lower
rates of interest or lower principal and interest payments to its customers.
Borrowers may choose from a wide variety of combinations of interest rates and
points on many of its products so that its customers may elect to pay higher
points at closing and lower interest over the life of the loan, or pay a
higher interest rate and reduce the points payable at closing. In addition,
from time to time mortgages are offered in the following categories: those
which allow the borrower to make lower monthly payments for the first one, two
or three years of the loan; fixed rate mortgages; and adjustable rate
mortgages having interest rate adjustments every one, five or seven years
based upon a specified independent index.
Borrower demand for adjustable rate mortgage loans compared to fixed rate
mortgage loans is a function of interest rate levels, consumer expectations
for changes in interest rate levels and the difference between interest rates
and loan fees offered for fixed rate mortgage loans and for adjustable rate
mortgage loans. The Bank's and CBS Mortgage's loan origination volume has
been subject to some minor seasonal variations, with the heaviest demand in
the late spring and summer months. Loan demand is also affected by the
general interest rate environment and, to a large measure, by the general
state of the local economy.
During times of relatively lower market interest rates, demand by
previous borrowers for refinancings increases. Refinancings are not solicited
by CBS Mortgage or the Bank. However, if a request for a refinancing is
received, borrowers are offered current mortgage loan products. Refinancings
are processed in a manner identical to original originations and are charged
the same fees as charged for original originations.
LOAN SERVICING. CBS Mortgage services residential real estate loans
owned by the Bank as well as for others, including FNMA, FHLMC and other
private mortgage investors. Loan servicing includes collecting and remitting
loan payments, accounting for principal and interest, making advances to cover
delinquent payments, making inspections as required of mortgaged premises,
contacting delinquent mortgagors, supervising foreclosures and property
dispositions in the event of unremedied defaults and generally administering
the loans. Funds that have been escrowed by borrowers for the payment of
mortgage related expenses, such as property taxes and hazard and mortgage
insurance premiums, are maintained in non-interest-bearing accounts at the
Bank. At December 31, 1996, the Bank had $5.5 million deposited in such escrow
accounts.
CBS Mortgage receives fees for servicing mortgage loans, which generally
range from 0.250% to 0.375% per annum on the declining principal balance of
fixed rate mortgage loans and from 0.375% to 0.500% per annum on the declining
principal balance of adjustable rate mortgage loans. Such fees serve to
compensate CBS Mortgage for the costs of performing the servicing function.
Other sources of loan servicing revenues include late charges and other
ancillary fees. For the years ended 1996, 1995 and 1994, the Bank earned $3.0
million, $3.5 million and $3.7 million, respectively, in conjunction with CBS
Mortgage's loan servicing. Servicing fees are collected by CBS Mortgage out of
the monthly mortgage payments made by borrowers.
CBS Mortgage's servicing portfolio is subject to reduction by normal
amortization, by prepayment or by foreclosure of outstanding loans. At
December 31, 1996, 1995 and 1994, CBS Mortgage had an aggregate loan servicing
portfolio of $1.7 billion, $1.7 billion and $1.5 billion, respectively. Of
these amounts at such respective dates, CBS Mortgage serviced loans for the
Bank aggregating $958.2 million, $824.6 million and $481.8 million and loans
for others aggregating $776.7 million, $900.7 million and $1.0 billion. At
December 31, 1996, 55.2% of the dollar value of loans being serviced by CBS
Mortgage was for the Bank, 16.1% was being serviced for FHLMC, 26.6% was being
serviced for FNMA and 2.1% was being serviced for others. At December 31,
1996, $33.4 million of the loans serviced for private mortgage investors were
being subserviced for CBS Mortgage by a third party mortgage company.
Beginning in 1990, in order to increase the size of its loan servicing
portfolio, CBS Mortgage began to purchase bulk packages of mortgage servicing
rights from the Federal government and other institutions on a competitive bid
basis. The PMSRs, which were acquired in 1990 and 1991, were primarily
conventional loans secured by real property. The bulk purchase market for
loan servicing was attractive to purchasers in the early 1990s due to the
relatively large amounts of such servicing rights that were being sold by
banks and thrift institutions due to the introduction of new regulatory
capital standards, and by the Resolution Trust Corporation as part of its
liquidation function. Prices bid on these bulk offerings ranged from 0.35% to
1.25% of the principal balance of the underlying mortgages. Between 1992 and
1994, CBS Mortgage pursued the purchase of PMSRs from private institutions.
The packages of servicing rights purchased from the private institutions
during this period were purchased at prices which have generally ranged
between 0.82% to 1.47% on the principal balances of the underlying mortgages.
No servicing rights were purchased by CBS Mortgage in 1996 or 1995. As of
December 31, 1996, an aggregate of $776.7 million of CBS Mortgage's $1.7
billion servicing portfolio, or 44.8%, was loans serviced for others. At
December 31, 1996, CBS Mortgage had no commitments for further purchases of
PMSRs.
The amount, if any, by which PMSRs exceed the lower of 90% of
determinable fair market value, 90% of origination cost or current amortized
book value must be deducted from capital in calculating regulatory capital.
See "Regulation - Regulatory Capital Requirements." At December 31, 1996,
there were no deductions from capital for PMSR valuation adjustments.
The following table sets forth certain information regarding CBS
Mortgage's servicing portfolio of mortgage loans for the periods indicated.
Year Ended December 31,
-------------------------
1996 1995 1994
---------------------------------------------
(In thousands)
Beginning servicing portfolio $ 1,725,400 $ 1,511,263 $ 1,239,756
----------------------------------------
Loans originated(1) -- 8,810 24,965
Bulk servicing acquired -- -- 323,149
Bank loan originations 104,023 68,960 52,769
Bank whole loans acquired 185,176 390,230 139,621
----------------------------------------
Total servicing originated
and acquired 289,199 468,000 540,504
----------------------------------------
Loans sold servicing
released 47 2,602 210
Amortization and payoffs 273,219 246,223 263,903
Foreclosures 6,244 5,038 4,884
----------------------------------------
Total servicing reductions 279,510 253,863 268,997
----------------------------------------
Ending servicing portfolio $ 1,735,089 $ 1,725,400 $ 1,511,263
========================================
________________________
1Includes loans originated for the Bank in 1995 and 1994.
MORTGAGE-BACKED SECURITIES
The Bank maintains a significant portfolio of mortgage-backed securities
as a means of investing in housing-related mortgage instruments without the
costs associated with originating mortgage loans for portfolio retention. At
December 31, 1996, the Company's mortgage-backed securities portfolio
(including $180.7 million of mortgage-backed securities available-for-sale),
net of unamortized premiums and unearned discounts, amounted to $1.5 billion,
or 53.0%, of total assets. By investing in mortgage-backed securities,
management seeks to achieve a positive spread over the cost of funds used to
purchase these securities. At December 31, 1996, the Company's net
mortgage-backed securities had an aggregate market value of $1.5 billion.
The following table sets forth the composition of the Company's
mortgage-backed securities portfolio at the dates indicated.
At December 31,
1996 1995 1994
---------- -------- ------
Amount Percent Amount Percent Amount Percent
-----------------------------------------------------------------
(Dollars in thousands)
Held-to-maturity:
REMICS $ 1,213,849 90.25% $1,241,999 89.00% $1,426,757 88.90%
FNMA certificates 77,324 5.75 90,061 6.45 101,633 6.33
GNMA certificates 33,900 2.52 39,363 2.82 44,843 2.79
Non-agency certificates 19,826 1.48 24,091 1.73 30,431 1.90
FHLMC certificates -- -- -- -- 1,239 0.08
Interest-only securities 38 -- 55 -- 81 --
------------------------------------------------------------------
1,344,937 100.00% 1,395,569 100.00% 1,604,984 100.00%
======== ======= =======
Unamortized premium 3,153 3,841 4,550
Unearned discount (3,503) (3,657) (3,695)
------------------------------------------------------------------
Total held-to-maturity $1,344,587 $1,395,753 $1,605,839
===================================================================
Available-for-sale:
REMICS $ 185,651 100.00% $ 186,505 99.52% $ 32,978 100.00%
Non-agency certificates -- 0.00 908 0.48 -- --
-------------------------------------------------------------------
185,651 100.00% 187,413 100.00% 32,978 100.00%
======== ======= =======
Unamortized premium 33 44 6
Unearned discount (255) (284) --
Net unrealized loss (4,773) (759) (735)
-------------------------------------------------------------------
Total available-for-sale $ 180,656 $ 186,414 $ 32,249
===================================================================
Total mortgage-backed
securities $1,525,243 $1,582,167 $1,638,088
===================================================================
The mortgage-backed securities which the Bank purchases and maintains in
portfolio can include FNMA, FHLMC and GNMA certificates, certain privately
issued, credit-enhanced mortgage-backed securities which are rated "A" or
better by the national securities rating agencies, certain types of
collateralized mortgage obligations ("CMOs") and interest-only ("IO")
certificates. The FNMA, FHLMC and GNMA certificates are modified pass-through
mortgage-backed securities, which represent undivided interests in underlying
pools of fixed-rate, or certain types of adjustable rate, single family
residential mortgages issued by these quasi-governmental (GNMA) and private
(FNMA and FHLMC) corporations. FNMA and GNMA provide to the certificate
holder a guarantee (which is backed by the full faith and credit of the U.S.
government in the case of GNMA certificates) of timely payments of interest
and scheduled principal payments, whether or not they have been collected.
FHLMC guarantees the timely payment of interest and the full (though not
necessarily timely) payment of principal. The guarantees of FNMA and FHLMC
are not backed by the full faith and credit of the U.S. government. The
mortgage-backed securities acquired by the Bank that have been pooled and sold
by private issuers, generally large investment banking firms, provide for the
timely payments of principal and interest either through insurance issued by a
reputable insurer or the right to receive certain payments thereunder is
subordinated in a manner which is sufficient to have such mortgage-backed
securities earn a credit rating of "A" or better from one or more of the
national securities rating agencies.
A CMO is a special type of pay-through debt obligation in which the
stream of principal and interest payments on the underlying mortgages or
mortgage-backed securities is used to create classes with different maturities
and, in some cases, amortization schedules and a residual class of the CMO
security being sold, with each such class possessing different risk
characteristics. The residual interest sold represents any residual cash flows
which result from the excess of the monthly receipts generated by principal
and interest payments on the underlying mortgage collateral and any
reinvestment earnings thereon, less the cash payments to the CMO holders and
any administrative expenses. As a matter of policy, due to the risk
associated with residual interests, the Bank has never invested in, and does
not intend to invest in, residual interests in CMOs. CMOs and other
mortgage-backed securities may be structured as Real Estate Mortgage
Investment Conduits ("REMICs") for U.S. Federal income tax purposes.
Mortgage-backed securities generally yield less than the loans which
underlie such securities because of their payment guarantees or credit
enhancements which reduce credit risk. In addition, mortgage-backed securities
are more liquid than individual mortgage loans and may be used to
collateralize obligations of the Bank. Mortgage-backed securities issued or
guaranteed by FNMA or FHLMC (except IO securities or the residual interests in
CMOs) are weighted at no more than 20% for risk-based capital purposes,
compared to a weight of 50% to 100% for residential loans. See "Regulation -
Regulatory Capital Requirements."
The FDIC has issued a statement of policy which states, among other
things, that mortgage derivative products (including CMOs and CMO residuals
and stripped mortgage-backed securities such as IOs) which possess average
life or price volatility in excess of a benchmark fixed rate 30 year
mortgage-backed pass-through security are "high-risk mortgage securities," are
not suitable investments for depository institutions, and if considered "high
risk" at purchase must be carried in the institution's trading account or as
assets held for sale, and must be marked to market on a regular basis. In
addition, if a security was not considered "high risk" at purchase but was
later found to be "high risk" based on the tests, the security may remain in
the held-to-maturity portfolio as long as the institution has the positive
intent to hold the security to maturity and has a documented plan in place to
manage the higher risk. At December 31, 1996, the Bank had mortgage-backed
securities considered "high risk" with a recorded booked value of
approximately $114.3 million. These securities were not considered "high
risk" at purchase, but were later found to be "high risk" based on the results
of the required tests. The Bank has the positive intent to hold these
securities to maturity and has documented the Bank's plan to manage the higher
risk of these securities. If the Bank should elect to consider a new type of
security for its portfolio, the Bank intends to ascertain in advance that the
security does not fail any of the tests that will qualify it as a "high risk
mortgage security." The Bank will not purchase any security that fails such
tests unless it has in place a documented plan to manage the higher risk of
that security and has approval from the Board of Directors.
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,
1996 1995 1994
----------------------------------------
(In thousands)
Mortgage-backed securities
held-to-maturity purchased $ --- $ 52,741 $511,847
--------------------------------------
Available-for-sale securities sold(1) 864 72,298 794
Amortization of premiums, net of discount
accretion 552 495 1,589
Change in unrealized loss on mortgage-backed
securities available-for-sale 4,013 24 735
Principal repayments on mortgage-backed
securities 51,495 35,845 195,545
----------------------------------------
Total decrease 56,924 108,662 198,663
----------------------------------------
Net increase (decrease) in mortgage-backed
securities $ (56,924) $(55,921) $313,184
======================================
1Securities sold in 1995 after reclassification from held-to-maturity
portfolio pursuant to the FASB's Special Report, "A Guide to Implementation of
Statement 115 on Accounting for Certain Investments in Debt and Equity
Securities."
On January 1, 1994, the Company adopted the FASB Statement of Financial
Accounting Standards No. 115 (Statement 115), "Accounting for Certain
Investments in Debt and Equity Securities." In accordance with Statement 115,
the Company classifies securities as either held-to-maturity or
available-for-sale. Securities are classified as held-to-maturity when the
Company has the positive intent and ability to hold such securities to
maturity. Securities held-to-maturity are recorded at amortized cost.
Permanent declines in the value of held-to-maturity securities are charged to
earnings in the periods in which the declines are determined. Securities
available-for-sale are securities other than those held-to-maturity or for
trading purposes and are recorded at fair value, with unrealized gains and
losses excluded from earnings and recorded as a separate component of
stockholders' equity. In connection with the adoption of Statement 115, in
1994 the Company transferred approximately $50.8 million of mortgage-backed
securities to the available-for-sale category. Realized gains and losses on
securities are recorded in earnings in the year of sale based on the specific
identification of each individual security sold. Premiums and discounts on
mortgage-backed securities are amortized or accreted as a yield adjustment
over the life of the securities using the interest method, with the
amortization or accretion being adjusted when the prepayments are received.
In November 1995, the FASB issued the Special Report, "A Guide to
Implementation of Statement 115 on Accounting for Certain Investments in Debt
and Equity Securities." Provisions in this Special Report granted all
entities a one-time opportunity, until no later than December 31, 1995, to
reassess the appropriateness of the classifications of all securities held and
to account for any resulting reclassifications at fair value in accordance
with Statement 115. The provisions of the Special Report also directed that
any reclassifications as a result of this one-time reassessment would not call
into question the intent to hold other debt securities to maturity in the
future. In accordance with this Special Report, on November 20, 1995, the
Company reclassified approximately $226.6 million of mortgage-backed
securities to the available-for-sale category. These mortgage-backed
securities reclassified to the available-for-sale category were primarily COFI
securities and gave the Company the opportunity to somewhat change the
composition of the portfolio by selling certain securities if that was
considered necessary. In 1996 and 1995, the Company sold $864,000 and $72.3
million, respectively, of these mortgage-backed securities available-for-sale.
INVESTMENT ACTIVITIES
Under the Texas Savings Bank Act (the "Act"), the Bank is permitted to
invest in obligations of, or guaranteed as to principal and interest by, the
United States or the State of Texas, in the stock or in any obligations or
consolidated obligations of the FHLB, and in various other specified
instruments. The Bank holds investment securities from time to time to help
meet its liquidity requirements and as temporary investments until funds can
be utilized to purchase mortgage-backed securities, residential mortgage loans
or to originate construction loans for the Bank's portfolio. See Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations- Liquidity and Capital Resources."
SOURCES OF FUNDS
GENERAL. Advances from the FHLB, deposits, sales of securities under
agreements to repurchase and maturities and principal repayments on loans and
mortgage-backed securities have been the major sources of funds for use in the
Bank's lending and investments, and for other general business purposes.
Management of the Bank closely monitors rates and terms of competing sources
of funds on at least a weekly basis and utilizes the source which is the more
cost effective.
DEPOSITS. The Bank's market for deposits is competitive, which has
necessitated the Bank's emphasis on primarily short term certificate accounts
that are more responsive to market interest rates than savings accounts. The
Bank offers a traditional line of deposit products which currently includes
savings, interest-bearing checking (NOW), noninterest-bearing checking, money
market demand accounts and certificates of deposit which generally range in
terms from three to 60 months. Included among these deposit products are
individual retirement account certificates. During 1996 and early in 1997,
the Bank began to offer a range of products for commercial businesses
including Small Business Checking, Business Interest Checking, Analysis
Checking and Commercial Money Market Accounts, the amounts of which, in 1996,
are not material for separate presentation.
The following table shows the distribution of and certain other
information relating to the Bank's deposits by type as of the dates indicated.
At December 31,
----------------
1996(1) 1995(2)
Percent Percent
of of
Amount Deposits Amount Deposits
--------------------------------------------------------
(Dollars in Thousands)
Demand deposit accounts:
Noninterest-bearing checking $ 85,259 6.50% $ 81,207 6.31%
NOW 56,862 4.34 47,476 3.69
Savings 22,135 1.69 22,374 1.74
Money market demand 151,046 11.52 165,214 12.83
-------------------------------------------------
Total demand deposit accounts 315,302 24.05 316,271 24.57
-------------------------------------------------
Certificate accounts:
Within 1 year 772,690 58.94 704,966 54.76
1-2 years 158,583 12.10 188,400 14.63
2-3 years 40,961 3.12 32,556 2.53
3-4 years 18,268 1.39 29,717 2.31
4-5 years 5,064 0.39 15,210 1.18
Over 5 years 165 0.01 319 0.02
Total certificate accounts 995,731 75.95 971,168 75.43
------------------------------------------------------
1,311,033 100.00% 1,287,439 100.00%
========= =========
Discount to record
savings deposits at fair value, net (198) (355)
------------------------------------------------
Total $ 1,310,835 $ 1,287,084
=========== ==========
At December 31,
1994(3)
Percent
of
Amount Deposit
(Dollars in thousands)
Demand deposit accounts:
Noninterest-bearing checking $ 39,656 3.48%
NOW 25,477 2.23
Savings 22,146 1.94
Money market demand 204,188 17.90
--------------------
Total demand deposit accounts 291,467 25.55
--------------------
Certificate accounts:
Within 1 year 640,021 56.11
1-2 years 125,578 11.01
2-3 years 24,901 2.18
3-4 years 28,610 2.51
4-5 years 29,673 2.60
Over 5 years 407 0.04
--------------------
Total certificate accounts 849,190 74.45
--------------------
1,140,657 100.00%
===================
Discount to record
savings deposits at fair value, net (1,035)
-----------
Total $1,139,622
===========
_______________
1In 1996, the Bank assumed approximately $11.1 million in net deposits in
connection with the exchange of three branch offices for one and the sale of
another branch office.
2In 1995, the Bank assumed approximately $157.2 million in deposits in
connection with the acquisition of five branch offices of another financial
institution.
3In 1994, the Bank assumed approximately $150.2 million in deposits in
connection with the acquisition of eight branch offices of another financial
institution.
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,
-------------------------
1996 1995 1994
--------------------------------------
(Dollars in Thousands)
Average Average Average Average Average Average
Balance Rate Paid Balance Rate Paid Balance Rate Paid
-----------------------------------------------------------
Demand deposit accounts:
Noninterest-bearing checking $85,469 --% $ 62,164 --% $ 54,831 --%
NOW 49,181 2.07 29,904 2.06 22,041 1.79
Savings 22,104 2.32 20,162 2.52 21,754 2.49
Money market demand 157,933 3.64 156,730 3.61 214,092 3.11
Certificate accounts 970,433 5.42 909,992 5.49 707,324 4.34
--------------------------------------------------------------
Total deposits $1,285,120 4.66% $1,178,952 4.81% $1,020,042 3.75%
===============================================================
The following table presents by various interest rate categories the
amounts of certificate accounts at the dates indicated and the amounts of
certificate accounts at December 31, 1996, which mature during the periods
indicated.
Amounts at December 31, 1996 Maturing
(In thousands)
---------------------------------------
One Year
Amounts at December 31, or Less
---------------------------------------
1996 1995
---------- ---------
(In thousands)
Certificate accounts:
2.00% to 3.99% $14,835 $14,387 $14,223
4.00% to 5.99% 871,852 721,943 715,884
6.00 to 7.99% 104,092 223,310 40,363
8.00 to 9.99% 4,686 6,513 2,053
10.00% to 11.99% 266 5,015 167
-----------------------------------------
Total $995,731 $971,168 $772,690
=========================================
Greater than
Two Years Three Years Three Years
----------------------------------------
Certificate accounts:
2.00% to 3.99% 376 $ 95 $ 141
4.00% to 5.99% 136,942 11,565 7,461
6.00 to 7.99% 19,495 28,438 15,796
8.00 to 9.99% 1,766 768 99
10.00% to 11.99% 4 95 --
-----------------------------------
Total 158,583 $40,961 $23,497
===================================
Certificates maturing within one year consist primarily of six month and
one year certificates. Historically, a majority of such certificate holders
roll over their balances into new certificates with similar terms at the
Bank's then current interest rates. The Bank believes that its pricing
strategy will help the Bank to achieve balance levels deemed appropriate by
management on a continuing basis.
The following table sets forth the net deposit flows of the Bank during
the periods indicated.
Year Ended December 31,
-------------------------
1996 1995 1994
-------- ------- -------
(In thousands)
Net increase (decrease) before
interest credited(1) $ (34,707) $ 91,052 $ 77,893
Interest credited 58,458 56,410 38,624
Net deposit increase $ 23,751 $ 147,462 $ 116,517
======== ======= =======
1For the years ended December 31, 1996, 1995 and 1994, reflects the effect of
the assumption of $11.1 million, $157.2 million and $150.2 million of net
deposit liabilities in connection with branch office transactions in each
respective year. The net deposit outflow in 1996 was primarily due to
financial disintermediation as described below.
The following table sets forth the amount of the Bank's certificates of
deposits which are $100,000 or more by time remaining until maturity as of
December 31, 1996.
At December 31, 1996
----------------------
Number of Deposit
accounts Amount
---------------------- -------
(Dollars in thousands)
Three months or less 277 $ 29,242
Over three through six
months