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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
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended DECEMBER 31, 1997
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.)
5718 Westheimer, Suite 600
Houston, Texas 77057
------------------------
(Address of principal executive office)
(713) 435-5000
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(Registrant's telephone number)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
N/A N/A
Securities registered pursuant to section 12(g) of the Act:
Common Stock, $0.01 par value per share
---------------------------------------
(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 13, 1998, the aggregate market value of the 3,989,317 shares of
Common Stock of the Registrant issued and outstanding on such date, excluding
1,045,718 shares held by all directors and executive officers of the Registrant
as a group, was $131,647,461. This figure is based on the closing sale price of
$33.00 per share of the Company's Common Stock on March 13, 1998, as reported in
The Wall Street Journal on March 16, 1998.
- --------------------------
Number of shares of Common Stock outstanding as of March 13, 1998: 5,035,035
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, 1997, are incorporated into Part II, Items 5-8 of
this Form 10-K.
(2) Portions of the Registrant's definitive Proxy Statement for its 1998
Annual Meeting of Stockholders are incorporated into Part III, Items 10-13 of
this Form 10-K.
PART I.
ITEM 1. BUSINESS
- ------------------
COASTAL BANCORP, INC.
Coastal Bancorp, Inc. (the "Company") is engaged primarily in the business
of serving as the 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.
In October 1997, Coastal Banc Capital Corp. ("CBCC") was formed as a
wholly-owned subsidiary of HoCo. CBCC, a registered broker-dealer, was
initially formed to trade secured and unsecured whole loan assets primarily for
the Bank and for other businesses. At December 31, 1997, HoCo's equity
investment in CBCC was $76,000. CBCC had a net loss of $24,000 for the year
ended December 31, 1997.
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, 1997, the Company had total consolidated assets of $2.9
billion, total deposits of $1.4 billion, $28.8 million in Series A Preferred
Stock and stockholders' equity of $104.8 million.
The Company is subject to examination and regulation by the Office of
Thrift Supervision (the "OTS") and the Company and the Bank are subject to
examination and regulation by the Texas Savings and Loan Department (the
"Department"). The Company is also subject to various reporting and other
requirements of the Securities and Exchange Commission (the "SEC").
The Company's executive offices are located at Coastal Banc Plaza, 5718
Westheimer, Suite 600, Houston, Texas 77057, and its telephone number is (713)
435-5000.
COASTAL BANC SSB
The Bank is a Texas-chartered, Federally insured state savings bank. It is
headquartered in Houston, Texas and operates through 37 branch offices in
metropolitan Houston, Austin, Corpus Christi and small cities in the south east
quadrant of 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 the Bank's ongoing
savings bank business and shift towards commercial banking. 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, 1997, the Bank's total assets
had increased to $2.9 billion, total deposits were $1.4 billion and
stockholders' equity totaled $174.2 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; (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,
Austin, Corpus Christi, 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 six 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 five 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 exchanged 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. In 1997, the Bank
completed the acquisition of a branch in Port Arthur, Texas having deposits of
$54.6 million.
All of these transactions resulted in the net assumption of $1.6 billion of
deposits and the acquisition of 46 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 16 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 the further development of the Bank's
commercial lending and growth of 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 attempts to achieve an acceptable interest rate spread between
interest-earning assets and interest-bearing liabilities by altering the Bank's
cost of funds, or, at times, the yield on certain assets in its portfolio. To
accomplish this, the Bank 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, 1997,
of the Bank's $1.5 billion of mortgage-backed securities, $1.3 billion or 85.9%,
were invested in adjustable rate mortgage-backed securities. To a lesser
extent, the Bank has purchased first lien mortgages on single-family residences,
a large portion of which are adjustable rate mortgages. At December 31, 1997,
$519.8 million, or 41.2% of the Bank's loans receivable portfolio was comprised
of 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, including commercial business
lending. At December 31, 1997, of the Company's $2.9 billion in total assets,
$1.5 billion or 52.0% of total assets consisted of mortgage-backed securities
and $37.1 million or 1.3% of total assets consisted of cash and cash
equivalents. At December 31, 1997, the Company's total net loans receivable
portfolio amounted to $1.3 billion or 43.3% of total assets comprised primarily
of $688.6 million of first lien residential mortgage loans, $178.3 million of
commercial real estate loans and $130.3 million of multifamily mortgage loans,
which constituted 54.6%, 14.1% and 10.3%, 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:
$98.4 million (or 7.8%) of commercial loans to residential mortgage originators
("Warehouse loans"), $46.2 million (or 3.7%) of residential construction loans,
$23.4 million (or 1.9%) of consumer and other loans, $23.2 million (or 1.8%) of
real estate acquisition and development loans, $32.5 million (or 2.6%) of loans
secured by mortgage servicing rights ("MSR loans"), $29.7 million (or 2.4%) of
commercial, financial and industrial loans and $10.8 million (or 0.8%) of
commercial construction loans. The Company's non-accrual loans as of such date
were $17.4 million or 1.38% of total loans receivable, and the Company's total
nonperforming assets were $20.5 million, or 0.71% of total assets. 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 1.36% for the year
ended December 31, 1997.
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. Other provisions of the Act provided
for a reduction of the SAIF deposit insurance premium rates beginning in the
fourth quarter of 1996.
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 in order 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.
In November 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, which has continued through 1997. The Bank's new concept for
originating, underwriting and approving all loans over $1.0 million was
implemented during the fourth quarter of 1997. The Portfolio Control Center
("PCC") applies Internet and network computer technology to take a loan from
application to closing in less time and incorporating more comprehensive credit
information. The PCC is also responsible for the day-to-day monitoring and
management of the Bank's assets and liabilities.
The following table sets forth information concerning the composition of
the Bank's net loans receivable portfolio by type of loan at the dates
indicated.
At December 31,
1997 1996 1995
------------ ------------ -----------
Amount Percent Amount Percent Amount Percent
------------ -------- ------------ -------- ----------- --------
(Dollars in thousands)
Real-estate mortgage loans:
First lien residential $ 689,767 52.33% $ 791,337 61.96% $ 742,880 66.38%
Multifamily 131,454 9.97 139,486 10.92 95,297 8.52
Residential construction 83,359 6.33 77,146 6.04 33,935 3.03
Acquisition and development 31,619 2.40 26,132 2.05 15,517 1.39
Commercial 181,315 13.76 119,004 9.32 122,622 10.96
Commercial construction 14,506 1.10 3,963 0.31 -- --
Commercial, warehouse 98,679 7.49 53,573 4.19 48,822 4.36
Commercial, MSR 32,685 2.48 21,380 1.67 21,548 1.93
Commercial, financial and industrial 30,877 2.34 21,965 1.72 19,860 1.77
Loans secured by savings deposits 8,695 0.66 8,849 0.69 8,292 0.74
Consumer and other 15,030 1.14 14,400 1.13 10,316 0.92
------------ -------- ------------ -------- ----------- --------
Total loans 1,317,986 100.00% 1,277,235 100.00% 1,119,089 100.00%
------------ ======== ------------ ======== ----------- ========
Loans in process (47,893) (38,742) (11,526)
Premium (discount) to record
purchased loans, net 1,680 479 (1,366)
Unearned interest and loan fees (2,926) (2,344) (1,939)
Allowance for loan losses (7,412) (6,880) (5,703)
----------- ----------- -----------
Total loans receivable, net $ 1,261,435 $ 1,229,748 $1,098,555
============ ============ ===========
SCHEDULED MATURITIES. The following table sets forth certain
information at December 31, 1997 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, 1997
More than More than More than
One year one year to three years five years to
or less three years to five years ten years
--------- ------------ -------------- --------------
(In thousands)
First lien residential mortgage $ 2,408 $ 5,366 $ 9,790 $ 28,934
Multifamily mortgage 73,997 49,975 6,286 1,196
Residential construction 37,124 8,678 352 597
Real estate acquisition and
development 5,645 18,142 -- --
Commercial real estate 19,464 76,874 38,091 12,659
Commercial construction 8,345 -- 483 819
Commercial, other 122,000 17,928 20,439 1,873
Consumer and other 10,785 5,814 5,036 1,096
--------- ------------ -------------- --------------
Total loans $ 279,768 $ 182,777 $ 80,477 $ 47,174
========= ============ ============== ==============
AT DECEMBER 31, 1997
More than Over
ten years to twenty
twenty years years Total
------------- --------- ----------
(In thousands)
First lien residential mortgage $ 157,838 $485,431 $ 689,767
Multifamily mortgage -- -- 131,454
Residential construction -- -- 46,751
Real estate acquisition and
development -- -- 23,787
Commercial real estate 34,228 -- 181,316
Commercial construction 1,406 -- 11,053
Commercial, other -- -- 162,240
Consumer and other 994 -- 23,725
------------- -------- -----------
Total loans $ 194,466 $485,431 $1,270,093
============= ======== ===========
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, 1997 by category and which have fixed or adjustable rates.
Interest-Rate
Fixed Adjustable Total
--------- ----------- --------
(In thousands)
First lien residential mortgage $ 167,357 $ 520,002 $687,359
Multifamily mortgage 9,972 47,485 57,457
Residential construction 7,238 2,389 9,627
Real estate acquisition and development -- 18,142 18,142
Commercial real estate 57,089 104,763 161,852
Commercial construction 1,246 1,462 2,708
Commercial, other 13,077 27,163 40,240
Consumer and other 11,575 1,365 12,940
--------- ----------- --------
Total $ 267,554 $ 722,771 $990,325
========= =========== ========
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,
1997 1996 1995
----------- ----------- -----------
(In thousands)
First lien mortgage loan originations:
Adjustable rate $ 1,458 $ 3,542 $ 985
Fixed rate 4,849 5,471 746
Adjustable rate by correspondent lenders 26,220 67,461 92,911
Fixed rate by correspondent lenders 686 4,058 --
Residential construction and acquisition
and development loan originations 145,727 154,182 61,713
Warehouse loan originations 1,174,639 887,252 549,628
MSR loan originations 55,259 69,172 67,578
Multifamily loan originations 81,148 67,657 42,366
Commercial real estate loan originations 171,497 41,170 29,595
Commercial construction originations 12,222 3,806 --
Commercial, financial and industrial loan originations 43,497 30,080 5,100
Consumer loan originations 18,679 22,256 12,429
----------- ----------- -----------
Total loan originations 1,735,881 1,356,107 863,051
Purchase of residential mortgage loans 108,226 115,928 298,613
Loans acquired (net) in connection with
acquisition and disposition transactions -- 1,018 103,319
Purchase of multifamily and commercial
real estate loans -- 4,604 25,045
Purchase of consumer loans 70 -- --
----------- ----------- -----------
Total loan originations and purchases 1,844,177 1,477,657 1,290,028
----------- ----------- -----------
Foreclosures 4,226 4,363 3,394
Principal repayments and reductions to
principal balance 1,790,790 1,339,691 776,084
Residential loans sold 12,855 -- 679
----------- ----------- -----------
Total foreclosures, repayments and sales of loans 1,807,871 1,344,054 780,157
----------- ----------- -----------
Amortization of premiums, discounts and fees on loans (2,819) (485) 3,316
Provision for loan losses (1,800) (1,925) (1,664)
----------- ----------- -----------
Net increase in loans receivable $ 31,687 $ 131,193 $ 511,523
=========== =========== ===========
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,
1997 1996 1995
-------- -------- --------
(Dollars in thousands)
Amount purchased $107,881 $112,395 $296,452
Number of bulk
loan purchases 3 9 24
Personnel from the Bank generally analyze loan bid packages, as they
become available, and the PCC reviews the information in the loan packages to
determine whether to bid (or make an offer) on a package and the price of such
bid (or offer). The 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 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 1997
(before discontinuing this program), loans purchased from the correspondent
lenders totaled $26.9 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. In 1997,
the Bank sold $12.9 million of first lien residential mortgage loans.
While the Bank has the general authority to originate and purchase loans
secured by real estate located anywhere in the United States, the largest
concentration of its residential first lien mortgage and construction loan
portfolios is secured by realty located in Texas.
RESIDENTIAL CONSTRUCTION LENDING. The Bank initiated a construction
lending program with local builders in the latter part of 1989 which has grown
considerably since its inception. At the 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. Upon approval of the line of credit, the Bank issues a letter
which indicates to the builder the maximum amount which will be available under
the line, the term of the line of credit (which is generally 90 days to one
year), the interest rate of the loans to be offered under the line (which is
generally set at a rate above the Wall Street Journal prime rate or LIBOR on the
outstanding monthly loan balance) and the loan fees payable. When the builder
desires to draw upon a short-term line of credit, 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 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 loan-to-value ratio (applied to the underlying property that
collateralizes the loan) of any residential construction loan may not exceed 85%
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, 1997, the Bank had $46.8 million in outstanding residential
construction loans (net of loans in process). Of the construction loans
outstanding at December 31, 1997, $38.7 million were to 22 builders originated
under the Bank's line of credit program and $8.1 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. The Bank
initiated a program in 1993 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, generally 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, 1997, multifamily mortgage loans
totaling $131.5 million and commercial real estate loans of $181.3 million were
outstanding. The decision to increase commercial real estate lending resulted
primarily from the improvement in the local economies throughout Texas, which
was reflected in improved occupancy in retail centers together with an
improvement in the quality of the borrowers seeking such loans. At December 31,
1997, the Bank had outstanding commercial real estate loans totaling
approximately $322,000 that were on non-accrual status, $14,000 of which were
acquired from Texas Capital.
The Bank began seeking multifamily and commercial real estate construction
loans in 1996. The Bank will generally underwrite these loans in the same way
it currently underwrites its multifamily mortgage loans 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, 1997, commercial construction loans totaling $14.5
million were outstanding, of which $900,000 was on non-accrual status.
WAREHOUSE LENDING. Since 1992, the Bank has provided or participates in
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 interest on funds drawn at a floating rate.
In addition, the Bank usually 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, except when a third
party bank is acting as the lead bank in the lending relationship.
Warehouse loans are underwritten in accordance with Bank policies and
procedures. Interested loan originators who contact or are contacted by the
Bank are asked to prepare a loan application which seeks detailed information on
the originator's business. After evaluating the application and independently
verifying the applicant's credit history, if the originator appears to be a
likely candidate for approval, Bank personnel will visit the originator and
review, among other things, its business organization, management, quality
control, funding sources, risk management, loan volume and historical
delinquency rate, financial condition, contingent obligations and regulatory
compliance. The originator pays a fee for this review to offset a portion of
the Bank's expense; this amount is deducted from the origination fee if the line
of credit is approved. If the originator meets the established criteria, its
application is submitted for approval.
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 1997, the Bank originated $1.2 billion of Warehouse loans and had
such loans outstanding of $98.7 million at December 31, 1997.
MSR LENDING. Since 1992, the Bank has loaned funds to mortgage companies
for their purchase of mortgage servicing rights or to finance the mortgage
companies' ongoing operations to originate and retain mortgage servicing. The
mortgage companies receive fees for servicing mortgage loans which include
collecting and remitting loan payments to FNMA, FHLMC and other investors. Loans
of this nature generally have terms of one to five years, and are generally
limited to 70.0% of the price paid by the mortgage company for servicing rights,
or of the value of the originated servicing rights (subject to the regulatory
maximum for loans to one borrower). MSR loans are made at adjustable rates of
interest tied to LIBOR or the Bank's borrowing rate plus a spread and a
commitment fee. MSR loans are collateralized by purchased or originated
mortgage servicing rights to the remaining cash flows after remittance of
payments to FNMA, FHLMC or other investors on the servicing portfolio. Bank
personnel closely monitor MSR 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 MSR portfolio (through evaluation of the estimated future net cash
flows from the servicing rights) in order to ensure that the loan-to-value ratio
does not exceed 75.0% during the life of the loan. If the continuing
loan-to-value ratio exceeds that amount, the borrower is asked to repay a
portion of the principal balance to maintain the ratio limit. At December 31,
1997, the Bank had $32.7 million in outstanding MSR 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
generally lends only to the major developers with good track records and strong
financial capacity and on property where substantially all of the lots to be
developed are pre-sold. The term of the loans have generally been from 18 to 24
months at a spread over the prime rate, plus an origination fee. Repayment on
the loans is generally made as the lots are sold to builders. Land acquisition
and development loans involve additional risks when compared to loans on
existing residential properties. These loans typically involve relatively large
loan balances to single borrowers, and the repayment experience is dependent
upon the successful development of the land and the resale of the lots. These
risks can be significantly impacted by supply and demand conditions and the
general economic conditions in the local market area. At December 31, 1997, the
Bank had $31.6 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 1997, 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 continue 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, 1997,
Commercial Business loans outstanding totaled $30.9 million, of which $485,000
($336,000 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, 1997, the Bank had $23.7 million in consumer loans
outstanding, of which $8.7 million were savings deposit secured loans. At
December 31, 1997, loans totaling $53,000 in this category were on non-accrual
status.
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, 1997, 1996 and 1995, the Bank
had the following loans which were 90 days or more delinquent and were on
accrual status:
At December 31,
1997 1996 1995
----- ------- -----
(Dollars in thousands)
First lien single family mortgage $ -- $ 106 $ --
Residential construction 79 52 --
Commercial real estate 91 881 --
Commercial, financial and industrial 120 14 231
Consumer 50 142 --
----- ------- -----
Total $ 340 $ 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,
--------------------------------------
1997 1996 1995
----------- ----------- -----------
(Dollars in thousands)
Non-accrual loans:
First lien single family
mortgage $ 15,591 $12,238 $12,925
Residential construction -- -- 353
Commercial real estate 322 32 965
Commercial construction 900 -- --
Commercial, financial and
industrial 485 496 337
Consumer 53 73 42
---------- -------- --------
Total non-accrual loans 17,351 12,839 14,622
Total REO and repossessed assets 3,198 3,161 4,216
---------- -------- --------
Total nonperforming assets $ 20,549 $16,000 $18,838
========== ======== ========
Ratio of nonperforming
assets to total assets 0.71% 0.56% 0.68%
========== ======== ========
Ratio of non-accrual loans to total
loans receivable 1.38% 1.04% 1.33%
========== ======== ========
At December 31, 1997, approximately $925,000 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,
1997, $827,000 in interest income was included in net income for these same
loans prior to the time they were placed on non-accrual status.
At December 31, 1997, the Bank had 236 first lien residential mortgage
loans in non-accrual status, aggregating $15.6 million, with an average balance
of approximately $66,000. A total of 211 of these loans, with an aggregate
balance of $12.9 million, were acquired through bulk loan purchases, 2 of these
loans, with an aggregate balance of $29,000, were acquired through the Southwest
Plan Acquisition and 2 of these loans, with an aggregate balance of $113,000,
were acquired in the Texas Capital acquisition. Of the 211 residential mortgage
loans acquired through bulk purchases, at December 31, 1997, 32 of such loans
totaling $1.3 million were being serviced by other institutions, which
constituted 3.8% of the $35.6 million of aggregate loans serviced by others.
At December 31, 1997, nonperforming assets included REO with an aggregate
book value of $3.2 million and repossessed assets of $12,000. At such date, the
Bank's REO consisted of 36 single family residential properties and 5 commercial
properties (acquired from Texas Capital).
At December 31, 1997, in addition to the loans in non-accrual status, the
Bank had $9.8 million in loans classified as substandard, $42,000 classified as
doubtful and $10.7 million of loans designated as "special mention" for
regulatory purposes. Of these loans, $1.1 million of the substandard loans and
$282,000 of the "special mention" loans were acquired from Texas Capital. 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 for 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, 1997, the
carrying value of loans that are considered to be impaired under Statement 114
totaled approximately $2.0 million (all of which were on non-accrual) and the
related allowance for loan losses on those impaired loans totaled $1.1 million.
The average balance of impaired loans during the year ended December 31, 1997
was approximately $897,000. For the year ended December 31, 1997, the Bank did
not recognize interest income on loans considered impaired.
The Bank had loaned $83.4 million at December 31, 1997, 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 Texas. See "Residential Construction Lending." Except for
concentrations in its Warehouse lending lines, the Bank had no other loan
concentrations. At December 31, 1997, the Bank had $98.7 million of Warehouse
loans outstanding. See "Warehouse Lending."
ALLOWANCE FOR LOAN LOSSES. The Bank maintains loan loss allowances to
absorb future losses that may be realized on its loans receivable portfolio.
The following table summarizes activity in the Bank's allowance for loan losses
during the periods indicated.
Year Ended December 31,
----------------------------
1997 1996 1995
-------- -------- --------
(Dollars in thousands)
Balance at beginning of year $ 6,880 $ 5,703 $ 2,158
Charge-offs(1) (1,416) (851) (404)
Recoveries 148 103 17
Provisions for loan losses 1,800 1,925 1,664
Acquisition allowance adjustment(2) -- -- 2,268
-------- -------- --------
Balance at end of the year $ 7,412 $ 6,880 $ 5,703
======== ======== ========
Ratio of net charge-offs during the
period to average net loans
outstanding during the period 0.10% 0.06% 0.05%
======== ======== ========
(1)In 1997, $591,000 of the charge-offs were attributable to single family
residential loans, $472,000 to Commercial Business loans, $349,000 to consumer
and other loans and $4,000 to commercial real estate loans. In 1996, $651,000
of the charge-offs were attributable to single family residential loans,
$142,000 to consumer and other loans and $58,000 to Commercial Business loans.
In 1995, $359,000 of the charge-offs were attributable to single family
residential loans and $45,000 to consumer and other loans.
(2)The 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,
1997 1996 1995
------- ------- -------
(In thousands)
First lien residential mortgage $ 2,566 $ 2,217 $ 2,992
Multifamily mortgage 511 369 249
Residential construction 251 223 307
Real estate acquisition and development 316 261 130
Commercial real estate 1,468 1,151 1,072
Commercial construction 203 20 --
Commercial, Warehouse and MSR 494 361 230
Commercial, financial and industrial 1,008 985 395
Consumer and other 233 374 177
Unallocated 362 919 151
------- ------- -------
$ 7,412 $ 6,880 $ 5,703
======= ======= =======
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,
1997 1996 1995
-------- -------- --------
(In thousands)
First lien residential mortgage $ 908 $ (180) $ 1,032
Multifamily mortgage 142 120 23
Residential construction 28 (84) (67)
Real estate acquisition and development 55 131 (25)
Commercial real estate 321 79 479
Commercial construction 183 20 --
Commercial, Warehouse and MSR 133 131 132
Commercial, financial and industrial 416 618 --
Consumer and other 171 322 90
Unallocated (557) 768 --
-------- -------- --------
$ 1,800 $ 1,925 $ 1,664
======== ======== ========
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, MSR, Commercial Business and consumer and other loans in
the following percentages of outstanding principal amounts: 0.25%, 0.25%,
0.50%, 1.0%, 0.50%, 0.25%, 0.50%, 1.0% and 1.0%. In addition, a general
allowance allocation is calculated on unfunded commitments and letters of credit
using the general allowance percentages described above for the applicable loan
type. Specific 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 historical 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 or
purchase and then sell to third party investors fixed rate residential mortgage
loans principally to avoid the interest rate and credit risk associated with
holding fixed rate mortgage loans in portfolio. During the years ended 1997,
1996 and 1995, the Bank (in 1997 and 1996) and CBS Mortgage (in 1995) originated
or purchased with the intent to sell $4.1 million, $11.2 million and $8.8
million, respectively, of single family residential mortgage loans and sold $4.4
million, $11.7 million and $8.3 million, respectively, of such loans to
secondary market investors ("SMI"). During 1997, 1996 and 1995, the Bank (in
1997 and 1996) and CBS Mortgage (in 1995) originated residential real estate
loans for portfolio totaling $6.3 million, $9.0 million, and $1.7 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 believe 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, although not actively
solicited. Conventional conforming loans that are secured by first liens on
completed residential real estate are generally originated for amounts up to 95%
of the appraised value or selling price of the mortgaged property, whichever is
less. All loans with loan-to-value ratios in excess of 80% generally require the
borrower to purchase private mortgage insurance from approved third party
insurers. 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 $227,150, 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 1997, 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 to its
customers lower rates of interest or lower principal and interest payments.
Borrowers may choose from a wide variety of combinations of interest rates and
points on many products so that 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, 1997, the Bank had $6.2 million deposited in such escrow accounts.
CBS Mortgage receives fees for servicing mortgage loans, which generally
range from 0.250% to 0.375% per annum on the declining principal balance of
fixed rate mortgage loans and from 0.375% to 0.500% per annum on the declining
principal balance of adjustable rate mortgage loans. Such fees serve to
compensate CBS Mortgage for the costs of performing the servicing function.
Other sources of loan servicing revenues include late charges and other
ancillary fees. For the years ended 1997, 1996 and 1995, the Bank earned $1.4
million, $1.6 million and $2.0 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 and are net of the amortization
of mortgage servicing rights.
CBS Mortgage's servicing portfolio is subject to reduction by normal
amortization, by prepayment or by foreclosure of outstanding loans. At December
31, 1997, 1996 and 1995, CBS Mortgage had an aggregate loan servicing portfolio
of $1.6 billion, $1.7 billion and $1.7 billion, respectively. Of these amounts
at such respective dates, CBS Mortgage serviced loans for the Bank aggregating
$879.6 million, $958.2 million and $824.6 million and loans for others
aggregating $675.7 million, $776.7 million and $900.7 million. At December 31,
1997, 56.6% of the dollar value of loans being serviced by CBS Mortgage was for
the Bank, 14.9% was being serviced for FHLMC, 26.7% was being serviced for FNMA
and 1.8% was being serviced for others.
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 purchased mortgage servicing rights 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 servicing rights 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 1997, 1996 or
1995. As of December 31, 1997, an aggregate of $675.7 million of CBS Mortgage's
$1.6 billion servicing portfolio, or 43.4%, was loans serviced for others. At
December 31, 1997, CBS Mortgage had no commitments for further purchases of
mortgage servicing rights.
The amount, if any, by which purchased mortgage servicing rights exceed the
lower of 90% of determinable fair market value, 90% of origination cost or
current amortized book value must be deducted from capital in calculating
regulatory capital. See "Regulation - Regulatory Capital Requirements." At
December 31, 1997, there were no deductions from capital for purchased mortgage
servicing rights valuation adjustments.
The following table sets forth certain information regarding CBS Mortgage's
servicing portfolio of mortgage loans for the periods indicated.
Year Ended December 31,
1997 1996 1995
----------- ----------- -----------
(In thousands)
Beginning servicing portfolio $ 1,735,089 $ 1,725,400 $ 1,511,263
----------- ----------- -----------
Loans originated(1) -- -- 8,810
Bank loan originations 140,673 104,023 68,960
Bank whole loans acquired 126,864 185,176 390,230
----------- ----------- -----------
Total servicing originated
and acquired 267,537 289,199 468,000
----------- ----------- -----------
Loans sold servicing released -- 47 2,602
Amortization and payoffs 430,373 273,219 246,223
Foreclosures 6,249 6,244 5,038
----------- ----------- -----------
Total servicing reductions 436,622 279,510 253,863
----------- ----------- -----------
Ending servicing portfolio $ 1,566,004 $ 1,735,089 $ 1,725,400
=========== =========== ===========
________________________
(1)Loans originated or purchased for the Bank.
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, 1997, the Company's mortgage-backed securities portfolio (including $170.0
million of mortgage-backed securities available-for-sale), net of unamortized
premiums and unearned discounts, amounted to $1.5 billion, or 52.0%, 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, 1997, 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,
1997 1996 1995
---------------------- --------------------- ----------------------
Amount Percent Amount Percent Amount Percent
------------ -------- ------------ -------- ----------- ---------
(Dollars in thousands)
Held-to-maturity:
REMICS $ 1,232,219 91.59% $ 1,213,849 90.25% $1,241,999 89.00%
FNMA certificates 69,906 5.20 77,324 5.75 90,061 6.45
GNMA certificates 28,701 2.13 33,900 2.52 39,363 2.82
Non-agency certificates 14,586 1.08 19,826 1.48 24,091 1.73
Interest-only securities 20 -- 38 -- 55 --
------------ -------- ------------ -------- ----------- --------
1,345,432 100.00% 1,344,937 100.00% 1,395,569 100.00%
======== ======== ========
Unamortized premium 2,831 3,153 3,841
Unearned discount (3,173) (3,503) (3,657)
------------ ------------ -----------
Total held-to-maturity $ 1,345,090 $ 1,344,587 $1,395,753
============ ============ ===========
Available-for-sale:
REMICS $ 173,717 100.00% $ 185,651 100.00% $ 186,505 99.52%
Non-agency certificates -- -- -- -- 908 0.48
------------ -------- ------------ -------- ----------- --------
173,717 100.00% 185,651 100.00% 187,413 100.00%
======== ======== ========
Unamortized premium 25 33 44
Unearned discount (247) (255) (284)
Net unrealized loss (3,498) (4,773) (759)
----------- ----------- -----------
Total available-for-sale $ 169,997 $ 180,656 $ 186,414
============ ============ ===========
Total mortgage-backed
securities $ 1,515,087 $ 1,525,243 $1,582,167
============ ============ ===========
The mortgage-backed securities which the Bank purchases and maintains in
portfolio can include FNMA, FHLMC and GNMA certificates, certain privately
issued, credit-enhanced mortgage-backed securities which are rated "A" or better
by the national securities rating agencies, certain types of collateralized
mortgage obligations ("CMOs") and interest-only ("IO") certificates. The FNMA,
FHLMC and GNMA certificates are modified pass-through mortgage-backed
securities, which represent undivided interests in underlying pools of
fixed-rate, or certain types of adjustable rate, single family residential
mortgages issued by these quasi-governmental (GNMA) and private (FNMA and FHLMC)
corporations. FNMA and GNMA provide to the certificate holder a guarantee
(which is backed by the full faith and credit of the U.S. government in the case
of GNMA certificates) of timely payments of interest and scheduled principal
payments, whether or not they have been collected. FHLMC guarantees the timely
payment of interest and the full (though not necessarily timely) payment of
principal. The guarantees of FNMA and FHLMC are not backed by the full faith
and credit of the U.S. government. The mortgage-backed securities acquired by
the Bank that have been pooled and sold by private issuers, generally large
investment banking firms, provide for the timely payments of principal and
interest either through insurance issued by a reputable insurer or the right to
receive certain payments thereunder is subordinated in a manner which is
sufficient to have such mortgage-backed securities generally earn a credit
rating of "A" or better from one or more of the national securities rating
agencies.
A CMO is a special type of pay-through debt obligation in which the stream
of principal and interest payments on the underlying mortgages or
mortgage-backed securities is used to create classes with different maturities
and, in some cases, amortization schedules and a residual class of the CMO
security being sold, with each such class possessing different risk
characteristics. The residual interest sold represents any residual cash flows
which result from the excess of the monthly receipts generated by principal and
interest payments on the underlying mortgage collateral and any reinvestment
earnings thereon, less the cash payments to the CMO holders and any
administrative expenses. As a matter of policy, due to the risk associated with
residual interests, the Bank has never invested in, and does not intend to
invest in, residual interests in CMOs. 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, 1997, the Bank had mortgage-backed securities considered
"high risk" with a recorded booked value of approximately $16.8 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,
1997 1996 1995
--------- --------- ---------
(In thousands)
Mortgage-backed securities
held-to-maturity purchased $ 56,136 $ -- 52,741
Available-for-sale securities sold(1) (11,308) (864) (72,298)
Amortization of premiums
net of discount accretion (83) (552) (495)
Change in unrealized loss on
mortgage-backed securities
available-for-sale 1,275 (4,013) (24)
Principal repayments on
mortgage-backed securities (56,176) (51,495) (35,845)
--------- --------- ---------
Net decrease in
mortgage-backed securities $(10,156) $(56,924) $(55,921)
========= ========= =========
(1) Securities 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 1997, 1996 and
1995, the Company sold $11.3 million, $864,000 and $72.3 million, respectively,
of 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 other loans for the Bank's portfolio. See Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of
Operations-Liquidity and Capital Resources."
SOURCES OF FUNDS
GENERAL. Advances from the FHLB, deposits, sales of securities under
agreements to repurchase and maturities and principal repayments on loans and
mortgage-backed securities have been the major sources of funds for use in the
Bank's lending and investments, and for other general business purposes.
Management of the Bank closely monitors rates and terms of competing sources of
funds on at least a weekly basis and utilizes the source which is the more cost
effective.
DEPOSITS. The Bank'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, 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 1997 or 1996, are not material for
separate presentation.
The following table shows the distribution of and certain other information
relating to the Company's deposits by type as of the dates indicated.
At December 31,
--------------------------------------
1997(1) 1996(2) 1995(3)
Percent Percent Percent
of of of
Amount Deposits Amount Deposits Amount Deposits
----------- --------- ----------- --------- ----------- ---------
(Dollars in Thousands)
Demand deposit accounts:
Noninterest-bearing checking $ 101,782 7.40% $ 85,259 6.50% $ 81,207 6.31%
Interest-bearing checking 69,972 5.09 56,862 4.34 47,476 3.69
Savings 25,555 1.86 22,135 1.69 22,374 1.74
Money market demand 165,986 12.07 151,046 11.52 165,214 12.83
----------- --------- ----------- --------- ----------- ---------
Total demand deposit accounts 363,295 26.42 315,302 24.05 316,271 24.57
----------- --------- ----------- --------- ----------- ---------
Certificate accounts:
Within 1 year 781,455 56.83 772,690 58.94 704,966 54.76
1-2 years 186,734 13.58 158,583 12.10 188,400 14.63
2-3 years 30,028 2.18 40,961 3.12 32,556 2.53
3-4 years 7,292 0.53 18,268 1.39 29,717 2.31
4-5 years 6,153 0.45 5,064 0.39 15,210 1.18
Over 5 years 178 0.01 165 0.01 319 0.02
----------- --------- ----------- --------- ----------- ---------
Total certificate accounts 1,011,840 73.58 995,731 75.95 971,168 75.43
----------- --------- ----------- --------- ----------- --------
1,375,135 100.00% 1,311,033 100.00% 1,287,439 100.00%
======== ======= ========
Discount to record
savings deposits at fair value, net. (75) (198) (355)
----------- ----------- -----------
Total $1,375,060 $1,310,835 $1,287,084
=========== =========== ===========
_______________
(1)In 1997, the Bank assumed approximately $54.6 million in deposits in
connection with the acquisition of one branch office of another financial
institution.
(2)In 1996, the Bank assumed approximately $11.1 million in net deposits in
connection with the exchange of three branch offices for one and the sale of
another branch office.
(3)In 1995, the Bank assumed approximately $157.2 million in deposits in
connection with the acquisition of five 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,
1997 1996 1995
----------- ----------- -----------
(Dollars in Thousands)
Average Average Average Average Average Average
Balance Rate Paid Balance Rate Paid Balance Rate Paid
----------- ---------- ----------- ---------- ----------- ---------
Demand deposit accounts:
Noninterest-bearing checking $ 91,293 --% $ 85,469 --% $ 62,164 --%
Interest-bearing checking 61,392 1.78 49,181 2.07 29,904 2.06
Savings 23,912 2.29 22,104 2.32 20,162 2.52
Money market demand 158,993 3.63 157,933 3.64 156,730 3.61
Certificate accounts 1,008,845 5.50 970,433 5.42 909,992 5.49
----------- ---------- ----------- ---------- --------- ------
Total deposits $ 1,344,435 4.68% $ 1,285,120 4.66% $ 1,178,952 4.81%
=========== ========== =========== ========== =========== ==========
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, 1997, which mature during the periods
indicated.
Amounts at December 31, 1997 Maturing
(In thousands)
Amounts at December 31, One Year
1997 1996 or Less
-------------------------- --------
(In thousands)
Certificate accounts:
2.00% to 3.99% $ 7,905 $ 14,835 $ 7,422
4.00% to 5.99% 899,205 871,852 743,317
6.00 to 7.99% 102,029 104,092 28,900
8.00 to 9.99% 2,701 4,686 1,816
10.00% to 11.99% -- 266 --
---------- -------- --------
Total $1,011,840 $995,731 $781,455
========== ======== ========
Amounts at December 31, 1997 Maturing
(In thousands)
Greater than
Two Years Three Years Three Years
---------- ---------- -------------
Certificate accounts:
2.00% to 3.99% $ 351 $ 46 $ 86
4.00% to 5.99% 132,851 11,759 11,278
6.00 to 7.99% 52,746 18,223 2,160
8.00 to 9.99% 786 -- 99
10.00% to 11.99% -- -- --
-------- ------- -------
Total $186,734 $30,028 $13,623
======== ======= =======
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,
1997 1996 1995
-------- --------- ---------
(In thousands)
Net increase (decrease) before interest
credited(1) $ 2,383 $(34,707) $ 91,052
Interest credited 61,842 58,458 56,410
-------- -------- ---------
Net deposit increase $ 64,225 $ 23,751 $ 147,462
======== ========= =========
(1) For the years ended December 31, 1997, 1996 and 1995, reflects the effect of
the assumption of $54.6 million, $11.1 million and $157.2 million of net deposit
liabilities in connection with branch office transactions in each respective
year. The net deposit outflow in 1997 and 1996 (net of acquired deposits) was
primarily due to financial disintermediation as described below.
The following table sets forth the amount of the Bank's certificates of
deposits which are $100,000 or more by time remaining until maturity as of
December 31, 1997.
At December 31, 1997
-------------------------
Number of Deposit
accounts Amount
--------- ---------
(Dollars in thousands)
Three months or less 273 $ 29,844
Over three through six
months 217 23,106
Over six through twelve
months 349 38,383
Over twelve months 293 31,260
--------- ---------
Total 1,132 $ 122,593
========= =========
The Bank's deposits are obtained primarily from residents of Houston,
Austin, Corpus Christi and small cities in the south east quadrant of Texas.
Currently, the principal methods used by the Bank to attract and retain deposit
accounts include competitive interest rates, having branch locations in
under-served markets and offering a variety of services for the Bank's
customers. The Bank uses traditional marketing methods to attract new customers
and savings deposits, including newspaper advertising. Through 1997, the Bank
has not solicited brokered deposit accounts and generally has not negotiated
rates on larger denomination (i.e., jumbo) certificates of deposit. The Bank
did, however, acquire deposits, classified on the books and records of a prior
entity as brokered, through the branch acquisition in 1994. In addition, in
early 1997, the Bank has begun the solicitation of deposit accounts through a
"money desk." Money desk rates are only offered to institutions (primarily
credit unions and municipal utility districts) and are generally up to 50 basis
points higher than on regular certificate of deposit accounts.
Management of the Bank intensified its deposit product marketing beginning
in 1993 in order to increase its share of core deposits in the markets in which
it operates. Management believes that the combination of the new packaged
deposit products (which generally have higher minimum balance requirements and
which provide value-added incentives to the customer, such as, for example, free
traveler's checks, reduced or waived monthly service charges and free money
orders) plus increased advertising, sales training, branch promotion and
cross-selling of products will help maintain the volume of the Bank's deposits
and strengthen customer relationships without requiring the Bank to alter its
deposit pricing strategy. The Bank's management also believes that such efforts
will assist the Bank in maintaining deposits, particularly during periods of
relatively low deposit rates, which might otherwise flow out of the institution
due to disintermediation (the movement of funds away from savings institutions
and into direct investment vehicles such as government and corporate securities
and mutual funds). Notwithstanding this plan, the ability of the Bank to attract
and maintain deposits and the Bank's cost of funds have been, and will continue
to be, significantly affected by general money market conditions.
The Bank also provides its customers with the opportunity to invest in
mutual funds, including government bond funds, tax-free municipal bond funds,
growth funds, income growth funds, and sector funds specific to an industry,
which are provided through a third party arrangement with another company, which
maintains representatives at the Bank's branch offices. The Bank earns a fee
after the payment of all expenses, which was not material to the Bank's
financial condition.
BORROWINGS. The following table sets forth certain information regarding
the borrowings of the Bank at or for the dates indicated.
At or For the Year
Ended December 31,
1997 1996 1995
--------- ----------- ---------
(Dollars in thousands)
FHLB advances:
Average balance outstanding $ 368,896 $ 387,296 $367,895
Maximum amount outstanding
at any month-end during the
period 540,475 491,930 405,016
Balance outstanding at end of
period 540,475 409,720 312,186
Average interest rate during the
period 5.78% 5.62% 6.01%
Average interest rate at end of
period 5.95% 5.61% 5.88%
Securities sold under agreements
to repurchase:
Average balance outstanding $ 974,136 $ 930,706 $752,427
Maximum amount outstanding
at any month-end during the
period 1,035,576 1,022,085 993,832
Balance outstanding at end of
period 791,760 966,987 993,832
Average interest rate during the
period 5.66% 5.52% 5.98%
Average interest rate at end of
period 6.00% 5.55% 5.78%
Federal funds purchased averaged approximately $161,000 during the year
ended December 31, 1997 with an average interest rate during the period of
5.59%. There were no federal funds purchased outstanding at any month-end
during 1997 and there were no f