SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended September 30, 1996
OR
[ X ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-19684
COASTAL FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 57-0925911
- --------------------------------------------------------------------------------
(State or other jurisdiction of incorporation (I.R.S. Employer I.D.)
or organization)
2619 North Oak Street, Myrtle Beach, South Carolina 29577-3129
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (803) 448-5151
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), 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. [ X ]
As of November 30, 1996, there were issued and outstanding 3,447,187
shares of the registrant's Common
Stock.
<PAGE>
The aggregate market value of the voting stock held by nonaffiliates of
the registrant, based on the closing sales price of the registrant's common
stock as quoted on the National Association of Securities Dealers, Inc.
Automated Quotation System under the symbol "CFCP" on November 30, 1996, was
$74,114,521(3,447,187 shares at $21.50 per share, which is the ending bid on
November 30, 1996.). It is assumed for purposes of this calculation that none of
the registrant's officers, directors and 5% stockholders are affiliates.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Annual Report to Stockholders for the Fiscal Year
Ended September 30, 1996. (Parts I and II)
2. Portions of the Proxy Statement for the 1997 Annual Meeting of
Stockholders. (Part III)
PART I
Item 1. Business
General
Coastal Financial Corporation ("Coastal Financial" or the
"Corporation") was incorporated in the State of Delaware in June 1990, for the
purpose of becoming a savings and loan holding company for Coastal Federal
Savings Bank ("Coastal Federal" or the "Bank"). On January 28, 1991, the
stockholders of the Bank approved a plan to reorganize the Bank into the holding
company form of ownership. The reorganization was completed on November 6, 1991,
on which date the Bank became the wholly-owned subsidiary of the Corporation,
and the stockholders of the Bank became stockholders of the Corporation. Prior
to completion of the reorganization, the Corporation had no material assets or
liabilities and engaged in no business activities. On April 1, 1993 Coastal
Federal's investment in Coastal Investments Corporation, formerly named Coastal
Investment Services, Inc., was transferred to Coastal Financial and became a
first tier subsidiary of the Corporation. The majority of the financial results
relates to the Corporation's largest subsidiary, Coastal Federal.
On November 2, 1995, Coastal Financial purchased Granger-O'Harra
Mortgage, Inc.("Granger-O'Harra") and merged Granger-O'Harra into a recently
formed subsidiary, Coastal Federal Mortgage, Inc. Coastal Federal Mortgage, Inc.
engages in the origination of conforming mortgage loans which are sold in the
secondary market generally servicing released.
On May 7, 1996, the Corporation formed Coastal Technology Services,
Inc. ("CTS"). CTS primarily develops specialized banking software for sale to
financial services companies. Activity for fiscal 1996 was limited for CTS.
Coastal Federal was organized in 1953 as a mutual savings and loan
association and, since that time, its deposits have been federally insured. In
March 1989, Coastal Federal converted from a federally chartered mutual savings
and loan association to a federally chartered mutual savings bank. On October 4,
1990, Coastal Federal converted to the stock form of ownership ("Conversion")
through the sale and issuance of 492,541 shares of common stock at a price of
$10.00 per share, which resulted in gross proceeds to Coastal Federal of
$4,925,410.
<PAGE>
Coastal Federal conducts its business from its main office in Myrtle
Beach, South Carolina, nine branch offices located in South Carolina and a
lending office in Sunset Beach, North Carolina. At September 30, 1996, Coastal
Financial had total assets of $459.7 million, total deposits of $313.4 million
and stockholders' equity of $27.7 million. The deposits of the Bank are insured
by the Federal Deposit Insurance Corporation ("FDIC") under the Savings
Association Insurance Fund ("SAIF"). The corporate offices of the Bank are
located at 2619 Oak Street, Myrtle Beach, South Carolina and the telephone
number is (803) 448-5151.
Eight of Coastal Federal's nine offices are in Horry County, South
Carolina. The economy of the Horry County area is dependent primarily on
tourism. To the extent Horry County area businesses rely heavily on tourism for
business, decreased tourism would have a significant adverse effect on Coastal
Federal's primary deposit base and lending area. Moreover, Coastal Federal would
likely experience a higher degree of loan delinquencies should the local economy
be significantly adversely affected.
Coastal Federal's principal business currently consists of attracting
deposits from the general public and using these funds to originate conventional
one-to-four family first mortgage loans, consumer and commercial business loans
and commercial real estate loans.
From 1982 until 1986, Coastal Mortgage Bankers and Realty Co., Inc.
("Coastal Mortgage"), Coastal Federal's wholly-owned service corporation,
invested in corporations which were actively engaged in real estate development
activities, primarily in the Myrtle Beach area. In 1986, Congress enacted
significant changes to the tax laws that reduced the tax benefits available on
second homes and rental property. The change in tax laws had a negative effect
on certain projects in which Coastal Mortgage was involved, and Coastal Mortgage
incurred significant losses from these real estate projects. Consequently, in
1986 Coastal Mortgage decreased its emphasis on real estate projects, decreasing
its loans to joint ventures as a percentage of total loans from 1.48% at
September 30, 1988 to 0% at September 30, 1995 and 1996, respectively.
Accordingly, losses from real estate partnerships were $394,000 in fiscal 1988
compared to income of $143,000 in fiscal 1996.
In 1988, the Bank decreased its emphasis on the origination of
commercial real estate loans. Commercial real estate loans as a percentage of
total loans have decreased from 20.1% of total loans at September 30, 1988 to
14.3% of total loans at September 30, 1996.
As part of its lending strategy, subject to market conditions,
management intends to continue emphasizing the origination of consumer and
commercial business loans in addition to first mortgage loans. At September 30,
1996, 6.3% and 10.7%, respectively, of the Bank's total loan portfolio consisted
of commercial business and consumer loans.
Selected Consolidated Financial Data and Other Items
The information contained in the table captioned "Selected Consolidated
Financial and Other Data" on page 2 of the Corporation's Annual Report to
Stockholders for the Fiscal Year Ended September 30, 1996 is incorporated herein
by reference.
<PAGE>
Yields Earned and Rates Paid
The following table sets forth, for the periods and at the date
indicated, the weighted average yields earned on Coastal Financial's assets, the
weighted average interest rates paid on its liabilities, together with the net
yield on interest-earning assets.
<TABLE>
<CAPTION>
Year Ended At
September 30, September 30,
----------------------------------
1994 1995 1996 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average yield
on loan portfolio .................... 7.93% 8.39% 8.57% 8.59%
Weighted average yield
on mortgage-backed
securities ............................ 7.59 7.81 7.78 7.23
Weighted average yield
on Federal Funds and
overnight deposits .................... 3.40 5.77 5.89 5.35
Weighted average yield
on investment portfolio ............... 4.46 5.14 6.55 6.70
Weighted average yield
on all interest-
earning assets ....................... 7.77 8.27 8.46 8.38
Weighted average rate
paid on savings deposits .............. 3.29 3.96 4.08 4.12
Weighted average rate
paid on Federal Home
Loan Bank advances .................... 5.56 6.53 6.27 5.97
Weighted average rate
paid on repurchase
agreements ............................ 3.11 3.70 4.63 3.57
Weighted average rate
paid on all interest
bearing liabilities .................. 3.68 4.75 4.70 4.44
Interest rate spread (spread
between weighted average
rate on all interest-earning
assets and all interest-
bearing liabilities) ................. 4.09 3.52 3.76 3.94
Net interest margin (net
interest income as a percentage
of average interest-earning
assets) ............................... 4.12 3.62 3.86 4.07
</TABLE>
<PAGE>
Rate/Volume Analysis
The following table sets forth certain information regarding changes to
interest income and interest expense of the Corporation for the periods
indicated. For each category of interest-earning asset and interest-bearing
liability, information is provided on changes attributed to (i) changes in rate
(changes in rate multiplied by old volume); (ii) changes in volume (changes in
volume multiplied by old rate); and (iii) changes in rate-volume (change in rate
multiplied by change in volume). Non-accrual loans are included in the average
volume calculations.
<TABLE>
<CAPTION>
Year Ended September 30,
-------------------------------------------------------------------------------------------
1994 Compared to 1993 1995 Compared to 1994
Increase (Decrease) Increase (Decrease)
Due to Due to
-------------------------------------------- ------------------------------------------
Rate/ Rate/
Rate Volume Volume Net Rate Volume Volume Net
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Loans ........................ $(1,810) $ 1,179 $ (88) $ (719) $ 1,377 $ 3,346 $ 222 $ 4,945
Mortgage-backed
securities................... (52) (576) 41 (587) 4 567 17 588
Investments and
other........................ 113 (89) (123) (99) 11 188 34 233
--- -- --- -- -- --- -- ---
Total net change in
income on interest-
earning assets................ (1,749) 514 (170) (1,405) 1,392 4,101 273 5,766
----- --- --- ----- ----- ----- --- -----
Interest-Bearing
Liabilities:
Deposits...................... (1,433) 22 (3) (1,414) 1,735 (297) (64) 1,374
FHLB advances................. (186) 291 (18) 87 526 3,215 564 4,305
Repurchase
agreements................... (10) 20 (11) (1) 35 3 7 45
-- -- -- - -- - - --
Total net change in
expense on interest-
bearing liabilities........... (1,629) 333 (32) (1,328) 2,296 2,921 507 5,724
----- --- -- ----- ----- ----- --- -----
Net change in net
interest income............... $ (120) $ 181 $ (138) $ (77) $ (904) $1,180 $ (234) $ 42
========= ======= ======= ======= ======= ====== ======= =====
<PAGE>
<CAPTION>
Year Ended September 30,
-------------------------------------------
1996 Compared to 1995
Increase (Decrease)
Due to
-------------------------------------------
Rate/
Rate Volume Volume Net
---- ------ ------ ---
<S> <C> <C> <C> <C>
Interest-Earning Assets:
Loans ........................ $ 615 $ 2,361 $ 51 $ 3,027
Mortgage-backed
securities................... (4) 1,083 (6) 1,073
Investments and
other........................ 177 96 19 292
--- -- -- ---
Total net change in
income on interest-
earning assets................ 644 3,540 49 4,392
--- ----- -- -----
Interest-Bearing
Liabilities:
Deposits...................... 300 1,455 44 1,799
FHLB advances................. (289) 51 (2) (240)
Repurchase
agreements................... 16 194 49 260
-- --- -- ---
Total net change in
expense on interest-
bearing liabilities........... 27 1,700 91 1,819
-- ----- -- -----
Net change in net
interest income............... $ 617 $ 1,840 $ (42) $2,573
======= ======= ====== ======
</TABLE>
<PAGE>
Average Balance Sheet
The following table sets forth certain information relating to the
Corporation's average balance sheet and reflects the average yield on assets and
average cost of liabilities for the periods indicated. Such yields and costs are
derived by dividing income or expense by the average balance of assets or
liabilities, respectively, for the periods presented. Average balances are
derived from month-end balances. Management does not believe that the use of
month-end balances instead of daily average balances has caused any material
difference in the information presented.
<TABLE>
<CAPTION>
Year Ended September 30,
----------------------------------------------------------------------------------------
1994 1995
------------------------------------------- ------------------------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Loans ........................... $299,356 $ 23,726 7.93% $341,557 $ 28,671 8.39%
Investments(1) .................. 14,882 692 4.20 15,153 925 6.10
Mortgage-backed
securities ..................... 1,897 144 7.59 9,365 732 7.82
-------- -------- ---- -------- -------- ----
Total interest-earning
assets .......................... $316,135 $ 24,562 7.77% $366,075 $ 30,328 8.28%
======== ======== ==== ======== ======== ====
LIABILITIES
Transaction accounts ............ 72,359 1,210 1.67 80,586 1,678 2.08
Passbook accounts ............... 63,620 1,523 2.39 55,370 1,314 2.37
Certificate accounts ............ 121,142 5,783 4.77 124,287 6,898 5.55
FHLB advances ................... 54,226 3,014 5.56 112,097 7,319 6.53
Securities sold
under repurchase
agreements ..................... 570 18 3.11 1,705 63 3.70
-------- -------- ---- -------- -------- ----
Total interest-bearing
liabilities ..................... $313,779 $ 11,548 3.68% $363,733 $ 17,272 4.75%
======== ======== ==== ======== ======== ====
Net interest income/
interest rate spread ............ $ 13,014 4.09% $ 13,056 3.52%
Net yield on earning
assets .......................... 4.12% 3.62%
Ratio of earning assets
to interest-bearing
liabilities ..................... 1.01x 1.02x
<PAGE>
<CAPTION>
Year Ended September 30,
-----------------------------------
1996
-----------------------------------
Average Yield/
Balance Interest Rate
------- -------- -----
<S> <C> <C> <C>
ASSETS
Loans ...................... $369,733 $ 31,698 8.57%
Investments(1) ............. 16,730 1,217 7.27
Mortgage-backed
securities ................ 23,214 1,805 7.78
-------- -------- ----
Total interest-earning
assets ..................... $409,677 $ 34,720 8.46%
======== ======== ====
LIABILITIES
Transaction accounts ....... 114,220 2,862 2.51
Passbook accounts .......... 44,631 1,160 2.60
Certificate accounts ....... 134,415 7,667 5.70
FHLB advances .............. 112,878 7,079 6.27
Securities sold
under repurchase
agreements ................ 6,955 323 4.63
-------- -------- ----
Total interest-bearing
liabilities ................ $406,162 $ 19,091 4.70%
======== ======== ====
Net interest income/
interest rate spread ....... $ 15,629 3.76%
Net yield on earning
assets ..................... 3.86%
Ratio of earning assets
to interest-bearing
liabilities................. 1.02x
- -----------------
(1) Includes short-term interest-bearing deposits and Federal funds sold.
</TABLE>
<PAGE>
Lending Activities
General. The principal lending activities of Coastal Federal are the
origination of residential one-to-four family mortgage loans, consumer loans and
commercial business loans. The Bank originates construction and permanent loans
on single family and multi-unit dwellings, as well as on commercial structures.
The Bank has emphasized the origination of adjustable rate residential and
commercial real estate mortgages since 1982.
The Bank's loan portfolio, including mortgage-backed securities,
totaled approximately $404.2 million at September 30, 1996, representing
approximately 87.9% of its total assets. On that date, approximately 58.0% of
Coastal Federal's total loan portfolio, including mortgage-backed securities,
were secured by mortgages on one-to-four family residential properties. The
balance of the Bank's outstanding loans at that date consisted of construction
loans, consumer loans and commercial real estate and commercial business loans.
In an effort to ensure that the yields on its loan portfolio and
investments are interest-rate sensitive, the Bank has implemented a number of
measures, including: (i) increased emphasis on origination of adjustable rate
mortgages on residential and commercial properties; (ii) origination of
construction loans secured by residential properties, generally with terms for a
one-year period; and (iii) origination of commercial and consumer loans having
either adjustable rates or relatively short maturities. At September 30, 1996,
adjustable rate loans constituted $271.4 million (or 72.0%) of the Bank's total
loan portfolio. Therefore, at such date, fixed rate loans comprised only 18.0%
of the total loan portfolio. These lending practices were adopted to shorten the
term of the Bank's assets and make the loan portfolio more responsive to
interest rate volatility.
<PAGE>
Loan Portfolio Analysis
The following tables set forth the composition of Coastal Federal's loan
and mortgage-backed securities portfolio by type of loan and type of security as
of the dates indicated.
<TABLE>
<CAPTION>
At September 30,
-----------------------------------------------------------------
1992 1993 1994
------------------ ------------------- -------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Type of Loan:
Mortgage loans:
Construction.................................. $ 8,867 3.05% $ 12,266 4.04% $ 23,222 6.66%
On existing property.......................... 197,234 67.80 206,632 68.06 225,544 64.67
Mortgage-backed securities.................... 14,640 5.03 3,525 1.16 794 .23
Income property (commercial).................. 34,835 11.98 35,328 11.64 42,207 12.10
Commercial business loans...................... 10,665 3.67 13,913 4.58 14,052 4.03
Consumer loans:
Mobile home.................................. 2,299 .79 1,807 .60 1,497 .43
Automobiles.................................. 2,661 .91 5,126 1.69 6,300 1.81
Equity lines of credit....................... 10,180 3.50 11,362 3.74 12,763 3.66
Other........................................ 9,499 3.27 13,626 4.49 22,373 6.41
-------- ---- ------ ---- -------- ------
Total loans, loans held for sale, and
mortgage-backed securities................... $290,880 100.00% $303,585 100.0% $348,752 100.00%
====== ===== ======
Less:
Loans in process............................. (3,535) (5,607) (13,087)
Deferred loan fees (costs)................... (576) (546) (343)
Allowance for loan losses.................... (1,851) (2,753) (3,353)
-------- ------ -------
Total loans and
mortgage-backed securities, net.............. $284,918 $294,679 $331,969
======== ======== ========
<CAPTION>
At September 30,
-------------------------------------------
1995 1996
------------------- -------------------
Amount Percent Amount Percent
------ ------- ------ -------
<S> <C> <C> <C> <C>
Type of Loan:
Mortgage loans:
Construction.................................. $ 27,905 7.10% $ 34,566 8.10%
On existing property.......................... 228,881 58.27 231,373 54.23
Mortgage-backed securities.................... 12,776 3.25 27,029 6.33
Income property (commercial).................. 54,401 13.85 61,180 14.34
Commercial business loans...................... 19,610 4.99 26,946 6.32
Consumer loans:
Mobile home.................................. 1,204 .31 1,103 .26
Automobiles.................................. 5,941 1.51 7,261 1.70
Equity lines of credit....................... 13,210 3.36 12,441 2.91
Other........................................ 28,887 7.36 24,776 5.81
-------- ------ -------- -----
Total loans, loans held for sale, and
mortgage-backed securities................... $392,815 100.00% $426,675 100.00%
====== ======
Less:
Loans in process............................. (17,178) (18,589)
Deferred loan fees (costs)................... (71) 286
Allowance for loan losses.................... (3,578) (4,172)
-------- --------
Total loans and
mortgage-backed securities, net.............. $371,988 $404,200
======== ========
(table continued on following page)
<PAGE>
<CAPTION>
At September 30,
------------------- -------------------- ---------------------
1992 1993 1994
------------------- -------------------- ---------------------
Amount Percent Amount Percent Amount Percent
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Type of Security:
Residential real estate:
Single family, one-to-four.......................$201,859 69.41% $218,095 71.85% $246,246 70.61%
Multi-family..................................... 2,306 .79 1,773 .58 1,510 .43
Mortgage-backed securities......................... 14,640 5.03 3,525 1.16 794 .23
Commercial or industrial real estate............... 35,828 12.32 35,829 11.80 42,207 12.10
Developed building lots, acquisi-
tion and development of land...................... 11,123 3.82 11,881 3.91 12,718 3.65
Automobiles........................................ 2,661 .91 5,126 1.69 6,300 1.81
Savings accounts................................... 1,077 .37 910 .30 966 .28
Other.............................................. 21,386 7.35 26,446 8.71 38,011 10.89
------ ------ -------- ------ -------- ------
Total loans, loans held for sale and
mortgage-backed securities........................$290,880 100.00% $303,585 100.00% $348,752 100.00%
====== ====== ======
Less:
Loans in process.................................. (3,535) (5,607) (13,087)
Deferred loan fees (costs)........................ (576) (546) (343)
Allowance for loan losses ........................ (1,851) (2,753) (3,353)
------ ------ ------
Total loans and mortgage-
backed securities, net............................$284,918 $294,679 $331,969
======== ======== ========
<PAGE>
<CAPTION>
At September 30,
----------------------------------------------
1995 1996
-------------------- --------------------
Amount Percent Amount Percent
------ ------- ------ -------
<S> <C> <C> <C> <C>
Type of Security:
Residential real estate:
Single family, one-to-four.............. $257,408 65.53% $247,013 57.89%
Multi-family............................ 2,018 .51 1,833 .43
Mortgage-backed securities................ 12,776 3.25 27,029 6.33
Commercial or industrial real estate...... 54,401 13.85 61,180 14.34
Developed building lots, acquisi-
tion and development of land............. 15,806 4.02 17,093 4.01
Automobiles............................... 5,941 1.51 7,261 1.70
Savings accounts.......................... 705 .18 436 .10
Other..................................... 43,760 11.15 64,830 15.20
-------- ------ -------- ------
Total loans, loans held for sale and
mortgage-backed securities............... $392,815 100.00% $426,675 100.00%
====== ======
Less:
Loans in process......................... (17,178) (18,589)
Deferred loan fees (costs)............... (71) 286
Allowance for loan losses ............... (3,578) (4,172)
-------- --------
Total loans and mortgage-
backed securities, net................... $371,988 $404,200
======== ========
</TABLE>
<PAGE>
Single Family Residential Loans. The Bank has been active in the
origination of conventional loans to enable borrowers to purchase existing homes
or residential lots, refinance existing mortgage loans or construct new homes.
Mortgage loans originated by the Bank are generally long-term loans, amortized
on a monthly basis, with principal and interest due each month. The initial
contractual loan payment period for single family residential loans typically
range from 15 to 30 years. The Bank's experience indicates that real estate
loans remain outstanding for significantly shorter periods than their
contractual terms. Borrowers may refinance or prepay loans at their option,
subject to any prepayment penalty provisions included in the note. The Bank
generally requires mortgage title insurance on all mortgage loans.
Since 1982, the Bank has offered adjustable mortgage loans ("ARMs"),
the interest rates of which adjust based upon either the cost of funds, prime
rate or treasury securities indices. The interest rates on ARMs generally may
not adjust more than 1-2% per year and 4-6% over the life of the loan. The Bank
originates ARMs at below the fully phased-in interest rate but generally
qualifies borrowers at the fully phased-in rate when the loan to value ratio
exceeds 80%. Monthly payments could increase significantly at the first
repricing period. Although Coastal Federal's ARMs have been beneficial in
helping Coastal Federal improve the interest rate sensitivity of its assets,
such loans may pose potential additional risks to Coastal Federal. A precipitous
increase in interest rates could be expected to result in an increase in
delinquencies or defaults on such loans.
Coastal Federal continues to offer one-to-four family residential loans
with fixed rates of interest. These loans generally can be sold in the secondary
market or are portfolio loans where the Bank offers such loans at rates
approximately 1% above conforming loan rates.
At September 30, 1996, approximately $274.0 million or 57.9% of the
Bank's loan portfolio, including mortgage-backed securities, consisted of
one-to-four family residential loans.
Construction Loans. The Bank originates construction loans on single
family residences that generally have a term of six months for individuals or
one year for builders. The individual's loans are usually tied to a commitment
by the Bank to provide permanent financing during the six month period. The
interest rate charged on construction loans is indexed to the prime rate as
published in The Wall Street Journal or current permanent loan rate and varies
depending on the terms of the loan and the loan amount. The Bank customarily
requires personal guaranties of payment from the principals of the borrowing
entities.
In the past, the Bank had originated a significant amount of commercial
real estate construction loans. The interest rate on such loans presently
offered by the Bank is indexed to either the U.S. Treasury securities or the
prime rate as published in The Wall Street Journal. Commercial real estate
construction financing generally exposes the lender to a greater risk of loss
than long-term financing on improved, occupied real estate, due in part to the
fact that the loans are underwritten on projected rather than historical, income
<PAGE>
and rental results. The Bank's risk of loss on such loans is dependent largely
upon the accuracy of the initial appraisal of the property's value at completion
of construction and the estimated cost (including interest) of completion. If
either estimate proves to have been inaccurate and the borrower is unable to
provide additional funds pursuant to his guaranty, the lender either may be
required to advance funds beyond the amount originally committed to permit
completion of the development and/or be confronted at the maturity of the loan
with a project whose value is insufficient to assure full repayment. The general
practice of Coastal Federal is to provide a permanent financing commitment on
commercial properties at the time the Bank provides the construction financing.
The Bank's underwriting criteria are designed to evaluate and to
minimize the risks of each commercial real estate construction loan. The Bank
considers evidence of the financial stability and reputation of both the
borrower and the contractor, the amount of the borrower's cash equity in the
project, independent evaluation and review of the building costs, local market
conditions, pre-construction sale and leasing information based upon evaluation
of similar projects and the borrower's cash flow projections upon completion.
The Bank generally requires personal guaranties of payment by the principals of
any borrowing entity.
At September 30, 1996, approximately $34.6 million or 8.1% of the
Bank's gross loan portfolio consisted of construction loans on both residential
($22.2 million) and commercial properties ($12.4 million).
Commercial Real Estate Loans. The Bank may invest, by OTS regulation,
in non-residential real estate loans up to 400% of its capital as computed under
GAAP plus general loan loss reserves. At September 30, 1996, this limited
Coastal Federal's aggregate non-residential real estate loans to approximately
$127 million. At such time, the Bank had non-residential real estate loans
outstanding of $78.3 million. The Bank will maintain a level of these loan types
within the guidelines set forth. The commercial real estate loans originated by
the Bank are primarily secured by shopping centers, office buildings, warehouse
facilities, retail outlets, hotels, motels and multi-family apartment buildings.
The interest rate of the commercial real estate loans presently offered by the
Bank generally adjusts every one or three years and is indexed to U.S. Treasury
securities. Such loans generally have a ten-year term, with the payments based
up to a 20 year amortization schedule. The Bank generally requires that such
loans have a minimum debt service coverage of 120% of projected net operating
income together with other generally accepted underwriting criteria. At
September 30, 1996, the Bank had approximately $61.2 million of loans secured by
commercial real estate, representing approximately 14.3% of Coastal Federal's
total loan portfolio.
Commercial real estate lending entails significant additional risks
compared to residential lending. Commercial real estate loans typically involve
large loan balances to single borrowers or groups of related borrowers. The
payment experience of such loans is typically dependent upon the successful
operation of the real estate project. These risks can be significantly affected
by supply and demand conditions in the market for office and retail space and
for apartments and, as such, may be subject, to a greater extent, to adverse
conditions in the economy. In dealing with these risk factors, Coastal Federal
generally limits itself to a real estate market or to borrowers with which it
has experience. The Bank concentrates on originating commercial real estate
loans secured by properties located within its market areas of Horry County,
Florence County, the Pee Dee Region, northeastern Georgetown County, all within
South Carolina and Brunswick County, North Carolina, although the Bank has, on a
limited basis, originated or purchased commercial real estate loans secured by
properties located in other parts of the Southeast.
<PAGE>
Consumer Loans. The Bank permitted by OTS regulations to invest up to
35% of their assets in consumer loans. The Bank currently offers a wide variety
of consumer loans on a secured and unsecured basis including home improvement
loans, loans secured by savings accounts and automobile, truck and boat loans.
The Bank also offers a revolving line of credit secured by owner-occupied real
estate. Total consumer loans amounted to $45.6 million, or 10.7% of the total
loan portfolio, at September 30, 1996.
Coastal Federal has marketed consumer loans in order to provide a wider
range of financial services to its customers and because of the shorter term and
normally higher interest rates on such loans than on residential real estate
loans.
Consumer loans entail greater risk than do residential mortgage loans,
particularly in the case of consumer loans which are unsecured or secured by
assets that depreciate rapidly, such as automobiles. In the latter case,
repossessed collateral for a defaulted consumer loan may not provide an adequate
source of repayment of the outstanding loan and the remaining deficiency often
does not warrant further substantial collection efforts against the borrower. In
addition, consumer loan collections are dependent on the borrower's continuing
financial stability and, thus, are more likely to be adversely affected by job
loss, divorce, illness or personal bankruptcy. Furthermore, the application of
various federal and state laws, including federal and state bankruptcy and
insolvency laws, may limit the amount recoverable on such loans. Such loans may
also give rise to claims and defenses by the borrower against Coastal Federal as
the holder of the loan, and a borrower may be able to assert claims and defenses
which it has against the seller of the underlying collateral.
Commercial Business Loans. The Bank is permitted under OTS regulations
to make secured or unsecured loans for commercial, corporate, business or
agricultural purposes, including the issuance of letters of credit secured by
real estate, business equipment, inventories, accounts receivable and cash
equivalents. The aggregate amount of such loans outstanding may not exceed 20%
of such institution's assets.
Coastal Federal has been making commercial business loans since 1983 on
both a secured and unsecured basis with terms which generally do not exceed one
year. The majority of these loans have interest rates which adjust with changes
in the prime rate as published in the Wall Street Journal. The Bank's non-real
estate commercial loans primarily consist of short-term loans for working
capital purposes, seasonal loans and lines of credit. The Bank customarily
requires a personal guaranty of payment by the principals of any borrowing
entity and reviews the financial statements and income tax returns of the
guarantors. At September 30, 1996, the Bank had $26.9 million outstanding in
commercial business loans, which represented approximately 6.3% of its loan
portfolio, including mortgage-backed securities.
<PAGE>
Loan Maturity
The following table sets forth certain information at September 30,
1996 regarding the dollar amount of loans and mortgage-backed securities
maturing in the Company's loan portfolio based on their contractual terms to
maturity but does not include scheduled payments or potential prepayments.
Demand loans, loans having no stated schedule of repayments and no stated
maturity and overdrafts are reported as due in one year or less.
<TABLE>
<CAPTION>
More than More than More than More than
One Year Three Years Five Years Ten Years
One Year Through Through Through Through Over
or Less Three Years Five Years Ten Years Twenty Years Twenty Years Totals
------- ----------- ---------- --------- ------------ ------------ ------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
First mortgage loans ............. $ 10,674 $ 9,979 $ 13,787 $ 11,784 $ 62,282 $199,981 $308,487
Other residential and
non-residential ................. 13,233 3,602 3,362 3,108 14,123 6,156 43,584
Equity lines of credit ........... 12,441 -- -- -- -- -- 12,441
Consumer loans ................... 5,267 7,812 6,184 2,780 1,779 -- 23,822
Commercial loans ................. 4,607 3,102 2,413 3,542 2,202 -- 15,866
-------- -------- -------- -------- -------- -------- --------
Total loans ................. $ 46,222 $ 24,495 $ 25,746 $ 21,214 $ 80,386 $206,137 $404,200
======== ======== ======== ======== ======== ======== ========
</TABLE>
The following table sets forth the dollar amount of all loans due after
one year at September 30, 1996 which have fixed interest rates and those which
have floating or adjustable interest rates.
<TABLE>
<CAPTION>
Fixed Floating or
Rates Adjustable Rates Totals
----- ---------------- ------
(In thousands)
<S> <C> <C> <C>
First mortgage loans .............. $ 76,046 $221,767 $297,813
Other residential and
non-residential .................. 2,627 27,724 30,351
Consumer loans .................... 16,690 1,865 18,555
Commercial loans .................. 4,040 7,219 11,259
-------- -------- --------
Total loans .................. $ 99,403 $258,575 $357,978
======== ======== ========
</TABLE>
<PAGE>
Interest Rate Sensitivity Analysis
The following table illustrates the repricing analysis of the Bank's
interest-earning assets and interest-bearing liabilities as of September 30,
1996. For purposes of the table, repricing characteristics of loans include
estimated annual prepayment rates.
<TABLE>
<CAPTION>
Zero to Four Months One Year to Greater than
Three Months to One Year Five Years Five Years Total
------------ ----------- ---------- ---------- -----
(In thousands)
<S> <C> <C> <C> <C> <C>
Rate Sensitive Assets(1):
Mortgage loans and
mortgage-backed securities .... $ 27,306 $ 215,894 $ 89,818 $ 31,494 $ 364,512
Non-mortgage loans ............. 14,684 5,603 19,401 -- 39,688
Interest-bearing deposits and
investment securities ......... 5,222 330 17,512 -- 23,064
--------- --------- --------- --------- ---------
Total ...................... $ 47,212 $ 221,827 $ 126,731 $ 31,494 $ 427,264
========= ========= ========= ========= =========
Rate Sensitive Liabilities:
Core deposits(2) ............... $ 36,449 $ 60,668 $ 54,425 $ 30,962 $ 182,504
Time deposits .................. 56,806 42,777 31,343 -- 130,926
Borrowings ..................... 49,741 5,201 38,854 17,479 111,275
--------- --------- --------- --------- ---------
Total ...................... $ 142,996 $ 108,646 $ 124,622 $ 48,441 $ 424,705
========= ========= ========= ========= =========
Off-Balance Sheet Positions:
Commitments to originate
mortgage loans ................ $ (794) $ 3,874 $ (3,544) $ 464 --
Interest rate sensitivity gap ... $ (96,578) $ 117,055 $ (1,435) $ (16,483) $ 2,559
Cumulative interest
sensitivity gap ................ $ (96,578) $ 20,477 $ 19,042 $ 2,559 --
Cumulative interest sensitivity
gap as a percent of total assets (21.11%) 4.48% 4.16% .56% --
(1) Prepayments have been applied to all loans. Prepayment speeds vary according
to the instrument's original maturity, coupon rate and age.
(2) Decay rates have been applied to all core deposits as follows:
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NOW MMDA Passbook Non-interest
Accounts Accounts Accounts Demand
-------- -------- -------- ------
<S> <C> <C> <C> <C>
Percent Repricing:
1 - 12 months .............. 37.00% 79.00% 17.00% 37.00%
13 - 60 months ............. 42.93 16.24 42.65 42.93
Over 60 months ............. 20.07 4.76 40.35 20.07
------ ------ ------ ------
Total ...................... 100.00% 100.00% 100.00% 100.00%
====== ====== ====== ======
</TABLE>
<PAGE>
Interest Rate Sensitivity of Net Portfolio Value
The table below measures interest rate risk by estimating the change in
market value of the Bank's assets, liabilities, and off-balance sheet contracts
in response to an instantaneous change in the general level of interest rates.
The procedure for measuring interest rate risk was developed by the Office of
Thrift Supervision ("OTS") to replace the "gap" analysis (the difference between
interest-earning assets and interest-bearing liabilities that mature or reprice
within a specific time period) used previously by the OTS. The model first
estimates the level of the Bank's market value of portfolio equity ("MVPE")
(market value of assets, less market value of liabilities, plus or minus the
market value of any off-balance sheet items) under the current rate environment.
In general, market values are estimated by discounting the estimated cash flows
of each instrument by appropriate discount rates. The model then recalculates
the Bank's MVPE under different interest rate scenarios. The change in MVPE
under the different interest rate scenarios provides a measure of the Bank's
exposure to interest rate risk. Due to OTS reporting requirements,
classifications may vary from GAAP reporting. The data presented below is as of
September 30, 1996.
<TABLE>
<CAPTION>
-400 -300 -200 -100 +100 +200
Basis Basis Basis Basis No Basis Basis
Points Points Points Points Change Points Points
------ ------ ------ ------ ------ ------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Mortgage loans and
securities........... $388,401 $384,624 $381,316 $377,325 $371,609 $364,304 $355,832
Non-mortgage loans.... 41,142 40,663 40,196 39,746 39,308 38,883 38,473
Cash, deposits and
securities........... 41,522 40,768 40,046 39,355 38,693 38,060 37,453
Repossessed assets.... 336 336 336 336 336 336 336
Premises and equipment 5,567 5,567 5,567 5,567 5,567 5,567 5,567
Other assets.......... 9,974 11,490 13,440 16,583 19,992 23,600 26,983
-------- -------- -------- -------- -------- -------- --------
TOTAL................. 486,942 483,448 480,901 478,912 475,505 470,750 464,644
======== ======== ======== ======== ======== ======== ========
LIABILITIES
Deposits.............. $317,340 $316,484 $315,641 $314,812 $314,002 $313,204 $312,419
Borrowings............ 115,567 113,957 112,411 110,924 109,494 108,118 106,793
Other liabilities..... 6,275 6,275 6,275 6,275 6,275 6,275 6,276
-------- -------- -------- -------- -------- -------- --------
TOTAL................. 439,182 436,716 434,327 432,011 429,771 427,597 425,488
======== ======== ======== ======== ======== ======== ========
OFF BALANCE SHEET
POSITIONS............ $ 300 $177 $69 $(76) $(256) $(467) $(674)
MARKET VALUE OF
PORTFOLIO EQUITY..... $48,060 $46,909 $46,643 $46,825 $45,478 $42,686 $38,482
<PAGE>
<CAPTION>
+300 +400
Basis Basis
Points Points
------ ------
<S> <C> <C>
ASSETS
Mortgage loans and
securities........... $346,714 $337,292
Non-mortgage loans.... 38,072 37,684
Cash, deposits and
securities........... 36,871 36,313
Repossessed assets.... 336 336
Premises and equipment 5,567 5,567
Other assets.......... 30,200 33,253
-------- --------
TOTAL................. $457,760 $450,445
======== ========
LIABILITIES
Deposits.............. $311,650 $310,892
Borrowings............ 105,517 104,286
Other liabilities..... 6,275 6,275
TOTAL................. 423,442 421,453
======== ========
OFF BALANCE SHEET
POSITIONS............ $(881) $(1,094)
MARKET VALUE OF
PORTFOLIO EQUITY..... $33,437 $27,898
</TABLE>
Loan Solicitation and Processing. The Bank actively solicits mortgage
loan applications from existing customers, walk-ins, referrals and from real
estate brokers. Commercial real estate loan applications also are obtained by
direct solicitation by loan officers.
Detailed loan applications are obtained to determine the borrower's
ability to repay, and the more significant items on these applications are
verified through the use of credit reports, financial statements and
confirmations through verification forms. After analysis of the loan application
and property or collateral involved, including an appraisal of the property by
independent appraisers approved by the Bank's Board of Directors and reviewed by
the Bank's underwriter, a lending decision is made by the Bank. With respect to
commercial loans, the Bank also reviews the capital adequacy of the business,
the ability of the borrower to repay the loan and honor its other obligations
and general economic and industry conditions. All residential mortgage loan
applications over $500,000 require the approval of the Bank's Loan Committee,
which consists of Directors Clemmons, Gerald, Smart, Springs and Executive Vice
Presidents Griffin, Rexroad and Stalvey. All first mortgage loan applications in
excess of 95% of the appraised value of the property must be approved by the
Board of Directors.
<PAGE>
Loan applicants are promptly notified of the decision of the Bank by a
letter setting forth the terms and conditions of the decision. If approved, such
terms and conditions include the amount of the loan, interest rate, amortization
term, a brief description of real estate to be mortgaged to the Bank and notice
of requirement of insurance coverage necessary to protect the Bank's interest in
the collateral.
The Bank's general policy is to obtain a title insurance policy
insuring that the Bank has a valid lien on the mortgaged real estate and that
the property is free of encumbrances. Borrowers must also obtain paid hazard
insurance policies prior to closing and, when the property is in a flood plain
as designated by the Department of Housing and Urban Development, obtain paid
flood insurance policies. It is the policy of Coastal Federal to require flood
insurance for the full insurable value of the improvements for any such loan
located in a designated flood hazard area. Borrowers on loans which exceed 80%
of the value of the security property are also required to advance funds on a
monthly basis, with each payment of principal and interest, to a mortgage escrow
account from which the Bank makes disbursements for items such as real estate
taxes, hazard insurance premiums and private mortgage insurance premiums. In
cases of flood insurance, it is the Bank's policy to require escrow on these
premiums regardless of the loan-to-value ratio.
Loan Originations, Purchases and Sales. The Bank is a qualified
servicer for FHLMC and FNMA. Depending upon interest rates and economic
conditions, the Bank has sold loans in order to provide additional funds for
lending, to generate servicing fee income, and to decrease the amount of its
long-term, fixed rate loans in order to minimize the gap between the maturities
of its interest-earning assets and interest-bearing liabilities. The Bank
generally continues to collect payments on the loans, to supervise foreclosure
proceedings, if necessary, and to otherwise service the loans. The Bank retains
a portion of the interest paid by the borrower on the loans as consideration for
its servicing activities. At September 30, 1996, the Bank was servicing loans
sold to others with a principal balance of approximately $115.1 million. Sales
of whole loans and participation interests by the Bank are made without right of
recourse to the Bank by the buyer of the loans in the event of default by the
borrower. The majority of the loans sold during the year ended September 30,
1996 were conforming conventional loans originated and sold by Coastal Federal
Mortgage. These loans were sold on a servicing released basis. At September 30,
1996, the Bank's loan portfolio included purchased loans of approximately $15.3
million, which have been primarily secured by single family residences and which
have been written on adjustable rate mortgage loan instruments.
<PAGE>
Loans Originated, Purchased and Sold
The following table shows total loans originated, purchased, sold and
repaid during the periods indicated.
<TABLE>
<CAPTION>
Year Ended September 30,
-----------------------------------
1994 1995 1996
--------- --------- ---------
(In thousands)
<S> <C> <C> <C>
Loans receivable and mortgage-backed
securities, net at the beginning of the
period ................................. $ 294,679 $ 331,969 $ 371,988
--------- --------- ---------
Loans originated:
Construction ........................... 22,338 31,849 38,172
Residential ............................ 82,507 46,935 60,683
Nonresidential ......................... 17,156 8,307 11,897
Land ................................... 6,831 7,263 8,355
Commercial business .................... 21,840 20,145 23,062
Consumer ............................... 24,089 26,530 18,201
--------- --------- ---------
Total loans originated ............. 174,761 141,029 160,370
--------- --------- ---------
Loans purchased:
Multi-family residential and
commercial real estate ............... 63 6,337 12,448
Mortgage-backed securities ............ -- 1,000 11,867
--------- --------- ---------
Total loans purchased .............. 63 7,337 24,315
--------- --------- ---------
Loans sold:
Whole loans sold ...................... (29,299) (2,806) (40,672)
Mortgage-backed securities ............ (1,613) -- (13,220)
--------- --------- ---------
Total loans sold ................... (30,912) (2,806) (53,892)
--------- --------- ---------
Loan and mortgage-backed securities
principal repayments and other ......... (105,707) (105,026) (97,689)
--------- --------- ---------
Other ................................... (915) (515) (892)
--------- --------- ---------
Loans receivable and mortgage-backed
securities, net, at end of period ..... $ 331,969 $ 371,988 $ 404,200
========= ========= =========
</TABLE>
<PAGE>
Loan Commitments. The Bank, upon the submission of a loan application,
generally provides a 45-day written commitment as to the interest rate
applicable to such loan. If the loan has not been closed within 45 days, the
rate may be adjusted to reflect current market conditions at the Bank's option.
Loans which require closing time in excess of 45 days from the date of
application are issued a written commitment, with a term ranging from three to
six months. For fixed rate loans, the Bank either charges a higher interest rate
on the loan or may charge up to one point to lock in the rate for 180 days. At
September 30, 1996, Coastal Federal had loan commitments of approximately $9.0
million.
Loan Origination and Other Fees. Coastal Federal may receive loan
origination fees and discount "points." Loan fees and points are a percentage of
the principal amount of the mortgage loan which are charged to the borrower for
funding the loan. Coastal Federal allows the purchaser to reduce the rate of
interest by the payment of points at the customers options. Fees on long-term
commercial real estate and residential construction loans vary with loan type.
Delinquencies. Coastal Federal's collection procedures provide for a
series of contacts with delinquent borrowers. If the delinquency continues, more
formal efforts are made to contact the delinquent borrower. If a residential
real estate loan continues in a delinquent status for 90 days or more, Coastal
Federal generally initiates foreclosure proceedings. Coastal Federal generally
initiates foreclosure proceedings on a commercial real estate loan if the loan
continues in a delinquent status for 60 days or more. In certain limited
instances, however, Coastal Federal may modify the loan or grant a limited
moratorium on loan payments to enable the borrower to reorganize his financial
affairs.
Problem Assets and Asset Classification. Loans are reviewed on a
regular basis and a reserve for uncollectible interest is established on loans
where collection of interest is questionable, generally when such loans become
90 days delinquent. Loan balances that relate to interest amounts reserved are
considered to be on a nonaccrual basis. Typically, payments received on a
nonaccrual loan are applied to the outstanding principal and interest as
determined at the time of collection of the loan.
<PAGE>
The following table sets forth information with respect to the Bank's
non-performing assets at the dates indicated. At each of the dates indicated,
Coastal Federal has no debt that has been restructured.
<TABLE>
<CAPTION>
At September 30,
-------------------------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Loans accounted for on a nonaccrual basis:
Real estate -
Residential.............................. 312 205 79 999 307
Commercial............................... 2,630 64 1,056 134 --
Commercial business....................... -- -- -- 154 60
Consumer.................................. 43 44 16 36 78
----- ----- ------ ------ ------
Total................................... 2,985 31 1,151 1,323 445
----- ----- ------ ------ ------
Accruing loans which are
contractually past due
90 days or more:
Real estate -
Residential.............................. -- -- -- -- --
Commercial............................... -- -- -- -- --
Commercial business....................... -- -- -- -- --
Consumer.................................. -- -- -- -- --
----- ----- ------ ------ ------
-- ----- ------ ----- -----
Total................................... -- -- -- __ -- --
----- ----- ------ ------ ------
Restructured loans......................... 480 -- -- -- --
Real estate owned........................... 2,555 2,197 781 789 323
Other nonperforming
assets..................................... -- -- -- -- --
----- ----- ------ ------ ------
Total nonperforming
assets..................................... $6,020 $2,510 $1,932 $2,112 $768
======= ====== ====== ====== ====
Total loans delinquent 90
days or more to net
loans...................................... 1.11% .10% .03% .36% .12%
Total loans delinquent 90
days or more to total
assets..................................... .91% .09% .03% .33% .10%
Total nonperforming assets
to total assets............................ 1.83% .74% .56% .53% .17%
</TABLE>
<PAGE>
For the year ended September 30,1996, gross interest income which would
have been recorded had non-accruing loans been current in accordance with their
original terms would have amounted to $46,000, of which $13,000 was included in
interest income.
The allowance for uncollectible interest which is netted against
accrued interest receivable totaled $83,000 and $50,000 at September 30, 1995
and 1996, respectively.
The OTS has adopted various changes in its regulations regarding
problem assets of savings institutions. These regulations, which became
effective on December 31, 1987, are intended to comply with directives to the
Federal Home Loan Bank Board ("FHLBB") (as predecessor to the OTS) in the
Competitive Equality Banking Act ("CEBA"). The regulations conform the OTS asset
classification system to commercial banking practices, eliminate the FHLBB's
previous regulation that had classified certain problem assets as "scheduled
items" and put the establishment of loan loss allowances on a basis consistent
with the requirements of GAAP.
OTS regulations require that each insured institution review and
classify its assets on a regular basis. In addition, in connection with
examinations of insured institutions, OTS examiners have authority to identify
problem assets and, if appropriate, require them to be classified. There are
three classifications for problem assets: substandard, doubtful and loss.
Substandard assets must have one or more defined weaknesses and are
characterized by the distinct possibility that the insured institution will
sustain some loss if the deficiencies are not corrected. Doubtful assets have
the weaknesses of substandard assets with the additional characteristic that the
weaknesses make collection or liquidation in full on the basis of currently
existing facts, conditions and values questionable, and there is a high
possibility of loss. An asset classified loss is considered uncollectible and of
such little value that continuance as an asset of the institution is not
warranted. The regulations also have a special mention category, described as
assets which do not currently expose an insured institution to a sufficient
degree of risk to warrant classification but do possess credit deficiencies or
potential weaknesses deserving management's close attention. Assets classified
as substandard or doubtful require the institution to establish general
allowances for loan losses. If an asset or portion thereof is classified loss,
the insured institution must either establish specific allowances for loan
losses in the amount of 100% of the portion of the asset classified loss or
charge off such amount. A portion of general loss allowances established to
cover possible losses related to assets classified substandard or doubtful may
be included in determining an institution's regulatory capital, while specific
valuation allowances for loan losses generally do not qualify as regulatory
capital.
Coastal Federal had no individual classified asset in excess of
$450,000 as of September 30, 1996. At that date, classified assets amounted to
$5.1 million ($18,000.00 loss; $1.0 million substandard; $50,000.00 doubtful;
and $4.0 million special mention).
Allowance for Loan Losses. In making loans, the Bank recognizes the
fact that credit losses will be experienced and that the risk of loss will vary
with, among other things, the type of loan being made, the creditworthiness of
the borrower over the term of the loan and, in the case of a secured loan, the
quality of the security for the loan.
<PAGE>
The Bank's management evaluates the need to establish allowances for
losses on loans and other assets each year based on estimated losses on specific
loans and on any real estate held for sale or investment when a finding is made
that a significant decline in value has occurred. Such evaluation includes a
review of all loans for which full collectibility may not be reasonably assured
and considers, among other matters, the estimated market value of the underlying
collateral of problem loans, prior loss experience, economic conditions and
overall portfolio quality. Additions to the allowance for losses are charged
against earnings in the year they are established. The Bank established
provisions for losses on loans for the years ended September 30, 1994, 1995 and
1996 of $510,000, $202,000 and $790,000, respectively. As a result, the Bank has
a $4.2 million allowance for loan losses as of September 30, 1996. The allowance
as a percentage of loans receivable was 1.11% at September 30, 1996 compared to
1.0% at September 30, 1995. See "Management's Discussion and Analysis" in the
1996 Annual Report to Stockholders attached hereto and incorporated by
reference.
While the Bank believes it has established its existing allowance for
loan losses in accordance with GAAP at September 30, 1996, there can be no
assurance that regulators, when reviewing the Bank's loan portfolio in the
future, will not request the Bank to significantly increase its allowance for
loan losses, thereby adversely affecting the Bank's financial condition and
earnings.
<PAGE>
Loan Loss Allowance Analysis
The following table sets forth an analysis of Coastal Federal's allowance
for loan losses for the periods indicated. Where specific loan loss reserves
have been established, any difference between the loss reserve and the amount of
loss realized has been charged or credited to the loan loss allowance as a
charge-off or recovery.
<TABLE>
<CAPTION>
Year Ended September 30,
--------------------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Allowance at beginning of
period........................................... $1,532 $1,851 $2,753 $3,353 $3,578
Provision for loan losses......................... 645 1,389 510 202 790
--- ------ ------ ------ ------
Recoveries:
Residential real estate.......................... 29 -- 3 232 --
Commercial real estate........................... 116 11 148 11 75
Real estate construction......................... -- -- -- -- --
Consumer......................................... 3 106 79 12 7
------ ------ ------ ------ -----
Total recoveries............................... 148 117 230 255 82
------ ------ ------ ------ -----
Charge-offs:
Residential real estate.......................... 153 71 38 206 24
Commercial real estate........................... 119 392 13 18 216
Real estate construction......................... -- -- -- -- --
Consumer......................................... 202 141 89 8 38
------ ------ ------ ------ -----
Total charge-offs.............................. 474 604 140 232 278
------ ------ ------ ------ -----
Net charge-offs (recoveries) .................. 326 487 (90) (23) 196
------ ------ ------ ------ -----
Allowance at end of period....................... $1,851 $2,753 $3,353 $3,578 $4,172
====== ====== ====== ====== ======
Ratio of allowance to net
loans outstanding at the
end of the period................................ 0.69% 0.98% 1.01% 1.00% 1.11%
Ratio of net charge-offs (recoveries)
to average loans outstanding
during the period................................ 0.12% 0.17% (.03%) (.01%) .05%
</TABLE>
<PAGE>
Loan Loss Allowance by Category
The following table sets forth the breakdown of the allowance for
loan losses by loan category for the periods indicated.
<TABLE>
<CAPTION>
September 30,
1992 1993 1994
--------------------------------- --------------------------------- ----------------------------
As a % Loan Type As a % Loan Type As a % Loan Type
of out- As a % of out- As a % of out- As a %
standing of out- standing of out- standing of out-
loans in standing loans in standing loans in standing
Amount category loans Amount category loans Amount category loans
------ -------- ----- ------ -------- ----- ------ -------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate -- mortgage
Residential................... $ 257 0.11% 78.09% $ 542 .25% 75.48% $ 742 .30% 75.05%
Commercial.................... 1,282 3.79 12.68 1,901 5.54 12.22 2,296 5.58 11.94
Consumer........................ 312 1.26 9.23 310 .89 12.30 315 .71 13.01
------ ---- ------ ------ ---- ------ ------ ---- ------
Total allowance for
loan losses.................. $1,851 0.69% 100.00% $2,753 .98% 100.00% $3,353 1.01% 100.00%
====== ====== ====== ====== ====== ======
<CAPTION>
1995 1996
--------------------------------- --------------------------------
As a % Loan Type As a % Loan Type
of out- As a % of out- As a %
standing of out- standing of out-
loans in standing loans in standing
Amount category loans Amount category loans
------ -------- ----- ------ -------- -----
<S> <C> <C> <C> <C> <C> <C>
Real Estate -- mortgage
Residential................... $ 803 .31% 72.03% $ 837 .37% 65.35%
Commercial.................... 2,371 4.36 14.17 2,875 3.80 22.34
Consumer........................ 404 .80 13.80 460 1.01 12.31
------ ---- ------ ------ ---- ------
Total allowance for
loan losses.................. $3,578 1.00% 100.00% $4,172 1.11% 100.00%
====== ====== ====== ======
</TABLE>
<PAGE>
Investment Activities
Under OTS regulations, the Bank has authority to invest in various
types of liquid assets, including U.S. Treasury obligations, securities of
various federal agencies and of state and municipal governments, deposits at the
FHLB of Atlanta, certificates of deposit of federally insured institutions,
certain bankers' acceptances and federal funds. Subject to various restrictions,
such savings institutions may also invest a portion of their assets in
commercial paper, corporate debt securities and mutual funds, the assets of
which conform to the investments that federally chartered savings institutions
are otherwise authorized to make directly. These institutions are also required
to maintain minimum levels of liquid assets which vary from time to time. See
"Regulation of Coastal Federal - Federal Home Loan Bank System." The Bank may
decide to increase its liquidity above the required levels depending upon the
availability of funds and comparative yields on investments in relation to
return on loans.
Coastal Federal is required under federal regulations to maintain a
minimum amount of liquid assets and is also permitted to make certain other
securities investments. See "Regulation" herein and "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources" in the Annual Report. The balance of the Bank's investments
in short-term securities in excess of regulatory requirements reflects
management's response to the significantly increasing percentage of deposits
with short maturities. At September 30, 1996, Coastal Federal's regulatory
liquidity was 8.0%, which was in excess of the required 5.0%.
Investment decisions are made by the Investment Officer who reports
quarterly to the Asset/Liability Committee ("ALCO Committee"). The ALCO
Committee meets quarterly and consists of Directors Benton, Creel, Bishop,
Springs, Clemmons and Gerald, Chief Financial Officer Rexroad and Executive Vice
Presidents Graham, Griffin and Stalvey. The ALCO Committee acts within policies
established by the Board of Directors. At September 30, 1996, the Bank's
investment security portfolio had a market value of approximately $17.5 million.
The investment securities portfolio consisted primarily of U.S. Government
agency securities. For further information concerning the Bank's securities
portfolio, see Notes 2 and 3 of the Notes to Consolidated Financial Statements.
<PAGE>
Investment Securities Analysis
The following table sets forth Coastal Federal's investment securities
portfolio at carrying value at the dates indicated.
<TABLE>
<CAPTION>
September 30,
----------------------------------------------------------------------------------
1994 1995 1996
-------------------------- ------------------------ ----------------------
Amortized Percent of Amortized Percent of Amortized Percent of
Cost(1) Portfolio Cost(1) Portfolio Cost(1) Portfolio
-------------------------- ------------------------ ----------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
U.S. Government securities ............ $ -- --% $ -- --% -- --
FHLMC ................................. 1,000 13.02 -- -- -- --
FHLB .................................. 5,000 65.10 1,000 42.94 17,334 98.13
FNMA .................................. -- -- -- -- --
FFCB .................................. 999 13.01 999 42.89 --
Municipal ............................. 681 8.87 330 14.17 330 1.87
------- ------ ------- ------- ------ --
Total .............................. $ 7,680 100.00% $ 2,329 100.00% $17,664 100.00%
======= ====== ======= ====== ======= ======
(1) The market value of the Bank's investment securities portfolio amounted to
$7.5 million, $2.3 million and $17.5 million at September 30, 1994, 1995 and
1996, respectively.
</TABLE>
The following table sets forth the maturities and weighted average
yields of the debt securities at September 30, 1996.
<TABLE>
<CAPTION>
Less Than One to Five to
One Year Five Years Ten Years
Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
U.S. Government
securities.............................. $ -- --% $ -- --% $ -- --%
Agency securities......................... 330 5.10 4,300 (1) 7.13 13,034 (2) 6.66
---- ---- ------ ---- ------- ----
Total................................. $330 5.10% $4,300 7.13% $13,034 6.66%
=== ===== ===== ===== ====== =====
(1) Includes $4.3 million subject to call provisions. Should these bonds be
called prior to maturity the Bank may not be able to obtain the same yield with
similar term securities.
(2) Includes $13.1 million subject to call provisions. Should these bonds be
called prior to maturity the Bank may not be able to obtain the same yield with
similar term securities.
</TABLE>
<PAGE>
Service Corporation Activities
Coastal Federal has one wholly-owned service corporation: Coastal
Mortgage Bankers and Realty Co., Inc. "Coastal Mortgage Bankers", which was
incorporated in 1970 under the laws of South Carolina.
COASTAL FEDERAL
COASTAL MORTGAGE
BANKERS*
North Beach Shady Forest Sherwood Ridge 501 Development
Investments, Inc. Development Development Development Corporation
Corporation Corporation Corporation
- ---------------
* For a description of these subsidiaries, see "Real Estate Development
Activities."
<PAGE>
Real Estate Development Activity
Since 1982, Coastal Mortgage and its subsidiaries have been involved in
real estate operations, either as the sole owner/developer or as a joint venture
partner.
o Through its investment in 501 Development Corporation, Coastal
Mortgage has a 50% ownership interest in a project that consists of
approximately 50 acres in Horry County, which has received zoning approval as a
planned unit development. At September 30, 1996, the total remaining investment
in this project was approximately $47,000.
With the exception of one project, for which a joint venture was
created to dispose of real estate acquired through foreclosure, the Corporation
has not entered into any real estate activity since 1984 and has, in fact,
almost eliminated its investment in these real estate activities. These efforts
are reflected in the reduction of Corporation's investment and loans to
subsidiaries from $8.5 million at September 30, 1987 to approximately $187,000
at September 30, 1996.
In prior years, the Bank made loans to purchasers of units in which the
Bank's Subsidiaries were involved in a joint venture.
The following table summarizes the balances of permanent loans to
individual unit purchasers, by project, at September 30, 1996 (net of
participations sold to other financial institutions).
<TABLE>
<CAPTION>
Number of Total Slow Loans(1)
Project Borrowers Amount Number Amount
- ------- --------- ------ ------ ------
<S> <C> <C> <C> <C>
Beach Cove 89 $5,978,804 -- $ --
Condominium
North Myrtle Beach,
South Carolina
Bluewater 111 $5,579,894 -- $ --
Condominium
Myrtle Beach,
South Carolina
Cobblestone Villas 61 $2,300,008 -- $ --
Condominium
Myrtle Beach,
South Carolina
Carolina Pines 27 $ 939,761 -- $ --
Condominium
Conway, South Carolina
- -----------------
(1) Loans over 60 days delinquent
</TABLE>
<PAGE>
In most cases, development was undertaken through joint ventures in
which a subsidiary of Coastal Mortgage Bankers made an equity investment and, as
a partner, participated in the profits or losses of the joint ventures. Coastal
Federal generally made loans to the joint ventures, subject to Coastal Federal's
underwriting standards and policies and generally with the personal guarantees
of the partners. Generally, Coastal Federal sold participations in the
construction loans, which had interest and fees at market rates, to other
financial institutions.
The business of real estate development involves substantial risks.
Development activities typically involve substantial capital outlays both before
and during construction. Post-construction operations also may result in a
negative cash flow and losses due to an inability to recoup costs until project
sales occur, substantial cost overruns or other factors over which the developer
has little or no control. Seasonality, location and general economic and market
conditions, particularly in resort locations such as the Myrtle Beach area, as
well as the size of the project and the experience, reputation and performance
of the developer and the project operator are other facts which may adversely
affect real estate development projects. Adverse changes in these factors could
cause additional losses. In addition, the development and sale of condominium
projects is subject to a number of federal and state statutes, including, but
not limited to, the Interstate Land Sales Full Disclosure Act, Federal
Securities Act of 1933, state "Blue Sky" laws, state real estate laws, Federal
Unfair Trade Practices Act, South Carolina Unfair Trade Practices Act and the
Racketeer Influenced and Corrupt Organizations Act, the violation of which could
result in liability to the participant. Furthermore, changes in the federal
income tax have reduced the attractiveness of rental property as an investment,
which may adversely affect the ability to sell these properties.
As discussed under "Regulation Of Coastal Federal", Coastal Mortgage is
a "nonincludable subsidiary" as defined in the OTS capital regulations and the
Bank must exclude its investment in and loans to it when calculating its
regulatory capital. As of September 30, 1996, the Bank's investment in and loans
to Coastal Mortgage totalled approximately $187,000.00.
Deposit Activities and Other Sources of Funds
General. Deposits and loan repayments are the major source of Coastal
Federal's funds for lending and other investment purposes. Loan repayments are a
relatively stable source of funds, while deposit inflows and outflows and loan
prepayments are significantly influenced by general interest rates and money
market conditions. Borrowings may be used on a short-term basis to compensate
for reductions in the availability of funds from other sources. They may also be
used on a longer term basis for general business purposes.
Deposit Accounts. Deposits are attracted from within Coastal Federal's
primary market area through the offering of a broad selection of deposit
instruments, including NOW accounts, money market accounts, regular savings
accounts, certificates of deposit and retirement savings plans. Deposit account
terms vary, according to the minimum balance required, the time periods the
funds must remain on deposit and the interest rate, among other factors. In
determining the terms of its deposit accounts, Coastal Federal considers the
rates offered by its competition, profitability to Coastal Federal, matching
deposit and loan products and its customer preferences and concerns. Coastal
Federal generally reviews its deposit mix and pricing weekly.
<PAGE>
Deposit Balances
The following table sets forth information concerning the Bank's time
deposits and other deposits at September 30, 1996.
<TABLE>
<CAPTION>
Average Percentage
Interest Minimum of Total
Rate Term Category Amount Balance Deposits
---- ---- -------- ------ ------- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
Checking and Savings
1.50% None NOW $ 100 $ 35,654 11.38%
-- None Commercial checking 100 19,926 6.36
4.93 Money market Demand 1,000-2,500 84,997 27.12
2.50 None Passbook savings 100-500 39,287 12.53
2.25 Money market Passbook 2,500 3,553 1.13
----- -------
Total checking and savings $183,417 58.52%
-------- -----
Certificates of Deposit
4.78 3 months Fixed term, fixed rate $ 1,000 $ 2,122 .68%
5.54 6 months Fixed term, fixed rate 1,000 23,479 7.49
5.12 9 months Fixed term, fixed rate 1,000 9,293 2.96
5.64 12 months Fixed term, fixed rate 1,000 47,059 15.01
and variable rate
5.83 18 months Fixed term, fixed rate
and variable rate 1,000 20,981 6.69
5.92 24 months Fixed term, fixed rate 1,000 4,049 1.29
5.65 30 months Fixed term, fixed rate 1,000 2,189 .70
5.97 36 months Fixed term, fixed rate 1,000 8,944 2.85
6.06 48 months Fixed term, fixed rate 1,000 4,728 1.51
6.18 96 months Fixed term, fixed rate 1,000 26 .01
-- 30-365 days Mini-jumbo certificates 50,000 -- --
-- 30-365 days Jumbo certificates 100,000 -- --
------ -----
Total fixed $122,870 39.20%
======== =====
5.00 18 months Variable rate $ 100 $ 4,593 1.47%
5.63 30 months Variable rate 100 2,550 .81
-------- -----
Total variable $ 7,143 2.28%
======== =====
Total certificates $130,013 41.48%
======== =====
Total deposits $313,430 100.00%
======== ======
</TABLE>
<PAGE>
Deposit Flow
The following table sets forth the balances of savings deposits in the
various types of savings accounts offered by the Bank at the dates indicated.
<TABLE>
<CAPTION>
At September 30,
---------------------------------------------------------------------
1994 1995
---------------- ---------------------------------------
Percent Percent
of of Increase
Amount Total Amount Total (Decrease)
------------------- -------------------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Transaction accounts:
NOW......................................... $ 30,244 12.23% $ 29,852 10.93% $(392)
Commercial checking......................... 12,605 5.10 16,494 6.04 3,889
-------- ----- ------ ----- -----
Total transaction accounts.................... 42,849 17.33 46,346 16.97 3,497
-------- ----- ------ ----- -----
Money market demand accounts.................. 30,461 12.31 41,516 15.20 11,055
Passbook savings accounts..................... 64,318 25.99 46,421 17.00 (17,897)
Fixed-rate certificates (original maturity):
3 months..................................... 1,549 .63 3,431 1.26 1,882
6 months..................................... 13,830 5.59 9,522 3.49 (4,308)
9 months..................................... 1,126 .46 26,751 9.80 25,625
12 months.................................... 9,931 4.01 57,315 21.00 47,384
18 months.................................... 64,158 25.94 12,426 4.55 (51,732)
24 months.................................... 2,714 1.10 3,845 1.41 1,131
30 months.................................... 975 .39 1,786 .65 811
36 months.................................... 3,063 1.24 9,504 3.48 6,441
48 months.................................... 2,399 .97 4,613 1.69 2,214
96 months.................................... 34 .01 24 -- (10)
Mini-jumbo................................... -- -- -- -- --
Jumbo........................................ -- -- -- -- --
-------- ----- -------- ------ ------
99,779 40.34 129,217 47.33 29,438
--------- ----- -------- ------ ------
Variable rate certificates:
(original maturity)
18 months.................................... 7,308 2.95 7,100 2.60 (208)
30 months.................................... 2,670 1.08 2,499 .90 (171)
-------- ------- ----- ----- ----
Total variable................................ 9,978 4.03 9,599 3.50 (379)
------- ------ ----- ---- ----
Total certificates............................ 109,757 44.37 138,816 50.83 29,059
-------- ----- ------- ----- ------
Total deposits................................ $247,385 100.00% $273,099 100.00% $25,714
======== ======= ======== ======= =======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
At September 30,
-------------------------------------
1996
-------------------------------------
Percent
of Increase
Amount Total (Decrease)
-------------------------------------
<S> <C> <C> <C>
Transaction accounts:
NOW......................................... $ 35,654 11.38% $ 5,802
Commercial checking......................... 19,926 6.36 3,432
------ ---- -----
Total transaction accounts.................... 55,580 17.74 9,234
------ ----- -----
Money market demand accounts.................. 84,997 27.12 43,481
Passbook savings accounts..................... 42,840 13.66 (3,581)
Fixed-rate certificates (original maturity):
3 months..................................... 2,122 .68 (1,309)
6 months..................................... 23,479 7.49 13,957
9 months..................................... 9,293 2.96 (17,458)
12 months.................................... 47,059 15.01 (10,256)
18 months.................................... 20,981 6.69 8,555
24 months.................................... 4,049 1.29 204
30 months.................................... 2,189 .70 403
36 months.................................... 8,944 2.85 (560)
48 months.................................... 4,728 1.51 115
96 months.................................... 26 .01 2
Mini-jumbo................................... -- -- --
Jumbo........................................ -- -- --
------- ---- ------
122,870 39.20 (6,347)
------ ------ ------
Variable rate certificates:
(original maturity)
18 months.................................... 4,593 1.47 (2,507)
30 months.................................... 2,550 .81 51
----- --- --
Total variable................................ 7,143 2.28 (2,456)
----- ---- ------
Total certificates............................ 130,013 41.48 (8,803)
------- ----- -------
Total deposits................................ $313,430 100.00% $40,331
======== ======= =======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
At September 30,
1994 1995 1996
-------------------- ------------------------------- ------------------------------
Percent Percent Percent
of of Increase of Increase
Amount Total Amount Total (Decrease) Amount Total (Decrease)
-------------------- ------------------------------- ------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed and variable rate certificates
which mature as follows:
Within 1 year ............... $ 96,909 88.3% $117,724 84.8% $ 20,815 $ 94,651 72.8% $(23,073)
After 1 but within 2 years .. 9,394 8.5 8,749 6.3 (645) 28,241 21.7 19,492
After 2 but within 3 years .. 2,617 2.4 8,449 6.1 5,832 5,484 4.2 (2,965)
Thereafter .................... 837 .8 3,894 2.8 3,057 1,637 1.3 (2,257)
-------- ----- -------- ----- -------- -------- ----- --------
Total ....................... $109,757 100.0% $130,013 100.0% $ 29,059 $130,013 100.0% $ (8,803)
======== ===== ======== ===== ======== ======== ===== ========
</TABLE>
NOTE: Individual Retirement Accounts ("IRAs") are included in certificate
balances. Such accounts amounted to $15.3 million, $16.0 million and
$15.2 million at September 30, 1994, 1995 and 1996, respectively.
Time Deposits by Rates
The following table sets forth the Bank's time deposits classified by rates
as of the dates indicated.
<TABLE>
<CAPTION>
At September 30,
Rate 1994 1995 1996
- ---- ---- ---- ----
(In thousands)
<S> <C> <C> <C>
0.00 - 5.99% ............... $108,994 $ 76,939 $113,871
6.00 - 8.00% ............... 359 61,402 15,623
8.01 - 10.00% .............. 140 124 130
10.01 - 12.00% .............. 264 351 389
-------- -------- --------
Total .................... $109,757 $138,816 $130,013
======== ======== ========
</TABLE>
<PAGE>
Time Deposits by Maturity and Rate
The following table sets forth the amount and maturities of time deposits at
September 30, 1996.
<TABLE>
<CAPTION>
Amount Due
--------------------------------------------------------------------------
Less Than 1-2 2-3 3-4 After
Rate One Year Years Years Years 4 Years Total
- ---- -------- ----- ----- ----- ------- ------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
0.00 - 5.99% $ 91,529 $ 19,862 $ 1,798 $ 656 $ 26 $113,871
6.00 - 8.00% 2,603 8,379 3,686 955 -- 15,623
8.01 - 10.00% 130 -- -- -- -- 130
10.01 - 12.00% 389 -- -- -- -- 389
-------- -------- -------- -------- -------- --------
Total ..... $ 94,651 $ 28,241 $ 5,484 $ 1,611 $ 26 $130,013
======== ======== ======== ======== ======== ========
</TABLE>
In the unlikely event Coastal Federal is liquidated, depositors will be
entitled to full payment of their deposit accounts prior to any payment being
made to the Corporation as the sole stockholder of Coastal Federal.
Substantially all of Coastal Federal's depositors are residents of the State of
South Carolina.
Borrowings. Demand and time deposits are the primary source of funds
for Coastal Federal's lending and investment activities and for its general
business purposes. The Bank has in the past, however, relied upon advances from
the FHLB of Atlanta to supplement its supply of lendable funds and to meet
deposit withdrawal requirements. The FHLB of Atlanta has served as one of the
Bank's primary borrowing sources. Advances from the FHLB of Atlanta are
typically secured by the Bank's first mortgage loans. At September 30, 1996,
Coastal Federal had advances totaling $104.6 million from the FHLB of Atlanta
due on various dates through 2005 with a weighted average interest rate of
5.97%.
The FHLB of Atlanta functions as a central reserve bank providing
credit for savings institutions and certain other member financial institutions.
As a member, Coastal Federal is required to own capital stock in the FHLB of
Atlanta and is authorized to apply for advances on the security of such stock
and certain of its mortgage loans and other assets (principally securities which
are obligations of, or guaranteed by, the United States) provided certain
standards related to creditworthiness have been met. Advances are made pursuant
to several different programs. Each credit program has its own interest rate and
range of maturities. Depending on the program, limitations on the amount of
advances are based either on a fixed percentage of an institution's net worth or
on the FHLB's assessment of the institution's creditworthiness. The FHLB of
Atlanta determines specific lines of credit for each member institution.
<PAGE>
In addition to the borrowings described above, the Bank, from time to
time, has borrowed funds under reverse repurchase agreements pursuant to which
it sells securities (generally secured by government securities and
mortgage-backed securities) under an agreement to buy them back at a specified
price at a later date. These agreements to repurchase are deemed to be
borrowings collateralized by the securities sold. At September 30, 1996, the
Bank did not have any broker repurchase agreements. The Bank has also offered
repurchase agreements to its customers which are borrowings that are
collateralized by underlying government securities. At September 30, 1996, the
Bank had $3.4 million outstanding in customer repurchase agreements.
The following tables set forth certain information regarding short-term
borrowings by the Bank at the end of and during the periods indicated:
<TABLE>
<CAPTION>
At September 30,
---------------------------------
1994 1995 1996
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Outstanding balance:
Securities sold under agreements
to repurchase:
Customer ............................ $ 1,906 $ 2,677 $ 3,365
Broker .............................. -- -- --
Short-term advances ................... 61,071 36,989 54,404
Weighted average rate paid on:
Securities sold under agreements
to repurchase:
Customer ............................ 4.92% 3.77% 3.57%
Broker .............................. -- -- --
Short-term advances ................... 5.62 6.40 5.68
Maximum amount of borrowings outstanding
at any month end:
Securities sold under agreements
to repurchase:
Customer ............................ $ 2,158 $ 3,448 $ 3,950
Broker .............................. -- -- 12,840
Short-term advances ................... 61,071 85,078 68,213
Approximate average short-term borrowings
outstanding with respect to:
Securities sold under agreements
to repurchase:
Customer ............................ $ 600 $ 1,700 $ 2,900
Broker .............................. -- -- 4,100
Short-term advances ................... 20,700 61,400 56,600
Weighted average rate paid on:
Securities sold under agreements
to repurchase:
Customer ............................ 3.11% 3.70% 3.55%
Broker .............................. -- -- 5.40
Short-term advances ................... 5.46 6.17 5.68
</TABLE>
<PAGE>
Competition
As of September 30, 1996, Coastal Federal had the largest market share
(14.1%) of any financial institution located in Horry County, South Carolina
according to Sheshunoff Information Services, Inc. The Bank faces strong
competition in the attraction of deposits (its primary source of lendable funds)
and in the origination of loans. Its most direct competition for deposits and
loans has historically come from other financial institutions located in its
primary market area. The Bank estimates that there are over 70 offices of other
financial institutions in its primary market area. Particularly in times of high
interest rates, the Bank has faced additional significant competition for
investors' funds from short-term money market securities and other corporate and
government securities. The Bank's competition for loans comes principally from
other financial institutions, mortgage banking companies and mortgage brokers.
Personnel
As of September 30, 1996, the Company had 158 full-time Associates and
15 part-time Associates. The Associates are not represented by a collective
bargaining unit. The Bank believes its relationship with its Associates is
excellent.
REGULATION OF COASTAL FINANCIAL
General
The Corporation is a savings and loan holding company within the
meaning of the Home Owners' Loan Act of 1933 ("HOLA"), as amended by FIRREA. As
such, the Corporation is registered with the OTS and is subject to OTS
regulations, examinations, supervision and reporting requirements. As explained
more fully below under "Regulation of Coastal Federal - Federal Regulation of
Savings Associations," the key provisions of FIRREA replaced the Federal Home
Loan Bank Board ("FHLBB") with the OTS, abolished the Federal Savings and Loan
Insurance Corporation ("FSLIC") and vested the prior insurance responsibilities
of the FSLIC with the FDIC. As a subsidiary of a savings and loan holding
company, the Bank is subject to certain restrictions in its dealings with the
Corporation and with other companies affiliated with the Corporation and also is
subject to regulatory requirements and provisions as a federal savings and loan
association.
Holding Company Acquisitions
The HOLA and OTS regulations generally prohibit a savings and loan
holding company, without prior OTS approval, from acquiring any other savings
association or savings and loan holding company or controlling the assets
thereof. They also prohibit, among other things, any director or officer of a
savings and loan holding company, or any individual who owns or controls more
than 25 percent of the voting shares of such holding company, from acquiring
control of any savings association not a subsidiary of such savings and loan
holding company, unless the acquisition is approved by the OTS.
<PAGE>
Holding Company Activities
As a unitary savings and loan holding company, the Corporation
generally is not subject to activity restrictions. If the Corporation acquires
control of another savings bank as a separate subsidiary, it would become a
multiple savings and loan holding company, and the activities of the Corporation
and any of its subsidiaries (other than the Bank or any other SAIF-insured
savings association) would become subject to such restrictions unless such other
associations each qualify as a QTL and were acquired in a supervisory
acquisition.
If the Bank fails the QTL test, the Corporation must obtain the
approval of the OTS prior to continuing after such failure, directly or through
its other subsidiaries, any business activity other than those approved for
multiple savings and loan holding companies or their subsidiaries. In addition,
within one year of such failure the Corporation must register as, and will
become subject to, the restrictions applicable to bank holding companies. The
activities authorized for a bank holding company are more limited than are the
activities authorized for a unitary or multiple savings and loan holding
company. See "-- Qualified Thrift Lender Test."
Coastal Financial must obtain approval from the OTS before acquiring
control of more than 5% of the voting shares of any other SAIF-insured
association. Such acquisitions generally are prohibited if they result in a
multiple savings and loan holding company controlling savings associations in
more than one state. However, such interstate acquisitions are permitted based
on specific state authorization or in a supervisory acquisition of a failing
savings association.
Affiliate Restrictions
The affiliate restrictions contained in Sections 23A and 23B of the
Federal Reserve Act apply to all federally insured savings associations and any
such "affiliate." A savings and loan holding company, its subsidiaries and any
other company under common control are considered affiliates of the subsidiary
savings association under the HOLA. Generally, Sections 23A and 23B: (i) limit
the extent to which the insured association or its subsidiaries may engage in
certain covered transactions with an affiliate to an amount equal to ten percent
of such institution's capital and surplus, and contain an aggregate limit on all
such transactions with all affiliates to an amount equal to twenty percent of
such capital and surplus, and (ii) require that all such transactions be on
terms substantially the same, or at least as favorable to the institution or
subsidiary, as those provided to a non-affiliate. The term "Covered transaction"
includes the making of loans, purchase of assets, issuance of a guarantee and
similar other types of transactions. Also, a savings association may not make
any loan to an affiliate unless the affiliate is engaged only in activities
permissible for bank holding companies. Only the Federal Reserve Board may grant
exemptions from the restrictions of Sections 23A and 23B. The OTS, however, may
impose more stringent restrictions on savings associations for reasons of safety
and soundness.
Qualified Thrift Lender Test
Any savings and loan holding company that controls a savings
association that fails the qualified thrift lender test, as explained under
"Regulation of Coastal Federal -- Qualified Thrift Lender Test", must, within
one year after the date on which the association ceases to be a qualified thrift
lender, register as and be deemed a bank holding company subject to all
applicable laws and regulations.
<PAGE>
REGULATION OF COASTAL FEDERAL
General
The Bank is subject to extensive regulation, examination and
supervision by the OTS as it chartering agency, and the FDIC, as the insurer of
its deposits. The activities of federal savings institutions are governed by the
"HOLA" and, in certain respects, the Federal Deposit Insurance Act ("FDIA") and
the regulations issued by the OTS and the FDIC to implement these statutes.
These laws and regulations delineate the nature and extent of the activities in
which federal savings associations may engage. Lending activities and other
investments must comply with various statutory and regulatory capital
requirements. In addition, the Bank's relationship with its depositors and
borrowers is also regulated to a great extent, especially in such matters as the
ownership of savings accounts and the form and content of the Bank's mortgage
documents. The Bank must file reports with the OTS and the FDIC concerning its
activities and financial condition in addition to obtaining regulatory approvals
prior to entering into certain transactions such as mergers with, or
acquisitions of, other financial institutions. There are periodic examinations
by the OTS and the FDIC to review the Bank's compliance with various regulatory
requirements. The regulatory structure also gives the regulatory authorities
extensive discretion in connection with their supervisory and enforcement
activities and examination policies, including policies with respect to the
classification of assets and the establishment of adequate loan loss reserves
for regulatory purposes. Any change in such policies, whether by the OTS, the
FDIC or Congress, could have a material adverse impact on the Corporation, the
Bank and their operations. The Corporation, as a savings and loan holding
company, is also required to file certain reports with, and otherwise comply
with the rules and regulations of the OTS.
Proposed Federal Legislation
Legislation is proposed periodically providing for a comprehensive
reform of the banking and thrift industries, and has included provisions that
would (i) require federal savings associations to convert to a national bank or
a state-chartered bank or thrift, (ii) require all savings and loan holding
companies to become bank holding companies and (iii) abolish the OTS. It is
uncertain when or if any of this type of legislation will be passed, and if
passed, in what form the legislation would be passed. As a result, management
cannot accurately predict the possible impact of such legislation on the Bank.
Federal Regulation of Savings Associations
Office of Thrift Supervision. The OTS is an office in the Department of
the Treasury subject to the general oversight of the Secretary of the Treasury.
Except as modified by FIRREA, the OTS possesses the supervisory and regulatory
duties and responsibilities formerly vested in the Federal Home Loan Bank Board.
Among other functions, the OTS issues and enforces regulations affecting
federally insured savings associations and regularly examines these
institutions.
Federal Deposit Insurance Corporation. The FDIC is an independent
federal agency established originally to insure the deposits, up to prescribed
statutory limits, of federally insured banks and to preserve the safety and
soundness of the banking industry. In 1989 the FDIC also became the insurer, up
to the prescribed limits, of the deposit accounts held at federally insured
savings associations and established two separate insurance funds: the Bank
Insurance Fund ("BIF") and the SAIF. As insurer of deposits, the FDIC has
examination, supervisory and enforcement authority over all savings
associations.
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The Bank's accounts are insured by the SAIF. The FDIC insures deposits
at the Bank to the maximum extent permitted by law. The Bank currently pays
deposit insurance premiums to the FDIC based on a risk-based assessment system
established by the FDIC for all SAIF-member institutions. Under applicable
regulations, institutions are assigned to one of three capital groups which are
based solely on the level of an institution's capital -- "well capitalized,"
"adequately capitalized," and "undercapitalized" -- which are defined in the
same manner as the regulations establishing the prompt corrective action system
under Section 38 of the FDIA, as discussed below. These three groups are then
divided into three subgroups which reflect varying levels of supervisory
concern, from those which are considered to be healthy to those which are
considered to be of substantial supervisory concern. The matrix so created
results in nine assessment risk classifications, with rates currently ranging
from .23% of insured deposits for well capitalized, financially sound
institutions with only a few minor weaknesses to .31% of insured deposits for
undercapitalized institutions that pose a substantial risk of loss to the SAIF
unless effective corrective action is taken. Until the first half of 1996, the
same amounts applied to BIF member institutions. The FDIC is authorized to raise
assessment rates in certain circumstances. The Bank's assessments expensed for
the year ended September 30,1996, equaled $622,000, excluding the special
assessment discussed below.
Until the second half of 1995, the same matrix applied to BIF-member
institutions. as a result of the BIF having reached its designated reserve
ratio, effective January 1, 1996, the FDIC substantially reduced deposit
insurance premiums for well-capitalized, well-managed, financial institutions
that are members of the BIF. Under the new assessment schedule, rates were
reduced to a range of 0 to 27 basis points, with approximately 92% of BIF
members paying the statutory minimum annual assessment rate of $2,000. Pursuant
to the Deposit Insurance Fund ("DIF"), which was enacted on September 30, 1996,
the FDIC imposed a special one-time assessment on each depository institution
with SAIF-assessable deposits so that the SAIF may achieve its designated
reserve ratio. The Bank's assessment amounted to $1.6 million and was accrued
during the quarter ended September 30, 1996. Beginning January 1, 1997, the
assessment schedule for SAIF members will be the same as that for BIF members.
In addition, beginning January 1, 1997, SAIF members will be charged an
assessment of approximately 0.065% of SAIF-assessable deposits for the purpose
of paying interest on the obligations issued by the Financing Corporation
("FICO") in the 1980s to help fund the thrift industry cleanup. BIF-assessable
deposits will be charged an assessment to help pay interest on the FICO bonds at
a rate of approximately 0.013% until the earlier of December 31, 1999 or the
date upon which the last savings association ceases to exist, after which time
the assessment will be the same for all insured deposits.
The DIF Act provides for the merger of the BIF and the SAIF into the
Deposit Insurance Fund on January 1, 1999, but only if no insured depository
institution is a savings association on that date. The DIF contemplates the
development of a common charter for all federally chartered depository
institutions and the abolition of separate charters for national banks and
federal savings associations. It is not known what form the common charter may
take and what effect, if any, the adoption of a new charter would have on the
operation of the Bank.
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The FDIC may terminate the deposit insurance of any insured depository
institution if it determines after a hearing that the institution has engaged or
is engaging in unsafe or unsound practices, is in an unsafe or unsound condition
to continue operations, or has violated any applicable law, regulation, order or
any condition imposed by an agreement with the FDIC. It also may suspend deposit
insurance temporarily during the hearing process for the permanent termination
of insurance, if the institution has no tangible capital. If insurance of
accounts is terminated, the accounts at the institution at that time, less
subsequent withdrawals, shall continue to be insured for a period of six months
to two years, as determined by the FDIC. Management is unaware of any existing
circumstance which could result in termination of the deposit insurance of the
Bank.
Federal Home Loan Bank System. The FHLB System, consisting of 12 FHLBs,
now is under the jurisdiction of the Federal Housing Finance Board ("FHFB"). The
designated duties of the FHFB are to: supervise the FHLBs; ensure that the FHLBs
carry out their housing finance mission; ensure that the FHLBs remain adequately
capitalized and able to raise funds in the capital market; and ensure that the
FHLBs operate in a safe and sound manner.
The Bank, as a member of the FHLB-Atlanta, is required to acquire and
hold shares of capital stock in the FHLB-Atlanta in an amount equal to the
greater of (i) 1.0% of the aggregate outstanding principal amount of residential
mortgage loans, home purchase contracts and similar obligations at the beginning
of each year, or (ii) 1/20 of its advances (borrowings) from the FHLB-Atlanta.
The Bank is in compliance with this requirement with an investment in
FHLB-Atlanta stock of $5.2 million at September 30, 1996.
Among other benefits, the FHLB provides a central credit facility
primarily for member institutions. It is funded primarily from proceeds derived
from the sale of consolidated obligations of the FHLB System. It makes advances
to members in accordance with policies and procedures established by the FHFB
and the Board of Directors of the FHLB-Atlanta.
Liquidity Requirements. Under OTS regulations, each savings institution
is required to maintain an average daily balance of liquid assets (cash, certain
time deposits and savings accounts, bankers' acceptances, and specified U.S.
Government, state or federal agency obligations and certain other investments)
equal to a monthly average of not less than a specified percentage (currently
5.0%) of its net withdrawable accounts plus short-term borrowings. OTS
regulations also require each savings institution to maintain an average daily
balance of short-term liquid assets at a specified percentage (currently 1.0%)
of the total of its net withdrawable savings accounts and borrowings payable in
one year or less. Monetary penalties may be imposed for failure to meet
liquidity requirements. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources"
contained in the Annual Report
Prompt Corrective Action. Under Section 38 of the FDIA, as added by the
Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), each
federal banking agency is required to implement a system of prompt corrective
action for institutions which it regulates. The federal banking agencies have
promulgated substantially similar regulations to implement this system of prompt
corrective action. Under the regulations, an institution shall be deemed to be
(i) "well capitalized" if it has a total risk-based capital ratio of 10.0% or
more, has a Tier I risk-based capital ratio of 6.0% or more, has a Tier I
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leverage capital ratio of 5.0% or more and is not subject to specified
requirements to meet and maintain as specific capital level for any capital
measure; (ii) "adequately capitalized" if it has a total risk-based capital
ratio of 8.0% or more, a Tier I risk-based capital ratio of 4.0% or more and a
Tier I leverage capital ratio of 4.0% or more (3.0% under certain circumstances)
and does not meet the definition of "well capitalized;" (iii) "undercapitalized"
if it has a total risk-based capital ratio that is less than 8.0%, a Tier I
risk-based capital ratio that is less than 4.0% or a Tier I leverage capital
ratio that is less than 4.0% (3.0% under certain circumstances); (iv)
"significantly undercapitalized" if it has a total risk-based capital ratio that
is less than 6.0%, a Tier I risk-based capital ratio that is less than 3.0% or a
Tier I leverage capital ratio that is less than 3.0%; and (v) "critically
undercapitalized" if it has a ratio of tangible equity to total assets that is
equal to or less than 2.0%.
Section 38 of the FDIA and the implementing regulations also provide
that a federal banking agency may, after notice and an opportunity for a
hearing, reclassify a well capitalized institution as adequately capitalized and
may require an adequately capitalized institution or an undercapitalized
institution to comply with supervisory actions as if it were in the next lower
category if the institution is in an unsafe or unsound condition or engaging in
an unsafe or unsound practice. (The OTS may not, however, reclassify a
significantly undercapitalized institution as critically undercapitalized.)
An institution generally must file a written capital restoration plan
which meets specified requirements, as well as a performance guaranty by each
company that controls the institution, with the appropriate federal banking
agency within 45 days of the date that the institution receives notice or is
deemed to have notice that it is undercapitalized, significantly
undercapitalized or critically undercapitalized. Immediately upon becoming
undercapitalized, an institution shall become subject to the provisions of
Section 38 of the FDIA, which sets forth various mandatory and discretionary
restrictions on its operations.
At September 30, 1996, the Bank was categorized as "well capitalized"
under the prompt corrective action regulations of the OTS.
Standards for Safety and Soundness. The FDIA requires the federal
banking regulatory agencies to prescribe, by regulation, standards for all
insured depository institutions relating to: (i) internal controls, information
systems and internal audit systems; (ii) loan documentation; (iii) credit
underwriting; (iv) interest rate risk exposure; (v) asset growth; and (vi)
compensation, fees and benefits. The federal banking agencies recently adopted
final regulations and Interagency Guidelines Prescribing Standards for Safety
and Soundness ("Guidelines") to implement safety and soundness standards
required by the FDIA. The Guidelines set forth the safety and soundness
standards that the federal banking agencies use to identify and address problems
at insured depository institutions before capital becomes impaired. The agencies
also proposed asset quality and earnings standards which, if adopted in final,
would be added to the Guidelines. Under the final regulations, if the OTS
determines that the Bank fails to meet any standard prescribed by the
Guidelines, the agency may require the Bank to submit to the agency an
acceptable plan to achieve compliance with the standard, as required by the
FDIA. The final regulations establish deadlines for the submission and review of
such safety and soundness compliance plans.
<PAGE>
Qualified Thrift Lender Test
All savings associations are required to meet a qualified thrift lender
("QTL") test set forth in the HOLA and regulations of the OTS thereunder to
avoid operating certain restrictions. A savings institution that fails to become
or remain a QTL shall either become a national bank or be subject to the
following restrictions on its operations: (i) the association may not make any
new investment or engage in activities that would not be permissible for
national banks; (ii) the association may not establish any new branch office
where a national bank located in the savings institution's home state would not
be able to establish a branch office; (iii) the association shall be ineligible
to obtain new advances from any FHLB; and (iv) the payment of dividends by the
association shall be subject to the rules regarding the statutory and regulatory
dividend restrictions applicable to national banks. Also, beginning three years
after the date on which the savings institution ceases to be a QTL, the savings
institution would be prohibited from retaining any investment or engaging in any
activity not permissible for a national bank and would be required to repay any
outstanding advances to any FHLB. In addition, within one year of the date on
which savings association controlled by a company ceases to be a QTL, the
company must register as a bank holding company and become subject to the rules
applicable to such companies. A savings institution may requalify as a QTL if it
thereafter complies with the QTL test.
Currently, the QTL test requires that either an institution qualify as
a domestic building and loan association under the Code or that 65% of an
institution's "portfolio assets" (as defined) consist of certain housing and
consumer-related assets on a monthly average basis in nine out of every 12
months. Assets that qualify without limit for inclusion as part of the 65%
requirement are loans made to purchase, refinance, construct, improve or repair
loans; mortgage-backed securities (where the mortgages are secured by domestic
residential housing or manufactured housing); FHLB stock; direct or indirect
obligations of the FDIC; and loans for educational purposes, loans to small
businesses and loans made through credit cards. In addition, the following
assets, among others, may be included in meeting the test subject to an overall
limit of 20% of the savings institution's portfolio assets: 50% of residential
mortgage loans originated and sold within 90 days of origination; 100% of
consumer loans; and stock issued by the FHLMC or the FNMA. Portfolio assets
consist of total assets minus the sum of (i) goodwill and other intangible
assets, (ii) property used by the savings institution to conduct its business,
and (iii) liquid assets up to 20% of the institution's total assets. At
September 30, 1996, the Bank's qualified thrift investments exceeded 65% of its
portfolio assets as required by regulation.
Capital Requirements. Under OTS regulations a savings association must
satisfy three minimum capital requirements: core capital, tangible capital and
risk-based capital. Savings associations must meet all of the standards in order
to comply with the capital requirements. The Corporation is not subject to any
minimum capital requirements.
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OTS capital regulations establish a 3% core capital ratio (defined as
the ratio of core capital to adjusted total assets). Core capital is defined to
include common stockholders' equity, noncumulative perpetual preferred stock and
any related surplus, and minority interests in equity accounts of consolidated
subsidiaries, less (i) any intangible assets; and (ii) equity and debt
investments in subsidiaries that are not "includable subsidiaries," which is
defined as subsidiaries engaged solely in activities not impermissible for a
national bank, engaged in activities impermissible for a national bank but only
as an agent for its customers, or engaged solely in mortgage-banking activities.
In calculating adjusted total assets, adjustments are made to total assets to
give effect to the exclusion of certain assets from capital and to appropriately
account for the investments in and assets of both includable and nonincludable
subsidiaries. Institutions that fail to meet the core capital requirement would
be required to file with the OTS a capital plan that details the steps they will
take to reach compliance. In addition, the OTS' prompt corrective action
regulation provides that a savings institution that has a core capital leverage
ratio of less than 4% (3% for institutions receiving the highest CAMEL
examination rating) will be deemed to be "undercapitalized" and may be subject
to certain restrictions. See "-- Prompt Corrective Action."
As required by federal law, the OTS has proposed a rule revising its
minimum core capital requirement to be no less stringent than that imposed on
national banks. The OTS has proposed that only those savings associations rated
a composite one (the highest rating) under the CAMEL rating system for savings
associations will be permitted to operate at or near the regulatory minimum
leverage ratio of 3%. All other savings associations will be required to
maintain a minimum leverage ratio of 4% to 5%. The OTS will assess each
individual savings association through the supervisory process on a case-by-case
basis to determine the applicable requirement. No assurance can be given as to
the final form of any such regulation, the date of its effectiveness or the
requirement applicable to the Bank.
Savings associations also must maintain "tangible capital" not less
than 1.5% of the Bank's adjusted total assets. "Tangible capital" is defined,
generally, as core capital minus any "intangible assets."
Each savings institution must maintain total capital equal to at least
8% of risk-weighted assets. Total capital consists of the sum of core and
supplementary capital, provided that supplementary capital cannot exceed core
capital, as previously defined. Supplementary capital includes (i) permanent
capital instruments such as cumulative perpetual preferred stock, perpetual
subordinated debt, and mandatory convertible subordinated debt, (ii) maturing
capital instruments such as subordinated debt, intermediate-term preferred stock
and mandatory redeemable preferred stock, subject to an amortization schedule,
and (iii) general valuation loan and lease loss allowances up to 1.25% of
risk-weighted assets.
The risk-based capital regulation assigns each balance sheet asset held
by a savings institution to one of four risk categories based on the amount of
credit risk associated with that particular class of assets. Assets not included
for purposes of calculating capital are not included in calculating
risk-weighted assets. The categories range from 0% for cash and securities that
are backed by the full faith and credit of the U.S. Government to 100% for
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repossessed assets or assets more than 90 days past due. Qualifying residential
mortgage loans (including multi-family mortgage loans) are assigned a 50% risk
weight. Consumer, commercial, home equity and residential construction loans are
assigned a 100% risk weight, as are nonqualifying residential mortgage loans and
that portion of land loans and nonresidential construction loans which do not
exceed an 80% loan-to-value ratio. The book value of assets in each category is
multiplied by the weighing factor (from 0% to 100%) assigned of that category.
These products are then totaled to arrive at total risk-weighted assets.
Off-balance sheet items are included in risk-weighted assets by converting them
to an approximate balance sheet "credit equivalent amount" based on a conversion
schedule. These credit equivalent amounts are then assigned to risk categories
in the same manner as balance sheet assets and included risk-weighted assets.
The OTS has incorporated an interest rate risk component into its
regulatory capital rule. Under the rule, savings associations with "above
normal" interest rate risk exposure would be subject to a deduction from total
capital for purposes of calculating their risk-based capital requirements. A
savings association's interest rate risk is measured by the decline in the net
portfolio value of its assets (i.e., the difference between incoming and
outgoing discounted cash flows from assets, liabilities and off-balance sheet
contracts) that would result from a hypothetical 200 basis point increase or
decrease in market interest rates divided by the estimated economic value of the
association's assets, as calculated in accordance with guidelines set forth by
the OTS. A savings association whose measured interest rate risk exposure
exceeds 2% must deduct an interest rate risk component in calculating its total
capital under the risk-based capital rule. The interest rate risk component is
an amount equal to one-half of the difference between the institution's measured
interest rate risk and 2%, multiplied by the estimated economic value of the
association's assets. That dollar amount is deducted from an association's total
capital in calculating compliance with its risk-based capital requirement. Under
the rule, there is a two quarter lag between the reporting date of an
institution's financial data and the effective date for the new capital
requirement based on that data. A savings association with assets of less than
$300 million and risk-based capital ratios in excess of 12% is not subject to
the interest rate risk component, unless the OTS determines otherwise. The rule
also provides that the Director of the OTS may waive or defer an association's
interest rate risk component on a case-by-case basis. Under certain
circumstances, a savings association may request an adjustment to its interest
rate risk component if it believes that the OTS-calculated interest rate risk
component overstates its interest rate risk exposure. In addition, certain
"well-capitalized" institutions may obtain authorization to use their own
interest rate risk model to calculate their interest rate risk component in lieu
of the OTS-calculated amount. The OTS has postponed the date that the component
will first be deducted from an institution's total capital until savings
associations become familiar with the process for requesting an adjustment to
its interest rate risk component.
At September 30, 1996, Coastal Federal's core capital of approximately
$27.3 million, or 5.96% of adjusted total assets, was $13.5 million in excess of
the OTS requirement of $13.7 million, or 3% of adjusted total assets. As of such
date, the Bank's tangible capital of approximately $27.3 million, or 5.96% of
adjusted total assets, was $20.4 million in excess of the OTS requirement of
$6.9 million, or 1.5% of adjusted total assets. Finally, at September 30, 1996,
the Bank had risk-based capital of approximately $30.8 million or 10.41% of
total risk-weighted assets, which was $7.1 million in excess of the OTS
risk-based capital requirement of $23.6 million or 8% of risk-weighted assets.
<PAGE>
Limitations On Capital Distributions. OTS regulations impose uniform
limitations on the ability of all savings associations to engage in various
distributions of capital such as dividends, stock repurchases and cash-out
mergers. In addition, OTS regulations require the Bank to give the OTS 30 days'
advance notice of any proposed declaration of dividends, and the OTS has the
authority under its supervisory powers to prohibit the payment of dividends. The
regulation utilizes a three-tiered approach which permits various levels of
distributions based primarily upon a savings association's capital level.
A Tier 1 savings association generally has capital in excess of its
fully phased-in capital requirement (both before and after the proposed capital
distribution) and has not been notified by the OTS that it is in need of more
than normal supervision. A Tier 1 savings association may make (without
application but upon prior notice to, and no objection made by, the OTS) capital
distributions during a calendar year up to 100% of its net income to date during
the calendar year plus one-half its surplus capital ratio (i.e., the amount of
capital in excess of its fully phased-in requirement) at the beginning of the
calendar year. Capital distributions in excess of such amount require advance
approval from the OTS.
A savings association with either (i) capital equal to or in excess of
its minimum capital requirement but below its fully phased-in capital
requirement (both before and after the proposed capital distribution), or (ii)
capital in excess of its fully phased-in capital requirement (both before and
after the proposed capital distribution) but which has been notified by the OTS
that it is in need of more than normal supervision may be designated by the OTS
as a Tier 2 association. Such an association may make (without application)
capital distributions up to an amount equal to 75% of its net income during the
previous four quarters depending on how close the association is to meeting its
fully phased-in capital requirement. Capital distributions exceeding this amount
require prior OTS approval.
Tier 3 associations include savings associations with either (i)
capital below the minimum capital requirement (either before or after the
proposed capital distribution), or (ii) capital in excess of the fully phased-in
capital requirement but which has been notified by the OTS that it shall be
treated as a Tier 3 association because it is in need of more than normal
supervision. Tier 3 associations may not make any capital distributions without
prior approval from the OTS.
The Bank is currently meeting the criteria to be designated a Tier 1
association and, consequently, could at its option (after prior notice to, and
no objection made by, the OTS) distribute up to 100% of its net income during
the calendar year plus 50% of its surplus capital ratio at the beginning of the
calendar year less any distributions previously paid during the year.
Loans to One Borrower. Under the HOLA, savings institutions are
generally subject to the national bank limit on loans to one borrower.
Generally, this limit is 15% of the Bank's unimpaired capital and surplus, plus
an additional 10% of unimpaired capital and surplus, if such loan is secured by
readily-marketable collateral, which is defined to include certain financial
instruments and bullion. The OTS by regulation has amended the loans to one
borrower rule to permit savings associations meeting certain requirements,
including capital requirements, to extend loans to one borrower in additional
amounts under circumstances limited essentially to loans to develop or complete
residential housing units. At September 30, 1996, the Bank's limit on loans to
one borrower was $4.6 million. At September 30, 1996, the Bank's largest
aggregate amount of loans to one borrower was $3.0 million, all of which was
performing according to its terms.
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Activities of Savings Associations and Their Subsidiaries. FIRREA
provides that, when a savings association establishes or acquires a subsidiary
or elects to conduct any new activity through a subsidiary that the association
controls, the savings association shall notify the FDIC and the OTS 30 days in
advance and provide the information each agency may, by regulation, require.
Savings associations also must conduct the activities of subsidiaries in
accordance with existing regulations and orders.
The OTS may determine that the continuation by a savings association of
its ownership control of, or its relationship to, the subsidiary constitutes a
serious risk to the safety, soundness or stability of the association or is
inconsistent with sound banking practices or with the purposes of the FDIA.
Based upon that determination, the FDIC or the OTS has the authority to order
the savings association to divest itself of control of the subsidiary. The FDIC
also may determine by regulation or order that any specific activity poses a
serious threat to the SAIF. If so, it may require that no SAIF member engage in
that activity directly.
Transactions with Affiliates. Pursuant to FIRREA, savings associations
must comply with Sections 23A and 23B of the Federal Reserve Act ("Sections 23A
and 23B") relative to transactions with affiliates in the same manner and to the
same extent as if the savings association were a Federal Reserve member bank. A
savings and loan holding company, its subsidiaries and any other company under
common control are considered affiliates of the subsidiary savings association
under the HOLA. Generally, Sections 23A and 23B: (i) limit the extent to which
the insured association or its subsidiaries may engage in certain covered
transactions with an affiliate to an amount equal to 10% of such institution's
capital and surplus and place an aggregate limit on all such transactions with
affiliates to an amount equal to 20% of such capital and surplus, and (ii)
require that all such transactions be on terms substantially the same, or at
least as favorable to the institution or subsidiary, as those provided to a
non-affiliate. The term "covered transaction" includes the making of loans,
purchase of assets, issuance of a guaranty and similar other types of
transactions.
Three additional rules apply to savings associations under FIRREA: (i)
a savings association may not make any loan or other extension of credit to an
affiliate unless that affiliate is engaged only in activities permissible for
bank holding companies; (ii) a savings association may not purchase or invest in
securities issued by an affiliate (other than securities of a subsidiary); and
(iii) the OTS may, for reasons of safety and soundness, impose more stringent
restrictions on savings associations but may not exempt transactions from or
otherwise abridge Section 23A or 23B. Exemptions from Section 23A or 23B may be
granted only by the Federal Reserve Board, as is currently the case with respect
to all FDIC-insured banks. The Bank has not been significantly affected by the
rules regarding transactions with affiliates.
The Bank's authority to extend credit to executive officers, directors
and 10% shareholders, as well as entities controlled by such persons, is
currently governed by Sections 22(g) and 22(h) of the Federal Reserve Act, and
Regulation O thereunder. Among other things, these regulations require that such
loans be made on terms and conditions substantially the same as those offered to
unaffiliated individuals and not involve more than the normal risk of repayment.
Regulation O also places individual and aggregate limits on the amount of loans
the Bank may make to such persons based, in part, on the Bank's capital
position, and requires certain board approval procedures to be followed. The OTS
regulations, with certain minor variances, apply Regulation O to savings
institutions.
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Regulatory and Criminal Enforcement Provisions. Under the FDIA, the OTS
has primary enforcement responsibility over savings institutions and has the
authority to bring action against all "institution-affiliated parties,"
including stockholders, and any attorneys, appraisers and accountants who
knowingly or recklessly participate in wrongful action likely to have an adverse
effect on an insured institution. Formal enforcement action may range from the
issuance of a capital directive or cease and desist order to removal of officers
or directors, receivership, conservatorship or termination of deposit insurance.
Civil penalties cover a wide range of violations and can amount to $25,000 per
day, or $1 million per day in especially egregious cases. Under the FDIA, the
FDIC has the authority to recommend to the Director of the OTS that enforcement
action be taken with respect to a particular savings institution. If action is
not taken by the Director, the FDIC has authority to take such action under
certain circumstances. Federal law also establishes criminal penalties for
certain violations.
TAXATION
Federal Taxation
General. The Corporation and the Bank report their income via a
consolidated return on a fiscal year basis using the accrual method of
accounting and are subject to federal income taxation in the same manner as
other corporations with some exceptions, including particularly the Bank's
reserve for bad debts discussed below. The following discussion of tax matters
is intended only as a summary and does not purport to be a comprehensive
description of the tax rules applicable to the Bank or the Corporation.
Tax Bad Debt Reserves. For taxable years beginning prior to January 1,
1996, savings institutions such as the Bank which met certain definitional tests
primarily relating to their assets and the nature of their business ("qualifying
thrifts") were permitted to establish a reserve for bad debts and to make annual
additions thereto, which additions may, within specified formula limits, have
been deducted in arriving at their taxable income. The Bank's deduction with
respect to "qualifying loans," which are generally loans secured by certain
interests in real property, may have been computed using an amount based on the
Bank's actual loss experience, or a percentage equal to 8% of the Bank's taxable
income, computed with certain modifications and reduced by the amount of any
permitted additions to the nonqualifying reserve. Each year the Bank selected
the most favorable way to calculate the deduction attributable to an addition to
the tax bad debt reserve. The Bank used the percentage-of-taxable-income method
for the taxable years ended September 30, 1996, 1995 and 1994.
Recently enacted legislation repealed the reserve method of accounting
for bad debt reserves for tax years beginning after December 31, 1995. As a
result, savings associations will no longer be able to calculate their deduction
for bad debts using the percentage-of-taxable-income method. Instead, they will
be required to compute their deduction based on specific charge-offs during the
taxable year or, if the savings association or its controlled group had assets
of less than $500 million, based on actual loss experience over a period of
years. The legislation also requires savings associations to recapture into
taxable income over a six-year period their post-1987 additions to their bad
debt tax reserves, thereby generating additional current tax liability. At
September 30, 1996, the Bank's post-1987 reserves totaled approximately $1.45
million. The recapture may be suspended for up to two years if, during those
years, the institution satisfies a residential loan requirement. The Bank
anticipates meeting the residential loan requirement for the taxable year ending
September 30, 1997.
<PAGE>
Under prior law, if the Bank failed to satisfy the qualifying thrift
definition tests in any taxable year, it would be unable to make additions to
its bad debt reserve. Instead, the Bank would be required to deduct bad debts as
they occur and would additionally be required to recapture its bad debt reserve
deductions ratably over a multi-year period. At September 30, 1996, the Bank's
total bad debt reserve for tax purposes was approximately $ 6.65 million. Among
other things, the qualifying thrift definitional tests required the Bank to hold
at least 60% of its assets as "qualifying assets". Qualifying assets generally
include cash, obligations of the United States or any agency or instrumentality
thereof, certain obligations of a state or political subdivision thereof, loans
secured by interests in improved residential real property or by savings
accounts, student loans and property used by the Bank in the conduct of its
banking business. Under current law, a savings association will not be required
to recapture its pre-1988 bad debt reserves if it ceases to meet the qualifying
thrift definitional tests. However, if the Bank fails to meet the definition of
a "bank" under Internal Revenue Code Section 581 it will be required to
recapture its pre-1988 tax bad debt reserves. The Bank anticipates meeting the
definition of a "bank" in the future.
Distributions. To the extent that the Bank makes "nondividend
distributions" to the Corporation that are considered as made: (i) from the
reserve for losses on qualifying real property loans, to the extent the reserve
for such losses exceeds the amount that would have been allowed under the
experience method; or (ii) from the supplemental reserve for losses on loans
("Excess Distributions"), then an amount based on the amount distributed will be
included in the Bank's taxable income. Nondividend distributions include
distributions in excess of the Bank's current and accumulated earnings and
profits, distributions in redemption of stock, and distributions in partial or
complete liquidation. However, dividends paid out of the Bank's current or
accumulated earnings and profits, as calculated for federal income tax purposes,
will not be considered to result in a distribution from the Bank's bad debt
reserve. Thus, any dividends to the Corporation that would reduce amounts
appropriated to the Bank's bad debt reserve and deducted for federal income tax
purposes would create a tax liability for the Bank. The amount of additional
taxable income attributable to an Excess Distribution is an amount that, when
reduced by the tax attributable to the income, is equal to the amount of the
distribution. Thus, if, the Bank makes a "nondividend distribution," then
approximately one and one-half times the amount so used would be includable in
gross income for federal income tax purposes, assuming a 35% corporate income
tax rate (exclusive of state and local taxes). See "Regulation" for limits on
the payment of dividends by the Bank. The Bank does not intend to pay dividends
that would result in a recapture of any portion of its tax bad debt reserve.
Corporate Alternative Minimum Tax. The Code imposes a tax on
alternative minimum taxable income ("AMTI") at a rate of 20%. The excess of the
tax bad debt reserve deduction using the percentage of taxable income method
over the deduction that would have been allowable under the experience method is
treated as a preference item for purposes of computing the AMTI. In addition,
only 90% of AMTI can be offset by net operating loss carryovers. AMTI is
increased by an amount equal to 75% of the amount by which the Bank's adjusted
current earnings exceeds its AMTI (determined without regard to this preference
and prior to reduction for net operating losses). For taxable years beginning
after December 31, 1986, and before January 1, 1996, an environmental tax of
.12% of the excess of AMTI (with certain modification) over $2.0 million is
imposed on corporations, including the Bank, whether or not an Alternative
Minimum Tax ("AMT") is paid.
<PAGE>
Dividends-Received Deduction and Other Matters. The Corporation may
exclude from its income 100% of dividends received from the Bank as a member of
the same affiliated group of corporations. The corporate dividends-received
deduction is generally 70% in the case of dividends received from unaffiliated
corporations with which the Corporation and the Bank will not file a
consolidated tax return, except that if the Corporation or the Bank owns more
than 20% of the stock of a corporation distributing a dividend, then 80% of any
dividends received may be deducted.
There have not been any IRS audits of the Corporation's Federal income
tax returns during the past five years.
State Income Taxation. South Carolina has adopted the Code as it
relates to savings and loan associations, effective for taxable years beginning
after December 31, 1985. Coastal Federal is subject to South Carolina income tax
at the rate of 6%. This rate of tax is imposed on savings associations in lieu
of the general state business corporation income tax.
For information regarding income taxes payable by Coastal Federal, see
Note 10 of the Notes to Consolidated Financial Statements. Coastal Federal's
federal income tax returns for 1986 were audited and no additional assessment
was required.
<PAGE>
Item 2. Properties
The following table sets forth the location of the offices of Coastal
Financial's subsidiaries, as well as certain additional information relating to
these offices, as of September 30, 1996.
<TABLE>
<CAPTION>
Total Investment
Including Land, Net Book
Year Building, Furniture Value as of Square Owned/
Location Opened and Fixtures 9/30/96 Footage Leased
- -------- ------ ------------ ------- ------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Main Office
2619 Oak St. 1980 $6,219 $2,761 25,000 Owned
Myrtle Beach, SC (1)
Dunes Office
7500 North Kings Hwy 1971 506 150 2,000 Owned
Myrtle Beach, SC
Ocean Drive Office
521 Main Street 1973 893 485 4,100 Owned
North Myrtle Beach, SC
Surfside Office
112 Highway 17 South 1975 583 196 2,300 Owned
& Glenns Bay Road
Surfside Beach, SC
Conway Office
310 Highway 378 1976 885 337 2,882 Owned
Conway, SC
Socastee Office
1 Cimerron Drive 1981 780 268 2,275 Owned
Myrtle Beach, SC
Murrells Inlet Office
Highway 17 South 1986 1,049 649 3,450 Owned
Murrells Inlet, SC
Waccamaw Medical Pk Office
7000 Waccamaw Medical Pk Rd 1986 598 363 1,450 Owned
Conway, SC
Florence Office
1385 Alice Drive 1996 350 343 2,500 Leased
Florence, SC
<PAGE>
<CAPTION>
Total Investment
Including Land, Net Book
Year Building, Furniture Value as of Square Owned/
Location Opened and Fixtures 9/30/96 Footage Leased
- -------- ------ ------------ ------- ------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Coastal Mortgage Bankers and
Realty Co., Inc.
2619 Oak Street 1970 2 0 N/A N/A
Myrtle Beach, SC
Coastal Investments
Corporation
2619 Oak Street 1987 47 27 N/A N/A
Myrtle Beach, SC
Coastal Federal Mortgage, Inc.
1385 Alice Drive 1995 156 142 2,818 Leased
Florence, SC
Sunset Beach Office
7290 Beach Drive, SW 1994 19 15 900 Leased
Sunset Beach, NC
- ------------
(1) The original main office was located at 816 North Kings Highway and opened
in January 1954. The main office was moved to its new location in 1980.
</TABLE>
The net book value of Coastal Federal's investment in office,
properties and equipment totaled $5.7 million at September 30, 1996. See Note 6
of Notes to the Consolidated Financial Statements. Coastal Federal uses the
services of an independent data processing service to process customer records
and monetary transactions, post deposit and general ledger entries and record
activity in installment lending, loan servicing and loan originations.
Item 3. Legal Proceedings
The Bank is a defendant in two significant lawsuits as summarized
below.
The first action commenced on August 9, 1993, and the Plaintiff is
seeking approximately $400,000 in damages. The Plaintiff contended that the Bank
breached its fiduciary duties in handling of their accounts. The Bank defended
this suit and was found without damages on October 28, 1996 by the South
Carolina Circuit Court. The Plaintiff appealed this lawsuit on November 12,
1996. At this date, the Bank does not know if or when the action will go to
trial. The Bank will continue to vigorously defend this suit and does not
anticipate any settlement discussions.
<PAGE>
The second lawsuit involves a wholly-owned subsidiary of Coastal
Mortgage Bankers & Realty Company, Inc. An answer to this suit was filed on
October 29, 1993 on behalf of the Joint Venture. The Plaintiff's complaint was
amended to add additional Defendants on June 25, 1994. The Plaintiff alleges
construction deficiencies and seeks damages in excess of $15.0 million. The
cause of action is negligent construction, breach of implied warranty of
workmanship, habitability and fitness. A subsidiary of the Bank is a one-third
owner in the joint venture company which is being sued. The joint venture is
vigorously defending this suit.
Based upon the present status of these cases, the Corporation's
understanding of the facts in each case, and discussion with its legal
representatives, the Corporation does not believe that any of these lawsuits
represent a material FAS 5 contingency which would require accrual or financial
statement disclosure. As a result, the Corporation has not established any
specific allowances for the suits. Due to the nature of the uncertainty of
litigation, the Corporation can not predict the amount of loss, if any, that may
ultimately result from this litigation.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters
The information contained under the section captioned "Market for the
Corporation's Common Stock and Related Stockholder Matters" in the Corporation's
Annual Report to Stockholders for the Fiscal Year Ended September 30, 1996
("Annual Report") is incorporated herein by reference.
Item 6. Selected Financial Data
The information contained in the section captioned "Selected Financial
Highlights" in the Annual Report is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
The information contained in the section captioned "Management's
Discussion and Analysis" in the Annual Report is incorporated herein by
reference.
Item 8. Financial Statements and Supplementary Data
The consolidated financial statements contained in the Annual Report
which are listed under Item 14 herein are incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
The registrant has not, within the 24 months before the date of the
most recent financial statements, changed its accountants, nor have there been
any disagreements on accounting and financial disclosures.
<PAGE>
Item 10. Directors and Executive Officers of the Registrant
The information contained under the section captioned "Proposal I --
Election of Directors" in the Bank's definitive proxy statement for the Bank's
1997 Annual Meeting of Stockholders (the "Proxy Statement") is incorporated
herein by reference.
Certain executive officers of the Bank also serve as executive officers
of the Corporation. The day-to-day management duties of the executive officers
of the Corporation and the Bank relate primarily to their duties as to the Bank.
<PAGE>
<TABLE>
<CAPTION>
Executive Officers of the Registrant
Name, Age and Position Business Experience
<S> <C>
Michael C. Gerald, 47, Mr. Gerald has been associated with
President, Chief Executive Coastal Federal since 1974 and serves as
Officer and a Director Director, President and Chief Executive
Officer of the Corporation and Bank. Mr.
Gerald also serves as Director and
President of Coastal Mortgage Bankers &
Realty Company, Inc., as a Director of
Coastal Federal Mortgage, Coastal
Investments Corporation and Coastal
Technology Solutions. He currently
serves on the Board of Visitors of
Coastal Carolina University's Wall
School of Business Administration and
Computer Science, the Governmental
Affairs Committee of America's Community
Bankers, the Board of Directors of the
Institute of Financial Education, the
Board of Trustees of the Springmaid
Villas Art Museum and is a member of the
Coastal Education Foundation.
Jimmy R. Graham, 48, Mr. Graham serves as Executive Vice
Executive Vice President and President and Information Systems Group
Information Systems Group Leader of Coastal Federal. Mr. Graham
Leader serves as Executive Vice President of
Coastal Financial Corporation and
President and CEO of Coastal Technology
Solutions. He has been associated with
the Bank since 1977.
Jerry L. Rexroad, CPA, 36, Mr. Rexroad joined the Company in April
Executive Vice President and 1995 and is Executive Vice President and
Chief Financial Officer Chief Financial Officer of Coastal
Federal and Coastal Financial
Corporation. Mr. Rexroad also serves as
the Chief Financial Officer and a
Director for Coastal Federal Mortgage
Bankers & Realty Company, Inc., Coastal
Investments Corporation, Coastal
Technology Solutions and Coastal Federal
Mortgage. He currently serves as
Chairman Elect of the Junior Achievement
Board of Directors and Advisory Council
of Horry County. He is a Past Chairman
of the Board and Treasurer of Junior
Achievement of Greenville. Mr. Rexroad
is the Vice President of the Financial
Manager's Society of South Carolina.
<PAGE>
He is a certified public accountant, and
is a member of the AICPA and SCACPA.
Prior to joining the Company, Mr.
Rexroad was a partner with KPMG Peat
Marwick LLP where he was partner in
charge of the Financial Institutions
practice in South Carolina.
Allen W. Griffin, 36, Mr. Griffin is currently Executive Vice
Executive Vice President President and Sales Servicing Group
and Sales Servicing Leader for Coastal Federal. He also
Group Leader serves as an Executive Vice President of
the Corporation. He has been associated
with the Bank for the past ten years.
Mr. Griffin is a Director of the Myrtle
Beach Rotary Club and is also a Director
of the Eastern Group of Robert Morris
Associates Chapter and past Director of
the YMCA, Junior Achievement and
vocational rehabilitation.
Phillip G. Stalvey, 40, Mr. Stalvey is Executive Vice President
Executive Vice President and Sales Group Leader for the Bank. He
and Sales Group Leader also serves as an Executive Vice
President of the Corporation and is a
director of Coastal Federal Mortgage. He
has been associated with Coastal Federal
for the past 15 years. In addition, Mr.
Stalvey is the past President and
Director of the Myrtle Beach Civitan
Club, a committee member of a local
Scout Troop, and Commissioner on the
City of Myrtle Beach Planning and Zoning
Board.
Susan J. Cooke, 46, Ms. Cooke is Vice President and
Vice President and Corporate Secretary for Coastal Federal,
Corporate Secretary Corporate Secretary for Coastal
Financial Corporation, Coastal Mortgage
Bankers & Realty Company, Inc., Coastal
Investments Corporation and Coastal
Technology Solutions. Ms. Cooke has been
employed with Coastal Federal for nine
years. She is a member of the American
Business Women's Association and the
National Association for Female
Executives.
</TABLE>
<PAGE>
Item 11. Executive Compensation
The information contained under the section captioned "Proposal I --
Election of Directors -- Remuneration of Executive Officers" in the Proxy
Statement is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and
Management
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by
reference to the section captioned "Voting Securities and
Principal Holders Thereof" of the Proxy Statement.
(b) Security Ownership of Management
Information required by this item is incorporated herein by
reference to the sections captioned "Proposal I -- Election of
Directors" and "Voting Securities and Principal Holders
Thereof" of the Proxy Statement.
(c) Management of the Corporation knows of no arrangements,
including any pledge by any person of securities of the
Corporation, the operation of which may at a subsequent date
result in a change in control of the registrant.
Item 13. Certain Relationships and Related Transactions
The information required by this item is incorporated herein by
reference to the section captioned "Proposal I -- Election of Directors" and
"Voting Securities and Principal Holders Thereof" in the Proxy Statement.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
COASTAL FINANCIAL CORPORATION
Date: December 27, 1996 By: /s/ Michael C. Gerald
---------------------
Michael C. Gerald
President/Chief Executive Officer
(Duly Authorized Representative)
Pursuant to the requirement of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By:/s/ James T. Clemmons By:/s/ Michael C. Gerald
- --------------------- -------------------------
James T. Clemmons Michael C. Gerald
Chairman of the Board President/Chief Executive Officer
and a Director
(Principal Executive Officer)
Date: December 27, 1996 Date: December 27, 1996
By: /s/ Jerry L. Rexroad By: /s/ Wilson B. Springs
- ------------------------- -------------------------
Jerry L. Rexroad Wilson B. Springs
Executive Vice President Director
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
Date: December 27, 1996 Date: December 27, 1996
By: /s/ James C. Benton By: /s/ Samuel A. Smart
- ----------------------- -----------------------
James C. Benton Samuel A. Smart
Director Director
Date: December 27, 1996 Date: December 27, 1996
By: /s/ Harold D. Clardy By:/s/James P. Creel
- ------------------------ --------------------
Harold D. Clardy James P. Creel
Director Director
Date: December 27, 1996 Date: December 27, 1996
By: /s/ G. David Bishop
- -----------------------
G. David Bishop
Director
Date: December 27, 1996
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K
1. Independent Auditors' Report*
2. All Financial Statements*
(a) Consolidated Statements of Financial Condition as of September
30, 1995 and 1996.
(b) Consolidated Statements of Operations for the Years Ended
September 30, 1994, 1995 and 1996.
(c) Consolidated Statements of Stockholders' Equity for the Years
Ended September 30, 1994, 1995 and 1996.
(d) Consolidated Statements of Cash Flows for the Years Ended
September 30, 1994, 1995 and 1996.
(e) Notes to Consolidated Financial Statements.
3. All schedules have been omitted as the required information is
either inapplicable or included in the Notes to Consolidated
Financial Statements.
4. Exhibits
3 (a) Certificate of Incorporation of Coastal
Financial Corporation**
3 (b) Bylaws of Coastal Financial Corporation**
10 (a) Employment Agreement with Michael C. Gerald***
(b) Employment Agreement with Jerry L. Rexroad***
(c) Employment Agreement with Phillip G. Stalvey***
(d) Employment Agreement with Allen W. Griffin***
(e) Employment Agreement with Jimmy R. Graham***
(f) Employment Agreement with Richard L. Granger***
(g) Employment Agreement with Robert S. O'Harra***
(h) 1990 Stock Option Plan***
(i) Directors Performance Plan****
13 Annual Report to Stockholders for the Fiscal
Year Ended September 30, 1996*
21 Subsidiaries of the Registrant
23 Consent of Independent Auditors
<PAGE>
5. No reports on Form 8-K have been filed during the last quarter of
the fiscal year covered by this report.
- -----------------
* Incorporated by reference from the Annual Report to Stockholders for the
fiscal year ended September 30, 1996, attached as an exhibit hereto.
** Incorporated by reference to Registration Statement on Form S-4 filed with
the Securities and Exchange Commission on November 26, 1990.
*** Incorporated by reference to 1995 Form 10K filed with the Securities and
Exchange Commission on December 29, 1995.
**** Incorporated by reference to the proxy statement for the 1996 Annual
Meeting of Stockholders.
EXHIBIT 13
ANNUAL REPORT TO STOCKHOLDERS FOR THE
FISCAL YEAR ENDED SEPTEMBER 30, 1996
<PAGE>
COASTAL FINANCIAL CORPORATION
1996 ANNUAL REPORT
<PAGE>
-- DEDICATION --
COASTAL FINANCIAL CORPORATION
A QUEST FOR EXCELLENCE
GREAT PEOPLE
GREAT MARKETS
[GRAPHIC-PHOTOGRAPH]
The ultimate source of our success at Coastal Financial is,
without question, our demonstrated ability to attract, develop
and retain the very best and brightest people.
Their total commitment to Exceeding the Expectations of
our Customers assures a continued focus on our Basic
Corporate Objective of Maximizing The Value Of Our
Shareholders' Investment and our Long-Term Goal Of
Being The Best Financial Services Company In Our Marketplace.
1996 was the best year in Coastal Financial's history and
continued to showcase our capacity for turning
potential into accomplishment.
Our great people, great markets and overriding commitment to
our QUEST FOR EXCELLENCE operating philosophy has again produced
outstanding results for our Shareholders and will help to insure that
our best years are yet to come.
[GRAPHIC-CHART]
The value of one share of Coastal Financial Corporation's Capital Stock
purchased at $10.00 in the initial public offering, and affected by stock
dividends, stock splits, and reinvested cash dividends, was $134.94 based upon
NASDAQ Quotations at September 30, 1996. The foregoing reflects historical
results and may not be indicative of future stock prices.
<PAGE>
FINANCIAL HIGHLIGHTS
The following table sets forth certain information concerning the financial
position of the Company (including data from operations of its subsidiaries) as
of and for the dates indicated. The consolidated data is derived in part from,
and should be read in conjunction with, the Consolidated Financial Statements of
the Company and its subsidiaries presented herein.
<TABLE>
<CAPTION>
At September 30,
---------------------------------------------
1992 1993 1994 1995
---- ---- ---- ----
(dollars in thousands, except per share data)
<S> <C> <C> <C> <C>
FINANCIAL CONDITION DATA:
Total assets................................................................ $328,175 $335,284 $374,980 $401,201
Loans receivable, net....................................................... 266,722 280,425 331,175 356,819
Mortgage-backed securities.................................................. 14,640 3,525 794 12,776
Cash, interest-bearing deposits and investment securities................... 28,345 27,580 29,316 13,530
Deposits.................................................................... 255,720 266,855 247,385 273,099
Borrowings.................................................................. 48,525 41,906 98,446 95,997
Stockholders' equity........................................................ 18,452 21,829 23,104 24,820
OPERATING DATA:
Interest income............................................................. $ 27,773 $ 25,967 $ 24,562 $ 30,328
Interest expense............................................................ 16,572 12,876 11,548 17,272
-------- -------- -------- --------
Net interest income......................................................... 11,201 13,091 13,014 13,056
Provision for loan losses................................................... 645 1,389 510 202
-------- -------- -------- --------
Net interest income after provision for loan losses......................... 10,556 11,702 12,504 12,854
-------- -------- -------- --------
Other income:
Fees and service charges on loans and deposit accounts...................... 694 811 1,001 1,051
Gain on sales of loans receivable........................................... 284 1,125 411 39
Gain (loss) on sales of investment securities............................... 5 (29) -- --
Gain on sales of mortgage-backed securities, net............................ -- 238 54 --
Real estate operations...................................................... (482) (176) 341 876
Other income................................................................ 1,367 1,209 1,022 1,284
-------- -------- -------- --------
Total other income.......................................................... 1,868 3,178 2,829 3,250
Total general and administrative expense.................................... 8,268 9,272 10,279 10,152
-------- -------- -------- --------
Earnings before income taxes................................................ 4,156 5,608 5,054 5,952
Income taxes................................................................ 1,641 2,270 1,906 2,232
-------- -------- -------- --------
Net earnings before cumulative effect of adopting FASB 109.................. 2,515 3,338 3,148 3,720
-------- -------- -------- --------
Cumulative effect of adopting FASB 109...................................... -- -- 664 --
Net income.................................................................. $ 2,515 $ 3,338 $ 3,812 $ 3,720
======== ======== ======== ========
Net earnings per common share before cumulative effect of adopting FASB
109....................................................................... $ .71 $ .91 $ .86 $ 1.05
Cumulative effect of adopting FASB 109...................................... -- -- .18 --
Net earnings per common share............................................... $ .71 $ .91 $ 1.04 $ 1.05
======== ======== ======== ========
Cash dividends per common share............................................. -- -- $ .19 $ .38
Weighted average shares outstanding......................................... 3,522 3,678 3,661 3,555
======== ======== ======== ========
<PAGE>
<CAPTION>
1996
----
<S> <C>
FINANCIAL CONDITION DATA:
Total assets................................................................ $459,712
Loans receivable, net....................................................... 370,368
Mortgage-backed securities.................................................. 27,029
Cash, interest-bearing deposits and investment securities................... 38,332
Deposits.................................................................... 313,430
Borrowings.................................................................. 109,886
Stockholders' equity........................................................ 27,681
OPERATING DATA:
Interest income............................................................. $ 34,720
Interest expense............................................................ 19,091
--------
Net interest income......................................................... 15,629
Provision for loan losses................................................... 790
--------
Net interest income after provision for loan losses......................... 14,839
--------
Other income:
Fees and service charges on loans and deposit accounts...................... 1,415
Gain on sales of loans receivable........................................... 990
Gain (loss) on sales of investment securities............................... (6)
Gain on sales of mortgage-backed securities, net............................ 189
Real estate operations...................................................... 345
Other income................................................................ 1,699
--------
Total other income.......................................................... 4,632
Total general and administrative expense.................................... 13,586
--------
Earnings before income taxes................................................ 5,885
Income taxes................................................................ 2,164
--------
Net earnings before cumulative effect of adopting FASB 109.................. 3,721
--------
Cumulative effect of adopting FASB 109...................................... --
Net income.................................................................. $ 3,721
========
Net earnings per common share before cumulative effect of adopting FASB
109....................................................................... $ 1.04
Cumulative effect of adopting FASB 109...................................... --
Net earnings per common share............................................... $ 1.04
========
Cash dividends per common share............................................. $ .44
========
Weighted average shares outstanding......................................... 3,595
========
</TABLE>
Earnings per share and weighted average shares outstanding have been
restated to reflect 10%, 15% and 5% common stock dividends declared on November
29, 1991, August 28, 1992 and May 30, 1995, respectively, three 3 for 2 common
stock dividends declared on January 27, 1993, August 18, 1993 and January 7,
1994, respectively, and two 5 for 4 stock dividends declared on January 9, 1996
and June 20, 1996.
<PAGE>
KEY OPERATING RATIOS:
The table below sets forth certain performance ratios of the Company for the
periods indicated.
<TABLE>
<CAPTION>
At or for Years Ended September 30,
---------------------------------------------
1992 1993 1994 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Other Data:
Return on assets (net income divided by average assets) before impact of
adopting FASB 109......................................................... 0.78% 1.00% 0.92% 0.94%
Including effect of adopting FASB 109....................................... N/A N/A 1.12% N/A
Return on average equity (net income divided by average equity) before
impact of adopting FASB 109............................................... 14.71% 16.59% 13.88% 15.54%
Including effect of adopting FASB 109....................................... N/A N/A 16.80% N/A
Average equity to average assets............................................ 5.30% 6.08% 6.66% 6.08%
Tangible book value per share............................................... $ 5.34 $ 6.27 $ 6.82 $ 7.40
Dividend payout ratio....................................................... N/A N/A 16.19% 34.46%
Interest rate spread (difference between average yield on interest-earning
assets and average cost of interest-bearing liabilities).................. 3.73% 4.15% 4.09% 3.52%
Net interest margin (net interest income as a percentage of average
interest-earning assets).................................................. 3.72% 4.20% 4.12% 3.62%
Allowance for loan losses to total loans at end of period................... 0.69% 0.98% 1.01% 1.00%
Ratio of non-performing assets to total assets (1).......................... 1.83% 0.75% 0.56% 0.53%
Tangible capital ratio...................................................... 5.47% 6.27% 5.94% 6.13%
Core capital ratio.......................................................... 5.47% 6.27% 5.94% 6.13%
Risk-based capital ratio.................................................... 9.05% 10.57% 10.11% 10.45%
Number of:
Real estate loans outstanding............................................. 5,460 5,647 6,614 6,688
Deposit accounts.......................................................... 33,274 32,960 33,618 39,881
Number of full service offices............................................ 8 8 8 8
<PAGE>
<CAPTION>
1996
----
<S> <C>
Other Data:
Return on assets (net income divided by average assets) before impact of
adopting FASB 109......................................................... 0.85%
Including effect of adopting FASB 109....................................... N/A
Return on average equity (net income divided by average equity) before
impact of adopting FASB 109............................................... 13.97%
Including effect of adopting FASB 109....................................... N/A
Average equity to average assets............................................ 6.10%
Tangible book value per share............................................... $ 8.04
Dividend payout ratio....................................................... 38.51%
Interest rate spread (difference between average yield on interest-earning
assets and average cost of interest-bearing liabilities).................. 3.76%
Net interest margin (net interest income as a percentage of average
interest-earning assets).................................................. 3.86%
Allowance for loan losses to total loans at end of period................... 1.11%
Ratio of non-performing assets to total assets (1).......................... 0.17%
Tangible capital ratio...................................................... 5.93%
Core capital ratio.......................................................... 5.93%
Risk-based capital ratio.................................................... 10.41%
Number of:
Real estate loans outstanding............................................. 5,741
Deposit accounts.......................................................... 41,755
Number of full service offices............................................ 9
(1) Nonperforming assets consist of nonaccrual loans 90 days or more past due
and real estate acquired through foreclosure.
</TABLE>
<PAGE>
DEAR FRIENDS
This year's Annual Report focuses on our exceptional people and the dynamic
markets in which we do business.
It was truly a great year. Our stock price increased 56%. Our business
flourished. And, most importantly, our people grew personally and professionally
by facing and conquering the significant challenges which were encountered.
Since 1991, our operating earnings
have increased at an annualized rate in
excess of 17%. Even more exciting is the
fact that, during that same period of
time, the value of Coastal Financial
Corporation's stock has grown at a
compound annual rate of over 68%.
[GRAPHIC-PHOTOGRAPH]
Another noteworthy measure of our
success is evidenced by the growth of
our market capitalization, which has
increased from $4.6 million in October
1990, the date of our initial public
offering, to $65.4 million at the close
of this fiscal year. Simply stated . . .
an initial investment of $1,000 in
October 1990 would have grown to $13,494
at September 30, 1996.
Now that's what I call maximizing the value of Shareholders' Investment, and
it is all due to our great people, great markets and overriding commitment to
our QUEST FOR EXCELLENCE operating philosophy.
1996 . . . OUR BEST YEAR YET
The real news for 1996 was the strong
checking account and loan portfolio growth which
resulted primarily from the restructuring of our
operating environment to create a stronger focus
on the sales and marketing of financial
services. The result was a year in which we
[GRAPHIC-PHOTOGRAPH] achieved dramatic gains in both operating
earnings and Shareholder value.
Our financial performance during fiscal 1996
again met our high expectations and well
positions us to aggressively address future
opportunities.
<PAGE>
Noteworthy Financial Results for Fiscal 1996:
-- The market price of Coastal [GRAPHIC-PERFORMANCE GRAPH]
Financial Corporation's stock increased
56%. This compares with an 18.7%
increase in the NASDAQ Bank Index and a
17.6% increase in the NASDAQ Composite
Index during the same period.
-- The value of Coastal Financial
Corporation's common stock has grown at
a compound annual rate of over 68%
during the past five years.
-- An increase of 10.1% in cash
dividends paid per common share.
-- The payment of two 5 for 4 stock
splits in the form of 25% stock
dividends.
-- Net earnings of $3.7 million or [GRAPHIC-CHART}
$1.04 per share, after payment of a
special, one-time FDIC assessment of
$1.0 million, after tax. Excluding this
non-recurring charge, net earnings for
fiscal 1996 increased 27% over the prior
year.
-- Shareholders' equity advanced
11.5% to $27.7 million.
-- Book value per share grew 8.7% to [GRAPHIC-CHART}
$8.04
-- A 14.6% growth in total assets to [GRAPHIC-CHART}
$459.7 million.
-- Loans receivable increased 3.8% to
$370.4 million. Additionally, included
in mortgage-backed securities are $6.2
million of loans which were securitized
in fiscal 1996.
-- Deposits grew 14.8% to the highest
level in the Company's history.
-- Transaction deposits grew by 60%
in fiscal 1996.
-- Non-performing Assets to Total [GRAPHIC-CHART}
Assets decreased to 0.17%.
-- Allowance for Loan Losses to Net [GRAPHIC-CHART}
Loans increased to 1.11%.
-- The Company had Loan Charge Offs
of .05% in 1996.
<PAGE>
As good as these results are, what about the future? We believe our
performance during 1996 was a pretty good indication of the good things yet to
come. But before we look forward, let's review our business philosophy and look
back at this past year.
OUR GUIDING VISION
Charles Darwin once wrote "It is not [GRAPHIC-PHOTOGRAPH]
the strongest of the species that
survive, nor the most intelligent, but
the one most responsive to change."
As a financial services leader, we
are constantly focusing on current and
future needs and continually developing
new ideas to keep our Customers happy.
Our QUEST FOR EXCELLENCE operating
philosophy assures that we view change
and constant improvement as essential to
the achievement of our long-term
objectives. Despite our success, we
continue to work hard to keep our
organization efficient, assure that our
most experienced leaders remain close to
our Customers and maintain a fresh
outlook and entrepreneurial spirit.
[GRAPHIC-PHOTOGRAPH] In our ongoing effort to improve upon
our performance, Coastal Financial
Corporation works diligently to create
an exciting and highly charged corporate
atmosphere which is both challenging and
rewarding.
Our unique approach to business has
enabled us to develop the kind of
unencumbered, flexible operating style
that can achieve superior results.
Instead of layers of bureaucracy, we are
substituting significant levels of
personal responsibility to everyone in
the organization. This environment will
help to assure that we remain fast,
flexible and totally Customer focused.
We are absolutely convinced that this approach will help to assure that our
best years are yet to come.
A LOOK AT 1996
It really was a great year for Coastal Financial, especially when you
consider some of the obstacles we overcame.
<PAGE>
For starters, we continued to operate [GRAPHIC-PHOTOGRAPH]
in an inequitable environment where
other financial services companies,
whose deposits were insured by the FDIC
under the Bank Insurance Fund (BIF) were
allowed a significant advantage in
premium cost as compared to companies,
such as Coastal Federal, whose deposits
are insured by the FDIC under the
Savings Association Insurance Fund
(SAIF). During fiscal 1996, Coastal
Federal paid $622,000 for FDIC deposit
insurance premiums, while other
financial services companies, with the
same level of deposits, but whose
deposits were insured under the BIF,
would have paid practically nothing for
the same deposit insurance coverage.
This BIF/SAIF insurance premium disparity was significantly reduced with the
passage of the Omnibus Appropriations Bill on September 30, 1996. As a result of
this legislation, Coastal Financial Corporation recognized a $1.0 million
non-recurring charge to after-tax earnings in the fourth quarter of fiscal 1996.
Beginning January 1, 1997, our premiums for deposit insurance, while still
not on parity with BIF insured financial services companies, are expected to be
reduced from 23 cents per $100 in deposits to 6.4 cents per $100 in deposits.
[GRAPHIC-PHOTOGRAPH] We at Coastal Financial have worked
very hard toward the passage of
legislation addressing this disparate
treatment of deposit insurance premiums
for the past two years and are extremely
pleased that the Administration and
Congress have addressed this significant
issue in a responsible manner.
The 1996 financial results are only
partially indicative of the real growth
we experienced this past year. Some of
the initiatives and achievements aimed
at increasing the value of the Company
and maximizing our ability to capitalize
on opportunities in the years ahead
were:
-- A major Corporate reorganization which restructured our operating
environment in order to create a stronger focus on the sales and marketing of
financial services.
<PAGE>
-- The extremely successful offering [GRAPHIC-PHOTOGRAPH]
of our COASTAL BANKER CHECKING program
which was developed during fiscal 1995
and introduced at the beginning of
fiscal 1996. As of September 30, 1996,
over 10,000 members of the communities
we serve have switched to this unique
checking account program.
-- The development and implementation
of advanced cash and asset/liability
management processes. These initiatives
will greatly aid us in achieving
profitable growth, controlling general
and administrative expenses and managing
the overall sensitivity of our balance
sheet to interest rate volatility.
-- The consolidation of Coastal Federal's mortgage banking operations into
Coastal Federal Mortgage, formerly Granger-O'Harra Mortgage. Through this
initiative, we have not only enhanced operational efficiency and profitability,
but have also entered a number of new and rapidly growing markets throughout the
state. In fact, in a typical month, over half of our mortgage banking volume now
comes from markets where we had no presence a year ago.
-- The opening of a full service banking office in Florence. In just five
months, we have significantly exceeded our fiscal 1996 business plan objectives
and are well positioned to expand our banking programs to the individuals and
businesses of the growing and dynamic Pee Dee area communities.
-- The continued growth and development of Coastal Investments Corporation
and its talented group of securities brokerage sales professionals. During
fiscal 1996, revenue from the sales of investment products increased by almost
30% over the prior year. We are now poised to grow that organization
substantially through innovative sales and marketing initiatives.
-- The conversion of our Check Imaging system from an outsource environment
to an in-house process. Through this well planned and executed endeavor, we have
considerably shortened the delivery cycle for checking account statements and,
in addition, significantly reduced the costs related to this activity.
<PAGE>
-- Our leadership role in serving as [GRAPHIC-PHOTOGRAPH]
the Major Corporate Sponsor for the
Horry County March of Dimes WalkAmerica
Campaign For Healthier Babies continued
to evidence our support for the
communities we serve. The $65,000 which
was raised by our caring and
civic-minded Associates was recognized,
both statewide and nationally, for its
4th place finish among the top 100 South
Carolina teams, and its 89th place
finish among the 500 nationally ranked
teams.
-- The overwhelming response to our
SAVE FOR AMERICA program by local
schools recently prompted state
Treasurer Richard Eckstrom to hail
Coastal Federal as "a model bank for its
long-term vision and community
commitment to encourage student saving."
Through the combined efforts of School
Administrators, Parent-Teacher
Organization volunteers and our
Associates, this vehicle allows school
children to maintain a savings account
through in-school direct deposits and
encourages them to learn the
fundamentals of banking, goal setting
and practical money management.
[GRAPHIC-PHOTOGRAPH] -- Each year, Coastal Financial
Corporation and its great people, give
generously of their time, talents and
financial resources in support of over
250 community organizations which
contribute significantly to the quality
of life, health and welfare of our
neighborhoods.
Our concept of viewing change and
constant improvement as essential to the
achievement of our long-term objectives
is well reflected by these results.
GREAT PEOPLE
Coastal Financial's success in meeting both marketplace and organizational
challenges is due, in large measure, to the fact that our Leadership Group and
Associates are fully committed to our QUEST FOR EXCELLENCE operating philosophy
in the conduct of their routine business activities.
<PAGE>
During this past year, several of our Leadership Group members envisioned a
plan to reach out to the new residents of our communities who were interested in
learning more about the banking services available in our marketplace. The
program which was developed in response to this challenge has given us a very
effective new delivery channel to that segment of the market. These Leadership
Group members could have just as easily continued to work in the ways of the
past, but chose instead to make a difference.
All businesses wish for this kind of [GRAPHIC-PHOTOGRAPH]
initiative, but few ever get it. Part of
the reason is too much supervision, too
many committees trying to make decisions
that leaders should be making and
inadequate product and Customer service
training. As a result, the people who
must make decisions while dealing with
Customers feel constrained and
intimidated.
This is just one example of the great
things we see daily which are made
possible by our great people being
totally committed to our QUEST FOR
EXCELLENCE operating philosophy.
This philosophy has two major focuses which guide our day-to-day activities.
The first is a strong commitment to business results, and the second is a high
level of integrity.
[GRAPHIC-PHOTOGRAPH] Our emphasis on results is quite
obvious. We could not have achieved the
tremendous accomplishments of recent
years without the outstanding individual
performance of each of our Leadership
Group members and Associates. However,
it is our corporate commitment to never
compromising our integrity that provides
the foundation for our future.
No matter how good the individual
performances of our great people are,
they are only effective if orchestrated
into something of real value. That
requires teamwork and unselfish ness,
two components which are virtually
unattainable without an extraordinary
degree of integrity and a deep-seeded
sense of confidence and unity of purpose
throughout the organization.
<PAGE>
GREAT MARKETS
Horry County, the second fastest [GRAPHIC-PHOTOGRAPH]
growing Metropolitan Statistical Area in
the nation, and Florence County, which
was recently cited by the U.S.
Department Of Commerce as the fastest
growing metropolitan area in the United
States in terms of exports from 1993 to
1995, are certainly two very exciting
markets in which to be building a
financial services business.
According to recent statistics, Horry
County, which has enjoyed an average
annual growth rate of 4.4 percent over
the past 60 years, as compared to the
state average of 1.7 percent, is
projected to achieve average annual
growth of 5.3 percent during the
1990-2010 period. Over that same time
frame, South Carolina's population is
projected to increase by an average
annual rate of 1.4 percent.
And, a rapidly expanding retail and
service-based industry has brought
national attention to the Pee Dee Region
in recent editions of THE NEW YORK
TIMES, THE WALL STREET JOURNAL and THE
KIPLINGER LETTER.
We are, indeed, very fortunate to be
located in the heart of communities with
such exceptional momentum.
COASTAL FINANCIAL'S FUTURE
[GRAPHIC-PHOTOGRAPH] A word about the future. Coastal
Financial has the greatest Board Of
Directors, Leadership Group and
Associates imaginable. They are
talented, experienced and totally
committed to our Basic Corporate
Objective of Maximizing The Value Of Our
Shareholders' Investment and our
Long-Term Goal of Being The Best
Financial Services Company In Our
Marketplace. Not only do they have a
powerful record of accomplishment, but
more importantly, they are determined to
see that our best years are yet to come.
The one question we are most often asked is the same question we continually
ask ourselves: "Can we keep it up?"
<PAGE>
[GRAPHIC-PHOTOGRAPH] We believe the answer is a resounding
"yes," as long as we maintain our
philosophy of viewing change and
constant improvement as essential to the
achievement of our long-term objectives.
That's what really sets us apart from
the competition.
Consumer tastes and interests change
at such a rapid pace that the
marketplace and work environment seem to
be in constant flux. Sometimes drastic
change, sometimes subtle change, but
always change.
If we remain fast, flexible and focused, change will never be a problem, but
rather, create unique opportunities.
I just can't thank our great people enough. They do their very best to help
many tens of thousands of our Customers every day and are totally committed to
Exceeding their Expectations on every occasion.
In the final analysis, when you stop and think about it, a goal like that is
really all we can ask for and all we should want, because it's the best way
possible to assure a great future.
All of us at Coastal Financial Corporation appreciate your continued loyalty
and support and are looking ahead to the future with great enthusiasm and
excitement.
/s/Michael C. Gerald
--------------------
Michael C. Gerald
President
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
General
Coastal Financial Corporation (the "Company"), reported $3.7 million in net
income in fiscal 1996 and 1995. Net earnings for the year ended September 30,
1996 included a special assessment from the FDIC for the recapitalization of the
Savings Association Insurance Fund ("SAIF") of $1,620,000, and a related
reduction in income taxes of $615,000. Excluding this special assessment, net
income increased 27.0% in 1996. Net interest income increased $2.6 million as a
result of increased interest income of $4.4 million offset by an increase of
$1.8 million in interest expense. Provision for loan losses increased from
$202,000 for the year ended September 30, 1995, to $790,000 for the year ended
September 30, 1996. Other income increased from $3.3 million in fiscal 1995, to
$4.6 million in 1996. General and administrative expenses increased $3.4 million
for fiscal 1996, as compared to fiscal 1995. Included in general and
administrative expenses in fiscal 1996, is a $1.6 million special assessment
from the FDIC for the recapitalization of the SAIF Insurance Fund.
Total assets increased from $401.2 million at September 30, 1995 to $459.7
million at September 30, 1996. Liquid assets, consisting of cash,
interest-bearing deposits, and securities, increased from $26.3 million at
September 30, 1995 to $65.3 million at September 30, 1996. Loans receivable
increased 3.8% from $356.8 million at September 30, 1995, to $370.3 million at
September 30, 1996. Total loan originations for fiscal 1996 were $160.3 million
as compared to $141.0 million for fiscal 1995. Mortgage-backed securities
increased from $12.8 million at September 30, 1995, to $27.0 million at
September 30, 1996. Included in the ending mortgage-backed security portfolio
are $6.2 million of mortgage-backed securities which were created from the
securitization of conforming loans during fiscal 1996.
The growth in loans was funded by increased deposits of $40.3 million and
loan repayments. The Company's strategy is to increase its reliance on core
deposits as opposed to its traditional reliance on certificates of deposit and
advances from the Federal Home Loan Bank ("FHLB"). During fiscal 1996, deposits
increased from $273.1 million at September 30, 1995, to $313.4 million at
September 30, 1996. During this same period, transaction deposits increased
$52.7 million.
As a result of $3.7 million in net earnings, the acquisition of Coastal
Federal Mortgage, Inc. for $376,000 (see discussion under "Liquidity and Capital
Resources"), less the cash dividends paid to shareholders of approximately $1.5
million, stockholders' equity increased from $24.8 million at September 30, 1995
to $27.7 million at September 30, 1996.
Liquidity and Capital Resources
In accordance with OTS regulations, the Company is required to maintain
specific levels of cash and liquid investments in qualifying types of United
States treasury and Federal agency securities and other investments generally
having maturities of five years or less. The required level of such investments
is calculated on a liquidity base, consisting of net withdrawable accounts and
short-term borrowings, and is equal to 5.0% of such base amount. Short-term
liquid assets may not be less than 1.0% of the liquidity base.
<PAGE>
Historically, the Company has maintained its liquidity at levels believed by
management to be adequate to meet requirements of normal operations, potential
deposit outflows and strong loan demand and still allow for optimal investment
of funds and return on assets. The liquidity ratio, as calculated for regulatory
purposes, was 5.5%, 7.3%, and 8.0% for the years ended September 30, 1994, 1995
and 1996, respectively. The Company expects to continue to maintain liquidity at
approximately the same level as 1996.
The principal sources of funds for the Company are cash flows from
operations, consisting mainly of mortgage, consumer and commercial loan
payments, retail customer deposits and advances from the Federal Home Loan Bank
("FHLB") of Atlanta.
The principal use of cash flows is the origination of loans receivable. The
Company originated loans receivable of $174.8 million, $141.0 million and $160.4
million for the years ended September 30, 1994, 1995 and 1996, respectively. A
large portion of these loan originations were financed through loan principal
repayments which amounted to $104.6 million, $104.2 million and $93.6 million
for the years ended September 30, 1994, 1995 and 1996, respectively. In
addition, the Company has sold certain loans in the secondary market to finance
future loan originations. The increase in originations and sales of mortgage
loans can be primarily attributed to the purchase of Coastal Federal Mortgage,
d/b/a Granger & O'Harra Mortgage Inc. ("CFM") in November 1995. CFM specializes
in originating conforming mortgage loans which are then sold to correspondent
financial institutions. For the year ended September 30, 1996, CFM originated
$36.4 million of loans and sold $34.5 million of loans. For the years ended
September 30, 1994, 1995 and 1996, the Company sold loans amounting to $29.3
million, $2.8 million and $40.7 million, respectively.
During fiscal 1996, deposits increased from $273.1 million at September 30,
1995, to $313.4 million at September 30, 1996. The increase was attributed to
transaction accounts which increased approximately $52.7 million. This was
offset by a decrease in passbook accounts of $3.6 million and certificate
accounts of $8.8 million.
At September 30, 1996, the Company had commitments to originate $9.0 million
in loans and $32.0 million in unused lines of credit, which the Company expects
to fund from normal operations.
At September 30, 1996, the Company had $94.7 million of certificates of
deposit which were due to mature within one year. Based upon previous
experience, the Company believes that a major portion of these certificates will
be redeposited. Additionally, at September 30, 1996, the Company had excess
collateral pledged to the FHLB which would support additional FHLB advance
borrowings of $63.0 million.
As a condition of deposit insurance, current FDIC regulations require that
Coastal Federal Savings Bank (the "Bank") calculate and maintain a minimum
regulatory capital requirement on a quarterly basis and satisfy such requirement
at the calculation date and throughout the ensuing quarter. The Bank's tangible
and core capital approximated $27.3 million at September 30, 1996, exceeding the
Bank's tangible and core requirements by $20.4 million and $13.6 million,
respectively. At September 30, 1996, the Bank's capital exceeded its current
risk-based minimum capital requirement by $7.1 million. The risk-based capital
requirement may increase in the future.
<PAGE>
Results of Operations
Comparison of the Years Ended September 30, 1995 and 1996
General
Net earnings were $3.7 million for the years ended September 30, 1995 and
1996. Included in net earnings for 1996, is a special assessment from the FDIC
for the recapitalization of the SAIF of $1,620,000, and a related reduction in
income taxes of $615,000. Excluding this special assessment, net income
increased 27.0% in 1996. Net interest income increased $2.6 million primarily as
a result of an increase in interest income of $4.4 million which was offset by
an increase in interest expense of $1.8 million. Provision for loan losses
increased $588,000. Other income increased from $3.3 million for the year ended
September 30, 1995, to $4.6 million for the year ended September 30, 1996.
General and administrative expenses increased $3.4 million when compared to
fiscal 1995. Included in general and administrative expenses in fiscal 1996, is
a $1.6 million special assessment from the FDIC for the recapitalization of the
SAIF Insurance Fund.
Interest Income
Interest income for the year ended September 30, 1996, increased 14.5% to
$34.7 million as compared to $30.3 million for the year ended September 30, 1995
primarily due to the increased yield on assets and a 11.7% increase in average
interest-earning assets. The net yield on interest-earning assets for the year
ended September 30, 1996, was 8.46% compared to a net yield of 8.27% in the
prior year. The increase in net yield primarily resulted from the repricing of
adjustable-rate mortgage loans and growth in commercial real estate loans which
have a higher yield. The average yield on loans receivable for fiscal year 1996
was 8.57% compared to 8.39% in 1995. The yield on investments which includes
Investments, Overnight Funds and Federal Funds, increased to 6.55% for the
fiscal year 1996 from 5.14% for fiscal year 1995. Total interest-earning assets
for fiscal year 1996 averaged $406.2 million compared to $371.9 million for the
year ended September 30, 1995.
Interest Expense
Interest expense on interest-bearing liabilities was $19.1 million for the
year ended September 30, 1996, as compared to $17.3 million in fiscal 1995. The
cost of interest-bearing liabilities was 4.70% for the year ended September 30,
1996, compared to 4.75% in fiscal year 1995. The increase in interest expense of
10.5% primarily resulted from a growth in deposits and a slight increase in
overall market rates paid on deposits. The average cost of deposits for the year
ended September 30, 1996, was 4.08% compared to 3.96% for the year ended
September 30, 1995. The cost of FHLB advances for fiscal 1996 was 6.27% compared
to 6.53% for fiscal 1995. Total average interest-bearing liabilities increased
11.7% from $363.7 million at September 30, 1995, to $406.2 million at September
30, 1996.
Net Interest Income
Net interest income was $15.6 million for the year ended September 30, 1996,
compared to $13.1 million for the year ended September 30, 1995. The net
interest margin increased to 3.76% for fiscal 1996 compared to 3.52% for fiscal
1995. Average interest-earning assets increased $43.5 million while average
<PAGE>
interest-bearing liabilities increased $42.4 million. At September 30, 1996, the
cost of one month advances was approximately 5.5%, compared to approximately
6.7% which was the yield on the 10 year treasury security. Should the yield
curve continue to remain relatively flat, the Company may continue to experience
a high amount of loan prepayments and refinancings and may experience a
declining net interest margin in fiscal 1997.
Provision for Loan Losses
The Company's provision for loan losses increased from $202,000 for fiscal
1995 to $790,000 for fiscal 1996. The allowance for loan losses as a percentage
of loans was 1.11% at September 30, 1996, compared to 1.00% at September 30,
1995. During fiscal 1996, commercial real estate and construction loans
increased 16.3%. As a result of the increase in loans which may possess a higher
degree of risk, the Company increased its allowance for loan losses as a
percentage of loans. Loans delinquent 90 days or more were .12% of total loans
at September 30, 1996, compared to .37% at September 30, 1995. The allowance for
loan losses was 937% of loans delinquent more than 90 days at September 30,
1996, compared to 270% at September 30, 1995. Management believes that the
current level of the allowance for loan losses is adequate considering the
composition of the loan portfolio, the portfolio's loss experience, delinquency
trends, current regional and local economic conditions and other factors. Also
see "Nonperforming Assets" and "Allowance for Loan Losses."
Other Income
In fiscal 1996, total other income increased to $4.6 million as compared to
$3.3 million for the period ended September 30, 1995. Fees and service charges
on loans and deposit accounts increased $364,000 for the year ended September
30, 1996, as a result of growth in core deposits and loans. Income from real
estate operations decreased $531,000 from the prior fiscal year due to reduced
sales of real estate at the Bank's subsidiaries. This was offset by increased
gains on sales of loans receivable and mortgage-backed securities of $951,000
and $189,000, respectively, primarily due to increased mortgage banking
activities of CFM which was acquired in November 1995. Other income increased
from $1.3 million for the year ended September 30, 1995, to $1.7 million for the
year ended September 30, 1996. The increase is attributed to an increase of fee
income from ATMs of $85,000, fee income from debit cards of $53,000, gains on
the sale of assets of $44,000, miscellaneous income of $44,000 and higher
revenues from sales of alternative investment products at the Company's
subsidiary, Coastal Investments Corporation, of $154,000.
Other Expense
General and administrative expenses were $13.6 million for fiscal 1996 as
compared to $10.2 million for fiscal 1995. Salaries and employee benefits were
$6.2 million for fiscal 1996 as compared to $5.3 million for fiscal 1995, or a
16.3% increase. Approximately a third of this increase is attributable to
increased group insurance costs, 401K benefits, and increased bonuses and
incentives. In addition, personnel at CFM accounted for approximately a third of
the increase. Normal salary increases and increased lending personnel accounted
for a significant portion of the remaining increase. Net occupancy, furniture
and fixtures and data processing expense increased $498,000 for fiscal 1996, as
compared to fiscal 1995 primarily as a result of enhancements to technology and
the addition of CFM. FDIC insurance premiums, excluding the special SAIF
<PAGE>
assessment, increased from $566,000 for fiscal 1995, to $622,000 for fiscal 1996
as a result of the 14.8% growth in deposits. Other expenses increased from $1.9
million in 1995 to $2.3 million in 1996. In addition, in 1996 the Company
recorded a special assessment from the FDIC for the recapitalization of the SAIF
of $1,620,000.
Income Taxes
Although fiscal 1996 net income was slightly higher than fiscal 1995, income
taxes were slightly lower due to increased tax exempt interest.
Results of Operations
Comparison of the Years Ended September 30, 1994 and 1995
General
Net earnings decreased from $3.8 million for the year ended September 30,
1994, to net earnings of $3.7 million for the year ended September 30, 1995.
Included in net earnings for 1994, is a favorable $664,000 cumulative effect of
the change in accounting for income taxes. Excluding the effect of the
accounting change in 1994, net income increased 18.2% in 1995. Net interest
income increased $42,000 primarily as a result of an increase in interest income
of $5.8 million which was offset by an increase in interest expense of $5.7
million. Provision for loan losses decreased $308,000. Other income increased
from $2.8 million for the year ended September 30, 1994, to $3.3 million for the
year ended September 30, 1995.
Interest Income
Interest income for the year ended September 30, 1995, increased 23.5% to
$30.3 million as compared to $24.6 million for the year ended September 30, 1994
primarily due to the increased yield on assets and a 17.7% increase in average
interest-earning assets. The net yield on interest-earning assets for the year
ended September 30, 1995, was 8.27% compared to a net yield of 7.77% in the
prior year. The increase in net yield primarily resulted from the repricing of
adjustable-rate mortgage loans. The average yield on loans receivable for fiscal
year 1995 was 8.39% compared to 7.93% in 1994. The yield on investments which
includes Investments, Overnight Funds and Federal Funds, increased to 5.14% for
the fiscal year 1995 from 4.20% for fiscal year 1994. Total interest-earning
assets for fiscal year 1995 averaged $371.9 million compared to $316.l million
for the year ended September 30, 1994.
Interest Expense
Interest expense on interest-bearing liabilities was $17.3 million for the
year ended September 30, 1995, as compared to $11.5 million in fiscal 1994. The
cost of interest-bearing liabilities was 4.75% for the year ended September 30,
1995, compared to 3.68% in fiscal year 1994. The increase in interest expense of
49.6% primarily resulted from a growth in deposits and an increase in overall
market rates paid on deposits and FHLB advances. The average rate on deposits
for the year ended September 30, 1995, was 3.96% compared to 3.29% for the year
ended September 30, 1994. The cost of FHLB advances for fiscal 1995 was 6.53%
compared to 5.56% for fiscal 1994. A contributing factor to the increased costs
of advances was a lengthening in the average maturity of the advances. Total
average interest-bearing liabilities increased 15.9% from $313.8 million at
September 30, 1994, to $363.7 million at September 30, 1995.
<PAGE>
Net Interest Income
Net interest income was $13.1 million for the year ended September 30, 1995,
compared to $13.0 million for the year ended September 30, 1994. The net
interest margin decreased to 3.52% for fiscal 1995 compared to 4.12% for fiscal
1994. Average interest-earning assets increased $55.8 million while average
interest-bearing liabilities increased $49.9 million. At September 30, 1995, the
cost of one month advances was 6.12%, compared to 6.50% which was the yield on
the 30 year treasury security. Should the yield curve continue to remain flat,
the Bank may continue to experience a high amount of loan prepayments and
refinancings and may experience a declining net interest margin in fiscal 1996.
Provision for Loan Losses
The Company's provision for loan losses decreased from $510,000 for fiscal
1994 to $202,000 for fiscal 1995. The allowance for loan losses as a percentage
of loans was 1.00% at September 30, 1995, compared to 1.01% at September 30,
1994. Loans delinquent 90 days or more were .37% of total loans at September 30,
1995, compared to .35% at September 30, 1994. The allowance for loan losses was
270.42% of loans delinquent more than 90 days at September 30, 1995, compared to
291.39% at September 30, 1994. Management believes that the current level of the
allowance for loan losses is adequate considering the composition of the loan
portfolio, the portfolio's loss experience, delinquency trends, current regional
and local economic conditions and other factors. Also see "Nonperforming Assets"
and "Allowance for Loan Losses."
Other Income
In fiscal 1995, total other income increased to $3.3 million as compared to
$2.8 million for the period ended September 30, 1994. Fees and service charges
on loans and deposit accounts increased $50,000 for the year ended September 30,
1995. Due to the sale of certain real estate held for development and the
realization of a deferred gain on a previous sale of real estate owned which had
been financed by the Bank, income from real estate operations increased $535,000
for the fiscal year. This was partially offset by decreased gains on sales of
loans receivable and mortgage-backed securities of $372,000 and $54,000,
respectively, due to decreased mortgage banking activities. Other income
increased from $1.0 million for the year ended September 30, 1994, to $1.3
million for the year ended September 30, 1995. The increase is attributed to an
increase of FHLB stock dividends of $206,000, income from ATMs of $64,000, and
miscellaneous income of $44,000.
Other Expense
General and administrative expenses were $10.2 million for fiscal 1995 as
compared to $10.3 million for fiscal 1994. Salaries and employee benefits were
$5.3 million for fiscal 1995 as compared to $5.2 million for fiscal 1994, or a
2.2% increase. Throughout fiscal 1995, and into 1996, management has implemented
a number of cost saving measures to reduce the reliance on full time Associates
and minimize the increase in compensation expense. Net occupancy, furniture and
fixtures and data processing expense increased $25,000 for fiscal 1995, as
compared to fiscal 1994. FDIC insurance premiums decreased from $619,000 for
fiscal 1994, to $566,000 for fiscal 1995. Other expenses decreased from $2.2
million in 1994 to $1.9 million in 1995. The decrease is attributed to reduced
legal expenses of $69,000, recruiting expenses services of $36,000 and other
sundry expenses of $136,000.
<PAGE>
Income Taxes
Income taxes increased from $1.9 million in fiscal 1994 to $2.2 million in
fiscal as a result of increased earnings before income taxes.
Non-performing Assets
Non-performing assets were $768,000 at September 30, 1996 compared to $2.1
million at September 30, 1995. Non-accrual loans decreased from $1.3 million at
September 30, 1995, to $445,000 at September 30, 1996. Real estate acquired
through foreclosure decreased from $789,000 at September 30, 1995, to $323,000
at September 30, 1996. At September 30, 1996, approximately 69% of the loans 90
days past due are secured by residential mortgage loans. All real estate
acquired through foreclosure is recorded at the lower of cost or fair value less
estimated selling costs and the Company does not expect any material losses on
this real estate. Loans are reviewed on a regular basis and an allowance for
uncollectable interest is established on loans where collection is questionable,
generally when such loans become 90 days delinquent. Loan balances for which
interest amounts have been reserved and all loans more than 90 days delinquent
are considered to be on a non-accrual basis. Typically, payments received on a
non-accrual loan are applied to the outstanding principal or recognized as
interest based upon the collectability of the loan as determined by management.
Allowance for Loan Losses
The Company's management evaluates the need to establish additional
allowances against losses on loans quarterly. Such an evaluation includes a
review of all loans for which full collectability may not be reasonably assured
and considers, among other matters, the estimated market value of the underlying
collateral of problem loans, composition of the loan portfolio, prior loss
experience, economic conditions, etc. The Company established provisions for
loan losses for the years ended September 30, 1994, 1995 and 1996, of $510,000,
$202,000 and $790,000, respectively. For the years ended September 30, 1994,
1995 and 1996, the Company had net charge-offs (recoveries) of ($90,000),
($23,000) and $196,000, respectively. At September 30, 1996, the Company had an
allowance for loan losses of $4.2 million, which was 1.11% of net loans compared
to 1.00% at September 30, 1995. Management believes that the current level of
the allowance for loan losses is adequate considering the composition of the
loan portfolio, the portfolio's loss experience, delinquency trends, current
regional and local economic conditions and other factors. While management uses
the best information available to make evaluations, future adjustments to the
allowance may be necessary if economic conditions differ substantially from the
assumptions used in making the evaluation. The allowance for possible loan
losses is subject to periodic evaluation by various regulatory authorities and
may be subject to adjustment upon their examination.
Impact of New Accounting Pronouncements
On June 30, 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of"
which is effective for financial statements issued for fiscal years beginning
after December 15, 1995. SFAS No. 121 provides guidance for recognition and
measurement of impairment of long-lived assets, certain identifiable
intangibles, and goodwill related both to assets to be held and used and assets
to be disposed of. This statement is not anticipated to have a material effect
on the Company.
<PAGE>
In May 1995, the FASB issued SFAS No. 122, "Accounting for Mortgage
Servicing Rights, an amendment of SFAS No. 65" which is effective prospectively
for fiscal years beginning after December 15, 1995. The statement requires the
recognition of an asset for the right to service mortgage loans for others,
regardless of how those rights were acquired (either purchased or originated).
Further, it amends SFAS 65 to require assessment of impairment based on fair
value. Based upon the Company's present mortgage lending operation, this
statement did not have a significant affect on the Company.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock Based
Compensation" which is effective for financial statements issued for fiscal
years beginning after December 15, 1995. SFAS No. 123 provides guidance on the
valuation of compensation costs arising from both fixed and performance stock
compensation plans. SFAS No. 123 encourages but does not require entities to
account for stock compensation awards based on their estimated fair value on the
date they are granted. Entities can continue to follow current accounting
requirements, which generally do not result in an expense charge for most
options. However, they must disclose in a footnote to their financial statements
what the effect on net income and earnings per share would have been had they
used the fair value model. The Company expects to continue its current
accounting practice. Therefore, this statement will generally not have an effect
on future operating results.
In June, 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities." This statement
will become effective for transactions occurring after December 31, 1996 and
supersedes SFAS No. 122. The Statement uses a "financial components" approach
that focuses on control to determine the proper accounting for financial asset
transfers. Under that approach, after financial assets are transferred, an
entity would recognize on its balance sheet all assets it controls and
liabilities it has incurred. The entity would remove from the balance sheet
those assets it no longer controls and liabilities it has satisfied. The Company
does not anticipate that adoption of this standard will have a material effect
on the Company's financial statements in 1997.
In November 1995, the FASB issued a guide to implementation of SFAS 115 on
accounting for certain investments in debt and equity securities which allows
for the one time transfer of certain investments classified as held for
investment to available for sale.
In order to increase the Company's ability to manage its liquid assets, the
Company reclassified the majority of its investments classified as held for
investment, which had an amortized cost of $14.8 million and a market value of
$15.0 million, to the available for sale classification in the first quarter of
fiscal 1996.
Effects of Inflation and Changing Prices
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles which require the measurement of
financial position and results of operations in terms of historical dollars,
without consideration of change in the relative purchasing power over time due
to inflation. Unlike most industrial companies, virtually all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates have a more significant impact on a financial institution's
performance than the effect of inflation. Interest rates do not necessarily
change in the same magnitude as the price of goods and services.
<PAGE>
Capital Standards and Regulatory Matters
The Bank's capital standards include (1) a leverage limit requiring all OTS
chartered financial institutions to maintain core capital in an amount not less
than 3% of the financial institution's total assets; (2) a tangible capital
requirement of not less than 1.5% of total assets; and (3) a risk-based capital
requirement of not less than 8.0% of risk weighted assets.
The following table summarizes the capital requirements and the Bank's
capital position at September 30, 1996 (dollars in thousands):
<TABLE>
<CAPTION>
Percent
Amount of Assets
------ ---------
<S> <C> <C>
Tangible capital (1)................................. $27,271 5.93%
Tangible capital requirement......................... 6,859 1.50
------- -----
Excess............................................... 20,412 4.43%
======= =====
Core capital......................................... $27,271 5.93%
Core capital requirement............................. 13,719 3.00
------- -----
Excess............................................... $13,552 2.93%
======= =====
Risk-based capital................................... $30,777 10.41%
Minimum risk-based capital requirements.............. 23,641 8.00
------- -----
Excess............................................... $ 7,136 2.41%
======= =====
(1) Equals the Bank's stockholders' equity
</TABLE>
The Act also changed the present qualified thrift lender test (QTL). As of
September 30, 1996, Coastal Federal met the existing QTL test. Based on the
Bank's current portfolio of assets, management does not anticipate that the new
QTL regulations will have an adverse effect on the Bank's operations.
Recently the Federal Regulatory Agencies have agreed on a new higher capital
leverage limit for many financial institutions which is 5%. The Bank also meets
this capital standard.
On September 30, 1996, the Bank recorded a $1,620,000 special assessment to
the FDIC for the recapitalization of the SAIF. Beginning January 1, 1997, the
Bank is expected to begin paying 6.4 cents per $100 of deposits insured.
Previously the Bank had been paying approximately 23 cents per $100 of deposits
insured. It is expected that the Bank Insurance Fund ("BIF") members and SAIF
members will begin paying the same amount to the insurance fund in fiscal year
2000.
<PAGE>
________________________________________________________________________________
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS
COASTAL FINANCIAL CORPORATION
Myrtle Beach, South Carolina
We have audited the consolidated statements of financial condition of
Coastal Financial Corporation and subsidiaries (the "Company") as of September
30, 1995 and 1996, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the years in the three-year
period ended September 30, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Company
at September 30, 1995 and 1996, and the results of their operations and their
cash flows for each of the years in the three-year period ended September 30,
1996, in conformity with generally accepted accounting principles.
As discussed in note 1, the Company changed its method of accounting for
investments to adopt the provisions of the Financial Accounting Standards
Board's Statement of Financial Accounting Standards ("SFAS") No. 115, Accounting
for Certain Investments in Debt and Equity Securities at October 1, 1994 and
changed its method of accounting for income taxes on October 1, 1993 to adopt
the provisions of SFAS No. 109, Accounting for Income Taxes.
/s/KPMG Peat Marwick LLP
------------------------
KPMG Peat Marwick LLP
Greenville, South Carolina
October 18, 1996
<PAGE>
<TABLE>
<CAPTION>
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30, 1995 and 1996
ASSETS 1995 1996
-------- --------
(In thousands)
<S> <C> <C>
Cash and amounts due from banks.......................................................................... $ 9,318 $ 15,639
Short-term interest-bearing deposits..................................................................... 1,883 5,222
Investment securities held to maturity (market value of $2,297 at September 30, 1995 and $332 at
September 30, 1996).................................................................................... 2,329 330
Investment securities available for sale................................................................. -- 17,141
Mortgage-backed securities held to maturity (market value of $12,904 at September 30, 1995).............. 12,776 --
Mortgage-backed securities available for sale............................................................ -- 27,029
Loans receivable (net of allowance for loan losses of $3,578 at September 30, 1995 and $4,172 at
September 30, 1996).................................................................................... 356,819 370,368
Loans receivable held for sale........................................................................... 2,393 6,803
Real estate acquired through foreclosure, net............................................................ 789 323
Office property and equipment, net....................................................................... 5,415 5,736
Federal Home Loan Bank (FHLB) stock, at cost............................................................. 4,726 5,228
Accrued interest receivable on loans..................................................................... 2,167 2,444
Accrued interest receivable on investment securities..................................................... 250 526
Other assets............................................................................................. 2,336 2,923
-------- --------
$401,201 $459,712
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits............................................................................................... 273,099 313,430
Securities sold under agreements to repurchase......................................................... 2,677 3,365
Advances from FHLB..................................................................................... 93,320 104,553
Other borrowings....................................................................................... -- 1,968
Drafts outstanding..................................................................................... 2,289 1,922
Advances by borrowers for property taxes and insurance................................................. 1,629 1,435
Accrued interest payable............................................................................... 767 798
Other liabilities...................................................................................... 2,600 4,560
-------- --------
Total liabilities.................................................................................. 376,381 432,031
-------- --------
Stockholders' equity:
Serial preferred stock, 1,000,000 shares authorized and unissued....................................... -- --
Common stock $.01 par value, 5,000,000 shares authorized; 3,356,056 shares at September 30, 1995 and
3,442,616 shares at September 30, 1996 issued and outstanding........................................ 34 34
Additional paid-in capital............................................................................. 8,710 8,710
Retained earnings, restricted.......................................................................... 18,674 20,015
Treasury stock, at cost (120,169 and 54,161 shares, respectively)...................................... (2,598) (1,185)
Unrealized gain on securities available for sale, net of income taxes.................................. -- 107
-------- --------
Total stockholders' equity......................................................................... 24,820 27,681
-------- --------
$401,201 $459,712
======== ========
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended September 30, 1994, 1995 and 1996
1994 1995 1996
---------- --------- ---------
(In thousands, except
share data)
<S> <C> <C> <C>
Interest income:
Loans receivable.......................................................................... $ 23,726 28,671 31,698
Investment securities..................................................................... 501 381 721
Mortgage-backed securities................................................................ 144 732 1,805
Other..................................................................................... 191 544 496
---------- --------- ---------
Total interest income................................................................. 24,562 30,328 34,720
---------- --------- ---------
Interest expense:
Deposits.................................................................................. 8,516 9,890 11,689
Securities sold under agreements to repurchase............................................ 18 63 323
Advances from FHLB........................................................................ 3,014 7,319 7,079
---------- --------- ---------
Total interest expense................................................................ 11,548 17,272 19,091
---------- --------- ---------
Net interest income................................................................... 13,014 13,056 15,629
Provision for loan losses................................................................... 510 202 790
---------- --------- ---------
Net interest income after provision for loan losses................................... 12,504 12,854 14,839
---------- --------- ---------
Other income:
Fees and service charges on loans and deposit accounts.................................... 1,001 1,051 1,415
Gain on sales of loans held for sale...................................................... 411 39 990
Loss on sales of investment securities, net............................................... -- -- (6)
Gain on sales of mortgage-backed securities, net.......................................... 54 -- 189
Income from real estate acquired through foreclosure...................................... 31 224 202
Income from real estate partnerships...................................................... 310 652 143
Other income.............................................................................. 1,022 1,284 1,699
---------- --------- ---------
Total other income.................................................................... 2,829 3,250 4,632
---------- --------- ---------
<PAGE>
<CAPTION>
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended September 30, 1994, 1995 and 1996
(continued)
1994 1995 1996
---------- --------- ---------
(In thousands, except
share data)
<S> <C> <C> <C>
General and administrative expenses:
Salaries and employee benefits............................................................ 5,194 5,307 6,174
Net occupancy, furniture and fixtures and data processing expense......................... 2,308 2,333 2,831
FDIC insurance premium.................................................................... 619 566 622
FDIC insurance premium to recapitalize the SAIF........................................... -- -- 1,620
Other expense............................................................................. 2,158 1,946 2,339
---------- --------- ---------
Total general and administrative expense.............................................. 10,279 10,152 13,586
---------- --------- ---------
Earnings before income taxes.......................................................... 5,054 5,952 5,885
Income taxes................................................................................ 1,906 2,232 2,164
---------- --------- ---------
Net income before cumulative effect of adopting SFAS No. 109................................ 3,148 3,720 3,721
Cumulative effect of adopting SFAS No. 109.................................................. 664 -- --
---------- --------- ---------
Net income.................................................................................. $ 3,812 3,720 3,721
========== ========= =========
Earnings per common share before cumulative effect of adopting SFAS No. 109................. $ 0.86 1.05 1.04
Cumulative effect of adopting SFAS No. 109.................................................. 0.18 -- --
Earnings per common share................................................................... $ 1.04 1.05 1.04
========== ========= =========
Weighted average common shares outstanding.................................................. 3,661,000 3,555,000 3,595,000
========== ========= =========
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended September 30, 1994, 1995 and 1996
Total
Additional Stock-
Common Paid-in Retained Treasury holders'
Stock Capital Earnings Stock Other Equity
----- ------- -------- ----- ----- ------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1993............................... $ 33 $6,538 $15,258 $ -- $ -- $21,829
Exercise of stock options................................... -- 88 -- -- -- 88
Cash paid for fractional shares............................. -- -- (7) -- -- (7)
Treasury stock repurchases.................................. -- -- -- (2,001) -- (2,001)
Cash dividends.............................................. -- -- (617) -- -- (617)
Net income.................................................. -- -- 3,812 -- -- 3,812
---- ------ ------- ------- ------ -------
Balance at September 30, 1994............................... 33 6,626 18,446 (2,001) -- 23,104
Exercise of stock options................................... -- 96 (215) 241 -- 122
Treasury stock repurchases.................................. -- -- -- (838) -- (838)
Cash paid for fractional shares............................. -- -- (6) -- -- (6)
Cash dividends.............................................. -- -- (1,282) -- -- (1,282)
Common stock dividend....................................... 1 1,988 (1,989) -- -- --
Net income.................................................. -- -- 3,720 -- -- 3,720
---- ------ ------- ------- ------ -------
Balance at September 30, 1995............................... 34 8,710 18,674 (2,598) -- 24,820
Exercise of stock options................................... -- -- (863) 970 -- 107
Issuance of shares in acquisition........................... -- -- (67) 443 -- 376
Cash paid for fractional shares............................. -- -- (17) -- -- (17)
Cash dividends.............................................. -- -- (1,433) -- -- (1,433)
Unrealized gain on securities available for sale,
net of income taxes....................................... -- -- -- -- 107 107
Net income.................................................. -- -- 3,721 -- -- 3,721
---- ------ ------- ------- ------ -------
$ 34 $8,710 $20,015 $(1,185) $ 107 $27,681
==== ====== ======= ======= ======= =======
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended September 30, 1994, 1995 and 1996
1994 1995 1996
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings before FASB 109 adjustment...................................................... $ 3,812 3,720 3,721
Adjustments to reconcile net earnings to net cash provided (used) by operating activities:
Income from real estate partnerships....................................................... (310) (652) (143)
Depreciation............................................................................... 529 552 740
Provision for loan losses.................................................................. 510 202 790
FHLB stock dividends....................................................................... (95) -- --
Origination of loans receivable held for sale.............................................. (19,626) (5,199) (45,082)
Proceeds from sales of loans receivable held for sale...................................... 29,299 2,806 40,672
(Increase) decrease in:
Other assets............................................................................. (589) (1,266) (587)
Accrued interest receivable.............................................................. 95 (434) (553)
Increase (decrease) in:
Accrued interest payable................................................................. 146 284 31
Deferred income taxes payable............................................................ (399) -- --
Other liabilities........................................................................ 1,128 531 1,960
--------- -------- --------
Net cash provided (used) by operating activities....................................... 14,500 544 1,549
--------- -------- --------
Cash flows from investing activities:
Proceeds from maturities of investment securities held to maturity........................... 6,325 5,675 --
Purchases of investment securities held to maturity.......................................... (1,988) (324) --
Proceeds from sale of investment securities available for sale............................... -- -- 7,000
Proceeds from maturities of investment securities available for sale......................... -- -- 1,999
Purchases of investment securities available for sale........................................ -- -- (24,331)
Purchases of loans receivable................................................................ (63) (6,337) (12,448)
Proceeds from sale of mortgage-backed securities available for sale.......................... 1,613 -- 13,220
Purchases of mortgage-backed securities available for sale................................... -- (1,000) (11,867)
Principal collected on mortgage-backed securities............................................ 1,118 811 4,129
Origination of loans receivable.............................................................. (155,135) (135,830) (115,288)
Principal collected on loans receivable...................................................... 104,589 104,215 93,560
Proceeds from sales of real estate acquired through foreclosure.............................. 765 305 937
Proceeds from sales of office properties and equipment....................................... -- -- 192
Purchases of office properties and equipment................................................. (528) (1,166) (1,253)
Redemptions (purchases) of FHLB stock........................................................ (997) 101 (502)
Other investing activities, net.............................................................. 866 884 447
--------- -------- --------
Net cash used by investing activities.................................................... (43,435) (32,666) (44,205)
--------- -------- --------
<PAGE>
<CAPTION>
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended September 30, 1994, 1995 and 1996
(continued)
1994 1995 1996
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Cash flows from financing activities:
Increase (decrease) in deposits.............................................................. (19,470) 25,714 40,331
Increase in securities sold under agreements to repurchase................................... 1,621 771 688
Proceeds from FHLB advances.................................................................. 101,419 365,120 75,850
Repayment of FHLB advances................................................................... (46,500) (368,340) (64,617)
Proceeds from other borrowings............................................................... -- -- 1,968
Increase (decrease) in advance payments by borrowers for property taxes and insurance........ 204 79 (194)
Increase (decrease) in drafts outstanding, net............................................... 272 411 (367)
Repurchase of treasury stock, at cost........................................................ (2,001) (838) --
Cash dividends to stockholders and cash for fractional shares................................ (624) (1,288) (1,450)
Exercise of stock options.................................................................... 88 57 107
--------- -------- --------
Net cash provided by financing activities................................................ 35,009 21,686 52,316
--------- -------- --------
Net increase (decrease) in cash and cash equivalents........................................... 6,074 (10,436) 9,660
--------- -------- --------
Cash and cash equivalents at beginning of year................................................. 15,563 21,637 11,201
--------- -------- --------
Cash and cash equivalents at end of year....................................................... $ 21,637 11,201 20,861
========= ======== ========
Supplemental information:
Interest paid................................................................................ $ 11,402 16,988 19,060
========= ======== ========
Income taxes paid............................................................................ $ 1,684 2,377 3,030
========= ======== ========
Supplemental schedule of non-cash investing and financing transactions:
Securitization of mortgage loans into mortgage-backed securities............................. $ -- 11,793 19,366
========= ======== ========
Transfer of mortgage loans to real estate acquired through foreclosure....................... $ 405 313 471
========= ======== ========
Common stock dividend declared............................................................... $ -- 1,989 --
========= ======== ========
Transfer of investment securities held to maturity to available for sale..................... $ -- -- 14,775
========= ======== ========
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of the more significant accounting policies used
in the preparation and presentation of the accompanying consolidated financial
statements. The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions. These estimates and assumptions affect the reported amount of
assets and liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements. In addition, they affect the reported
amounts of income and expenses during the reporting period. Actual results could
differ from these estimates and assumptions.
(a) Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Coastal Financial Corporation (the "Company"), and its wholly-owned
subsidiaries, Coastal Federal Mortgage, Inc., Coastal Investments Corporation,
Coastal Technology Services, Inc. and Coastal Federal Savings Bank (the "Bank")
and its wholly-owned subsidiary, Coastal Mortgage Bankers and Realty Co., Inc.
(and its wholly-owned subsidiaries, Shady Forest Development Corporation,
Sherwood Development Corporation, Ridge Development Corporation, 501 Development
Corporation, North Beach Investments, Inc. and North Strand Property Management,
Inc.). In consolidation, all significant intercompany balances and transactions
have been eliminated. Coastal Financial Corporation is a unitary thrift holding
company organized under the laws of the state of Delaware.
The Company's subsidiary operations consist primarily of the origination and
sale of conforming mortgages and the sales of financial products. The Bank's
subsidiary operations consist primarily of the sale of real estate acquired
through direct investments and investments in partnerships with others in the
mid 1980's. Investments in real estate partnerships are accounted for using the
equity method.
(b) Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash
and amounts due from banks, short-term interest-bearing deposits and federal
funds sold. Cash and cash equivalents have maturities of three months or less.
Accordingly, the carrying amount of such instruments is considered to be a
reasonable estimate of fair value.
(c) Investment and Mortgage-backed Securities
Investment and mortgage-backed securities are accounted for in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting
for Certain Investments in Debt and Equity Securities", which was adopted by the
Company on October 1, 1994. Investments are classified into three categories as
follows: (1) Held to Maturity -- debt securities that the entity has the
positive intent and ability to hold to maturity, which are reported at amortized
cost; (2) Trading -- debt and equity securities that are bought and held
principally for the purpose of selling them in the near term, which are reported
at fair value, with unrealized gains and losses included in earnings and (3)
Available for Sale -- debt and equity securities that may be sold under certain
conditions, which are reported at fair value, with unrealized gains and losses
excluded from earnings and reported as a separate component of stockholders'
equity, net of income taxes.
<PAGE>
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
The Company determines investment and mortgage-backed securities
classification at the time of purchase. Premiums and discounts on securities are
accreted or amortized as an adjustment to income over the estimated life of the
security using a method which approximates a level yield. Unrealized losses on
securities, reflecting a decline in value judged by the Company to be other than
temporary, are charged to income in the consolidated statements of operations.
In November 1995, the FASB issued a guide to implementation of SFAS No. 115
on accounting for certain investments in debt and equity securities which allows
for the one time transfer of certain investments classified as held to maturity
to available for sale. The Company reclassified its investments classified as
held to maturity to the available for sale classification in the first quarter
of fiscal 1996.
The cost basis of securities sold is determined by specific identification.
Purchases and sales of securities are recorded on a trade date basis. The fair
value of securities is based on quoted market prices or dealer quotes.
The Bank maintained liquid assets in excess of the amount required by
regulations during all periods included in these consolidated financial
statements. The required amount is 5% of the average daily balances of deposits
and short-term borrowings. Liquid assets consist principally of cash, including
time deposits and investment securities.
(d) Allowance for Loan and Real Estate Losses
The Company provides for loan losses on the allowance method. Accordingly,
all loan losses are charged to the allowance and all recoveries are credited to
the allowance. Additions to the allowance for loan losses are provided by
charges to operations based on various factors which, in management's judgment,
deserve current recognition in estimating losses. Such factors considered by
management include the market value of the underlying collateral, growth and
composition of the loan portfolios, the relationship of the allowance for loan
losses to outstanding loans, loss experience, delinquency trends, and local and
regional economic conditions. Management evaluates the carrying value of loans
periodically and the allowance is adjusted accordingly. While management uses
the best information available to make evaluations, future adjustments to the
allowance may be necessary if economic conditions differ substantially from the
assumptions used in making the evaluation. The allowance for possible loan
losses is subject to periodic evaluation by various regulatory authorities and
may be subject to adjustment upon their examination.
<PAGE>
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
The Company adopted SFAS No. 114, "Accounting by Creditors for Impairment of
a Loan" on October 1, 1995. This standard requires that all creditors value
loans at the loan's fair value if it is probable that the creditor will be
unable to collect all amounts due according to the terms of the loan agreement.
Fair value may be determined based upon the present value of expected cash
flows, market price of the loan, if available, or value of the underlying
collateral. Expected cash flows are required to be discounted at the loan's
effective interest rate. SFAS No. 114 was amended by SFAS No. 118 to allow a
creditor to use existing methods for recognizing interest income on an impaired
loan and by requiring additional disclosures about how a creditor recognizes
interest income on an impaired loan. The adoption of the standards required no
increase in the allowance for loan losses and had no impact on net income for
the year ended September 30, 1996.
Under SFAS No. 114, as amended by SFAS No. 118, when the ultimate
collectibility of an impaired loan's principal is in doubt, wholly or partially,
all cash receipts are applied to principal. When this doubt does not exist, cash
receipts are applied under the contractual terms of the loan agreement first to
principal then to interest income. Once the recorded principal balance has been
reduced to zero, future cash receipts are applied to interest income, to the
extent that any interest has been foregone. Further cash receipts are recorded
as recoveries of any amounts previously charged off.
A loan is also considered impaired if its terms are modified in a troubled
debt restructuring after October 1, 1995. For these accruing impaired loans,
cash receipts are typically applied to principal and interest receivable in
accordance with the terms of the restructured loan agreement. Interest income is
recognized on these loans using the accrual method of accounting. As of
September 30, 1996, the Company had no impaired loans.
(e) Loans Receivable Held for Sale
Mortgage loans originated and intended for sale in the secondary market are
carried at the lower of cost or estimated market value in the aggregate. Net
unrealized losses are provided for in a valuation allowance by charges to
operations. At September 30, 1995 and 1996, the Company had approximately $2.4
million and $6.8 million in mortgage loans held for sale. The market value of
loans receivable held for sale exceeded the carrying value at September 30, 1995
and 1996.
(f) Real Estate Owned and Investments in Real Estate Partnerships
Real estate acquired through foreclosure is initially recorded at the lower
of cost or estimated fair value. Subsequent to the date of acquisition, it is
carried at the lower of cost or fair value, less selling costs. Market values of
real estate owned are reviewed regularly and allowances for losses are
established when it is determined that the carrying value of real estate exceeds
the fair value less selling costs. Costs relating to the development and
improvement of such property are capitalized, whereas those costs relating to
holding the property are charged to expense.
<PAGE>
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
Real estate purchased for development and sale and investments in real
estate partnerships are stated at the lower of cost or estimated net realizable
value. Costs directly related to such real estate are capitalized until
construction required to bring these properties to a saleable condition is
completed. Capitalized costs include real estate taxes, interest, and other
direct costs incurred during the improvement period.
Gains on the sale of real estate purchased for development and sale are
recorded at the time of sale provided certain criteria relating to property
type, cash down payment, loan terms, and other factors are met. If these
criteria are not met at the date of sale, the gain is deferred and recognized
using the installment or cost recovery method until they are satisfied, at which
time the remaining deferred gain is recorded as income.
Market values of real estate purchased for development and sale are reviewed
regularly and allowances for losses are established when the carrying value
exceeds the estimated net realizable value. In determining the estimated net
realizable value, the Company deducts from the estimated selling price the
projected cost to complete and dispose of the property and the estimated cost
(i.e. interest, property taxes, etc.) to hold the property to an expected date
of sale.
(g) Office Properties and Equipment
Office properties and equipment are carried at cost less accumulated
depreciation. Depreciation is computed primarily on the straight-line method
over estimated useful lives. Estimated lives range up to thirty years for
buildings and improvements and up to ten years for furniture, fixtures and
equipment. Maintenance and repairs are charged to expense as incurred.
Improvements which extend the lives of the respective assets are capitalized.
When property or equipment is sold or otherwise disposed of, the cost and
related accumulated depreciation are removed from the respective accounts and
the resulting gain or loss is reflected in income.
(h) Uncollected Interest
The Company maintains an allowance for the loss of uncollected interest
primarily on loans which are ninety days or more past due. This allowance is
reviewed periodically and necessary adjustments, if any, are included in the
determination of current interest income.
(i) Loan Fees and Discounts
The net of origination fees received and direct costs incurred in the
origination of loans are deferred and amortized to interest income over the
contractual life of the loans adjusted for actual principal repayments using a
method approximating a level yield.
<PAGE>
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
(j) Income Taxes
Effective October 1, 1993, the Company adopted SFAS No. 109 which resulted
in a favorable cumulative adjustment of approximately $664,000. Deferred taxes
are provided for differences in financial reporting bases for assets and
liabilities as compared with their tax bases. A current tax liability or asset
is established for taxes presently payable or refundable and a deferred tax
liability or asset is established for future tax items. A valuation allowance,
if applicable, is established for deferred tax assets that may not be realized.
The statement also eliminates the tax benefit associated with the thrift bad
debt reserves on a prospective basis. Tax bad debt reserves in excess of the
base year amount (established as taxable years ending December 31, 1987 or
later), creates a tax liability.
(k) Loan Sales
Gains or losses on sales of loans are recognized when substantially all
risks and rewards of ownership are transferred. The Company sells and services
loans under contracts providing for guaranteed yields to buyers for the
remaining lives of the loans which may differ from the loan contract rates.
Gains or losses on such loan sales are determined based on the estimated present
value of the difference between estimated future receipts and normal servicing
costs incurred by the Company. The carrying value of any resulting asset is
reviewed periodically and, if necessary, adjustments are charged or credited to
income to reflect changes in the estimated present value of future cash flows.
(l) Drafts Outstanding
The Company invests all excess funds on deposit at other banks (including
amounts on deposit for payment of outstanding disbursement checks) on a daily
basis in an overnight interest-bearing account. Accordingly, outstanding checks
are reported as a liability.
(m) Securities Sold Under Agreement to Repurchase
The Company has sold an interest in various U.S. Government securities to
certain customers who wish to deposit amounts greater than $100,000. These
agreements function similarly to a certificate of deposit in that the agreement
is for a fixed length of time at a fixed interest rate. However, these deposits
are not insured by the FDIC but are insured by a security interest in the
security. The Company has classified these amounts separately from deposits.
(n) Reclassifications
Certain amounts in the 1994 and 1995 consolidated financial statements have
been reclassified to conform with the 1996 presentation.
<PAGE>
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(2) INVESTMENT SECURITIES
The amortized cost and market value of investment securities held to
maturity at September 30, 1995 is summarized as follows:
<TABLE>
<CAPTION>
1995
-----------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
(In thousands)
<S> <C> <C> <C> <C>
U.S. Government and agency obligations:
Due within one year..................................... $ 1,329 -- (1) 1,328
Due after one but within five years..................... 1,000 -- (31) 969
------- --- --- -----
$ 2,329 -- (32) 2,297
======= === =====
</TABLE>
The amortized cost and market value of investment securities available for
sale at September 30, 1996 is summarized as follows:
<TABLE>
<CAPTION>
1996
-----------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
(In thousands)
<S> <C> <C> <C> <C>
U.S. Government and agency obligations:
Due within one year..................................... $ -- -- -- --
Due after one but within five years..................... 13,037 -- (150) 12,887
Due after five years.................................... 4,297 -- (43) 4,254
------- --- --- -----
$17,334 -- (193) 17,141
======= ==== ======
</TABLE>
There were no investment securities available for sale at September 30,
1995.
There were no realized gains or losses during the year ended September 30,
1995. The Company had gross realized losses of $18,000 and gross realized gains
of $12,000 for the year ended September 30, 1996.
Certain investment and mortgage-backed securities are pledged to secure
other borrowed money and customer deposits in excess of FDIC insurance coverage.
The carrying value of the securities pledged at September 30, 1996 was
$4,784,246 with a market value of $4,832,237.
<PAGE>
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(3) MORTGAGE-BACKED SECURITIES
Mortgage-backed securities held to maturity at September 30, 1995 consisted
of the following:
<TABLE>
<CAPTION>
1995
-----------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
(In thousands)
<S> <C> <C> <C> <C>
FNMA...................................................... $ 538 -- (9) 529
GNMA...................................................... 992 -- (11) 981
FHLMC..................................................... 11,246 148 -- 11,394
------- --- --- ------
$12,776 148 (20) 12,904
======= === === ======
</TABLE>
Mortgage-backed securities available for sale at September 30, 1996
consisted of the following:
<TABLE>
<CAPTION>
1996
-----------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
(In thousands)
<S> <C> <C> <C> <C>
FNMA...................................................... $ 2,469 12 -- 2,481
GNMA...................................................... 5,330 -- (98) 5,232
FHLMC..................................................... 18,861 455 -- 19,316
------- --- ---- ------
$26,660 467 (98) 27,029
======= === === ======
</TABLE>
The Company had gross realized gains of $54,000 on sales of mortgage-backed
securities and no realized losses on sales in 1994. There were no realized gains
or losses for the year ended September 30, 1995. For the year ended September
30, 1996, there were gross realized gains of $189,000 and no realized losses.
<PAGE>
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(4) LOANS RECEIVABLE, NET
Loans receivable, net at September 30 consisted of the following:
<TABLE>
<CAPTION>
1995 1996
--------- -------
(In thousands)
<S> <C> <C>
First mortgage loans:
Single family to 4 family units................................................. $ 226,488 224,570
Other........................................................................... 54,401 61,180
Construction loans.............................................................. 27,905 34,566
Consumer and commercial loans:
Installment consumer loans...................................................... 34,123 31,601
Mobile home loans............................................................... 1,204 1,103
Savings account loans........................................................... 705 436
Equity lines of credit.......................................................... 13,210 12,441
Commercial and other loans...................................................... 19,610 26,946
--------- -------
377,646 392,843
Less:
Allowance for loan losses....................................................... 3,578 4,172
Deferred loan fees (costs)...................................................... 71 (286)
Undisbursed portion of loans in process......................................... 17,178 18,589
--------- -------
$ 356,819 370,368
========= =======
</TABLE>
The changes in the allowance for loan losses for the years ended September
30 consisted of the following:
<TABLE>
<CAPTION>
1944 1995 1996
------ ----- -----
(In thousands)
<S> <C> <C>
Beginning allowance............................................................ $2,753 3,353 3,578
Provision for loan losses...................................................... 510 202 790
Loan recoveries................................................................ 230 255 82
Loan charge-offs............................................................... (140) (232) (278)
------ ----- -----
$3,353 3,578 4,172
====== ===== =====
</TABLE>
Non-accrual loans totaled approximately $1.3 million and $445,000 at
September 30, 1995 and 1996, respectively.
<PAGE>
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(4) LOANS RECEIVABLE, NET -- Continued
Directors and officers of the Company are customers of the Bank in the
ordinary course of business. Deposits and loans of directors and officers bear
interest at rates and have terms consistent with those offered to other
customers. Loans to officers and directors of the Company for the years ended
September 30, are summarized as follows:
<TABLE>
<CAPTION>
1994 1995 1996
------ ----- -----
(In thousands)
<S> <C> <C> <C>
Beginning balance.............................................................. $1,915 1,805 1,598
New loans...................................................................... 304 -- --
Repayments..................................................................... (414) (207) (256)
------ ----- -----
Ending balance................................................................. $1,805 1,598 1,342
====== ===== =====
</TABLE>
The carrying amounts and fair values of loans receivable at September 30,
1995 and 1996 are as follows (In thousands):
<TABLE>
<CAPTION>
1995 1996
------------------------ ----------------------
Carrying Calculated Carrying Calculated
Amount Fair Value Amount Fair Value
-------- ------- ------- -------
<S> <C> <C> <C> <C>
Mortgage loans.......................................... $291,545 297,543 321,951 330,025
Consumer loans.......................................... 36,032 35,578 24,098 23,520
Equity lines of credit.................................. 13,210 13,479 12,441 12,715
Commercial loans........................................ 19,610 20,892 16,050 16,082
Allowance for loan losses............................... (3,578) (3,578) (4,172) (4,172)
-------- ------- ------- -------
$356,819 363,914 370,368 378,170
======== ======= ======= =======
</TABLE>
Management has made estimates of fair value discount rates and estimated
prepayment rates that it believes to be reasonable based upon present market
conditions. However, because there is no active market for many of the above
financial instruments, management believes such information is of limited value
and has no basis to determine whether the fair value presented above would be
indicative of the value which could be negotiated during an actual sale.
Furthermore, this information is as of September 30, 1995 and 1996. Changes in
market interest and prepayment rates since September 30, 1995 and 1996 would
have significant impact on the fair value presented and should be considered
when analyzing this financial data.
A portion of the credit lines and commercial loans have interest rate floors
which may increase the value of these loans. No increase in fair market value
was assigned for these interest rate floors.
<PAGE>
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(4) LOANS RECEIVABLE, NET -- Continued
At September 30, 1996, excluding single family home loans and the fact that
the majority of the loan portfolio is located in the Company's immediate market
area, there were no concentrations of loans in any type of industry, type of
property, or to one borrower that exceeded 10% of the Company's total loan
portfolio. The Company does have 200 loans aggregating approximately $12.3
million which were originated on individual income producing condominium units
in two projects in which the Bank's subsidiaries were a partner. At September
30, 1996, none of these loans were over sixty days delinquent. The majority of
these loans have been outstanding greater than four years and management does
not believe that they represent a significant risk in the loan portfolio.
Approximately $700,000 of these loans have been sold to other financial
institutions.
At September 30, 1995 and 1996, the Company had commitments outstanding to
originate loans totaling approximately $19.0 million and $9.0 million,
respectively, (excluding undisbursed portion of loans in process). Commitments
on loan originations are made at prevailing market interest rates, and are
generally limited to 60 days from date of application. Additionally, at
September 30, 1995 and 1996, the Company had undisbursed equity lines of credit
of approximately $17.1 million and $15.6 million, respectively.
Loans serviced for the benefit of others amounted to approximately $109.4
million, $110.7 million and $115.1 million at September 30, 1994, 1995 and 1996,
respectively.
As disclosed in note 9, certain mortgage loans are pledged to secure
advances from the Federal Home Loan Bank of Atlanta ("FHLB").
<PAGE>
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(5) INVESTMENT IN REAL ESTATE PARTNERSHIPS
The Bank's subsidiaries are general partners in real estate partnerships,
with ownership interests ranging up to 50%, originally organized for the
purposes of constructing and marketing residential real estate. Since 1988,
these subsidiaries have not entered into any new partnerships and the activity
of these partnerships has primarily consisted of selling the remaining interests
in their investments. Condensed combined financial information for the
partnerships at or for the year ended at September 30 is summarized as follows:
<TABLE>
<CAPTION>
1995 1996
---- ----
(In thousands)
<S> <C> <C>
Assets (principally land and improvements, at cost), net............................... $222 113
==== ===
Liabilities -- principally deferred revenue on land sold in 1994 in the amount of $233. 76 5
---- ---
Partners' equity:
Bank's subsidiaries.................................................................. 73 46
Others............................................................................... 73 62
---- ---
146 108
---- ---
Liabilities and partners' equity................................................... $222 113
==== ===
</TABLE>
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Sales...................................... $1,767 2,016 523
Cost of sales.............................. 1,213 885 140
------ ----- ----
Gross profit on sales.................... 554 1,131 383
Other (expense) income, net................ 47 78 (223)
------ ----- ----
Net income............................... $ 601 1,209 160
====== ===== ===
Bank's equity in partnership's income...... $ 310 611 115
====== === ===
</TABLE>
<PAGE>
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(6) OFFICE PROPERTY AND EQUIPMENT, NET
Office property and equipment, net at September 30 consisted of the
following:
<TABLE>
<CAPTION>
1995 1996
---- ----
(In thousands)
<S> <C> <C>
Land..................................................... $ 1,314 1,132
Building and improvements................................ 4,447 4,990
Furniture, fixtures and equipment........................ 5,267 5,964
------- ------
11,028 12,086
Less accumulated depreciation............................ 5,613 6,350
------- ------
$ 5,415 5,736
======= =====
</TABLE>
The Company leases office space and various equipment. Total rental expense
for the years ended September 30, 1994, 1995 and 1996 was approximately
$547,000, $121,000, and $86,000 respectively. The rental expense for 1994
included a one-time charge of $150,000 as a result of a lease buyout penalty.
This charge was due to the decision to convert from an in-house computer system
to a data processing center.
Future minimum rental payments for operating leases having remaining
noncancelable lease terms in excess of one year at September 30, 1996 are as
follows (In thousands):
<TABLE>
<CAPTION>
<S> <C>
1997............................................ $ 29
1998............................................ 27
1999............................................ 18
2000............................................ --
2001............................................ --
----
$ 74
====
</TABLE>
<PAGE>
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(7) INVESTMENT REQUIRED BY LAW
Investment in stock of the FHLB is required by law of every
Federally-insured savings institution. No ready market exists for this stock and
it has no quoted market value. However, redemption of this stock has been at par
value.
The Bank, as a member of the FHLB of Atlanta, is required to acquire and
hold shares of capital stock in the FHLB of Atlanta in an amount equal to the
greater of (i) 1.0% of the aggregate outstanding principal amount of residential
mortgage loans, home purchase contracts and similar obligations at the beginning
of each year, or (ii) 1/20 of its advances (borrowings) from the FHLB of
Atlanta. The Bank is in compliance with this requirement with an investment in
FHLB of Atlanta stock of $5.2 million at September 30, 1996.
(8) DEPOSITS
Deposits at September 30, consisted of the following:
<TABLE>
<CAPTION>
1995 1996
-------------------------------------------
Weighted Weighted
Amount Rate Amount Rate
-------------------- -------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Transaction accounts:
Noninterest bearing.......................$ 16,494 --% $ 19,926 --%
NOW....................................... 29,852 1.53 35,654 1.23
Money market checking..................... 41,516 4.38 84,997 4.85
-------- ---- -------- ----
Total transaction accounts.............. 87,862 2.59 140,577 3.24
-------- ---- -------- ----
Passbook accounts:
Regular passbooks......................... 42,664 2.55 39,287 2.67
Money market.............................. 3,757 2.44 3,553 2.44
-------- ---- -------- ----
Total passbook accounts................. 46,421 2.54 42,840 2.66
-------- ---- -------- ----
Certificate accounts:
0.00 - 5.99%............................ 76,939 113,871
6.00 - 8.00%............................ 61,402 15,623
8.01 - 10.00%............................ 124 130
10.01 - 12.00%............................ 351 389
-------- ---- -------- ----
Total certificate accounts.............. 138,816 6.08 130,013 5.64
-------- ---- -------- ----
$273,099 4.35% $313,430 4.12%
======== ==== ======== ====
</TABLE>
The aggregate amount of deposit accounts with a minimum denomination of
$100,000 or more was $56,391,948 and $60,405,591 at September 30, 1995 and 1996,
respectively.
<PAGE>
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(8) DEPOSITS -- Continued
The amounts and scheduled maturities of certificate accounts at September
30, are as follows:
<TABLE>
<CAPTION>
1995 1996
--------- -------
(In thousands)
<S> <C> <C>
Within 1 year................................... $ 117,724 94,651
After 1 but within 2 years...................... 8,749 28,241
After 2 but within 3 years...................... 8,449 5,484
Thereafter...................................... 3,894 1,637
--------- -------
$ 138,816 130,013
========= =======
</TABLE>
Interest expense on deposits for the years ended September 30 consisted of
the following:
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Transaction accounts.................... $ 1,310 1,925 3,162
Passbook accounts....................... 1,895 1,581 1,599
Certificate accounts.................... 5,311 6,384 6,928
------- ----- ------
$ 8,516 9,890 11,689
======= ===== ======
</TABLE>
The fair value of demand deposit accounts is $134.3 million and $183.4
million which was the amount currently payable at September 30, 1995 and 1996,
respectively. The fair value of certificate accounts was $139.6 million and
$130.3 million compared to a book value of $138.8 and $130.0 and was estimated
by discounting the amounts payable at the certificate rates currently offered
for deposits of similar remaining maturities. The fair value estimates above did
not include the substantial benefit that results from the low cost funding
provided by the deposit liabilities compared to the cost of borrowing funds in
the market.
<PAGE>
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(9) ADVANCES FROM FHLB
Advances from the FHLB at September 30 consisted of the following:
<TABLE>
<CAPTION>
1995 1996
--------------------- ----------------------
Weighted Weighted
Amount Rate Amount Rate
--------------------- ----------------------
(In thousands)
<S> <C> <C> <C> <C>
Fiscal Year Maturity
1996........................................ $36,989 6.40% $ -- -- %
1997........................................ 12,368 6.87 54,404 5.68
1998........................................ 21,634 6.62 20,120 5.90
1999........................................ 5,905 7.57 13,105 6.35
2000........................................ 7,461 6.44 6,861 6.46
2001 or greater............................. 8,963 7.05 10,063 6.90
------- ---- -------- ----
$93,320 6.65% $104,553 5.97 %
</TABLE>
Stock in the FHLB of Atlanta and specific first mortgage loans of
approximately $160,947,000 and $223,400,000 at September 30, 1995 and 1996,
respectively, are pledged as collateral for these advances. The Bank has adopted
the policy of pledging excess collateral to facilitate future advances. At
September 30, 1996, the excess first mortgage loan collateral pledged to the
FHLB will support additional borrowings of approximately $63 million.
The estimated fair value of the FHLB advances at September 30, 1995 and 1996
is $93.7 million and $104.2 million. This estimate is based on discounting
amounts payable at contractual rates using current market rates for advances
with similar maturities.
<PAGE>
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(10) INCOME TAXES
Income tax expense for the years ended September 30 consisted of the
following:
<TABLE>
<CAPTION>
Current Deferred Total
------- -------- -----
<S> <C> <C> <C>
1994:
Federal................................... 1,569 72 1,641
State..................................... 256 9 265
----- ---- -----
1,825 81 1,906
===== == =====
1995:
Federal................................... 1,697 229 1,926
State..................................... 268 38 306
----- ---- -----
1,965 267 2,232
===== === =====
1996:
Federal................................... 2,528 (646) 1,882
State..................................... 403 (121) 282
----- ---- -----
2,931 (767) 2,164
===== ==== =====
</TABLE>
<PAGE>
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(10) INCOME TAXES -- Continued
The tax effect of the Company's temporary differences between the financial
statement carrying amounts and tax basis of assets and liabilities that give
rise to the net deferred tax asset at September 30, 1995 and 1996 related to the
following:
<TABLE>
<CAPTION>
1995 1996
---- ----
(In thousands)
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses.......................................................... $1,373 1,600
Accrued medical reserves........................................................... 54 79
Other real estate reserves and deferred gains on other real estate................. 76 75
Accrued FDIC premiums.............................................................. -- 615
Net operating loss carryforwards................................................... 138 138
Other.............................................................................. 38 99
------ -----
Total deferred tax assets............................................................ 1,679 2,606
Less valuation allowance............................................................. (138) (138)
------ -----
Net deferred tax assets.............................................................. 1,541 2,468
===== =====
Deferred tax liabilities:
Tax bad debt reserve in excess of base year amount................................. 499 552
Property and equipment principally due to differences in depreciation.............. 185 190
FHLB stock, due to stock dividends not recognized for tax purposes................. 356 356
Investment in Joint Venture........................................................ 150 86
Unrealized gain on securities available for sale................................... -- 69
Deferred loan fees................................................................. -- 204
Other.............................................................................. 170 134
------ -----
Total deferred tax liabilities....................................................... 1,360 1,591
------ -----
Net deferred tax asset............................................................... $ 181 877
====== ===
</TABLE>
The net deferred tax asset is included in other assets in the consolidated
financial statements. The valuation allowance relates to the state loss
carryforwards which may not be ultimately realized to reduce taxes of the
Company. A portion of the change in the net deferred tax asset relates to
unrealized gains and losses on securities available for sale. A current period
deferred tax expense of $69,000 for the unrealized gains on securities available
for sale has been recorded directly to stockholders' equity. The balance of the
change in the deferred tax asset results from the current period deferred tax
benefit of $767,000.
<PAGE>
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(10) INCOME TAXES -- Continued
Income taxes of the Company differ from the amounts computed by applying the
Federal income tax rate of 34% for the years ended September 30 to earnings
before income taxes as follows:
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Computed federal income taxes........................ $1,718 2,024 2,001
State tax, net of federal benefit.................... 175 201 173
Other, net........................................... 13 7 (10)
------ ----- -----
Total income tax expense............................. $1,906 2,232 2,164
====== ===== =====
</TABLE>
The Bank has been permitted under the Internal Revenue Code to deduct an
annual addition to the tax reserve for bad debts in determining taxable income,
subject to certain limitations. This addition may differ significantly from the
bad debt expense for financial reporting purposes and was based on either 8% of
taxable income (the "Percentage of Taxable Income Method") or actual loan loss
experience (the "Experience Method") for the years ended September 30, 1994,
1995 and 1996. As a result of recent tax legislation, the Bank will be required
to recapture tax bad debt reserves in excess of pre-1988 base year amounts over
a period of approximately eight years. In addition, for the period ending
September 30, 1997, the Bank will be required to change its overall tax method
of accounting for bad debts to either the experience method or the specific
charge-off method.
Retained earnings at September 30, 1995 and 1996 include approximately
$5,200,000 representing pre-1988 tax bad debt base year reserve amounts for
which no deferred income tax liability has been provided since these reserves
are not expected to reverse until indefinite future periods and may never
reverse. Circumstances that would require an accrual of a portion or all of this
unrecorded tax liability are a reduction in qualifying loan levels relative to
the end of 1987, failure to meet the tax definition of a bank, dividend payments
in excess of current year or accumulated tax earnings and profits, or other
distributions in dissolution, liquidation or redemption of the Bank's stock.
(11) BENEFIT PLANS
The Company participates in a multiple-employer defined benefit pension plan
covering substantially all employees. Separate actuarial valuations are not
available for each participating employer, nor are plan assets segregated.
Pension expense for the years ended September 30, 1994, 1995 and 1996 was minor.
Plan assets exceeded the present value of accumulated plan benefits at June 30,
1996, the latest actuarial valuation date.
The Company has a defined contribution plan covering substantially all
employees. The Company matches employee contributions based upon the Company
meeting certain operating results. Matching contributions made by the Company
were approximately $40,000, $28,000 and $149,000 for fiscal years 1994, 1995 and
1996, respectively.
<PAGE>
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(12) REGULATORY MATTERS
At September 30, 1996, the Bank's loans-to-one borrower limit was
approximately $4.6 million. At September 30, 1996, the Bank is in compliance
with the core, tangible and risk-based capital requirements and loans-to-one
borrower limits.
The regulatory requirements for the Bank and the Bank's compliance with such
requirements at September 30, 1996 is as follows.
<TABLE>
<CAPTION>
Percent
Amount of Assets
------ ---------
(In thousands)
<S> <C> <C>
Stockholders' equity for the Bank................................................. $27,318 5.94%
Reduction for investments in and advances to "Nonincludable" subsidiaries......... (47) (.01)
------- -----
Tangible capital.................................................................. 27,271 5.93
Tangible capital requirement...................................................... 6,859 1.50
------- -----
Excess............................................................................ $20,412 4.43%
======= ====
Core capital...................................................................... 27,271 5.93
Core capital requirement.......................................................... 13,719 3.00
------- -----
Excess............................................................................ $13,552 2.93%
======= ====
Risk-based capital................................................................ 30,777 10.41
Risk-based capital requirements................................................... 23,641 8.00
------- -----
Excess............................................................................ $ 7,136 2.41%
======= ====
</TABLE>
(13) LIQUIDATION ACCOUNT
In conjunction with the Bank's conversion and sale of common stock, as
required by Office of Thrift Supervision regulations, on October 6, 1990 the
Bank established a liquidation account and will maintain this account for the
benefit of the remaining eligible account holders. The initial balance of this
liquidation account was equal to the Bank's net worth defined by OTS regulations
as of the date of the latest statement of financial condition contained in the
final offering circular. In the event of a complete liquidation of the Bank (and
only in such event) each eligible holder shall be entitled to receive a
liquidation distribution from this account in the amount of the then current
adjusted balance for deposits then held, before any liquidation distribution may
be made to the stockholders. The Bank is prohibited from declaring cash
dividends or repurchasing its capital stock if it would cause a reduction in the
Bank's net worth below either the liquidation account or the statutory net worth
requirements set by the OTS.
<PAGE>
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(14) EARNINGS PER SHARE
Earnings per share for the years ended September 30, 1994, 1995 and 1996 are
computed by dividing net earnings by the weighted average number of common share
equivalents outstanding during the year. Common share equivalents include, if
applicable, dilutive stock option share equivalents determined by using the
treasury stock method. All share and per share data have been retroactively
restated for all common stock dividends.
(15) STOCK OPTION PLAN
The Company's stock option plan provides for stock options to be granted
primarily to directors, officers and other key employees. Options granted under
the stock option plan may be incentive stock options or non-incentive stock
options. The remaining shares of stock reserved for the stock option plan at
September 30, 1996 amounted to approximately 35,000 shares. All outstanding
options have been retroactively restated to reflect the effects of the common
stock dividends. The stock option plan is administered by three non-management
directors of the Company. At September 30, 1996, the Bank had the following
options outstanding:
<TABLE>
<CAPTION>
Options
Options Available for Option
Grant Date Granted Exercise Price Expiration Date
- ---------- ------- -------- ----- ---------------
<S> <C> <C> <C> <C>
September 26, 1990................................ 119,703 100% $ 1.42 September 26, 2000
November 28, 1990................................. 238 100 1.42 November 28, 2000
May 29, 1991...................................... 4,988 100 1.96 May 29, 2001
August 4, 1992.................................... 17,904 80 3.77 August 4, 2002
January 21, 1994.................................. 2,461 40 11.89 January 21, 2004
April 20, 1994.................................... 2,461 40 13.41 April 20, 2004
June 30, 1994..................................... 4,102 40 11.89 June 30, 2004
September 16, 1994................................ 6,603 40 12.19 September 16, 2004
September 28, 1994................................ 820 40 12.19 September 28, 2004
November 14, 1994................................. 1,542 20 11.89 November 14, 2004
March 22, 1995.................................... 3,117 20 12.19 March 22, 2005
May 1, 1995....................................... 32,813 20 10.98 May 1, 2005
September 27, 1995................................ 39,064 20 12.16 September 27, 2005
November 2, 1995.................................. 31,250 -- 12.80 November 2, 2005
November 15, 1995................................. 15,626 -- 12.80 November 15, 2005
May 6, 1996....................................... 3,125 -- 15.60 May 6, 2006
</TABLE>
During the years ended September 30, 1994, 1995 and 1996, options for
47,760, 34,027, and 57,647 shares, at an average of $1.93, $1.43, and $1.95 per
share, respectively, were exercised.
<PAGE>
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(16) COMMON STOCK DIVIDENDS
On January 27, 1993, August 18, 1993 and January 7, 1994, the Company
declared a 3 for 2 stock split in the form of common stock dividends aggregating
327,330, 495,084 and 745,179 shares. On May 30, 1995, the Company declared a 5%
common stock dividend aggregating 102,003 shares at a market value of
approximately $2 million. On January 9, 1996 and June 20, 1996, the Company
declared a five for four stock split in the form of a 25% stock dividend,
aggregating approximately 542,000 and 687,000 shares respectively. All share
data has been retroactively restated to give effect to the common stock
dividends.
(17) CASH DIVIDENDS
On June 28, 1994, September 16, 1994, December 14, 1994 and March 22, 1995
the Company declared a quarterly cash dividend of $.09 per share. On June 21,
1995, September 27, 1995, December 27, 1995 and March 27, 1996, the Company
declared a quarterly cash dividend of $.10 per share. On June 27, 1996 and
September 25, 1996, the Company declared quarterly cash dividends of $.11,
respectively.
(18) LEGAL MATTERS
The legal proceedings against the Company are generally incidental to its
business. Based upon the present status of these cases, management believes that
liabilities arising from these proceedings, if any, will not have a materially
adverse effect on the consolidated financial position or results of operations
of the Company.
<PAGE>
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(19) QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly operating data for the years ended September 30 is summarized as
follows (In thousands, except share data):
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
1995:
Total interest income.............................................. $ 6,984 7,483 7,885 7,976
Total interest expense............................................. 3,693 4,272 4,669 4,638
---------- ---------- --------- ---------
Net interest income................................................ 3,291 3,211 3,216 3,338
Provision for loan losses.......................................... 75 20 50 57
---------- ---------- --------- ---------
Net interest income after provision for loan losses................ 3,216 3,191 3,166 3,281
Other income....................................................... 825 787 723 914
General and administrative expenses................................ 2,569 2,594 2,399 2,590
---------- ---------- --------- ---------
Earnings before income taxes....................................... 1,472 1,384 1,490 1,605
Income taxes....................................................... 530 529 544 629
---------- ---------- --------- ---------
Net earnings....................................................... $ 942 855 946 976
========== ========== ========= =========
Earnings per common share.......................................... $ .26 .24 .27 .28
========== ========== ========= =========
Weighted average shares outstanding................................ 3,592,000 3,553,000 3,550,000 3,523,000
========== ========== ========= =========
</TABLE>
<PAGE>
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(19) QUARTERLY FINANCIAL DATA (UNAUDITED) -- Continued
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
1996:
Total interest income.............................................. $ 8,408 8,577 8,748 8,987
Total interest expense............................................. 4,757 4,685 4,661 4,988
---------- ---------- --------- ---------
Net interest income................................................ 3,651 3,892 4,087 3,999
Provision for loan losses.......................................... 115 225 300 150
---------- ---------- --------- ---------
Net interest income after provision for loan losses................ 3,536 3,667 3,787 3,849
Other income....................................................... 935 1,132 1,291 1,273
General and administrative expenses*............................... 2,792 2,955 3,115 4,723
---------- ---------- --------- ---------
Earnings before income taxes....................................... 1,679 1,844 1,963 399
Income taxes*...................................................... 621 676 729 137
---------- ---------- --------- ---------
Net earnings....................................................... $ 1,058 1,168 1,234 262
========== ========== ========= =========
Earnings per common share.......................................... $ .30 .32 .34 .07
========== ========== ========= =========
Weighted average shares outstanding................................ 3,558,000 3,595,000 3,598,000 3,628,000
========== ========== ========= =========
</TABLE>
* The three month period ended September 30, 1996 includes a special assessment
from the FDIC for the recapitalization of the SAIF of $1,620,000, and a
related reduction in income taxes of $615,000. Excluding this special
assessment, net income for the three months ended would have been $1,267,000,
or $0.35 per share.
<PAGE>
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(20) COASTAL FINANCIAL CORPORATION FINANCIAL STATEMENTS (PARENT COMPANY ONLY)
The following is condensed financial information of Coastal Financial
Corporation (parent company only), the primary asset of which is its investment
in its bank subsidiary, for the periods indicated. (In thousands):
<TABLE>
<CAPTION>
Coastal Financial Corporation
Condensed Balance Sheets
September 30, 1995 and 1996
1995 1996
---- ----
<S> <C> <C>
Assets
Cash.......................................................... $ 442 145
Investment in subsidiaries.................................... 24,749 27,855
Deferred tax asset............................................ 86 36
Other assets.................................................. 11 34
------- ------
Total assets............................................ $25,288 28,070
======= ======
Liabilities and Stockholders' Equity
Accounts payable (principally dividends)...................... 468 389
Total stockholders' equity.................................... 24,820 27,681
------- ------
Total liabilities and stockholders' equity.............. $25,288 28,070
======= ======
</TABLE>
<TABLE>
<CAPTION>
Coastal Financial Corporation
Condensed Statement of Operations
For the years ended September 30, 1994, 1995 and 1996
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Income:
Management fees.............................................. $ -- 230 108
Dividends from subsidiary.................................... 3,100 1,725 1,090
Equity in undistributed earnings of subsidiaries............. 871 2,013 2,616
------ ----- -----
Total income............................................. 3,971 3,968 3,814
------ ----- -----
Expenses:
Amortization of organization cost............................ 8 8 14
Professional fees............................................ 181 177 38
Supplies and printing........................................ 26 40 7
Other expenses............................................... 26 25 32
Income tax (benefit) expense................................. (82) (2) 2
------ ----- -----
Total expenses........................................... 159 248 93
------ ----- -----
Net income..................................................... $3,812 3,720 3,721
====== ===== =====
</TABLE>
<PAGE>
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(20) COASTAL FINANCIAL CORPORATION FINANCIAL STATEMENTS (PARENT COMPANY ONLY)
-- Continued
<TABLE>
<CAPTION>
Coastal Financial Corporation
Condensed Statement of Cash Flows
For the years ended September 30, 1994, 1995 and 1996
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Operating activities:
Net income................................................................. $ 3,812 3,720 3,721
Adjustments to reconcile net income to net cash (used) provided by:
Equity in undistributed net income of subsidiary......................... (871) (2,013) (2,616)
Increase (decrease) in other assets...................................... 41 (46) 27
Increase (decrease) in other liabilities................................. 308 82 (79)
------- ------ ------
Total cash provided by operating activities............................ 3,290 1,743 1,053
------- ------ ------
Financing activities:
Purchase of Treasury Stock................................................. (2,001) (838) --
Capital contributions to subsidiary........................................ -- (150) --
Cash dividend to shareholders.............................................. (617) (1,282) (1,433)
Proceeds from stock options................................................ 88 56 107
Other financing activities, net............................................ (6) 59 (24)
------- ------ ------
Total cash used by financing activities................................ (2,536) (2,155) (1,350)
------- ------ ------
Net increase (decrease) in cash and cash equivalents......................... 754 (412) (297)
Cash and cash equivalents at beginning of the year........................... 100 854 442
------- ------ ------
Cash and cash equivalents at end of the year................................. $ 854 442 145
======= === ===
</TABLE>
<PAGE>
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(21)CARRYING AMOUNTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts and fair value of financial instruments as of September
30, 1995 and 1996 are summarized below:
<TABLE>
<CAPTION>
1995 1996
-------------------------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
----------------------- ----------------------
(In thousands) (In thousands)
<S> <C> <C> <C> <C>
Financial Assets
Cash and cash equivalents................................ $ 11,201 11,201 $ 20,861 20,861
Investment securities.................................... 2,329 2,297 17,471 17,473
Mortgage-backed securities............................... 12,776 12,904 27,029 27,029
Loans receivable held for sale........................... 2,393 2,453 6,803 6,905
Loans receivable, net.................................... 356,819 363,914 370,368 378,170
FHLB stock............................................... 4,726 4,726 5,228 5,228
-------- ------- -------- -------
$390,244 397,495 $447,760 455,666
======== ======= ======== =======
Financial Liabilities
Deposits:
Demand accounts........................................ 134,283 134,283 183,417 183,417
Certificate accounts................................... 138,816 139,565 130,013 130,303
Advances from Federal Home Loan Bank..................... 93,320 93,718 104,553 104,241
Securities sold under agreements to repurchase........... 2,677 2,677 3,365 3,365
Other borrowings......................................... -- -- 1,922 1,922
-------- ------- -------- -------
$369,096 370,243 $423,270 423,248
======== ======= ======== =======
</TABLE>
The Company had $41.0 million of off-balance sheet financial commitments as
of September 30, 1996, which are commitments to originate loans and unused
consumer lines of credit. Since these obligations are generally based on current
market rates, the carrying amount is considered to be a reasonable estimate of
fair value.
Fair value estimates are made at a specific point in time, based on relevant
market information and information about the financial instrument. These
estimates do not reflect any premium or discount that could result from offering
for sale the Company's entire holdings of a particular financial instrument.
Because no active market exists for a significant portion of the Company's
financial instruments, fair value estimates are based on judgments regarding
future expected loss experience, current economic conditions, current interest
rates and prepayment trends, risk characteristics of various financial
instruments, and other factors. These estimates are subjective in nature and
involve uncertainties and matters of significant judgment and therefore cannot
be determined with precision. Changes in any of these assumptions used in
calculating fair value would also significantly affect the estimates. Further,
the fair value estimates were calculated as of September 30, 1996. Changes in
market interest rates and prepayment assumptions could significantly change the
fair value.
<PAGE>
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(21)CARRYING AMOUNTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS -- Continued
Fair value estimates are based on existing on and off-balance sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and liabilities that are not considered
financial instruments. For example, the Company has significant assets and
liabilities that are not considered financial assets or liabilities including
deposit franchise value, loan servicing portfolio, real estate, deferred tax
liabilities, premises and equipment, and goodwill. In addition, the tax
ramifications related to the realization of the unrealized gains and losses can
have a significant effect on fair value estimates and have not been considered
in any of these estimates.
(22) ACQUISITION
On November 2, 1995, the Company acquired Granger-O'Harra Mortgage, Inc.
Granger-O'Harra is a mortgage brokerage company located in Florence, South
Carolina with assets of approximately $1.0 million. In fiscal 1995,
Granger-O'Harra originated approximately $20 million in mortgage loans. The
Company exchanged approximately 17,500 shares of its stock for the stock of
Granger-O'Harra. In 1996, Granger-O'Harra Mortgage, Inc. was merged into Coastal
Federal Mortgage, Inc. The transaction was accounted for as a purchase and there
were no material intangibles resulting from the transaction.
(23) COMMITMENTS AND CONTINGENCIES
The Company has a $8 million outstanding line of credit with a commercial
bank. The line of credit is secured by 51% of the stock of the Bank. At
September 30, 1996, there was no outstanding balance on this line of credit.
<PAGE>
BOARD OF DIRECTORS
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
COASTAL FINANCIAL CORPORATION
DIRECTORS
James C. Benton
President, C. L. Benton &
Sons, Inc.
G. David Bishop
Chairman, WCI Management Group Inc.
Harold D. Clardy
President, Chapin Company
James T. Clemmons
Chairman
Coastal Financial Corporation
James P. Creel
President, Creel Corporation
Michael C. Gerald
President and Chief Executive Officer
Coastal Financial Corporation
Samuel A. Smart
Retired, United States Department of Defense
Wilson B. Springs
Owner, H. B. Springs Company
ADVISORY DIRECTORS
James H. Dusenbury
Dusenbury, Hendrix & Little
Attorneys at Law
William J. Sigmon, Sr.
Former President and Chief Executive Officer
Burroughs &
Chapin Company
<PAGE>
COASTAL FEDERAL SAVINGS BANK
DIRECTORS
James C. Benton
President, C. L. Benton &
Sons, Inc.
G. David Bishop
Chairman, WCI Management Group Inc.
Harold D. Clardy
President, Chapin Company
James T. Clemmons
Chairman
Coastal Federal Savings Bank
James P. Creel
President, Creel Corporation
Michael C. Gerald
President and Chief Executive Officer
Coastal Federal Savings Bank
Samuel A. Smart
Retired, United States Department of Defense
Wilson B. Springs
Owner, H. B. Springs Company
DIRECTOR EMERITUS
William J. Sigmon, Sr.
Former President and Chief
Executive Officer
Burroughs & Chapin Company
ADVISORY DIRECTOR
James H. Dusenbury
Dusenbury, Hendrix & Little
Attorneys at Law
<PAGE>
COASTAL INVESTMENTS
CORPORATION
DIRECTORS
James C. Benton
President, C. L. Benton &
Sons, Inc.
G. David Bishop
Chairman, WCI Management Group Inc.
James P. Creel
President, Creel Corporation
James H. Dusenbury
Attorney
Dusenbury, Hendrix & Little
Attorneys at Law
Michael C. Gerald
President and Chief
Executive Officer
Coastal Financial Corporation
J. Pinckney Kellett, IV
President and Chief Executive Officer
Coastal Investments Corporation
Jerry L. Rexroad, CPA
Chief Financial Officer
Coastal Investments Corporation
COASTAL TECHNOLOGY SOLUTIONS
DIRECTORS
James T. Clemmons
Chairman
Coastal Financial Corporation
Michael C. Gerald
President and Chief Executive Officer
Coastal Financial Corporation
Jimmy R. Graham
President and Chief
Executive Officer
Coastal Technology Solutions
Jerry L. Rexroad, CPA
Chief Financial Officer
Coastal Technology Solutions
Samuel A. Smart
Retired, United States
Department of Defense
<PAGE>
COASTAL FEDERAL MORTGAGE
DIRECTORS
James T. Clemmons
Chairman
Coastal Financial Corporation
Michael C. Gerald
President and Chief Executive Officer
Coastal Financial Corporation
Richard L. Granger
President and Chief Executive Officer
Coastal Federal Mortgage
Robert S. O'Harra
Executive Vice President and
Chief Operating Officer
Coastal Federal Mortgage
Jerry L. Rexroad, CPA
Chief Financial Officer
Coastal Federal Mortgage
Wilson B. Springs
Owner, H.B. Springs Company
Phillip G. Stalvey
Executive Vice President
Coastal Financial Corporation
<PAGE>
LEADERSHIP GROUP
COASTAL FEDERAL SAVINGS BANK
Dana J. Berry
Deposit Sales Group Leader
North Myrtle Beach
James W. Boyd
Vice President
Credit Administration Group Leader
Denise F. Brown
Deposit Sales Group Leader
Surfside
O. Kendall Buckner
Vice President
Regional Sales Group Leader
South Strand Region
Cynthia L. Buffington
Item Processing Group Leader
Glenn T. Butler
Vice President
Management Information Systems
Group Leader
Edward F. Cagle
Senior Vice President
Corporate Communications Group Leader
Pamela D. Collins
Deposit Sales Group Leader
Dunes
Susan J. Cooke
Vice President
Corporate Support Group Leader
Patty A. Coveno
Deposit Sales Group Leader
Conway
Robert D. Douglas
Senior Vice President
Human Resources Group Leader
James T. Faulk
Assistant Vice President
Collections Group Leader
Rita E. Fecteau
Vice President
Controller
<PAGE>
Trina S. Ferguson
Assistant Vice President
Residential Loan Administration
Group Leader
J. Daniel Fogle
Vice President
Regional Sales Group Leader
Conway Region
Mary L. Geist
Vice President
Computer Services Group Leader
Michael C. Gerald
President and Chief Executive Officer
Belinda B. Gillespie
Assistant Vice President
Office Sales Group Leader
Florence
Jimmy R. Graham
Executive Vice President
Information Systems Group Leader
Allen W. Griffin
Executive Vice President
Sales Servicing Group Leader
Don C. Hamilton
Assistant Vice President
Loan Sales Group Leader
Lisa B. James
Assistant Vice President
Deposit Servicing Group Leader
Ruth S. Kearns
Senior Vice President
Marketing Group Leader
Cecil H. Kennedy
Corporate Services Group Leader
Libby H. Kronenwetter
Assistant Vice President
Business Development Officer
North Strand Region
Debra M. Lambe
Newcomer Sales Officer
Scott W. Lander
Vice President
Regional Sales Group Leader
North Carolina
<PAGE>
Regina H. Lewis
Assistant Vice President
Community Relations Officer
Edward L. Loehr
Vice President
Budgeting and Treasury
Sherry A. Maloni
Assistant Vice President
Office Sales Group Leader
Waccamaw Medical Park
Margie A. Marlowe
Customer Delight Group Leader
William H. McCormick
Office Sales Group Leader
Socastee
Lauren E. Miller
Staff Development Coordinator
Erin P. Mitchell
Assistant Vice President
Commercial Sales Officer
David C. Murray
Office Sales Group Leader
Oak Street
Jerry L. Rexroad, CPA
Executive Vice President
Chief Financial Officer
Doug E. Shaffer
Vice President
Regional Sales Group Leader
North Strand Region
Cathe P. Singleton
Office Sales Group Leader
Murrells Inlet
J. Marcus Smith, Jr.
Vice President
Account Servicing Group Leader
Phillip G. Stalvey
Executive Vice President
Sales Group Leader
H. Delan Stevens
Loan Sales Group Leader
Conway
Donna P. Todd
Sales Support Officer
<PAGE>
Jeff A. Usher
Assistant Vice President
Loan Sales Group Leader
Surfside
Jerry A. Vereen
Vice President
Regional Sales Group Leader
Corporate Region
Cindy L. Walsh
Loan Servicing Group Leader
Douglas W. Walters
Loan Sales Group Leader
North Myrtle Beach
David E. Williams
Office Sales Group Leader
Dunes
<PAGE>
COASTAL FEDERAL SAVINGS BANK OFFICES
(803) 692-BANK
Oak Street Branch*
2619 North Oak Street
Myrtle Beach, SC 29577-3129
(803) 448-5151
Conway Branch*
310 Highway 378
Conway, SC 29526
(803) 444-0225
Dunes Branch*
7500 North Kings Highway
Myrtle Beach, SC 29572
(803) 444-0241
Florence Branch*
1385 Alice Drive
Florence, SC 29505
(803) 444-1299
Murrells Inlet Branch*
Highway 17 South & Inlet Crossing
Murrells Inlet, SC 29576
(803) 444-0200
North Myrtle Beach Branch*
521 Main Street
North Myrtle Beach, SC 29582
(803) 444-0265
Socastee Branch*
4801 Socastee Boulevard
Myrtle Beach, SC 29575
(803) 444-0281
Surfside Branch*
112 Highway 17 South &
Glenns Bay Road
Surfside Beach, SC 29575
(803) 444-0250
Waccamaw Medical Park Branch*
112 Waccamaw Medical Park Drive
Conway, SC 29526
(803) 444-0216
North Carolina Consumer Loan Office
7290 Beach Drive, South West
Sunset Beach, NC 28468
P.O. Box 6188
South Brunswick, NC 28470
(910) 579-8160
* COASTAL BANKER EXPRESS
24-Hour Drive-Up Automatic Teller
Machine Locations
<PAGE>
COASTAL INVESTMENTS CORPORATION
(803) 626-0491
Genie R. Blanton
Chief Compliance Officer
Conway Investment Center
(803) 444-0229
Victoria J. Damore
Registered Assistant
Myrtle Beach Investment Center
(803) 626-0491
Shirley A. English, CFP
Investment Services Representative
North Strand Investment Center
(803) 444-0269
Christopher A. Fulmer
Investment Service Representatives
South Strand Investment Center
(803) 444-0203
Shelby S. Hardee
Investment Services Representative
West Region Investment Center
(803) 444-0229
John Michael Hill
Investment Services Representative
Myrtle Beach Investment Center
(803) 626-0491
J. Pinckney Kellett, IV
President and Chief Executive Officer
Myrtle Beach Investment Center
(803) 626-0491
Jerry L. Rexroad, CPA
Chief Financial Officer
Myrtle Beach Investment Center
(803) 448-5151
<PAGE>
COASTAL FEDERAL MORTGAGE
(803) 662-2273
Richard L. Granger
President and
Chief Executive Officer
Edward F. Hurley
Vice President
Robert S. O'Harra
Executive Vice President and
Chief Operating Officer
Jerry L. Rexroad, CPA
Chief Financial Officer
Nancy L. Watts
Assistant Vice President
COASTAL TECHNOLOGY SOLUTIONS
(803) 626-0460
Glenn T. Butler
Senior Vice President
Jimmy R. Graham
President and Chief Executive
Officer
Jerry L. Rexroad, CPA
Chief Financial Officer
<PAGE>
CORPORATE INFORMATION
Common Stock and Dividend Information The common stock of Coastal Financial
Corporation is quoted through the NASDAQ Stock Market under the symbol CFCP. For
information contact J.C. Bradford at 1-800-829-4522, Trident Financial
Corporation at 1-800-222-2618, Robinson-Humphrey at 1-800-241-0077, Herzog,
Heine, Geduld, Inc. at 1-800-523-4936, Raymond James & Associates, Inc. at
1-800-441-4103 or Wheat First Butcher & Singer Securities at 1-800-678-3232. As
of November 30, 1996 the Corporation had 766 Shareholders and 3,447,187 shares
of common stock outstanding. This does not reflect the number of persons or
entities who hold stock in nominee or "street name." The prices have been
adjusted to reflect the stock dividends discussed below.
Market Price of Common Stock
The table below reflects the high and low bid stock prices published by
NASDAQ for each quarter.
<TABLE>
<CAPTION>
High Low
Fiscal Year 1995: Bid Bid
------ ------
<S> <C> <C>
First Quarter........................ $13.40 $11.58
Second Quarter....................... 12.19 11.58
Third Quarter........................ 12.48 10.97
Fourth Quarter....................... 13.12 11.84
Fiscal Year 1996:
First Quarter........................ 13.44 12.16
Second Quarter....................... 16.60 12.48
Third Quarter........................ 17.80 15.20
Fourth Quarter....................... 21.00 17.60
</TABLE>
Form 10-K
A copy of Coastal Financial Corporation's Annual Report on Form 10-K, as
filed with the Securities Exchange Commission for the year ended September 30,
1996, may be obtained without a charge by writing to the Shareholder Relations
Officer at the Corporate Address.
Annual Meeting of Shareholders
The Annual Meeting of Shareholders of Coastal Financial Corporation will be
held at the Myrtle Beach Martinique, 7100 North Ocean Boulevard, Myrtle Beach,
South Carolina, on Monday, January 27, 1997 at 2:00 p.m., Eastern Standard Time.
<PAGE>
Additional Information
If you are receiving duplicate mailing of Shareholder reports due to
multiple accounts, we can consolidate the mailings without affecting your
account registration. To do this, or for additional information, contact the
Shareholder Relations Office, at the Corporate address shown below.
Corporate Offices
Coastal Financial Corporation
2619 Oak Street
Myrtle Beach, South Carolina 29577
803-692-BANK
Transfer Agent and Registrar
Registrar and Transfer Company
P.O. Box 1010
Cranford, NJ 07016
(800) 866-1340
Independent Certified Public Accountants
KPMG Peat Marwick LLP
P.O. Box 10529
Greenville, South Carolina 29603
General Counsel
James H. Dusenbury
Dusenbury, Hendrix & Little
602 27th Avenue
Myrtle Beach, South Carolina 29577
Special Counsel
Breyer & Aggugia
1300 I Street, N.W.
Suite 470 East
Washington, DC 20005
Shareholder Relations Officer
Susan J. Cooke
Coastal Financial Corporation
2619 Oak Street
Myrtle Beach, South Carolina 29577
803-692-BANK
Coastal Financial Corporation is an equal opportunity employer and pledges
equal opportunities without regard to religion, citizenship, race, color, creed,
sex, age, national origin, disability or status as a disabled or Vietnam-Era
veteran.
<PAGE>
COASTAL FINANCIAL CORPORATION
Corporate Office
2619 Oak Street
Myrtle Beach, SC 29577-3129
(803) 448-5151
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Parent
Coastal Financial Corporation
State of
Subsidiary Percentage Owned Incorporation
- ---------- ---------------- -------------
Coastal Federal Savings Bank 100% United States
Coastal Federal Mortgage, Inc. 100% South Carolina
Coastal Investments Corporation 100% South Carolina
Coastal Technology Solutions 100% South Carolina
Coastal Mortgage Bankers and
Realty Co., Inc. (1) 100% South Carolina
Shady Forest Development
Corporation (2) 100% South Carolina
Sherwood Development
Corporation (2) 100% South Carolina
Ridge Development
Corporation (2) 100% South Carolina
501 Development
Corporation (2) 100% South Carolina
North Beach Investment,
Inc. (2) 100% South Carolina
- -----------------------
(1) First tier subsidiaries of Coastal Federal.
(2) Second tier subsidiaries of Coastal Federal and first tier subsidiaries of
Coastal Mortgage.
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
<PAGE>
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Coastal Financial Corporation
We consent to incorporation by reference in the registration statements on Forms
S-8 the 1990 Stock Option and Incentive Plan as amended, and the Coastal
Financial Corporation's Directors Performance Plan of Coastal Financial
Corporation of our report dated October 18, 1996, relating to the consolidated
statements of financial condition of Coastal Financial Corporation and
subsidiaries as of September 30, 1996 and 1995, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
years in the three-year period ended September 30, 1996, which report appears in
the September 30, 1996, annual report on Form 10-K of Coastal Financial
Corporation and subsidiaries. Our report dated October 18, 1996, refers to the
fact that the Company adopted the provisions of the Financial Accounting
Standards Board's Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" on October 1,
1994 and the provisions of SFAS No. 109, "Accounting for Income Taxes" on
October 1, 1993.
Greenville, South Carolina
December 27, 1996
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> SEP-30-1996
<CASH> 15,639
<INT-BEARING-DEPOSITS> 5,222
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 44,170
<INVESTMENTS-CARRYING> 330
<INVESTMENTS-MARKET> 0
<LOANS> 377,171
<ALLOWANCE> 4,172
<TOTAL-ASSETS> 459,712
<DEPOSITS> 313,430
<SHORT-TERM> 61,659
<LIABILITIES-OTHER> 5,358
<LONG-TERM> 50,149
0
0
<COMMON> 34
<OTHER-SE> 27,647
<TOTAL-LIABILITIES-AND-EQUITY> 459,712
<INTEREST-LOAN> 31,698
<INTEREST-INVEST> 2,526
<INTEREST-OTHER> 496
<INTEREST-TOTAL> 34,720
<INTEREST-DEPOSIT> 11,689
<INTEREST-EXPENSE> 19,091
<INTEREST-INCOME-NET> 15,629
<LOAN-LOSSES> (990)
<SECURITIES-GAINS> (6)
<EXPENSE-OTHER> 13,586
<INCOME-PRETAX> 5,885
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,721
<EPS-PRIMARY> 1.04
<EPS-DILUTED> 0
<YIELD-ACTUAL> 8.46
<LOANS-NON> 0
<LOANS-PAST> 445
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 4,149
<CHARGE-OFFS> 278
<RECOVERIES> 82
<ALLOWANCE-CLOSE> 23
<ALLOWANCE-DOMESTIC> 4,172
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
