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, 1998
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: (843) 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 December 22, 1998, there were issued and outstanding 6,270,348
shares of the registrant's Common Stock.
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 December 22, 1998, was
$122,271,786(6,270,348 shares at $19.50 per share, which is the ending bid on
December 22, 1998.). It is assumed for purposes of this calculation that none of
the registrant's officers, directors and 5% stockholders are affiliates.
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Annual Report to Stockholders for the Fiscal Year
Ended September 30, 1998 (Parts I and II)
2. Portions of the Proxy Statement for the 1999 Annual Meeting of
Stockholders. (Part III)
<PAGE>
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 financial results contained herein
relate primarily to the Corporation's principal 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 new
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 1998 was limited for CTS.
On February 20, 1998, Coastal Real Estate Investment Corporation
("CREIC") was incorporated in North Carolina. CREIC is a wholly owned operating
subsidiary of Coastal Federal and is a real estate investment trust ("REIT").
All of CREIC's operating activities are consolidated into Coastal Federal. CREIC
engages in the investment and management of real estate related assets,
primarily mortgage loans. On September 1, 1998, CREIC was capitalized with
approximately $131.8 million of mortgage loans from Coastal Federal.
<PAGE>
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.
Coastal Federal conducts its business from its main office in Myrtle
Beach, South Carolina, eight branch offices located in South Carolina and one
branch office located in Sunset Beach, North Carolina. At September 30, 1998,
Coastal Financial had total assets of $643.6 million, total deposits of $386.3
million and stockholders' equity of $37.9 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 (843) 448-5151.
Eight of Coastal Federal's ten 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, commercial business loans and
commercial real estate loans. Commercial real estate loans as a percentage of
total loans have increased from 13.9% of total loans at September 30, 1995 to
21.6% of total loans at September 30, 1998.
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,
1998, 3.4% and 10.3%, respectively, of the Bank's total loan portfolio consisted
of commercial business and consumer loans.
<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); (iii) changes in rate-volume (change in rate
multiplied by change in volume); and (iv) the net change (the sum of the prior
columns). Non-accrual loans are included in the average volume calculations.
<TABLE>
<CAPTION>
Year Ended September 30,
----------------------------------------------------------------------------------------
1996 Compared to 1995 1997 Compared to 1996
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 ........................ $ 615 $ 2,361 $ 51 $3,027 $ 502 $ 1,545 $ 24 $ 2,071
Mortgage-backed
securities................... (4) 1,083 (6) 1,073 (123) 820 (56) 641
Investments and
other........................ 177 96 19 292 (70) 747 (44) 633
----- ------- ---- ------ ----- ------- ---- -------
Total net change in
income on interest-
earning assets................ 788 3,540 64 4,392 309 3,112 (76) 3,345
----- ------- ---- ------ ----- ------- ---- -------
Interest-Bearing
Liabilities:
Deposits...................... 300 1,455 44 1,799 200 1,742 19 1,961
FHLB advances................. (289) 51 (2) (240) (361) (1,425) 73 (1,713)
Repurchase
agreements................... 16 194 50 260 50 576 181 807
----- ------- ---- ------ ----- ------- ---- -------
Total net change in
expense on interest-
bearing liabilities........... 27 1,700 92 1,819 (111) 893 273 1,055
----- ------- ---- ------ ----- ------- ---- -------
Net change in net
interest income............... $ 761 $1,840 $ (28) $2,573 $ 420 $2,219 $ (349) $2,290
===== ====== ===== ====== ======= ====== ====== ======
<PAGE>
<CAPTION>
Year Ended September 30,
-----------------------------------------------
1998 Compared to 1997
Increase (Decrease)
Due to
-----------------------------------------------
Rate/
Rate Volume Volume Net
---- ------ ------ ----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Interest-Earning Assets:
Loans ........................ $195 $2,240 $13 $2,448
Mortgage-backed
securities................... (482) 4,992 (985) 3,525
Investments and
other........................ 46 (281) (7) (242)
---- ------ --- ------
Total net change in
income on interest-
earning assets................ (241) 6,951 (979) 5,731
---- ------ --- ------
Interest-Bearing
Liabilities:
Deposits...................... (165) 1,089 (13) 911
FHLB advances................. (298) 1,501 (83) 1,120
Repurchase
agreements................... (47) 2,422 (100) 2,275
---- ------ --- ------
Total net change in
expense on interest-
bearing liabilities........... (510) 5,012 (196) 4,306
---- ------ --- ------
Net change in net
interest income............... $269 $1,939 $(783) $1,425
==== ====== ===== ======
</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,
-------------------------------------------------------------------------------
1996 1997
----------------------------------- -----------------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
------- -------- ------ ------- -------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Loans................................ $369,733 $ 31,698 8.57% $389,196 $33,769 8.70%
Investments(1)....................... 16,730 1,217 7.27 27,007 1,850 6.85
Mortgage-backed
securities.......................... 23,214 1,805 7.78 33,738 2,446 7.25
------ ----- ---- ------ ----- ----
Total interest-earning
assets............................... $409,677 $34,720 8.46% $449,941 $38,065 8.46%
======== ======= ===== ======= ====== =====
LIABILITIES
Transaction accounts................. 114,220 2,862 2.51 153,796 4,894 3.18
Passbook accounts.................... 44,631 1,160 2.60 41,143 1,015 2.47
Certificate accounts................. 134,415 7,667 5.70 135,335 7,741 5.72
FHLB advances........................ 112,878 7,079 6.27 90,154 5,366 5.95
Securities sold
under repurchase
agreements.......................... 6,955 323 4.63 19,387 1,130 5.82
----- --- ---- ------ ----- ----
Total interest-bearing
liabilities.......................... $413,099 $19,091 4.70% $439,815 $20,146 4.57%
======== ======= ===== ======= ====== =====
Net interest income/
interest rate spread................. $15,629 3.76% $17,919 3.89%
Net yield on earning
assets............................... 3.86% 4.03%
Ratio of earning assets
to interest-bearing
liabilities.......................... 1.02x 1.03x
<PAGE>
<CAPTION>
Year Ended September 30,
--------------------------------------
1998
------------------------------------
Average Yield/
Balance Interest Rate
------- -------- -----
(Dollars in thousands)
<S> <C> <C> <C>
ASSETS
Loans................................ $414,938 $36,314 8.75%
Investments(1)....................... 22,912 1,608 7.02
Mortgage-backed
securities.......................... 102,597 5,972 5.82
------- ----- ----
Total interest-earning
assets............................... $540,447 $43,894 8.11%
======= ====== ====
LIABILITIES
Transaction accounts................. 179,398 5,756 3.21
Passbook accounts.................... 36,102 924 2.56
Certificate accounts................. 144,569 7,879 5.45
FHLB advances........................ 115,389 6,488 5.62
Securities sold
under repurchase
agreements.......................... 60,998 3,404 5.58
------ ----- ----
Total interest-bearing
liabilities.......................... $536,456 $24,451 4.60%
======= ======= ====
Net interest income/
interest rate spread................. $19,443 3.51%
Net yield on earning
assets............................... 3.64%
Ratio of earning assets
to interest-bearing
liabilities.......................... 1.03x
</TABLE>
- -------------------------
(1) Includes short-term interest-bearing deposits and Federal funds sold.
<PAGE>
Lending Activities
General. The principal lending activities of Coastal Federal are the
origination of residential one-to-four family mortgage loans, consumer loans,
commercial business loans and commercial real estate loans. The Bank originates
construction and permanent loans on single family and multi-unit dwellings, as
well as on commercial structures. The Bank emphasizes the origination of
adjustable rate residential and commercial real estate mortgages.
The Bank's loan portfolio totaled approximately $424.8 million at
September 30, 1998, representing approximately 66.0% of its total assets. On
that date, approximately 65.9% of Coastal Federal's total loan portfolio was
secured by mortgages on one-to-four family residential properties.
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) 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, 1998, adjustable rate
loans constituted approximately $329.0 million (or 77.5%) of the Bank's total
loan portfolio. Therefore, at such date, fixed rate loans comprised only 22.5%
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 table set forth the composition of the Corporation's loan
portfolio by type of loan as of the dates indicated.
<TABLE>
<CAPTION>
At September 30,
-----------------------------------------------------
1994 1995
----------------------- -----------------------
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Mortgage loans:
Construction.............................................. $ 23,222 6.67% $27,905 7.34%
On existing property...................................... 225,544 64.82 228,881 60.23
Income property (commercial).............................. 42,207 12.13 54,401 14.31
Commercial business loans.................................. 14,052 4.04 19,610 5.16
Consumer loans:
Mobile home.............................................. 1,497 .43 1,204 .32
Automobiles.............................................. 6,300 1.81 5,941 1.56
Equity lines of credit................................... 12,763 3.67 13,210 3.48
Other.................................................... 22,373 6.43 28,887 7.60
------ ---- ------ ----
Total loans and loans held for sale....................... $347,958 100.00% $380,039 100.00%
====== ======
Less:
Loans in process......................................... (13,087) (17,178)
Deferred loan(fees)costs................................. (343) (71)
Allowance for loan losses............................... (3,353) (3,578)
------ -------
Total loans net........................................... $331,175 $359,212
======== ========
<PAGE>
<CAPTION>
At September 30,
-------------------------------------------------------
1996 1997
---------------------- ----------------------
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Mortgage loans:
Construction.............................................. $34,566 8.65% $ 34,216 7.93%
On existing property...................................... 231,373 57.89 240,268 55.69
Income property (commercial).............................. 73,295 18.34 97,680 22.64
Commercial business loans.................................. 14,831 3.71 10,939 2.54
Consumer loans:
Mobile home.............................................. 1,103 .28 1,291 .30
Automobiles.............................................. 7,261 1.82 6,055 1.40
Equity lines of credit................................... 12,441 3.11 15,294 3.54
Other.................................................... 24,776 6.20 25,714 5.96
------ ---- ------ ----
Total loans and loans held for sale....................... $399,646 100.00% $431,457 100.00%
====== ======
Less:
Loans in process......................................... (18,589) (15,084)
Deferred loan(fees)costs................................. 286 458
Allowance for loan losses............................... (4,172) (4,902)
------- -------
Total loans net........................................... $377,171 $411,929
======== ========
<PAGE>
<CAPTION>
---------------------------
1998
---------------------------
Amount Percent
------ -------
<S> <C> <C>
Mortgage loans:
Construction.............................................. $ 31,261 7.09%
On existing property...................................... 254,161 57.63
Income property (commercial).............................. 95,420 21.63
Commercial business loans.................................. 14,848 3.37
Consumer loans:
Mobile home.............................................. 990 .22
Automobiles.............................................. 5,106 1.16
Equity lines of credit................................... 18,655 4.23
Other.................................................... 20,567 4.67
------ ----
Total loans and loans held for sale....................... $441,008 100.00%
======
Less:
Loans in process......................................... (11,292)
Deferred loan(fees)costs................................. 702
Allowance for loan losses............................... (5,668)
--------
Total loans net........................................... $424,750
========
</TABLE>
<PAGE>
Single Family Residential Loans. The Bank actively originates
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 single family residential mortgage loans.
The Bank offers adjustable rate mortgage loans ("ARMs"), the interest
rates of which generally adjust based upon either the 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. Based upon market
conditions, the Bank may originate ARMs at below the fully phased-in interest
rate but generally qualifies borrowers at 2% above the initial rate when the
loan to value ratio exceeds 80%. Monthly payments could increase significantly
at the first repricing period. Although Coastal Federal's ARMs are 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. Whereas a significant decrease in rates
or a flat yield curve could cause repayments to increase significantly.
Coastal Federal also offers 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. A large majority of the conforming
fixed rate loans are generally sold to correspondent banks servicing released.
Loans sold to correspondents amounted to $38.4 and $64.8 million, respectively,
in fiscal 1997 and 1998. Coastal Federal sold approximately $5.8 and $6.9
million, respectively, of mortgages in 1997 and 1998 to FHLMC.
At September 30, 1998, approximately $279.7 million or 65.9% of the
Bank's loan portfolio 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 to twelve 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 upon completion of
construction. 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.
The interest rate on commercial real estate construction 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 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, 1998, approximately $31.3 million or 7.1% of the
Bank's gross loan portfolio consisted of construction loans on both residential
($20.3 million) and commercial properties ($11.0 million). Undisbursed proceeds
on these loans amounted to $11.3 million at September 30, 1998.
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, 1998, this limited
Coastal Federal's aggregate non-residential real estate loans to approximately
$178.6 million. At such time, the Bank had non-residential real estate loans
outstanding of $95.4 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, three or five years and is indexed to U.S.
Treasury securities. Such loans generally have a fifteen to twenty year term,
with the payments based up to a similar amortization schedule. The Bank may
require the loan to include a call option at the Bank's option in five to ten
years. 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.
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. Additionally, the Bank has,
on a limited basis, originated or purchased commercial real estate loans secured
by properties located in other parts of the Southeast.
Consumer Loans. The Bank is permitted by OTS regulations to invest up
to 35% of its 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 $45.3 million, or 10.3% of the total
loan portfolio, at September 30, 1998.
Coastal Federal has marketed consumer loans in order to provide a wider
range of financial services to its customers. These loans also have a 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 which may 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, 1998, the Bank had $14.8 million outstanding in
commercial business loans, which represented approximately 3.4% of its loan
portfolio.
Commercial business lending is inherently riskier than residential
mortgage lending and involves risks that are different from those associated
with residential and commercial real estate lending. Real estate lending is
generally considered to be collateral based lending with loan amounts based on
predetermined loan to collateral values and liquidation of the underlying real
estate collateral is viewed as the primary source of repayment in the event of
borrower default. Although commercial business loans are often collateralized by
equipment, inventory, accounts receivable or other business assets, the
liquidation of collateral in the event of a borrower default is often not a
sufficient source of repayment because accounts receivable may be uncollectible
and inventories and equipment may be obsolete or of limited use, among other
things. Accordingly, the repayment of a commercial business loan depends
primarily on the creditworthiness of the borrower (and any guarantors), while
liquidation of collateral is a secondary and potentially insufficient source of
repayment.
<PAGE>
Loan Maturity
The following table sets forth certain information at September 30,
1998 regarding the dollar amount of loans 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 (without a stated
maturity), 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
One Year Three Years Five Years
One Year Through Through Through
or Less Three Years Five Years Ten Years
-------- ----------- ---------- ---------
(In thousands)
<S> <C> <C> <C> <C>
First mortgage loans........................ $21,841 $ 7,040 $4,011 $14,742
Other residential and.......................
non-residential ........................... 20,074 8,249 2,438 9,635
Equity lines of credit...................... 18,655 -- -- --
Consumer loans.............................. 8,613 7,876 7,130 942
Commercial loans............................ 6,991 4,301 1,141 677
------- ------- ------- -------
Total loans............................ $76,174 $27,466 $14,720 $25,996
======= ======= ======= =======
<CAPTION>
More than
Ten Years
Through Over
Twenty Years Twenty Years Totals
------------ ------------ ------
(In thousands)
<S> <C> <C> <C>
First mortgage loans........................ $60,567 $161,463 $269,664
Other residential and.......................
non-residential ........................... 53,307 2,117 95,820
Equity lines of credit...................... -- -- 18,655
Consumer loans.............................. 1,202 -- 25,763
Commercial loans............................ 1,445 293 14,848
-------- -------- --------
Total loans............................ $116,521 $163,873 $424,750
======== ======== ========
</TABLE>
<PAGE>
The following table sets forth the dollar amount of all loans due after
one year at September 30, 1998 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......................... $46,190 $228,068 $274,258
Other residential and
non-residential............................. 10,097 50,649 60,746
Consumer loans............................... 9,795 365 10,160
Commercial loans............................. 5,042 2,815 7,857
------- -------- --------
Total loans............................. $71,124 $281,897 $353,021
======= ======== ========
</TABLE>
<PAGE>
Interest Rate Sensitivity Analysis
The following table illustrates the repricing analysis of the Company's
interest-earning assets and interest-bearing liabilities as of September 30,
1998. For purposes of the table, repricing characteristics of loans include
estimated annual prepayment rates.
<TABLE>
<CAPTION>
Zero to Four Months One Year to
Three Months to One Year Five Years
------------ ----------- ----------
(In thousands)
<S> <C> <C> <C>
Rate Sensitive Assets(1):
Mortgage loans and
mortgage-backed securities.......................... $44,616 $305,428 $191,205
Non-mortgage loans................................... 7,645 2,676 8,384
Interest-bearing deposits and
investment securities............................... 9,650 126 3,753
------- -------- --------
Total............................................ $61,911 $308,230 $203,342
======= ======== ========
Rate Sensitive Liabilities:
Core deposits(2)..................................... $48,831 $83,668 $65,014
Time deposits........................................ 69,270 57,936 27,947
Borrowings........................................... 84,061 94 125,575
-------- -------- --------
Total............................................ $202,162 $141,698 $218,536
======== ======== ========
Off-Balance Sheet Positions:
Commitments to originate
mortgage loans...................................... $6,574 $(812) $(6,540)
Interest rate sensitivity gap......................... $(145,946) $176,069 ($18,995)
Cumulative interest
sensitivity gap...................................... $(145,946) $30,123 $11,128
Cumulative interest sensitivity
gap as a percent of total assets (22.84%) 4.71% 1.74%
<PAGE>
<CAPTION>
Greater than
Five Years Total
---------- -----
(In thousands)
<S> <C> <C>
Rate Sensitive Assets(1):
Mortgage loans and
mortgage-backed securities.......................... $34,977 $576,226
Non-mortgage loans................................... -- 18,705
Interest-bearing deposits and
investment securities............................... -- 13,529
------- --------
Total............................................ $34,977 $608,460
======= ========
Rate Sensitive Liabilities:
Core deposits(2)..................................... $33,655 $231,168
Time deposits........................................ -- 155,153
Borrowings........................................... 830 210,560
------- --------
Total............................................ $34,485 $596,881
======= ========
Off-Balance Sheet Positions:
Commitments to originate
mortgage loans...................................... $737 (41)
Interest rate sensitivity gap......................... $1,838 $12,966
Cumulative interest
sensitivity gap...................................... $12,966 --
Cumulative interest sensitivity
gap as a percent of total assets 2.03% --
</TABLE>
(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>
<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 - 36 months........................... 33.87 11.00 25.82 33.87
37 - 60 months........................... 9.06 5.24 16.83 9.06
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. Further, this report does not
include assets owned by the Company not included in the Bank. The data presented
below is as of September 30, 1998. This information is an estimate and may not
be indicative of actual market values or the actual changes in market values
should rates change significantly at a future date.
<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........... $616,973 $608,750 $601,400 $594,893 $588,542 $580,947 $571,005
Non-mortgage loans.... 19,863 19,664 19,471 19,281 19,097 18,919 18,744
Cash, deposits and
securities........... 27,367 27,329 27,298 27,272 27,245 27,220 27,193
Repossessed assets.... 43 43 43 43 43 43 43
Premises and equipment 8,848 8,848 8,848 8,848 8,848 8,848 8,848
Other assets.......... 9,393 10,591 11,821 13,733 16,324 20,068 24,328
----- ------ ------ ------ ------ ------ ------
TOTAL................. 682,487 675,225 668,881 664,070 660,099 656,045 650,161
======= ======= ======= ======= ======= ======= =======
LIABILITIES
Deposits.............. $392,861 $391,857 $390,872 $389,908 $388,954 $388,021 $387,102
Borrowings............ 220,623 216,796 213,109 209,554 206,127 202,820 199,629
Other liabilities..... 6,466 6,466 6,466 6,466 6,466 6,466 6,466
------- ------- ------- ------- ------- ------- -------
TOTAL................. 619,950 615,119 610,446 605,928 601,547 597,307 593,197
======= ======= ======= ======= ======= ======= =======
OFF BALANCE SHEET
POSITIONS............ $ 3,267 $2,459 $1,706 $ 1,001 $429 $89 $(166)
MARKET VALUE OF
PORTFOLIO EQUITY..... $65,804 $62,565 $60,141 $59,143 $58,981 $58,827 $56,798
<PAGE>
<CAPTION>
+300 +400
Basis Basis
Points Points
------ ------
(In thousands)
<S> <C> <C>
ASSETS
Mortgage loans and
securities........... $559,059 $545,869
Non-mortgage loans.... 18,575 18,409
Cash, deposits and
securities........... 27,163 27,125
Repossessed assets.... 43 43
Premises and equipment 8,848 8,848
Other assets.......... 28,351 32,149
------ ------
TOTAL................. 642,039 632,443
======= =======
LIABILITIES
Deposits.............. $386,195 $385,308
Borrowings............ 196,548 193,572
Other liabilities..... 6,466 6,466
------- -------
TOTAL................. 589,209 585,347
======= =======
OFF BALANCE SHEET
POSITIONS............ $(374) $(570)
MARKET VALUE OF
PORTFOLIO EQUITY..... $52,456 $46,526
</TABLE>
<PAGE>
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 loan applications over
$500,000 require the approval of the Bank's Internal Loan Committee, Director
Gerald and Executive Vice Presidents Rexroad and Stalvey. All loan applications
greater than $1,000,000 require the approval of the Bank's Loan Committee which
consists of Directors Clemmons, Gerald, Smart, Springs and Executive Vice
Presidents Rexroad and Stalvey. All first mortgage loan applications in excess
of 97% of the appraised value of the property, unless the borrowers have private
mortgage insurance, must be approved by the Banks' Loan Committee.
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 qualified to
service loans 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, 1998, the Bank was servicing loans
sold to others with a principal balance of approximately $88.0 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,
1998 were conforming conventional loans originated and sold by Coastal Federal
Mortgage. These loans were sold on a servicing released basis. At September 30,
1998, the Bank's consolidated loan portfolio included purchased loans of
approximately $23.0 million, which have been primarily secured by single family
residences and which have been written as adjustable rate mortgage loan
instruments. These loans are generally secured by properties located in the
Southeast and were purchased according to the Bank's non-conforming mortgage
loan underwriting standards.
<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,
-----------------------------------
1996 1997 1998
--------- --------- ---------
(In thousands)
<S> <C> <C> <C>
Loans receivable net, at the beginning of the
period ..................................... $ 359,212 $ 377,171 411,929
--------- --------- ---------
Loans originated:
Construction ............................... 38,172 45,986 62,805
Residential ................................ 60,683 59,289 70,588
Nonresidential ............................. 11,897 13,794 23,622
Land ....................................... 8,355 10,308 20,025
Commercial business ........................ 23,062 33,730 16,076
Consumer ................................... 18,201 15,396 12,136
--------- --------- ---------
Total loans originated ................. 160,370 178,503 205,252
--------- --------- ---------
Loans purchased, primarily single
family residential mortgages ................ 12,448 9,948 10,442
--------- --------- ---------
Loans sold .................................. (40,672) (44,160) (71,674)
--------- --------- ---------
Loan principal repayments and other ......... (112,926) (109,946) (130,286)
--------- --------- ---------
Other ....................................... (1,261) 413 (913)
--------- --------- ---------
Loans receivable net, at end of period ...... $ 377,171 $ 411,929 $ 424,750
========= ========= =========
</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, 1998, the Company had loan commitments of approximately $11.5
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.
<TABLE>
<CAPTION>
At September 30,
-------------------------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Loans accounted for on a nonaccrual basis:
Real estate -
Residential............................ $ 79 $ 999 $ 307 $ 71 $ 222
Commercial............................... 1,056 134 -- -- --
Commercial business...................... -- 154 60 99 1,962
Consumer................................. 16 36 78 87 73
------ ------ ---- ---- ------
Total................................... 1,151 1,323 445 257 2,257
------ ------ ---- ---- ------
Accruing loans which are contractually
past due 90 days or more:
Real estate -
Residential.............................. -- -- -- -- --
Commercial............................... -- -- -- -- --
Commercial business....................... -- -- -- -- --
Consumer.................................. -- -- -- -- --
------ ------ ---- ---- ------
Total................................... -- -- -- -- --
------ ------ ---- ---- ------
Restructured loans......................... -- -- -- -- --
Real estate owned........................... 781 789 323 250 35
Other nonperforming
assets..................................... -- -- -- -- --
------ ------ ---- ---- ------
Total nonperforming
assets..................................... $1,932 $2,112 $768 $507 $2,292
====== ====== ==== ==== ======
Total nonaccrual loans to net
loans...................................... .03% .36% .12% .06% .54%
Total nonaccrual loans to total
assets..................................... .03% .33% .10% .05% .35%
Total nonperforming assets
to total assets............................ .56% .53% .17% .10% .36%
</TABLE>
- ------------
For the year ended September 30, 1998, interest income which would have
been recorded would have been approximately $181,000, had non-accruing
loans been current in accordance with their original terms. There were
no impaired loans at September 30, 1997. There was one impaired loan at
September 30, 1998.
<PAGE>
The allowance for uncollectible interest which is netted against
accrued interest receivable totaled $36,000 and $202,000 at September 30, 1997
and 1998, respectively.
The OTS has adopted various changes in its regulations regarding
problem assets of savings institutions. 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 four classifications for problem assets: special
mention, 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 three individual classified assets in excess of
$500,000 as of September 30, 1998. At that date, classified assets amounted to
$8.6 million ($5.4 million substandard; $124,000 doubtful; and $3.1 million
special mention). Substandard assets consist primarily of two commercial real
estate loans with balances of approximately $3.7 million at September 30, 1998.
Special mention assets consist primarily of one commercial real estate loan with
a balance of approximately $1.6 million at September 30, 1998. The two
substandard loans are fully secured by real estate.
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.
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, 1996, 1997 and
1998 of $790,000, $760,000 and $865,000, respectively. As a result, the Bank has
a $5.7 million allowance for loan losses as of September 30, 1998. The allowance
as a percentage of loans receivable was 1.33% at September 30, 1998 compared to
1.19% at September 30, 1997. See "Management's Discussion and Analysis
- --Non-Performing Assets and --Allowance for Loan Losses" in the 1998 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, 1998, 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 the Company'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,
-----------------------------------------------------
1994 1995 1996 1997 1998
------- ------- ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Allowance at beginning of
period ............................. $ 2,753 $ 3,353 $ 3,578 $ 4,172 $ 4,902
Allowance recorded on
acquired loans ..................... -- -- -- 110 109
Provision for loan losses ........... 510 202 790 760 865
------- ------- ------- ------- -------
Recoveries:
Residential real estate ............ 3 232 -- 20 7
Commercial real estate ............. 148 11 75 14 1
Real estate construction ........... -- -- -- -- --
Consumer ........................... 79 12 7 38 56
------- ------- ------- ------- -------
Total recoveries ................. 230 255 82 72 64
------- ------- ------- ------- -------
Charge-offs:
Residential real estate ............ 38 206 24 46 28
Commercial real estate ............. 13 18 216 -- 17
Real estate construction ........... -- -- -- -- --
Consumer ........................... 89 8 38 166 227
------- ------- ------- ------- -------
Total charge-offs ................ 140 232 278 212 272
------- ------- ------- ------- -------
Net charge-offs (recoveries) ..... (90) (23) 196 140 208
------- ------- ------- ------- -------
Allowance at end of period ......... $ 3,353 $ 3,578 $ 4,172 $ 4,902 $ 5,668
======= ======= ======= ======= =======
Ratio of allowance to net
loans outstanding at the
end of the period .................. 1.01% 1.00% 1.11% 1.19% 1.33%
Ratio of net charge-offs (recoveries)
to average loans outstanding
during the period .................. (.03%) (.01%) .05% .04% .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,
-------------------------------------------------------------------
1994 1995
--------------------------------- ---------------------------------
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
------ -------- -------- ------ -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Real Estate -- mortgage
Residential................. $ 742 .30% 75.05% $ 803 .31% 72.03%
Commercial.................... 2,296 5.58 11.94 2,371 4.36 4.17
Consumer...................... 315 .71 13.01 404 .80 3.80
----- ------ ----- ------
Total allowance for
loan losses.................. $3,353 1.01% 100.00% $3,578 1.00% 100.00%
====== ====== ====== ======
<CAPTION>
September 30,
-----------------------------------------------------------------------------------------------------
1996 1997 1998
--------------------------------- --------------------------------- -------------------------------
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................ $ 837 .37% 65.35% $1,064 .41% 63.56% $1,375 .47 68.60
Commercial................. 2,875 3.80 22.34 3,261 2.78 28.52 3,685 3.30 26.32
Consumer................... 460 1.01 12.31 577 1.77 7.92 608 2.82 5.08
------ ----- ------ ------ ------ ------
Total allowance for
loan losses............... $4,172 1.11% 100.00% $4,902 1.19% 100.00% $5,668 1.33% 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.
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, Sherry and Stalvey and Vice President Loehr. The ALCO
Committee acts within policies established by the Board of Directors. At
September 30, 1998, the Bank's investment portfolio had a market value of
approximately $180.0 million. The investment securities portfolio consisted
primarily of U.S. Government agency securities and mortgage-backed securities.
For further information concerning the Bank's securities portfolio, see Notes 2
and 3 of the Notes to Consolidated Financial Statements attached hereto and
incorporated by reference.
<PAGE>
Securities Analysis
The following table sets forth Coastal Federal's investment securities
portfolio at amortized cost at the dates indicated.
<TABLE>
<CAPTION>
September 30,
----------------------------------------------------------------------------------------
1996 1997 1998
-------------------------- -------------------------- -----------------------
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 agency
securities:
FHLMC ............................ $ -- -- % $ 995 3.82% $ -- -- %
FHLB ............................. 17,334 98.13 17,738 67.89 8,840 90.64
FNMA ............................. -- -- -- -- -- --
FFCB ............................. -- -- 7,391 28.29 912 9.36
Municipal ........................ 330 1.87 -- -- -- --
------- ------ ------- ------ ------- ------
Total ........................... $17,664 100.00% $26,124 100.00% $ 9,752 100.00%
======= ====== ======= ====== ======= ======
</TABLE>
- -------------
(1) The market value of the Bank's investment securities portfolio amounted
to $17.5 million, $26.2 million and $9.8 million at September 30, 1996,
1997 and 1998, respectively.
<PAGE>
The following table sets forth the final maturities and weighted
average yields of the securities at amortized cost at September 30, 1998.
<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> <C>
U.S. Government agency
securities................................ $ -- --% $ -- --% $ -- --%
FHLMC................................... -- -- -- -- -- --
FHLB................................... -- -- 2,141 6.48 6,699 8.48
FNMA................................... -- -- -- -- -- --
FFCB................................... -- -- 912 7.07 -- --
Municipal............................... -- -- -- -- -- --
---- --- ------ ---- ------ ----
Total................................ $ -- --% $3,053 6.74% $6,699 8.48%
==== === ====== ==== ====== ====
</TABLE>
<PAGE>
The following table sets forth Coastal Federal's mortgage-backed
securities portfolio at amortized cost at the dates indicated.
<TABLE>
<CAPTION>
September 30,
1996 1997 1998
------------------------- ------------------------- -----------------------
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>
Mortgage-Backed Securities:
FHLMC ............................... $ 18,861 70.75% $ 14,048 62.79% $ 24,901 14.69%
FNMA ................................ 2,469 9.26 1,861 8.31 95,024 56.05
GNMA ................................ 5,330 19.99 6,471 28.90 49,586 29.26
-------- ------ -------- ------ -------- ------
Total .............................. $ 26,660 100.00% $ 22,380 100.00% $169,511 100.00%
======== ====== ======== ====== ======== ======
</TABLE>
- ------
(1) The market value of the Bank's mortgage-backed securities portfolio
amounted to $27.0 million, $23.0 million and $170.2 million at
September 30, 1996, 1997 and 1998, respectively.
The following table sets forth the maturities and weighted average
yields of the securities at September 30, 1998.
<TABLE>
<CAPTION>
Less Than One to Five to Ten Years
One Year Five Years Ten Years and Thereafter
--------------- ------------------ ---------------- -------------------
Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage-Backed Securities: ..............
FHLMC................................... $ -- --% $ -- --% $ -- --% $24,901 6.64%
FNMA.................................... -- -- -- -- -- -- 95,024 5.55
GNMA.................................... -- -- -- -- -- -- 49,586 6.85
---- --- ---- --- ---- --- -------- ----
Total..................................... $ -- --% $ -- --% $ -- --% $169,511 6.09%
==== === ===== === ==== === ======== ====
</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.
<TABLE>
<S> <C>
+------------------------+
| |
| COASTAL FEDERAL |
| |
| |
+------------------------+
| |
| ----------------------
| +-------------------+
| | COASTAL REAL |
| | ESTATE INVESTMENT |
+------------------------+ | CORPORATION |
| | +-------------------+
| COASTAL MORTGAGE |
| BANKERS* |
| |
+------------------------+
|
|
|
+------------------------------------------------+----------------------------------------+
| | | | |
+------------------+ +-----------------+ +---------------+ +----------------+ +-------------------+
| North Beach | | Shady Forest | | Sherwood | | Ridge | | 501 Development |
| Investments, Inc.| | Development | | Development | | Development | | Corporation |
| | | Corporation | | Corporation | | Corporation | | |
| | | | | | | | | |
+------------------+ +-----------------+ +---------------+ +----------------+ +-------------------+
</TABLE>
- --------------
* For a description of these subsidiaries, see "Real Estate Development
Activities."
(1) First tier operating subsidiary of Coastal Federal Savings Bank
consolidated with Coastal Federal Savings Bank for regulatory
reporting. On December 10, 1998 Coastal Federal exchanged its stock of
Coastal Real Estate Investment Corporation for 100% of the outstanding
stock of Coastal Federal Holding Corporation.
<PAGE>
Real Estate Development Activity
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 new 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 zero at September 30,
1998.
In prior years, the Bank made loans to purchasers of condominium 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, 1998 (net of
participation's sold to other financial institutions).
<TABLE>
<CAPTION>
Slow Loans(1)
Number of Total ---------------------
Project Borrowers Amount Number Amount
- ------- --------- ------ ------ ------
<S> <C> <C> <C> <C>
Beach Cove 78 $4,629,418 1 $87,546
Condominium
North Myrtle Beach,
South Carolina
Bluewater 100 $4,060,624 1 $54,118
Condominium
Myrtle Beach,
South Carolina
Cobblestone Villas 50 $1,773,774 -- $ --
Condominium
Myrtle Beach,
South Carolina
Carolina Pines 13 $ 347,465 -- $ --
Condominium
Conway, South Carolina
</TABLE>
- ----------------
(1) Loans over 60 days delinquent
<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.
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 checking accounts, money market accounts, regular
statement savings and passbook 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 at
least monthly.
<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,
------------------------------------------------------------------------------------------------
1996 1997 1998
---------------------------- -------------------------------- -------------------------------
Percent Percent Percent
of Increase of Increase of Increase
Amount Total (Decrease) Amount Total (Decrease) Amount Total (Decrease)
------ ----- ---------- ------ ----- ---------- ------ ----- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Transaction accounts:
NOW checking.................... $35,654 11.38% $5,802 $38,773 11.17% $3,119 42,434 10.99 3,661
Commercial checking............. 19,926 6.36 3,432 23,765 6.85 3,839 27,285 7.06 3,520
------ ------ ----- ------- ---- ----- ------ ----- -----
Total transaction accounts........ 55,580 17.74 9,234 62,538 18.02 6,958 69,719 18.05 7,181
------ ------ ----- ------ ----- ----- ------ ----- -----
Money market demand accounts...... 84,997 27.12 43,481 104,476 30.10 19,479 124,207 32.15 19,731
Savings accounts.................. 42,840 13.66 (3,581) 39,445 11.36 (3,395) 37,242 9.64 (2,203)
Fixed-rate certificates
(original maturity):
3 months......................... 2,122 .68 (1,309) 1,826 .53 (296) 2,045 .53 219
6 months......................... 23,479 7.49 13,957 22,185 6.39 (1,294) 25,563 6.62 3,378
9 months......................... 9,293 2.96 (17,458) 7,342 2.12 (1,951) 5,396 1.40 (1,946)
12 months........................ 47,059 15.01 (10,256) 43,901 12.64 (3,158) 46,121 11.94 2,220
18 months........................ 20,981 6.69 8,555 32,250 9.29 11,269 35,140 9.10 2,890
24 months........................ 4,049 1.29 204 7,390 2.13 3,341 17,348 4.49 9,958
30 months........................ 2,189 .70 403 4,809 1.39 2,620 6,558 1.70 1,749
36 months........................ 8,944 2.85 (560) 9,215 2.65 271 4,740 1.23 (4,475)
48 months........................ 4,728 1.51 115 5,664 1.63 936 6,852 1.77 1,188
96 months........................ 26 .01 2 27 .01 1 29 .01 2
------- ------ ----- ------ ------ ------ ------- ----- ------
.................................. 122,870 39.20 (6,347) 134,609 38.78 11,739 149,792 38.77 15,183
------- ------ ------- ------- ------ ------ ------- ----- ------
Variable rate certificates:
(original maturity)
18 months........................ 4,593 1.47 (2,507) 3,678 1.06 (915) 3,137 .81 (541)
30 months........................ 2,550 .81 51 2,370 .68 (180) 2,224 .58 (146)
----- ------ ------ ----- ------ ------- ----- -------- -----
Total variable.................... 7,143 2.28 (2,456) 6,048 1.74 (1,095) 5,361 1.39 (687)
----- ------ ------- ----- ------ ------- ----- -------- -----
Total certificates................ 130,013 41.48 (8,803) 140,657 40.52 11,644 155,153 40.16 14,496
------- ------ ------- ------- ------ ------ ------- -------- ------
Total deposits....................$313,430 100.00% $40,331 $347,116 100.00% $33,686 $386,321 100.00% $39,205
======== ====== ======= ======== ====== ======= ======== ======= =======
</TABLE>
<PAGE>
Time Deposits by Maturity and Rate
The following table sets forth the amount and maturities of time deposits at
September 30, 1998.
<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%........... $105,253 $18,467 $3,640 $ 1,367 -- 128,727
6.00 - 8.00%........... 21,656 2,364 1,361 636 -- 26,017
8.01 - 10.00%.......... 297 112 -- -- -- 409
-------- ------- ------ ------ --- -------
Total................ $127,206 $20,943 $5,001 $2,003 $-- 155,153
======== ======= ====== ====== === =======
</TABLE>
The following table sets forth the amount and maturities of time deposits
with balances of $100,000 or more at September 30, 1998.
<TABLE>
<CAPTION>
Amount Due
- -----------------------------------------------------------------------------------
Within Over 3 Over 6 Over 12
3 months through 6 months through 12 months Months Total
- -----------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
$7,745 $12,801 $10,132 $5,765 $36,443
====== ======= ======= ====== =======
</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, 1998,
Coastal Federal had advances totaling $144.9 million from the FHLB of Atlanta
due on various dates through 2008 with a weighted average interest rate of
5.13%.
<PAGE>
The FHLB of Atlanta functions as a central reserve bank providing
credit for financial 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.
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, 1998, the
Bank had $55.0 million in 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, 1998, the
Bank had $4.2 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:
<PAGE>
<TABLE>
<CAPTION>
At September 30,
--------------------------------
1996 1997 1998
-------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C>
Outstanding balance:
Securities sold under agreements
to repurchase:
Customer ............................... $ 3,365 $ 2,666 $ 4,214
Broker ................................. -- -- 55,000
Short-term FHLB advances.(1) ............. 54,404 68,620 120,235
Weighted average rate paid on:
Securities sold under agreements
to repurchase:
Customer ............................... 3.57% 3.16% 3.43%
Broker ................................. -- -- 5.69
Short-term FHLB advances.(1) ............. 5.68 5.60 5.10
Maximum amount of borrowings outstanding
at any month end:
Securities sold under agreements
to repurchase:
Customer ............................... $ 3,950 $ 3,257 $ 4,214
Broker ................................. 12,840 37,516 86,250
Short-term FHLB advances.(1) ............. 68,213 75,020 120,235
Approximate average short-term borrowings
outstanding with respect to:
Securities sold under agreements
to repurchase:
Customer ............................... $ 2,900 $ 2,100 $ 2,989
Broker ................................. 4,100 17,200 56,262
Short-term FHLB advances.(1) ............. 56,600 74,023 92,369
Weighted average rate paid on:
Securities sold under agreements
to repurchase:
Customer ............................... 3.55% 3.36% 3.61%
Broker ................................. 5.40 5.60 5.68
Short-term FHLB advances.(1) ............. 5.68 5.60 5.10
</TABLE>
(1) Short-term FHLB advances include various advances which are subject to call
by FHLB.
<PAGE>
Competition
As of September 30, 1998, Coastal Federal had the largest market share
(13.8%) 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, 1998, the Company had 205 full-time Associates and
25 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.
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.
REGULATION OF COASTAL FEDERAL
General
The Bank is subject to extensive regulation, examination and
supervision by the OTS as its 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.
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 30,1998, equaled $213,000.
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 are 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 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 $7.3 million at September 30, 1998.
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
4.0%) of its net withdrawable accounts plus short-term borrowings. 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 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 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%.
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, 1998, 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.
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, 1998, 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.
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
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, 1998, Coastal Federal's core capital of approximately
$39.0 million, or 6.10% of adjusted total assets, was $13.4 million in excess of
the OTS requirement of $25.5 million, or 4% of adjusted total assets. As of such
date, the Bank's tangible capital of approximately $39.0 million, or 6.10% of
adjusted total assets, was $26.2 million in excess of the OTS requirement of
$12.8% million, or 1.5% of adjusted total assets. Finally, at September 30,
1998, the Bank had risk-based capital of approximately $43.1 million or 12.67%
of total risk-weighted assets, which was $15.9 million in excess of the OTS
risk-based capital requirement of $27.2 million or 8% of risk-weighted assets.
See note 11 on page 25 of the Company's Annual Report to Stockholders for the
fiscal year ended September 30, 1998.
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, 1998, the Bank's limit on loans to
one borrower was $6.5 million. The Bank may apply to have this amount increased
to $13.0 million for borrowers who have loans secured by residential lending. At
September 30, 1998, the Bank had applied for this limit increase for four
borrowers. At September 30, 1998, the Bank's largest aggregate amount of loans
to one borrower was $11.4 million, all of which was performing according to
their terms. The Bank had received permission to increase the loan to one
borrower limit on this borrower.
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.
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 discussion related to the Bank's Tax Bad
Debt Reserves, please refer to page 22 note 9 of the Company's Annual Report to
Stockholders for the fiscal year ended September 30, 1998.
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%. For years
beginning before December 31, 1995, 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 was 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 audits of the Corporation's federal or state
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 9 of the Notes to Consolidated Financial Statements.
<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, 1998.
<TABLE>
<CAPTION>
Total Investment
Including Land, Net Book Approximate
Year Building, Furni- Value as of Square Owned/
Location Opened ture and Fixtures 9/30/98 Footage Leased
- -------- ------ ----------------- ------- ------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Main Office
2619 Oak St. 1980 $7,367 $2,922 25,000 Owned
Myrtle Beach, SC (1)
Dunes Office
7500 North Kings Hwy 1971 551 131 2,000 Owned
Myrtle Beach, SC
Ocean Drive Office
521 Main Street 1973 1,408 905 4,100 Owned
North Myrtle Beach, SC
Surfside Office
112 Highway 17 South 1975 1,350 891 2,300 Owned
& Glenns Bay Road
Surfside Beach, SC
Conway Office
310 Highway 378 1976 926 284 2,882 Owned
Conway, SC
Socastee Office
1 Cimerron Drive 1981 1,013 416 2,275 Owned
Myrtle Beach, SC
Murrells Inlet Office
Highway 17 South 1986 1,080 602 3,450 Owned
Murrells Inlet, SC
Waccamaw Medical Pk Office
7000 Waccamaw Medical Pk Rd 1986 636 324 1,450 Owned
Conway, SC
Florence Office
1385 Alice Drive 1996 374 285 2,500 Leased
Florence, SC
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 82 29 N/A N/A
Myrtle Beach, SC
Coastal Federal Mortgage, Inc.
1385 Alice Drive 1995 173 121 1,038 Leased
Florence, SC
<PAGE>
<CAPTION>
Total Investment
Including Land, Net Book Approx.
Year Building, Furni- Value as of Square Owned/
Location Opened ture and Fixtures 9/30/98 Footage Leased
- -------- ------ ----------------- ------- ------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
South Brunswick Office
1625 Seaside Road S.W. 1998 $ 994 $ 967 3,000 Owned
Sunset Beach, NC
Mall Plaza 1997 1,148 1,125 17,500 Owned
504 27th Avenue North
Myrtle Beach, SC
</TABLE>
- ------------
(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.
<PAGE>
The net book value of the Company's investment in office, properties
and equipment totaled $9.0 million at September 30, 1998. See Note 5 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.
Year 2000 Compliance
The Company is a user of computers, computer software and equipment utilizing
embedded microprocessors that will be affected by the year 2000 issue. The year
2000 issue exists because many computer systems and applications use two-digit
date fields to designate a year. As the century date change occurs,
date-sensitive systems may recognize the year 2000 as 1900, or not at all. This
inability to recognize or properly treat the year 2000 may cause erroneous
results, ranging from system malfunctions to incorrect or incomplete processing.
The Company's Year 2000 Committee consists of the Chief Executive Officer, three
Executive Vice Presidents, two Vice Presidents, and one Associate from the
Internal Audit Group. The Committee makes a monthly progress report to the Board
of Directors. The Committee has developed and is implementing a comprehensive
plan to make all information and non-information technology assets year 2000
compliant. The plan is comprised of the following phases:
1. Awareness - Educational initiatives on year 2000 issues and concerns. This
phase is ongoing, especially as it relates to informing customers of the
Company's year 2000 preparedness.
2. Assessment - Inventory of all technology assets and identification of
third-party vendors and service providers. This phase was completed as of
August 31, 1998.
3. Renovation - Review of vendor and service providers responses to the
Company's year 2000 inquires and development of a follow-up plan and
timberline. This phase was completed as of October 15, 1998.
4. Validation - Testing all systems and third-party vendors for year 2000
compliance. The Company is currently in this phase of its plan. A
third-party service bureau processes all customer transactions and has
completed upgrades to its systems to be year 2000 compliant. The Company
will test the third-party systems by reviewing the results of transactions
at six different test dates before and after the year 2000 date change
covering all of the applications used by the Company. Testing was completed
as of November 16, 1998. In the event that testing reveals that the
third-party systems are not year 2000 compliant, the Company's service
bureau intends to either transfer the Company to other systems that are
year 2000 compliant and provide additional resources to resolve the year
2000 issues. Other parties whose year 2000 compliance may affect the
Company include the FHLB of Atlanta, brokerage firms, the operator of the
Company's ATM network and the Company's 401K administrator. These
third-parties have indicated their compliance or intended compliance. Where
it is possible to do so, the Company has scheduled testing with these
third-parties. Where testing is not possible, the Company will rely on
certifications from vendors and service providers.
5. Implementation - Replacement or repair of non-compliant technology. As the
Company progresses through the validation phase, the Company expects to
determine necessary remedial actions and provide for their implementation.
The Company has already implemented a new year 2000 compliant computerized
teller system and has verified the year 2000 compliance of its computer
hardware and other equipment containing embedded microprocessors. The
Company's plan provides for year 2000 readiness to be completed by December
31, 1998.
<PAGE>
The Company estimates its total cost to replace computer equipment, software
programs or other equipment containing embedded microprocessors that were not
year 2000 compliant to be $118,000, of which $41,156 has been incurred as of
September 30, 1998. System maintenance or modification costs are charged to
expense as incurred, while the cost of new hardware, software or other equipment
is capitalized and amortized over their estimated useful lives. The Company does
not separately track the internal costs and time that its own employees spend on
year 2000 issues, which are principally payroll costs.
Because the Company depends substantially on its computer systems and those of
third-parties, the failure of these systems to be year 2000 compliant could
cause substantial disruption of the Company's business and could have a material
adverse financial impact on the Company. Failure to resolve year 2000 issues
presents the following risks to the Company; (1) the Company could lose
customers to other financial institutions, resulting in a loss of revenue, if
the Company's third-party service bureau is unable to properly process customer
transactions; (2) governmental agencies, such as the Federal Home Loan Company,
and correspondent institutions could fail to provide funds to the Company, which
could materially impair the Company's liquidity and affect the Company's ability
to fund loans and deposit withdrawals; (3) concern on the part of depositors
that year 2000 issues could impair access to their deposit account balances
could result in the Company experiencing deposit outflows prior to December 31,
1999; and (4) the Company could incur increased personnel costs if additional
staff is required to perform functions that inoperative systems would have
otherwise performed. Management believes that it is not possible to estimate the
potential lost revenue due to the year 2000 issue, as the extent and longevity
of any potential problem cannot be predicted.
There can be no assurances that the Company's year 2000 plan will effectively
address the year 2000 issues, that the Company's estimates of the timing and
costs of completing the plan will ultimately be accurate or that the impact of
any failure of the Company or its third-party vendors and service providers to
be year 2000 compliant will not have a material adverse effect on the Company's
business, financial condition or results of operations.
<PAGE>
Item 3. Legal Proceedings
The Company is not a defendant in any lawsuits.
The Bank is a defendant in one significant lawsuit. The action
commenced on December 1, 1997, and the Plaintiffs are seeking approximately $1.5
million in actual damages as well as punitive damages. The cause of action is
breach of fiduciary duties, negligence, fraud, civil conspiracy and breach of
contract arising out of a lending relationship. At this date, the Bank does not
know if or when the action will go to trial. The Bank will vigorously defend
this suit and does not anticipate any settlement discussion. The Bank does not
expect the results of this action to be material to its financial results.
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, 1998
("Annual Report") is incorporated herein by reference.
Item 6. Selected Financial Data
The information contained in the section captioned "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 7A. Quantitative and Qualitative Disclosures about
Market Risk
The information contained in the section captioned "Interest Rate Risk
Disclosure" in the Annual Report is incorporated herein by reference.
<PAGE>
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.
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
1999 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>
EXECUTIVE OFFICERS OF THE REGISTRANT
<CAPTION>
Name, Age and Position Business Experience
- ---------------------- -------------------
<S> <C>
Michael C. Gerald, 49, Mr. Gerald has been associated with Coastal Federal since 1974 and serves as
President, Chief Executive Director, President and Chief Executive Officer of the Corporation and Bank. Mr.
Officer and a Director Gerald also serves as Director and President of Coastal Mortgage Bankers &
Realty Company, Inc., and as Director and President of Coastal Real Estate
Investment Corporation. 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 Waccamaw Community Foundation and is a member of the
Board of Directors of the Coastal Education Foundation.
Jimmy R. Graham, 50, Mr. Graham serves as Executive Vice President and Information Systems Group
Executive Vice President and Leader of Coastal Federal. Mr. Graham serves as Executive Vice President of
Information Systems Group Coastal Financial Corporation. He has been associated with the Bank since 1977.
Leader
Jerry L. Rexroad, CPA, 38, Mr. Rexroad joined the Company in April 1995 and is Executive Vice President and
Executive Vice President and Chief Financial Officer of Coastal Federal and Coastal Financial Corporation.
Chief Financial Officer Mr. Rexroad also serves as the Chief Financial Officer and a Director for
Coastal Federal Mortgage Bankers & Realty Company, Inc., Coastal Investments
Corporation, and Coastal Federal Mortgage, Coastal Real Estate Investment
Corporation and President of Coastal Federal Holdings Corporation. He currently
serves as Vice Chairman of the Junior Achievement Board of Directors Horry
County. He is a Past Chairman of the Board of Directors for Junior Achievement
of Horry County as well as Past Chairman of the Board of Directors for
Junior Achievement of Greenville. Mr. Rexroad is the President of the Financial
Manager's Society of South Carolina.
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.
Phillip G. Stalvey, 42, Mr. Stalvey is Executive Vice President and Sales Group Leader for the Bank. He
Executive Vice President also serves as an Executive Vice President of the Corporation and is a director
and Sales Group Leader. of Coastal Federal Mortgage and Coastal Investment Corporation. He has been
associated with Coastal Federal for the past 17 years. In addition, Mr. Stalvey
is a member of the Florence Stake Presidency with his Church, a committee member
of a local Scout Troop and a Board of Director for the Myrtle Beach Airforce
Base Redevelopment Authority.
<PAGE>
<CAPTION>
Name, Age and Position Business Experience
- ---------------------- -------------------
<S> <C>
Steven J. Sherry, 47 Mr. Sherry is Executive Vice President and Director of Marketing for the Bank.
Executive Vice President and He also serves as Executive Vice President/Chief Marketing Officer for Coastal
Director of Marketing. Financial Corporation. He has been associated with Coastal Federal, in a
consultative fashion for over five years, and formally with the organization for
seven months. Mr. Sherry is a Director on the Board for the Horry Cultural Arts
Council, member of the Bank Marketing Association, and holds various achievement
awards for marketing and advertising.
Susan J. Cooke, 48, Ms. Cooke is Vice President and Corporate Secretary for Coastal Federal and for
Vice President and Coastal Financial Corporation, Corporate Secretary for Coastal Mortgage Bankers
Corporate Secretary & Realty Company, Inc., and Coastal Investor Services. Ms. Cooke has been
employed with Coastal Federal for eleven years. She is a member of the American
Society of Corporate Secretaries, Inc. 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>
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, 1997 and 1998.
(b) Consolidated Statements of Operations for the Years Ended
September 30, 1996, 1997 and 1998.
(c) Consolidated Statements of Stockholders' Equity for the
Years Ended September 30, 1996, 1997 and 1998.
(d) Consolidated Statements of Cash Flows for the Years Ended
September 30, 1996, 1997 and 1998.
(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) Employment Agreement with Steven J. Sherry
(i) 1990 Stock Option Plan***
(j) Directors Performance Plan****
<PAGE>
13 Annual Report to Stockholders for the Fiscal
Year Ended September 30, 1998*
21 Subsidiaries of the Registrant
23 Consent of Independent Auditors
27 Financial Data Schedule
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, 1998, 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.
***** Incorporated by reference to 1997 Form 10K filed with the Securities
and Exchange Commission on January 2, 1998.
<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 29, 1998 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 29, 1998 Date: December 29, 1998
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 29, 1998 Date: December 29, 1998
By: /s/James C. Benton By: /s/Samuel A. Smart
-------------------------- ---------------------------------
James C. Benton Samuel A. Smart
Director Director
Date: December 29, 1998 Date: December 29, 1998
By: /s/Harold D. Clardy By: /s/James P. Creel
-------------------------- ---------------------------------
Harold D. Clardy James P. Creel
Director Director
Date: December 29, 1998 Date: December 29, 1998
By: /s/G. David Bishop By: /s/James H. Dusenbury
-------------------------- ---------------------------------
G. David Bishop James H. Dusenbury
Director Director
Date: December 29, 1998 Date: December 29, 1998
EXHIBIT 10 (h)
AGREEMENT
THIS AGREEMENT is made and entered into this _27th_ day of _October_
1998, by and between Coastal Federal Savings Bank, (the "Bank"), Myrtle Beach,
South Carolina; and Steven J. Sherry (the "Executive").
The Bank wishes to employ the Executive in the capacity of Executive
Vice President, Marketing. The Executive desires to be employed in such
capacity. Accordingly, in consideration of the respective promises and
conditions contained in this Agreement, the Bank and the Executive agree as
follows:
1. Terms.
The term of this Agreement shall be deemed to have commenced
as of the date first above written and shall continue for a period of twelve
(12) full calendar months thereafter. Commencing on the first anniversary date,
and continuing at each anniversary date thereafter, the Board of Directors of
the Bank (the "Board") shall consider extension of the Agreement for an
additional year, the results thereof shall be included in the minutes of the
Board's meeting.
2. Payment in the Event of a Change in Control
a. For the purposes of this Agreement, a "Change in Control" of
Coastal Financial Corporation shall be deemed to occur if and
when
(1) any person (as such term is used in Sections 13(d) and
14(d)(2) of the Securities Exchange Act of 1934) is or becomes
the beneficial owner, directly or indirectly, of securities of
Coastal Financial Corporation representing 25 percent or more
of the combined voting power of Coastal Financial
Corporation's then outstanding securities;
(2) the membership of the Board of Directors of Coastal
Financial Corporation changes as the result of a contested
election, such that individuals who were directors at the
beginning of any 24-month period (whether commencing before or
after the effective date of this Agreement) do not constitute
a majority of the Board at the end of such period; or
(3) shareholders of Coastal Financial Corporation approve a
merger, consolidation, sale or disposition of all or
substantially all of the assets of Coastal Financial
Corporation, or a plan of partial or complete liquidation.
b. If, within one year after the occurrence of a Change in
Control, the Executive's employment is terminated, unless
termination is because of his death, or for disability, the
Executive shall be entitled to 1.0 times the Executive's
average "base amount" for the preceding five (5) calendar
years, within the meaning of Section 280G(b)(3) of the
Internal Revenue Code of 1986 ("Code"), as amended. In the
event the Executive has been employed by the Bank for less
than five (5) calendar years preceding the Change in Control,
the Executive's base amount shall be determined by reference
to the period during which he has been employed by the Bank,
with any period of less than one full year annualized. In the
event that a Change in Control occurs during his initial year
of employment hereunder, the Executive's base amount shall be
annualized. Any payment to the Executive made under this
subparagraph shall be made, at the Executive's election,
either in a lump sum payable within ten days, of the Change in
Control, or in substantially equal installment payments over a
one year period. The Executive is entitled to a monetary
payment and may elect the method of payment only in the event
that his termination occurs within one year after a Change in
Control.
c. If within one year after the occurrence of a Change in
Control, a material change in the Executive's duties or
responsibilities, would cause Executive's position to become
one of lesser responsibility, importance, or scope from the
position and attributes as described in the Executive's job
description prior to the Change in Control, Executive shall be
entitled to 1.0 times the Executive's average "base amount" as
set forth in Section 2(b) hereof.
4. Source of Payments
All payments provided in this Agreement shall be timely paid in cash or
check from the general funds of the Bank.
5. Applicable Law
The parties agree that this Agreement shall be governed by and
construed in accordance with the laws of the state of South Carolina,
and further agree that any litigation regarding this Agreement shall be
brought and litigated in the state or federal courts located in South
Carolina. Accordingly, the Executive consents to personal jurisdiction
in the state and federal courts in South Carolina.
6. Headings
The headings or titles of sections are for convenience of reference
only and do not constitute a part of this Agreement.
7. Severability
The parties agree that each paragraph of this Agreement and each
provision within each paragraph is severable from the remainder of the
Agreement, and further agree that if any portion of this Agreement
shall be severed, the remainder of the Agreement shall be enforced
according to its terms and to the fullest extent permitted by law.
8. Waiver
Any failure or default by any party to this Agreement to exercise any
right or enforce any obligation under this Agreement shall not
constitute a waiver of such right or obligation and shall not preclude
the future exercise or enforcement thereof.
9. Assignment
Nothing in this Agreement shall preclude the Bank, with or without the
consent of the Executive, from assigning the rights, duties, and
obligations under this Agreement to an affiliated corporation or to any
other corporation or entity with which the Bank shall merge or
consolidate or otherwise transfer its assets or stock. Upon such an
assignment and assumption, the term "The Bank," as used herein, shall
refer to such assignee corporation or entity, and this Agreement shall
continue in full force and effect. This Agreement may not be assigned,
pledged, or otherwise encumbered by the Executive without the Bank's
prior written consent.
10. Modification
This Agreement constitutes the entire understanding of the parties with
respect to the subject matter herein and supersedes any other oral or
written agreements or understandings with respect thereto, which
agreements and understandings, if any, are hereby terminated. This
Agreement may not be modified in any manner whatsoever, except by a
writing signed by the Executive and the Bank's Chief Executive Officer
or Chairman of the Board of Directors.
- ---------------------------- ------------------------------------
Date Coastal Federal Savings Bank
- ---------------------------- ---------------------------------
Date Coastal Financial Corporation
- ---------------------------- ---------------------------------
Date Executive
- ---------------------------- ---------------------------------
Date Witness
EXHIBIT 13
ANNUAL REPORT TO STOCKHOLDERS FOR THE
FISCAL YEAR ENDED SEPTEMBER 30, 1998
<PAGE>
Coastal
Financial Corporation
1998
Annual
Report
<PAGE>
The Coastal Federal Customer
Continued growth depends upon Coastal Federal's ability to uncover customer
needs and meet those needs with the right products and services, delivered by
well-trained Associates.
Personal Banking
Coastal Banker Checking, Savings and Investments
Our Customers enjoy the benefits of one of our four COASTAL BANKER Checking
options. They can add long term growth to their financial plans with a Coastal
Federal savings account or tap the broad resources available from Coastal
Investor Services, Inc., the securities brokerage subsidiary of Coastal
Financial Corporation.*
Easy Access
In addition to the knowledgeable personnel at Coastal Federal locations,
Customers can access their Checking accounts, Savings and credit accounts 24
hours a day using their touch-tone telephones. Or with their computers and
Coastal Federal PC Banking, they can take advantage of the convenience of the
Internet to manage their finances. When they're in a hurry, our Customers can
stop by any of our conveniently located ATMs, or use our ATM/VISA(R) Check Card
to eliminate the check-writing hassles of presenting multiple IDs and waiting
for approval.
Ruetilla Ford
Mrs. Ford has been a Coastal Federal Customer since the days when she climbed
the stairs to the Bank's original second-floor location at the Colonial Building
in downtown Myrtle Beach - that's more than 45 years. She still lives in the
home that she and her late husband Charles built themselves, with the help of a
Coastal Federal mortgage. Now that Mrs. Ford is retired from the AVX
Corporation, Coastal Federal is there for savings, financial planning and
investment advice. A tireless gardener and enthusiastic traveler, Mrs. Ford
enjoys the people she encounters at her part-time job at The Breakers and the
organizations of which she is an active member. And Coastal Federal runs in the
family. "Both my sons are Coastal Federal Customers," she says.
- ---------------------
*Securities offered through Robert Thomas Securities, Inc., Member NASD/SIPC
- -- NOT FDIC Insured
- -- NOT GUARANTEED by Coastal Federal Savings Bank
- -- Subject to risk and may lose value
<PAGE>
The Coastal Federal Customer
Coastal Federal offers a wide array of time-saving, added-value financial
advantages that are right for our Customers.
Personal Banking
Loans and Other Credit Products
When our Customers are ready to buy or build a home, or purchase a lot to build
on later, Coastal Federal has a mortgage specialist at every location to deliver
personal attention. Our specialists have a keen understanding of the community
real estate market, and have local decision-making authority to speed the
approval process.
For big expenses, our Customers can lower the cost of credit with a Coastal
Federal Home Equity Line or Loan. (Home Equity products may be tax de-ductible;
Customers should check with their tax advisors.) Our Consumer Loans can make the
money available for buying a vehicle or taking advantage of a great deal. And
our Customers enjoy the purchasing power and worldwide convenience of our
popular Fly Free on Us(R) VISA(R) Credit Card.
We make it simple.
Our All-in-One Application makes it easy for our Customers to sign up for a
broad range of services, all at one time. No lengthy forms, no hassle. Then as
they add future services, we simply up-date the data. It's part of the added
convenience our Customers can count on from Coastal Federal.
Tom & Bonnie Black
As an ERA Winner's Circle Realtor, Bonnie Black knows the real estate market in
the coastal Carolina area. When she and husband Tom bought their home in
Calabash, North Carolina, Coastal Federal was their choice as a Mortgage Lender.
"We like Coastal Federal's personal attention," Tom said. So when they recently
decided to refinance and renovate their home, Coastal Federal was their choice
once again. When they renovated their home, Tom built a wide, comfortable deck
so they could make the most of the coastal climate. Both Tom and Bonnie grew up
in military families, with frequent moves and traveling, so they appreciate the
friendliness and quiet of Calabash. Now that Tom and Bonnie are planning their
own real estate ventures, Coastal Federal is helping them with personal
attention to define the right options for their business as well.
<PAGE>
Quest for
Excellence
Our Mission:
Exceeding the
Expectations of
Our Customer
Coastal
Financial
Corporation
1998
Annual
Report
Coastal
Financial
Corporation
<PAGE>
Our Values
Values we follow in carrying forth the Bank's Mission Statement.
Commitment
We pledge to Exceed the Expectations of our Customer and adhere to the Guiding
Principles of the Bank.
Leadership
Continuously developing and communicating the correct visions and ensuring their
reality.
Integrity
Retaining Trust and Respect.
Quality
Doing the Right things Right.
<PAGE>
Dedication
Quest for Excellence
Shortly after becoming a public company in 1990, we set out to develop a
foundation which would support the significant changes we would, and should,
experience.
Our vision then, and today, is that change is necessary for growth and progress.
However, no matter how, or in what magnitude, the change should occur, we
believed that our foundation principles had to be unchanging.
The result of this initiative produced a clearly defined set of values which we
refer to as our Quest for Excellence operating philosophy.
This Guiding Vision, in the big picture, links our Basic Corporate Objective of
Maximizing The Value Of Our Shareholders' Investment with our Long Term Goal of
Being The Best Financial Services Company In Our Marketplace by constantly
focusing our attention on the fact that this result may only be achieved by
providing exceptional Customer service. We firmly believe that this level of
commitment to Exceeding the Expectations of our Customer can only be delivered
by motivated Career Associates, working as part of a group which is well focused
on established goals. And further, that the degree of our success will be
significantly influenced by our ability to contribute to the improvement of the
Communities we serve.
Our overriding commitment to our QUEST FOR EXCELLENCE operating philosophy has
again produced outstanding results for our Shareholders and we are absolutely
convinced that this approach will help to insure that our best years are yet to
come.
<PAGE>
Share Price Performance
[GRAPHIC -- SHARE PRICE PERFORMANCE GRAPH PLOTTED TO POINTS IN CHART BELOW]
Initial Public Offering
October 4, 1990 .................................................$10.00
Sept. 30, 1991 ..................................................$10.00
Sept. 30, 1992 ..................................................$27.20
Sept. 30, 1993 ..................................................$68.31
Sept. 30, 1994 ..................................................$85.56
Sept. 30, 1995 ..................................................$85.92
Sept. 30, 1996 ..................................................$134.94
Sept. 30, 1997 ..................................................$217.16
Sept. 30, 1998 ..................................................$215.52
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 $215.52 based upon
NASDAQ Quotations at September 30, 1998. 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,
---------------------------
1994 1995
------------- -------------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C>
FINANCIAL CONDITION DATA:
Total assets ....................................................... $ 374,980 $ 401,201
Loans receivable, net .............................................. 331,175 356,819
Mortgage-backed securities ......................................... 794 12,776
Cash, interest-bearing deposits and investment securities .......... 29,316 13,530
Deposits ........................................................... 247,385 273,099
Borrowings ......................................................... 98,446 95,997
Stockholders' equity ............................................... 23,104 24,820
OPERATING DATA:
Interest income .................................................... $ 24,562 $ 30,328
Interest expense ................................................... 11,548 17,272
--------- ---------
Net interest income ................................................ 13,014 13,056
Provision for loan losses .......................................... 510 202
--------- ---------
Net interest income after provision for loan losses ................ 12,504 12,854
--------- ---------
OTHER INCOME:
Fees and service charges on loans and deposit accounts ............. 1,001 1,051
Gain on sales of loans held for sale ............................... 411 39
Gain (loss) on sales of investment securities ...................... -- --
Gain on sales of mortgage-backed securities, net ................... 54 --
Real estate operations ............................................. 341 876
Other income ....................................................... 1,022 1,284
--------- ---------
Total other income ................................................. 2,829 3,250
Total general and administrative expense ........................... 10,279 10,152
--------- ---------
Earnings before income taxes ....................................... 5,054 5,952
Income taxes ....................................................... 1,906 2,232
--------- ---------
Net earnings before cumulative effect of adopting FASB 109 ......... 3,148 3,720
--------- ---------
Cumulative effect of adopting FASB 109 ............................. 664 --
--------- ---------
Net income ......................................................... $ 3,812 $ 3,720
========= =========
Net earnings per common diluted share before cumulative effect of
adopting FASB 109 ................................................. $ .48 $ .59
Cumulative effect of adopting FASB 109 ............................. .10 --
--------- ---------
Net earnings per common diluted share .............................. $ .58 $ .59
========= =========
Cash dividends per common share .................................... $ .11 $ .21
========= =========
Weighted average shares outstanding ................................ 6,508 6,320
========= =========
<PAGE>
<CAPTION>
AT SEPTEMBER 30,
------------------------------------------
1996 1997 1998
-------------- ------------- -------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C>
FINANCIAL CONDITION DATA:
Total assets ....................................................... $459,712 $ 494,003 $ 643,560
Loans receivable, net .............................................. 370,368 403,570 414,264
Mortgage-backed securities ......................................... 27,029 23,023 170,181
Cash, interest-bearing deposits and investment securities .......... 38,332 39,582 25,507
Deposits ........................................................... 313,430 347,116 386,321
Borrowings ......................................................... 109,886 106,337 210,560
Stockholders' equity ............................................... 27,681 32,391 37,851
OPERATING DATA:
Interest income .................................................... $34,720 $ 38,065 $ 43,894
Interest expense ................................................... 19,091 20,146 24,451
-------- --------- ---------
Net interest income ................................................ 15,629 17,919 19,443
Provision for loan losses .......................................... 790 760 865
-------- --------- ---------
Net interest income after provision for loan losses ................ 14,839 17,159 18,578
-------- --------- ---------
OTHER INCOME:
Fees and service charges on loans and deposit accounts ............. 1,415 1,593 1,639
Gain on sales of loans held for sale ............................... 990 931 1,579
Gain (loss) on sales of investment securities ...................... (6) 7 96
Gain on sales of mortgage-backed securities, net ................... 189 235 521
Real estate operations ............................................. 345 141 149
Other income ....................................................... 1,699 1,792 1,895
--------- --------- ---------
Total other income ................................................. 4,632 4,699 5,879
Total general and administrative expense ........................... 13,586 12,716 13,618
--------- --------- ---------
Earnings before income taxes ....................................... 5,885 9,142 10,839
Income taxes ....................................................... 2,164 3,351 3,987
--------- --------- ---------
Net earnings before cumulative effect of adopting FASB 109 ......... 3,721 5,791 6,852
--------- --------- ---------
Cumulative effect of adopting FASB 109 ............................. -- -- --
--------- --------- ---------
Net income ......................................................... $ 3,721 $ 5,791 $ 6,852
========= ========= =========
Net earnings per common diluted share before cumulative effect of
adopting FASB 109 ................................................. $ .58 $ .89 $ 1.04
Cumulative effect of adopting FASB 109 ............................. -- -- --
--------- --------- ---------
Net earnings per common diluted share .............................. $ .58 $ .89 $ 1.04
========= ========= =========
Cash dividends per common share .................................... $ .23 $ .26 $ .28
========= ========= =========
Weighted average shares outstanding ................................ 6,391 6,503 6,563
========= ========= =========
</TABLE>
All share and per share data have been restated to reflect two 5 for 4
stock dividends declared on January 9, 1996 and June 20, 1996, respectively, and
two 4 for 3 stock dividends declared on April 30, 1997 and May 6, 1998.
<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,
-------------------------
1994 1995
------------ ------------
<S> <C> <C>
Other Data:
Return on assets (net income divided by average assets) ............................ 0.92% 0.94%
Return on average equity (net income divided by average equity) .................... 13.88% 15.54%
Average equity to average assets ................................................... 6.66% 6.08%
Tangible book value per share ...................................................... $ 3.84 $ 4.16
Dividend payout ratio .............................................................. 16.19% 34.46%
Interest rate spread (difference between average yield on interest-earning assets
and average cost of interest-bearing liabilities) ................................. 4.09% 3.52%
Net interest margin (net interest income as a percentage of average interest-
earning assets) ................................................................... 4.12% 3.62%
Allowance for loan losses to total loans at end of period .......................... 1.01% 1.00%
Ratio of non-performing assets to total assets (1) ................................. 0.56% 0.53%
Tangible capital ratio ............................................................. 5.94% 6.13%
Core capital ratio ................................................................. 5.94% 6.13%
Risk-based capital ratio ........................................................... 10.11% 10.45%
Number of:
Real estate loans outstanding ..................................................... 6,614 6,688
Deposit accounts .................................................................. 33,618 39,881
Number of full service offices .................................................... 8 8
<CAPTION>
AT OR FOR YEARS ENDED SEPTEMBER 30,
-------------------------------------
1996 1997 1998
------------ ------------ -----------
<S> <C> <C> <C>
Other Data:
Return on assets (net income divided by average assets) ............................ 0.85% 1.21% 1.13%
Return on average equity (net income divided by average equity) .................... 13.97% 19.36% 19.52%
Average equity to average assets ................................................... 6.10% 6.24% 6.05%
Tangible book value per share ...................................................... $ 4.52 $ 5.23 $ 6.04
Dividend payout ratio .............................................................. 38.51% 27.63% 25.14%
Interest rate spread (difference between average yield on interest-earning assets
and average cost of interest-bearing liabilities) ................................. 3.76% 3.89% 3.51%
Net interest margin (net interest income as a percentage of average interest-
earning assets) ................................................................... 3.86% 4.03% 3.64%
Allowance for loan losses to total loans at end of period .......................... 1.11% 1.19% 1.33%
Ratio of non-performing assets to total assets (1) ................................. 0.17% 0.10% 0.36%
Tangible capital ratio ............................................................. 5.93% 6.31% 6.10%
Core capital ratio ................................................................. 5.93% 6.31% 6.10%
Risk-based capital ratio ........................................................... 10.41% 11.05% 12.67%
Number of:
Real estate loans outstanding ..................................................... 5,741 6,752 6,666
Deposit accounts .................................................................. 41,755 43,544 43,720
Number of full service offices .................................................... 9 9 10
</TABLE>
(1) Nonperforming assets consist of nonaccrual loans 90 days or more past due
and real estate acquired through foreclosure.
<PAGE>
Dear Friends
Record financial results
The year 1998 was the best in Coastal Financial Corpora-tion's history. We
achieved record financial results and accomplished many strategic objectives
aimed at maximizing our ability to capitalize on opportunities in the future.
Net income for the year totaled $6.9 million, or $1.04 per diluted share, an
increase of 18% compared to $5.8 million, or $0.89 per diluted share in 1997.
These results produced a return on average Shareholders' equity of 19.52% and a
return on average assets of 1.13%.
Our balance sheet continues to be very strong. Total assets increased over 30%,
or $149.6 million, for the year. This growth enabled us to achieve a better risk
balance in terms of asset/liability mix and geographic dispersion. Asset quality
remained excellent compared to both industry standards and historical norms.
While our operating results for 1998 met our high expectations, the market price
of Coastal Financial Corporation's shares remained steady. Despite the very
challenging global economy, the market price of Coastal Financial Corporation's
common stock remained at 99.24% of the market price at September 30, 1997. This
level of share price performance, while quite a contrast compared to the 60%
increase in 1997 and the 56% increase in 1996, compares favorably to the Dow
Jones Industrial Average which, at September 30, 1998, was at 98.7% of its value
at September 30, 1997.
Since becoming a public company in October, 1990, Coastal Financial
Corporation's stock has grown at a compound annual rate of over 46%, taking our
market capitalization from $4.6 million in October 1990, to $106.5 million at
the close of this fiscal year. Put another way, an initial investment of $1,000
in October of 1990 would have grown to $21,552. We believe this level of
performance to be a record for the banking industry.
Equally as impressive is the fact that, since 1990, our operating earnings have
increased at a compound annualized rate in excess of 17%.
During 1998, the quarterly cash dividend was increased 3.7% to $0.07 per share,
marking the continuation of increased dividends each year since 1992, the year
we began paying cash dividends.
One of the best indicators of performance is Return On Shareholders' Equity, and
this measure for 1998 was, again, outstanding. Our Return On Average
Shareholders' Equity measure of 19.52% ranks us among the top performing
financial services companies in the nation.
Progress toward attainment of 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 was further evidenced by the
following public recognition:
Coastal Financial Corporation was recently listed as #1 in Return on Equity for
all publicly-held financial institutions in North and South Carolina in the
1998/1999 edition of Corporate Carolina, published by the editors of Business
North Carolina.
Coastal Federal placed 1st in voting by the readers of the (Myrtle Beach) Sun
News in the Financial Institutions category of the Sun News Best Of The Beach
Competition for 1998.
Coastal Federal was ranked #1 by the 1998 Sheshunoff Market Share Report, in
deposit market share for Horry County, South Carolina, the second fastest
growing Metropolitan Statistical Area in the nation.
We are extremely proud of the performance evidenced by these results and are
especially proud of our Associates who worked so hard to achieve them.
<PAGE>
1998
Our best year yet
This was indeed a year of significant achievement for Coastal Financial
Corporation. The ongoing restructuring of our operations to create a stronger
focus on the sales and marketing of financial services, an initiative for which
we began the allocation of substantial resources in 1996, has continued to pay
significant dividends, particularly in the areas of loan, deposit and investment
product sales.
Our financial performance during fiscal 1998 again met our high expectations and
well positions us to aggressively pursue future opportunities.
Noteworthy Financial Results for Fiscal 1998:
PERFORMANCE GRAPH 1998
- -- The value of Coastal Financial Corporation's common stock has grown at a
compound annual rate of over 25% during the past five years.
- -- A 3.7% increase in cash dividends paid per common share.
- -- The payment of a 4 for 3 stock split in the form of a 33% stock dividend.
[GRAPHIC -- Performance Graph]
EARNINGS PER SHARE
- -- Net earnings of $6.9 million or $1.04 per diluted share. Net earnings for
fiscal 1998 increased 18% over the prior year.
- -- Shareholders' equity advanced 16.9% to $37.9 million.
[GRAPHIC -- Bar Graph plotted to numbers in chart below]
1994 ........................ $0.48
1995 ........................ $0.59
1996 ........................ $0.58
1997 ........................ $0.89
1998 ........................ $1.04
BOOK VALUE PER SHARE
- -- Book value per share grew 15.5% to $6.04.
[GRAPHIC -- Bar Graph plotted to numbers in chart below]
1994 ........................ $3.84
1995 ........................ $4.16
1996 ........................ $4.52
1997 ........................ $5.23
1998 ........................ $6.04
<PAGE>
ASSETS
- -- A 30.3% growth in total assets to $643.6 million.
- -- Loans receivable increased 3.11% to $424.8 million.
- -- Deposits were up 11.3% to the highest level in the Company's history.
- -- Transaction deposits grew by 16.1% in fiscal 1998.
[GRAPHIC -- Bar Graph plotted to numbers in chart below]
(in millions)
1994 ........................ $375.00
1995 ........................ $401.20
1996 ........................ $459.70
1997 ........................ $494.00
1998 ........................ $643.60
ALLOWANCE FOR LOAN LOSSES TO NET LOANS
- -- Allowance for Loan Losses to Net Loans increased to 1.33%.
- -- The Company had Net Loan Charge Offs of .05% in 1998.
[GRAPHIC -- Bar Graph plotted to numbers in chart below]
1994 ........................ 1.01%
1995 ........................ 1.00%
1996 ........................ 1.11%
1997 ........................ 1.19%
1998 ........................ 1.33%
Coastal Financial Corporation's outstanding operating results have been
recognized by the financial markets and have been a major factor in the
achievement of a compound annual growth rate of more than 46% in our stock price
since becoming a public company in October of 1990.
As good as these results are, it's the future that we are really interested in.
The question we're most often asked at Coastal Financial is the same question we
continually ask ourselves: "Can we keep it up?"
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 Corporate objectives. That's what really sets us apart from
the competition.
<PAGE>
A Look Back at 1998
Winston Churchill once said, "The further backward you look, the further forward
you can see." Churchill was describing the process of analyzing and interpreting
the elements of change and continuous improvement ... two elements which are
essential to the future success of both organizations and individuals.
At Coastal Financial Corporation, we embrace change as the essential ingredient
of continuous improvement, and, when interwoven with the changeless core values
imbedded in our Quest for Excellence Operating Philosophy, we are con-fident in
our belief that our formula will continue to produce exceptional results.
As we rapidly approach the change of the century and millennium, we are stronger
than ever and truly believe the future looks great. While we expect 1999 to be a
challenging and difficult year, with a likely continued slowing of the economy,
we are very excited about the opportunities which lie ahead.
In continuing to prepare our organization for the future, we undertook many
significant initiatives during 1998. Some of the initiatives and accomplishments
aimed at increasing the long term value of the Company by maximizing our ability
to capitalize on opportunities in the years ahead were:
- -- The expansion of Coastal Federal University to assure that we remain focused
on leadership development offerings such as our Pledge To Excellence Program.
We believe that the ultimate test for a leader is not whether they can make
smart decisions and take decisive action, which are two very valuable
attributes, but, rather, whether they can teach others to be leaders and
build an organization that remains successful even when they are not present.
The key to our ability to remain a high performance organization, with
exceptional leadership, is our ever-increasing capacity to create new
leaders.
- -- The continued development of our franchise in Horry, Florence and Brunswick
counties. Our newest Sales Center in Sunset Beach, North Carolina, and plans
for the development of other Sales Centers throughout our existing and
contiguous market areas is consistent with our efforts to build a significant
presence in coastal North Carolina as well as to expand our presence and
market awareness along the South Carolina coast and throughout the robust and
growing Pee Dee region.
We view de novo Sales Center development as a strategic line of business.
And, while there is some dilution to earnings per share, as there is with any
major capital investment, such as a new computer system, we believe these
additions, in the long term, will contribute significantly to growth in
earnings per share and enhance the franchise value of Coastal Financial
Corporation.
- -- Preparation for the Year 2000. A significant amount of time has been
allocated, over the past two years, toward preparing Coastal Financial
Corporation for dealing with the challenge posed by the Year 2000 (Y2K)
computer problem which affects all businesses, nationwide and worldwide. Our
Leadership Group and Board of Directors are acutely aware of the seriousness
of this issue for our Customers and our organization, and have engaged the
services of a highly qualified consultant to work with our project team. It
is our goal to have all affected areas in compliance by calendar year-end
1998, thus providing the entire year of 1999 for testing and validating our
efforts.
- -- The further development of our internet web site at:
http://www.coastalfederal.com to include PC Banking. This web site employs
the most secure encryption technology permitted by the Federal government.
Through this web site, our Customers may, for their accounts, verify current
deposit or loan balances, print up-to-date statements, determine interest
information, transfer funds between accounts or make a loan payment. In the
near future, we will offer our PC Bill Pay product which is unique to our
market in that it does not require any optional software.
[GRAPHIC -- Photo]
Michael C. Gerald
President and Chief Executive Officer
<PAGE>
OUR CONTINUED GROWTH DEPENDS UPON BUILDING LONG TERM RELATIONSHIPS
WITH OUR CUSTOMERS
- -- The reorganization of Coastal Investor Services to ensure greater alignment
with Corporate objectives. This initiative resulted in a higher level of
leadership being devoted to this very important segment of our business and
created greater geographic coverage to the markets we serve through the
addition of Investment Advisors to our Florence and Brunswick County banking
offices.
- -- A re-alignment of our product offerings into four categories: Personal Lines,
Business Lines, Investment Services and Residential Mortgages. Our capacity
to compete effectively and continue to experience substantial growth rests in
our ability to uncover Customer needs and meet those needs with the right
products and services, delivered by a well-trained and highly motivated group
of Associates. To better enable us to achieve that result, we have developed
a relationship selling approach which allows for competitive
relationship-based pricing as well as added new products and sales tools to
assist in the selling effort.
- -- The further decentralization of decision-making. Our future success is firmly
rooted in the Communities we serve, and the ability to be flexible and
responsive to those needs is a cornerstone of our competitive advantage.
Community support, pricing, lending decisions and mix of product offerings
are largely determined by our Regional Leaders. This focus provides both
increased speed of decisions as well as the ability to better match our
services and actions to specific Customer and Community needs.
- -- The development of a Customer For Life Relationship Building program. Like
any sales organization, we commit significant resources, in both time and
dollars, in prospecting for Customers. During 1998, we began developing
approaches, processes and procedures designed to better define our long term
Customers, and provide added-value services which will enhance and sustain
the relationship. Continued growth is dependent upon retaining good Customers
while adding new ones and, through the successful implementation of this very
valuable program, we will be well positioned to retain valued Customers for
life.
These initiatives well reflect our culture of viewing change and constant
improvement as essential to the achievement of our long term objectives.
Prepared for the Future
Our two primary strengths at Coastal Financial Corporation are our Associates
and our QUEST FOR EXCELLENCE Operating Philosophy. These powerful attributes
have allowed us to achieve record levels of performance and provide the solid
foundation for helping to assure that our best years are yet to come.
While the financial services industry is, and will continue to be, rapidly
changing and highly competitive, our plan going forward is, quite simply, to
build on this solid foundation and our powerful record of achievement and
success.
All of us at Coastal Financial Corporation appreciate your continued
encouragement, loyalty and support, and look to the future with great enthusiasm
and excitement.
/s/Michael C. Gerald
Michael C. Gerald
President and Chief Executive Officer
OUR COMMITMENT TO SERVICE FOR OUR CUSTOMERS IS EXTENDED BY NEW TECHNOLOGIES THAT
ALLOW 24 HOUR ACCESS TO ACCOUNTS.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
FORWARD LOOKING STATEMENTS
This report may contain certain "forward-looking statements" within the
meaning of Section 27A of the Securities Exchange Act of 1934, as amended, that
represent the Company's expectations or beliefs concerning future events. Such
forward-looking statements are about matters that are inherently subject to
risks and uncertainties. Factors that could influence the matters discussed in
certain forward-looking statements include the timing and amount of revenues
that may be recognized by the Company, continuation of current revenue and
expense trends (including trends affecting charge-offs), absence of unforeseen
changes in the Company's markets, legal and regulatory changes, and general
changes in economy (particularly in the markets served by the Company).
GENERAL
Coastal Financial Corporation (the "Company") reported $6.9 million in net
income for the year ended September 30, 1998, compared to $5.8 million for the
year ended September 30, 1997. Net interest income increased $1.5 million as a
result of increased interest income of $5.8 million offset by an increase of
$4.3 million in interest expense. Provision for loan losses increased from
$760,000 for the year ended September 30, 1997, to $865,000 for the year ended
September 30, 1998. Other income increased from $4.7 million in fiscal 1997, to
$5.9 million in 1998. General and administrative expenses increased $902,000 for
fiscal 1998, as compared to fiscal 1997.
Total assets increased from $494.0 million at September 30, 1997 to $643.6
million at September 30, 1998, or 30.3%. Liquid assets, consisting of cash,
interest-bearing deposits, and securities, increased from $62.6 million at
September 30, 1997 to $195.7 million at September 30, 1998. This increase
primarily resulted from the Company's decision to significantly increase it's
investment in mortgage-backed securities. Mortgage-backed securities increased
from $23.0 million at September 30, 1997, to $170.2 million at September 30,
1998. Loans receivable increased 2.6% from $403.6 million at September 30, 1997,
to $414.3 million at September 30, 1998. Total loan originations for fiscal 1998
were $205.3 million as compared to $178.5 million for fiscal 1997.
The growth in mortgage-backed securities was funded by increased deposits
of $39.2 million, increased advances from the FHLB of $43.4 million and
increased repurchase agreements of $56.5 million. The increase in advances and
repurchase agreements were used primarily to fund growth in the investment
portfolio. During fiscal 1998, deposits increased from $347.1 million at
September 30, 1997, to $386.3 million at September 30, 1998. During this same
period, transaction deposits increased $26.9 million and certificate accounts
increased $14.5 million. The Company's strategy is to increase its reliance on
core transaction deposits as opposed to certificates of deposits.
As a result of $6.9 million in net earnings, less the cash dividends paid
to shareholders of approximately $1.7 million, stockholders' equity increased
from $32.4 million at September 30, 1997 to $37.9 million at September 30, 1998.
LIQUIDITY AND CAPITAL RESOURCES
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 principal sources of funds for the Company are cash flows from
operations, consisting mainly of mortgage, consumer and commercial loan
payments, retail customer deposits, repurchase agreements securitized by
mortgage-backed securities 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 $160.4 million, $178.5 million and $205.3
million for the years ended September 30, 1996, 1997 and 1998, respectively. A
large portion of these loan originations were financed through loan principal
repayments which amounted to $93.6 million, $109.9 million and $130.3 million
for the years ended September 30, 1996, 1997 and 1998, respectively. In
addition, the Company has generally sold conforming fixed rate mortgage loans
which are sold to correspondent financial institutions in the secondary market
to finance future loan originations. For the year ended September 30, 1998, the
Company's mortgage subsidiary originated $68.6 million of loans and sold $64.8
million of loans. For the years ended September 30, 1996, 1997 and 1998, the
Company sold loans amounting to $40.7 million, $44.2 million and $71.7 million,
respectively.
During 1998, the Company used deposit growth to fund its loan growth. In
fiscal 1998, deposits increased from $347.1 million at September 30, 1997, to
$386.3 million at September 30, 1998. The increase was attributed to transaction
accounts which increased approximately $26.9 million, and certificate accounts
which increased $14.5 million. This was offset by a decrease in passbook
accounts of $2.2 million.
1
<PAGE>
At September 30, 1998, the Company had commitments to originate $11.5
million in loans and $35.1 million in unused lines of credit, which the Company
expects to fund from normal operations.
At September 30, 1998, the Company had $127.2 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. At September 30, 1998, the Company had excess collateral pledged
to the FHLB which would support additional FHLB advance borrowings of $28.5
million. Additionally, at September 30, 1998, the Company had repurchase
agreement lines of credit and available collateral consisting of investment
securities and mortgage-backed securities of $104.2 million as well as federal
funds available of $15.0 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 $39.0 million at September 30, 1998, exceeding the
Bank's tangible and core requirements by $26.2 million and $13.4 million,
respectively. At September 30, 1998, the Bank's capital exceeded its current
risk-based minimum capital requirement by $15.9 million. The risk-based capital
requirement may increase in the future.
RESULTS OF OPERATIONS
COMPARISON OF THE YEARS ENDED SEPTEMBER 30, 1997 AND 1998
GENERAL
Net earnings were $6.9 million ($1.04 per diluted share) for the year ended
September 30, 1998 compared to $5.8 million ($0.89 per diluted share) for the
year ended September 30, 1997. Net interest income increased $1.5 million
primarily as a result of an increase in interest income of $5.8 million which
was offset by an increase in interest expense of $4.3 million.
INTEREST INCOME
Interest income for the year ended September 30, 1998, increased 15.3% to
$43.9 million as compared to $38.1 million for the year ended September 30, 1997
primarily due to a 20.8% increase in average interest-earning assets. The net
yield on interest-earning assets for the year ended September 30, 1997 was 8.46%
compared to 8.11% for the year ended September 30, 1998. The average yield on
loans receivable for fiscal year 1998 was 8.75% compared to 8.70% in 1997. The
yield on investments which includes Investments, Overnight Funds and Federal
Funds, decreased slightly to 6.69% for the fiscal year 1998 from 6.70% for
fiscal year 1997. Total interest-earning assets for fiscal year 1998 averaged
$546.6 million compared to $452.5 million for the year ended September 30, 1997.
The increase in average interest-earning assets is due to an increase in average
loans receivable of approximately $27.9 million and mortgage-backed securities
of approximately $68.9 million.
INTEREST EXPENSE
Interest expense on interest-bearing liabilities was $24.5 million for the
year ended September 30, 1998, as compared to $20.1 million in fiscal 1997. The
cost of interest-bearing liabilities was 4.60% for the year ended September 30,
1998, compared to 4.57% in fiscal year 1997. The average cost of deposits for
the year ended September 30, 1998, was 4.10% compared to 4.15% for the year
ended September 30, 1997. The cost of FHLB advances and reverse repurchase
agreements for fiscal 1998 was 5.62% and 5.68%, respectively, compared to 5.95%
and 5.60%, respectively, for fiscal 1997. Total average interest-bearing
liabilities increased 21.2% from $438.6 million at September 30, 1997, to $531.7
million at September 30, 1998. The increase in average interest-bearing
liabilities is due to an increase in average deposits of approximately $26.2
million, FHLB advances of $25.2 million and reverse repurchase agreements of
$40.9 million.
NET INTEREST INCOME
Net interest income was $19.4 million for the year ended September 30,
1998, compared to $17.9 million for the year ended September 30, 1997. The net
interest margin decreased to 3.51% for fiscal 1998 compared to 3.89% for fiscal
1997. During the second quarter of fiscal 1998, the Bank entered into a leverage
strategy by purchasing ARM mortgage-backed securities which were funded by
repurchase agreements and short-term advances. This strategy has had an expected
spread of approximately fifty to seventy-five basis points during the first
year. Should the yield curve continue to flatten and mortgage prepayment speeds
continue to increase, the net spread on this strategy could decline.
Average interest-earning assets increased $94.1 million while average
interest-bearing liabilities increased $93.1 million. At September 30, 1998, the
yield on the one year treasury security was approximately 4.6%, compared to
approximately 4.7% 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 mortgage loan repayments and refinancings and may
experience a declining net interest margin in fiscal 1999.
2
<PAGE>
PROVISION FOR LOAN LOSSES
The Company's provision for loan losses increased from $760,000 for fiscal
1997 to $865,000 for fiscal 1998. The allowance for loan losses as a percentage
of loans was 1.33% at September 30, 1998, compared to 1.19% at September 30,
1997. Loans delinquent 90 days or more were .54% of total loans at September 30,
1998, compared to .06% at September 30, 1997. The allowance for loan losses was
251% of loans delinquent more than 90 days at September 30, 1998, compared to
1,906% at September 30, 1997. 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 1998, total other income increased from $4.7 million for the
period ended September 30, 1997, to $5.9 million for the period ended September
30, 1998. Due to a decreasing long-term interest rate environment which has
resulted in increased mortgage originations, gain on sale of loans was $1.6
million for the year ended September 30, 1998, compared to $931,000 for the year
ended September 30, 1997. Gain on sale of securities was $617,000 for fiscal
1998, compared to $242,000 for fiscal 1997. Other income increased slightly from
$1.8 million for the year ended September 30, 1997, to $1.9 million for the year
ended September 30, 1998.
OTHER EXPENSE
General and administrative expenses were $13.6 million for fiscal 1998 as
compared to $12.7 million for fiscal 1997. Salaries and employee benefits were
$7.4 million for fiscal 1998 as compared to $6.8 million for fiscal 1997, or a
7.5% increase. Normal salary increases and increased lending personnel accounted
for a significant portion of this increase. Net occupancy, furniture and
fixtures and data processing expense increased $369,000 for fiscal 1998, as
compared to fiscal 1997. This is primarily attributed to increased depreciation
expense on Coastal Federal University and the North Carolina office. FDIC
insurance premiums decreased from $283,000 for the year ended September 30, 1997
to $213,000 for the year ended September 30, 1998. Other expenses increased
slightly from $2.7 million in 1997 to $2.8 million in 1998.
RESULTS OF OPERATIONS
COMPARISON OF THE YEARS ENDED SEPTEMBER 30, 1996 AND 1997
GENERAL
Net earnings were $5.8 million for the year ended September 30, 1997
compared to $3.7 million for the year ended September 30, 1996. Included in net
earnings for 1996, is a special assessment from the FDIC for the
recapitalization of the SAIF of $1.6 million, and a related reduction in income
taxes of $615,000. Excluding this special assessment, net income increased 23%
in 1997. Net interest income increased $2.3 million primarily as a result of an
increase in interest income of $3.3 million which was offset by an increase in
interest expense of $1.1 million.
INTEREST INCOME
Interest income for the year ended September 30, 1997, increased 9.6% to
$38.1 million as compared to $34.7 million for the year ended September 30, 1996
primarily due to the constant yield on assets and a 8.9% increase in average
interest-earning assets. The net yield on interest-earning assets for the year
ended September 30, 1996 and 1997 was 8.46%. The average yield on loans
receivable for fiscal year 1997 was 8.70% compared to 8.57% in 1996. The
increase in yield on loans receivables resulted from the repricing of teaser
rate ARMs originated in previous years and the continued growth of the
commercial real estate loan portfolio which has a higher yield than the mortgage
loan portfolio. The yield on investments which includes Investments, Overnight
Funds and Federal Funds, increased to 6.70% for the fiscal year 1997 from 6.55%
for fiscal year 1996. Total interest-earning assets for fiscal year 1997
averaged $452.5 million compared to $415.5 million for the year ended September
30, 1996.
INTEREST EXPENSE
Interest expense on interest-bearing liabilities was $20.1 million for the
year ended September 30, 1997, as compared to $19.1 million in fiscal 1996. The
cost of interest-bearing liabilities was 4.57% for the year ended September 30,
1997, compared to 4.70% in fiscal year 1996. The increase in interest expense of
5.5% 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, 1997, was 4.15% compared to 4.08% for the year ended
September 30, 1996. The cost of FHLB advances for fiscal 1997 was 5.95% compared
to 6.27% for fiscal 1996. Total average interest-bearing liabilities increased
8.0% from $406.2 million at September 30, 1996, to $438.6 million at September
30, 1997.
3
<PAGE>
NET INTEREST INCOME
Net interest income was $17.9 million for the year ended September 30,
1997, compared to $15.6 million for the year ended September 30, 1996. The net
interest margin increased to 3.89% for fiscal 1997 compared to 3.76% for fiscal
1996. Average interest-earning assets increased $37.0 million while average
interest-bearing liabilities increased $32.4 million. At September 30, 1997, the
yield on the one year treasury security was approximately 5.5%, compared to
approximately 6.1% 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 mortgage loan repayments and refinancings and may
experience a declining net interest margin in fiscal 1998.
PROVISION FOR LOAN LOSSES
The Company's provision for loan losses decreased slightly from $790,000
for fiscal 1996 to $760,000 for fiscal 1997. The allowance for loan losses as a
percentage of loans was 1.19% at September 30, 1997, compared to 1.11% at
September 30, 1996. Loans delinquent 90 days or more were .06% of total loans at
September 30, 1997, compared to .12% at September 30, 1996. The allowance for
loan losses was 1,906% of loans delinquent more than 90 days at September 30,
1997, compared to 938% at September 30, 1996. 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 1997, total other income increased slightly from $4.6 million for
the period ended September 30, 1996, to $4.7 million for the period ended
September 30, 1997. Fees and service charges on loans and deposit accounts
increased $178,000, or 12.6%, for the year ended September 30, 1997, as a result
of growth in core deposits and loans. Income from real estate operations
decreased $204,000 from the prior fiscal year due to expenses related to a real
estate owned commercial property. This was partially offset by a gain on a land
sale that occurred in the first quarter of fiscal 1997 by one of the Bank's
subsidiaries. Other income increased from $1.7 million for the year ended
September 30, 1996, to $1.8 million for the year ended September 30, 1997
primarily as a result of increased fees related to ATM and debit card
transactions.
OTHER EXPENSE
General and administrative expenses were $12.7 million for fiscal 1997 as
compared to $13.6 million for fiscal 1996. Included in general and
administrative expense in 1996 is the $1.6 million assessment for capitalization
of the SAIF. Salaries and employee benefits were $6.8 million for fiscal 1997 as
compared to $6.2 million for fiscal 1996, or a 10.8% increase. Approximately a
third of this increase is attributable to increased group insurance costs, 401K
benefits, and increased bonuses and incentives due to increased return on equity
and increased loan production. 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 $60,000
for fiscal 1997, as compared to fiscal 1996. FDIC insurance premiums decreased
from $622,000 for the year ended September 30, 1996 to $283,000 for the year
ended September 30, 1997 as a result of the SAIF assessment paid in fiscal 1996.
Other expenses increased from $2.3 million in 1996 to $2.7 million in 1997. This
increase is primarily related to increased marketing expense, legal fees,
employment services, expenses related to debit cards and expenses related to
transaction accounts.
INCOME TAXES
Income taxes increased from $2.2 million in fiscal 1996 to $3.4 million in
fiscal 1997 as a result of increased earnings before income taxes.
NON-PERFORMING ASSETS
Non-performing assets were $2.3 million at September 30, 1998 compared to
$507,000 at September 30, 1997. Loans past due 90 days or more increased from
$257,000 at September 30, 1997, to $2.3 at September 30, 1998. This increase is
primarily attributable to the initiation of foreclosure proceedings on one
commercial real estate loan totaling approximately $2.0 million. The loan is
secured by commercial property as well as a large tract of undeveloped land.
Management does not expect a material loss from this loan. Real estate acquired
through foreclosure decreased from $250,000 at September 30, 1997, to $35,000 at
September 30, 1998.
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.
4
<PAGE>
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, 1996, 1997 and 1998, of $790,000, $760,000 and $865,000,
respectively. For the years ended September 30, 1996, 1997 and 1998, the Company
had net charge-offs of $196,000, $140,000 and $208,000, respectively. At
September 30, 1998, the Company had an allowance for loan losses of $5.7
million, which was 1.33% of net loans compared to 1.19% at September 30, 1997.
Management believes that the current level of the allowance for loan losses
is presently 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.
INTEREST RATE RISK DISCLOSURE
The words: anticipate, estimate, expect, project, target, goal, and similar
expressions, when used in disclosure documents, are intended to identify
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933. Such forward-looking statements are subject to certain risks,
uncertainties, and assumptions including those set forth below. Should one or
more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from those
expected or projected. These forward-looking statements speak only as of the
date of the document. The Bank expressly disclaims any obligation or undertaking
to publicly release any updates or revisions to any forward-looking statement
contained herein to reflect any change in the Bank's expectations with regard to
any change in events, conditions or circumstances on which any such statement is
based.
The Bank's Asset Liability Management Committee ("ALCO") monitors and
considers methods of managing exposure to interest rate risk. The Bank's
exposure to interest rate risk is reviewed on at least a quarterly basis by the
Board of Directors and the ALCO. Interest rate risk exposure is measured using
interest rate sensitivity analysis to determine the Bank's change in net
portfolio value in the event of hypothetical changes in interest rates. The ALCO
is charged with the responsibility to maintain the level of sensitivity of the
Bank's net portfolio value within Board approved limits.
Net portfolio value represents the market value of portfolio equity and is
equal to the market value of assets minus the market value of liabilities, with
adjustments made for off-balance sheet items over a range of assumed changes in
market interest rates. The Bank's Board of Directors has adopted an interest
rate risk policy which establishes maximum allowable decreases in NPV in the
event of a sudden and sustained one hundred to four hundred basis point increase
or decrease in market interest rates. The following table presents the Bank's
projected change in NPV for the various rate shock levels as of September 30,
1998.
<TABLE>
<CAPTION>
MARKET VALUE OF
CHANGE IN INTEREST RATES BOARD LIMIT PORTFOLIO EQUITY PERCENT CHANGE
- ---------------------------- ------------- ------------------ ---------------
(In Thousands)
<S> <C> <C> <C>
400 basis point rise -44.00% $46,526 -21%
300 basis point rise -32.00% $52,456 -11%
200 basis point rise -20.00% $56,798 -4%
100 basis point rise -11.00% $58,827 0%
No Change 00% $58,981
100 basis point decline -18.00% $59,143 0%
200 basis point decline -22.00% $60,141 2%
300 basis point decline -37.00% $62,565 6%
400 basis point decline -55.00% $65,804 12%
</TABLE>
The preceding table indicates that at September 30, 1998, in the event of a
sudden and sustained increase in prevailing market interest rates, the Bank's
NPV would be expected to decrease, and that in the event of a sudden decrease in
prevailing market interest rates, the Bank's NPV would be expected to change
minimally. At September 30, 1998, the Bank's estimated changes in NPV were
within the limits established by the Board of Directors.
Computation of prospective effects of hypothetical interest rate changes
are based on numerous assumptions, including relative levels of market interest
rates, loan prepayments and deposit decay, and should not be relied upon as
indicative of actual results. Further, the computations do not contemplate any
actions the ALCO could undertake in response to sudden changes in interest
rates.
The Bank also uses interest rate sensitivity gap analysis to monitor the
relationship between the maturity and repricing of its interest-earning assets
and interest-bearing liabilities. Interest rate sensitivity gap is defined
5
<PAGE>
as the difference between the amount of interest-earning assets maturing or
repricing within a specific time period and the amount of interest-bearing
liabilities maturing or repricing within the same time period. A gap is
considered positive when the amount of interest-rate-sensitive assets exceeds
the amount of interest-rate-sensitive liabilities. Generally, during a period of
rising rates, a positive gap would result in an increase in net interest income.
Conversely, during a period of falling interest rates, a positive gap would
result in a decrease in net interest income. Management's goal is to maintain
reasonable balance between exposure to interest rate fluctuations and earnings.
The Company's one-year cumulative gap is a positive $30.1 million, or 4.7% of
the Company's total assets of $643.6 million at September 30, 1998.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 130, Reporting
Comprehensive Income (Statement 130). SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components in a full set
of general purpose financial statements. Enterprises are required to classify
items of "other comprehensive income" by their nature in the financial statement
and display the balance of other comprehensive income separately in the equity
section of a statement of financial position. SFAS No. 130 is effective for
fiscal periods beginning after December 15, 1997. Earlier application is
permitted. Comparative financial statements provided for earlier periods are
required to be reclassified to reflect the provisions of this statement.
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of
an Enterprise and Related Information. SFAS No. 131 establishes standards for
the way public business enterprises are to report information about operating
segments in annual financial statements and requires those enterprises to report
selected information about operating segments in interim financial reports
issued to shareholders. SFAS No. 131 is effective for financial statements for
fiscal periods beginning after December 15, 1997. Earlier application is
encouraged. In the initial year of application, comparative information for
earlier years is to be restated, unless it is impractical to do so. SFAS No. 131
need not be applied to interim financial statements in the initial year of its
application, but comparative information for interim periods in the initial year
of application shall be reported in financial statements for interim periods in
the second year of application. It is not anticipated that this standard will
materially effect the Company.
SFAS 133, Accounting for Derivative Instruments and Hedging Activities
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts and hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position, and measure those
instruments at fair value. If certain conditions are met, a derivative may be
specifically designated as (a) a hedge of the exposure to changes in the fair
value of a recognized asset and liability or a firm commitment, (b) a hedge of
the exposure to variable cash flows of a forecasted transaction, or (c) a hedge
of the foreign currency exposure of a net investment in a foreign corporation.
This statement is effective for fiscal quarters beginning after June 15, 1999.
The Company has not determined the impact of adopting this statement.
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.
6
<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 4% 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, 1998 (dollars in thousands):
PERCENT
AMOUNT OF ASSETS
---------- ----------
Tangible capital (1) ............................ $38,989 6.10%
Tangible capital requirement .................... 12,774 1.50
------- -----
Excess .......................................... 26,215 4.60%
======= =====
Core capital .................................... $38,989 6.10%
Core capital requirement ........................ 25,547 4.00
------- -----
Excess .......................................... $13,442 2.10%
======= =====
Risk-based capital .............................. $43,116 12.67%
Minimum risk-based capital requirements ......... 27,215 8.00
------- -----
Excess .......................................... $15,901 4.67%
======= =====
PERCENT
AMOUNT OF ASSETS
---------- ----------
Tier I leverage ratio ......................... $38,989 6.10%
Tier I leverage ratio requirement ............. 25,742 5.00
------- -----
Excess ........................................ 13,247 1.10%
======= =====
Tier I risk-based capital ..................... $38,989 11.46%
Tier I risk-based capital requirement ......... 13,607 6.00
------- -----
Excess ........................................ $25,382 5.46%
======= =====
Total risk-based capital ...................... $43,116 12.67%
Total risk-based capital requirements ......... 27,215 10.00
------- -----
Excess ........................................ $15,901 2.67%
======= =====
(1) Equals the Bank's stockholders' equity
YEAR 2000 COMPLIANCE
The Company is a user of computers, computer software and equipment
utilizing embedded microprocessors that will be effected by the year 2000 issue.
The year 2000 issue exists because many computer systems and applications use
two-digit date fields to designate a year. As the century date change occurs,
date-sensitive systems may recognize the year 2000 as 1900, or not at all. This
inability to recognize or properly treat the year 2000 may cause erroneous
results, ranging from system malfunctions to incorrect or incomplete processing.
The Company's year 2000 committee consists of the Chief Executive Officer,
three Executive Vice Presidents, two Vice Presidents, and one associate from the
Internal Audit Group. The committee makes a monthly progress report to the Board
of Directors. The committee has developed and is implementing a comprehensive
plan to make all information and non-information technology assets year 2000
compliant. The plan is comprised of the following phases:
1. Awareness -- Educational initiatives on year 2000 issues and concerns.
This phase is ongoing, especially as it relates to informing Customers of the
Company's year 2000 preparedness.
2. Assessment -- Inventory of all technology assets and identification of
third-party vendors and service providers. This phase was completed as August
31, 1998.
3. Renovation -- Review of vendor and service providers responses to the
Company's year 2000 inquires and development of a follow-up plan and timeline.
This phase was completed as of October 15, 1998.
4. Validation -- Testing all systems and third-party vendors for year 2000
compliance. The Company is currently in this phase of its plan. A third-party
service bureau processes all Customer transactions and has completed upgrades to
its systems to be year 2000 compliant. The Company will test the third-party
systems by reviewing the results of transactions at six different test dates
before and after the year 2000 date change covering all of the applications used
by the Company. Testing was completed as of November 16, 1998. In the event that
testing reveals that the third-party systems are not year 2000 compliant, the
Company's service bureau intends to either transfer the Company to other systems
that are year 2000 compliant and provide additional resources to resolve the
year 2000 issues. Other parties whose year 2000 compliance may affect the
Company
7
<PAGE>
include the FHLB of Atlanta, brokerage firms, the operator of the Company's ATM
network and the Company's 401K administrator. These third-parties have indicated
their compliance or intended compliance. Where it is possible to do so, the
Company has scheduled testing with these third-parties. Where testing is not
possible, the Company will rely on certifications from vendors and service
providers.
5. Implementation -- Replacement or repair of non-compliant technology. As
the Company progresses through the validation phase, the Company expects to
determine necessary remedial actions and provide for their implementation. The
Company has already implemented a new year 2000 compliant computerized teller
system and has verified the year 2000 compliance of its computer hardware and
other equipment containing embedded microprocessors. The Company's plan provides
for year 2000 readiness to be completed by December 31, 1998.
The Company estimates its total cost to replace computer equipment,
software programs or other equipment containing embedded microprocessors that
were not year 2000 compliant to be $118,000, of which $41,156 has been incurred
as of September 30, 1998. System maintenance or modification costs are charged
to expense as incurred, while the cost of new hardware, software or other
equipment is capitalized and amortized over their estimated useful lives. The
Company does not separately track the internal costs and time that its own
Associates spend on year 2000 issues, which are principally payroll costs.
Because the Company depends substantially on its computer systems and those
of third-parties, the failure of these systems to be year 2000 compliant could
cause substantial disruption of the Company's business and could have a material
adverse financial impact on the Company. Failure to resolve year 2000 issues
presents the following risks to the Company; (1) the Company could lose
Customers to other financial institutions, resulting in a loss of revenue, if
the Company's third-party service bureau is unable to properly process Customer
transactions; (2) governmental agencies, such as the Federal Home Loan Company,
and correspondent institutions could fail to provide funds to the Company, which
could materially impair the Company's liquidity and affect the Company's ability
to fund loans and deposit withdrawals; (3) concern on the part of depositors
that year 2000 issues could impair access to their deposit account balances
could result in the Company experiencing deposit outflows prior to December 31,
1999; and (4) the Company could incur increased personnel costs if additional
staff is required to perform functions that inoperative systems would have
otherwise performed. Management believes that it is not possible to estimate the
potential lost revenue due to the year 2000 issue, as the extent and longevity
of any potential problem cannot be predicted. Because substantially all of the
Company's loan portfolio consists of loans to individuals rather than commercial
enterprises, management believes that year 2000 issues will not impair the
ability of the Company's borrowers to repay their debt.
There can be no assurances that the Company's year 2000 plan will
effectively address the year 2000 issues, that the Company's estimates of the
timing and costs of completing the plan will ultimately be accurate or that the
impact of any failure of the Company or its third-party vendors and service
providers to be year 2000 compliant will not have a material adverse effect on
the Company's business, financial condition or results of operations.
8
<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, 1997 and 1998, 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, 1998. 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, 1997 and 1998, and the results of its operations and its cash
flows for each of the years in the three-year period ended September 30, 1998,
in conformity with generally accepted accounting principles.
/s/KPMG Peat Marwick LLP
Greenville, South Carolina
October 30, 1998
9
<PAGE>
<TABLE>
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
SEPTEMBER 30, 1997 AND 1998
<CAPTION>
1997 1998
------------ -----------
(Dollars in thousands)
<S> <C> <C>
ASSETS
Cash and amounts due from banks ...................................................... $ 12,852 11,978
Short-term interest-bearing deposits ................................................. 559 3,688
Investment securities available for sale ............................................. 26,171 9,841
Mortgage-backed securities available for sale ........................................ 23,023 170,181
Loans receivable (net of allowance for loan losses of $4,902 at September 30, 1997
and $5,668 at September 30, 1998).................................................... 403,570 414,264
Loans receivable held for sale ....................................................... 8,359 10,486
Real estate acquired through foreclosure, net ........................................ 250 35
Office property and equipment, net ................................................... 7,561 9,001
Federal Home Loan Bank (FHLB) stock, at cost ......................................... 5,618 7,266
Accrued interest receivable on loans ................................................. 2,814 2,546
Accrued interest receivable on investment securities ................................. 452 1,324
Other assets ......................................................................... 2,774 2,950
-------- -------
$494,003 $643,560
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits ............................................................................ 347,116 386,321
Securities sold under agreements to repurchase ...................................... 2,666 59,214
Advances from FHLB .................................................................. 101,478 144,909
Other borrowings .................................................................... 2,193 6,437
Drafts outstanding .................................................................. 1,018 1,615
Advances by borrowers for property taxes and insurance .............................. 1,409 1,329
Accrued interest payable ............................................................ 952 1,352
Other liabilities ................................................................... 4,780 4,532
-------- --------
Total liabilities ................................................................. 461,612 605,709
-------- --------
Stockholders' equity:
Serial preferred stock, 1,000,000 shares authorized and unissued .................... -- --
Common stock $.01 par value, 15,000,000 shares authorized; 6,195,379 shares at
September 30, 1997 and 6,263,777 shares at September 30, 1998 issued and
outstanding, ...................................................................... 62 63
Additional paid-in capital .......................................................... 8,682 8,983
Retained earnings, restricted ....................................................... 23,402 28,369
Treasury stock, at cost (9,760 shares) .............................................. (182) --
Unrealized gain on securities available for sale, net of income tax ................. 427 436
-------- --------
Total stockholders' equity ........................................................ 32,391 37,851
-------- --------
$494,003 $643,560
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
10
<PAGE>
<TABLE>
<CAPTION>
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED SEPTEMBER 30, 1996, 1997 AND 1998
1996 1997 1998
----------- ----------- -----------
(In thousands, except share data)
<S> <C> <C> <C>
Interest income:
Loans receivable ................................................ $ 31,698 33,769 36,314
Investment securities ........................................... 721 1,574 1,309
Mortgage-backed securities ...................................... 1,805 2,446 5,972
Other ........................................................... 496 276 299
----------- ----------- -----------
Total interest income ......................................... 34,720 38,065 43,894
----------- ----------- -----------
Interest expense:
Deposits ........................................................ 11,689 13,650 14,559
Securities sold under agreements to repurchase .................. 323 1,130 3,404
Advances from FHLB .............................................. 7,079 5,366 6,488
----------- ----------- -----------
Total interest expense ........................................ 19,091 20,146 24,451
----------- ----------- -----------
Net interest income ........................................... 15,629 17,919 19,443
Provision for loan losses ........................................ 790 760 865
----------- ----------- -----------
Net interest income after provision for loan losses ........... 14,839 17,159 18,578
----------- ----------- -----------
Other income:
Fees and service charges on loans and deposit accounts .......... 1,415 1,593 1,639
Gain on sales of loans held for sale ............................ 990 931 1,579
Gain (loss) on sales of investment securities, net .............. (6) 7 96
Gain on sales of mortgage-backed securities, net ................ 189 235 521
Income (loss) from real estate acquired through foreclosure ..... 202 (137) (72)
Income from real estate partnerships ............................ 143 278 221
Other income .................................................... 1,699 1,792 1,895
----------- ----------- -----------
Total other income ............................................ 4,632 4,699 5,879
----------- ----------- -----------
<PAGE>
<CAPTION>
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED SEPTEMBER 30, 1996, 1997 AND 1998
1996 1997 1998
----------- ----------- -----------
(In thousands, except share data)
<S> <C> <C> <C>
General and administrative expenses:
Salaries and employee benefits .................................. 6,174 6,841 7,355
Net occupancy, furniture and fixtures and data processing expense 2,831 2,891 3,260
FDIC insurance premium .......................................... 622 283 213
FDIC insurance premium to recapitalize the SAIF ................. 1,620 -- --
Other expense ................................................... 2,339 2,701 2,790
----------- ----------- -----------
Total general and administrative expense ...................... 13,586 12,716 13,618
----------- ----------- -----------
Earnings before income taxes .................................. 5,885 9,142 10,839
Income taxes ..................................................... 2,164 3,351 3,987
----------- ----------- -----------
Net income ....................................................... $ 3,721 5,791 6,852
=========== =========== ===========
Earnings per common share
Basic ........................................................... $ 0.61 0.93 1.09
=========== =========== ===========
Diluted ......................................................... $ 0.58 0.89 1.04
=========== =========== ===========
Average common shares outstanding
Basic ........................................................... 6,100,000 6,227,000 6,264,000
=========== =========== ===========
Diluted ......................................................... 6,391,000 6,503,000 6,563,000
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
11
<PAGE>
<TABLE>
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 1996, 1997 AND 1998
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN RETAINED TREASURY STOCKHOLDERS'
STOCK CAPITAL EARNINGS STOCK OTHER EQUITY
-------- ------------ ------------- ------------ ------- --------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1995 ............. $62 $8,682 $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 dividend ............................. -- -- (1,433) -- -- (1,433)
Unrealized gain on securities available for
sale, net of income taxes ............... -- -- -- -- 107 107
Net income ................................ -- -- 3,721 -- -- 3,721
--- ------ -------- -------- --- -------
Balance at September 30, 1996 ............. 62 8,682 20,015 (1,185) 107 27,681
Exercise of stock option .................. -- -- (786) 1,003 -- 217
Cash paid for fractional shares ........... -- -- (18) -- -- (18)
Cash dividend ............................. -- -- (1,600) -- -- (1,600)
Unrealized gain on securities available for
sale, net of income taxes ............... -- -- -- -- 320 320
Net income ................................ -- -- 5,791 -- 5,791
--- ------ -------- -------- -------
Balance at September 30, 1997 ............. 62 8,682 23,402 (182) 427 32,391
Exercise of stock options ................. 1 301 (161) 182 -- 323
Cash paid for fractional shares............ -- (9) -- -- (9)
Cash dividends ............................ -- (1,715) -- -- (1,715)
Unrealized gain on securities available for
sale, net of income taxes ............... -- -- -- -- 9 9
Net income ................................ -- -- 6,852 -- -- 6,852
--- ------ --------- -------- --- ---------
Balance at September 30, 1998 ............. $63 $8,983 $28,369 $ -- $436 $37,851
=== ====== ========= ======== ==== =========
</TABLE>
See accompanying notes to consolidated financial statements.
12
<PAGE>
<TABLE>
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1996, 1997 AND 1998
<CAPTION>
1996 1997 1998
--------- --------- ---------
(In thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings ........................................................... $ 3,721 5,791 6,852
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Income from real estate partnerships .................................. (143) (278) (221)
Depreciation .......................................................... 740 865 1,030
Provision for loan losses ............................................. 790 760 865
Origination of loans receivable held for sale ......................... (45,082) (45,717) (69,546)
Proceeds from sales of loans receivable held for sale ................. 40,672 44,160 71,674
(Increase) decrease in:
Other assets ......................................................... (587) 149 (176)
Accrued interest receivable .......................................... (553) (296) (604)
Increase (decrease) in:
Accrued interest payable ............................................. 31 154 400
Other liabilities .................................................... 1,960 220 (248)
--------- --------- ---------
Net cash provided by operating activities .......................... 1,549 5,808 10,026
--------- --------- ---------
Cash flows from investing activities:
Proceeds from sale of investment securities available for sale ......... 7,000 5,693 4,500
Proceeds from maturities of investment securities available for sale ... 1,999 17,839 25,596
Purchases of investment securities available for sale .................. (24,331) (32,022) (13,798)
Purchases of loans receivable .......................................... (12,448) (9,948) (10,442)
Proceeds from sale of mortgage-backed securities available for sale .... 13,220 25,678 86,547
Purchases of mortgage-backed securities available for sale ............. (11,867) (26,636) (279,141)
Principal collected on mortgage-backed securities ...................... 4,129 4,850 45,505
Origination of loans receivable, net ................................... (115,288) (132,786) (135,706)
Principal collected on loans receivable ................................ 93,560 109,946 130,286
Proceeds from sales of real estate acquired through foreclosure ........ 937 456 263
Proceeds from sales of office properties and equipment ................. 192 -- --
Purchases of office properties and equipment ........................... (1,253) (2,690) (2,470)
Purchases of FHLB stock ................................................ (502) (390) (1,648)
Other investing activities, net ........................................ 447 914 193
--------- --------- ---------
Net cash used by investing activities .............................. (44,205) (39,096) (150,315)
--------- --------- ---------
<PAGE>
<CAPTION>
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1996, 1997 AND 1998
1996 1997 1998
--------- --------- ---------
(In thousands)
<S> <C> <C> <C>
Cash flows from financing activities:
Increase in deposits ................................................... 40,331 33,686 39,205
Increase (decrease) in securities sold under agreements to repurchase .. 688 (2,666) 56,548
Proceeds from FHLB advances ............................................ 75,850 198,170 242,625
Repayment of FHLB advances ............................................. (64,617) (201,245) (199,194)
Proceeds from other borrowings, net .................................... 1,968 224 4,244
Decrease in advance payments by borrowers for property taxes and
insurance ............................................................. (194) (26) (80)
Increase (decrease) in drafts outstanding, net ......................... (367) (904) 597
Cash dividends to stockholders and cash for fractional shares .......... (1,450) (1,618) (1,724)
Exercise of stock options .............................................. 107 217 323
--------- --------- ---------
Net cash provided by financing activities .......................... 52,316 25,838 142,544
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents ..................... 9,660 (7,450) 2,255
--------- --------- ---------
Cash and cash equivalents at beginning of year ........................... 11,201 20,861 13,411
--------- --------- ---------
Cash and cash equivalents at end of year ................................. $ 20,861 13,411 15,666
========= ========= =========
Supplemental information:
Interest paid .......................................................... $ 19,060 19,992 24,051
========= ========= =========
Income taxes paid ...................................................... $ 3,030 2,687 4,112
========= ========= =========
Supplemental schedule of non-cash investing and financing transactions:
Securitization of mortgage loans into mortgage-backed securities ....... $ 19,366 -- 4,997
========= ========= =========
Transfer of mortgage loans to real estate acquired through foreclosure . $ 471 383 48
========= ========= =========
Transfer of investment securities held to maturity to available for sale $ 14,775 -- --
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
13
<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 Investment Services, Inc.
and Coastal Federal Savings Bank (the "Bank"), and the Bank's wholly-owned
subsidiaries, Coastal Real Estate Investment Corporation and Coastal Mortgage
Bankers and Realty Co., Inc. (and Coastal Mortgage Bankers and Realty Co. Inc.'s
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.
(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". Investments are
classified into three categories as follows: (1) Held to Maturity -- debt
securities that the Company 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.
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.
14
<PAGE>
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
(D) ALLOWANCE FOR LOAN 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 loan losses is
subject to periodic evaluation by various regulatory authorities and may be
subject to adjustment upon their examination.
The Company follows SFAS No. 114, "Accounting by Creditors for Impairment
of a Loan," for determining impairment on loans. SFAS No. 114 requires that
nonhomogenous impaired loans and certain restructured loans be measured at the
present value of expected future cash flows discounted at the loan's effective
interest rate, at the loan's observable market price or at the fair value of the
collateral if the loan is collateral dependent. A specific reserve is set up for
each impaired loan.
(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, 1997 and 1998, the Company had approximately $8.4
million and $10.5 million in mortgage loans held for sale. The aggregate market
value of loans receivable held for sale exceeded the aggregate carrying value at
September 30, 1997 and 1998.
(F) REAL ESTATE OWNED
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.
(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.
15
<PAGE>
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
(J) INCOME TAXES
Deferred taxes are provided for differences in the financial reporting
bases for assets and liabilities as compared to 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 taxable items. A
valuation allowance, if applicable, is established for deferred tax assets to
reflect an amount that will more likely than not be realized.
(K) LOAN SALES
Gains or losses on sales of loans are recognized when control has been
surrendered over these assets in accordance with SFAS No. 125 "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities."
The resulting servicing rights are amortized in proportion to, and over the
period of, estimated net servicing revenues. Impairment of mortgage servicing
rights is assessed based on the fair value of those rights. Fair values are
estimated using discounted cash flows based on a current market interest rate.
The amount of impairment recognized is the amount by which the capitalized
mortgage servicing rights exceed their fair value.
(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 maintains collateral 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 Federal
Deposit Insurance Corporation (the "FDIC"), but are collateralized by an
interest in the pledged securities. The Company has classified these amounts
separately from deposits.
(N) RECLASSIFICATIONS
Certain amounts in the 1996 and 1997 consolidated financial statements have
been reclassified to conform with the 1998 presentation.
(O) STOCK BASED COMPENSATION
In 1996, the Company adopted the disclosure provisions of SFAS No. 123
"Accounting for Stock Based Compensation". The statement permits the Company to
continue accounting for stock based compensation as set forth in APB Opinion 25,
"Accounting for Stock Issued to Employees", provided the Company discloses the
proforma effect on net income and earnings per share of adopting the full
provisions of SFAS No. 123. Accordingly, the Company continues to account for
stock based compensation under APB Opinion 25 and has provided the required
proforma disclosures.
16
<PAGE>
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(2) INVESTMENT SECURITIES
The amortized cost and market value of investment securities available for
sale at September 30, 1997 is summarized as follows:
<TABLE>
<CAPTION>
1997
-----------------------------------------------------
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 ......... 9,996 17 -- 10,013
Due after five years ........................ 16,128 30 -- 16,158
------- -- -- ------
$26,124 47 -- 26,171
======= == == ======
</TABLE>
The amortized cost and market value of investment securities available for
sale at September 30, 1998 is summarized as follows:
<TABLE>
<CAPTION>
1998
---------------------------------------------------
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 ......... 3,053 44 -- 3,097
Due after five years ........................ 6,699 45 -- 6,744
------ -- -- -----
$9,752 89 -- 9,841
====== == == =====
</TABLE>
The Company had gross realized losses of $18,000 and gross realized gains
of $12,000 for the year ended September 30, 1996. For the year ended September
30, 1997, gross realized losses were $58,000 and gross realized gains were
$65,000. For the year ended September 30, 1998, gross realized gains were
$96,000 and there were no realized losses.
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, 1998 was $83.1
million with a market value of $83.4 million.
(3) MORTGAGE-BACKED SECURITIES
Mortgage-backed securities available for sale at September 30, 1997
consisted of the following:
<TABLE>
<CAPTION>
1997
-----------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
----------- ------------ ------------ ---------
(In thousands)
<S> <C> <C> <C> <C>
FNMA ................ $ 1,861 2 -- 1,863
GNMA ................ 6,471 26 -- 6,497
FHLMC ............... 14,048 615 -- 14,663
------- --- -- ------
$22,380 643 -- 23,023
======= === == ======
</TABLE>
17
<PAGE>
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED.....................-
(3) MORTGAGE-BACKED SECURITIES -- Continued
Mortgage-backed securities available for sale at September 30, 1998
consisted of the following:
<TABLE>
<CAPTION>
1998
-----------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
----------- ------------ ------------ ---------
(In thousands)
<S> <C> <C> <C> <C>
FNMA .............. $ 95,024 413 (156) 95,281
GNMA .............. 49,586 68 (95) 49,559
FHLMC ............. 24,901 479 (39) 25,341
-------- --- ---- ------
$169,511 960 (290) 170,181
======== === ==== =======
</TABLE>
For the year ended September 30, 1996, there were gross realized gains of
$189,000 and no realized losses. The Company had gross realized gains of
$258,000 and realized losses of $23,000 for the year ended September 30, 1997.
For the year ended September 30, 1998, the Company had gross realized gains of
$533,000 and realized losses of $12,000.
(4) LOANS RECEIVABLE, NET
Loans receivable, net at September 30 consisted of the following:
<TABLE>
<CAPTION>
1997 1998
----------- ----------
(In thousands)
<S> <C> <C>
First mortgage loans:
Single family to 4 family units ................. $237,964 248,781
Other, primarily commercial real estate ......... 97,680 95,420
Construction loans .............................. 34,216 31,261
Consumer and commercial loans:
Installment consumer loans ...................... 24,378 19,489
Mobile home loans ............................... 1,291 990
Savings account loans ........................... 1,336 1,078
Equity lines of credit .......................... 15,294 18,655
Commercial and other loans ...................... 10,939 14,848
-------- -------
423,098 430,522
Less:
Allowance for loan losses ....................... 4,902 5,668
Deferred loan fees (costs) ...................... (458) (702)
Undisbursed portion of loans in process ......... 15,084 11,292
-------- -------
$403,570 414,264
======== =======
</TABLE>
The changes in the allowance for loan losses for the years ended September
30 consisted of the following:
<TABLE>
<CAPTION>
1996 1997 1998
--------- --------- ---------
(In thousands)
<S> <C> <C> <C>
Beginning allowance .......................... $3,578 4,172 4,902
Provision for loan losses .................... 790 760 865
Allowance recorded on acquired loans ......... -- 110 109
Loan recoveries .............................. 82 72 64
Loan charge-offs ............................. (278) (212) (272)
------ ----- -----
$4,172 4,902 5,668
====== ===== =====
</TABLE>
18
<PAGE>
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(4) LOANS RECEIVABLE, NET -- Continued
Non-accrual loans which were over ninety days delinquent totaled
approximately $257,000 and $2.3 million at September 30, 1997 and 1998,
respectively. For the year ended September 30, 1998, interest income which would
have been recorded would have been approximately $181,000, had non-accruing
loans been current in accordance with their original terms.
The carrying amounts and fair values of loans receivable at September 30,
1997 and 1998 are as follows (In thousands):
<TABLE>
<CAPTION>
1997 1998
--------------------------- ------------------------
CARRYING CALCULATED CARRYING CALCULATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------------ ------------ ---------- -----------
<S> <C> <C> <C> <C>
Mortgage loans .................... $369,662 378,964 382,572 393,667
Consumer loans .................... 12,622 12,310 10,513 10,587
Equity lines of credit ............ 17,902 18,260 18,655 18,468
Commercial loans .................. 8,286 8,208 8,192 8,280
Allowance for loan losses ......... (4,902) (4,902) (5,668) (5,668)
-------- ------- ------- -------
$403,570 412,840 414,264 425,334
======== ======= ======= =======
</TABLE>
Management has made estimates of fair value discount rates and estimated
prepayment rates that it believes to be reasonable based upon market conditions
at the dates indicated. 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, 1997 and 1998.
Changes in market interest and prepayment rates since September 30, 1997 and
1998 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.
At September 30, 1998, 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 178 loans aggregating approximately $8.7
million which were originated on individual income producing condominium units
in two projects in which the Bank's subsidiaries were a partner. 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 $1.5 million of these loans have been sold to other financial
institutions.
At September 30, 1997 and 1998, the Company had commitments outstanding to
originate loans totaling approximately $5.4 million and $11.5 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, 1997 and 1998, the Company had undisbursed lines of credit of
approximately $31.4 million and $35.1 million, respectively.
Loans serviced for the benefit of others amounted to approximately $115.1
million, $104.5 million and $88.0 million at September 30, 1996, 1997 and 1998,
respectively.
As disclosed in note 8, certain mortgage loans are pledged to secure
advances from the Federal Home Loan Bank ("FHLB") of Atlanta.
19
<PAGE>
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED.....................-
(5) OFFICE PROPERTY AND EQUIPMENT, NET
Office property and equipment, net at September 30 consisted of the
following:
<TABLE>
<CAPTION>
1997 1998
--------- --------
(In thousands)
<S> <C> <C>
Land ...................................... $ 1,981 2,311
Building and improvements ................. 5,647 7,395
Furniture, fixtures and equipment ......... 7,105 7,398
------- -----
14,733 17,104
Less accumulated depreciation ............. 7,172 8,103
------- ------
$ 7,561 9,001
======= ======
</TABLE>
The Company leases office space and various equipment. Total rental expense
for the years ended September 30, 1996, 1997 and 1998 was approximately
$138,000, $112,000, and $153,000 respectively.
Future minimum rental payments for operating leases having remaining
noncancelable lease terms in excess of one year at September 30, 1998 are as
follows (In thousands):
1999 ......... $156
2000 ......... 155
2001 ......... 131
2002 ......... 85
2003 ......... 62
----
$589
====
(6) INVESTMENT REQUIRED BY LAW
Investment in stock of the FHLB of Atlanta 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 $7.3 million at September 30, 1998.
20
<PAGE>
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED.....................-
(7) DEPOSITS
Deposits at September 30, consisted of the following:
<TABLE>
<CAPTION>
1997 1998
----------------------- ----------------------
WEIGHTED WEIGHTED
AMOUNT RATE AMOUNT RATE
---------- ---------- ---------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Transaction accounts:
Noninterest bearing .................. $ 23,765 --% $ 27,285 --%
NOW .................................. 38,773 1.27 42,434 1.19
Money market checking ................ 104,476 4.47 124,207 4.47
-------- ---- -------- ----
Total transaction accounts ......... 167,014 3.10 193,926 3.12
-------- ---- -------- ----
Passbook accounts:
Regular passbooks .................... 36,652 2.63 34,652 2.53
Money market ......................... 2,793 2.38 2,590 2.35
-------- ---- -------- ----
Total passbook accounts ............ 39,445 2.62 37,242 2.52
-------- ---- -------- ----
Certificate accounts:
0.00 - 5.99% ........................ 110,606 128,727
6.00 - 8.00% ........................ 29,683 26,017
8.00 - 10.00% ........................ 368 409
-------- --------
Total certificate accounts ......... 140,657 5.58 155,153 5.38
-------- ---- -------- ----
$347,116 4.02% $386,321 3.96%
======== ==== ======== ====
</TABLE>
The aggregate amount of deposit accounts with a minimum denomination of
$100,000 or more was $80,691,000 and $95,493,000 at September 30, 1997 and 1998,
respectively.
The amounts and scheduled maturities of certificate accounts at September
30, are as follows:
<TABLE>
<CAPTION>
1997 1998
----------- ----------
(In thousands)
<S> <C> <C>
Within 1 year ................................ $111,942 127,206
After 1 but within 2 years ................... 23,704 20,943
After 2 but within 3 years ................... 3,630 5,001
Thereafter ................................... 1,381 2,003
-------- -------
$140,657 155,153
======== =======
</TABLE>
Interest expense on deposits for the years ended September 30 consisted of
the following:
<TABLE>
<CAPTION>
1996 1997 1998
--------- -------- --------
(Dollars In thousands)
<S> <C> <C> <C>
Transaction accounts ......... $ 3,162 4,894 5,756
Passbook accounts ............ 1,599 1,015 924
Certificate accounts ......... 6,928 7,741 7,879
------- ----- -----
$11,689 13,650 14,559
======= ====== ======
</TABLE>
The fair value of transaction and passbook accounts is $206.5 million and
$231.2 million which was the amount currently payable at September 30, 1997 and
1998, respectively. The fair value of certificate accounts was $142.6 million
and $156.0 million compared to a book value of $140.7 million and $155.2 million
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.
21
<PAGE>
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED.....................-
(8) ADVANCES FROM FHLB
Advances from the FHLB at September 30 consisted of the following:
<TABLE>
<CAPTION>
1997 1998
----------------------- -----------------------
WEIGHTED WEIGHTED
AMOUNT RATE AMOUNT RATE
---------- ---------- ----------- ---------
(Dollars in thousands)
FISCAL YEAR MATURITY
<S> <C> <C> <C> <C>
1998 .................... $ 24,820 6.13 $ -- --%
1999 .................... 27,235 5.77 28,235 5.74
2000 .................... 6,761 6.45 6,961 6.19
2001 .................... 7,646 5.91 32,146 4.83
2002 .................... 30,061 5.36 4,261 6.62
2003 or greater ......... 4,955 7.03 73,306 5.21
-------- ---- -------- ----
$101,478 5.86% $144,909 5.13%
======== ==== ======== ====
</TABLE>
Stock in the FHLB of Atlanta and specific first mortgage loans of
approximately $213.9 million and $231.2 million at September 30, 1997 and 1998,
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, 1998, the excess first mortgage loan collateral pledged to the
FHLB will support additional borrowings of approximately $28.5 million.
The estimated fair value of the FHLB advances at September 30, 1997 and
1998 is $101.0 million and $145.3 million. This estimate is based on discounting
amounts payable at contractual rates using current market rates for advances
with similar maturities.
(9) INCOME TAXES
Income tax expense for the years ended September 30 consisted of the
following:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
--------- ---------- --------
(In thousands)
1996:
<S> <C> <C> <C>
Federal ......... $2,528 (646) 1,882
State ........... 403 (121) 282
------ ---- -----
2,931 (767) 2,164
====== ==== =====
1997:
Federal ......... $2,646 331 2,977
State ........... 311 63 374
------ ---- -----
2,957 394 3,351
====== ==== =====
1998:
Federal ......... $3,397 138 3,535
State ........... 430 22 452
------ ---- -----
3,827 160 3,987
====== ==== =====
</TABLE>
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, 1997 and 1998 related to the
following:
22
<PAGE>
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED.....................-
(9) INCOME TAXES -- Continued
<TABLE>
<CAPTION>
1997 1998
--------- --------
(In thousands)
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses ................................................. $1,858 2,140
Accrued medical reserves .................................................. 123 121
Other real estate reserves and deferred gains on other real estate ........ 81 87
Net operating loss carryforwards ........................................ 135 135
Other ..................................................................... 122 121
------ -----
Total deferred tax assets .................................................. 2,319 2,604
Less valuation allowance ................................................... (135) (135)
------ -----
Net deferred tax assets .................................................... 2,184 2,469
====== =====
Deferred tax liabilities:
Tax bad debt reserve in excess of base year amount ........................ 484 581
Property and equipment principally due to differences in depreciation ..... 237 237
FHLB stock, due to stock dividends not recognized for tax purposes ........ 356 356
Unrealized gain on securities available for sale .......................... 263 292
Deferred loan fees ........................................................ 318 335
Book over tax basis in investment in unconsolidated subsidiary ............ -- 309
Other ..................................................................... 237 260
------ -----
Total deferred tax liabilities ............................................. 1,895 2,370
------ -----
Net deferred tax asset ..................................................... $ 289 99
====== =====
</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 $29,000 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
expense of $161,000.
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>
1996 1997 1998
--------- ---------- --------
(In thousands)
<S> <C> <C> <C>
Computed federal income taxes ............. $2,001 3,108 3,685
State tax, net of federal benefit ......... 173 247 298
Other, net ................................ (10) (4) 4
------ ----- -----
Total income tax expense .................. $2,164 3,351 3,987
====== ===== =====
</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, 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 based year amounts over a
period of approximately six to eight years. In addition, for the period ending
September 30, 1997, the Bank was required to change its overall tax method of
accounting for bad debts to the experience method.
Retained earnings at September 30, 1998 includes approximately $5,200,000
million 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
23
<PAGE>
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED.....................-
(9) INCOME TAXES -- Continued
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.
(10) 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, 1996, 1997 and 1998 was minor.
Plan assets exceeded the present value of accumulated plan benefits at June 30,
1998, 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 return on equity operating results. Matching contributions made
by the Company were approximately $149,000, $245,000 and $221,000 for fiscal
years 1996, 1997 and 1998, respectively.
(11) REGULATORY MATTERS
At September 30, 1998, the Bank's loans-to-one borrower limit was
approximately $6.5 million. The Bank may apply to have this amount increased to
$13.0 million for borrowers who have loans secured by residential lending. At
September 30, 1998, the Bank had applied for this limit increase for four
borrowers. At September 30, 1998, the Bank is in compliance with the core,
tangible and risk-based capital requirements and loans-to-one borrower limits.
On September 30, 1996, the Bank recorded a $1.6 million special assessment
to the FDIC for the recapitalization of the Savings Association Insurance Fund
(the "SAIF"). Beginning January 1, 1997, the Bank began 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.
24
<PAGE>
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED.....................-
(11) REGULATORY MATTERS -- Continued
The regulatory requirements for the Bank and the Bank's compliance with
such requirements at September 30, 1997 and 1998 are as follows.
<TABLE>
<CAPTION>
PERCENT
AMOUNT OF ASSETS
------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
1997:
Tangible capital (1) ............................ 31,193 6.31%
Tangible capital requirement .................... 7,365 1.50
------ -----
Excess .......................................... $ 23,828 4.81%
======== =====
Core capital .................................... 31,193 6.31%
Core capital requirement ........................ 14,730 3.00
-------- -----
Excess .......................................... $ 16,463 3.31%
======== =====
Risk-based capital .............................. 34,749 11.05%
Minimum risk-based capital requirements ......... 25,147 8.00
-------- -----
Excess .......................................... $ 9,602 3.05%
======== =====
Tier I leverage ratio ........................... 31,193 6.31%
Tier I leverage ratio requirement ............... 19,760 5.00
-------- -----
Excess .......................................... $ 11,433 1.31%
======== =====
Tier I risk-based capital ....................... 31,193 9.92%
Tier I risk-based capital requirement ........... 12,574 6.00
-------- -----
Excess .......................................... $ 18,619 3.92%
======== =====
<PAGE>
<CAPTION>
PERCENT
AMOUNT OF ASSETS
-------- ------------
(DOLLARS IN THOUSANDS)
1998:
<S> <C> <C>
Tangible capital (1) ............................ $ 38,989 6.10%
Tangible capital requirement .................... 12,774 1.50
---------- -----
Excess .......................................... $ 26,215 4.60%
========== =====
Core capital .................................... $ 38,989 6.10%
Core capital requirement ........................ 25,547 4.00
---------- -----
Excess .......................................... $ 13,442 2.10%
========== =====
Risk-based capital .............................. $ 43,116 12.67%
Minimum risk-based capital requirements ......... 27,215 8.00
---------- -----
Excess .......................................... $ 15,901 4.67%
========== =====
Tier I leverage ratio ........................... 38,989 6.10%
Tier I leverage ratio requirement ............... 25,742 5.00
---------- -----
Excess .......................................... $ 13,247 1.10%
========== =====
Tier I risk-based capital ....................... 38,989 11.46%
Tier I risk-based capital requirement ........... 13,607 6.00
---------- -----
Excess .......................................... $ 25,382 5.46%
========== =====
Total risk-based capital ........................ 43,116 12.67%
Total risk-based capital requirements ........... 27,215 10.00
---------- -----
Excess .......................................... $ 15,901 2.67%
========== =====
</TABLE>
(1) Equals the Bank's stockholders' equity
25
<PAGE>
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED.....................-
(12) LIQUIDATION ACCOUNT
In conjunction with the Bank's conversion to stock form on October 4, 1990,
as required by Office of Thrift Supervision (the "OTS") regulations, the Bank
established, on that date, 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.
(13) EARNINGS PER SHARE
The Company has adopted the provisions of SFAS 128, "Earnings per Share"
("EPS"), for the year ended September 30, 1998. The presentation of primary and
fully-diluted EPS has been replaced with basic and diluted EPS. All prior-period
EPS data have been restated to reflect the adoption of SFAS 128. Basic earnings
per share are computed by dividing net income applicable to common shareholders
by the weighted-average number of common shares outstanding. Diluted earnings
per share are computed by dividing net income by the weighted average number of
shares of common stock and common stock equivalents outstanding during the
period, with common stock equivalents calculated based on the average market
price. Common share equivalents include, if applicable, dilute 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.
<PAGE>
The following is a summary of the earnings per share calculation for the
years ended September 30:
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT SHARE DATA) 1996 1997 1998
- -------------------------------------------------------------- -------------- -------------- --------------
<S> <C> <C> <C>
BASIC:
Net income (numerator) ................................... $ 3,721 5,791 6,852
=========== ===== =====
Average common shares outstanding (denominator) .......... 6,100,000 6,227,000 6,264,000
=========== ========= =========
Per share amount ......................................... $ 0.61 $ 0.93 $ 1.09
=========== =========== ===========
DILUTED:
Net income (numerator) ................................... $ 3,721 5,791 6,852
=========== =========== ===========
Average common shares outstanding ........................ 6,100,000 6,227,000 6,264,000
Dilutive common stock options ............................ 291,000 276,000 299,000
----------- ----------- -----------
Average diluted shares outstanding (denominator) ......... 6,391,000 6,503,000 6,563,000
=========== =========== ===========
Per share amount ......................................... $ 0.58 $ 0.89 $ 1.04
=========== =========== ===========
</TABLE>
(14) STOCK OPTION PLAN
The Company's stock option plan provides for stock options to be granted
primarily to directors, officers and other key Associates. 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, 1998 amounted to approximately 604,000 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, 1998, the Company had the following
options outstanding:
26
<PAGE>
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED.....................-
(14) STOCK OPTION PLAN -- Continued
<TABLE>
<CAPTION>
OPTIONS
OPTIONS AVAILABLE FOR OPTION
GRANT DATE (CALENDAR YEAR) GRANTED EXERCISE PRICE EXPIRATION DATE
- ---------------------------- --------- --------------- ---------- ----------------
<S> <C> <C> <C> <C>
1990 .................. 152,215 100 % $ .80 2000
1992 .................. 14,919 100 2.12 2002
1994 .................. 9,358 80 6.69 2004
1995 .................. 161,333 60 7.29 2005
1996 .................. 69,351 40 11.54 2006
1997 .................. 185,642 20 16.29 2007
1998 .................. 66,398 -- 16.84 2008
</TABLE>
During the years ended September 30, 1996, 1997 and 1998, options for
102,484, 80,631, and 62,067 shares, at an average of $1.09, $2.71, and $4.20 per
share, respectively, were exercised.
The Company applies APB Opinion No. 25 and related Interpretations in
accounting for its plan. Accordingly, no compensation cost has been recognized
for its fixed stock option plans. Had compensation cost for the Company's
stock-based compensation plans been determined consistent with FASB Statement
No. 123, the Company's net income and earnings per share would have been reduced
to the proforma amounts indicated below (in thousands except per share date):
<TABLE>
<CAPTION>
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Net income As reported $ 3,721 $ 5,791 $ 6,852
Proforma 3,704 5,693 6,516
Diluted earnings
per share As reported $ 0.58 $ 0.89 1.04
Proforma 0.58 0.88 .99
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1996, 1997 and 1998, respectively: dividend yield
of approximately 1.60%, 1.57% and 1.65%, expected volatility of approximately
27%, 35% and 30%, risk-free interest rate of 6.08%, 6.08% and 4.70%, expected
lives of 10 years and a vesting period of 5 years.
(15) COMMON STOCK DIVIDENDS
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
723,000 and 916,000 shares respectively. On April 30, 1997 and May 6, 1998, the
Company declared a four for three stock split in the form of a 33% stock
dividend, aggregating approximately 1,547,000 and 1,562,000 shares respectively.
All share data has been retroactively restated to give effect to the common
stock dividends.
(16) CASH DIVIDENDS
On December 18, 1996, and March 26,1997 the Company declared quarterly cash
dividends of $.0619, respectively. On June 25, 1997, September 24, 1997,
December 16, 1997, and March 25, 1998, the Company declared quarterly cash
dividends of $.0675, respectively. On June 24, 1998 and September 23, 1998 the
Company declared quarterly cash dividends of $.07, respectively.
(17) LEGAL MATTERS
The Company is not a defendant in any lawsuits. The Bank is a defendant in
one significant lawsuit. The action commenced on December 1, 1997, and the
Plaintiffs are seeking approximately $1.5 million in actual damages as well as
punitive damages. The cause of action is breach of fiduciary duties, negligence,
fraud, civil conspiracy and breach of contract arising out of a lending
relationship. At this date, the Bank does not know if or when the action will go
to trial. The Bank will vigorously defend this suit and does not anticipate any
settlement discussion. The Bank does not expect the results of this action to be
material to its financial results.
27
<PAGE>
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED.....................-
(18) 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>
1997:
Total interest income ....................................... $ 8,997 9,229 9,806 10,033
Total interest expense ...................................... 4,810 4,852 5,213 5,271
--------- ----- ----- ------
Net interest income ......................................... 4,187 4,377 4,593 4,762
Provision for loan losses ................................... 230 120 190 220
--------- ----- ----- ------
Net interest income after provision for loan losses ......... 3,957 4,257 4,403 4,542
Other income ................................................ 1,363 971 994 1,370
General and administrative expenses ......................... 3,308 3,062 2,999 3,346
--------- ----- ----- ------
Earnings before income taxes ................................ 2,012 2,166 2,398 2,566
Income taxes ................................................ 734 790 882 945
--------- ----- ----- ------
Net earnings ................................................ $ 1,278 1,376 1,516 1,621
========= ===== ===== ======
Earnings per common share -- diluted ........................ $ .20 .21 .23 .25
========= ===== ===== ======
Weighted average shares outstanding -- diluted .............. 6,455,000 6,473,000 6,531,000 6,553,000
========= ========= ========= =========
<PAGE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
1998:
Total interest income ....................................... $ 10,177 10,773 11,294 11,648
Total interest expense ...................................... 5,447 5,955 6,329 6,719
--------- ------ ------ ------
Net interest income ......................................... 4,730 4,818 4,965 4,929
Provision for loan losses ................................... 190 250 240 185
--------- ------ ------ ------
Net interest income after provision for loan losses ......... 4,540 4,568 4,725 4,744
Other income ................................................ 1,515 1,576 1,521 1,438
General and administrative expenses ......................... 3,478 3,504 3,444 3,361
--------- ------ ------ ------
Earnings before income taxes ................................ 2,577 2,640 2,802 2,821
Income taxes ................................................ 950 961 1,040 1,038
--------- ------ ------ ------
Net earnings ................................................ $ 1,627 1,679 1,762 1,783
========= ====== ====== ======
Earnings per common share -- diluted ........................ $ .25 .26 .27 .27
========= ====== ====== ======
Weighted average shares outstanding -- diluted .............. 6,548,000 6,552,000 6,581,000 6,583,000
========= ========= ========= =========
</TABLE>
28
<PAGE>
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED.....................-
(19) 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>
COASTAL FINANCIAL CORPORATION
CONDENSED BALANCE SHEETS
SEPTEMBER 30, 1997 AND 1998
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
ASSETS
Cash ................................................... $ 1,208 220
Investment in subsidiaries ............................. 32,644 40,785
Deferred tax asset ..................................... 49 68
Other assets ........................................... 18 86
------- ------
Total assets ....................................... $33,919 41,159
======= ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable (principally dividends) ............... 1,028 739
Note payable ........................................... 500 2,569
Total stockholders' equity ............................. 32,391 37,851
------- ------
Total liabilities and stockholders' equity ......... $33,919 41,159
======= ======
<CAPTION>
COASTAL FINANCIAL CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
YEARS ENDED SEPTEMBER 30, 1996, 1997 AND 1998
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Income:
Interest income .......................................... $ -- 1 --
Management fees .......................................... 108 108 244
Dividends from subsidiary ................................ 1,090 1,850 850
Equity in undistributed earnings of subsidiaries ......... 2,616 3,969 6,033
------ ----- -----
Total income .......................................... 3,814 5,928 7,127
------ ----- -----
Expenses:
Amortization of organization cost ........................ 14 16 16
Professional fees ........................................ 38 40 75
Supplies and printing .................................... 7 29 11
Other expenses ........................................... 32 66 191
Income tax (benefit) expense ............................. 2 (14) (18)
------ ----- -----
Total expenses ........................................ 93 137 275
------ ----- -----
Net income ................................................. $3,721 5,791 6,852
====== ===== =====
</TABLE>
29
<PAGE>
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED.....................-
(19) COASTAL FINANCIAL CORPORATION FINANCIAL STATEMENTS (PARENT
COMPANY ONLY) -- Continued
<TABLE>
COASTAL FINANCIAL CORPORATION
CONDENSED STATEMENT OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1996, 1997 AND 1998
<CAPTION>
1996 1997 1998
----------- ----------- -----------
Operating activities:
<S> <C> <C> <C>
Net income ................................................. $ 3,721 5,791 6,852
Adjustments to reconcile net income to net cash provided by:
Equity in undistributed net income of subsidiary .......... (2,616) (3,969) (6,033)
Increase (decrease) in other assets ....................... 27 3 (87)
Increase (decrease) in other liabilities .................. (79) 639 (289)
-------- ------ ------
Total cash provided by operating activities ............. 1,053 2,464 443
-------- ------ ------
Financing activities:
Capital contributions to subsidiary ........................ -- (500) (2,000)
Cash dividend to shareholders .............................. (1,433) (1,600) (1,715)
Proceeds from stock options ................................ 107 217 323
Proceeds from line of credit advance ....................... -- 500 2,069
Other financing activities, net ............................ (24) (18) (108)
-------- ------ ------
Total cash used by financing activities ................. (1,350) (1,401) (1,431)
-------- ------ ------
Net increase (decrease) in cash and cash equivalents ......... (297) 1,063 (988)
Cash and cash equivalents at beginning of the year ........... 442 145 1,208
-------- ------ ------
Cash and cash equivalents at end of the year ................. $ 145 1,208 220
======== ====== ======
</TABLE>
(20) CARRYING AMOUNTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts and fair value of financial instruments as of
September 30, 1997 and 1998 are summarized below:
<TABLE>
<CAPTION>
1997 1998
--------------------------- ------------------------
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 .............................. $ 13,411 13,411 15,666 15,666
Investment securities .................................. 26,171 26,171 9,841 9,841
Mortgage-backed securities ............................. 23,023 23,023 170,181 170,181
Loans receivable held for sale ......................... 8,359 8,359 10,486 10,486
Loans receivable, net .................................. 403,570 412,840 414,264 425,334
FHLB stock ............................................. 5,618 5,618 7,266 7,266
--------- ------- ------- -------
$ 480,152 489,422 627,704 638,774
========= ======= ======= =======
Financial Liabilities
Deposits:
Demand accounts ...................................... 206,459 206,459 231,168 231,168
Certificate accounts ................................. 140,657 142,615 155,153 156,037
Advances from Federal Home Loan Bank ................... 101,478 100,971 144,909 145,298
Securities sold under agreements to repurchase ......... 2,666 2,666 59,214 59,214
Other borrowings ....................................... 2,193 2,193 6,437 6,437
--------- ------- ------- -------
$ 453,453 454,904 596,881 598,154
========= ======= ======= =======
</TABLE>
30
<PAGE>
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED.....................-
(20) CARRYING AMOUNTS AND FAIR VALUE OF FINANCIAL
INSTRUMENTS -- Continued
The Company had $51.8 million of off-balance sheet financial commitments as
of September 30, 1998, which are commitments to originate loans, unused consumer
lines of credit and undisbursed portion of loans in process. Since these
obligations are based on current market rates, the carrying amount is considered
to be a reasonable estimate of fair value.
Fair value estimates are made at the dates indicated above, 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. Changes in
market interest rates and prepayment assumptions could significantly change the
fair value.
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.
(21) COMMITMENTS AND CONTINGENCIES
The Company has a $16.0 million outstanding line of credit with a
commercial bank. The line of credit is secured by 100% of the stock of the Bank.
At September 30, 1998, the outstanding balance was approximately $2.5 million.
31
<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
James H. Dusenbury
Dusenbury, Hendrix & Little,
Attorneys at Law
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 Director
William J. Sigmon, Sr.
Former President and
Chief Executive Officer
Burroughs & Chapin Company
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
James H. Dusenbury
Dusenbury, Hendrix & Little,
Attorneys at Law
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
Coastal Investor Services, Inc.
Directors
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
E. Haden Hamilton, Jr.
President and
Chief Executive Officer
Coastal Investor Services, Inc.
Jerry L. Rexroad, CPA
Chief Financial Officer
Coastal Investor Services, Inc.
Phillip G. Stalvey
Executive Vice President
Coastal Financial Corporation
<PAGE>
Leadership Group
Coastal Federal Savings Bank
Sherri J. Adams
Personal Banking Leader
North Myrtle Beach
Ginger Allen
Senior Loan Underwriter
James R. Baker
Assistant Vice President
Systems Engineer
Jeffrey A. Benjamin
Senior Vice President
Credit Administration Leader
Denise F. Brown
Assistant Vice President
Personal Banking Leader
Surfside
Stephen L. Brunson, Jr.
Assistant Vice President
Residential Banking Leader
Cynthia L. Buffington
Item Processing Leader
Glenn T. Butler
Vice President
Management Information Systems
Leader
Susan R. Cammons
Residential Banking Leader
Surfside
Pamela D. Collins
Personal Banking Leader
Dunes
Susan J. Cooke
Vice President
Corporate Support Leader
Corporate Secretary
Patricia A. Coveno
Personal Banking Leader
Conway
Robert D. Douglas
Senior Vice President
Human Resources Leader
Miriam E. Evans
Corporate Services Leader
Barbara R. Faber, CPA
Assistant Vice President
Banking Administration Leader
James T. Faulk
Assistant Vice President
Collections Leader
Rita E. Fecteau
Vice President
Controller
Trina S. Ferguson
Vice President
Residential Loan Administration
Leader
J. Daniel Fogle
Vice President
Regional Banking Leader
West Region
Joel P. Foster
Assistant Vice President
Business Banking Officer
Mary L. Geist
Vice President
Data Services Leader
Michael C. Gerald
President and Chief Executive Officer
Belinda B. Gillespie
Assistant Vice President
Personal Banking Leader
Florence
Jimmy R. Graham
Executive Vice President
Information Systems Leader
Richard L. Granger
Vice President
Residential Banking Leader
Florence
Allen W. Griffin
Senior Vice President
Regional Banking Leader
Florence Region
Lisa B. James
Assistant Vice President
Deposit Servicing Leader
Ruth S. Kearns
Senior Vice President
Director of Public Relations
Assistant Corporate Secretary
Cecil H. Kennedy
Facilities/Maintenance Leader
Scott W. Lander
Vice President
Regional Banking Leader
North Carolina Region
Edward L. Loehr
Vice President
Budgeting and Treasury
Sandy L. Louden
Personal Banking Leader
Socastee
Sherry A. Maloni
Assistant Vice President
Personal Banking Leader
Waccamaw Medical Park
Janice B. Metz
Marketing Programs Coordinator
Cindy L. Milardo
Assistant Vice President
Loan Servicing Leader
Lauren E. Miller
Assistant Vice President
Dean of Associate Development
Coastal Federal University
Erin P. Mitchell
Assistant Vice President
Business Banking Officer
Jerry L. Rexroad, CPA
Executive Vice President
Chief Financial Officer
Douglas E. Shaffer
Senior Vice President
Regional Banking Leader
North Strand Region
Steven J. Sherry
Executive Vice President
Chief Marketing Officer
Cathe P. Singleton
Assistant Vice President
Personal Banking Leader
Murrells Inlet
Ashley M. Smith
Assistant Vice President
Personal Banking Leader
South Brunswick
J. Marcus Smith, Jr.
Vice President
Account Servicing Leader
Phillip G. Stalvey
Executive Vice President
Sales Leader
H. Delan Stevens
Assistant Vice President
Business Banking Leader
West Region
Donna P. Todd
Assistant Vice President
Personal Banking Support Leader
John L. Truelove
Vice President
Regional Banking Leader
South Strand Region
Jerry A. Vereen
Vice President
Regional Banking Leader
Central Region
Douglas W. Walters
Assistant Vice President
Residential Banking Leader
North Myrtle Beach
David E. Williams
Personal Banking Leader
Oak Street
Locations
Coastal Federal
Savings Bank Offices
Oak Street Office
2619 Oak Street
Myrtle Beach, SC 29577-3129
843.448.5151
Conway Office
310 Highway 378
Conway, SC 29526
843.444.0225
Dunes Office
7500 North Kings Highway
Myrtle Beach, SC 29572
843.444.0241
Florence Office
1385 Alice Drive
Florence, SC 29505
843.444.1299
Murrells Inlet Office
3348 Highway 17 South
& Inlet Crossing
Murrells Inlet, SC 29576
843.444.0200
North Myrtle Beach Office
521 Main Street
North Myrtle Beach, SC 29582
843.444.0265
Socastee Office
4801 Socastee Boulevard
Myrtle Beach, SC 29575
843.444.0281
Surfside Office
112 Highway 17 South
& Glenns Bay Road
Surfside Beach, SC 29575
843.444.0250
Waccamaw Medical Park Office
112 Waccamaw Medical Park Drive
Conway, SC 29526
843.444.0216
South Brunswick Office
1625 Seaside Road, SW
Sunset Beach, NC 28468
843.444.1258
910.579.8160
Coastal Investor Services, Inc.
843.918.7600
Susan J. Cooke
Corporate Secretary
Myrtle Beach Investment Center
843.448.5151
Victoria J. Damore
Financial Advisor
Conway Investment Center
843.918.7604
Fred Elmore
Financial Advisor
Florence Investment Center
843.679.9041
E. Haden Hamilton, Jr.
President, Chief Executive Officer and Financial Advisor
Myrtle Beach Investment Center
843.918.7603
John Michael Hill
Vice President and Financial Advisor
Myrtle Beach Investment Center
843.918.7602
Deborah Hinson
Sales Assistant
Myrtle Beach Investment Center
843.918.7600
Jennifer Ivey
Sales Assistant
Myrtle Beach Investment Center
843.918.7600
Jerry L. Rexroad, CPA
Chief Financial Officer
Myrtle Beach Investment Center
843.448.5151
Scott Sensenig
Financial Advisor
South Brunswick Investment Center
843.918.7607
<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,
Edgar M. Norris and Co., Inc. at 1.800.476.3662
or Wheat First Union at 1.800.678.3232.
As of November 30, 1998, the Corporation had 916 shareholders and 6,264,467
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.
High Low
Bid Bid
--- ---
Fiscal Year 1998:
First Quarter $18.38 $15.38
Second Quarter 18.00 14.53
Third Quarter 20.69 16.50
Fourth Quarter 20.69 16.63
Fiscal Year 1997:
First Quarter 12.38 10.41
Second Quarter 14.35 12.38
Third Quarter 17.35 15.85
Fourth Quarter 18.94 17.16
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, 1998,
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 25, 1999 at 2:00 p.m., Eastern Standard Time.
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
843.448.5151
Transfer Agent and Registrar
Registrar and Transfer Company
P.O. Box 1010
Cranford, NJ 07016
800.866.1340 Ext. 2511
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
Muldoon, Murphy & Faucette
5101 Wisconsin Avenue
Washington, DC 20016
Shareholder Relations Officer
Susan J. Cooke
Coastal Financial Corporation
2619 Oak Street
Myrtle Beach, South Carolina 29577
843.448.5151
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>
The Coastal Federal Customer
The sign of a good community bank is helping local businesses grow with a wide
range of innovative products and services that best meet their needs.
Business Banking
Business Checking
If the owners are the brains of a company, then the checking account is its
heart. Our Customers can choose the benefits of the Business Checking option
that best suits their needs: Min-imum Balance, Business Plus, Commercial or
Non-Profit.
Money Management
Coastal Federal has the right assort-ment of financial options to help our
Customers' businesses thrive. Business Customers can enjoy the flexibility of
accessing their funds daily with our Money Market Gold Business Cash Management
account or lock in on an attractive rate of return with one of our fixed-rate
Certificates of Deposit. And with desktop Coastal Federal PC Banking, they can
control and access funds directly from their computers.
Arnold Johnson
"I don't feel like a number at Coastal Federal," says Arnold Johnson, owner of
Arnold's Pools in Myrtle Beach. "And they are efficient; I've never had to wait
to get things in order."
Since the early 1980s, Mr. Johnson has had both business and personal accounts
with Coastal Federal; most of his employees bank here, too.
As Arnold's Pools has grown, Mr. Johnson has taken advantage of the business
financing and other commercial services Coastal Federal offers.
He likes the range of services, and the way we keep up with technological and
security advances. As a Shareholder, Mr. Johnson has found Coastal Federal to be
a good investment.
He has confidence in the knowledge and integrity of Coastal Federal leaders.
"The Board members all have good reputations. They are businessmen who
understand business."
The Coastal Federal Customer
Regardless of the size of the company, Coastal Federal offers the right
assortment of financial options to make it easy to help businesses succeed.
Business Banking
Business Financing
Customers can keep their businesses growing using Coastal Federal's wide
selection of loans and lines of credit. Or conveniently extend their operating
capital with our Preferred Prime Business Credit Card, which offers credit
limits up to $50,000. Most importantly, our Business Customers can be confident
that our attention to service doesn't stop when the loan closes. Alternative
Investments Business and personal investment services are available through
Coastal Investor Services, Inc., the securities brokerage subsidiary of Coastal
Financial Corporation.* Customers have access to financial planners that provide
corporate retirement programs, wealth management plans for owners, and personal
investment planning.
Wayne Cole
When you ask Wayne Cole what he thinks about Coastal Federal, you will get an
immediate answer: "Coastal Federal changed my life!"
Mr. Cole says that Coastal Federal is responsive when opportunities arise for
local business people. When Mr. Cole decided to open his jewelry store in North
Myrtle Beach, things moved fast. On Monday, he applied for a business loan at
Coastal Federal. Tuesday, the loan was approved. Wednesday, he resigned from his
job. Thursday, he purchased inventory, display cases, insurance, a safe and
security system. Friday, he started renovating the building.
Within two weeks, everything was finished, polished and in place. The door of
Cole's Jewelers opened May 1, 1990. "Since then, there's never been a day when I
didn't make a sale. Our business is based on service," Mr. Cole said. "And
that's just what Coastal Federal provides."
Mr. Cole puts his trust in Coastal Federal's expertise and community commitment.
"I'm a shareholder - of course!"
*Securities offered through Robert Thomas Securities, Inc., Member NASD/SIPC
- -- NOT FDIC Insured
- -- NOT GUARANTEED by Coastal Federal Savings Bank
- -- Subject to risk and may lose value
<PAGE>
Coastal
Financial
Corporation
Corporate Office: 2619 Oak Street
Myrtle Beach, South Carolina 29577-3129
(843) 448-5151
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Parent
Coastal Financial Corporation
<TABLE>
<CAPTION>
State of
Subsidiary Percentage Owned Incorporation
- ---------- ---------------- -------------
<S> <C> <C>
Coastal Federal Savings Bank 100% United States
Coastal Federal Mortgage, Inc. 100% South Carolina
Coastal Investor Services, Inc. 100% South Carolina
Coastal Technology Solutions 100% South Carolina
Coastal Real Estate Investment
Corporation (3) 100% North 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
</TABLE>
- -----------------------
(1) First tier subsidiaries of Coastal Federal.
(2) Second tier subsidiaries of Coastal Federal and first tier subsidiaries of
Coastal Mortgage.
(3) First tier operating subsidiary of Coastal Federal Savings Bank,
consolidated with Coastal Federal for Regulatory Reporting.
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Coastal Financial Corporation:
We consent to incorporation by reference in previously filed registration
statements on Form S-8 of Coastal Financial Corporation and subsidiaries (the
"Company") of our report dated October 30, 1998, relating to the consolidated
statements of financial condition of the Company as of September 30, 1998 and
1997, 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, 1998, which report appears in the September 30, 1998, annual
report on Form 10-K of the Company.
Greenville, South Carolina
December 23, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<CASH> 11,978
<INT-BEARING-DEPOSITS> 3,688
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 180,022
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 424,750
<ALLOWANCE> 5,668
<TOTAL-ASSETS> 643,560
<DEPOSITS> 386,321
<SHORT-TERM> 93,886
<LIABILITIES-OTHER> 8,828
<LONG-TERM> 116,674
0
0
<COMMON> 63
<OTHER-SE> 37,788
<TOTAL-LIABILITIES-AND-EQUITY> 643,560
<INTEREST-LOAN> 36,314
<INTEREST-INVEST> 7,281
<INTEREST-OTHER> 299
<INTEREST-TOTAL> 43,894
<INTEREST-DEPOSIT> 14,559
<INTEREST-EXPENSE> 24,451
<INTEREST-INCOME-NET> 19,443
<LOAN-LOSSES> (1,579)
<SECURITIES-GAINS> 617
<EXPENSE-OTHER> 13,618
<INCOME-PRETAX> 10,839
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,852
<EPS-PRIMARY> 1.09
<EPS-DILUTED> 0
<YIELD-ACTUAL> 8.11
<LOANS-NON> 0
<LOANS-PAST> 2,257
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 5,668
<CHARGE-OFFS> 272
<RECOVERIES> 64
<ALLOWANCE-CLOSE> 0
<ALLOWANCE-DOMESTIC> 5,668
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
