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, 1997
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
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (803) 448-5151
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [ X ] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
As of November 30, 1997, there were issued and outstanding 4,655,982
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 November 30, 1997, was
$104,759,595(4,655,982 shares at $22.50 per share, which is the ending bid on
November 30, 1997.). 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, 1997. (Parts I and II)
2. Portions of the Proxy Statement for the 1998 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 1997 was limited for CTS.
Coastal Federal was organized in 1953 as a mutual savings and loan
association and, since that time, its deposits have been federally insured. In
March 1989, Coastal Federal converted from a federally chartered mutual savings
and loan association to a federally chartered mutual savings bank. On October 4,
1990, Coastal Federal converted to the stock form of ownership ("Conversion")
through the sale and issuance of 492,541 shares of common stock at a price of
$10.00 per share, which resulted in gross proceeds to Coastal Federal of
$4,925,410.
Coastal Federal conducts its business from its main office in Myrtle
Beach, South Carolina, nine branch offices located in South Carolina and a
lending office in Sunset Beach, North Carolina. The lending office will be
converted to a full service branch office in fiscal 1998. At September 30, 1997,
Coastal Financial had total assets of $494.0 million, total deposits of $347.1
million and stockholders' equity of $32.4 million. The deposits of the Bank are
insured by the Federal Deposit Insurance Corporation ("FDIC") under the Savings
Association Insurance Fund ("SAIF"). The corporate offices of the Bank are
located at 2619 Oak Street, Myrtle Beach, South Carolina and the telephone
number is (803) 448-5151.
Eight of Coastal Federal's nine offices are in Horry County, South
Carolina. The economy of the Horry County area is dependent primarily on
tourism. To the extent Horry County area businesses rely heavily on tourism for
business, decreased tourism would have a significant adverse effect on Coastal
Federal's primary deposit base and lending area. Moreover, Coastal Federal would
likely experience a higher degree of loan delinquencies should the local economy
be significantly adversely affected.
<PAGE>
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
22.6% of total loans at September 30, 1997.
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,
1997, 2.5% and 9.8%, respectively, of the Bank's total loan portfolio consisted
of commercial business and consumer loans.
Selected Consolidated Financial Data and Other Items
The information contained in the table captioned "Selected Consolidated
Financial and Other Data" on page 2 of the Corporation's Annual Report to
Stockholders for the Fiscal Year Ended September 30, 1997 is incorporated herein
by reference.
<PAGE>
Yields Earned and Rates Paid
The following table sets forth, for the periods and at the date
indicated, the weighted average yields earned on Coastal Financial's assets, the
weighted average interest rates paid on its liabilities, together with the net
yield on interest-earning assets.
<TABLE>
<CAPTION>
Year Ended At
September 30, September 30,
----------------------------------
1995 1996 1997 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average yield
on loan portfolio .................... 8.39% 8.57% 8.70% 8.88%
Weighted average yield
on mortgage-backed
securities ............................ 7.81 7.78 7.25 7.40
Weighted average yield
on Federal Funds and
overnight deposits .................... 5.77 5.89 5.27 5.33
Weighted average yield
on investment securities .............. 5.14 6.55 6.70 6.80
Weighted average yield
on all interest-
earning assets ....................... 8.27 8.46 8.46 8.63
Weighted average rate
paid on savings deposits .............. 3.96 4.08 4.15 4.08
Weighted average rate
paid on Federal Home
Loan Bank advances .................... 6.53 6.27 5.95 5.82
Weighted average rate
paid on repurchase
agreements ............................ 3.70 4.63 5.82 4.52
Weighted average rate
paid on all interest
bearing liabilities .................. 4.75 4.70 4.57 4.50
Interest rate spread (spread
between weighted average
rate on all interest-earning
assets and all interest-
bearing liabilities) ................. 3.52 3.76 3.89 4.13
Net interest margin (net
interest income as a percentage
of average interest-earning
assets) ............................... 3.62 3.86 4.03 4.29
</TABLE>
<PAGE>
Rate/Volume Analysis
The following table sets forth certain information regarding changes to
interest income and interest expense of the Corporation for the periods
indicated. For each category of interest-earning asset and interest-bearing
liability, information is provided on changes attributed to (i) changes in rate
(changes in rate multiplied by old volume); (ii) changes in volume (changes in
volume multiplied by old rate); (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,
------------------------------------------------------------------------------------------
1995 Compared to 1994 1996 Compared to 1995
Increase (Decrease) Increase (Decrease)
Due to Due to
Rate/ Rate/
Rate Volume Volume Net Rate Volume Volume Net
---- ------ ------ ----- ---- ------ ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Loans ........................ $1,377 $ 3,346 $ 222 $4,945 $ 615 $ 2,361 $ 51 $3,027
Mortgage-backed
securities................... 4 567 17 588 (4) 1,083 (6) 1,073
Investments and
other........................ 11 188 34 233 177 96 19 292
-- ---- -- --- --- -- -- ---
Total net change in
income on interest-
earning assets................ 1,392 4,101 273 5,766 788 3,540 64 4,392
----- ----- --- ----- --- ----- -- -----
Interest-Bearing
Liabilities:
Deposits...................... 1,735 (297) (64) 1,374 300 1,455 44 1,799
FHLB advances................. 526 3,215 564 4,305 (289) 51 (2) (240)
Repurchase
agreements................... 35 3 7 45 16 194 50 260
--- - -- -- -- --- -- ---
Total net change in
expense on interest-
bearing liabilities........... 2,296 2,921 507 5,724 27 1,700 92 1,819
------ ----- --- ----- -- ----- -- -----
Net change in net
interest income............... $ (904) $ 1,180 $ (234) $ 42 $ 761 $1,840 $ (28) $2,573
========= ======= ======= ===== ===== ====== ====== ======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Year Ended September 30,
------------------------------------------
1997 Compared to 1996
Increase (Decrease)
Due to
Rate/
Rate Volume Volume Net
---- ------ ------ ----
<S> <C> <C> <C> <C>
Interest-Earning Assets:
Loans ........................ $ 502 $ 1,545 $ 24 $ 2,071
Mortgage-backed
securities................... (123) 820 (56) 641
Investments and
other........................ (70) 747 (44) 633
---- --- ---- ---
Total net change in
income on interest-
earning assets................ 309 3,112 (76) 3,345
--- ----- ---- -----
Interest-Bearing
Liabilities:
Deposits...................... 200 1,742 19 1,961
FHLB advances................. (361) (1,425) 73 (1,713)
Repurchase
agreements................... 50 576 181 807
-- --- --- ---
Total net change in
expense on interest-
bearing liabilities........... (111) 893 273 1,055
----- --- --- -----
Net change in net
interest income............... $ 420 $2,219 $ (349) $2,290
======= ====== ======= ======
</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,
-------------------------------------------------------------------------------
1995 1996
------------------------------------ ------------------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
------- -------- ------ ------- -------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Loans................................ $341,557 $28,671 8.39% $369,733 $31,698 8.57%
Investments(1)....................... 15,153 925 6.10 16,730 1,217 7.27
Mortgage-backed
securities.......................... 9,365 732 7.82 23,214 1,805 7.78
-------- ------- ----- -------- ------- -----
Total interest-earning
assets............................... $366,075 $30,328 8.28% $409,677 $34,720 8.46%
======== ======= ===== ======== ======= =====
LIABILITIES
Transaction accounts................. 80,586 1,678 2.08 114,220 2,862 2.51
Passbook accounts.................... 55,370 1,314 2.37 44,631 1,160 2.60
Certificate accounts................. 124,287 6,898 5.55 134,415 7,667 5.70
FHLB advances........................ 112,097 7,319 6.53 112,878 7,079 6.27
Securities sold
under repurchase
agreements.......................... 1,705 63 3.70 6,955 323 4.63
------- -------- ----- -------- ------ -----
Total interest-bearing
liabilities.......................... $374,045 $17,272 4.75% $413,099 $19,091 4.70%
======== ======= ===== ======== ======= =====
Net interest income/
interest rate spread................. $13,056 3.52% $15,629 3.76%
Net yield on earning
assets............................... 3.62% 3.86%
Ratio of earning assets
to interest-bearing
liabilities.......................... 1.02x 1.02x
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Year Ended September 30,
--------------------------------------
1997
--------------------------------------
Average Yield/
Balance Interest Rate
------- -------- -----
<S> <C> <C> <C>
ASSETS
Loans................................ $ 389,196 $33,769 8.70%
Investments(1)....................... 27,007 1,850 6.85
Mortgage-backed
securities.......................... 33,738 2,446 7.25
---------- ------- ----
Total interest-earning
assets............................... $ 449,941 $38,065 8.46%
========== ======= ====
LIABILITIES
Transaction accounts................. 153,796 4,894 3.18
Passbook accounts.................... 41,143 1,015 2.47
Certificate accounts................. 135,335 7,741 5.72
FHLB advances........................ 90,154 5,366 5.95
Securities sold
under repurchase
agreements.......................... 19,387 1,130 5.82
--------- ------- ----
Total interest-bearing
liabilities.......................... $ 439,815 $20,146 4.57%
========== ======= ====
Net interest income/
interest rate spread................. $17,919 3.89%
Net yield on earning
assets............................... 4.03%
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 commerical 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 $411.9 million at
September 30, 1997, representing approximately 83.4% of its total assets. On
that date, approximately 63.5% 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, 1997, adjustable rate
loans constituted approximatley $318 million (or 77.0%) of the Bank's total loan
portfolio. Therefore, at such date, fixed rate loans comprised only 23.0% of the
total loan portfolio. These lending practices were adopted to shorten the term
of the Bank's assets and make the loan portfolio more responsive to interest
rate volatility.
<PAGE>
Loan Portfolio Analysis
The following tables set forth the composition of the Corporation's loan
portfolio by type of loan and type of security as of the dates indicated.
<TABLE>
<CAPTION>
At September 30,
-----------------------------------------------------------------------------------------
1993 1994 1995 1996
------------------ ------------------ ------------------- ------------------
Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Type of Loan:
Mortgage loans:
Construction........................... $ 12,266 4.08% $ 23,222 6.67% $ 27,905 7.34% $ 34,566 8.65%
On existing property................... 206,632 68.86 225,544 64.82 228,881 60.23 231,373 57.89
Income property (commercial)........... 35,328 11.77 42,207 12.13 54,401 14.31 73,295 18.34
Commercial business loans............... 13,913 4.64 14,052 4.04 19,610 5.16 14,831 3.71
Consumer loans:
Mobile home........................... 1,807 .60 1,497 .43 1,204 .32 1,103 .28
Automobiles........................... 5,126 1.71 6,300 1.81 5,941 1.56 7,261 1.82
Equity lines of credit................ 11,362 3.79 12,763 3.67 13,210 3.48 12,441 3.11
Other................................. 13,626 4.55 22,373 6.43 28,887 7.60 24,776 6.20
-------- ------ -------- ----- -------- ------ -------- ------
Total loans and loans held for sale.... $300,060 100.00% $347,958 100.0% $380,039 100.00% $399,646 100.00%
====== ===== ====== ======
Less:
Loans in process...................... (5,607) (13,087) (17,178) (18,589)
Deferred loan(fees)costs.............. (546) (343) (71) 286
Allowance for loan losses............. (2,753) (3,353) (3,578) (4,172)
-------- -------- -------- --------
Total loans net........................ $291,154 $331,175 $359,212 $377,171
======== ======== ======== ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
At September 30,
---------------------
1997
---------------------
Amount Percent
<S> <C> <C>
Type of Loan:
Mortgage loans:
Construction........................... $ 34,216 7.93%
On existing property................... 246,323 57.09
Income property (commercial)........... 97,680 22.64
Commercial business loans............... 10,939 2.54
Consumer loans:
Mobile home........................... 1,291 .30
Automobiles........................... 6,055 1.40
Equity lines of credit................ 15,294 3.54
Other................................. 19,659 4.56
-------- ------
Total loans and loans held for sale.... $431,457 100.00%
======
Less:
Loans in process...................... (15,084)
Deferred loan(fees)costs.............. 458
Allowance for loan losses............. (4,902)
Total loans net........................ $411,929
========
</TABLE>
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 adjust based upon either the cost of funds, prime rate or
treasury securities indices. The interest rates on ARMs generally may not adjust
more than 1-2% per year and 4-6% over the life of the loan. The Bank originates
ARMs at below the fully phased-in interest rate but generally qualifies
borrowers at 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 have been beneficial in helping Coastal Federal
improve the interest rate sensitivity of its assets, such loans may pose
potential additional risks to Coastal Federal. A precipitous increase in
interest rates could be expected to result in an increase in delinquencies or
defaults on such loans. Whereas a significant decrease in rates or a flat yield
curve could cause repayments to increase significantly.
<PAGE>
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 offered by Coastal Federal are originated through Coastal
Federal Mortgage, Inc. (CFM). These loans are generally sold to correspondent
banks servicing released. Loans sold by CFM amounted to $34.5 and $38.4 million,
respectively, in fiscal 1996 and 1997. Coastal Federal sold approximately $6.2
and $5.8 million, respectively, of mortgages in 1996 and 1997 generally to
FHLMC.
At September 30, 1997, approximately $274.2 million or 63.5% 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, 1997, approximately $34.2 million or 7.9% of the
Bank's gross loan portfolio consisted of construction loans on both residential
($19.7 million) and commercial properties ($14.5 million). Undisbursed proceeds
on these loans amounted to $15.1 million at September 30, 1997.
<PAGE>
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, 1997, this limited
Coastal Federal's aggregate non-residential real estate loans to approximately
$146.1 million. At such time, the Bank had non-residential real estate loans
outstanding of $120.7 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 years 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. At
September 30, 1997, the Bank had approximately $97.7 million of loans secured by
commercial real estate, representing approximately 22.6% of Coastal Federal's
total loan portfolio.
Commercial real estate lending entails significant additional risks
compared to residential lending. Commercial real estate loans typically involve
large loan balances to single borrowers or groups of related borrowers. The
payment experience of such loans is typically dependent upon the successful
operation of the real estate project. These risks can be significantly affected
by supply and demand conditions in the market for office and retail space and
for apartments and, as such, may be subject, to a greater extent, to adverse
conditions in the economy. In dealing with these risk factors, Coastal Federal
generally limits itself to a real estate market or to borrowers with which it
has experience. The Bank concentrates on originating commercial real estate
loans secured by properties located within its market areas of Horry County,
Florence County, the Pee Dee Region, northeastern Georgetown County, all within
South Carolina and Brunswick County, North Carolina. 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 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 $42.3 million, or 9.8% of the total
loan portfolio, at September 30, 1997.
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
<PAGE>
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, 1997, the Bank had $10.9 million outstanding in
commercial business loans, which represented approximately 2.5% 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 often insufficient source of
repayment.
<PAGE>
Loan Maturity
The following table sets forth certain information at September 30,
1997 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 More than
One Year Three Years Five Years Ten Years
One Year Through Through Through Through Over
or Less Three Years Five Years Ten Years Twenty Years Twenty Years Totals
------- ----------- ---------- --------- ------------ ------------ ------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
First mortgage loans . $ 3,586 $ 7,982 $ 3,999 $ 10,665 $ 62,545 $221,492 $310,269
Other residential and
non-residential ..... 10,834 4,884 4,282 4,890 32,318 8,249 65,457
Equity lines of credit 15,294 -- -- -- -- -- 15,294
Consumer loans ....... 2,743 4,906 3,643 795 536 -- 12,623
Commercial loans ..... 2,386 2,947 1,529 399 1,025 -- 8,286
-------- -------- -------- -------- -------- -------- --------
Total loans ..... $ 34,843 $ 20,719 $ 13,453 $ 16,749 $ 96,424 $229,741 $411,929
======== ======== ======== ======== ======== ======== ========
</TABLE>
The following table sets forth the dollar amount of all loans due after
one year at September 30, 1997 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......................... $54,317 $252,366 $306,683
Other residential and
non-residential............................. 6,484 48,139 54,623
Consumer loans............................... 9,485 395 9,880
Commercial loans............................. 2,432 3,468 5,900
------- -------- --------
Total loans............................. $72,718 $304,368 $377,086
======= ======== ========
</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,
1997. For purposes of the table, repricing characteristics of loans include
estimated annual prepayment rates.
<TABLE>
<CAPTION>
Zero to Four Months One Year to Greater than
Three Months to One Year Five Years Five Years Total
------------ ----------- ---------- ---------- -----
(In thousands)
<S> <C> <C> <C> <C> <C>
Rate Sensitive Assets(1):
Mortgage loans and
mortgage-backed securities............... $57,040 $223,641 $91,460 $23,324 $395,465
Mortgage-backed securities................ $1,147 $2,943 $14,089 $4,200 $ 22,379
Non-mortgage loans........................ 9,059 3,699 8,150 -- 20,908
Interest-bearing deposits and
investment securities.................... 1,159 1,913 20,220 3,391 26,683
------- -------- -------- ------- --------
Total................................. $68,405 $232,196 $133,919 $30,915 $465,435
======= ======== ======== ======= ========
Rate Sensitive Liabilities:
Core deposits(2).......................... $42,058 $69,741 $62,219 $32,441 $206,459
Time deposits............................. 67,494 48,433 24,730 -- 140,657
Borrowings................................ 52,858 23,720 27,802 1,957 106,337
------- -------- -------- ------- --------
Total................................. $162,410 $141,894 $114,751 $34,398 $453,453
======== ======== ======== ======= ========
Off-Balance Sheet Positions:
Commitments to originate
mortgage loans........................... $1,772 $2,468 $(4,756) $516 --
Interest rate sensitivity gap.............. $(92,233) $92,770 $14,412 $(2,967) $11,982
Cumulative interest
sensitivity gap........................... $(92,233) $537 $14,949 $11,982 --
Cumulative interest sensitivity
gap as a percent of total assets (18.77%) 0.11% 3.04% 2.44% --
</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:<PAGE>
<TABLE>
<CAPTION>
NOW MMDA Passbook Non-interest
Accounts Accounts Accounts Demand
-------- -------- -------- ------
<S> <C> <C> <C> <C>
Percent Repricing:
1 - 12 months............................ 37.00% 79.00% 17.00% 37.00%
13 - 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, 1997. This information is an estimate and may not
be indicative of actual changes in market values should rates change
significantly at a future date.
<PAGE>
<TABLE>
<CAPTION>
-400 -300 -200 -100 +100 +200 +300 +400
Basis Basis Basis Basis No Basis Basis Basis Basis
Points Points Points Points Change Points Points Points Points
------ ------ ------ ------ ------ ------ ------ ------ ------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Mortgage loans and
securities ......... $ 440,467 $ 436,263 $ 432,780 $ 429,505 $ 425,152 $ 418,999 $ 411,243 $ 402,373 $ 392,891
Non-mortgage loans .. 22,352 22,177 22,006 21,842 21,680 21,523 21,369 21,218 21,073
Cash, deposits and
securities ......... 44,022 43,074 42,161 41,282 40,436 39,621 38,836 38,080 37,351
Repossessed assets .. 253 253 253 253 253 253 253 253 253
Premises and equipmen 7,383 7,383 7,383 7,383 7,383 7,383 7,383 7,383 7,383
Other assets ........ 9,584 10,928 12,846 15,563 19,326 23,372 27,170 30,774 34,197
--------- --------- --------- --------- --------- --------- --------- --------- ---------
TOTAL ............... 524,061 520,078 517,429 515,828 514,230 511,151 506,254 500,081 493,148
========= ========= ========= ========= ========= ========= ========= ========= =========
LIABILITIES
Deposits ............ $ 348,602 $ 347,730 $ 346,876 $ 346,030 $ 345,198 $ 344,380 $ 343,576 $ 342,785 $ 342,004
Borrowings .......... 114,383 112,743 111,158 109,625 108,142 106,707 105,317 103,971 102,666
Other liabilities ... 6,495 6,495 6,495 6,495 6,495 6,495 6,496 6,495 6,496
--------- --------- --------- --------- --------- --------- --------- --------- ---------
TOTAL ............... 469,480 466,968 464,529 462,150 459,835 457,582 455,389 453,251 451,165
========= ========= ========= ========= ========= ========= ========= ========= =========
OFF BALANCE SHEET
POSITIONS .......... $ 992 $ 814 $ 661 $ 516 $ 320 $ 49 $ (230) $ (498) $ (774)
MARKET VALUE OF
PORTFOLIO EQUITY ... $ 58,573 $ 53,924 $ 53,561 $ 54,194 $ 54,715 $ 53,617 $ 50,635 $ 46,331 $ 41,209
</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 residential mortgage loan
applications over $400,000 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 95% of the appraised value of the property must be approved by the Board of
Directors.
Loan applicants are promptly notified of the decision of the Bank by a
letter setting forth the terms and conditions of the decision. If approved, such
terms and conditions include the amount of the loan, interest rate, amortization
term, a brief description of real estate to be mortgaged to the Bank and notice
of requirement of insurance coverage necessary to protect the Bank's interest in
the collateral.
The Bank's general policy is to obtain a title insurance policy
insuring that the Bank has a valid lien on the mortgaged real estate and that
the property is free of encumbrances. Borrowers must also obtain paid hazard
insurance policies prior to closing and, when the property is in a flood plain
as designated by the Department of Housing and Urban Development, obtain paid
flood insurance policies. It is the policy of Coastal Federal to require flood
insurance for the full insurable value of the improvements for any such loan
located in a designated flood hazard area. Borrowers on loans which exceed 80%
of the value of the security property are also required to advance funds on a
monthly basis, with each payment of principal and interest, to a mortgage escrow
account from which the Bank makes disbursements for items such as real estate
taxes, hazard insurance premiums and private mortgage insurance premiums. In
cases of flood insurance, it is the Bank's policy to require escrow on these
premiums regardless of the loan-to-value ratio.
Loan Originations, Purchases and Sales. The Bank is a qualified
servicer for FHLMC and FNMA. Depending upon interest rates and economic
conditions, the Bank has sold loans in order to provide additional funds for
lending, to generate servicing fee income, and to decrease the amount of its
long-term, fixed rate loans in order to minimize the gap between the maturities
of its interest-earning assets and interest-bearing liabilities. The Bank
generally continues to collect payments on the loans, to supervise foreclosure
proceedings, if necessary, and to otherwise service the loans. The Bank retains
a portion of the interest paid by the borrower on the loans as consideration for
its servicing activities. At September 30, 1997, the Bank was servicing loans
sold to others with a principal balance of approximately $104.5 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,
<PAGE>
1997 were conforming conventional loans originated and sold by Coastal Federal
Mortgage. These loans were sold on a servicing released basis. At September 30,
1997, the Bank's loan portfolio included purchased loans of approximately $22.1
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.
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,
---------------------------------------
1995 1996 1997
--------- --------- ---------
(In thousands)
<S> <C> <C> <C>
Loans receivable net, at the beginning of the
period ..................................... $ 331,175 $ 359,212 $ 377,171
--------- --------- ---------
Loans originated:
Construction ............................... 31,849 38,172 45,986
Residential ................................ 46,935 60,683 59,289
Nonresidential ............................. 8,307 11,897 13,794
Land ....................................... 7,263 8,355 10,308
Commercial business ........................ 20,145 23,062 33,730
Consumer ................................... 26,530 18,201 15,396
--------- --------- ---------
Total loans originated ................. 141,029 160,370 178,503
--------- --------- ---------
Loans purchased, primarily single
family residental mortgages ................. 6,337 12,448 9,948
--------- --------- ---------
Loans sold .................................. (2,806) (40,672) (44,160)
--------- --------- ---------
Loan principal repayments and other ......... (116,008) (112,926) (109,946)
--------- --------- ---------
Other ....................................... (515) (1,261) 413
--------- --------- ---------
Loans receivable net, at end of period ...... $ 359,212 $ 377,171 $ 411,929
========= ========= =========
</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, 1997, Coastal Federal had loan commitments of approximately $3.2
million. At September 30, 1997, CFM had loan commitments of approximately $2.3
million.
Loan Origination and Other Fees. Coastal Federal may receive loan
origination fees and discount "points." Loan fees and points are a percentage of
the principal amount of the mortgage loan which are charged to the borrower for
funding the loan. Coastal Federal allows the purchaser to reduce the rate of
interest by the payment of points at the customers options. Fees on long-term
commercial real estate and residential construction loans vary with loan type.
Delinquencies. Coastal Federal's collection procedures provide for a
series of contacts with delinquent borrowers. If the delinquency continues, more
formal efforts are made to contact the delinquent borrower. If a residential
real estate loan continues in a delinquent status for 90 days or more, Coastal
Federal generally initiates foreclosure proceedings. Coastal Federal generally
initiates foreclosure proceedings on a commercial real estate loan if the loan
continues in a delinquent status for 60 days or more. In certain limited
instances, however, Coastal Federal may modify the loan or grant a limited
moratorium on loan payments to enable the borrower to reorganize his financial
affairs.
Problem Assets and Asset Classification. Loans are reviewed on a
regular basis and a reserve for uncollectible interest is established on loans
where collection of interest is questionable, generally when such loans become
90 days delinquent. Loan balances that relate to interest amounts reserved are
considered to be on a nonaccrual basis. Typically, payments received on a
nonaccrual loan are applied to the outstanding principal and interest as
determined at the time of collection of the loan.
<PAGE>
The following table sets forth information with respect to the Bank's
non-performing assets at the dates indicated. At each of the dates indicated,
Coastal Federal has no debt that has been restructured.
<TABLE>
<CAPTION>
At September 30,
-------------------------------------------------------
1993 1994 1995 1996 1997
------ ------ ------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Loans accounted for on a nonaccrual basis:
Real estate -
Residential ........................... $ 205 $ 79 $ 999 $ 307 $ 71
Commercial ............................ 64 1,056 134 -- --
Commercial business ................... -- -- 154 60 99
Consumer .............................. 44 16 36 78 87
------ ------ ------ ------ ------
Total ................................ 313 1,151 1,323 445 257
------ ------ ------ ------ ------
Accruing loans which are
contractually past due
90 days or more:
Real estate -
Residential ........................... -- -- -- -- --
Commercial ............................ -- -- -- -- --
Commercial business .................... -- -- -- -- --
Consumer ............................... -- -- -- -- --
------ ------ ------ ------ ------
Total ................................ -- -- -- __ -- --
------ ------ ------ ------ ------
Restructured loans ....................... -- -- -- -- --
Real estate owned ........................ 2,197 781 789 323 250
Other nonperforming
assets .................................. -- -- -- -- --
------ ------ ------ ------ ------
Total nonperforming
assets .................................. $2,510 $1,932 $2,112 $ 768 $ 507
====== ====== ====== ====== ======
Total nonaccrual loans to net
loans ................................... .10% .03% .36% .12% .06%
Total nonaccrual loans to total
assets .................................. .09% .03% .33% .10% .05%
Total nonperforming assets
to total assets ......................... .74% .56% .53% .17% .10%
</TABLE>
For the year ended September 30, 1997, gross interest income which
would have been recorded had non-accruing loans been current in
accordance with their original terms would have amounted to
approximately $13,000, of which approximately $5,000 was included in
interest income. There were no impaired loans at September 30, 1996 or
1997.
<PAGE>
The allowance for uncollectible interest which is netted against
accrued interest receivable totaled $50,000 and $36,000 at September 30, 1996
and 1997, 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 three classifications for problem assets: substandard,
doubtful and loss. Substandard assets must have one or more defined weaknesses
and are characterized by the distinct possibility that the insured institution
will sustain some loss if the deficiencies are not corrected. Doubtful assets
have the weaknesses of substandard assets with the additional characteristic
that the weaknesses make collection or liquidation in full on the basis of
currently existing facts, conditions and values questionable, and there is a
high possibility of loss. An asset classified loss is considered uncollectible
and of such little value that continuance as an asset of the institution is not
warranted. The regulations also have a special mention category, described as
assets which do not currently expose an insured institution to a sufficient
degree of risk to warrant classification but do possess credit deficiencies or
potential weaknesses deserving management's close attention. Assets classified
as substandard or doubtful require the institution to establish general
allowances for loan losses. If an asset or portion thereof is classified loss,
the insured institution must either establish specific allowances for loan
losses in the amount of 100% of the portion of the asset classified loss or
charge off such amount. A portion of general loss allowances established to
cover possible losses related to assets classified substandard or doubtful may
be included in determining an institution's regulatory capital, while specific
valuation allowances for loan losses generally do not qualify as regulatory
capital.
Coastal Federal had one individual classified asset in excess of
$500,000 as of September 30, 1997. At that date, classified assets amounted to
$6.8 million ($1.6 million substandard; $15,000 doubtful; and $5.2 million
special mention). In the first quarter of fiscal 1998, the classified asset in
excess of $500,000 was paid in full.
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, 1995, 1996 and
1997 of $202,000, $790,000 and $760,000, respectively. As a result, the Bank has
a $4.9 million allowance for loan losses as of September 30, 1997. The allowance
as a percentage of loans receivable was 1.19% at September 30, 1997 compared to
1.11% at September 30, 1996. See "Management's Discussion and Analysis
- --Non-Performing Assets and --Allowance for Loan Losses" in the 1997 Annual
Report to Stockholders attached hereto and incorporated by reference.
<PAGE>
While the Bank believes it has established its existing allowance for
loan losses in accordance with GAAP at September 30, 1997, 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.
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,
-------------------------------------------------------------
1993 1994 1995 1996 1997
------- ------- ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Allowance at beginning of
period ............................. $ 1,851 $ 2,753 $ 3,353 $ 3,578 $ 4,172
Allowance recorded on
acquired loans ...................... -- -- -- -- 110
Provision for loan losses ........... 1,389 510 202 790 760
------- ------- ------- ------- -------
Recoveries:
Residential real estate ............ -- 3 232 -- 20
Commercial real estate ............. 11 148 11 75 14
Real estate construction ........... -- -- -- -- --
Consumer ........................... 106 79 12 7 38
------- ------- ------- ------- -------
Total recoveries ................. 117 230 255 82 72
------- ------- ------- ------- -------
Charge-offs:
Residential real estate ............ 71 38 206 24 46
Commercial real estate ............. 392 13 18 216 --
Real estate construction ........... -- -- -- -- --
Consumer ........................... 141 89 8 38 166
------- ------- ------- ------- -------
Total charge-offs ................ 604 140 232 278 212
------- ------- ------- ------- -------
Net charge-offs (recoveries) ..... 487 (90) (23) 196 140
------- ------- ------- ------- -------
Allowance at end of period ......... $ 2,753 $ 3,353 $ 3,578 $ 4,172 $ 4,902
======= ======= ======= ======= =======
Ratio of allowance to net
loans outstanding at the
end of the period .................. 0.98% 1.01% 1.00% 1.11% 1.19%
Ratio of net charge-offs (recoveries)
to average loans outstanding
during the period .................. 0.17% (.03%) (.01%) .05% .04%
</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,
-------------------------------------------------------------------------------------------------
1993 1994 1995
--------------------------------- --------------------------------- ----------------------------
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................... $ 542 0.25% 75.48% $ 742 .30% 75.05% $ 803 .31% 72.03%
Commercial.................... 1,901 5.54 12.22 2,296 5.58 11.94 2,371 4.36 14.17
Consumer...................... 310 .89 12.30 315 .71 13.01 404 .80 13.80
------ ------ ------ ------ ------ ------
Total allowance for
loan losses.................. $2,753 0.98% 100.00% $3,353 1.01% 100.00% $3,578 1.00% 100.00%
====== ====== ====== ====== ====== =======
<CAPTION>
September 30,
-------------------------------------------------------------------
1996 1997
--------------------------------- --------------------------------
As a % Loan Type As a % Loan Type
of out- As a % of out- As a %
standing of out- standing of out-
loans in standing loans in standing
Amount category loans Amount category loans
------ -------- ----- ------ -------- -----
<S> <C> <C> <C> <C> <C> <C>
Real Estate -- mortgage
Residential................... $ 837 .37% 65.35% $1,064 .41% 63.56%
Commercial.................... 2,875 3.80 22.34 3,261 2.78 28.52
Consumer...................... 460 1.01 12.31 577 1.77 7.92
------ ---- ------ ------
Total allowance for
loan losses.................. $4,172 1.11% 100.00% $4,902 1.19% 100.00%
====== ====== ====== ======
</TABLE>
<PAGE>
Investment Activities
Under OTS regulations, the Bank has authority to invest in various
types of liquid assets, including U.S. Treasury obligations, securities of
various federal agencies and of state and municipal governments, deposits at the
FHLB of Atlanta, certificates of deposit of federally insured institutions,
certain bankers' acceptances and federal funds. Subject to various restrictions,
such savings institutions may also invest a portion of their assets in
commercial paper, corporate debt securities and mutual funds, the assets of
which conform to the investments that federally chartered savings institutions
are otherwise authorized to make directly. These institutions are also required
to maintain minimum levels of liquid assets which vary from time to time. See
"Regulation of Coastal Federal - Federal Home Loan Bank System." The Bank may
decide to increase its liquidity above the required levels depending upon the
availability of funds and comparative yields on investments in relation to
return on loans.
Coastal Federal is required under federal regulations to maintain a
minimum amount of liquid assets and is also permitted to make certain other
securities investments. See "Regulation" herein and "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources" in the Annual Report. The balance of the Bank's investments
in short-term securities in excess of regulatory requirements reflects
management's response to the significantly increasing percentage of deposits
with short maturities. At September 30, 1997, Coastal Federal's regulatory
liquidity was 6.1%, which was in excess of the required 4.0%.
Investment decisions are made by the Investment Officer who reports
quarterly to the Asset/Liability Committee ("ALCO Committee"). The ALCO
Committee meets quarterly and consists of Directors Benton, Creel, Bishop,
Springs, Clemmons and Gerald, Chief Financial Officer Rexroad and Executive Vice
Presidents Graham, Griffin and Stalvey. The ALCO Committee acts within policies
established by the Board of Directors. At September 30, 1997, the Bank's
investment portfolio had a market value of approximately $49.2 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,
------------------------------------------------------------------------------------------------
1995 1996 1997
--------------------------- -------------------------- -------------------------
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......................... 1,000 42.94 17,334 98.13 17,738 67.89
FNMA......................... -- -- -- -- -- --
FFCB......................... 999 42.89 -- -- 7,391 28.29
Municipal.................... 330 14.17 330 1.87 -- --
--- ------- ------ ----- ----- -----
Total....................... $2,329 100.00% $17,664 100.00% $26,124 100.00%
====== ====== ======= ====== ======= ======
</TABLE>
(1) The market value of the Bank's investment securities portfolio amounted to
$2.3 million, $17.5 million and $26.2 million at September 30, 1995, 1996
and 1997, respectively.
The following table sets forth the final maturities and weighted
average yields of the securities at amortized cost at September 30, 1997.
<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................................... -- -- -- -- 995 6.89
FHLB................................... -- -- 6,506 6.72 11,231 6.93
FNMA................................... -- -- -- -- -- --
FFCB................................... -- -- 3,490 6.84 3,902 7.04
Municipal............................... -- -- -- -- -- --
---- --- ------ ---- ------- ----
Total................................ $ -- --% $9,996(1) 6.78% $16,128(2) 6.95%
==== === ====== ===== ======= ====
</TABLE>
(1) Includes $8.7 million subject to call provisions. Should these bonds be
called prior to maturity the Bank may not be able to obtain the same yield
with similar term securities.
(2) Includes $13.8 million subject to call provisions. Should these bonds be
called prior to maturity the Bank may not be able to obtain the same yield
with similar term securities.
<PAGE>
The following table sets forth Coastal Federal's mortgage-backed
securities portfolio at amortized cost at the dates indicated.
<TABLE>
<CAPTION>
September 30,
---------------------------------------------------------------------------------
1995 1996 1997
------------------------- ------------------------ ------------------------
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 ................... $11,246 88.02% $18,861 70.75% $14,048 62.79%
FNMA .................... 538 4.22 2,469 9.26 1,861 8.31
GNMA .................... 992 7.76 5,330 19.99 6,471 28.90
------- ------ ------- ------ ------- ------
Total .................. $12,776 100.00% $26,660 100.00% $22,380 100.00%
======= ====== ======= ====== ======= ======
</TABLE>
(1) The market value of the Bank's mortgage-backed securities portfolio
amounted to $12.9 million, $27.0 million and $23.0 million at September 30,
1995, 1996 and 1997, respectively.
The following table sets forth the maturities and weighted average
yields of the securities at September 30, 1997.
<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>
Mortgage-Backed Securities: ..............
FHLMC................................... $ -- --% $-- --% $14,048 7.90%
FNMA.................................... 216 8.67 -- -- 1,645 6.57
GNMA.................................... -- -- -- -- 6,471 7.46
---- ---- --- -- ------- ----
Total..................................... $216 8.67% $-- --% $22,164 7.67%
==== ==== === == ======= ====
</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>
<CAPTION>
+------------------------+
| |
| COASTAL FEDERAL |
| |
| |
+------------------------+
|
|
+------------------------+
| |
| COASTAL MORTGAGE |
| BANKERS* |
| |
+------------------------+
|
|
|
|
+------------------------------------------------+----------------------------------------+
| | | | |
<S> <C> <C> <C> <C>
+------------------+ +-----------------+ +---------------+ +----------------+ +-------------------+
| 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."
<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,
1997.
In prior years, the Bank made loans to purchasers of units in which the
Bank's subsidiaries were involved in a joint venture.
The following table summarizes the balances of permanent loans to
individual unit purchasers, by project, at September 30, 1997 (net of
participations sold to other financial institutions).
<TABLE>
<CAPTION>
Number of Total Slow Loans(1)
Project Borrowers Amount Number Amount
- ------- --------- ------ ------ ------
<S> <C> <C> <C> <C>
Beach Cove 87 $5,440,601 -- $ --
Condominium
North Myrtle Beach,
South Carolina
Bluewater 103 $4,207,632 1 $55,529
Condominium
Myrtle Beach,
South Carolina
Cobblestone Villas 58 $2,101,438 -- $ --
Condominium
Myrtle Beach,
South Carolina
Carolina Pines 16 $ 449,483 -- $ --
Condominium
Conway, South Carolina
</TABLE>
- ----------
(1) Loans over 60 days delinquent
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.
<PAGE>
The business of real estate development involves substantial risks. In
addition, the development and sale of condominium projects is subject to a
number of federal and state statutes, including, but not limited to, the
Interstate Land Sales Full Disclosure Act, Federal Securities Act of 1933, state
"Blue Sky" laws, state real estate laws, Federal Unfair Trade Practices Act,
South Carolina Unfair Trade Practices Act and the Racketeer Influenced and
Corrupt Organizations Act, the violation of which could result in liability to
the participant. Furthermore, changes in the federal income tax laws have
reduced the attractiveness of rental property as an investment, which may
adversely affect the ability to sell these properties.
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,
------------------------------------------------------------------------------------
1995 1996 1997
----------------- ------------------------------ ------------------------------
Percent Percent Percent
of of Increase of Increase
Amount Total Amount Total (Decrease) Amount Total (Decrease)
------ ----- ------ ----- ---------- ------ ----- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Transaction accounts:
NOW checking ............................. $ 29,852 10.93% $ 35,654 11.38% $ 5,802 $ 38,773 11.17 $ 3,119
Commercial checking ...................... 16,494 6.04 19,926 6.36 3,432 23,765 6.85 3,839
-------- ----- -------- ----- -------- --------- ----- --------
Total transaction accounts ................. 46,346 16.97 55,580 17.74 9,234 62,538 18.02 6,958
-------- ----- -------- ----- -------- --------- ----- --------
Money market demand accounts ............... 41,516 15.20 84,997 27.12 43,481 104,476 30.10 19,479
Savings accounts ........................... 46,421 17.00 42,840 13.66 (3,581) 39,445 11.36 (3,395)
Fixed-rate certificates (original maturity):
3 months .................................. 3,431 1.26 2,122 .68 (1,309) 1,826 .53 (296)
6 months .................................. 9,522 3.49 23,479 7.49 13,957 22,185 6.39 (1,294)
9 months .................................. 26,751 9.80 9,293 2.96 (17,458) 7,342 2.12 (1,951)
12 months ................................. 57,315 21.00 47,059 15.01 (10,256) 43,901 12.64 (3,158)
18 months ................................. 12,426 4.55 20,981 6.69 8,555 32,250 9.29 11,269
24 months ................................. 3,845 1.41 4,049 1.29 204 7,390 2.13 3,341
30 months ................................. 1,786 .65 2,189 .70 403 4,809 1.39 2,620
36 months ................................. 9,504 3.48 8,944 2.85 (560) 9,215 2.65 271
48 months ................................. 4,613 1.69 4,728 1.51 115 5,664 1.63 936
96 months ................................. 24 -- 26 .01 2 27 .01 1
Mini-jumbo ................................ -- -- -- -- -- -- -- --
Jumbo ..................................... -- -- -- -- -- -- -- --
-------- ----- -------- ----- -------- --------- ----- --------
129,217 47.33 122,870 39.20 (6,347) 134,609 38.78 11,739
-------- ----- -------- ----- -------- --------- ----- --------
Variable rate certificates:
(original maturity)
18 months ................................. 7,100 2.60 4,593 1.47 (2,507) 3,678 1.06 (915)
30 months ................................. 2,499 .90 2,550 .81 51 2,370 .68 (180)
-------- ----- -------- ----- -------- --------- ----- --------
Total variable ............................. 9,599 3.50 7,143 2.28 (2,456) 6,048 1.74 (1,095)
-------- ----- -------- ----- -------- --------- ----- --------
Total certificates ......................... 138,816 50.83 130,013 41.48 (8,803) 140,657 40.52 10,644
-------- ----- -------- ----- -------- --------- ----- --------
Total deposits ............................. $273,099 100.00% $313,430 100.00% $ 40,331 $ 347,116 100.00% $ 33,686
======== ====== ======== ====== ======== ========= ====== ========
</TABLE>
<PAGE>
Time Deposits by Maturity and Rate
The following table sets forth the amount and maturities of time deposits at
September 30, 1997.
<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%........... $ 93,712 $13,956 $2,364 $ 547 $27 $110,606
6.00 - 8.00%........... 18,230 9,482 1,164 807 -- 29,683
8.01 - 10.00%.......... -- 266 102 -- -- 368
-------- ------- ------ ------ --- --------
Total................ $111,942 $23,704 $3,630 $1,354 $27 $140,657
======== ======= ====== ====== === ========
</TABLE>
The following table sets forth the amount and maturities of time deposits
with balances of $100,000 or more at September 30, 1997.
<TABLE>
<CAPTION>
Amount Due
----------------------------------------------------------------------------
Within Over 3 Over 6 Over 12
3 months through 6 months through 12 months Months
-------- ---------------- ----------------- ------
(In thousands)
<S> <C> <C> <C>
$3,639 $11,141 $7,616 $8,240
====== ======= ====== ======
</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, 1997,
Coastal Federal had advances totaling $101.5 million from the FHLB of Atlanta
due on various dates through 2005 with a weighted average interest rate of
5.86%.
<PAGE>
The FHLB of Atlanta functions as a central reserve bank providing
credit for savings institutions and certain other member financial institutions.
As a member, Coastal Federal is required to own capital stock in the FHLB of
Atlanta and is authorized to apply for advances on the security of such stock
and certain of its mortgage loans and other assets (principally securities which
are obligations of, or guaranteed by, the United States) provided certain
standards related to creditworthiness have been met. Advances are made pursuant
to several different programs. Each credit program has its own interest rate and
range of maturities. Depending on the program, limitations on the amount of
advances are based either on a fixed percentage of an institution's net worth or
on the FHLB's assessment of the institution's creditworthiness. The FHLB of
Atlanta determines specific lines of credit for each member institution.
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, 1997, the
Bank did not have any broker repurchase agreements. The Bank has also offered
repurchase agreements to its customers which are borrowings that are
collateralized by underlying government securities. At September 30, 1997, the
Bank had $2.7 million outstanding in customer repurchase agreements.
<PAGE>
The following tables set forth certain information regarding short-term
borrowings by the Bank at the end of and during the periods indicated:
<TABLE>
<CAPTION>
At September 30,
---------------------------------
1995 1996 1997
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Outstanding balance:
Securities sold under agreements
to repurchase:
Customer ............................ $ 2,677 $ 3,365 $ 2,666
Broker .............................. -- --
Short-term FHLB advances .............. 36,989 54,404 68,620
Weighted average rate paid on:
Securities sold under agreements
to repurchase:
Customer ............................ 3.77% 3.57% 3.16%
Broker .............................. -- -- --
Short-term FHLB advances .............. 6.40 5.68 5.60
Maximum amount of borrowings outstanding
at any month end:
Securities sold under agreements
to repurchase:
Customer ............................ $ 3,448 $ 3,950 $ 3,257
Broker .............................. -- 12,840 37,516
Short-term FHLB advances .............. 85,078 68,213 75,020
Approximate average short-term borrowings
outstanding with respect to:
Securities sold under agreements
to repurchase:
Customer ............................ $ 1,700 $ 2,900 $ 2,100
Broker .............................. -- 4,100 17,200
Short-term FHLB advances .............. 61,400 56,600 74,023
Weighted average rate paid on:
Securities sold under agreements
to repurchase:
Customer ............................ 3.70% 3.55% 3.36%
Broker .............................. -- 5.40 5.60
Short-term FHLB advances .............. 6.17 5.68 5.60
</TABLE>
Competition
As of September 30, 1997, Coastal Federal had the largest market share
(14.0%) 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
<PAGE>
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, 1997, the Company had 202 full-time Associates and
15 part-time Associates. The Associates are not represented by a collective
bargaining unit. The Bank believes its relationship with its Associates is
excellent.
REGULATION OF COASTAL FINANCIAL
General
The Corporation is a savings and loan holding company within the
meaning of the Home Owners' Loan Act of 1933 ("HOLA"), as amended by FIRREA. As
such, the Corporation is registered with the OTS and is subject to OTS
regulations, examinations, supervision and reporting requirements. As explained
more fully below under "Regulation of Coastal Federal - Federal Regulation of
Savings Associations," the key provisions of FIRREA replaced the Federal Home
Loan Bank Board ("FHLBB") with the OTS, abolished the Federal Savings and Loan
Insurance Corporation ("FSLIC") and vested the prior insurance responsibilities
of the FSLIC with the FDIC. As a subsidiary of a savings and loan holding
company, the Bank is subject to certain restrictions in its dealings with the
Corporation and with other companies affiliated with the Corporation and also is
subject to regulatory requirements and provisions as a federal savings and loan
association.
Holding Company Acquisitions
The HOLA and OTS regulations generally prohibit a savings and loan
holding company, without prior OTS approval, from acquiring any other savings
association or savings and loan holding company or controlling the assets
thereof. They also prohibit, among other things, any director or officer of a
savings and loan holding company, or any individual who owns or controls more
than 25 percent of the voting shares of such holding company, from acquiring
control of any savings association not a subsidiary of such savings and loan
holding company, unless the acquisition is approved by the OTS.
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.
<PAGE>
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
<PAGE>
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
<PAGE>
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 30,1997, equaled $283,000.
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 will be charged an
assessment of approximately 0.065% of SAIF-assessable deposits for the purpose
of paying interest on the obligations issued by the Financing Corporation
("FICO") in the 1980s to help fund the thrift industry cleanup. BIF-assessable
deposits will be charged an assessment to help pay interest on the FICO bonds at
a rate of approximately 0.013% until the earlier of December 31, 1999 or the
date upon which the last savings association ceases to exist, after which time
the assessment will be the same for all insured deposits.
The 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.
<PAGE>
The Bank, as a member of the FHLB-Atlanta, is required to acquire and
hold shares of capital stock in the FHLB-Atlanta in an amount equal to the
greater of (i) 1.0% of the aggregate outstanding principal amount of residential
mortgage loans, home purchase contracts and similar obligations at the beginning
of each year, or (ii) 1/20 of its advances (borrowings) from the FHLB-Atlanta.
The Bank is in compliance with this requirement with an investment in
FHLB-Atlanta stock of $5.6 million at September 30, 1997.
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.)
<PAGE>
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, 1997, 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.
<PAGE>
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, 1997, 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.
<PAGE>
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
<PAGE>
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, 1997, Coastal Federal's core capital of approximately
$31.2 million, or 6.31% of adjusted total assets, was $16.5 million in excess of
the OTS requirement of $14.7 million, or 3% of adjusted total assets. As of such
date, the Bank's tangible capital of approximately $31.2 million, or 6.31% of
adjusted total assets, was $23.8 million in excess of the OTS requirement of
$7.4 million, or 1.5% of adjusted total assets. Finally, at September 30, 1997,
the Bank had risk-based capital of approximately $34.7 million or 11.05% of
total risk-weighted assets, which was $9.6 million in excess of the OTS
risk-based capital requirement of $25.1 million or 8% of risk-weighted assets.
See note 12 on page 28 of the Company's Annual Report to Stockholders for the
fiscal year ended September 30, 1997.
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.
<PAGE>
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, 1997, the Bank's limit on loans to
one borrower was $5.2 million. However, the Bank may request to increase its
loan to one borrower for borrowers who develop one to four family residential
projects. At September 30, 1997, the Bank's largest aggregate amount of loans to
one borrower was $5.6 million, all of which was performing according to its
terms. The Bank 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
<PAGE>
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.
<PAGE>
Tax Bad Debt Reserves. For taxable years beginning prior to January 1,
1996, savings institutions such as the Bank which met certain definitional tests
primarily relating to their assets and the nature of their business ("qualifying
thrifts") were permitted to establish a reserve for bad debts and to make annual
additions thereto, which additions may, within specified formula limits, have
been deducted in arriving at their taxable income. The Bank's deduction with
respect to "qualifying loans," which are generally loans secured by certain
interests in real property, may have been computed using an amount based on the
Bank's actual loss experience, or a percentage equal to 8% of the Bank's taxable
income, computed with certain modifications and reduced by the amount of any
permitted additions to the nonqualifying reserve. Each year the Bank selected
the most favorable way to calculate the deduction attributable to an addition to
the tax bad debt reserve. The Bank used the percentage-of-taxable-income method
for the taxable years ended September 30, 1995 and 1996. For the period ending
September 30, 1997, the Bank was required to change its tax method of accounting
for bad debts to the experience method.
Recently enacted legislation repealed the reserve method of accounting
for bad debt reserves for tax years beginning after December 31, 1995. As a
result, savings associations will no longer be able to calculate their deduction
for bad debts using the percentage-of-taxable-income method. Instead, they will
be required to compute their deduction based on specific charge-offs during the
taxable year or, if the savings association or its controlled group had assets
of less than $500 million, based on actual loss experience over a period of
years. For the taxable year ended September 30, 1997, the controlled group has
assets less than $500 million. The legislation also requires savings
associations to recapture into taxable income over a six-year period their
post-1987 additions to their bad debt tax reserves, thereby generating
additional current tax liability. At September 30, 1997, the Bank's post-1987
reserves totaled approximately $1.53 million. The recapture may be suspended for
up to two years if, during those years, the institution satisfies a residential
loan requirement. The Bank anticipates meeting the residential loan requirement
for the taxable year ending September 30, 1997.
Under prior law, if the Bank failed to satisfy the qualifying thrift
definition tests in any taxable year, it would be unable to make additions to
its bad debt reserve. Instead, the Bank would be required to deduct bad debts as
they occur and would additionally be required to recapture its bad debt reserve
deductions ratably over a multi-year period. At September 30, 1997, the Bank's
total bad debt reserve for tax purposes was approximately $ 6.71 million. Among
other things, the qualifying thrift definitional tests required the Bank to hold
at least 60% of its assets as "qualifying assets". Qualifying assets generally
include cash, obligations of the United States or any agency or instrumentality
thereof, certain obligations of a state or political subdivision thereof, loans
secured by interests in improved residential real property or by savings
accounts, student loans and property used by the Bank in the conduct of its
banking business. Under current law, a savings association will not be required
to recapture its pre-1988 bad debt reserves if it ceases to meet the qualifying
thrift definitional tests. However, if the Bank fails to meet the definition of
a "bank" under Internal Revenue Code Section 581 it will be required to
recapture its pre-1988 tax bad debt reserves. The Bank anticipates meeting the
definition of a "bank" in the future.
Distributions. To the extent that the Bank makes "nondividend
distributions" to the Corporation that are considered as made: (i) from the
reserve for losses on qualifying real property loans, to the extent the reserve
for such losses exceeds the amount that would have been allowed under the
<PAGE>
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.
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 10 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, 1997.
<TABLE>
<CAPTION>
Total Investment
Including Land, Net Book Approximate
Year Building, Furni- Value as of Square Owned/
Location Opened ture and Fixtures 9/30/97 Footage Leased
- -------- ------ ----------------- ------- ------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Main Office
2619 Oak St. 1980 $6,864 $2,929 25,000 Owned
Myrtle Beach, SC (1)
Dunes Office
7500 North Kings Hwy 1971 543 157 2,000 Owned
Myrtle Beach, SC
Ocean Drive Office
521 Main Street 1973 989 535 4,100 Owned
North Myrtle Beach, SC
Surfside Office
112 Highway 17 South 1975 642 220 2,300 Owned
& Glenns Bay Road
Surfside Beach, SC
Conway Office
310 Highway 378 1976 909 315 2,882 Owned
Conway, SC
Socastee Office
1 Cimerron Drive 1981 807 254 2,275 Owned
Myrtle Beach, SC
Murrells Inlet Office
Highway 17 South 1986 1,075 636 3,450 Owned
Murrells Inlet, SC
Waccamaw Medical Pk Office
7000 Waccamaw Medical Pk Rd 1986 632 361 1,450 Owned
Conway, SC
Florence Office
1385 Alice Drive 1996 365 317 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
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Total Investment
Including Land, Net Book Approximate
Year Building, Furni- Value as of Square Owned/
Location Opened ture and Fixtures 9/30/97 Footage Leased
- -------- ------ ----------------- ------- ------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Coastal Investments
Corporation
2619 Oak Street 1987 72 40 N/A N/A
Myrtle Beach, SC
Coastal Federal Mortgage, Inc.
1385 Alice Drive 1995 170 138 1,038 Leased
Florence, SC
<CAPTION>
Total Investment
Including Land, Net Book
Year Building, Furni- Value as of Square Owned/
Location Opened ture and Fixtures 9/30/97 Footage Leased
- -------- ------ ----------------- ------- ------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Sunset Beach Office
7290 Beach Drive, SW 1994 26 19 900 Leased
Sunset Beach, NC
South Brunswick Office Under
1625 Seaside Road S.W. Construction 496 496 3,000 Owned
Sunset Beach, NC
Mall Plaza 1997 1,143 1,143 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.
The net book value of the Company's investment in office, properties
and equipment totaled $7.6 million at September 30, 1997. See Note 6 of Notes to
the Consolidated Financial Statements. Coastal Federal uses the services of an
independent data processing service to process customer records and monetary
transactions, post deposit and general ledger entries and record activity in
installment lending, loan servicing and loan originations.
The Company began working on year 2000 compliance issues in early 1997.
Its data processor is currently 65% complete with their programming. Testing
will begin in July 1998 and the Company expects to be in full compliance by
December 31, 1998. Internal software applications and hardware compliance issues
will be resolved by December 31, 1998, to allow testing in early 1999. The
Company believes it has adequate resources and funds to address the year 2000
issues. The Company is also in the process of addressing any loan relationships
it believes could be materially effected by year 2000 issues.
<PAGE>
Item 3. Legal Proceedings
The Bank is a defendant in one significant lawsuit as summarized below.
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
discussions.
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, 1997
("Annual Report") is incorporated herein by reference.
Item 6. Selected Financial Data
The information contained in the section captioned "Selected Financial
Highlights" in the Annual Report is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
The information contained in the section captioned "Management's
Discussion and Analysis" in the Annual Report is incorporated herein by
reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
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.
<PAGE>
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, 1997.
<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 % $ 41,209 -24.68 %
300 basis point rise -32.00 % $ 46,331 -15.32 %
200 basis point rise -20.00 % $ 50,635 - 7.46 %
100 basis point rise -11.00 % $ 53,617 - 2.01 %
No Change 00 % $ 54,715
100 basis point decline -18.00 % $ 54,194 - 0.95 %
200 basis point decline -22.00 % $ 53,561 - 2.11 %
300 basis point decline -37.00 % $ 53,924 - 1.45 %
400 basis point decline -55.00 % $ 55,573 1.57 %
</TABLE>
The preceding table indicates that at September 30, 1997, 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, 1997, 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 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 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.
<PAGE>
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 $.5 million, or .11% of the
Company's total assets of $494.0 million at September 30, 1997. For futher
information concerning the Bank's market risk, see the table on page 14 of this
document.
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
1998 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>
Executive Officers of the Registrant
Name, Age and Position Business Experience
- ---------------------- -------------------
Michael C. Gerald, 48, Mr. Gerald has been associated with
President, Chief Executive Coastal Federal since 1974 and serves as
Officer and a Director Director, President and Chief Executive
Officer of the Corporation and Bank. Mr.
Gerald also serves as Director and
President of Coastal Mortgage Bankers &
Realty Company, Inc., and as Director
and President of Coastal Federal
Mortgage and Coastal Investments
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 Institute of
Financial Education, the Board of
Trustees of the Franklin G. Burroughs
and Simeon B. Chapin Art Museum and is a
member of the Board of Directors of the
Coastal Education Foundation.
Jimmy R. Graham, 49, Mr. Graham serves as Executive Vice
Executive Vice President and President and Information Systems Group
Information Systems Group Leader of Coastal Federal. Mr. Graham
Leader serves as Executive Vice President of
Coastal Financial Corporation. He has
been associated with the Bank since
1977.
Jerry L. Rexroad, CPA, 37, Mr. Rexroad joined the Company in April
Executive Vice President and 1995 and is Executive Vice President and
Chief Financial Officer Chief Financial Officer of Coastal
Federal and Coastal Financial
Corporation. Mr. Rexroad also serves as
the Chief Financial Officer and a
Director for Coastal Federal Mortgage
Bankers & Realty Company, Inc., Coastal
Investments Corporation, and Coastal
Federal Mortgage. He currently serves as
Chairman of the Junior Achievement Board
of Directors and Advisory Council of
Horry County. He is a Past Chairman of
the Board and Treasurer of Junior
Achievement of Greenville. Mr. Rexroad
is the President of the Financial
Manager's Society of South Carolina.
<PAGE>
Name, Age and Position Business Experience
- ---------------------- -------------------
Jerry L. Rexroad, CPA, 37, He is a certified public accountant, and
Executive Vice President and is a member of the AICPA and SCACPA.
Chief Financial Officer Prior to joining the Company, Mr.
(continued) Rexroad was a partner with KPMG Peat
Marwick LLP where he was partner in
charge of the Financial Institutions
practice in South Carolina.
Allen W. Griffin, 37, Mr. Griffin is currently Executive Vice
Executive Vice President President and Banking Administration
and Banking Administration Group Leader for Coastal Federal. He
Group Leader also serves as an Executive Vice
President of the Corporation. He has
been associated with the Bank for the
past eleven years. Mr. Griffin is a
School Director for Christian Academy
and is past Director of the Eastern
Group of Robert Morris Associates
Chapter, Myrtle Beach Rotary Club of the
YMCA, and Junior Achievement.
Phillip G. Stalvey, 41, Mr. Stalvey is Executive Vice President
Executive Vice President and Sales Group Leader for the Bank. He
and Sales Group Leader also serves as an Executive Vice
President of the Corporation and is a
director of Coastal Federal Mortgage and
Coastal Investment Corporation. He has
been associated with Coastal Federal for
the past 15 years. In addition, Mr.
Stalvey is a member of the Florence
Stake Presidency with his Church, a
committee member of a local Scout Troop,
Landscape Committee Chairman for the
City of Myrtle Beach and a Board of
Director for the Myrtle Beach Airforce
Base Redevelopment Authority.
Susan J. Cooke, 47, Ms. Cooke is Vice President and
Vice President and Corporate Secretary for Coastal Federal,
Corporate Secretary Corporate Secretary for Coastal
Financial Corporation, Coastal Mortgage
Bankers & Realty Company, Inc., and
Coastal Investments Corporation. Ms.
Cooke has been employed with Coastal
Federal for ten years. She is a member
of the American Society of Corporate
Secretaries, Inc. and the National
Association for Female Executives.
<PAGE>
Item 11. Executive Compensation
The information contained under the section captioned "Proposal I --
Election of Directors -- Remuneration of Executive Officers" in the Proxy
Statement is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and
Management
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by
reference to the section captioned "Voting Securities and
Principal Holders Thereof" of the Proxy Statement.
(b) Security Ownership of Management
Information required by this item is incorporated herein by
reference to the sections captioned "Proposal I -- Election of
Directors" and "Voting Securities and Principal Holders
Thereof" of the Proxy Statement.
(c) Management of the Corporation knows of no arrangements,
including any pledge by any person of securities of the
Corporation, the operation of which may at a subsequent date
result in a change in control of the registrant.
Item 13. Certain Relationships and Related Transactions
The information required by this item is incorporated herein by
reference to the section captioned "Proposal I -- Election of Directors" and
"Voting Securities and Principal Holders Thereof" in the Proxy Statement.
<PAGE>
SIGNATURES
+ Pursuant to the requirements of Section 13 or 15 (d) of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
COASTAL FINANCIAL CORPORATION
Date: December 26, 1997 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 26, 1997 Date: December 26, 1997
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 26, 1997 Date: December 26, 1997
By: /s/ James C. Benton By: /s/ Samuel A. Smart
------------------- -------------------
James C. Benton Samuel A. Smart
Director Director
Date: December 26, 1997 Date: December 26, 1997
By: /s/ Harold D. Clardy By: /s/ James P. Creel
-------------------- ------------------
Harold D. Clardy James P. Creel
Director Director
Date: December 26, 1997 Date: December 26, 1997
By: /s/ G. David Bishop By: /s/ James H. Dusenbury
-------------------- ----------------------
G. David Bishop James H. Dusenbury
Director Director
Date: December 26, 1997 Date: December 26, 1997
<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, 1996 and 1997.
(b) Consolidated Statements of Operations for the Years
Ended September 30, 1995, 1996 and 1997.
(c) Consolidated Statements of Stockholders' Equity for
the Years Ended September 30, 1995, 1996 and 1997.
(d) Consolidated Statements of Cash Flows for the Years
Ended September 30, 1995, 1996 and 1997.
(e) Notes to Consolidated Financial Statements.
3. All schedules have been omitted as the required information is
either inapplicable or included in the Notes to Consolidated
Financial Statements.
4. Exhibits
3 (a) Certificate of Incorporation of Coastal Financial
Corporation**
3 (b) Bylaws of Coastal Financial Corporation**
10 (a) Employment Agreement with Michael C. Gerald***
(b) Employment Agreement with Jerry L. Rexroad***
(c) Employment Agreement with Phillip G. Stalvey
(d) Employment Agreement with Allen W. Griffin***
(e) Employment Agreement with Jimmy R. Graham***
(f) Employment Agreement with Richard L. Granger***
(g) Employment Agreement with Robert S. O'Harra***
(h) 1990 Stock Option Plan***
(i) Directors Performance Plan****
<PAGE>
13 Annual Report to Stockholders for the Fiscal Year
Ended September 30, 1997*
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, 1997, attached as an exhibit hereto.
** Incorporated by reference to Registration Statement on Form S-4 filed with
the Securities and Exchange Commission on November 26, 1990.
*** Incorporated by reference to 1995 Form 10K filed with the Securities and
Exchange Commission on December 29, 1995.
**** Incorporated by reference to the proxy statement for the 1996 Annual
Meeting of Stockholders.
EXHIBIT 10 (c)
EMPLOYMENT AGREEMENT WITH PHILLIP G. STALVEY
<PAGE>
EMPLOYMENT AGREEMENT
THIS AGREEMENT is made effective as of the 21st day of October, 1997,
by and between COASTAL FEDERAL SAVINGS BANK (the "Savings Bank"), Myrtle Beach,
South Carolina; COASTAL FINANCIAL CORPORATION, (the "Company"), a Delaware
corporation; and PHILLIP G. STALVEY (the "Executive").
WHEREAS, the Savings Bank wishes to assure itself of the services of
the Executive for the period provided in this Agreement; and
WHEREAS, the Executive is willing to serve in the employ of the Savings
Bank on a full-time basis for said period.
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, and upon the other terms and conditions hereinafter provided, the
parties hereby agree as follows:
1. POSITION AND RESPONSIBILITIES.
During the period of his employment hereunder, the Executive agrees to
serve as Executive Vice President of the Savings Bank.
2. TERMS AND DUTIES.
(a) 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 thirty-six (36)
full calendar months thereafter. Commencing on the first anniversary date, and
continuing at each anniversary date thereafter, the Board of Directors of the
Savings Bank (the "Board") may extend the Agreement for an additional year.
Prior to the extension of the Agreement as provided herein, the Board will
conduct a formal performance evaluation of the Executive for purposes of
determining whether to extend the Agreement, and the results thereof shall be
included in the minutes of the Board's meeting.
(b) During the period of his employment hereunder, except for periods
of absence occasioned by illness, reasonable vacation periods, and reasonable
leaves of absence, the Executive shall devote substantially all his business
time, attention, skill, and efforts to the faithful performance of his duties
hereunder including activities and services related to the organization,
operation and management of the Savings Bank; provided, however, that, with the
approval of the Board, as evidenced by a resolution of such Board, from time to
time, the Executive may serve, or continue to serve, on the boards of directors
of, and hold any other offices or positions in, companies or organizations,
which, in such Board's judgment, will not present any conflict of interest with
the Savings Bank, or materially affect the performance of the Executive's duties
pursuant to this Agreement.
3. COMPENSATION AND REIMBURSEMENT.
(a) The compensation specified under this Agreement shall constitute
the salary and benefits paid for the duties described in Sections 1 and 2. The
Savings Bank shall pay the Executive as compensation a salary of $125,000 per
year ("Base Salary"). Such Base Salary shall be payable in accordance with the
customary payroll practices of the Savings Bank. During the period of this
Agreement, the Executive's Base Salary shall be reviewed at least annually; the
first such review will be made no later than one year from the date of this
Agreement. Such review shall be conducted by a Committee designated by the
Board, and the Board may increase (but may not decrease) the Executive's Base
<PAGE>
Salary. In addition to the Base Salary provided in this Section 3(a), the
Savings Bank shall provide the Executive at no cost to the Executive with all
such other benefits as are provided uniformly to permanent full-time employees
of the Savings Bank.
(b) The Savings Bank will provide the Executive with employee benefit
plans, arrangements and perquisites substantially equivalent to those in which
the Executive was participating or otherwise deriving benefit from immediately
prior to the beginning of the term of this Agreement, and the Savings Bank will
not, without the Executive's prior written consent, make any changes in such
plans, arrangements or perquisites which would adversely affect the Executive's
rights or benefits thereunder. Without limiting the generality of the foregoing
provisions of this Subsection (b), the Executive will be entitled to participate
in or receive benefits under any employee benefit plans including, but not
limited to, retirement plans, supplemental retirement plans, pension plans,
profit-sharing plans, health-and-accident plan, medical coverage or any other
employee benefit plan or arrangement made available by the Savings Bank in the
future to its senior executives and key management employees, subject to, and on
a basis consistent with, the terms, conditions and overall administration of
such plans and arrangements. The Executive will be entitled to incentive
compensation and bonuses as provided in any plan, or pursuant to any arrangement
of the Savings Bank, in which the Executive is eligible to participate. Nothing
paid to the Executive under any such plan or arrangement will be deemed to be in
lieu of other compensation to which the Executive is entitled under this
Agreement, except as provided under Section 5(e).
(c) In addition to the Base Salary provided for by paragraph (a) of
this Section 3, the Savings Bank shall pay or reimburse the Executive for all
reasonable travel and other obligations under this Agreement and may provide
such additional compensation in such form and such amounts as the Board may from
time to time determine.
4. PAYMENTS TO THE EXECUTIVE UPON AN EVENT OF TERMINATION.
(a) Upon the occurrence of an Event of Termination (as herein defined)
during the Executive's term of employment under this Agreement, the provisions
of this Section shall apply. As used in this Agreement, an "Event of
Termination" shall mean and include any one or more of the following: (i) the
termination by the Savings Bank of the Executive's full-time employment
hereunder for any reason other than a Change in Control, as defined in Section
5(a) hereof; disability, as defined in Section 6(a) hereof; death as provided in
Section 7; retirement, as defined in Section 7 hereof; or for Cause, as defined
in Section 8 hereof; (ii) the Executive's resignation from the Savings Bank's
employ, upon (A) unless consented to by the Executive, a material change in the
Executive's function, duties, or responsibilities, which change would cause
Executive's position to become one of lesser responsibility, importance, or
scope from the position and attributes thereof described in Sections 1 and 2,
above, (any such material change shall be deemed a continuing breach of this
Agreement), (B) a relocation of the Executive's principal place of employment by
more than 35 miles from its location at the effective date of this Agreement, or
a material reduction in the benefits and perquisites to the Executive from those
being provided as of the effective date of this Agreement, (C) the liquidation
or dissolution of the Savings Bank, or (D) any breach of this Agreement by the
Savings Bank. Upon the occurrence of any event described in clauses (A), (B),
(C), or (D), above, the Executive shall have the right to elect to terminate his
employment under this Agreement by resignation upon not less than sixty (60)
days prior written notice given within a reasonable period of time not to
exceed, except in case of a continuing breach, four calendar months after the
event giving rise to said right to elect.
<PAGE>
(b) Upon the occurrence of an Event of Termination, the Savings Bank
shall pay the Executive, or, in the event of his subsequent death, his
beneficiary or beneficiaries, or his estate, as the case may be, as severance
pay or liquidated damages, or both, a sum equal to the payments due to the
Executive for the remaining term of the Agreement, including Base Salary,
bonuses, and any other cash or deferred compensation paid or to be paid
(including the value of employer contributions that would have been made on the
Executive's behalf over the remaining term of the agreement to any tax-qualified
retirement plan sponsored by the Savings Bank as of the Date of Termination), to
the Executive for the term of the Agreement provided, however, that if the
Savings Bank is not in compliance with its minimum capital requirements or if
such payments would cause the Savings Bank's capital to be reduced below its
minimum capital requirements, such payments shall be deferred until such time as
the Savings Bank is in capital compliance. All payments made pursuant to this
Section 4(b) shall be paid in substantially equal monthly installments over the
remaining term of this Agreement following the Executive's termination;
provided, however, that if the remaining term of the Agreement is less than one
(1) year (determined as of the Executive's Date of Termination), such payments
and benefits shall be paid to the Executive in a lump sum within 30 days of the
Date of Termination.
(c) Upon the occurrence of an Event of Termination, the Savings Bank
will cause to be continued life, medical, dental and disability coverage
substantially identical to the coverage maintained by the Savings Bank for the
Executive prior to his termination. Such coverage shall cease upon the
expiration of the remaining term of this Agreement.
5. CHANGE IN CONTROL.
(a) No benefit shall be paid under this Section 5 unless there shall
have occurred a Change in Control of the Company or the Bank. For purposes of
this Agreement, a "Change in Control" of the Company or the Bank shall be deemed
to occur if and when (a) an offeror other than the Company purchases shares of
the common stock of the Company or the Bank pursuant to a tender or exchange
offer for such shares, (b) 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 the Company or the
Bank representing 25% or more of the combined voting power of the Company's then
outstanding securities, (c) the membership of the board of directors of the
Company or the Bank changes as the result of a contested election, such that
individuals who were directors at the beginning of any twenty-four 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 (d)
shareholders of the Company or the Bank approve a merger, consolidation, sale or
disposition of all or substantially all of the Company's or the Bank's assets,
or a plan of partial or complete liquidation.
(b) If any of the events described in Section 5(a) hereof constituting
a Change in Control have occurred or the Board of the Savings Bank or the
Company has determined that a Change in Control has occurred, the Executive
shall be entitled to the benefits provided in paragraphs (c), (d) and (e) of
this Section 5 upon his involuntary termination of employment at any time during
the period beginning three (3) months prior to the announcement by the Savings
Bank or the Company of an event constituting a Change of Control or voluntary
termination within twelve (12) months following a Change of Control for any
reason, unless such termination is because of his death, retirement as provided
in Section 7, termination for Cause, or termination for Disability.
<PAGE>
(c) Upon the occurrence of a Change in Control followed by the
Executive's termination of employment, the Savings Bank shall pay the Executive,
or in the event of his subsequent death, his beneficiary or beneficiaries, or
his estate, as the case may be, as severance pay or liquidated damages, or both,
a sum equal to 2.99 times the Executive's "base amount," within the meaning of
ss.280G(b)(3) of the Internal Revenue Code of 1986 ("Code"), as amended. In the
event the Executive has been employed by the Savings Bank for less than five
calendar (5) 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 Savings 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. Such payment shall
be made in a lump sum paid within ten (10) days of the Executive's Date of
Termination or, at the Executive's election, in substantially equal installment
payments over a three (3) year period following Date of Termination.
(d) Upon the occurrence of a Change in Control followed by the
Executive's termination of employment, the Savings Bank will cause to be
continued life, medical, dental and disability coverage substantially identical
to the coverage maintained by the Savings Bank for the Executive prior to his
severance. In addition, Executive shall be entitled to receive the value of
employer contributions that would have been made on the Executive's behalf over
the remaining term of the agreement to any tax-qualified retirement plan
sponsored by the Savings Bank as of the Date of Termination. Such coverage and
payments shall cease upon the expiration of thirty-six (36) months.
(e) Upon the occurrence of a Change in Control, the Executive shall be
entitled to receive benefits due him under, or contributed by the Company or the
Savings Bank on his behalf, pursuant to any retirement, incentive, profit
sharing, bonus, performance, disability or other employee benefit plan
maintained by the Savings Bank or the Company on the Executive's behalf to the
extent that such benefits are not otherwise paid to the Executive upon a Change
in Control.
(f) Notwithstanding the preceding paragraphs of this Section 5, in the
event that the aggregate payments or benefits to be made or afforded to the
Executive under this Section would be deemed to include an "excess parachute
payment" under ss.280G of the Code, such payments or benefits shall be payable
or provided in equal monthly installments over the minimum period necessary to
reduce the present value of such payments or benefits to an amount which is one
dollar ($1.00) less than three times the Executive's "base amount" under
ss.280G(b)(3) of the Code.
6. TERMINATION FOR DISABILITY.
(a) If the Executive shall become disabled as defined in the Savings
Bank's then current disability plan (or, if no such plan is then in effect, if
the Executive is permanently and totally disabled within the meaning of Section
22(e)(3) of the Code as determined by a physician designated by the Board), the
Savings Bank may terminate Executive's employment for "Disability."
(b) Upon the Executive's termination of employment for Disability, the
Savings Bank will pay Executive, as disability pay, a bi-weekly payment equal to
three-quarters (3/4) of Executive's bi-weekly rate of Base Salary on the
effective date of such termination. These disability payments shall commence on
the effective date of Executive's termination and will end on the earlier of (i)
the date the Executive returns to the full-time employment of the Savings Bank
in the same capacity as he was employed prior to his termination for Disability
<PAGE>
and pursuant to an employment agreement between the Executive and the Savings
Bank; (ii) Executive's full-time employment by another employer; (iii) the
Executive attaining the age of 65; or (iv) the Executive's death; or (v) the
expiration of the term of this Agreement. The disability pay shall be reduced by
the amount, if any, paid to the Executive under any plan of the Savings Bank
providing disability benefits to the Executive.
(c) The Savings Bank will cause to be continued life, medical, dental
and disability coverage substantially identical to the coverage maintained by
the Savings Bank for the Executive prior to his termination for Disability. This
coverage and payments shall cease upon the earlier of (i) the date the Executive
returns to the full-time employment of the Savings Bank, in the same capacity as
he was employed prior to his termination for Disability and pursuant to an
employment agreement between the Executive and the Savings Bank; (ii)
Executive's full-time employment by another employer; (iii) the Executive's
attaining the age of 65; or (iv) the Executive's death; or (v) the expiration of
the term of this Agreement.
(d) Notwithstanding the foregoing, there will be no reduction in the
compensation otherwise payable to the Executive during any period during which
Executive is incapable of performing his duties hereunder by reason of temporary
disability.
7. TERMINATION UPON RETIREMENT; DEATH OF THE EXECUTIVE.
Termination by the Savings Bank of the Executive based on "Retirement"
shall mean retirement at age 65 or in accordance with any retirement arrangement
established with the Executive's consent with respect to him. Upon termination
of Executive upon Retirement, the Executive shall be entitled to all benefits
under any retirement plan of the Savings Bank or the Company and other plans to
which the Executive is a party. Upon the death of the Executive during the term
of this Agreement, the Savings Bank shall pay to the Executive's estate the
compensation due to the Executive through the last day of the calendar month in
which his death occurred.
8. TERMINATION FOR CAUSE.
For purposes of this Agreement, "Termination for Cause" shall include
termination because of the Executive's personal dishonesty, incompetence,
willful misconduct, breach of fiduciary duty involving personal profit,
intentional failure to perform stated duties, willful violation of any law,
rule, or regulation (other than traffic violations or similar offenses) or final
cease-and-desist order, or material breach of any provision of this Agreement.
For purposes of this Section, no act, or the failure to act, on the Executive's
part shall be "willful" unless done, or omitted to be done, not in good faith
and without reasonable belief that the action or omission was in the best
interest of the Savings Bank or its affiliates. Notwithstanding the foregoing,
the Executive shall not be deemed to have been terminated for Cause unless and
until there shall have been delivered to him a copy of a resolution duly adopted
by the affirmative vote of not less than three-fourths of the members of the
Board at a meeting of the Board called and held for that purpose (after
reasonable notice to the Executive and an opportunity for him, together with
counsel, to be heard before the Board), finding that in the good faith opinion
of the Board, the Executive was guilty of conduct justifying termination for
Cause and specifying the reasons thereof. The Executive shall not have the right
to receive compensation or other benefits for any period after termination for
Cause. Any stock options granted to the Executive under any stock option plan or
any unvested awards granted under any other stock benefit plan of the Savings
<PAGE>
Bank, the Company, or any subsidiary or affiliate thereof, shall become null and
void effective upon the Executive's receipt of Notice of Termination for Cause
pursuant to Section 9 hereof, and shall not be exercisable by the Executive at
any time subsequent to such Termination for Cause.
9. REQUIRED PROVISIONS.
(a) The Savings Bank may terminate the Executive's employment at any
time, but any termination by the Savings Bank, other than Termination for Cause,
shall not prejudice the Executive's right to compensation or other benefits
under this Agreement. Executive shall not have the right to receive compensation
or other benefits for any period after Termination for Cause as defined in
Section 8 herein.
(b) If the Executive is suspended and/or temporarily prohibited from
participating in the conduct of the Savings Bank's affairs by a notice served
under Section 8(e)(3) or (g)(1) of the Federal Deposit Insurance Act ("FDIA")
(12 U.S.C. 1818(e)(3) and (g)(1)), the Savings Bank's obligations under the
Agreement shall be suspended as of the date of service, unless stayed by
appropriate proceedings. If the charges in the notice are dismissed, the Savings
Bank may, in its discretion, (i) pay the Executive all or part of the
compensation withheld while its contract obligations were suspended and (ii)
reinstate (in whole or in part) any of its obligations that were suspended.
(c) If the Executive is removed and/or permanently prohibited from
participating in the conduct of the Savings Bank's affairs by an order issued
under Section 8(e)(4) or (g)(1) of the FDIA (12 U.S.C. 1818(e)(4) or (g)(1)),
all obligations of the Savings Bank under the Agreement shall terminate as of
the effective date of the order, but vested rights of the contracting parties
shall not be affected.
(d) If the Savings Bank is in default (as defined in Section 3(x)(1)
of the FDIA), all obligations under this Agreement shall terminate as of the
date of default, but this paragraph shall not affect any vested rights of the
parties.
(e) All obligations under this Agreement shall be terminated (except
to the extent determined that continuation of the Agreement is necessary for the
continued operation of the Savings Bank): (i) by the Director of the Office of
Thrift Supervision (the "Director") or his or her designee at the time the
Federal Deposit Insurance Corporation or the Resolution Trust Corporation enters
into an agreement to provide assistance to or on behalf of the Savings Bank
under the authority contained in Section 13(c) of the FDIA or (ii) by the
Director, or his or her designee at the time the Director or such designee
approves a supervisory merger to resolve problems related to operation of the
Savings Bank or when the Savings Bank is determined by the Director to be in an
unsafe or unsound condition. Any rights of the parties that have already vested,
however, shall not be affected by such action.
(f) Any payments made to the Executive pursuant to this Agreement, or
otherwise, are subject to and conditioned upon compliance with 12 U.S.C.
ss.1828(k) and any regulations promulgated thereunder.
<PAGE>
10. NOTICE.
(a) Any purported termination by the Savings Bank or by the Executive
shall be communicated by Notice of Termination to the other party hereto. For
purposes of this Agreement, a "Notice of Termination" shall mean a written
notice which shall indicate the specific termination provision in this Agreement
relied upon and shall set forth in reasonable detail the facts and circumstances
claimed to provide a basis for termination of the Executive's employment under
the provision so indicated.
(b) "Date of Termination" shall mean (A) if the Executive's employment
is terminated for Disability, thirty (30) days after a Notice of Termination is
given (provided that he shall not have returned to the performance of his duties
on a full-time basis during such thirty (30) day period), and (B) if his
employment is terminated for any other reason, the date specified in the Notice
of Termination (which, in the case of a Termination for Cause, shall not be less
than thirty (30) days from the date such Notice of Termination is given).
(c) If, within thirty (30) days after any Notice of Termination is
given, the party receiving such Notice of Termination notifies the other party
that a dispute exists concerning the termination, except upon the occurrence of
a Change in Control and voluntary termination by the Executive in which case the
Date of Termination shall be the date specified in the Notice, the Date of
Termination shall be the date on which the dispute is finally determined, either
by mutual written agreement of the parties, by a binding arbitration award, or
by a final judgment, order or decree of a court of competent jurisdiction (the
time for appeal there from having expired and no appeal having been perfected)
and provided further that the Date of Termination shall be extended by a notice
of dispute only if such notice is given in good faith and the party giving such
notice pursues the resolution of such dispute with reasonable diligence.
Notwithstanding the pendency of any such dispute, the Savings Bank will continue
to pay the Executive his full compensation in effect when the notice giving rise
to the dispute was given (including, but not limited to, Base Salary) and
continue him as a participant in all compensation, benefit and insurance plans
in which he was participating when the notice of dispute was given, until the
dispute is finally resolved in accordance with this Agreement. Amounts paid
under this Section are in addition to all other amounts due under this Agreement
and shall not be offset against or reduce any other amounts due under this
Agreement.
11. SOURCE OF PAYMENTS.
All payments provided in this Agreement shall be timely paid in cash or
check from the general funds of the Savings Bank. The Company, however,
guarantees all payments and the provision of all amounts and benefits due
hereunder to the Executive and, if such payments are not timely paid or provided
by the Savings Bank, such amounts and benefits shall be paid or provided by the
Company.
12. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFITS PLANS.
This Agreement contains the entire understanding between the parties
hereto and supersedes any prior employment agreement between the Savings Bank or
any predecessor of the Savings Bank and the Executive, except that this
Agreement shall not affect or operate to reduce any benefit or compensation
inuring to the Executive of a kind elsewhere provided. No provision of this
Agreement shall be interpreted to mean that the Executive is subject to
receiving fewer benefits than those available to him without reference to this
Agreement.
<PAGE>
13. NO ATTACHMENT.
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and any
attempt, voluntary or involuntary, to affect any such action shall be null,
void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of,
the Executive, the Savings Bank, the Company and their respective successors and
assigns.
14. MODIFICATION AND WAIVER.
(a) This Agreement may not be modified or amended except by an
instrument in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have been
waived, nor shall there by any estoppel against the enforcement of any provision
of this Agreement, except by written instrument of the party charged with such
waiver or estoppel. No such written waiver shall be deemed a continuing waiver
unless specifically stated therein, and each such waiver shall operate only as
to the specific term or condition waived and shall not constitute a waiver of
such term or condition for the future as to any act other than that specifically
waived.
15. SEVERABILITY.
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other provision
of this Agreement or any part of such provision not held so invalid, and each
such other provision and part thereof shall to the full extent consistent with
law continue in full force and effect.
16. HEADINGS FOR REFERENCE ONLY.
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement.
17. GOVERNING LAW.
This Agreement shall be governed by the laws of the State of South
Carolina, unless otherwise specified herein; provided, however, that in the
event of a conflict between the terms of this Agreement and any applicable
federal or state law or regulation, the provisions of such law or regulation
shall prevail.
18. ARBITRATION.
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration, conducted before a panel
of three arbitrators sitting in a location selected by the employee within one
hundred (100) miles from the location of the Savings Bank, in accordance with
the rules of the American Arbitration Savings Bank then in effect. Judgment may
be entered on the arbitrator's award in any court having jurisdiction; provided,
<PAGE>
however, that the Executive shall be entitled to seek specific performance of
his right to be paid until the Date of Termination during the pendency of any
dispute or controversy arising under or in connection with this Agreement.
19. PAYMENT OF LEGAL FEES; INTEREST
All reasonable legal fees paid or incurred by the Executive pursuant to
any dispute or question of interpretation relating to this Agreement shall be
paid or reimbursed by the Savings Bank, if successful pursuant to a legal
judgment, arbitration or settlement. With respect to any payment under this
Agreement that is the subject of a dispute between the Executive and the Savings
Bank and/or the Company, if the Executive is the prevailing party in such
dispute, the Executive shall be entitled to interest at a rate not less than
nine (9) percent per annum on the payment for the period during which it was
withheld by the Savings Bank and/or the Company.
20. INDEMNIFICATION.
The Savings Bank shall provide the Executive (including his heirs,
executors and administrators) with coverage under a standard directors' and
officers' liability insurance policy at its expense, or in lieu thereof, shall
indemnify the Executive (and his heirs, executors and administrators) to the
fullest extent permitted under law against all expenses and liabilities
reasonably incurred by him in connection with or arising out of any action,
suite or proceeding in which he may be involved by reason of his having been a
director or officer of the Savings Bank (whether or not he continues to be a
directors or officer at the time of incurring such expenses or liabilities),
such expenses and liabilities to include, but not be limited to, judgment, court
costs and attorneys' fees and the cost of reasonable settlements.
21. SUCCESSOR TO THE SAVINGS BANK OR THE COMPANY.
The Savings Bank and the Company shall require any successor or
assignee, whether direct or indirect, by purchase, merger, consolidation or
otherwise, to all or substantially all the business or assets of the Savings
Bank or the Company, expressly and unconditionally to assume and agree to
perform the Savings Bank's or the Company's obligations under this Agreement, in
the same manner and to the same extent that the Savings Bank or the Company
would be required to perform if no such succession or assignment had taken
place.
<PAGE>
IN WITNESS WHEREOF, the Savings Bank and the Company have caused this
Agreement to be executed and their seal to be affixed hereunto by a duly
authorized officer, and the Executive has signed this Agreement, on the 21st day
of October, 1997.
ATTEST: COASTAL FEDERAL SAVINGS BANK
/s/ Susan J. Cooke BY: /s/ Michael C. Gerald
- ------------------- ----------------------
Susan J. Cooke Michael C. Gerald
[SEAL]
ATTEST: COASTAL FINANCIAL CORPORATION
/s/ Susan J. Cooke BY: /s/ Michael C. Gerald
- ------------------- ----------------------
Susan J. Cooke Michael C. Gerald
[SEAL]
WITNESS:
/s/ Susan J. Cooke /s/ Phillip G. Stalvey
- ------------------- ----------------------
Susan J. Cooke Phillip G. Stalvey
EXECUTIVE
EXHIBIT 13
ANNUAL REPORT TO STOCKHOLDERS FOR THE
FISCAL YEAR ENDED SEPTEMBER 30, 1997
<PAGE>
- --------------------------------------------------------------------------------
COASTAL FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
1997 ANNUAL REPORT
<PAGE>
<PAGE>
DEDICATION
- --------------------------------------------------------------------------------
COASTAL FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
A QUEST FOR EXCELLENCE
GREAT PEOPLE
COASTAL FEDERAL UNIVERSITY
-----------------------------------
[GRAPHIC OMITTED]
Great people are the cornerstone of Coastal Financial Corporation and nothing
could better evidence our commitment to attract, develop and retain the very
best people than the creation of Coastal Federal University.
With this initiative, we are committing the resources necessary to better
prepare our Great People for the future. Coastal Federal University is dedicated
to providing a learning environment for all Associates by creating opportunities
to continuously develop skills and knowledge, both personally and
professionally.
As the financial services industry continues to change at an ever increasing
pace, we believe this approach will assure a continued focus on our Basic
Corporate Objective of Maximizing The Value Of Our Shareholders' Investment and
our Long-Term Goal Of Being The Best Financial Services Company In Our
Marketplace.
Thanks to our Great People, initiatives such as the founding of Coastal Federal
University to provide a pillar of quality professional development for them and
our overriding commitment to our QUEST FOR EXCELLENCE operating philosophy, we
have again produced outstanding results for our Shareholders. We are absolutely
convinced that this approach will help to insure that our best years are yet to
come.
[GRAPHIC OMITTED]
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 $217.16 based upon
NASDAQ Quotations at September 30, 1997. 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,
-----------------------
1993 1994
------------ ----------
(dollars in thousands,
<S> <C> <C>
FINANCIAL CONDITION DATA:
Total assets ............................................................... $335,284 $374,980
Loans receivable, net ...................................................... 280,425 331,175
Mortgage-backed securities ................................................... 3,525 794
Cash, interest-bearing deposits and investment securities .................. 27,580 29,316
Deposits ..................................................................... 266,855 247,385
Borrowings .................................................................. 41,906 98,446
Stockholders' equity ......................................................... 21,829 23,104
OPERATING DATA:
Interest income ............................................................ $ 25,967 $ 24,562
Interest expense ............................................................ 12,876 11,548
-------- --------
Net interest income ......................................................... 13,091 13,014
Provision for loan losses ................................................... 1,389 510
-------- --------
Net interest income after provision for loan losses ........................ 11,702 12,504
-------- --------
OTHER INCOME:
Fees and service charges on loans and deposit accounts ..................... 811 1,001
Gain on sales of loans held for sale ....................................... 1,125 411
Gain (loss) on sales of investment securities .............................. (29) --
Gain on sales of mortgage-backed securities, net ........................... 238 54
Real estate operations ...................................................... (176) 341
Other income ............................................................... 1,209 1,022
-------- --------
Total other income ......................................................... 3,178 2,829
Total general and administrative expense .................................... 9,272 10,279
-------- --------
Earnings before income taxes ................................................ 5,608 5,054
Income taxes ............................................................... 2,270 1,906
-------- --------
Net earnings before cumulative effect of adopting FASB 109 .................. 3,338 3,148
-------- --------
Cumulative effect of adopting FASB 109 ....................................... -- 664
-------- --------
Net income .................................................................. $ 3,338 $ 3,812
======== ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Net earnings per common share before cumulative effect of adopting FASB 109 $ .68 $ .65
Cumulative effect of adopting FASB 109 ....................................... -- .14
-------- --------
Net earnings per common share ................................................ $ .68 $ .79
======== ========
Cash dividends per common share ............................................. -- $ .14
======== ========
Weighted average shares outstanding .......................................... 4,904 4,881
======== ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
1995 1996 1997
---------- -------------- ---------
(dollars in thousands, except per
share data)
<S> <C> <C> <C>
FINANCIAL CONDITION DATA:
Total assets ............................................................... $401,201 $459,712 $494,003
Loans receivable, net ...................................................... 356,819 370,368 403,570
Mortgage-backed securities ................................................... 12,776 27,029 23,023
Cash, interest-bearing deposits and investment securities .................. 13,530 38,332 39,582
Deposits ..................................................................... 273,099 313,430 347,116
Borrowings .................................................................. 95,997 109,886 106,337
Stockholders' equity ......................................................... 24,820 27,681 32,391
OPERATING DATA:
Interest income ............................................................ $ 30,328 $34,720 $ 38,065
Interest expense ............................................................ 17,272 19,091 20,146
-------- -------- --------
Net interest income ......................................................... 13,056 15,629 17,919
Provision for loan losses ................................................... 202 790 760
-------- -------- --------
Net interest income after provision for loan losses ........................ 12,854 14,839 17,159
-------- -------- --------
OTHER INCOME:
Fees and service charges on loans and deposit accounts ..................... 1,051 1,415 1,593
Gain on sales of loans held for sale ....................................... 39 990 931
Gain (loss) on sales of investment securities .............................. -- (6) 7
Gain on sales of mortgage-backed securities, net ........................... -- 189 235
Real estate operations ...................................................... 876 345 141
Other income ............................................................... 1,284 1,699 1,792
-------- --------- --------
Total other income ......................................................... 3,250 4,632 4,699
Total general and administrative expense .................................... 10,152 13,586 12,716
-------- --------- --------
Earnings before income taxes ................................................ 5,952 5,885 9,142
Income taxes ............................................................... 2,232 2,164 3,351
-------- --------- --------
Net earnings before cumulative effect of adopting FASB 109 .................. 3,720 3,721 5,791
-------- --------- --------
Cumulative effect of adopting FASB 109 ....................................... -- -- --
-------- --------- --------
Net income .................................................................. $ 3,720 $ 3,721 $ 5,791
======== ========= ========
Net earnings per common share before cumulative effect of adopting FASB 109 $ .78 $ .78 $ 1.19
Cumulative effect of adopting FASB 109 ....................................... -- -- --
-------- --------- --------
Net earnings per common share ................................................ $ .78 $ .78 $ 1.19
======== ========= ========
Cash dividends per common share ............................................. $ .28 $ .31 $ .35
======== ========= ========
Weighted average shares outstanding .......................................... 4,740 4,793 4,877
======== ========= ========
</TABLE>
All share and per share data have been restated to reflect 10%, 15%, 5%,
and 35% common stock dividends declared on November 29, 1991, August 28, 1992
and May 30, 1995, respectively, three 3 for 2 common stock dividends declared on
January 27, 1993, August 18, 1993 and January 7, 1994, respectively, two 5 for 4
stock dividends declared on January 9, 1996 and June 20, 1996, respectively, and
one four for three stock dividend declared on April 30, 1997.
<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,
---------------------
1993 1994
---------- ----------
<S> <C> <C>
Other Data:
Return on assets (net income divided by average assets) .............................. 1.00% 0.92%
Return on average equity (net income divided by average equity) ........................ 16.59% 13.88%
Average equity to average assets ...................................................... 6.08% 6.66%
Tangible book value per share ......................................................... $ 4.70 $ 5.12
Dividend payout ratio .................................................................. N/A 16.19%
Interest rate spread (difference between average yield on interest-earning assets and
average cost of interest-bearing liabilities) ......................................... 4.15% 4.09%
Net interest margin (net interest income as a percentage of average interest-earning 4.20% 4.12%
assets)
Allowance for loan losses to total loans at end of period .............................. 0.98% 1.01%
Ratio of non-performing assets to total assets (1) .................................... 0.75% 0.56%
Tangible capital ratio ............................................................... 6.27% 5.94%
Core capital ratio ..................................................................... 6.27% 5.94%
Risk-based capital ratio ............................................................... 10.57% 10.11%
Number of:
Real estate loans outstanding ......................................................... 5,647 6,614
Deposit accounts ..................................................................... 32,960 33,618
Number of full service offices ...................................................... 8 8
<PAGE>
<CAPTION>
At or for Years Ended
September 30,
--------------------------------
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Other Data:
Return on assets (net income divided by average assets) .............................. 0.94% 0.85% 1.21%
Return on average equity (net income divided by average equity) ........................ 15.54% 13.97% 19.36%
Average equity to average assets ...................................................... 6.08% 6.10% 6.24%
Tangible book value per share ......................................................... $ 5.55 $ 6.03 $ 6.97
Dividend payout ratio .................................................................. 34.46% 38.51% 27.63%
Interest rate spread (difference between average yield on interest-earning assets and
average cost of interest-bearing liabilities) ......................................... 3.52% 3.76% 3.89%
Net interest margin (net interest income as a percentage of average interest-earning 3.62% 3.86% 4.03%
assets)
Allowance for loan losses to total loans at end of period .............................. 1.00% 1.11% 1.19%
Ratio of non-performing assets to total assets (1) .................................... 0.53% 0.17% 0.10%
Tangible capital ratio ............................................................... 6.13% 5.93% 6.31%
Core capital ratio ..................................................................... 6.13% 5.93% 6.31%
Risk-based capital ratio ............................................................... 10.45% 10.41% 11.05%
Number of:
Real estate loans outstanding ......................................................... 6,688 5,741 6,752
Deposit accounts ..................................................................... 39,881 41,755 43,544
Number of full service offices ...................................................... 8 9 9
</TABLE>
(1) Nonperforming assets consist of nonaccrual loans 90 days or more past due
and real estate acquired through foreclosure.
2
<PAGE>
--------------
DEAR FRIENDS
--------------
This year's Annual Report spotlights Coastal Federal University. This
investment in the future of our Associates will help to assure the 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 by focusing on the personal and professional development of
the real source of our success, our Great People.
What a remarkable year 1997 was. It was a truly successful year and
reflects well on our QUEST FOR EXCELLENCE operating philosophy and our Great
People.
Our Basic Corporate Objective is To Maximize The Value Of Our Shareholders'
Investment. And, in that regard, 1997 was a remarkably rewarding year, with our
stock price up 60%, following an increase of 56% for fiscal 1996. Since becoming
a publicly owned company in 1990, Coastal Financial Corporation's stock has
grown at a compound annual rate of over 54%, taking our market capitalization
from $4.6 million in October 1990, the date of our initial public offering, to
$106.3 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 $21,700 at September
30, 1997.
The attainment of our Basic Corporate Objective is correlated closely with
our Long-Term Goal of Being The Best Financial Services Company In Our
Marketplace. Evidence of our success in this measure is reflected in our record
earnings and Coastal Federal's continued #1 ranking, by the 1997 SHESHUNOFF
MARKET SHARE REPORT, in deposit market share for Horry County, South Carolina,
the second fastest growing Metropolitan Statistical Area in the nation.
1997 marked the continuation of increased dividends for each consecutive
year since 1992, the year we began paying cash dividends. Net income for 1997
totaled $5.8 million, an increase of 23% over our record operating earnings
performance of 1996. Since 1990, our operating earnings have increased at a
compound annualized rate in excess of 16%.
[GRAPHIC OMITTED]
Noteworthy Financial Results for Fiscal 1997:
o The market price of Coastal Financial Corporation's
stock increased 60%. This compares with an 37.2% increase in the NASDAQ Bank
Index during the same period.
oThe value of Coastal Financial Corporation's common stock has grown at a
compound annual rate of over 51% during the past five years.
o An increase of 9.1% in cash dividends paid per common share.
o The payment of a 4 for 3 stock split in the form of a 33% stock dividend.
3
<PAGE>
[GRAPHIC OMITTED]
oNet earnings of $5.8 million or $1.19 per share. Net operating earnings for
fiscal 1997 increased 23% over the prior year.
o Shareholders' equity advanced 17.0% to $32.4 million.
[GRAPHIC OMITTED]
o Book value per share grew 15.6% to $6.97
[GRAPHIC OMITTED]
o A 7.5% growth in total assets to $494.0 million.
o Loans receivable increased 9.0% to $403.6 million.
o Deposits were up 10.7% to the highest level in the Com-
pany's history.
o Transaction deposits grew by 18.8% in fiscal 1997.
[GRAPHIC OMITTED]
o Non-performing Assets to Total Assets decreased 41.2%
to 0.10%.
[GRAPHIC OMITTED]
o Allowance for Loan Losses to Net Loans increased to
1.19%.
o The Company had Loan Charge Offs of .04% in 1997.
4
<PAGE>
One of the best indicators of performance is Return On Average Equity and
this ratio for 1997 was, again, outstanding. Our Return On Average Equity
measure of 19.4% ranks us among the top performing financial services companies
in the nation.
We are extremely proud of the performance evidenced by these results and
are especially proud of the Great People who worked so hard to achieve them.
1997. . . OUR BEST YEAR YET
[GRAPHIC OMITTED]
This year was remarkable in terms of the dramatic gains we achieved in both
Shareholder value and operating earnings. The restructuring of our operating
environment to create a stronger focus on the sales and marketing of financial
services in fiscal 1996 has continued to pay significant dividends, particularly
in the areas of loan, deposit and investment product sales.
Our financial performance during fiscal 1997 again met our high
expectations and well positions us to aggressively pursue future opportunities.
Since becoming a publicly owned company in 1990, we have achieved dramatic
gains in virtually all measures of our performance. But, despite these
historical results, it's the future that we are most interested in. As our
performance continues to accelerate, the question we continually ask ourselves
is, "Can we keep it up?"
The future looks good. That is not to say the future is without challenge.
But with Great People, excellent products, great markets, strong financial
resources and our philosophy of viewing change and constant improvement as
essential to the achievement of our long-term objectives, we are confident that
the answer is an unequivocal "Yes." Those attributes really set us apart from
the competition, and enabled another record performance during 1997.
A LOOK AT 1997
While 1997 really was quite a remarkable year
for Coastal Financial from a financial performance
perspective, the financial results are only
partially indicative of the real growth we
experienced this past year.
Some of the initiatives and achievements aimed
at increasing the value of the Company and
maximizing our ability to capitalize on
opportunities in the years ahead were:
<PAGE>
oThe creation of Coastal Federal University to
assure that we remain on the cutting edge of
professional development education programs. In
support of that initiative and our overall
growth needs, we have recently acquired the
Mall Plaza property just across Oak Street from
our Corporate Offices. The addition of this
17,500 square foot facility, which currently
houses our Coastal Federal University Main
Campus, Human Resources, Marketing and Public
Relations Groups, will provide space for our
corporate facilities expansion needs well into
the future.
o The introduction of our "FLY FREE ON US...and more" line of Credit Cards.
Through this recent offering, we have rounded out our core banking product
offerings and have been extremely pleased with the degree of Customer
enthusiasm for this valuable travel and gift awards program.
5
<PAGE>
o The introduction of our internet web site at:
http://www.coastalfederal.com. This addition allows us to offer information
about our full array of financial services to technology users across the
country and around the world, as well as providing a vehicle for the
solicitation of on-line applications for financial services, general
information about Coastal Federal and relocation packages.
Our On-Line PC Banking program is currently in the final phases of testing
and will be released in fiscal 1998.
These initiatives are designed to allow technology users to benefit from our
programs while encouraging all of our Customers to come into our lobbies and
experience our commitment to providing exceptional banking services through
the efforts of our warm, friendly and well trained professionals.
oThe construction of a full service banking office in Brunswick County, North
Carolina. This Sales Center, which is scheduled to open in early December,
will better position us to expand our financial services offerings to the
individuals and businesses of the rapidly growing and dynamic Brunswick
County area.
oThe expansion of our array of residential mortgage lending products coupled
with a well conceived and executed advertising and marketing campaign, has
increased our loan origination volume and further supported our commitment to
being the leading provider of residential mortgage loans in each of the
markets we serve.
oOur leadership role in serving as the Major Corporate Sponsor for the Horry
County March of Dimes WalkAmerica Campaign For Healthier Babies continued to
evidence our support for the communities we serve. In addition to this
initiative, we encourage our Associates to be involved in other civic and
charitable events to further support the needs of the communities
we serve.
Each year, Coastal Financial Corporation and its Great People, give
generously of their time, talents and financial resources in support of
hundreds of community organizations which contribute significantly to the
quality of life, health and welfare of our neighborhoods.
Our QUEST FOR EXCELLENCE operating philosophy, which is embodied in our
culture of viewing change and constant improvement as essential to the
achievement of our long-term objectives, is well reflected in these initiatives.
GREAT PEOPLE
Coastal Financial has more than 200 Great People, and they are the reason
for our success. Their dedication and ever increasing ability to work together
as a team toward Exceeding The Expectations Of Our Customers gives us the
confidence that, together, we can do anything.
Several years ago, we recognized the valuable
[GRAPHIC OMITTED] role that each of our Career Associates plays in
our organization by offering a 401-k profit
sharing plan to our Associates. Many have taken
advantage of this opportunity and today, thanks to
the results that we, as a team, have achieved,
this plan is one of the most appreciated parts of
our excellent benefits package.
<PAGE>
The introduction of Coastal Federal University
further recognizes the significant capabilities of
each of our Great People and, through this
initiative, we will challenge them to achieve
their full potential. By teaching Coastal
Financial Corporation's core philosophies and
successful business strategies to our Associates,
we will, as an organization, be well prepared for
the 21st century. This initiative will reinforce
our commitment to the philosophies which
6
<PAGE>
have made us unique and successful, allow our Associates the opportunity to
become much more valuable to the organization, position us to deliver even
greater service to our Customers and, ultimately, create enhanced value to our
Shareholders, many of whom are our Associates.
[GRAPHIC OMITTED]
COASTAL FEDERAL UNIVERSITY
Sir Francis Bacon once said, "A wise man will make more opportunities than
he finds."
For our Associates, taking advantage of the educational opportunities
afforded by Coastal Federal University is one very good way of assuring that.
Coastal Federal University, with its focus on our QUEST FOR EXCELLENCE operating
philosophy, will continue our journey toward building a culture which is
"Totally Committed To Exceeding The Expectations Of Our Customer" by offering
unique, innovative and powerful professional development opportunities. Here,
our Great People can experience a stimulating community of people and ideas,
offering a rich variety of professional development and enrichment experiences.
Through enrolling in the programs offered through Coastal Federal University,
they will learn about Service, Teamwork, Operations, Leadership, Management, our
Corporate Philosophy and innovative ways to make our business even more
successful.
Our curriculums will stress development of the skills required for their
success over a career in business and will, in addition to preparing our
Associates to be Career Associates, prepare them to continue to learn over those
careers.
We are extremely excited about this initiative and believe that it
demonstrates that we are not complacent about, nor satisfied with our current
success, but, rather, are dedicating ourselves to building an even stronger
foundation for the future.
COASTAL FINANCIAL'S FUTURE
Looking ahead, we see a future filled with even more opportunity than the
past and firmly believe that we can achieve our Corporate goals if we maintain
our values and continually renew ourselves and our business.
Our pledge to our Shareholders is to do exactly that...to do everything in
our power to remain youthful in our approach and spirit...and continue to view
change and constant improvement as the catalyst for reaching our fullest
potential.
I just can't thank our Great People enough. Our Board Of Directors,
Leadership Group and Associates are simply the best imaginable. They go above
and beyond the call of duty in serving our Customers every day and are totally
committed to Exceeding their Expectations on every occasion.
Our QUEST FOR EXCELLENCE operating philosophy, our Great People and our
commitment to helping each of them achieve their full potential through Coastal
Federal University...we believe it's the best formula possible to assure a great
future.
<PAGE>
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
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
General
Coastal Financial Corporation (the "Company"), reported $5.8 million in net
income for the year ended September 30, 1997, compared to $3.7 million for the
year ended September 30, 1996. Net earnings for the year ended September 30,
1996 included a special assessment from the FDIC for the recapitalization of the
Savings Association Insurance Fund ("SAIF") of $1.6 million, and a related
reduction in income taxes of $615,000. Excluding the one-time SAIF assessment in
fiscal 1996, operating earnings in fiscal 1997 increased 23% over fiscal 1996.
Net interest income increased $2.3 million as a result of increased interest
income of $3.3 million offset by an increase of $1.1 million in interest
expense. Provision for loan losses decreased slightly from $790,000 for the year
ended September 30, 1996, to $760,000 for the year ended September 30, 1997.
Other income increased slightly from $4.6 million in fiscal 1996, to $4.7
million in 1997. General and administrative expenses decreased $870,000 for
fiscal 1997, as compared to fiscal 1996. Included in general and administrative
expenses in fiscal 1996, is a $1.6 million special assessment from the FDIC for
the recapitalization of the SAIF Insurance Fund.
Total assets increased from $459.7 million at September 30, 1996 to $494.0
million at September 30, 1997, or 7.5%. Liquid assets, consisting of cash,
interest-bearing deposits, and securities, decreased from $65.3 million at
September 30, 1996 to $62.6 million at September 30, 1997. Loans receivable
increased 9.0% from $370.4 million at September 30, 1996, to $403.6 million at
September 30, 1997. Total loan originations for fiscal 1997 were $178.5 million
as compared to $160.4 million for fiscal 1996. Mortgage-backed securities
decreased from $27.0 million at September 30, 1996, to $23.0 million at
September 30, 1997.
The growth in loans was funded by increased deposits of $33.7 million and
loan repayments. The Company's strategy is to increase its reliance on core
transaction deposits as opposed to certificates of deposit and advances from the
Federal Home Loan Bank ("FHLB"). During fiscal 1997, deposits increased from
$313.4 million at September 30, 1996, to $347.1 million at September 30, 1997.
During this same period, transaction deposits increased $26.4 million and
certificate accounts increased $10.6 million.
As a result of $5.8 million in net earnings, less the cash dividends paid
to shareholders of approximately $1.6 million, stockholders' equity increased
from $27.7 million at September 30, 1996 to $32.4 million at September 30, 1997.
Liquidity and Capital Resources
In accordance with OTS regulations, the Company is required to maintain
specific levels of cash and liquid investments in qualifying types of United
States treasury and Federal agency securities and other investments generally
having maturities of five years or less. The required level of such investments
is calculated on a liquidity base, consisting of net withdrawable accounts and
short-term borrowings, and is equal to 5.0% of such base amount. Short-term
liquid assets may not be less than 1.0% of the liquidity base.
Historically, the Company has maintained its liquidity at levels believed
by management to be adequate to meet requirements of normal operations,
potential deposit outflows and strong loan demand and still allow for optimal
investment of funds and return on assets. The liquidity ratio, as calculated for
regulatory purposes, was 7.3%, 8.0%, and 6.1% for the years ended September 30,
1995, 1996 and 1997, respectively. The Company expects to continue to maintain
liquidity at approximately the same level as 1997.
The principal sources of funds for the Company are cash flows from
operations, consisting mainly of mortgage, consumer and commercial loan
payments, retail customer deposits and advances from the Federal Home Loan Bank
("FHLB") of Atlanta.
The principal use of cash flows is the origination of loans receivable. The
Company originated loans receivable of $141.0 million, $160.4 million and $178.5
million for the years ended September 30, 1995, 1996 and 1997, respectively. A
large portion of these loan originations were financed through loan principal
repayments which amounted to $104.2 million, $93.6 million and $109.9 million
for the years ended September 30, 1995, 1996 and 1997, respectively. In
addition, the Company has sold certain loans in the secondary market to finance
future loan originations. The increase in originations and sales of mortgage
loans can be primarily attributed to the purchase of Coastal Federal Mortgage
("CFM"), in November 1995. CFM specializes in originating conforming mortgage
loans which are then sold to correspondent financial institutions. For the year
ended September 30, 1997, CFM originated $40.6 million of loans and sold $38.4
million of loans. For the years ended September 30, 1995, 1996 and 1997, the
Company sold loans amounting to $2.8 million, $40.7 million and $44.2 million,
respectively.
During 1997, the Company used deposit growth to fund the majority of its
loan growth. In fiscal 1997, deposits increased from $313.4 million at September
30, 1996, to $347.1 million at September 30, 1997. The increase was attributed
to transaction accounts which increased approximately $26.4 million, and
certificate accounts which increased $10.6 million. This was offset by a
decrease in passbook accounts of $3.4 million.
At September 30, 1997, the Company had commitments to originate $3.2
million in loans and $31.4 million in unused lines of credit, which the Company
expects to fund from normal operations.
At September 30, 1997, the Company had $111.9 million of certificates of
deposit which were due to mature within one year. Based upon previous
experience, the Company believes that a major portion of these certificates will
be redeposited. Additionally, at September 30, 1997, the Company had excess
collateral pledged to the FHLB which would support additional FHLB advance
borrowings of $59.0 million.
8
<PAGE>
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 $31.2 million at September 30, 1997, exceeding the
Bank's tangible and core requirements by $23.8 million and $16.5 million,
respectively. At September 30, 1997, the Bank's capital exceeded its current
risk-based minimum capital requirement by $9.6 million. The risk-based capital
requirement may increase in the future.
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.
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
9
<PAGE>
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.
Results of Operations
Comparison of the Years Ended September 30, 1995 and 1996
General
Net earnings were $3.7 million for the years ended September 30, 1995 and
1996. Included in net earnings for 1996, is a special assessment from the FDIC
for the recapitalization of the SAIF of $1,620,000, and a related reduction in
income taxes of $615,000. Excluding this special assessment, net income
increased 27.0% in 1996. Net interest income increased $2.6 million primarily as
a result of an increase in interest income of $4.4 million which was offset by
an increase in interest expense of $1.8 million. Provision for loan losses
increased $588,000. Other income increased from $3.3 million for the year ended
September 30, 1995, to $4.6 million for the year ended September 30, 1996.
General and administrative expenses increased $3.4 million when compared to
fiscal 1995. Included in general and administrative expenses in fiscal 1996, is
a $1.6 million special assessment from the FDIC for the recapitalization of the
SAIF Insurance Fund.
Interest Income
Interest income for the year ended September 30, 1996, increased 14.5% to
$34.7 million as compared to $30.3 million for the year ended September 30, 1995
primarily due to the increased yield on assets and a 11.7% increase in average
interest-earning assets. The net yield on interest-earning assets for the year
ended September 30, 1996, was 8.46% compared to a net yield of 8.27% in the
prior year. The increase in net yield primarily resulted from the repricing of
adjustable-rate mortgage loans and growth in commercial real estate loans which
have a higher yield. The average yield on loans receivable for fiscal year 1996
was 8.57% compared to 8.39% in 1995. The yield on investments which includes
Investments, Overnight Funds and Federal Funds, increased to 6.55% for the
fiscal year 1996 from 5.14% for fiscal year 1995. Total interest-earning assets
for fiscal year 1996 averaged $406.2 million compared to $371.9 million for the
year ended September 30, 1995.
Interest Expense
Interest expense on interest-bearing liabilities was $19.1 million for the
year ended September 30, 1996, as compared to $17.3 million in fiscal 1995. The
cost of interest-bearing liabilities was 4.70% for the year ended September 30,
1996, compared to 4.75% in fiscal year 1995. The increase in interest expense of
10.5% primarily resulted from a growth in deposits and a slight increase in
overall market rates paid on deposits. The average cost of deposits for the year
ended September 30, 1996, was 4.08% compared to 3.96% for the year ended
September 30, 1995. The cost of FHLB advances for fiscal 1996 was 6.27% compared
to 6.53% for fiscal 1995. Total average interest-bearing liabilities increased
11.7% from $363.7 million at September 30, 1995, to $406.2 million at September
30, 1996.
Net Interest Income
Net interest income was $15.6 million for the year ended September 30,
1996, compared to $13.1 million for the year ended September 30, 1995. The net
interest margin increased to 3.76% for fiscal 1996 compared to 3.52% for fiscal
1995. Average interest-earning assets increased $43.5 million while average
interest-bearing liabilities increased $42.4 million. At September 30, 1996, the
cost of one month advances was approximately 5.5%, compared to approximately
6.7% which was the yield on the 10 year treasury security. Should the yield
curve continue to remain relatively flat, the Company may continue to experience
a high amount of loan prepayments and refinancings and may experience a
declining net interest margin in fiscal 1997.
10
<PAGE>
Provision for Loan Losses
The Company's provision for loan losses increased from $202,000 for fiscal
1995 to $790,000 for fiscal 1996. The allowance for loan losses as a percentage
of loans was 1.11% at September 30, 1996, compared to 1.00% at September 30,
1995. During fiscal 1996, commercial real estate and construction loans
increased 16.3%. As a result of the increase in loans which may possess a higher
degree of risk, the Company increased its allowance for loan losses as a
percentage of loans. Loans delinquent 90 days or more were .12% of total loans
at September 30, 1996, compared to .37% at September 30, 1995. The allowance for
loan losses was 937% of loans delinquent more than 90 days at September 30,
1996, compared to 270% at September 30, 1995. Management believes that the
current level of the allowance for loan losses is adequate considering the
composition of the loan portfolio, the portfolio's loss experience, delinquency
trends, current regional and local economic conditions and other factors. Also
see "Nonperforming Assets" and "Allowance for Loan Losses."
Other Income
In fiscal 1996, total other income increased to $4.6 million as compared to
$3.3 million for the period ended September 30, 1995. Fees and service charges
on loans and deposit accounts increased $364,000 for the year ended September
30, 1996, as a result of growth in core deposits and loans. Income from real
estate operations decreased $531,000 from the prior fiscal year due to reduced
sales of real estate at the Bank's subsidiaries. This was offset by increased
gains on sales of loans receivable and mortgage-backed securities of $951,000
and $189,000, respectively, primarily due to increased mortgage banking
activities of CFM which was acquired in November 1995. Other income increased
from $1.3 million for the year ended September 30, 1995, to $1.7 million for the
year ended September 30, 1996. The increase is attributed to an increase of fee
income from ATMs of $85,000, fee income from debit cards of $53,000, gains on
the sale of assets of $44,000, miscellaneous income of $44,000 and higher
revenues from sales of alternative investment products at the Company's
subsidiary, Coastal Investments Corporation, of $154,000.
Other Expense
General and administrative expenses were $13.6 million for fiscal 1996 as
compared to $10.2 million for fiscal 1995. Salaries and employee benefits were
$6.2 million for fiscal 1996 as compared to $5.3 million for fiscal 1995, or a
16.3% increase. Approximately a third of this increase is attributable to
increased group insurance costs, 401K benefits, and increased bonuses and
incentives. In addition, personnel at CFM accounted for approximately a third of
the increase. Normal salary increases and increased lending personnel accounted
for a significant portion of the remaining increase. Net occupancy, furniture
and fixtures and data processing expense increased $498,000 for fiscal 1996, as
compared to fiscal 1995 primarily as a result of enhancements to technology and
the addition of CFM. FDIC insurance premiums, excluding the special SAIF
assessment, increased from $566,000 for fiscal 1995, to $622,000 for fiscal 1996
as a result of the 14.8% growth in deposits. Other expenses increased from $1.9
million in 1995 to $2.3 million in 1996. In addition, in 1996 the Company
recorded a special assessment from the FDIC for the recapitalization of the SAIF
of $1,620,000.
Income Taxes
Although fiscal 1996 net income was slightly higher than fiscal 1995,
income taxes were slightly lower due to increased tax exempt interest.
Non-performing Assets
Non-performing assets were $507,000 at September 30, 1997 compared to
$768,000 at September 30, 1996. Loans past due 90 days or more decreased from
$445,000 at September 30, 1996, to $257,000 at September 30, 1997. Real estate
acquired through foreclosure decreased from $323,000 at September 30, 1996, to
$250,000 at September 30, 1997. At September 30, 1997, approximately 40% of the
loans 90 days past due are secured by residential mortgage loans. Loans are
reviewed on a regular basis and an allowance for uncollectable interest is
established on loans where collection is questionable, generally when such loans
become 90 days delinquent. Loan balances for which interest amounts have been
reserved and all loans more than 90 days delinquent are considered to be on a
non-accrual basis. Typically, payments received on a non-accrual loan are
applied to the outstanding principal or recognized as interest based upon the
collectability of the loan as determined by management.
Allowance for Loan Losses
The Company's management evaluates the need to establish additional
allowances against losses on loans quarterly. Such an evaluation includes a
review of all loans for which full collectability may not be reasonably assured
and considers, among other matters, the estimated market value of the underlying
collateral of problem loans, composition of the loan portfolio, prior loss
experience, economic conditions, etc. The Company established provisions for
loan losses for the years ended September 30, 1995, 1996 and 1997, of $202,000,
$790,000 and $760,000, respectively. For the years ended September 30, 1995,
1996 and 1997, the Company had net charge-offs (recoveries) of ($23,000),
$196,000 and $140,000, respectively. At September 30, 1997, the Company had an
allowance for loan losses of $4.9 million, which was 1.19% of net loans compared
to 1.11% at September 30, 1996. 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
11
<PAGE>
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 are subject to periodic evaluation by various regulatory authorities
and may be subject to adjustment upon their examination.
Impact of New Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 128, Earnings per Share
(EPS), which is effective for both interim and annual periods ending after
December 15, 1997. This statement supersedes Accounting Principles Board Opinion
No. 15, Earnings per Share. The purpose of this statement is to simplify current
reporting and make U.S. reporting comparable to international standards. The
statement requires dual presentation of basic and diluted EPS by entities with
complex capital structures (as defined by the statement). The Company
anticipates that adoption of this standard will not have a material effect on
EPS.
Also, in February 1997, the FASB issued SFAS No. 129, Disclosure of
information about Capital Structure, which is effective for financial statements
for periods ending after December 15, l997. This statement applies to both
public and nonpublic entities. The new statement requires no change for entities
subject to the existing requirements. The Company anticipates that adoption of
the standard will not have a material affect on the Company.
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income.
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 both interim and annual
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
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.
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.
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).
12
<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, 1996 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, 1997. 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, 1996 and 1997, and the results of their operations and their
cash flows for each of the years in the three-year period ended September 30,
1997, in conformity with generally accepted accounting principles.
/s/KPMG Peat Marwick LLP
------------------------
KPMG Peat Marwick LLP
Greenville, South Carolina
October 17, 1997
<PAGE>
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30, 1996 and 1997
<TABLE>
<CAPTION>
1996 1997
ASSETS ------------ ------------
<S> <C> <C>
(Dollars in thousands)
Cash and amounts due from banks ...................................................... $ 15,639 $ 12,852
Short-term interest-bearing deposits ................................................ 5,222 559
Investment securities held to maturity (market value of $332 at September 30, 1996) ... 330 --
Investment securities available for sale ............................................. 17,141 26,171
Mortgage-backed securities available for sale ....................................... 27,029 23,023
Loans receivable (net of allowance for loan losses of $4,172 at September 30, 1996 and
$4,902 at September 30, 1997) ........................................................ 370,368 403,570
Loans receivable held for sale ...................................................... 6,803 8,359
Real estate acquired through foreclosure, net ....................................... 323 250
Office property and equipment, net ................................................... 5,736 7,561
Federal Home Loan Bank (FHLB) stock, at cost .......................................... 5,228 5,618
Accrued interest receivable on loans ................................................ 2,444 2,814
Accrued interest receivable on investment securities ................................. 526 452
Other assets ........................................................................ 2,923 2,774
---------- --------
$ 459,712 $494,003
========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits ........................................................................... 313,430 347,116
Securities sold under agreements to repurchase ....................................... 3,365 2,666
Advances from FHLB .................................................................. 104,553 101,478
Other borrowings ..................................................................... 1,968 2,193
Drafts outstanding .................................................................. 1,922 1,018
Advances by borrowers for property taxes and insurance .............................. 1,435 1,409
Accrued interest payable ............................................................ 798 952
Other liabilities .................................................................. 4,560 4,780
---------- --------
Total liabilities .................................................................. 432,031 461,612
---------- --------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Stockholders' equity:
Serial preferred stock, 1,000,000 shares authorized and unissued ..................... -- --
Common stock $.01 par value, 5,000,000 shares authorized;
4,590,155 shares at September 30, 1996 and 4,646,534
shares at September 30, 1997 issued and outstanding ................................. 46 46
Additional paid-in capital ......................................................... 8,698 8,698
Retained earnings, restricted ...................................................... 20,015 23,402
Treasury stock, at cost (54,161 and 9,760 shares, respectively) ..................... (1,185) (182)
Unrealized gain on securities available for sale, net of
income taxes ........................................................................ 107 427
---------- --------
Total stockholders' equity ......................................................... 27,681 32,391
---------- --------
$ 459,712 $494,003
========== ========
</TABLE>
See accompanying notes to consolidated financial statements.
14
<PAGE>
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended September 30, 1995, 1996 and 1997
<TABLE>
<CAPTION>
1995 1996 1997
------------ ------------ ----------
<S> <C> <C> <C>
(In thousands, except share data)
Interest income:
Loans receivable ................................................... $ 28,671 31,698 33,769
Investment securities ............................................. 381 721 1,574
Mortgage-backed securities ....................................... 732 1,805 2,446
Other ............................................................ 544 496 276
----------- ------- -------
Total interest income .......................................... 30,328 34,720 38,065
----------- ------- -------
Interest expense:
Deposits ......................................................... 9,890 11,689 13,650
Securities sold under agreements to repurchase ..................... 63 323 1,130
Advances from FHLB ................................................ 7,319 7,079 5,366
----------- ------- -------
Total interest expense .......................................... 17,272 19,091 20,146
----------- ------- -------
Net interest income ............................................. 13,056 15,629 17,919
Provision for loan losses .......................................... 202 790 760
----------- ------- -------
Net interest income after provision for loan losses ............ 12,854 14,839 17,159
----------- ------- -------
Other income:
Fees and service charges on loans and deposit accounts ............ 1,051 1,415 1,593
Gain on sales of loans held for sale .............................. 39 990 931
Gain (loss) on sales of investment securities, net ............... -- (6) 7
Gain on sales of mortgage-backed securities, net .................. -- 189 235
Income (loss) from real estate acquired through foreclosure ...... 224 202 (137)
Income from real estate operations ................................. 652 143 278
Other income ...................................................... 1,284 1,699 1,792
----------- -------- -------
Total other income ............................................. 3,250 4,632 4,699
----------- -------- -------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
General and administrative expenses:
Salaries and employee benefits .................................... 5,307 6,174 6,841
Net occupancy, furniture and fixtures and data processing expense 2,333 2,831 2,891
FDIC insurance premium ............................................. 566 622 283
FDIC insurance premium to recapaitalize the SAIF .................. -- 1,620 --
Other expense ...................................................... 1,946 2,339 2,701
----------- -------- -------
Total general and administrative expense ........................ 10,152 13,586 12,716
----------- -------- -------
Earnings before income taxes .................................... 5,952 5,885 9,142
Income taxes ...................................................... 2,232 2,164 3,351
----------- -------- -------
Net income ......................................................... $ 3,720 3,721 5,791
=========== ======== =======
Earnings per common share .......................................... $ 0.78 0.78 1.19
=========== ======== =======
Weighted average common shares outstanding ........................ 4,740,000 4,793,000 4,877,000
=========== ========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
15
<PAGE>
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended September 30, 1995, 1996 and 1997
<TABLE>
<CAPTION>
Additional
Common Paid-In Retained
Stock Capital Earnings
-------- ------------ -------------
<S> <C> <C> <C>
(In thousands)
Balance at September 30, 1994 ........................... $ 45 $6,614 $18,446
Exercise of stock options .............................. -- 96 (215)
Treasury stock repurchases .............................. -- -- --
Cash paid for fractional shares ........................ -- -- (6)
Cash dividends .......................................... -- -- (1,282)
Common stock dividend ................................. 1 1,988 (1,989)
Net income ............................................. -- -- 3,720
---- ------ -------
Balance at September 30, 1995 ........................... 46 8,698 18,674
Exercise of stock options .............................. -- -- (863)
Issuance of shares in acquisition ..................... -- -- (67)
Cash paid for fractional shares ........................ -- -- (17)
Cash dividends .......................................... -- -- (1,433)
Unrealized gain on securities available for sale, net of
income taxes .......................................... -- -- --
Net income ............................................. -- -- 3,721
---- ------ -------
Balance at September 30, 1996 ........................... 46 8,698 20,015
Exercise of stock options .............................. -- -- (786)
Cash paid for fractional shares ........................ -- -- (18)
Cash dividends .......................................... -- -- (1,600)
Unrealized gain on securities available for sale, net of
income taxes .......................................... -- -- --
Net income ............................................. -- -- 5,791
---- ------ -------
Balance at September 30, 1997 ........................... $ 46 $8,698 $23,402
==== ====== =======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Total
Treasury Stockholders'
Stock Other Equity
------------- ------- --------------
<S> <C> <C> <C>
Balance at September 30, 1994 ........................... $ (2,001) $ -- $23,104
Exercise of stock options .............................. 241 -- 122
Treasury stock repurchases .............................. (838) -- (838)
Cash paid for fractional shares ........................ -- -- (6)
Cash dividends .......................................... -- -- (1,282)
Common stock dividend ................................. -- -- --
Net income ............................................. -- -- 3,720
--------- --- ---------
Balance at September 30, 1995 ........................... (2,598) -- 24,820
Exercise of stock options .............................. 970 -- 107
Issuance of shares in acquisition ..................... 443 -- 376
Cash paid for fractional shares ........................ -- -- (17)
Cash dividends .......................................... -- -- (1,433)
Unrealized gain on securities available for sale, net of
income taxes .......................................... -- 107 107
Net income ............................................. -- -- 3,721
--------- ----- ---------
Balance at September 30, 1996 ........................... (1,185) 107 27,681
Exercise of stock options .............................. 1,003 -- 217
Cash paid for fractional shares ........................ -- -- (18)
Cash dividends .......................................... -- -- (1,600)
Unrealized gain on securities available for sale, net of
income taxes .......................................... -- 320 320
Net income ............................................. -- -- 5,791
--------- ----- ---------
Balance at September 30, 1997 ........................... $ (182) $427 $32,391
========= ===== =========
</TABLE>
See accompanying notes to consolidated financial statements.
16
<PAGE>
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended September 30, 1995, 1996 and 1997
<TABLE>
<CAPTION>
1995 1996 1997
------------- ------------ ------------
<S> <C> <C> <C>
(In thousands)
Cash flows from operating activities:
Net earnings ........................................................................... $ 3,720 3,721 5,791
Adjustments to reconcile net earnings to net cash provided (used) by operating
activities:
Income from real estate partnerships ................................................ (652) (143) (278)
Depreciation ........................................................................ 552 740 865
Provision for loan losses ............................................................ 202 790 760
Origination of loans receivable held for sale ....................................... (5,199) (45,082) (45,717)
Proceeds from sales of loans receivable held for sale .............................. 2,806 40,672 44,160
(Increase) decrease in:
Other assets ........................................................................ (1,266) (587) 149
Accrued interest receivable ......................................................... (434) (553) (296)
Increase (decrease) in:
Accrued interest payable ............................................................ 284 31 154
Other liabilities .................................................................. 531 1,960 220
----------- ------- -------
Net cash provided (used) by operating activities ................................. 544 1,549 5,808
----------- ------- -------
Cash flows from investing activities:
Proceeds from maturities of investment securities held to maturity ..................... 5,675 -- --
Purchases of investment securities held to maturity .................................... (324) -- --
Proceeds from sale of investment securities available for sale ........................ -- 7,000 5,693
Proceeds from maturities of investment securities available for sale .................. -- 1,999 17,839
Purchases of investment securities available for sale ................................. -- (24,331) (32,022)
Purchases of loans receivable ......................................................... (6,337) (12,448) (9,948)
Proceeds from sale of mortgage-backed securities available for sale .................. -- 13,220 25,678
Purchases of mortgage-backed securities available for sale ........................... (1,000) (11,867) (26,636)
Principal collected on mortgage-backed securities .................................... 811 4,129 4,850
Origination of loans receivable, net ................................................... (135,830) (115,288) (132,786)
Principal collected on loans receivable ................................................ 104,215 93,560 109,946
Proceeds from sales of real estate acquired through foreclosure ........................ 305 937 456
Proceeds from sales of office properties and equipment ................................. -- 192 --
Purchases of office properties and equipment .......................................... (1,166) (1,253) (2,690)
Redemptions (purchases) of FHLB stock ................................................ 101 (502) (390)
Other investing activities, net ...................................................... 884 447 914
----------- -------- --------
Net cash used by investing activities ............................................. (32,666) (44,205) (39,096)
----------- -------- --------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Cash flows from financing activities:
Increase in deposits .................................................................. 25,714 40,331 33,686
Increase (decrease) in securities sold under agreements to repurchase .................. 771 688 (2,666)
Proceeds from FHLB advances ............................................................ 365,120 75,850 198,170
Repayment of FHLB advances ............................................................ (368,340) (64,617) (201,245)
Proceeds from other borrowings, net ................................................... -- 1,968 224
Increase (decrease) in advance payments by borrowers for property taxes and insurance 79 (194) (26)
Increase (decrease) in drafts outstanding, net ....................................... 411 (367) (904)
Repurchase of treasury stock, at cost ................................................ (838) -- --
Cash dividends to stockholders and cash for fractional shares ........................ (1,288) (1,450) (1,618)
Exercise of stock options ............................................................ 57 107 217
----------- -------- --------
Net cash provided by financing activities .......................................... 21,686 52,316 25,838
----------- -------- --------
Net increase (decrease) in cash and cash equivalents .................................... (10,436) 9,660 (7,450)
----------- -------- --------
Cash and cash equivalents at beginning of year .......................................... 21,637 11,201 20,861
----------- -------- --------
Cash and cash equivalents at end of year ................................................ $ 11,201 20,861 13,411
=========== ======== ========
Supplemental information:
Interest paid ........................................................................ $ 16,988 19,060 19,992
=========== ======== ========
Income taxes paid ..................................................................... $ 2,377 3,030 2,687
=========== ======== ========
Supplemental schedule of non-cash investing and financing transactions:
Securitization of mortgage loans into mortgage-backed securities ..................... $ 11,793 19,366 --
=========== ======== ========
Transfer of mortgage loans to real estate acquired through foreclosure ............... $ 313 471 383
=========== ======== ========
Common stock dividend declared ......................................................... $ 1,989 -- --
=========== ======== ========
Transfer of investment securities held to maturity to available for sale ............... $ -- 14,775 --
=========== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements
17
<PAGE>
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of the more significant accounting policies used
in the preparation and presentation of the accompanying consolidated financial
statements. The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions. These estimates and assumptions affect the reported amount of
assets and liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements. In addition, they affect the reported
amounts of income and expenses during the reporting period. Actual results could
differ from these estimates and assumptions.
(a) Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Coastal Financial Corporation (the "Company"), and its wholly-owned
subsidiaries, Coastal Federal Mortgage, Inc., Coastal Investments Corporation
and Coastal Federal Savings Bank (the "Bank") and its wholly-owned subsidiary,
Coastal Mortgage Bankers and Realty Co., Inc. (and its wholly-owned
subsidiaries, Shady Forest Development Corporation, Sherwood Development
Corporation, Ridge Development Corporation, 501 Development Corporation, North
Beach Investments, Inc. and North Strand Property Management, Inc.). In
consolidation, all significant intercompany balances and transactions have been
eliminated. Coastal Financial Corporation is a unitary thrift holding company
organized under the laws of the state of Delaware. The Company's subsidiaries
operations consist primarily of the sales of financial products.
(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.
The Bank maintained liquid assets in excess of the amount required by
regulations during all periods included in these consolidated financial
statements. The required amount is 5% of the average daily balances of deposits
and short-term borrowings. Liquid assets consist principally of cash, including
time deposits and investment securities.
(d) Allowance for Loan 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
18
<PAGE>
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
value of loans periodically and the allowance is adjusted accordingly. While
management uses the best information available to make evaluations, future
adjustments to the allowance may be necessary if economic conditions differ
substantially from the assumptions used in making the evaluation. The allowance
for possible loan losses is subject to periodic evaluation by various regulatory
authorities and may be subject to adjustment upon their examination.
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.
Also on October 1, 1995, the Company adopted SFAS No. 118, "Accounting by
Creditors for Impairment of a Loan -- Income Recognition and Disclosures." SFAS
No. 118 amends SFAS No. 114 in the areas of disclosure requirements and methods
for recognizing interest income on an impaired loan.
Under SFAS No. 114, as amended by SFAS No. 118, when the ultimate
collectibility of an impaired loan's principal is in doubt, wholly or partially,
all cash receipts are applied to principal. When this doubt does not exist, cash
receipts are applied under the contractual terms of the loan agreement first to
principal then to interest income. Once the recorded principal balance has been
reduced to zero, future cash receipts are applied to interest income, to the
extent that any interest has been foregone. Further cash receipts are recorded
as recoveries of any amounts previously charged off.
(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, 1996 and 1997, the Company had approximately $6.8
million and $8.4 million, respectively, in mortgage loans held for sale. The
aggregate market value of loans receivable held for sale exceeded the aggregate
carrying value at September 30, 1996 and 1997.
(f) Real Estate Owned and Investments in Real Estate Partnerships
Real estate acquired through foreclosure is initially recorded at the lower
of cost or estimated fair value. Subsequent to the date of acquisition, it is
carried at the lower of cost or fair value, less selling costs. Market values of
real estate owned are reviewed regularly and allowances for losses are
established when it is determined that the carrying value of real estate exceeds
the fair value less selling costs. Costs relating to the development and
improvement of such property are capitalized, whereas those costs relating to
holding the property are charged to expense.
Real estate purchased for development and sale and investments in real
estate partnerships are stated at the lower of cost or estimated net realizable
value. Costs directly related to such real estate are capitalized until
construction required to bring these properties to a salable condition is
completed. Capitalized costs include real estate taxes, interest, and other
direct costs incurred during the improvement period.
Gains on the sale of real estate purchased for development and sale are
recorded at the time of sale provided certain criteria relating to property
type, cash down payment, loan terms, and other factors are met. If these
criteria are not met at the date of sale, the gain is deferred and recognized
using the installment or cost recovery method until they are satisfied, at which
time the remaining deferred gain is recorded as income.
Market values of real estate purchased for development and sale are
reviewed regularly and allowances for losses are established when the carrying
value exceeds the estimated net realizable value. In determining the estimated
net realizable value, the Company deducts from the estimated selling price the
projected cost to complete and dispose of the property and the estimated cost
(i.e. interest, property taxes, etc.) to hold the property to an expected date
of sale.
(g) Office Properties and Equipment
Office properties and equipment are carried at cost less accumulated
depreciation. Depreciation is computed primarily on the straight-line method
over estimated useful lives. Estimated lives range up to thirty years for
buildings and improvements and up to ten years for furniture, fixtures and
equipment. Maintenance and repairs are charged to expense as incurred.
Improvements which extend the lives of the respective assets are capitalized.
When property or equipment is sold or otherwise disposed of, the cost and
related accumulated depreciation are removed from the respective accounts and
the resulting gain or loss is reflected in income.
19
<PAGE>
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(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.
(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 that
may 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 FDIC but are
insured by a security interest in the security. The Company has classified these
amounts separately from deposits.
(n) 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.
(o) Reclassifications
Certain amounts in the 1995 and 1996 consolidated financial statements have
been reclassified to conform with the 1997 presentation. Such reclassifications
had no impact on net income or retained earnings as previously reported.
20
<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, 1996 is summarized as follows:
<TABLE>
<CAPTION>
1996
---------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Gross Gains Losses Value
----------- ------------ ------------ -------
<S> <C> <C> <C> <C>
(In thousands)
U.S. Government and agency obligations:
Due within one year .................. $ -- -- -- --
Due after one but within five years 13,037 -- (150) 12,887
Due after five years ............... 4,297 -- (43) 4,254
---------- ------------ ---- ------
$ 17,334 -- (193) 17,141
========== ============ ==== ======
</TABLE>
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
----------- ------------ ------------ -------
<S> <C> <C> <C> <C>
(In thousands)
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>
There were no realized gains or losses during the year ended September 30,
1995. The Company had gross realized losses of $18,000 and gross realized gains
of $12,000 for the year ended September 30, 1996. For the year ended September
30, 1997, gross realized losses were $58,000 and gross realized gains were
$65,000.
<PAGE>
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, 1997 was
$5,269,000 with a market value of $5,302,000.
(3) MORTGAGE-BACKED SECURITIES
Mortgage-backed securities available for sale at September 30, 1996
consisted of the following:
<TABLE>
<CAPTION>
1996
---------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ------------ ------------ -------
<S> <C> <C> <C> <C>
(In thousands)
FNMA ............... $ 2,469 12 -- 2,481
GNMA ............... 5,330 -- (98) 5,232
FHLMC ............... 18,861 455 -- 19,316
--------- --- --- ------
$26,660 467 (98) 27,029
========= === === ======
</TABLE>
21
<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, 1997
consisted of the following:
<TABLE>
<CAPTION>
1997
---------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ------------ ------------ -------
<S> <C> <C> <C> <C>
(In thousands)
FNMA ............... $ 1,861 2 -- 1,863
GNMA ............... 6,471 26 -- 6,497
FHLMC ............... 14,048 615 -- 14,663
---------- --- ------------ ------
$ 22,380 643 -- 23,023
========== === ============ ======
</TABLE>
The Company had no realized gains or losses on sales of mortgage-backed
securities 1995. 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.
(4) LOANS RECEIVABLE, NET
Loans receivable, net at September 30 consisted of the following:
<TABLE>
<CAPTION>
1996 1997
------------ -----------
<S> <C> <C>
(In thousands)
First mortgage loans:
Single family to 4 family units ............ $ 224,570 237,964
Other, primarily commercial real estate ... 73,295 97,680
Construction loans ........................ 34,566 34,216
Consumer and commercial loans:
Installment consumer loans ............... 31,601 24,378
Mobile home loans ........................ 1,103 1,291
Savings account loans ..................... 436 1,336
Equity lines of credit ..................... 12,441 15,294
Commercial and other loans ............... 14,831 10,939
---------- -------
392,843 423,098
Less:
Allowance for loan losses .................. 4,172 4,902
Deferred loan fees (costs) ............... (286) (458)
Undisbursed portion of loans in process ... 18,589 15,084
---------- -------
$ 370,368 403,570
========== =======
</TABLE>
<PAGE>
The changes in the allowance for loan losses for the years ended September
30 consisted of the following:
<TABLE>
<CAPTION>
1995 1996 1997
---------- --------- ---------
<S> <C> <C> <C>
(In thousands)
Beginning allowance ..................... $3,353 3,578 4,172
Provision for loan losses ............... 202 790 760
Allowance recorded on acquired loans ...... -- -- 110
Loan recoveries ........................... 255 82 72
Loan charge-offs ........................ (232) (278) (212)
------- ----- -----
$3,578 4,172 4,902
======= ===== =====
</TABLE>
Non-accrual loans which were over ninety days delinquent totaled
approximately $445,000 and $257,000 at September 30, 1996 and 1997,
respectively. There were no impaired loans at September 30, 1996 or 1997.
22
<PAGE>
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(4) LOANS RECEIVABLE, NET -- Continued
The carrying amounts and fair values of loans receivable at September 30,
1996 and 1997 are as follows (In thousands):
<TABLE>
<CAPTION>
1996 1997
------------------------- ----------------------
Carrying Calculated Carrying Calculated
Amount Fair Value Amount Fair Value
------------ ------------ ---------- -----------
<S> <C> <C> <C> <C>
Mortgage loans ............... $321,951 330,025 369,662 378,964
Consumer loans ............... 24,098 23,520 12,622 12,310
Equity lines of credit ...... 12,441 12,715 17,902 18,260
Commercial loans ............ 16,050 16,082 8,286 8,208
Allowance for loan losses ... (4,172) (4,172) (4,902) (4,902)
-------- ------- ------- -------
$370,368 378,170 403,570 412,840
======== ======= ======= =======
</TABLE>
Management has made estimates of fair value discount rates and estimated
prepayment rates that it believes to be reasonable based upon present market
conditions. However, because there is no active market for many of the above
financial instruments, management believes such information is of limited value
and has no basis to determine whether the fair value presented above would be
indicative of the value which could be negotiated during an actual sale.
Furthermore, this information is as of September 30, 1996 and 1997. Changes in
market interest and prepayment rates since September 30, 1996 and 1997 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, 1997, 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 190 loans aggregating approximately $9.7
million which were originated on individual income producing condominium units
in two projects in which the Bank's subsidiaries were a partner. At September
30, 1997, one loan in the amount of $56,000 was over sixty days delinquent. The
majority of these loans have been outstanding greater than four years and
management does not believe that they represent a significant risk in the loan
portfolio. Approximately $1.7 million of these loans have been sold to other
financial institutions.
At September 30, 1996 and 1997, the Company had commitments outstanding to
originate loans totaling approximately $9.0 million and $3.2 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, 1996 and 1997, the Company had undisbursed lines of credit of
approximately $32.0 million and $31.4 million, respectively.
Loans serviced for the benefit of others amounted to approximately $110.7
million, $115.1 million and $104.5 million at September 30, 1995, 1996 and 1997,
respectively.
As disclosed in note 9, certain mortgage loans are pledged to secure
advances from the Federal Home Loan Bank of Atlanta ("FHLB").
<PAGE>
(5) INVESTMENT IN REAL ESTATE PARTNERSHIPS
The Bank's subsidiaries are general partners in real estate partnerships,
with ownership interests ranging up to 50%, organized for the purposes of
constructing and marketing residential real estate. Condensed combined financial
information for the partnerships at or for the year ended at September 30 is
summarized as follows:
<TABLE>
<CAPTION>
1996 1997
------ -----
<S> <C> <C>
(In
thousands)
Assets, net .............................. $113 25
===== ==
Liabilities .............................. 5 1
----- --
Partners' equity:
Bank's subsidiaries ..................... 46 8
Others ................................. 62 16
----- --
108 24
----- --
Liabilities and partners' equity ...... $113 25
===== ==
</TABLE>
23
<PAGE>
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(5) INVESTMENT IN REAL ESTATE PARTNERSHIPS -- Continued
<TABLE>
<CAPTION>
1995 1996 1997
-------- --------- --------
<S> <C> <C> <C>
(In thousands)
Sales ....................................... $2,016 523 --
Cost of sales .............................. 885 140 --
------- --- --
Gross profit on sales ..................... 1,131 383 --
Other (expense) income, net ............... 78 (223) (36)
------- ---- ---
Net income ................................. $1,209 160 (36)
======= ==== ===
Bank's equity in partnership's income ...... $ 611 115 (12)
======= ==== ===
</TABLE>
(6) OFFICE PROPERTY AND EQUIPMENT, NET
Office property and equipment, net at September 30 consisted of the
following:
<TABLE>
<CAPTION>
1996 1997
--------- -------
<S> <C> <C>
(In thousands)
Land .................................... $ 1,132 1,981
Building and improvements ............... 4,990 5,647
Furniture, fixtures and equipment ...... 5,964 7,105
-------- -----
12,086 14,733
Less accumulated depreciation ......... 6,350 7,172
-------- ------
$ 5,736 7,561
======== ======
</TABLE>
The Company leases office space and various equipment. Total rental expense
for the years ended September 30, 1995, 1996 and 1997 was approximately
$121,000, $138,000, and $112,000 respectively.
Future minimum rental payments for operating leases having remaining
noncancelable lease terms in excess of one year at September 30, 1997 are as
follows (In thousands):
<TABLE>
<S> <C>
1998 ............... $112
1999 ............... 111
2000 ............... 92
2001 ............... 91
2002 ............... 56
----
$462
====
</TABLE>
(7) INVESTMENT REQUIRED BY LAW
Investment in stock of the FHLB is required by law of every
Federally-insured savings institution. No ready market exists for this stock and
it has no quoted market value. However, redemption of this stock has been at par
value.
The Bank, as a member of the FHLB of Atlanta, is required to acquire and
hold shares of capital stock in the FHLB of Atlanta in an amount equal to the
greater of (i) 1.0% of the aggregate outstanding principal amount of residential
mortgage loans, home purchase contracts and similar obligations at the beginning
of each year, or (ii) 1/20 of its advances (borrowings) from the FHLB of
Atlanta. The Bank is in compliance with this requirement with an investment in
FHLB of Atlanta stock of $5.6 million at September 30, 1997.
24
<PAGE>
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(8) DEPOSITS
Deposits at September 30, consisted of the following:
<TABLE>
<CAPTION>
1996 1997
--------------------- --------------------
Weighted Weighted
Amount Rate Amount Rate
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
(Dollars in thousands)
Transaction accounts:
Noninterest bearing ............... $ 19,926 --% $ 23,765 --%
NOW .............................. 35,654 1.23 38,773 1.27
Money market checking ............ 84,997 4.85 104,476 4.48
--------- ---- -------- ----
Total transaction accounts ...... 140,577 3.24 167,014 3.10
--------- ---- -------- ----
Passbook accounts:
Regular passbooks ............... 39,287 2.67 36,652 2.63
Money market ..................... 3,553 2.44 2,793 2.38
--------- ---- -------- ----
Total passbook accounts ......... 42,840 2.66 39,445 2.62
--------- ---- -------- ----
Certificate accounts:
0.00 - 5.99% .................. 113,871 110,606
6.00 - 8.00% .................. 15,623 29,683
8.01 - 10.00% .................. 130 368
10.01 - 12.00% .................. 389 --
--------- --------
Total certificate accounts ...... 130,013 5.64 140,657 5.58
--------- ---- -------- ----
$313,430 4.12% $347,116 4.02%
========= ==== ======== ====
</TABLE>
<PAGE>
The aggregate amount of deposit accounts with a minimum denomination of
$100,000 or more was $60,406,000 and $80,691,000 at September 30, 1996 and 1997,
respectively.
The amounts and scheduled maturities of certificate accounts at September
30, are as follows:
<TABLE>
<CAPTION>
1996 1997
---------- --------
<S> <C> <C>
(In thousands)
Within 1 year .................. $ 94,651 111,942
After 1 but within 2 years ...... 28,241 23,704
After 2 but within 3 years ...... 5,484 3,630
Thereafter ..................... 1,637 1,381
--------- -------
$130,013 140,657
========= =======
</TABLE>
Interest expense on deposits for the years ended September 30 consisted of
the following:
<TABLE>
<CAPTION>
1995 1996 1997
-------- -------- -------
<S> <C> <C> <C>
(In thousands)
Transaction accounts ...... $1,925 3,162 4,894
Passbook accounts ......... 1,581 1,599 1,015
Certificate accounts ...... 6,384 6,928 7,741
------- ----- -----
$9,890 11,689 13,650
======= ====== ======
</TABLE>
The fair value of transaction and passbook accounts is $183.4 million and
$206.5 million which was the amount currently payable at September 30, 1996 and
1997, respectively. The fair value of certificate accounts was $130.3 million
and $142.6 million compared to a book value of $130.0 million and $140.7 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.
25
<PAGE>
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(9) ADVANCES FROM FHLB
Advances from the FHLB at September 30 consisted of the following:
<TABLE>
<CAPTION>
1996 1997
--------------------- --------------------
Weighted Weighted
Amount Rate Amount Rate
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
(In thousands)
Fiscal Year Maturity
1997 .................. $ 54,404 5.68% $ -- --%
1998 .................. 20,120 5.90 68,620 5.60
1999 .................. 13,105 6.35 13,435 6.06
2000 .................. 6,861 6.46 6,761 6.45
2001 .................. 2,846 6.46 2,646 6.49
2002 or greater ...... 7,217 7.07 10,016 6.79
--------- ---- -------- ----
$104,553 5.97% $101,478 5.86%
========= ==== ======== ====
</TABLE>
Stock in the FHLB of Atlanta and specific first mortgage loans of
approximately $223.4 million and $213.9 million at September 30, 1996 and 1997,
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, 1997, the excess first mortgage loan collateral pledged to the
FHLB will support additional borrowings of approximately $59.0 million.
The estimated fair value of the FHLB advances at September 30, 1996 and
1997 is $104.2 million and $101.0 million. This estimate is based on discounting
amounts payable at contractual rates using current market rates for advances
with similar maturities.
<PAGE>
(10) INCOME TAXES
Income tax expense for the years ended September 30 consisted of the
following:
<TABLE>
<CAPTION>
Current Deferred Total
--------- ---------- ------
<S> <C> <C> <C>
(In thousands)
1995:
Federal ............... $1,697 229 1,926
State ............... 268 38 306
-------- --- -----
1,965 267 2,232
======== === =====
1996:
Federal ............... $2,528 (646) 1,882
State ............... 403 (121) 282
-------- ---- -----
2,931 (767) 2,164
======== ==== =====
1997:
Federal ............... $2,646 331 2,977
State ............... 311 63 374
-------- ---- -----
2,957 394 3,351
======== ==== =====
</TABLE>
26
<PAGE>
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(10) INCOME TAXES -- Continued
The tax effect of the Company's temporary differences between the financial
statement carrying amounts and tax basis of assets and liabilities that give
rise to the net deferred tax asset at September 30, 1996 and 1997 related to the
following:
<TABLE>
<CAPTION>
1996 1997
---------- ---------
<S> <C> <C>
(In thousands)
Deferred tax assets:
Allowance for loan losses .......................................... $1,600 1,858
Accrued medical reserves ............................................. 79 123
Other real estate reserves and deferred gains on other real estate ... 75 81
Accrued FDIC premiums ................................................ 615 --
Net operating loss carryforwards .................................... 138 135
Other ............................................................... 99 122
------- -----
Total deferred tax assets ............................................. 2,606 2,319
Less valuation allowance ............................................. (138) (135)
------- -----
Net deferred tax assets ............................................. 2,468 2,184
======= =====
Deferred tax liabilities:
Tax bad debt reserve in excess of base year amount .................. 552 484
Property and equipment principally due to differences in depreciation 190 237
FHLB stock, due to stock dividends not recognized for tax purposes ... 356 356
Unrealized gain on securities available for sale ..................... 69 263
Deferred loan fees ................................................... 204 318
Other ............................................................... 220 237
------- -----
Total deferred tax liabilities ....................................... 1,591 1,895
------- -----
Net deferred tax asset ................................................ $ 877 289
======= =====
</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 $194,000 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 $394,000.
<PAGE>
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>
1995 1996 1997
------ ----- -------
<S> <C> <C> <C>
(In thousands)
Computed federal income taxes ......... $2,024 2,001 3,108
State tax, net of federal benefit ...... 201 173 247
Other, net .............................. 7 (10) (4)
------ ----- -----
Total income tax expense ............... $2,232 2,164 3,351
====== ===== =====
</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,
1996 and 1997. 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, 1996 and 1997 includes approximately
$5,200,000 representing pre-1988 tax bad debt base year reserve amounts for
which no deferred income tax liability has been provided since these reserves
are not expected to reverse until indefinite future periods and may never
reverse. Circumstances that would require an accrual of a portion or all of this
unrecorded tax liability are
27
<PAGE>
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(10) INCOME TAXES -- Continued
a reduction in qualifying loan levels relative to the end of 1987, failure to
meet the tax definition of a bank, dividend payments in excess of current year
or accumulated tax earnings and profits, or other distributions in dissolution,
liquidation or redemption of the Bank's stock.
(11) BENEFIT PLANS
The Company participates in a multiple-employer defined benefit pension
plan covering substantially all employees. Separate actuarial valuations are not
available for each participating employer, nor are plan assets segregated.
Pension expense for the years ended September 30, 1995, 1996 and 1997 was minor.
Plan assets exceeded the present value of accumulated plan benefits at June 30,
1997, 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 $28,000, $149,000 and $245,000 for fiscal
years 1995, 1996 and 1997, respectively.
(12) REGULATORY MATTERS
At September 30, 1997, the Bank's loans-to-one borrower limit was
approximately $5.2 million. At September 30, 1997, 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 $1,620,000 special assessment to
the FDIC for the recapitalization of 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.
The ability of the Company to pay dividends depends primarily on the
ability of the Bank to pay dividends to the Company. The Bank is subject to
various regulatory capital requirements administered by the federal banking
agencies. Failure to meet minimum capital requirements can initiate certain
mandatory -- and possibly additional discretionary -- actions by regulators
that, if undertaken, could have a direct material effect on the Bank's financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Bank must meet specific capital guidelines that
involve quantitative measures of the Bank's assets, liabilities and certain
off-balance-sheet items as calculated under regulatory accounting practices.
<PAGE>
The regulatory requirements for the Bank and the Bank's compliance with
such requirements at September 30, 1996 and 1997 is as follows.
<TABLE>
<CAPTION>
Percent
Amount of Assets
--------- ----------
<S> <C> <C>
(In thousands)
1996:
Tangible capital (1) ........................ $27,271 5.93%
Tangible capital requirement ............... 6,859 1.50
-------- -----
Excess ....................................... $20,412 4.43%
======== =====
Core capital ................................. 27,271 5.93%
Core capital requirement ..................... 13,719 3.00
-------- -----
Excess ....................................... $13,552 2.93%
======== =====
Risk-based capital ........................... 30,777 10.41%
Minimum risk-based capital requirements ...... 23,641 8.00
-------- -----
Excess ....................................... $ 7,136 2.41%
======== =====
</TABLE>
28
<PAGE>
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(12) REGULATORY MATTERS -- Continued
<TABLE>
<CAPTION>
Percent
Amount of Assets
--------- ----------
<S> <C> <C>
1996:
Tier I leverage ratio ..................... $27,271 5.93%
Tier I leverage ratio requirement ......... 18,388 4.00
------ ----
Excess .................................... $ 8,883 1.93%
======= ====
Tier I risk-based capital .................. 27,271 9.23%
Tier I risk-based capital requirement ...... 11,821 4.00
------- ----
Excess .................................... $15,450 5.23%
======= ====
</TABLE>
<TABLE>
<CAPTION>
Percent
Amount of Assets
--------- ----------
<S> <C> <C>
(In thousands)
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 4.00
-------- -----
Excess ....................................... $11,433 2.31%
======== =====
Tier I risk-based capital .................. 31,193 9.92%
Tier I risk-based capital requirement ...... 12,574 4.00
-------- -----
Excess ....................................... $18,619 5.92%
======== =====
</TABLE>
(1) Equals the Bank's stockholder's equity
<PAGE>
(13) LIQUIDATION ACCOUNT
In conjunction with the Bank's conversion and sale of common stock, as
required by Office of Thrift Supervision regulations, on October 6, 1990 the
Bank established a liquidation account and will maintain this account for the
benefit of the remaining eligible account holders.The initial balance of this
liquidation account was equal to the Bank's net worth defined by OTS regulations
as of the date of the latest statement of financial condition contained in the
final offering circular. In the event of a complete liquidation of the Bank (and
only in such event) each eligible holder shall be entitled to receive a
liquidation distribution from this account in the amount of the then current
adjusted balance for deposits then held, before any liquidation distribution may
be made to the stockholders. The Bank is prohibited from declaring cash
dividends or repurchasing its capital stock if it would cause a reduction in the
Bank's net worth below either the liquidation account or the statutory net worth
requirements set by the OTS.
(14) EARNINGS PER SHARE
Earnings per share for the years ended September 30, 1995, 1996 and 1997
are computed by dividing net earnings by the weighted average number of common
share equivalents outstanding during the year. Common share equivalents include,
if applicable, dilutive stock option share equivalents determined by using the
treasury stock method. All share and per share data have been retroactively
restated for all common stock dividends.
29
<PAGE>
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(15) 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, 1997 amounted to approximately 253,000 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, 1997, the Company had the following
options outstanding:
<TABLE>
<CAPTION>
Options Average
Options Available for Option
Grant Date (Calendar Year) Granted Exercise Price Expiration Date
- ---------------------------- --------- --------------- -------- ----------------
<S> <C> <C> <C> <C>
1990 ............... 159,921 100% $ 1.07 2000
1991 ............... 6,651 100 1.47 2001
1992 ............... 23,872 100 2.83 2002
1994 ............... 23,985 60 9.17 2004
1995 ............... 162,493 40 9.07 2005
1996 ............... 66,642 20 15.19 2006
1997 ............... 41,245 -- 15.09 2007
</TABLE>
During the years ended September 30, 1995, 1996 and 1997, options for
45,369, 76,863, and 60,473 shares, at an average of $1.07, $1.46, and $3.61 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
-------- -------
<S> <C> <C> <C>
Net income As reported $3,721 $5,791
Proforma 3,704 5,693
Earnings per share As reported $ 0.78 1.19
Proforma 0.77 1.17
</TABLE>
<PAGE>
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, and 1997, dividend yield of approximately
1.6%, expected volatility of approximately 27% in 1996 and 35% in 1997,
risk-free interest rate of 6.08%, expected lives of 10 years and a vesting
period of 5 years.
(16) COMMON STOCK DIVIDENDS
On May 30, 1995, the Company declared a 5% common stock dividend
aggregating 102,003 shares. On January 9, 1996 and June 20, 1996, the Company
declared a five for four stock split in the form of a 25% stock dividend,
aggregating approximately 542,000 and 687,000 shares, respectively. On April 30,
1997, the Company declared a four for three stock split in the form of a 33%
stock dividend, aggregating approximately 1,160,000 shares. All share data has
been retroactively restated to give effect to the common stock dividends.
(17) CASH DIVIDENDS
On June 21, 1995, September 27, 1995, December 27, 1995 and March 27, 1996,
the Company declared a quarterly cash dividend of $.075 per share. On June 27,
1996, September 25, 1996, December 18, 1996, and March 26, 1997 the Company
declared quarterly cash dividends of $.0825, respectively. On June 25, 1997 and
September 24, 1997, the Company declared quarterly cash dividends of $.09,
respectively.
(18) LEGAL MATTERS
The legal proceedings against the Company are generally incidental to its
business. At September 30, 1997, there were no material legal proceedings
pending against the Company.
30
<PAGE>
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(19) QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly operating data for the years ended September 30 is summarized as
follows (In thousands, except share data):
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------ ----------- ----------- ----------
<S> <C> <C> <C> <C>
1996:
Total interest income .............................. $ 8,408 8,577 8,748 8,987
Total interest expense .............................. 4,757 4,685 4,661 4,988
---------- ----- ----- -----
Net interest income ................................. 3,651 3,892 4,087 3,999
Provision for loan losses ........................... 115 225 300 150
---------- ----- ----- -----
Net interest income after provision for loan losses 3,536 3,667 3,787 3,849
Other income ....................................... 935 1,132 1,291 1,273
General and administrative expenses* ............... 2,792 2,955 3,115 4,723
---------- ----- ----- -----
Earnings before income taxes ........................ 1,679 1,844 1,963 399
Income taxes* ....................................... 621 676 729 137
---------- ----- ----- -----
Net earnings ....................................... $ 1,058 1,168 1,234 262
========== ===== ===== =====
Earnings per common share ........................... $ .22 .24 .26 .05
========== ===== ===== =====
Weighted average shares outstanding .................. 4,744,000 4,793,000 4,797,000 4,837,000
========== ========= ========= =========
<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 ........................... $ .26 .28 .31 .33
========== ===== ===== ======
Weighted average shares outstanding .................. 4,841,000 4,855,000 4,898,000 4,915,000
========== ========= ========= =========
</TABLE>
<PAGE>
- ---------
* The three month period ended September 30, 1996 includes a special assessment
from the FDIC for the recapitalization of the SAIF of $1,620,000, and a
related reduction in income taxes of $615,000. Excluding this special
assessment, net income for the three months ended would have been $1,267,000,
or $0.26 per share.
31
<PAGE>
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(20) COASTAL FINANCIAL CORPORATION FINANCIAL STATEMENTS (PARENT COMPANY ONLY)
The following is condensed financial information of Coastal Financial
Corporation (parent company only), the primary asset of which is its investment
in its bank subsidiary, for the periods indicated (In thousands):
Coastal Financial Corporation
Condensed Balance Sheets
September 30, 1996 and 1997
<TABLE>
<CAPTION>
1996 1997
Assets ------- -------
<S> <C> <C>
Cash ......................................... $ 145 1,208
Investment in subsidiaries ................... 27,855 32,644
Deferred tax asset ........................... 36 49
Other assets ................................. 34 18
------- -------
Total assets ............................. $28,070 33,919
======= =======
Liabilities and Stockholders' Equity
Accounts payable ............................. 389 1,528
Total stockholders' equity ................... 27,681 32,391
------- -------
Total liabilities and stockholders'equity. $28,070 33,919
======= =======
</TABLE>
Coastal Financial Corporation
Condensed Statement of Operations
For the years ended September 30, 1995, 1996 and 1997
<TABLE>
<CAPTION>
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Income:
Interest income $ -- -- 1
Management fees 230 108 108
Dividends from subsidiary ...................... 1,725 1,090 1,850
Equity in undistributed earnings of subsidiaries 2,013 2,616 3,969
------- ------- -------
Total income ............................... 3,968 3,814 5,928
------- ------- -------
Expenses:
Amortization of organization cost 8 14 16
Professional fees .............................. 177 38 40
Supplies and printing 40 7 29
Other expenses ................................. 25 32 66
Income tax (benefit) expense ................... (2) 2 (14)
------- ------- -------
Total expenses 248 93 137
------- ------- -------
Net income $ 3,720 3,721 5,791
======= ======= =======
</TABLE>
32
<PAGE>
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(20) COASTAL FINANCIAL CORPORATION FINANCIAL STATEMENTS (PARENT COMPANY ONLY)
-- Continued
Coastal Financial Corporation
Condensed Statement of Cash Flows
For the years ended September 30, 1995, 1996 and 1997
<TABLE>
<CAPTION>
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Operating activities:
Net income ....................................... $ 3,720 3,721 5,791
Adjustments to reconcile net income
to net cash (used) provided by:
Equity in undistributed net income of subsidiary (2,013) (2,616) (3,969)
Increase (decrease) in other assets ............... (46) 27 3
Increase (decrease) in other liabilities ......... 82 (79) 639
-------- ------ ------
Total cash provided by operating activities ...... 1,743 1,053 2,464
-------- ------ ------
Financing activities:
Purchase of Treasury Stock ........................ (838) -- --
Capital contributions to subsidiary ............... (150) -- (500)
Cash dividend to shareholders ..................... (1,282) (1,433) (1,600)
Proceeds from stock options ........................ 56 107 217
Proceeds from line of credit advance ............... -- -- 500
Other financing activities, net .................. 59 (24) (18)
-------- ------ ------
Total cash used by financing activities ......... (2,155) (1,350) (1,401)
-------- ------ ------
Net increase (decrease) in cash and cash equivalents (412) (297) 1,063
Cash and cash equivalents at beginning of the year 854 442 145
-------- ------ ------
Cash and cash equivalents at end of the year ...... $ 442 145 1,208
======== ====== ======
</TABLE>
33
<PAGE>
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(21) CARRYING AMOUNTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts and fair value of financial instruments as of
September 30, 1996 and 1997 are summarized below:
<TABLE>
<CAPTION>
1996 1997
----------------------- ----------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
---------- ------------ ---------- -----------
<S> <C> <C> <C> <C>
(In thousands) (In thousands)
Financial Assets
Cash and cash equivalents ..................... $ 20,861 20,861 13,411 13,411
Investment securities ........................... 17,471 17,473 26,171 26,171
Mortgage-backed securities ..................... 27,029 27,029 23,023 23,023
Loans receivable held for sale .................. 6,803 6,905 8,359 8,359
Loans receivable, net ........................... 370,368 378,170 403,570 412,840
FHLB stock .................................... 5,228 5,228 5,618 5,618
--------- ------- --------- -------
$447,760 455,666 $480,152 489,422
========= ======= ========= =======
Financial Liabilities
Deposits:
Demand accounts .............................. 183,417 183,417 206,459 206,459
Certificate accounts ........................... 130,013 130,303 140,657 142,615
Advances from Federal Home Loan Bank ............ 104,553 104,241 101,478 100,971
Securities sold under agreements to repurchase.. 3,365 3,365 2,666 2,666
Other borrowings .............................. 1,922 1,922 2,193 2,193
--------- ------- --------- -------
$423,270 423,248 $453,453 454,904
========= ======= ========= =======
</TABLE>
The Company had $53.4 million of off-balance sheet financial commitments as
of September 30, 1997, 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 a specific point in time, based on
relevant market information and information about the financial instrument.
These estimates do not reflect any premium or discount that could result from
offering for sale the Company's entire holdings of a particular financial
instrument. Because no active market exists for a significant portion of the
Company's financial instruments, fair value estimates are based on judgments
regarding future expected loss experience, current economic conditions, current
<PAGE>
interest rates and prepayment trends, risk characteristics of various financial
instruments, and other factors. These estimates are subjective in nature and
involve uncertainties and matters of significant judgment and therefore cannot
be determined with precision. Changes in any of these assumptions used in
calculating fair value would also significantly affect the estimates. Further,
the fair value estimates were calculated as of September 30, 1997. 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.
(22) COMMITMENTS AND CONTINGENCIES
The Company has a $8 million outstanding line of credit with a commercial
bank. The line of credit is secured by 51% of the stock of the Bank. At
September 30, 1997, the outstanding balance was $500,000.
34
<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 INVESTMENTS
CORPORATION
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 Investments
Corporation
Jerry L. Rexroad, CPA
Chief Financial Officer
Coastal Investments
Corporation
Phillip G. Stalvey
Executive Vice President
Coastal Financial
Corporation
COASTAL FEDERAL
MORTGAGE
DIRECTORS
James T. Clemmons
Chairman
Coastal Financial
Corporation
Michael C. Gerald
President and Chief
Executive Officer
Coastal Federal Mortgage
Jerry L. Rexroad, CPA
Chief Financial Officer
Coastal Federal Mortgage
Wilson B. Springs
Owner, H.B. Springs
Company
Phillip G. Stalvey
Executive Vice President
Coastal Financial
Corporation
35
<PAGE>
- --------------------------------------------------------------------------------
LEADERSHIP GROUP
COASTAL FEDERAL SAVINGS BANK
- --------------------------------------------------------------------------------
Denise F. Brown
Deposit Sales Group Leader
Surfside
Cynthia L. Buffington
Item Processing Group Leader
Glenn T. Butler
Vice President
Management Information Systems
Group Leader
Edward F. Cagle
Senior Vice President
Marketing Group Leader
Susan R. Cammons
Loan Sales Group Leader
Surfside
Pamela D. Collins
Office Sales Group Leader
Dunes
Susan J. Cooke
Vice President
Corporate Support Group Leader
Corporate Secretary
Patricia A. Coveno
Deposit Sales Group Leader
Oak Street
Robert D. Douglas
Senior Vice President
Human Resources Group Leader
James T. Faulk
Assistant Vice President
Collections Group Leader
Rita E. Fecteau
Vice President
Controller
Trina S. Ferguson
Assistant Vice President
Residential Loan Administration
Group Leader
J. Daniel Fogle
Vice President
Regional Sales Group Leader
Conway Region
Mary L. Geist
Vice President
Computer Services Group Leader
Michael C. Gerald
President and Chief Executive Officer
Belinda B. Gillespie
Assistant Vice President
Office Sales Group Leader
Florence
Jimmy R. Graham
Executive Vice President
Information Systems Group Leader
Richard L. Granger
Vice President
Loan Sales Group Leader
Florence
Allen W. Griffin
Executive Vice President
Banking Administration Group Leader
Don C . Hamilton
Assistant Vice President
Mortgage Sales Group Leader
Myrtle Beach
Lisa B. James
Assistant Vice President
Deposit Servicing Group Leader
Ruth S. Kearns
Senior Vice President
Director of Public Relations
Assistant Corporate Secretary
Cecil H. Kennedy
Corporate Services Group Leader
Scott W. Lander
Vice President
Regional Sales Group Leader
North Carolina
Edward L. Loehr
Vice President
Budgeting and Treasury
Sandy L. Louden
Office Sales Group Leader
Socastee
Sherry A. Maloni
Assistant Vice President
Office Sales Group Leader
Waccamaw Medical Park
Janice B. Metz
Marketing Programs Coordinator
Cindy L. Milardo
Assistant Vice President
Loan Servicing Group Leader
Lauren E. Miller
Staff Development Coordinator
Erin P. Mitchell
Assistant Vice President
Commercial Sales Officer
Jerry L. Rexroad, CPA
Executive Vice President
Chief Financial Officer
Steve C. Sellers
Loan Sales Group Leader
Socastee
Douglas E. Shaffer
Vice President
Regional Sales Group Leader
North Strand Region
Cathe P. Singleton
Office Sales Group Leader
Murrells Inlet
Ashley M. Smith
Deposit Sales Group Leader
South Brunswick
J. Marcus Smith, Jr.
Vice President
Account Servicing Group Leader
Phillip G. Stalvey
Executive Vice President
Sales Group Leader
H. Delan Stevens
Office Sales Group Leader
Conway
Donna P. Todd
Assistant Vice President
Sales Support Group Leader
John L. Truelove
Vice President
Regional Sales Group Leader
South Strand Region
Jerry A. Vereen
Vice President
Regional Sales Group Leader
Central Region
Douglas W. Walters
Assistant Vice President
Loan Sales Group Leader
North Myrtle Beach
David E. Williams
Merchant Account Group Leader
36
<PAGE>
------------------------
COASTAL FEDERAL
SAVINGS BANK OFFICES
------------------------
Oak Street Office
2619 Oak Street
Myrtle Beach, SC
29577-3129
(803) 448-5151
Conway Office
310 Highway 378
Conway, SC 29526
(803) 444-0225
Dunes Office
7500 North Kings Highway
Myrtle Beach, SC 29572
(803) 444-0241
Florence Office
1385 Alice Drive
Florence, SC 29505
(803) 444-1299
Murrells Inlet Office
3348 Highway 17 South
& Inlet Crossing
Murrells Inlet, SC 29576
(803) 444-0200
North Myrtle Beach Office
521 Main Street
North Myrtle Beach, SC 29582
(803) 444-0265
Socastee Office
4801 Socastee Boulevard
Myrtle Beach, SC 29575
(803) 444-0281
Surfside Office
112 Highway 17 South
& Glenns Bay Road
Surfside Beach, SC 29575
(803) 444-0250
Waccamaw Medical Park Office
112 Waccamaw Medical Park Drive
Conway, SC 29526
(803) 444-0216
South Brunswick Office
1625 Seaside Road, SW
Sunset Beach, NC 28468
(803) 444-1258
(910) 579-8160
----------------------------------------
COASTAL INVESTMENTS CORPORATION
(803) 626-0491
----------------------------------------
Susan J. Cooke
Corporate Secretary
Myrtle Beach Investment Center
(803) 448-5151
Victoria J. Damore
Investment Services Representative
Conway Investment Center
(803) 626-0491
Michael C. Gerald
President and Chief Executive Officer
Myrtle Beach Investment Center
(803) 448-5151
John Michael Hill
Investment Services Representative
Myrtle Beach Investment Center
(803) 626-0491
Jerry L. Rexroad, CPA
Chief Financial Officer
Myrtle Beach Investment Center
(803) 448-5151
Julie M. Tellier
Sales Assistant
Myrtle Beach Investment Center
(803) 626-0491
-------------------------------
COASTAL FEDERAL MORTGAGE
(803) 662-2273
-------------------------------
Susan J. Cooke
Corporate Secretary
Michael C. Gerald
President and Chief Executive Officer
Edward F. Hurley
Vice President
Jerry L. Rexroad, CPA
Chief Financial Officer
Nancy L. Watts
Assistant Vice President
37
<PAGE>
---------------------------
CORPORATE INFORMATION
---------------------------
Common Stock and Dividend Information
The common stock of Coastal Financial Corporation is quoted through the
NASDAQ Stock Market under the symbol CFCP. For information contact J.C. Bradford
at 1-800-829-4522, Trident Financial Corporation at 1-800-222- 2618,
Robinson-Humphrey at 1-800-241-0077, Herzog, Heine, Geduld, Inc. at
1-800-523-4936, Raymond James & Associates, Inc. at 1-800-441-4103 or Wheat
First Butcher & Singer Securities at 1-800-678-3232. As of November 30, 1997 the
Corporation had 793 shareholders and 4,655,982 shares of common stock
outstanding. This does not reflect the number of persons or entities who hold
stock in nominee or "street name."
Market Price of Common Stock
The table below reflects the high and low bid stock prices published by
NASDAQ for each quarter.
<TABLE>
<CAPTION>
High Low
Bid Bid
--------- --------
<S> <C> <C>
Fiscal Year 1997:
First Quarter ...... $16.50 $13.88
Second Quarter ...... 19.13 16.50
Third Quarter ...... 23.13 21.13
Fourth Quarter ...... 25.25 22.88
Fiscal Year 1996:
First Quarter ...... 10.08 9.12
Second Quarter ...... 12.45 9.36
Third Quarter ...... 13.35 11.40
Fourth Quarter ...... 15.75 13.20
</TABLE>
Form 10-K
A copy of Coastal Financial Corporation's Annual Report on Form 10-K, as
filed with the Securities Exchange Commission for the year ended September 30,
1997, 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 26, 1998 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 Officer at the address shown below.
Corporate Offices
Coastal Financial Corporation
2619 Oak Street
Myrtle Beach, South Carolina 29577
803-448-5151
Transfer Agent and Registrar
Registrar and Transfer Company
P.O. Box 1010
Cranford, NJ 07016
(800) 866-1340
Independent Certified Public Accountants
KPMG Peat Marwick LLP
P.O. Box 10529
Greenville, South Carolina 29603
General Counsel
James H. Dusenbury
Dusenbury, Hendrix & Little
602 27th Avenue
Myrtle Beach, South Carolina 29577
Special Counsel
Breyer & Aggugia
1300 I Street, N.W.
Suite 470 East
Washington, DC 20005
Shareholder Relations Officer
Susan J. Cooke
Coastal Financial Corporation
2619 Oak Street
Myrtle Beach, South Carolina 29577
803-448-5151
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.
[GRAPHIC OMITTED]
38
<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK)
<PAGE>
--------------------------------------------
COASTAL FINANCIAL CORPORATION
--------------------------------------------
Corporate Office
2619 Oak Street
Myrtle Beach, SC 29577-3129
(803) 448-5151
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Parent
Coastal Financial Corporation
Percentage State of
Subsidiary Owned Incorporation
- ---------- ----- -------------
Coastal Federal Savings Bank 100% United States
Coastal Federal Mortgage, Inc. 100% South Carolina
Coastal Investments Corporation 100% South Carolina
Coastal Technology Solutions 100% South Carolina
Coastal Mortgage Bankers and
Realty Co., Inc. (1) 100% South Carolina
Shady Forest Development
Corporation (2) 100% South Carolina
Sherwood Development
Corporation (2) 100% South Carolina
Ridge Development
Corporation (2) 100% South Carolina
501 Development
Corporation (2) 100% South Carolina
North Beach Investment,
Inc. (2) 100% South Carolina
- -----------------------
(1) First tier subsidiaries of Coastal Federal.
(2) Second tier subsidiaries of Coastal Federal
and first tier subsidiaries of Coastal Mortgage.
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
<PAGE>
INDEPENDENT ACCOUNTANTS CONSENT
The Board of Directors
Coastal Financial Corporation and Subsidiaries
We consent to incorporation by reference in the registration statements No.
333-1274 and 333-01274 on Form S-8 of Coastal Financial Corporation and
Subsidiaries (the "Company") of our report dated October 17, 1997 relating to
the consolidated statements of financial condition of the Company as of
September 30, 1997 and 1996, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the years in the
three-year period ended September 30, 1997, which report appears in the
September 30, 1997, annual report on Form 10-K of the Company.
/s/KPMG Peat Marwick LLP
------------------------
KPMG Peat Marwick LLP
Greenville, South Carolina
December 26, 1997
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> SEP-30-1997
<CASH> 12,852
<INT-BEARING-DEPOSITS> 559
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 49,194
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 411,929
<ALLOWANCE> 4,902
<TOTAL-ASSETS> 494,003
<DEPOSITS> 347,116
<SHORT-TERM> 74,497
<LIABILITIES-OTHER> 7,141
<LONG-TERM> 32,859
0
0
<COMMON> 46
<OTHER-SE> 32,345
<TOTAL-LIABILITIES-AND-EQUITY> 494,003
<INTEREST-LOAN> 33,769
<INTEREST-INVEST> 4,020
<INTEREST-OTHER> 276
<INTEREST-TOTAL> 38,065
<INTEREST-DEPOSIT> 13,650
<INTEREST-EXPENSE> 20,146
<INTEREST-INCOME-NET> 17,919
<LOAN-LOSSES> 931
<SECURITIES-GAINS> 242
<EXPENSE-OTHER> 12,716
<INCOME-PRETAX> 9,142
<INCOME-PRE-EXTRAORDINARY> 5,791
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,791
<EPS-PRIMARY> 1.19
<EPS-DILUTED> 0
<YIELD-ACTUAL> 8.46
<LOANS-NON> 0
<LOANS-PAST> 257
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 4,902
<CHARGE-OFFS> 212
<RECOVERIES> 72
<ALLOWANCE-CLOSE> 0
<ALLOWANCE-DOMESTIC> 4,902
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
