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, 1999
OR
| | 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 (I.R.S. Employer I.D.)
- ---------------------------- ----------------------
of incorporation or organization)
2619 Oak Street, Myrtle Beach, South Carolina 29577-3129
- --------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (843) 448-5151
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [ ] NO [ X ] .
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
As of December 21, 1999, there were issued and outstanding 6,754,421
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 NASDAQ System under the symbol "CFCP" on December 21,
1999, was $84,430,263 (6,754,421 shares at $12.50 per share, which is the ending
bid price on December 21, 1999.). 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, 1999 (Parts I and II)
2. Portions of the Proxy Statement for the 2000 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 Investor Services, Inc., 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.
engaged in the origination of conforming mortgage loans which are sold in the
secondary market, generally on a servicing released basis. During fiscal 1999,
Coastal Federal Mortgage's operations were discontinued. Consequently, the
Bank's mortgage banking function was expanded.
On May 7, 1996, the Corporation formed Coastal Technology Services,
Inc. ("CTS"). CTS primarily develops specialized banking software for sale to
financial services companies. CTS's activities for fiscal 1999 was immaterial to
the consolidated financial condition and results of operations of Coastal
Financial.
On February 20, 1998, Coastal Real Estate Investment Corporation
("CREIC") was incorporated in North Carolina. CREIC is a wholly owned operating
subsidiary of Coastal Federal Holding Corporation ("CFHC") and is a real estate
investment trust ("REIT"). All of CREIC's operating activities are consolidated
into Coastal Federal Savings Bank. CREIC engages in the investment and
management of real estate related assets, primarily mortgage loans. On September
1, 1998, CREIC was capitalized with approximately $131.8 million of mortgage
loans from Coastal Federal. On December 10, 1998, CREIC became a wholly owned
subsidiary of CFHC through an exchange of stock transaction.
On June 25, 1998, Coastal Federal Holding Corporation ("CFHC") was
incorporated in the state of Delaware. CFHC is a wholly owned subsidiary of
Coastal Federal Savings Bank ("CFSB") and is a passive investment company
("PIC"). All of CFHC's operating activities are consolidated into Coastal
Federal Savings Bank. CFHC engages in the management of its investment in CREIC
and the management of the related dividends received on that investment.
Coastal Federal was organized in 1953 as a mutual savings and loan
association and, since that time, its deposits have been federally insured. In
March 1989, Coastal Federal converted from a federally chartered mutual savings
and loan association to a federally chartered mutual savings bank. On October 4,
1990, Coastal Federal converted to the stock form of ownership ("Conversion")
through the sale and issuance of 492,541 shares of common stock at a price of
$10.00 per share, which resulted in gross proceeds to Coastal Federal of
$4,925,410.
<PAGE>
Coastal Federal conducts its business from its main office in Myrtle
Beach, South Carolina, nine branch offices located in South Carolina, one branch
office located in Sunset Beach, North Carolina, and a lending office located in
Wilmington, North Carolina. At September 30, 1999, Coastal Financial had total
assets of $713.0 million, total deposits of $399.7 million and stockholders'
equity of $41.2 million. The deposits of the Bank are insured by the Federal
Deposit Insurance Corporation ("FDIC") under the Savings Association Insurance
Fund ("SAIF"). The corporate offices of the Bank are located at 2619 Oak Street,
Myrtle Beach, South Carolina and the telephone number is (843) 448-5151.
Nine of Coastal Federal's eleven offices are in Horry County, South
Carolina. The economy of the Horry County area depends 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
materially and adversely affected.
Coastal Federal's principal business currently consists of attracting
deposits from the general public and using these funds to originate conventional
one-to-four family first mortgage loans, consumer, commercial business loans and
commercial real estate loans. Commercial real estate loans as a percentage of
total loans have increased from 14.3% of total loans at September 30, 1995 to
23.3% of total loans at September 30, 1999.
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,
1999, 4.6% and 8.9%, respectively, of the Bank's total loan portfolio consisted
of commercial business and consumer loans.
<PAGE>
Rate/Volume Analysis
The following table sets forth certain information regarding changes to
interest income and interest expense of the Corporation for the periods
indicated. For each category of interest-earning asset and interest-bearing
liability, information is provided on changes attributed to (i) changes in rate
(changes in rate multiplied by old volume); (ii) changes in volume (changes in
volume multiplied by old rate); (iii) changes in rate-volume (change in rate
multiplied by change in volume); and (iv) the net change (the sum of the prior
columns). Non-accrual loans are included in the average volume calculations.
<TABLE>
<CAPTION>
Year Ended September 30,
-------------------------------------------------------------------------------------------------
1997 Compared to 1996 1998 Compared to 1997
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 ................. $ 502 $ 1,545 $ 24 $ 2,071 $ 195 $ 2,240 $ 13 $ 2,448
Mortgage-backed
Securities/Investments (193) 1,567 (100) 1,274 (436) 4,711 (992) 3,283
------- ------- ------- ------- ------- ------- ------- -------
Total net change in
income on interest-
earning assets ........ 309 3,112 (76) 3,345 (241) 6,951 (979) 5,731
------- ------- ------- ------- ------- ------- ------- -------
Interest-Bearing
Liabilities:
Deposits .............. 200 1,742 19 1,961 (165) 1,089 (13) 911
FHLB advances ......... (361) (1,425) 73 (1,713) (298) 1,501 (83) 1,120
Repurchase
agreements ........... 50 576 181 807 (47) 2,422 (100) 2,275
------- ------- ------- ------- ------- ------- ------- -------
Total net change in
expense on interest-
bearing liabilities ... (111) 893 273 1,055 (510) 5,012 (196) 4,306
------- ------- ------- ------- ------- ------- ------- -------
Net change in net
interest income ....... $ 420 $ 2,219 $ (349) $ 2,290 $ 269 $ 1,939 $ (783) $ 1,425
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
1999 Compared to 1998
Increase (Decrease)
Due to
---------------------------------------------
Rate/
Rate Volume Volume Net
------- ------- ------- -------
<S> <C> <C> <C> <C>
Interest-Earning Assets:
Loans ................. $ (830) $ 3,150 $ (93) $ 2,227
Mortgage-backed
Securities/Investments 201 3,156 81 3,438
------- ------- ------- -------
Total net change in
income on interest-
earning assets ........ (629) 6,306 (12) 5,665
------- ------- ------- -------
Interest-Bearing
Liabilities:
Deposits .............. (1,188) 1,148 108 68
FHLB advances ......... (392) 2,564 (165) 2,007
Repurchase
agreements ........... (49) 519 (5) 465
------- ------- ------- -------
Total net change in
expense on interest-
bearing liabilities ... (1,629) 4,231 (62) 2,540
------- ------- ------- -------
Net change in net
interest income ....... $ 1,000 $ 2,075 $ 50 $ 3,125
======= ======= ======= =======
</TABLE>
4
<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. Non-accrual loans are included in
average balance calculations.
<TABLE>
<CAPTION>
Year Ended September 30,
----------------------------------------------------------------------------------------------------
1997 1998 1999
------------------------------ ------------------------------ --------------------------------
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
ASSETS
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans ..................... $389,196 $ 33,769 8.70% $414,938 $ 36,314 8.75% $450,940 $ 38,541 8.55%
Mortgage-backed
Securities/Investments (1) 60,745 4,296 7.07 125,509 7,580 6.04 177,758 11,018 6.20
Total interest-earning
assets .................... $449,941 $ 38,065 8.46% $540,447 $ 43,894 8.11% $628,698 $ 49,559 7.88%
======== ======== ==== ======== ======== ==== ======== ======== ====
LIABILITIES
Transaction accounts ...... 153,796 4,894 3.18 179,398 5,756 3.21 210,072 6,368 3.03
Passbook accounts ......... 41,143 1,015 2.47 36,102 924 2.56 33,310 962 2.89
Certificate accounts ...... 135,335 7,741 5.72 144,569 7,879 5.45 144,698 7,297 5.04
FHLB advances ............. 90,154 5,366 5.95 115,389 6,488 5.62 161,005 8,495 5.28
Securities sold
under repurchase
agreements ............... 19,387 1,130 5.82 60,998 3,404 5.58 70,299 3,869 5.50
-------- -------- ---- -------- -------- ---- -------- -------- ----
Total interest-bearing
liabilities ............... $439,815 $ 20,146 4.57% $536,456 $ 24,451 4.60% $619,384 $ 26,991 4.33%
======== ======== ==== ======== ======== ==== ======== ======== ====
Net interest income/
interest rate spread................. $17,919 3.89% $19,443 3.51% $22,568 3.55%
Net yield on interest earning
assets............................... 4.03% 3.64% 3.67%
Ratio of interest earning assets
to interest-bearing
liabilities.......................... 1.03x 1.03x 1.03x
</TABLE>
- -------------------------
(1) Includes short-term interest-bearing deposits and Federal funds sold.
5
<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 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, 1999. This
information is an estimate and may not be indicative of actual market values or
the actual changes in market values should rates change significantly at a
future date.
<PAGE>
<TABLE>
<CAPTION>
-300 -200 -100 +100 +200 +300
Basis Basis Basis No Basis Basis Basis
Points Points Points Change Points Points Points
------ ------ ------ ------ ------ ------ ------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Mortgage loans and
securities........... $632,916 $625,103 $616,782 $606,078 $592,608 $577,232 $560,958
Non-mortgage loans.... 36,529 36,198 35,873 35,556 35,246 34,942 34,645
Cash, deposits and
securities........... 56,384 55,193 54,006 52,827 51,651 50,480 49,314
Repossessed assets.... 97 97 97 97 97 97 97
Premises and equipment 11,114 11,114 11,114 11,114 11,114 11,114 11,114
Other assets.......... 17,128 20,124 23,963 29,067 34,006 38,653 43,063
------ ------ ------ ------ ------ ------ ------
TOTAL................. 754,168 747,829 741,835 734,739 724,722 712,518 699,191
======= ======= ======= ======= ======= ======= =======
LIABILITIES
Deposits.............. $401,004 $400,223 $399,451 $398,691 $397,944 $397,208 $396,483
Borrowings............ 269,786 265,764 261,905 258,201 254,645 251,230 247,947
Other liabilities..... 8,023 8,023 8,023 8,023 8,023 8,023 8,023
-------- -------- -------- -------- -------- -------- --------
TOTAL................. 678,813 674,010 669,379 664,915 660,612 656,461 652,453
======= ======= ======= ======= ======= ======= =======
OFF BALANCE SHEET
POSITIONS............ $ 1,058 $492 $219 $304 $501 $823 $1,186
MARKET VALUE OF
PORTFOLIO EQUITY..... $76,413 $74,311 $72,675 $70,128 $64,611 $56,880 $47,924
</TABLE>
<PAGE>
Lending Activities
General. The principal lending activities of Coastal Federal are the
origination of residential one-to-four family mortgage loans, consumer loans,
commercial business loans and commercial real estate loans. The Bank originates
construction and permanent loans on single family and multi-unit dwellings, as
well as on commercial structures. The Bank emphasizes the origination of
adjustable rate residential and commercial real estate mortgages.
The Bank's loan portfolio totaled approximately $472.0 million at
September 30, 1999, representing approximately 66.0% of its total assets. On
that date, approximately 62.9% of Coastal Federal's total loan portfolio was
secured by mortgages on one-to-four family residential properties.
In an effort to ensure that the yields on its loan portfolio and
investments are interest-rate sensitive, the Bank has implemented a number of
measures, including: (i) emphasis on origination of adjustable rate mortgages on
residential and commercial properties; (ii) origination of construction loans
secured by residential properties, generally with terms for a one-year period;
and (iii) origination of commercial and consumer loans having either adjustable
rates or relatively short maturities. At September 30, 1999, adjustable rate
loans constituted approximately $329.5 million (or 69.8%) of the Bank's total
loan portfolio. Therefore, at such date, fixed rate loans comprised only 30.2%
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.
6
<PAGE>
Loan Portfolio Analysis
The following table set forth the composition of the Corporation's loan
portfolio by type of loan as of the dates indicated.
<TABLE>
<CAPTION>
At September 30,
--------------------------------------------------------------------------------------------------
1995 1996 1997 1998 1999
----------------- ------------------ ----------------- ----------------- -----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
Construction ............... $ 27,905 7.34% $ 34,566 8.65% $ 34,216 7.93% $ 31,261 7.09% $ 46,766 9.48%
On existing property ....... 228,881 60.23 231,373 57.89 240,268 55.69 254,161 57.63 265,069 53.73
Income property (commercial) 54,401 14.31 73,295 18.34 97,680 22.64 95,420 21.63 114,931 23.29
Commercial business loans ... 19,610 5.16 14,831 3.71 10,939 2.54 14,848 3.37 22,818 4.62
Consumer loans:
Mobile home ............... 1,204 .32 1,103 .28 1,291 .30 990 .22 1,166 .24
Automobiles ............... 5,941 1.56 7,261 1.82 6,055 1.40 5,106 1.16 6,809 1.38
Equity lines of credit .... 13,210 3.48 12,441 3.11 15,294 3.54 18,655 4.23 21,081 4.27
Other ..................... 28,887 7.60 24,776 6.20 25,714 5.96 20,567 4.67 14,738 2.99
-------- ---- -------- ---- -------- ---- -------- ---- -------- ----
Total loans and loans
held for sale......... $380,039 100.00% $399,646 100.00% $431,457 100.00% $441,008 100.00% $493,378 100.00%
====== ====== ====== ====== ======
Less:
Loans in process............ (17,178) (18,589) (15,084) (11,292) (15,315)
Deferred loan(fees)costs.... (71) 286 458 702 354
Allowance for loan losses.. (3,578) (4,172) (4,902) (5,668) (6,430)
------- ------- ------- ------- -------
Total loans and loans held
for sale, net.......... $359,212 $377,171 $411,929 $424,750 $471,987
======== ======== ======== ======== ========
</TABLE>
7
<PAGE>
Single Family Residential Loans. The Bank actively originates
conventional loans to enable borrowers to purchase existing homes or residential
lots, refinance existing mortgage loans or construct new homes. Mortgage loans
originated by the Bank are generally long-term loans, amortized on a monthly
basis, with principal and interest due each month. The contractual loan payment
period for single family residential loans typically range from 15 to 30 years.
The Bank's experience indicates that real estate loans remain outstanding for
significantly shorter periods than their contractual terms. Borrowers may
refinance or prepay loans at their option, subject to any prepayment penalty
provisions included in the note. The Bank generally requires mortgage title
insurance on all single family residential mortgage loans.
The Bank offers adjustable rate mortgage loans ("ARMs"), the interest
rates of which generally adjust based upon either the prime rate or treasury
securities indices. The interest rates on ARMs generally may not adjust more
than 2% per year and 6% over the life of the loan. Based upon market conditions,
the Bank may originate ARMs at below the fully phased-in interest rate but
generally qualifies borrowers at 2% above the initial rate when the loan to
value ratio exceeds 70%. Monthly payments could increase significantly at the
first repricing period. Although Coastal Federal's ARMs are beneficial in
helping Coastal Federal improve the interest rate sensitivity of its assets,
such loans may pose potential additional risks to Coastal Federal. A precipitous
increase in interest rates could be expected to result in an increase in
delinquencies or defaults on such loans. Whereas a significant decrease in rates
or a flat yield curve could cause repayments to increase significantly.
Coastal Federal also offers one-to-four family residential loans with
fixed rates of interest. These loans generally can be sold in the secondary
market or are portfolio loans where the Bank offers such loans at rates
approximately 1% above conforming loan rates. Loans sold to correspondents
amounted to $64.8 million and $24.8 million, respectively, in fiscal 1998 and
1999. Coastal Federal sold approximately $6.9 million and $36.0 million,
respectively, of mortgages in 1998 and 1999 to FHLMC.
At September 30, 1999, approximately $296.9 million or 62.9% of the
Bank's loan portfolio consisted of one-to-four family residential loans.
Construction Loans. The Bank originates construction loans on single
family residences that generally have a term of six to twelve months for
individuals or one year for builders. The individual's loans are usually tied to
a commitment by the Bank to provide permanent financing upon completion of
construction. The interest rate charged on construction loans is indexed to the
prime rate as published in The Wall Street Journal or current permanent loan
rate and varies depending on the terms of the loan and the loan amount. The Bank
customarily requires personal guaranties of payment from the principals of the
borrowing entities.
The interest rate on commercial real estate construction loans
presently offered by the Bank is indexed to either the U.S. Treasury securities
or the prime rate as published in The Wall Street Journal. Commercial real
estate construction financing generally exposes the lender to a greater risk of
loss than long-term financing on improved, occupied real estate, due in part to
the fact that the loans are underwritten on projected rather than historical,
income and rental results. The Bank's risk of loss on such loans is dependent
largely upon the accuracy of the initial appraisal of the property's value at
<PAGE>
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, 1999, approximately $46.7 million or 9.5% of the
Bank's gross loan portfolio consisted of construction loans on both residential
($31.8 million) and commercial properties ($14.9 million). Undisbursed proceeds
on these loans amounted to $15.3 million at September 30, 1999.
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, 1999, this limited
Coastal Federal's aggregate non-residential real estate loans to approximately
$196.8 million. At such time, the Bank had non-residential real estate loans
outstanding of $114.9 million. The Bank will maintain a level of these loan
types within the guidelines set forth. The commercial real estate loans
originated by the Bank are primarily secured by shopping centers, office
buildings, warehouse facilities, retail outlets, hotels, motels and multi-family
apartment buildings. The interest rate of the commercial real estate loans
presently offered by the Bank generally adjusts every one, three or five years
and is indexed to U.S. Treasury securities. Such loans generally have a fifteen
to twenty year term, with the payments based up to a similar amortization
schedule. The Bank may require the loan to include a call option at the Bank's
option in five to ten years. The Bank generally requires that such loans have a
minimum debt service coverage of 120% of projected net operating income together
with other generally accepted underwriting criteria.
Commercial real estate lending entails significant additional risks
compared to residential lending. Commercial real estate loans typically involve
large loan balances to single borrowers or groups of related borrowers. The
payment experience of such loans is typically dependent upon the successful
operation of the real estate project. These risks can be significantly affected
by supply and demand conditions in the market for office and retail space and
for apartments and, as such, may be subject, to a greater extent, to adverse
conditions in the economy. In dealing with these risk factors, Coastal Federal
generally limits itself to a real estate market or to borrowers with which it
has experience. The Bank concentrates on originating commercial real estate
loans secured by properties located within its market areas of Horry County,
Florence County, the Pee Dee Region, northeastern Georgetown County, all within
South Carolina and Brunswick County, North Carolina. Additionally, the Bank has,
on a limited basis, originated or purchased commercial real estate loans secured
by properties located in other parts of the Southeast.
<PAGE>
Consumer Loans. The Bank is permitted by OTS regulations to invest up
to 35% of its assets in consumer loans. The Bank currently offers a wide variety
of consumer loans on a secured and unsecured basis including home improvement
loans, loans secured by savings accounts and automobile, truck and boat loans.
The Bank also offers a revolving line of credit secured by owner-occupied real
estate. Total consumer loans amounted to $43.8 million, or 8.9% of the total
loan portfolio, at September 30, 1999.
Coastal Federal has marketed consumer loans in order to provide a wider
range of financial services to its customers. These loans also have a shorter
term and normally higher interest rates on such loans than on residential real
estate loans.
Consumer loans entail greater risk than do residential mortgage loans,
particularly in the case of consumer loans which are unsecured or secured by
assets which may depreciate rapidly, such as automobiles. In the latter case,
repossessed collateral for a defaulted consumer loan may not provide an adequate
source of repayment of the outstanding loan and the remaining deficiency often
does not warrant further substantial collection efforts against the borrower. In
addition, consumer loan collections are dependent on the borrower's continuing
financial stability and, thus, are more likely to be adversely affected by job
loss, divorce, illness or personal bankruptcy. Furthermore, the application of
various federal and state laws, including federal and state bankruptcy and
insolvency laws, may limit the amount recoverable on such loans. Such loans may
also give rise to claims and defenses by the borrower against Coastal Federal as
the holder of the loan, and a borrower may be able to assert claims and defenses
which it has against the seller of the underlying collateral.
Commercial Business Loans. The Bank is permitted under OTS regulations
to make secured or unsecured loans for commercial, corporate, business or
agricultural purposes, including the issuance of letters of credit secured by
real estate, business equipment, inventories, accounts receivable and cash
equivalents. The aggregate amount of such loans outstanding may not exceed 20%
of such institution's assets.
Coastal Federal has been making commercial business loans since 1983 on
both a secured and unsecured basis with terms which generally do not exceed one
year. The majority of these loans have interest rates which adjust with changes
in the prime rate as published in the Wall Street Journal. The Bank's non-real
estate commercial loans primarily consist of short-term loans for working
capital purposes, seasonal loans and lines of credit. The Bank customarily
requires a personal guaranty of payment by the principals of any borrowing
entity and reviews the financial statements and income tax returns of the
guarantors. At September 30, 1999, the Bank had $22.8 million outstanding in
commercial business loans, which represented approximately 4.6% of its loan
portfolio.
Commercial business lending is inherently riskier than residential
mortgage lending and involves risks that are different from those associated
with residential and commercial real estate lending. Real estate lending is
generally considered to be collateral based lending with loan amounts based on
predetermined loan to collateral values and liquidation of the underlying real
estate collateral is viewed as the primary source of repayment in the event of
borrower default. Although commercial business loans are often collateralized by
equipment, inventory, accounts receivable or other business assets, the
liquidation of collateral in the event of a borrower default is often not a
sufficient source of repayment because accounts receivable may be uncollectible
and inventories and equipment may be obsolete or of limited use, among other
things. Accordingly, the repayment of a commercial business loan depends
primarily on the creditworthiness of the borrower (and any guarantors), while
liquidation of collateral is a secondary and potentially insufficient source of
repayment.
<PAGE>
Loan Maturity
The following table sets forth certain information at September 30,
1999 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 Totals Twenty Years Twenty
------- ----------- ---------- --------- ------ ------------ ------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
First mortgage loans . $ 32,110 $ 3,517 $ 2,634 $ 14,300 $ 60,357 $177,526 $290,444
Other residential and
non-residential ..... 26,415 15,069 5,692 10,835 47,523 9,397 114,931
Equity lines of credit 21,081 -- -- -- -- -- 21,081
Consumer loans ....... 10,320 4,050 6,029 941 1,373 -- 22,713
Commercial loans ..... 15,674 2,139 1,970 1,135 1,727 173 22,818
Total loans .... $105,600 $ 24,775 $ 16,325 $ 27,211 $110,980 $187,096 $471,987
======== ======== ======== ======== ======== ======== ========
</TABLE>
The following table sets forth the dollar amount of all loans due after
one year at September 30, 1999 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 .............. $ 59,864 $198,470 $258,334
Other residential and
non-residential .................. 18,461 70,055 88,516
Consumer loans .................... 11,950 443 12,393
Commercial loans .................. 5,954 1,190 7,144
Total loans .................. $ 96,229 $270,158 $366,387
======== ======== ========
</TABLE>
Loan Solicitation and Processing. The Bank actively solicits mortgage
loan applications from existing customers, walk-ins, referrals and from real
estate brokers. Commercial real estate loan applications also are obtained by
direct solicitation by loan officers.
Detailed loan applications are obtained to determine the borrower's
ability to repay, and the more significant items on these applications are
verified through the use of credit reports, financial statements and
confirmations through verification forms. After analysis of the loan application
and property or collateral involved, including an appraisal of the property by
<PAGE>
independent appraisers approved by the Bank's Board of Directors and reviewed by
the Bank's underwriter, a lending decision is made by the Bank. With respect to
commercial loans, the Bank also reviews the capital adequacy of the business,
the ability of the borrower to repay the loan and honor its other obligations
and general economic and industry conditions. All loan applications over
$500,000 require the approval by members of the Bank's Internal Loan Committee,
Director Gerald and Executive Vice Presidents Rexroad and Stalvey. All loan
applications greater than $2,000,000 require the approval of the Bank's Loan
Committee which consists of Directors Clemmons, Gerald, Springs and Executive
Vice Presidents Rexroad and Stalvey. All first mortgage loan applications in
excess of 80% of the lesser of appraised value or purchase price of the
property, unless the borrowers have private mortgage insurance, must be approved
by a member of the Banks' Loan Committee.
Loan applicants are promptly notified of the decision of the Bank by a
letter setting forth the terms and conditions of the decision. If approved, such
terms and conditions include the amount of the loan, interest rate, amortization
term, a brief description of real estate to be mortgaged to the Bank and notice
of requirement of insurance coverage necessary to protect the Bank's interest in
the collateral.
The Bank's general policy is to obtain a title insurance policy
insuring that the Bank has a valid lien on the mortgaged real estate and that
the property is free of encumbrances. Borrowers must also obtain paid hazard
insurance policies prior to closing and, when the property is in a flood plain
as designated by the Federal Emergency Management Agency, obtain paid flood
insurance policies. It is the policy of Coastal Federal to require flood
insurance for the full insurable value of the improvements for any such loan
located in a designated flood hazard area. Borrowers on loans which exceed 80%
of the value of the security property are also required to advance funds on a
monthly basis, with each payment of principal and interest, to a mortgage escrow
account from which the Bank makes disbursements for items such as real estate
taxes, hazard insurance premiums and private mortgage insurance premiums. In
cases of flood insurance, it is the Bank's policy to require escrow on these
premiums regardless of the loan-to-value ratio.
Loan Originations, Purchases and Sales. The Bank is qualified to
service loans for FHLMC and FNMA. Depending upon interest rates and economic
conditions, the Bank has sold loans in order to provide additional funds for
lending, to generate servicing fee income, and to decrease the amount of its
long-term, fixed rate loans in order to minimize the gap between the maturities
of its interest-earning assets and interest-bearing liabilities. The Bank
generally continues to collect payments on the loans, to supervise foreclosure
proceedings, if necessary, and to otherwise service the loans. The Bank retains
a portion of the interest paid by the borrower on the loans as consideration for
its servicing activities. At September 30, 1999, the Bank was servicing loans
sold to others with a principal balance of approximately $99.4 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. At September 30, 1999, the Bank's consolidated loan portfolio included
purchased loans of approximately $23.6 million, which have been primarily
secured by single family residences and which have been written as adjustable
rate mortgage loan instruments. These loans are generally secured by properties
located in the Southeast and were purchased according to the Bank's
non-conforming mortgage loan underwriting standards.
<PAGE>
Loans Originated, Purchased and Sold
The following table shows total loans originated, purchased, sold and
repaid during the periods indicated.
<TABLE>
<CAPTION>
Year Ended September 30,
-------------------------------------
1997 1998 1999
--------- --------- ---------
(In thousands)
<S> <C> <C> <C>
Loans receivable net, at the beginning of the
period ..................................... $ 377,171 $ 411,929 424,750
--------- --------- ---------
Loans originated:
Construction ............................... 45,986 62,805 72,456
Residential ................................ 59,289 70,588 96,510
Nonresidential ............................. 13,794 23,622 22,233
Land ....................................... 10,308 20,025 19,060
Commercial business ........................ 33,730 16,076 29,232
Consumer ................................... 15,396 12,136 16,866
--------- --------- ---------
Total loans originated ................. 178,503 205,252 256,357
--------- --------- ---------
Loans purchased, primarily single
family residential mortgages ................ 9,948 10,442 9,078
--------- --------- ---------
Loans sold .................................. (44,160) (71,674) (60,781)
--------- --------- ---------
Loan principal repayments and other ......... (109,946) (130,286) (156,518)
--------- --------- ---------
Other ....................................... 413 (913) (899)
--------- --------- ---------
Loans receivable net, at end of period ...... $ 411,929 $ 424,750 $ 471,987
========= ========= =========
</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, 1999, the Company had residential loan origination commitments of
approximately $5.6 million.
Loan Origination and Other Fees. Coastal Federal may receive loan
origination fees and discount "points." Loan fees and points are a percentage of
the principal amount of the mortgage loan which are charged to the borrower for
funding the loan. Coastal Federal allows the purchaser to reduce the rate of
interest by the payment of points at the customers options. Fees on long-term
commercial real estate and residential construction loans vary with loan type.
Delinquencies. Coastal Federal's collection procedures provide for a
series of contacts with delinquent borrowers. If the delinquency continues, more
formal efforts are made to contact the delinquent borrower. If a residential
real estate loan continues in a delinquent status for 90 days or more, Coastal
Federal generally initiates foreclosure proceedings. Coastal Federal generally
initiates foreclosure proceedings on a commercial real estate loan if the loan
continues in a delinquent status for 60 days or more. In certain limited
instances, however, Coastal Federal may modify the loan or grant a limited
moratorium on loan payments to enable the borrower to reorganize his financial
affairs.
Problem Assets and Asset Classification. Loans are reviewed on a
regular basis and a reserve for uncollectible interest is established on loans
where collection of interest is questionable, generally when such loans become
90 days delinquent. Loan balances that relate to interest amounts reserved are
considered to be on a nonaccrual basis. Typically, payments received on a
nonaccrual loan are applied to the outstanding principal and interest as
determined at the time of collection of the loan.
<PAGE>
The following table sets forth information with respect to the Bank's
non-performing assets at the dates indicated.
<TABLE>
<CAPTION>
At September 30,
-------------------------------------------------
1995 1996 1997 1998 1999
------ ------ ------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Loans accounted for on a nonaccrual basis:
Real estate -
Residential ........................... $ 999 $ 307 $ 71 $ 222 $1,097
Commercial ............................ 134 -- -- -- 267
Commercial business ................... 154 60 99 1,962 --
Consumer .............................. 36 78 87 73 67
------ ------ ------ ------ ------
Total ................................ 1,323 445 257 2,257 1,431
------ ------ ------ ------ ------
Accruing loans which are
contractually past due
90 days or more:
Real estate -
Residential ........................... -- -- -- -- --
Commercial ............................ -- -- -- -- --
Commercial business .................... -- -- -- -- --
Consumer ............................... -- -- -- -- --
------ ------ ------ ------ ------
Total ................................ -- -- -- -- --
------ ------ ------ ------ ------
Restructured loans ....................... -- -- -- -- 418
Real estate owned ........................ 789 323 250 35 96
Other nonperforming
assets .................................. -- -- -- -- --
------ ------ ------ ------ ------
Total nonperforming
assets .................................. $2,112 $ 768 $ 507 $2,292 $1,945
====== ====== ====== ====== ======
Total nonaccrual loans to net
loans ................................... .36% .12% .06% .54% .30%
Total nonaccrual loans to total
assets .................................. .33% .10% .05% .35% .20%
Total nonperforming assets
to total assets ......................... .53% .17% .10% .36% .27%
</TABLE>
- ----------
In fiscal years 1997, 1998 and 1999, interest income which would have
been recorded approximated $9,000, $181,000 and $46,000, respectively,
had nonaccruing loans been current in accordance with their original
terms. At September 30, 1998 and 1999 and during the years then ended
there are no loans considered to be impaired.
<PAGE>
The allowance for uncollectible interest which is netted against
accrued interest receivable totaled $202,000 and $70,000 at September 30, 1998
and 1999, respectively.
The OTS has adopted various changes in its regulations regarding
problem assets of savings institutions. OTS regulations require that each
insured institution review and classify its assets on a regular basis. In
addition, in connection with examinations of insured institutions, OTS examiners
have authority to identify problem assets and, if appropriate, require them to
be classified. There are four classifications for problem assets: special
mention, substandard, doubtful and loss. Substandard assets must have one or
more defined weaknesses and are characterized by the distinct possibility that
the insured institution will sustain some loss if the deficiencies are not
corrected. Doubtful assets have the weaknesses of substandard assets with the
additional characteristic that the weaknesses make collection or liquidation in
full on the basis of currently existing facts, conditions and values
questionable, and there is a high possibility of loss. An asset classified loss
is considered uncollectible and of such little value that continuance as an
asset of the institution is not warranted. The regulations also have a special
mention category, described as assets which do not currently expose an insured
institution to a sufficient degree of risk to warrant classification but do
possess credit deficiencies or potential weaknesses deserving management's close
attention. Assets classified as substandard or doubtful require the institution
to establish general allowances for loan losses. If an asset or portion thereof
is classified loss, the insured institution must either establish specific
allowances for loan losses in the amount of 100% of the portion of the asset
classified loss or charge off such amount. A portion of general loss allowances
established to cover possible losses related to assets classified substandard or
doubtful may be included in determining an institution's regulatory capital,
while specific valuation allowances for loan losses generally do not qualify as
regulatory capital.
Coastal Federal had three individual classified assets in excess of
$700,000 as of September 30, 1999. At that date, classified assets amounted to
$11.6 million ($5.7 million substandard; $288,000 doubtful; $61,000 loss; and
$5.5 million special mention). Substandard assets consist primarily of seven
commercial real estate loans with balances of approximately $2.8 million and
four residential real estate loans with balances of approximately $2.0 million
at September 30, 1999. Special mention assets consist primarily of five
commercial real estate loans with balances of approximately $4.1 million at
September 30, 1999.
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
<PAGE>
provisions for losses on loans for the years ended September 30, 1997, 1998 and
1999 of $760,000, $865,000 and $750,000, respectively. As a result, the Bank has
a $6.4 million allowance for loan losses as of September 30, 1999. The allowance
as a percentage of loans receivable was 1.36% at September 30, 1999 compared to
1.33% at September 30, 1998. See "Management's Discussion and Analysis
- --Non-Performing Assets and --Allowance for Loan Losses" in the 1999 Annual
Report to Stockholders attached hereto and incorporated by reference.
While the Bank believes it has established its existing allowance for
loan losses in accordance with GAAP at September 30, 1999, there can be no
assurance that regulators, when reviewing the Bank's loan portfolio in the
future, will not request the Bank to significantly change its allowance for loan
losses, thereby affecting the Bank's financial condition and earnings.
<PAGE>
Loan Loss Allowance Analysis
The following table sets forth an analysis of the Company's allowance for
loan losses for the periods indicated. Where specific loan loss reserves have
been established, any difference between the loss reserve and the amount of loss
realized has been charged or credited to the loan loss allowance as a charge-off
or recovery.
<TABLE>
<CAPTION>
Year Ended September 30,
--------------------------------------------------------
1995 1996 1997 1998 1999
------ ------ ------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Allowance at beginning of
period........................................... $3,353 $3,578 $4,172 $4,902 $5,668
Allowance recorded on
acquired loans................................... - - 110 109 112
Provision for loan losses......................... 202 790 760 865 750
------ ------ ------ ------ ------
Recoveries:
Residential real estate.......................... 232 -- 20 7 184
Commercial real estate........................... 11 75 14 1 13
Real estate construction......................... -- -- -- -- --
Consumer......................................... 12 7 38 56 55
------ ------ ------ ------ ------
Total recoveries............................... 255 82 72 64 252
------ ------ ------ ------ ------
Charge-offs:
Residential real estate.......................... 206 24 46 28 15
Commercial real estate........................... 18 216 -- 17 8
Real estate construction......................... -- -- -- -- --
Consumer......................................... 8 38 166 227 329
------ ------ ------ ------ ------
Total charge-offs.............................. 232 278 212 272 352
------ ------ ------ ------ ------
Net charge-offs (recoveries) .................. (23) 196 140 208 100
------ ------ ------ ------ ------
Allowance at end of period....................... $3,578 $4,172 $4,902 $5,668 $6,430
====== ====== ====== ====== ======
Ratio of allowance to net
loans outstanding at the
end of the period................................ 1.00% 1.11% 1.19% 1.33% 1.36%
Ratio of net charge-offs (recoveries)
to average loans outstanding
during the period................................ (.01%) .05% .04% .05% .02%
</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,
-----------------------------------------------------------------------------------------------------
1995 1996 1997
----------------------------- ---------------------------------------- -----------------------
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 ......... $ 803 .31% 72.03% $ 837 .37% 65.35% 1,064 .41% 63.56%
Commercial .......... 2,371 4.36 24.17 2,875 3.80 22.34 3,261 2.78 28.52
Consumer ............ 404 .80 3.80 460 1.01 12.31 577 1.77 7.92
------ ------ --------- ------ ------- ------
Total allowance for
loan losses ........ $3,578 1.00% 100.00% $ 4,172 1.11% 100.00% $ 4,902 1.19% 100.00%
====== ====== ========= ====== ======= ======
<CAPTION>
1998 1999
------------------------------- -------------------------------
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 ......... $1,375 .47% 67.60% $ 1,747 .56 66.01%
Commercial .......... 3,685 3.30 26.32 4,191 3.04 29.18
Consumer ............ 608 2.82 6.08 492 2.17 4.81
------ ------ -------- ------
Total allowance for
loan losses ........ $5,668 1.33% 100.00% $ 6,430 1.36% 100.00%
====== ====== ======== ======
</TABLE>
<PAGE>
Investment Activities
Under OTS regulations, the Bank has authority to invest in various
types of liquid assets, including U.S. Treasury obligations, securities of
various federal agencies and of state and municipal governments, deposits at the
FHLB of Atlanta, certificates of deposit of federally insured institutions,
certain bankers' acceptances and federal funds. Subject to various restrictions,
such savings institutions may also invest a portion of their assets in
commercial paper, corporate debt securities and mutual funds, the assets of
which conform to the investments that federally chartered savings institutions
are otherwise authorized to make directly. These institutions are also required
to maintain minimum levels of liquid assets which vary from time to time. See
"Regulation of Coastal Federal - Federal Home Loan Bank System." The Bank may
decide to increase its liquidity above the required levels depending upon the
availability of funds and comparative yields on investments in relation to
return on loans.
Coastal Federal is required under federal regulations to maintain a
minimum amount of liquid assets and is also permitted to make certain other
securities investments. See "Regulation" herein and "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources" in the Annual Report. The balance of the Bank's investments
in short-term securities in excess of regulatory requirements reflects
management's response to the significantly increasing percentage of deposits
with short maturities.
Investment decisions are made by the Investment Officer who reports
quarterly to the Asset/Liability Committee ("ALCO Committee"). The ALCO
Committee meets quarterly and consists of Directors Benton, Creel, Bishop,
Springs, Clemmons and Gerald, Chief Financial Officer Rexroad and Executive Vice
Presidents Graham, Sherry and Stalvey and Vice President Loehr. The ALCO
Committee acts within policies established by the Board of Directors. At
September 30, 1999, the Bank's investment portfolio had a market value of
approximately $188.2 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,
------------------------------------------------------------------------------------------
1997 1998 1999
-------------------------- -------------------------- ------------------------
Amortized Percent of Amortized Percent of Percent of
Cost(1) Portfolio Cost(1) Portfolio Amortized Portfolio
------- --------- ------- --------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C>
U.S. Government agency
securities:
FHLMC....................... $ 995 3.82% $ -- -- $ -- --%
FHLB........................ 17,738 67.89% 8,840 90.64% 4,723 75.99%
FFCB........................ 7,391 28.29% 912 9.36 -- --
FAMA........................ -- -- -- -- 1,492 24.01%
Total...................... $26,124 100.00% $ 9,752 100.00% $6,215 100.00%
======= ======= ======= ======= ====== =======
</TABLE>
(1) The market value of the Bank's investment securities portfolio amounted to
$26.2 million, $9.8 million and $6.1 million at September 30, 1997, 1998
and 1999, respectively.
The following table sets forth the final maturities and weighted
average yields of the securities at amortized cost at September 30, 1999.
<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 and agency
Securities:
FHLB ..................... -- -- 2,770 6.86% 1,953 6.86
FAMA ..................... -- -- -- -- 1,492 5.93%
Total ................. $-- --% $2,770 6.86% $3,445 6.46%
=== === ====== ==== ====== =====
</TABLE>
<PAGE>
The following table sets forth Coastal Federal's mortgage-backed
securities portfolio at amortized cost at the dates indicated.
<TABLE>
<CAPTION>
September 30,
-----------------------------------------------------------------------------------------
1997 1998 1999
---------------------------- ----------------------- ---------------------------
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 ................... $ 14,048 62.79% $ 24,901 14.69% $ 35,175 18.98%
FNMA .................... 1,861 8.31 95,024 56.05 103,117 55.64
GNMA .................... 6,471 28.90 49,586 29.26 23,349 12.60
CMO ..................... -- -- -- -- 23,680 12.78
-------- ------ -------- ------ -------- ------
Total .................. $ 22,380 100.00% $169,511 100.00% $185,321 100.00%
======== ====== ======== ====== ======== ======
</TABLE>
- ---------
(1) The market value of the Bank's mortgage-backed securities portfolio
amounted to $23.0 million, $170.2 million and $182.1 million at September
30, 1997, 1998 and 1999, respectively.
The following table sets forth the maturities and weighted average
yields of the securities at September 30, 1999.
<TABLE>
<CAPTION>
Less Than One to Five to Ten Years
One Year Five Years Ten Years and Thereafter
---------------- ------------- -------------- -----------------------
Amount Yield Amount Yield Amount Yield Amount Yield
(Dollars in thousands)
<S> <C> <C> <C> <C>
Mortgage-Backed Securities:
FHLMC ................... $-- --% $ -- --% -- --% $ 35,175 7.30%
FNMA .................... -- -- -- -- -- 103,117 7.12
GNMA .................... -- -- -- -- 23,349 7.48
CMO ..................... -- -- -- -- 23,680 6.62
---- --- ---- ---- --- -- ----------- ----
Total ..................... $-- --% $ -- --% $-- --% $ 185,321 7.14%
==== === ==== ==== === === =========== ====
</TABLE>
<PAGE>
Service Corporation Activities
Coastal Federal has one wholly-owned service corporation: Coastal
Mortgage Bankers and Realty Co., Inc. "Coastal Mortgage Bankers," which was
incorporated in 1970 under the laws of South Carolina.
+------------------------+
| |
| COASTAL FEDERAL |
| | +-------------------+
+------------------------+ | COASTAL FEDERAL |
| | | HOLDING |
| |-----------| CORPORATION |
| +-------------------+
| +-------------------+
| | COASTAL REAL |
| | ESTATE INVESTMENT |
+------------------------+ | CORPORATION |
| | +-------------------+
| COASTAL MORTGAGE |
BANKERS* |
| |
+------------------------+
+------------------+ +-----------------+ +---------------+
| North Beach | | Shady Forest | | Sherwood |
| Investments, Inc.| | Development | | Development |
| | | Corporation | | Corporation |
| | | | | |
+------------------+ +-----------------+ +---------------+
+----------------+ +-------------------+
| Ridge | | 501 Development |
| Development | | Corporation |
| Corporation | | |
| | | |
+----------------+ +-------------------+
- --------------
* Inactive
(1) First tier operating subsidiary of Coastal Federal Savings Bank
consolidated with Coastal Federal Savings Bank for regulatory
reporting. On December 10, 1998 Coastal Federal exchanged its stock of
Coastal Real Estate Investment Corporation for 100% of the outstanding
stock of Coastal Federal Holding Corporation.
<PAGE>
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,
-------------------------------------------------------------------------------------------------
1997 1998 1999
---------------------------- ---------------------------- ------------------------------
Percent Percent Percent
of Increase of Increase of Increase
Amount Total (Decrease) Amount Total (Decrease) Amount Total (Decrease)
------ ----- ---------- ------ ----- ---------- ------ ----- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Transaction accounts:
NOW checking ..................$ 38,773 11.17% $ 3,119 $ 42,434 10.99% $ 3,661 $ 50,774 12.70% $ 8,340
Commercial checking ........... 23,765 6.85 3,839 27,285 7.06 3,520 37,256 9.32 9,971
--------- ----- --------- --------- ----- --------- --------- ----- ---------
Total transaction accounts ...... 62,538 18.02 6,958 69,719 18.05 7,181 88,030 22.03 18,311
--------- ----- --------- --------- ----- --------- --------- ----- ---------
Money market demand accounts .... 104,476 30.10 19,479 124,207 32.15 19,731 138,188 34.58 13,981
Savings accounts ................ 39,445 11.36 (3,395) 37,242 9.64 (2,203) 39,212 9.81 1,970
Fixed-rate certificates
(original maturity):
3 months ....................... 1,826 .53 (296) 2,045 .53 219 4,440 1.11 2,395
6 months ....................... 22,185 6.39 (1,294) 25,563 6.62 3,378 23,367 5.85 (2,196)
9 months ....................... 7,342 2.12 (1,951) 5,396 1.40 (1,946) 5,220 1.31 (176)
12 months ...................... 43,901 12.64 (3,158) 46,121 11.94 2,220 37,955 9.50 (8,166)
18 months ...................... 32,250 9.29 11,269 35,140 9.10 2,890 16,016 4.01 (19,124)
24 months ...................... 7,390 2.13 3,341 17,348 4.49 9,958 19,104 4.78 1,756
30 months ...................... 4,809 1.39 2,620 6,558 1.70 1,749 13,677 3.42 7,119
36 months ...................... 9,215 2.65 271 4,740 1.23 (4,475) 4,622 1.16 (118)
48 months ...................... 5,664 1.63 936 6,852 1.77 1,188 4,870 1.22 (1,982)
96 months ...................... 27 .01 1 29 .01 2 31 .01 2
--------- ----- --------- --------- ----- --------- --------- ----- ---------
134,609 38.78 11,739 149,792 38.77 15,183 129,302 32.35 (20,490)
--------- ----- --------- --------- ----- --------- --------- ----- ---------
Variable rate certificates:
(original maturity)
18 months ...................... 3,678 1.06 (915) 3,137 .81 (541) 2,716 .68 (421)
30 months ...................... 2,370 .68 (180) 2,224 .58 (146) 2,227 .56 3
--------- ----- --------- --------- ----- --------- --------- ----- ---------
Total variable .................. 6,048 1.74 (1,095) 5,361 1.39 (687) 4,943 1.24 (418)
--------- ----- --------- --------- ----- --------- --------- ----- ---------
Total certificates .............. 140,657 40.52 11,644 155,153 40.16 14,496 134,243 33.59 (20,910)
--------- ----- --------- --------- ----- --------- --------- ----- ---------
Total deposits ..................$ 347,116 100.00% $ 33,686 $ 386,321 100.00% $ 39,205 $ 399,673 100.00% $13,352
========= ====== ========= ========= ====== ========= ========= ====== =======
</TABLE>
<PAGE>
Time Deposits by Maturity and Rate
The following table sets forth the amount and maturities of time deposits at
September 30, 1999.
<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%........... $107,873 $19,785 $4,870 $ 1,123 -- $133,651
6.00 - 8.00%........... 217 -- -- -- -- 217
8.01 - 10.00%.......... 45 -- 330 -- -- 375
-------- ------- ------ ------ ----- --------
Total................ $108,135 $19,785 $5,200 $1,123 -- $134,243
======== ======= ====== ====== ===== =======
</TABLE>
The following table sets forth the amount and maturities of time deposits
with balances of $100,000 or more at September 30, 1999. Included in certificate
accounts were $5.3 million at September 30, 1999, originated by brokers for a
fee.
<TABLE>
<CAPTION>
Amount Due
Within Over 3 Over 6 Over 12
3 months through 6 months through 12 months Months Total
- -------- ---------------- ----------------- ------ -----
(In thousands)
<S> <C> <C> <C> <C>
$4,692 $21,514 $8,935 $6,772 $41,913
====== ======= ====== ====== =======
</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.
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, 1999,
Coastal Federal had advances totaling $164.0 million from the FHLB of Atlanta
due on various dates through 2008 with a weighted average interest rate of
5.33%.
<PAGE>
The FHLB of Atlanta functions as a central reserve bank providing
credit for financial institutions and certain other member financial
institutions. As a member, Coastal Federal is required to own capital stock in
the FHLB of Atlanta and is authorized to apply for advances on the security of
such stock and certain of its mortgage loans and other assets (principally
securities which are obligations of, or guaranteed by, the United States)
provided certain standards related to creditworthiness have been met. Advances
are made pursuant to several different programs. Each credit program has its own
interest rate and range of maturities. Depending on the program, limitations on
the amount of advances are based either on a fixed percentage of an
institution's net worth or on the FHLB's assessment of the institution's
creditworthiness. The FHLB of Atlanta determines specific lines of credit for
each member institution.
In addition to the borrowings described above, the Bank, from time to
time, has borrowed funds under reverse repurchase agreements pursuant to which
it sells securities (generally secured by government securities and
mortgage-backed securities) under an agreement to buy them back at a specified
price at a later date. These agreements to repurchase are deemed to be
borrowings collateralized by the securities sold. At September 30, 1999, the
Bank had $92.1 million in broker repurchase agreements. The Bank has also
offered repurchase agreements to its customers which are borrowings that are
collateralized by underlying government securities. At September 30, 1999, the
Bank had $4.8 million outstanding in customer repurchase agreements.
The following tables set forth certain information regarding short-term
borrowings by the Bank at the end of and during the periods indicated:
<TABLE>
<CAPTION>
At September 30,
-------------------------------
1997 1998 1999
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Outstanding balance:
Securities sold under agreements
to repurchase:
Customer ............................ $ 2,666 $ 4,214 $ 4,848
Broker .............................. -- 55,000 2,100
Short-term FHLB advances (1) .......... 68,620 120,235 118,000
Weighted average rate paid on:
Securities sold under agreements
to repurchase:
Customer ............................ 3.16% 3.43% 3.37%
Broker .............................. -- 5.69 5.53
Short-term FHLB advances (1) .......... 5.60 5.10 5.14
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Maximum amount of borrowings outstanding
at any month end:
Securities sold under agreements
to repurchase:
Customer ............................ $ 3,257 $ 4,214 $ 4,848
Broker .............................. 37,516 86,250 92,100
Short-term FHLB advances (1) .......... 75,020 120,235 147,135
Approximate average short-term borrowings
outstanding with respect to:
Securities sold under agreements
to repurchase:
Customer ............................ $ 2,100 $ 2,989 $ 3,199
Broker .............................. 17,200 56,262 67,100
Short-term FHLB advances (1) .......... 74,023 92,369 118,276
Weighted average rate paid on:
Securities sold under agreements
to repurchase:
Customer ............................ 3.36% 3.61% 3.09%
Broker .............................. 5.60 5.58 5.30
Short-term FHLB advances (1) .......... 5.60 5.10 5.14
</TABLE>
- ------
(1) Short-term FHLB advances include various advances which are subject to call
by FHLB.
Competition
As of September 30, 1999, Coastal Federal held a 13.4% share of the
deposits in Horry County S.C. according to Sheshunoff Information Services, Inc.
The Bank faces strong competition in the attraction of deposits (its primary
source of lendable funds) and in the origination of loans. Its most direct
competition for deposits and loans has historically come from other financial
institutions located in its primary market area. The Bank estimates that there
are over 70 offices of other financial institutions in its primary market area.
Particularly in times of high interest rates, the Bank has faced additional
significant competition for investors' funds from short-term money market
securities and other corporate and government securities. The Bank's competition
for loans comes principally from other financial institutions, mortgage banking
companies and mortgage brokers.
Personnel
As of September 30, 1999, the Company had 220 full-time Associates and
20 part-time Associates. The Associates are not represented by a collective
bargaining unit. The Bank believes its relationship with its Associates is
excellent.
<PAGE>
REGULATION AND SUPERVISION
General
As a savings and loan holding company, the Corporation is required by
federal law to file reports with, and otherwise comply with, the rules and
regulations of the OTS. The Bank is regulated, examined and supervised
extensively by the OTS, as its primary federal regulator, and the FDIC, as the
deposit insurer. The Bank is a member of the Federal Home Loan Bank System and
its deposit accounts are insured up to applicable limits by the Savings
Association Insurance Fund managed by the FDIC. The Bank must file reports with
the OTS and the FDIC concerning its activities and financial condition in
addition to obtaining certain approvals before entering into certain
transactions such as mergers with, or acquisitions of, other savings
institutions. The OTS and the FDIC examine the Bank periodically to test the
Bank's safety and soundness and compliance with various regulatory requirements.
This regulation and supervision establishes a comprehensive framework for the
Bank's activities and is intended primarily to protect the insurance fund and
the Bank's depositors.
The regulatory structure also gives regulatory authorities extensive
discretion in their supervisory and enforcement activities and examination
policies, including policies regarding asset classification and the
establishment of adequate loan loss reserves for regulatory purposes. Any change
in regulatory requirements and policies, whether by the OTS, the FDIC or the
Congress, could have a material adverse impact on the Corporation, the Bank and
their operations. The description of statutory provisions and regulations that
apply to the Corporation and the Bank discussed below and elsewhere in this
prospectus is not a complete description of them and their effects on the Bank
and the Corporation.
Holding Company Regulation
The Corporation is a nondiversified unitary savings and loan holding
company under federal law. Formerly, a unitary savings and loan holding company
was not restricted as to the types of business activities in which it could
engage, provided that its subsidiary savings association continued to be a
qualified thrift lender. See "--Federal Savings Institution Regulation
- --Qualified Thrift Lender Test." Recent legislation, however, restricts unitary
savings and loan holding companies not existing or applied for before May 4,
1999 to activities permissible for a financial holding company as defined under
the legislation, including insurance and securities activities, and those
permitted for a multiple savings and loan holding company, as described below.
The Corporation qualifies for the grandfather.
A savings and loan holding company is prohibited from, directly or
indirectly, acquiring more than 5% of the voting stock of another savings
institution or savings and loan holding company and from acquiring or retaining
control of a depository institution that is not insured by the FDIC, unless it
first receives the approval of the OTS. In evaluating applications by holding
companies to acquire savings institutions, the OTS considers the financial and
managerial resources and future prospects of the holding company and the
institution involved, the effect of the acquisition on the risk to the deposit
insurance funds, the convenience and needs of the community and competitive
factors.
<PAGE>
The OTS may not approve any acquisition that results in a multiple
savings and loan holding company controlling savings institutions in more than
one state. However, there are two exceptions to this general rule. First, the
approval of interstate supervisory acquisitions by savings and loan holding
companies. Second, the acquisition of a savings institution in another state if
the laws of the state of the target savings institution specifically permit the
acquisition. The states vary in the extent to which they permit interstate
savings and loan holding company acquisitions.
Although savings and loan holding companies do not have specific
capital requirements or specific restrictions on the payment of dividends or
other capital distributions, federal regulations place these restrictions on
subsidiary savings institutions as described below. The Bank must notify the OTS
30 days before declaring any dividend to the Corporation. In addition, the
financial impact of a holding company on its subsidiary institution is a matter
that is evaluated by the OTS, which has authority to order the stoppage of
activities or divestiture of subsidiaries deemed to pose a threat to the safety
and soundness of the institution.
Federal Savings Institution Regulation
Business Activities. The activities of federal savings institutions are
governed by federal law and regulations. These laws and regulations delineate
the nature and extent of the activities in which federal associations may
engage. In particular, many types of lending authority for federal association
are limited to a specified percentage of the institution's capital or assets.
Capital Requirements. The OTS capital regulations require savings
institutions to meet three minimum capital standards: a 1.5% tangible capital
ratio, a 3% leverage ratio and an 8% risk-based capital ratio. Effective April
1, 1999, however, the minimum leverage ratio increased to 4% for all
institutions except those with the highest rating on the CAMELS financial
institution rating system. In addition, the prompt corrective action standards
discussed below also establish, in effect, a minimum 2% tangible capital
standard, a 4% leverage ratio (3% for institutions receiving the highest rating
on the CAMELS financial institution rating system) and, together with the
risk-based capital standard itself, a 4% Tier 1 risk-based capital standard. The
OTS regulations also require that, in meeting the tangible, leverage and
risk-based capital standards, institutions must generally deduct investments in
and loans to subsidiaries engaged in activities as principal that are not
permissible for a national bank.
The risk-based capital standard requires an institution to maintain
Tier 1 or core capital to risk-weighted assets of at least 4% and total capital
to risk-weighted assets of at least 8%. Total capital is defined as core capital
and supplementary capital. In determining the amount of risk-weighted assets,
all assets, including certain off-balance sheet assets, are multiplied by a
risk-weight factor of 0% to 100%, assigned by the OTS capital regulation based
on the risks believed inherent in the type of asset. Core or Tier 1 capital is
defined as common stockholders' equity and retained earnings, certain
noncumulative perpetual preferred stock and related surplus, and minority
interests in equity accounts of consolidated subsidiaries, less intangibles
other than certain mortgage servicing rights and credit card relationships. The
components of supplementary capital include cumulative preferred stock,
long-term perpetual preferred stock, mandatory convertible securities,
subordinated debt and intermediate preferred stock, and the allowance for loan
and lease losses limited to a maximum of 1.25% of risk-weighted assets. Overall,
the amount of supplementary capital included as part of total capital cannot
exceed 100% of core capital.
<PAGE>
The capital regulations also incorporate an interest rate risk
component. Savings institutions with "above normal" interest rate risk exposure
are subject to a deduction from total capital for purposes of calculating their
risk-based capital requirements. Presently, the OTS has deferred implementation
of the interest rate risk component. At September 30, 1999, the Bank met each of
its capital requirements. See Note 12 to Notes to Consolidated Financial
Statements for further information.
Prompt Corrective Regulatory Action. The OTS is required to take
certain supervisory actions against undercapitalized institutions, the severity
of which depends upon the institution's degree of undercapitalization.
Generally, a savings institution that has a ratio of total capital to risk
weighted assets of less than 8%, a ratio of Tier 1 or core capital to
risk-weighted assets of less than 4%, or a ratio of core capital to total assets
of less than 4%, or 3% or less for institutions with the highest examination
rating, is considered to be "undercapitalized." A savings institution that has a
total risk-based capital ratio less than 6%, a Tier 1 capital ratio of less than
3% or a leverage ratio that is less than 3% is considered to be "significantly
undercapitalized" and a savings institution that has a tangible capital to
assets ratio equal to or less than 2% is deemed to be "critically
undercapitalized." Although there is a narrow exception, the OTS is required to
appoint a receiver or conservator for an institution that is "critically
undercapitalized" if the institution is critically undercapitalized on average
during the calendar quarter 270 days after becoming critically undercapitalized.
The regulation also provides that an institution must file a capital restoration
plan with the OTS within 45 days of the date that the OTS notifies it that it is
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized." Compliance with the plan must be guaranteed by any parent
holding company. In addition, numerous mandatory supervisory actions immediately
apply to an undercapitalized institution, including, but not limited to,
increased monitoring by regulators and restrictions on growth, capital
distributions and expansion. The OTS could also take any one of a number of
discretionary supervisory actions, including issuing a capital directive and
replacing senior executive officers and directors.
Insurance of Deposit Accounts. Deposits of the Bank are presently
insured by the Savings Association Insurance Fund. The FDIC maintains a
risk-based assessment system by which institutions are assigned to one of three
categories based on their capitalization and one of three subcategories based on
examination ratings and other supervisory information. An institution's
assessment rate depends upon the categories to which it is assigned. Assessment
rates for Savings Association Insurance Fund member institutions are determined
semiannually by the FDIC and currently range from zero basis points for the
healthiest institutions to 27 basis points for the riskiest.
In addition to the assessment for deposit insurance, institutions are
required to pay on bonds issued in the late 1980s by the Financing Corporation
to recapitalize the predecessor to the Savings Association Insurance Fund.
During 1998, Financing Corporation payments for Savings Association Insurance
Fund members approximated 6.10 basis points, while Bank Insurance Fund members
paid 1.22 basis points. By law, there will be equal sharing of Financing
Corporation payments between the members of both insurance funds on the earlier
of January 1, 2000 or the date the two insurance funds are merged.
<PAGE>
The FDIC may terminate an institution's deposit insurance if it finds
that the institution has engaged in unsafe or unsound practices, is in an unsafe
or unsound condition to continue operations or has violated any applicable law,
regulation, rule, order or condition imposed by the FDIC or the OTS. The
management of the Bank does not know of any practice, condition or violation
that might lead to termination of its deposit insurance.
Financial Institution Modernization Legislation. Recently enacted
federal legislation designed to modernize the regulation of the financial
services industry expands the ability of bank holding companies to affiliate
with other types of financial services companies such as insurance companies and
investment banking companies. However, the legislation provides that companies
that acquire control of a single savings association after May 4, 1999 (or that
filed an application for that purpose after that date) are not entitled to the
unrestricted activities formerly allowed for a unitary savings and loan holding
company. Rather, these companies will have authority to engage in the activities
permitted "a financial holding company" under the new legislation, including
insurance and securities-related activities, and the activities currently
permitted for multiple savings and loan holding companies, but generally not in
commercial activities. The authority for unrestricted activities is
grandfathered for unitary savings and loan holding companies, such as the
Corporation, that existed before May 4, 1999. However, the authority for
unrestricted activities would not apply to any company that acquired the
Corporation.
Loans to One Borrower. Federal law provides that savings institutions
must generally follow the limits on loans to one borrower applicable to national
banks. A savings institution may not make a loan or extend credit to a single or
related group of borrowers in excess of 15% of its unimpaired capital and
surplus. An additional amount may be lent, equal to 10% of unimpaired capital
and surplus, if secured by specified readily-marketable collateral. At September
30, 1999, the Bank's limit on loans to one borrower was $7.4 million. The Bank
may apply to have this amount increased to $14.8 million for borrowers who have
loans secured by residential lending. At September 30, 1999, the Bank had
applied for this limit increase for three borrowers with a maximum aggregate
exposure to the three borrowers of $24.6 million. At September 30, 1999, the
Bank's largest aggregate amount of loans to one borrower was $11.8 million, all
of which was performing according to their terms. The Bank had received
permission to increase the loan to one borrower limit on this borrower.
Qualified Thrift Lender Test. Federal law requires savings institutions
to meet a qualified thrift lender test. Under the test, a savings association is
required to either qualify as a "domestic building and loan association" under
the Internal Revenue Code or maintain at least 65% of its "portfolio assets" in
certain "qualified thrift investments" in at least 9 months out of each 12 month
period. "Portfolio assets" equals total assets less specified liquid assets up
to 20% of total assets, intangibles, including goodwill, and the value of
property used to conduct business. "Qualified thrift investments" are primarily
residential mortgages and related investments, including certain mortgage-backed
securities.
A savings institution that fails the qualified thrift lender test faces
certain operating restrictions and may be required to convert to a commercial
bank charter. As of September 30, 1999, the Bank complied with the qualified
thrift lender test. Recent legislation has expanded the extent to which
education loans, credit card loans and small business loans may be considered
"qualified thrift investments."
<PAGE>
Limitation on Capital Distributions. OTS regulations impose limitations
upon all capital distributions by a savings institution, including cash
dividends, payments to repurchase its shares and payments to stockholders of
another institution in a cash-out merger. The rule effective through the first
quarter of 1999 established three tiers of institutions based primarily on an
institution's capital level. A Tier I institution exceeded all capital
requirements before and after a proposed capital distribution and has not been
advised by the OTS that it needs more than normal supervision. A Tier I
institution could, after first giving notice to but without obtaining approval
of the OTS, make capital distributions during the calendar year equal to the
greater of 100% of its net earnings to date during the calendar year plus the
amount that would have reduced by one-half the excess capital over its capital
requirements at the beginning of the calendar year, or 75% of its net income for
the previous four quarters. Any additional capital distributions required prior
regulatory approval.
Effective April 1, 1999, the OTS's capital distribution regulation
changed. Under the new regulation, an application to and the prior approval of
the OTS is required before any capital distribution if the institution does not
meet the criteria for "expedited treatment" of applications under OTS
regulations (generally, compliance with all capital requirements and examination
ratings in one of two top categories), the total capital distributions for the
calendar year exceed net income for that year plus the amount of retained net
income for the preceding two years, the institution would be undercapitalized
following the distribution or the distribution would otherwise be contrary to a
statute, regulation or agreement with OTS. If an application is not required,
the institution must still give advance notice to OTS of the capital
distribution. If the Bank's capital fell below its regulatory requirements or if
the OTS notified it that it was in need of more than normal supervision, the
Bank's ability to make capital distributions could be restricted. In addition,
the OTS could prohibit a proposed capital distribution, which would otherwise be
permitted by the regulation if the OTS determines that the distribution would be
an unsafe or unsound practice.
Liquidity. The Bank is required to maintain an average daily balance of
specified liquid assets equal to a monthly average of not less than a specified
percentage of its net withdrawable deposit accounts plus short-term borrowings.
This liquidity requirement is currently 4%, but may be changed from time to time
by the OTS to any amount within the range of 4% to 10%. Monetary penalties may
be imposed for failure to meet these liquidity requirements. The Bank met these
requirements at September 30, 1999.
Assessments. Savings institutions are required to pay assessments to
the OTS to fund the agency's operations. The general assessments, paid on a
semi-annual basis, are computed upon the savings institution's total assets,
including consolidated subsidiaries, as reported in the Bank's latest quarterly
thrift financial report. The Bank's assessments for the fiscal year ended
September 30, 1999 totaled $126,000.
Branching. OTS regulations permit federally chartered savings
associations to branch nationwide under certain conditions. Generally, federal
savings associations may establish interstate networks and geographically
diversify their loan portfolios and lines of business. The OTS authority
preempts any state law purporting to regulate branching by federal savings
associations.
<PAGE>
Transactions with Related Parties. The Bank's authority to engage in
transactions with "affiliates" is limited by federal law. Generally, an
affiliate is any company that controls or is under common control with an
institution, including the Corporation. The aggregate amount of covered
transactions with any individual affiliate is limited to 10% of the capital and
surplus of the savings institution. The aggregate amount of covered transactions
with all affiliates is limited to 20% of the savings institution's capital and
surplus. Certain transactions with affiliates are required to be secured by
collateral in an amount and of a type described in federal law. The purchase of
low quality assets from affiliates is generally prohibited. The transactions
with affiliates must be on terms and under circumstances, that are at least as
favorable to the institution as those prevailing at the time for comparable
transactions with non-affiliated companies. In addition, savings institutions
are prohibited from lending to any affiliate that is engaged in activities that
are not permissible for bank holding companies and no savings institution may
purchase the securities of any affiliate other than a subsidiary.
The Bank's authority to extend credit to executive officers, directors
and 10% stockholders, as well as entities within the control of these persons,
is also governed by federal law. These persons are often referred to as
"insiders" of a company. Loans to insiders are required to be made on terms
substantially the same as those offered to unaffiliated individuals and may not
involve more than the normal risk of repayment. Recent legislation created an
exception for loans made pursuant to a benefit or compensation program that is
widely available to all employees of the institution and does not give
preference to insiders over other employees. The law limits both the individual
and aggregate amount of loans the Bank may make to insiders based, in part, on
the Bank's capital position and requires certain board approval procedures to be
followed.
Enforcement. The OTS has primary enforcement responsibility over
savings institutions and has the authority to bring actions against the
institution and 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 and/or directors, to
institution of a receivership or conservatorship, or to termination of deposit
insurance. Civil penalties cover a wide range of violations and can amount to
$25,000 per day, or even $1 million per day in especially serious cases. The
FDIC has the authority to recommend to the Director of the OTS that enforcement
action to be taken with respect to a particular savings institution. If action
is not taken by the Director, the FDIC has authority to take action under
certain circumstances. Federal law also establishes criminal penalties for
certain violations.
Standards for Safety and Soundness. The federal banking agencies have
adopted Interagency Guidelines prescribing Standards for Safety and Soundness.
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. If the OTS determines that a
savings institution fails to meet any standard prescribed by the guidelines, the
OTS may require the institution to submit an acceptable plan to achieve
compliance with the standard.
<PAGE>
Federal Home Loan Bank System
The Bank is a member of the Federal Home Loan Bank System, which
consists of 12 regional Federal Home Loan Banks. The Federal Home Loan Bank of
Atlanta provides a central credit facility primarily for member institutions.
The Bank, as a member of the Federal Home Loan Bank of Atlanta, is required to
acquire and hold shares of capital stock in that Federal Home Loan Bank of
Atlanta in an amount at least equal to 1.0% of the aggregate principal amount of
its unpaid residential mortgage loans and similar obligations at the beginning
of each year, or 1/20 of its advances (borrowings) from the Federal Home Loan
Bank of Atlanta, whichever is greater. The Bank was in compliance with this
requirement with an investment in Federal Home Loan Bank of Atlanta stock at
September 30, 1999, of $8.2 million. Federal Home Loan Bank of Atlanta advances
must be secured by specified types of collateral.
The Federal Home Loan Banks are required to provide funds for the
resolution of insolvent thrifts in the late 1980s and to contribute funds for
affordable housing programs. These requirements could reduce the amount of
dividends that the Federal Home Loan Banks pay to their members and could also
result in the Federal Home Loan Banks imposing a higher rate of interest on
advances to their members. If dividends were reduced, or interest on future
Federal Home Loan Bank advances increased, the Bank's net interest income would
likely also be reduced. Recent legislation has changed the structure of the
Federal Home Loan Banks funding obligations for insolvent thrifts, revised the
capital structure of the Federal Home Loan Banks and implemented entirely
voluntary membership for Federal Home Loan Banks. Management cannot predict the
effect that these changes may have with respect to its Federal Home Loan Bank
membership.
Federal Reserve System
The Federal Reserve Board regulations require savings institutions to
maintain non-interest earning reserves against their transaction accounts,
primarily NOW and regular checking accounts. The regulations generally require
that reserves be maintained against aggregate transaction accounts as follows:
for accounts aggregating $46.5 million or less, subject to adjustment by the
Federal Reserve Board the reserve requirement is 3%; and for accounts
aggregating greater than $46.5 million, the reserve requirement is $1.395
million plus 10%, subject to adjustment by the Federal Reserve Board between 8%
and 14%, against that portion of total transaction accounts in excess of $46.5
million. The first $4.9 million of otherwise reservable balances, as adjusted by
the Federal Reserve Board, are exempted from the reserve requirements. The Bank
complies with the foregoing requirements.
Community Reinvestment Act
Under the Community Reinvestment Act, as implemented by OTS
regulations, a savings association has a continuing and affirmative obligation
consistent with its safe and sound operation to help meet the credit needs of
its entire community, including low and moderate income neighborhoods. The
Community Reinvestment Act does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's
<PAGE>
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the Community
Reinvestment Act. The Community Reinvestment Act requires the OTS, in connection
with its examination of an institution, to assess the institution's record of
meeting the credit needs of its community and to take such record into account
in its evaluation of applications by such institution. The Community
Reinvestment Act requires public disclosure of an institution's Community
Reinvestment Act rating. The Bank's latest Community Reinvestment Act rating,
received from the OTS was
"satisfactory."
TAXATION
Federal Taxation
General. The Corporation and the Bank report their income via a
consolidated return on a fiscal year basis using the accrual method of
accounting and are subject to federal income taxation in the same manner as
other corporations with some exceptions, including particularly the Bank's
reserve for bad debts discussed below. The following discussion of tax matters
is intended only as a summary and does not purport to be a comprehensive
description of the tax rules applicable to the Bank or the Corporation.
Tax Bad Debt Reserves. For discussion related to the Bank's Tax Bad
Debt Reserves, please refer to page 25 note 10 of the Company's Annual Report to
Stockholders for the fiscal year ended September 30, 1999.
Distributions. To the extent that the Bank makes "nondividend
distributions" to the Corporation that are considered as made: (i) from the
reserve for losses on qualifying real property loans, to the extent the reserve
for such losses exceeds the amount that would have been allowed under the
experience method; or (ii) from the supplemental reserve for losses on loans
("Excess Distributions"), then an amount based on the amount distributed will be
included in the Bank's taxable income. Nondividend distributions include
distributions in excess of the Bank's current and accumulated earnings and
profits, distributions in redemption of stock, and distributions in partial or
complete liquidation. However, dividends paid out of the Bank's current or
accumulated earnings and profits, as calculated for federal income tax purposes,
will not be considered to result in a distribution from the Bank's bad debt
reserve. Thus, any dividends to the Corporation that would reduce amounts
appropriated to the Bank's bad debt reserve and deducted for federal income tax
purposes would create a tax liability for the Bank. The amount of additional
taxable income attributable to an Excess Distribution is an amount that, when
reduced by the tax attributable to the income, is equal to the amount of the
distribution. Thus, if, the Bank makes a "nondividend distribution," then
approximately one and one-half times the amount so used would be includable in
gross income for federal income tax purposes, assuming a 35% corporate income
tax rate (exclusive of state and local taxes). See "Regulation" for limits on
the payment of dividends by the Bank. The Bank does not intend to pay dividends
that would result in a recapture of any portion of its tax bad debt reserve.
Corporate Alternative Minimum Tax. The Code imposes a tax on
alternative minimum taxable income ("AMTI") at a rate of 20%. For years
beginning before December 31, 1995, the excess of the tax bad debt reserve
deduction using the percentage of taxable income method over the deduction that
would have been allowable under the experience method was treated as a
<PAGE>
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.
Audits. 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, 1999.
<TABLE>
<CAPTION>
Total Investment
Including Land, Net Book Approximate
Year Building, Furni- Value as of Square Owned/
Location Opened ture and Fixtures 9/30/99 Footage Leased
- -------- ------ ----------------- ------- ------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Main Office
2619 Oak St. 1980 $9,534 $3,527 25,000 Owned
Myrtle Beach, SC (1)
Dunes Office
7500 North Kings Hwy 1971 647 270 2,000 Owned
Myrtle Beach, SC
Ocean Drive Office
521 Main Street 1973 960 532 4,100 Owned
North Myrtle Beach, SC
Surfside Office
112 Highway 17 South 1975 1,435 1,007 3,300 Owned
& Glenns Bay Road
Surfside Beach, SC
Conway Office
310 Highway 378 1976 799 243 2,882 Owned
Conway, SC
Socastee Office
1 Cimerron Drive 1981 892 376 2,275 Owned
Myrtle Beach, SC
Murrells Inlet Office
Highway 17 South 1986 954 569 3,450 Owned
Murrells Inlet, SC
Waccamaw Medical Pk Office
7000 Waccamaw Medical Pk Rd 1986 566 289 1,450 Owned
Conway, SC
Florence Office
1385 Alice Drive 1996 366 230 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
<PAGE>
Total Investment
Including Land, Net Book Approximate
Year Building, Furni- Value as of Square Owned/
Location Opened ture and Fixtures 9/30/99 Footage Leased
- -------- ------ ----------------- ------- ------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Coastal Investor Services, Inc.
2619 Oak Street 1987 129 25 N/A N/A
Myrtle Beach, SC
Coastal Federal Mortgage, Inc.
2619 Oak Street 1995 173 73 1,038 Leased
Myrtle Beach, SC 29577
South Brunswick Office
1625 Seaside Road S.W. 1998 1,010 933 3,000 Owned
Sunset Beach, NC
Mall Plaza 1997 1,156 1,102 17,500 Owned
504 27th Avenue North
Myrtle Beach, SC
Conway Rental Property 1999 540 539 10,000 Owned
1515 4th Avenue
Conway, SC 29526
Little River Office 1999 1,074 1,074 2,300 Owned
1602 Highway 17
Little River, SC 29566
Carolina Forest Office (under construction) 416 416 3,500 Owned
3894 Renee Drive
Myrtle Beach, SC 29579
Wilmington Loan Office 1999 6 6 1,400 Leased
5710 Oleander Drive, Suite 209
Wilmington, NC 28403
</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 $11.2 million at September 30, 1999. See Note 5 of Notes
to the Consolidated Financial Statements. Coastal Federal uses the services of
an independent data processing service to process customer records and monetary
transactions, post deposit and general ledger entries and record activity in
installment lending, loan servicing and loan originations.
<PAGE>
Year 2000 Compliance
The Company is a user of computers, computer software and equipment utilizing
embedded microprocessors that will be effected by the year 2000 issue. The year
2000 issue exists because many computer systems and applications use two-digit
date fields to designate a year. As the century date change occurs,
date-sensitive systems may recognize the year 2000 as 1900, or not at all. This
inability to recognize or properly treat the year 2000 may cause erroneous
results, ranging from system malfunctions to incorrect or incomplete processing.
The Company's Year 2000 Committee consists of Senior management members of the
Company. The Committee makes a monthly progress report to the Board of
Directors. The Committee has developed and is implementing a comprehensive plan
to make all information and non-information technology assets year 2000
compliant. The plan is comprised of the following phases:
1. Awareness - Educational initiatives on year 2000 issues and concerns.
This phase is ongoing, especially as it relates to informing customers
of the Company's year 2000 preparedness.
2. Assessment - Inventory of all technology assets and identification of
third-party vendors and service providers. This phase was completed as
of August 31, 1998.
3. Renovation - Review of vendor and service providers responses to the
Company's year 2000 inquires and development of a follow-up plan and
timeline. This phase was completed as of October 15, 1998.
4. Validation - Testing all systems and third-party vendors for year 2000
compliance. The Company has currently completed this phase of its plan.
A third-party service bureau processes all customer transactions and
has completed upgrades to its systems to be year 2000 compliant. The
Company tested the third-party systems by reviewing the results of
transactions of different test dates before and after the year 2000
date change covering all of the applications used by the Company.
Testing was completed as of November 16, 1998. The results of the test
were all positive. Other parties whose year 2000 compliance may effect
the Company include the FHLB of Atlanta, brokerage firms, the operator
of the Company's ATM network and the Company's 401K administrator.
These third-parties have indicated their compliance or intended
compliance. Where it is possible to do so, the Company has tested with
these third-parties. All the test results were positive. Where testing
is not possible, the Company will rely on certifications from vendors
and service providers.
5. Implementation - Replacement or repair of non-compliant technology has
been completed.
The Company estimates its total cost to replace computer equipment, software
programs or other equipment containing embedded microprocessors that were not
year 2000 compliant to be $200,000, of which $172,000 has been incurred as of
September 30, 1999. System maintenance or modification costs are charged to
expense as incurred, while the cost of new hardware, software or other equipment
is capitalized and amortized over their estimated useful lives. The Company does
not separately track the internal costs and time that its own employees spend on
year 2000 issues, which are principally payroll costs.
<PAGE>
Because the Company depends substantially on its computer systems and those of
third-parties, the failure of these systems to be year 2000 compliant could
cause substantial disruption of the Company's business and could have a material
adverse financial impact on the Company. Failure to resolve year 2000 issues
presents the following risks to the Company; (1) the Company could lose
customers to other financial institutions, resulting in a loss of revenue, if
the Company's third-party service bureau is unable to properly process customer
transactions; (2) governmental agencies, such as the Federal Home Loan Bank, and
correspondent institutions could fail to provide funds to the Company, which
could materially impair the Company's liquidity and affect the Company's ability
to fund loans and deposit withdrawals; (3) concern on the part of depositors
that year 2000 issues could impair access to their deposit account balances
could result in the Company experiencing deposit outflows prior to December 31,
1999; and (4) the Company could incur increased personnel costs if additional
staff is required to perform functions that inoperative systems would have
otherwise performed. Management believes that it is not possible to estimate the
potential lost revenue due to the year 2000 issue, as the extent and longevity
of any potential problem cannot be predicted. Because substantially all of the
Company's loan portfolio consists of loans primarily secured by real estate,
management believes that year 2000 issues will not impair the ability of the
Company's borrowers to repay their debt.
There can be no assurances that the Company's year 2000 plan will effectively
address the year 2000 issues, that the Company's estimates of the timing and
costs of completing the plan will ultimately be accurate or that the impact of
any failure of the Company or its third-party vendors and service providers to
be year 2000 compliant will not have a material adverse effect on the Company's
business, financial condition or results of operations. The Company has
developed a contingency plan for year 2000 in the event there is a malfunction
in any of the critical application software. The plan provides for alternative
methods to conduct business until application problems can be rectified. The
Company has recognized that its commercial borrowers may also face risks from
year 2000 issues. The Company has identified its material loan relationships and
completed year 2000 surveys of those customers to assess their vulnerability to
year 2000 problems and their readiness for year 2000 compliance. The Company is
continuing to monitor its commercial borrowers for year 2000 risk and feels that
its commercial relationships do not pose an inordinate risk at this time.
Item 3. Legal Proceedings
- --------------------------
The Company is not a defendant in any lawsuits. The Bank is a defendant
in one significant lawsuit. The action commenced on December 1, 1997, and
the Plaintiffs are seeking approximately $1.5 million in actual damages
as well as punitive damages. The cause of action is breach of fiduciary
duties, negligence, fraud, civil conspiracy and breach of contract
arising out of a lending relationship. At this date, the Bank does not
know if or when the action will go to trial. The Bank will vigorously
defend this suit. Based upon discussions with its counsel, the Bank does
not expect the results of this action to be material to its financial
results.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
Not applicable.
<PAGE>
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, 1999
("Annual Report") is incorporated herein by reference.
Item 6. Selected Financial Data
- --------------------------------
The information contained in the section captioned "Financial
Highlights" in the Annual Report is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial
- ----------------------------------------------------------
Condition and Results of Operations
-----------------------------------
The information contained in the section captioned "Management's
Discussion and Analysis" in the Annual Report is incorporated herein by
reference.
Item 7A. Quantitative and Qualitative Disclosures about
- --------------------------------------------------------
Market Risk
-----------
The information contained in the section captioned "Interest Rate Risk
Disclosure" in the Annual Report is incorporated herein by reference.
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
2000 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, 50, 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 Real Estate
Investment Corporation. He currently
serves on the Board of Visitors of
Coastal Carolina University's Wall
School of Business, the Board of
Directors of the Waccamaw Community
Foundation, the Board of Directors of
the Coastal Education Foundation, the
Board of Directors of the North Carolina
Bankers Association and the Board of
Directors of the Financial Institutions
Retirement Fund.
Jimmy R. Graham, 51, 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, 39, 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 Mortgage Bankers &
Realty Company, Inc., Coastal
Investments Corporation, and Coastal
Federal Mortgage, Coastal Real Estate
Investment Corporation and President of
Coastal Federal Holdings Corporation.
He currently serves on the Junior
Achievement Board of Directors of Horry
County. He is a Past Chairman of the
Board of Directors for Junior
Achievement of Horry County as well as
Past Chairman of the Board of Directors
for Junior Achievement of Greenville.
Mr. Rexroad is the President of the
Financial Manager's Society of South
Carolina.
<PAGE>
Name, Age and Position Business Experience
- --------------------- -------------------
He is a certified public accountant, and
is a member of the AICPA and SCACPA.
Prior to joining the Company, Mr.
Rexroad was a partner with KPMG LLP
where he was partner in charge of the
Financial Institutions practice in South
Carolina.
Phillip G. Stalvey, 43, 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 Investor Services, Inc. He has
been associated with Coastal Federal for
the past 18 years. In addition, Mr.
Stalvey is a member of the Florence
Stake Presidency with his Church, a
committee member of a local Scout Troop
and a Board of Director for the Myrtle
Beach Airforce Base Redevelopment
Authority.
Steven J. Sherry, 48 Mr. Sherry is Executive Vice President
Executive Vice President and and Director of Marketing for the Bank.
Director of Marketing. He also serves as Executive Vice
President/Chief Marketing Officer for
Coastal Financial Corporation. He has
been associated with Coastal Federal, in
a consultative fashion for over five
years, and formally with the
organization for 18 months. Mr. Sherry
is a member of the Bank Marketing
Association, and holds various
achievement awards for marketing and
advertising.
Susan J. Cooke, 49, Ms. Cooke is Vice President and
Vice President and Corporate Secretary for Coastal Federal
Corporate Secretary and for Coastal Financial Corporation,
Corporate Secretary for Coastal Mortgage
Bankers & Realty Company, Inc., and
Coastal Investor Services, Inc. Ms.
Cooke has been employed with Coastal
Federal for twelve 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 -- Executive Compensation" in the Proxy Statement is
incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and
- -------------------------------------------------------------
Management
----------
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by
reference to the section captioned "Voting Securities and
Principal Holders Thereof" of the Proxy Statement.
(b) Security Ownership of Management
Information required by this item is incorporated herein by
reference to the sections captioned "Proposal I -- Election of
Directors" and "Voting Securities and Principal Holders
Thereof" of the Proxy Statement.
(c) Management of the Corporation knows of no arrangements,
including any pledge by any person of securities of the
Corporation, the operation of which may at a subsequent date
result in a change in control of the registrant.
Item 13. Certain Relationships and Related Transactions
- --------------------------------------------------------
The information required by this item is incorporated herein by
reference to the section captioned "Proposal I -- Election of Directors" and
"Voting Securities and Principal Holders Thereof" in the Proxy Statement.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
- -----------------------------------------------------------------
Form 8-K
--------
1. Independent Auditors' Report*
2. All Financial Statements*
(a) Consolidated Statements of Financial Condition as of
September 30, 1998 and 1999.
(b) Consolidated Statements of Operations for the Years
Ended September 30, 1997, 1998 and 1999.
(c) Consolidated Statements of Stockholders' Equity and
Comprehensive Income for the Years Ended September
30, 1997, 1998 and 1999.
(d) Consolidated Statements of Cash Flows for the Years
Ended September 30, 1997, 1998 and 1999.
(e) Notes to Consolidated Financial Statements.
3. All schedules have been omitted as the required information is
either inapplicable or included in the Notes to Consolidated
Financial Statements.
4. Exhibits
3 (a) Certificate of Incorporation of Coastal
Financial Corporation**
3 (b) Bylaws of Coastal Financial Corporation**
10 (a) Employment Agreement with Michael C. Gerald***
(b) Employment Agreement with Jerry L. Rexroad***
(c) Employment Agreement with Phillip G. Stalvey*****
(d) Employment Agreement with Allen W. Griffin***
(e) Employment Agreement with Jimmy R. Graham***
(f) Employment Agreement with Richard L. Granger***
(g) Employment Agreement with Robert S. O'Harra***
(h) Employment Agreement with Steven J. Sherry******
(i) 1990 Stock Option Plan***
(j) Directors Performance Plan****
13 Annual Report to Stockholders for the Fiscal
Year Ended September 30, 1999*
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.
- -----------------
<PAGE>
* Incorporated by reference from the Annual Report to Stockholders
for the fiscal year ended September 30, 1999, 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 10-K filed with the
Securities and Exchange Commission on December 29, 1995.
**** Incorporated by reference to the proxy statement for the 1996
Annual Meeting of Stockholders.
***** Incorporated by reference to 1997 Form 10-K filed with the
Securities and Exchange Commission on January 2, 1998.
****** Incorporated by reference to 1998 Form 10-K filed with the
Securities and Exchange Commission on December 29, 1998.
<PAGE>
SIGNATURES
+ Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
COASTAL FINANCIAL CORPORATION
Date: December 29, 1999 By /s/ Michael C. Gerald
---------------------
Michael C. Gerald
President/Chief Executive Officer
(Duly Authorized Representative)
Pursuant to the requirement of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By: /s/James T. Clemmons By: /s/ Michael C. Gerald
-------------------- ---------------------
James T. Clemmons Michael C. Gerald
Chairman of the Board President/Chief Executive Officer
and a Director
(Principal Executive Officer)
Date: December 29, 1999 Date: December 29, 1999
By: /s/Jerry L. Rexroad By: /s/Wilson B. Springs
-------------------- --------------------
Jerry L. Rexroad Wilson B. Springs
Executive Vice President Director
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
Date: December 29, 1999 Date: December 29, 1999
By: /s/James C. Benton By: /s/James P. Creel
------------------ -----------------
James C. Benton James P. Creel
Director Director
Date: December 29, 1999 Date: December 29, 1999
By: /s/Harold D. Clardy By: /s/James H. Dusenbury
-------------------- ---------------------
Harold D. Clardy James H. Dusenbury
Director Director
Date: December 29, 1999 Date: December 29, 1999
By: /s/G. David Bishop
------------------
G. David Bishop
Director
Date: December 29, 1999
Coastal
Financial Corporation
1999
Annual
Report
<PAGE>
Dedicated to the Coastal Federal Customer
Our Mission Statement says it all . . . We are totally committed to Exceeding
the Expectations of our Customer. And while there are thousands of words in this
annual report, you only need to remember three . . . BUILDING LASTING
RELATIONSHIPS. They summarize well the meaning of our Mission Statement and link
it to the exciting future of our Company.
Relationships are built on trust, which exists only when the individuals or
entities involved are trustworthy. Trustworthiness is comprised of two
indivisible and balanced components . . . Character, that is, who we are and
what we stand for, and Competency, that is, what we can do.
Our QUEST FOR EXCELLENCE Operating Philosophy clearly defines our Values and
Guiding Principles, which are unchanging, and provides a strong foundation for
the achievement 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.
BUILDING LASTING RELATIONSHIPS is the result of melding our character, as
defined by our QUEST FOR EXCELLENCE Operating Philosophy, with our competency in
delivering more value to our Customers than our competitors, attracting new
Customers and serving our Customers when, where and how they want to be served.
Our ongoing commitment to our QUEST FOR EXCELLENCE
operating philosophy and overriding focus on building lasting relationships has
continued to produce outstanding financial results, and we are absolutely
convinced that this approach will help to insure that our best years are yet to
come.
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 $177.72 based upon
Nasdaq Quotations at September 30, 1999. The foregoing reflects historical
results and may not be indicative of future stock prices.
[GRAPHIC-GRAPH DEPICTING SHARE PRICE PERFORMANCE]
2
<PAGE>
[GRAPHIC-PICTURE OF ROBERT AND ARLENE ARMSTRONG]
Robert and Arlene Armstrong
"We vacationed here three or four times a year since 1962," said Bob Armstrong.
"So we knew where we wanted to live when we retired." When they are not busy
with friends, church and community activities, the Armstrongs are on the water,
boating and fishing for flounder and trout.
In 1992, Mr. and Mrs. Armstrong moved to Surf-side Beach and opened accounts
with a branch of a large national bank. They were immediately unhappy with its
distant, impersonal service. A friend suggested Coastal Federal, where they
found the personal attention they wanted.
Mr. and Mrs. Armstrong do all their Personal Banking at Coastal Federal of
Surfside Beach. "It's all about knowing the bank and knowing the people. At
Coastal Federal, you feel like a neighbor. Everybody knows who you are, and
they're happy to see you."
[GRAPHIC-PICTURE OF BOB BARBOUR]
Bob Barbour
Bob Barbour likes the friendly, helpful people at Coastal Federal. "They
recently opened their Little River office," he said. "And the very first time I
walked in there, I found people I knew. Coastal Federal planned it that way."
Mr. Barbour finds that Coastal Federal's approach to business banking is based
on long-term relationships between bankers and business people, as well as our
commitment to providing the services and resources businesses need.
Horry County is one of the fastest growing real estate markets in the U.S., and
that means growing businesses, too. New neighborhoods such as Fairway Oaks &
Shorehaven Villas, where Mr. Barbour is Sales Executive, are drawing people who
want to enjoy golfing, the beaches, and the relaxed pace of life.
"I tell the people who move in here to go to Coastal Federal," Mr. Barbour says.
"I know they'll be well taken care of."
[GRAPHIC-PICTURE OF DALE AND DEBRA CHADWICK]
Dale and Debra Chadwick
"We do our business banking and personal banking with Coastal Federal," said
Dale Chadwick. "Our Residential Home Loan is with Coastal Federal. The Sunset
Beach office is convenient, and Scott Lander is a friend."
Mrs. Chadwick is Vice President of The Winds, on Ocean Isle Beach, where Coastal
Federal recently financed an addition to the hotel. Mr. Chadwick is a principal
with Carolina Golf Coast Properties, a leader in commercial real estate, golf
and waterfront properties in Brunswick County, and is developing the new
150-acre Sunset Park project, with shopping, professional and residential areas.
Business Financing from Coastal Federal lets Mr. and Mrs. Chadwick make the most
of their opportunities. "We rely on Coastal Federal for all our commercial
banking. They're the first bank we refer customers and clients to for their
commercial and other financial needs. We invest in Coastal Federal, too - we're
shareholders."
3
<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 or for Years Ended September 30,
- ---------------------------------------------------------------------------------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
(Dollars in thousands, except per share data)
Financial Condition Data:
<S> <C> <C> <C> <C> <C>
Total assets ............................................ $401,201 $459,712 $494,003 $643,560 $713,013
Loans receivable, net ................................... 356,819 370,368 403,570 414,264 455,351
Mortgage-backed securities .............................. 12,776 27,029 23,023 170,181 182,115
Cash, interest-bearing deposits and investment securities 13,530 38,332 39,582 25,507 30,296
Deposits ................................................ 273,099 313,430 347,116 386,321 399,673
Borrowings .............................................. 95,997 109,886 106,337 210,560 262,541
Stockholders' equity .................................... 24,820 27,681 32,391 37,851 41,237
Operating Data:
Interest income ......................................... $ 30,328 $ 34,720 $ 38,065 $ 43,894 $ 49,559
Interest expense ........................................ 17,272 19,091 20,146 24,451 26,991
-------- -------- -------- -------- --------
Net interest income ..................................... 13,056 15,629 17,919 19,443 22,568
Provision for loan losses ............................... 202 790 760 865 750
-------- -------- -------- -------- --------
Net interest income after provision for loan losses ..... 12,854 14,839 17,159 18,578 21,818
-------- -------- -------- -------- --------
Other Income:
Fees and service charges on loans and deposit accounts .. 1,051 1,415 1,593 1,639 2,025
Gain on sales of loans held for sale .................... 39 990 931 1,579 979
Gain (loss) on sales of investment securities ........... -- (6) 7 96 73
Gain on sales of mortgage-backed securities, net ........ -- 189 235 521 191
Real estate operations .................................. 876 345 141 149 (29)
Other income ............................................ 1,284 1,699 1,792 1,895 2,334
-------- -------- -------- -------- --------
Total other income ...................................... 3,250 4,632 4,699 5,879 5,573
Total general and administrative expense ................ 10,152 13,586 12,716 13,618 15,286
-------- -------- -------- -------- --------
Earnings before income taxes ............................ 5,952 5,885 9,142 10,839 12,105
Income taxes ............................................ 2,232 2,164 3,351 3,987 4,390
-------- -------- -------- -------- --------
Net income .............................................. $ 3,720 $ 3,721 $ 5,791 $ 6,852 7,715
======= ======= ======= ======== =====
Net earnings per common diluted share ................... $ .56 $ .55 $ .85 $ .99 $ 1.12
======= ======= ======= ======== =======
Cash dividends per common share ......................... $ .20 $ .22 $ .25 $ .27 $ .27
======= ======= ======= ======== =======
Weighted average shares outstanding ..................... 6,636 6,711 6,828 6,914 6,895
======= ======= ======= ======== =======
</TABLE>
<PAGE>
All share and per share data have been restated to reflect two 5 for 4 stock
dividends declared on January 9, 1996 and June 20, 1996, respectively, two 4 for
3 stock dividends declared on April 30, 1997 and May 6, 1998, and a 5% stock
dividend declared on November 10, 1999.
Key Operating Ratios:
The table below sets forth certain performance ratios of the Company at the
dates or for the periods indicated.
<TABLE>
<CAPTION>
At or for Years Ended September 30,
- ------------------------------------------------------------------------------------------------------------------------------------
1995 1996 1997 1998 1999
Other Data:
<S> <C> <C> <C> <C> <C>
Return on assets (net income divided by average assets) .................. 0.94% 0.85% 1.21% 1.13% 1.14%
Return on average equity (net income divided by average equity) .......... 15.54% 13.97% 19.36% 19.52% 19.30%
Average equity to average assets ......................................... 6.08% 6.10% 6.24% 6.05% 5.93%
Tangible book value per share ............................................ $ 3.96 $ 4.30 $ 4.98 $ 5.75 $ 6.10
Dividend payout ratio .................................................... 34.46% 38.51% 27.63% 25.14% 23.28%
Interest rate spread (difference between average yield on interest-earning
assets and average cost of interest-bearing liabilities) ............... 3.52% 3.76% 3.89% 3.51% 3.55%
Net interest margin (net interest income as a percentage of average
interest-earning assets) ............................................... 3.62% 3.86% 4.03% 3.64% 3.67%
Allowance for loan losses to total loans at end of period ................ 1.00% 1.11% 1.19% 1.33% 1.36%
Ratio of non-performing assets to total assets (1) ....................... 0.53% 0.17% 0.10% 0.36% 0.21%
Tangible capital ratio ................................................... 6.13% 5.93% 6.31% 6.10% 6.29%
Core capital ratio ....................................................... 6.13% 5.93% 6.31% 6.10% 6.29%
Risk-based capital ratio ................................................. 10.45% 10.41% 11.05% 12.67% 12.64%
Number of:
Real estate loans outstanding .......................................... 6,688 5,741 6,752 6,666 6,637
Deposit accounts ....................................................... 39,881 41,755 43,544 43,720 41,608
Full service offices (2) ............................................... 8 9 9 10 10
</TABLE>
(1) Nonperforming assets consist of nonaccrual loans 90 days of more past due
and real estate acquired through foreclosure.
(2) On October 6, 1999, the Bank opened its Little River office, bringing the
number of full service offices to 11.
4
<PAGE>
Dear Friends
Record Financial Results
The most fundamental and critical part of a successful future is a clear vision
of that future.
As we began our business planning process back in the summer of 1995, we were
faced with many options and potential courses of action to follow in working
toward 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.
My challenge to our Senior Leaders assembled to discuss the future of our
Company was to consider all of the possibilities which were available to us at
that particular point in time and develop the proper strategies to assure the
attainment of our goals.
During that session, I posed a number of scenarios to our team in order to
convey a sense of urgency, a sense of personal accountability and the need for
action. The product of my questions was not a set of inflexible answers, but,
rather, a paradigm shift relating to our view of the planning process itself
and, subsequently, the creation of what we call "discovery based planning."
The team that responded to that challenge in 1995 has since guided this Company
through four exceptional years of achievement, the most current of which yielded
another year of record financial results.
Coastal Financial Corporation's net income for the year totaled $7.7 million, or
$1.12 per diluted share, an increase of 13% compared to $6.9 million, or $.99
per diluted share in 1998. These results produced a return on average
Shareholders' equity of 19.30% and a return on average assets of 1.14%.
Total assets increased over 10%, to $713 million at year end, and importantly,
core deposits grew by over 14%. Asset quality remained excellent compared to
both industry standards and historical norms.
While our operating results for 1999 again met our high expectations, the market
price of Coastal Financial's common stock, at September 30, 1999, was 17.7% less
than the market price at September 30, 1998. While bank stocks, in general, have
been depressed this year, Coastal Financial's share price decline in 1999 has
been quite a contrast to its 0.76% decrease in 1998, 60% increase in 1997 and
56% increase in 1996.
Since becoming a publicly owned company in 1990, Coastal Financial Corporation's
stock has grown at a compound annual rate of over 37%, taking our market
capitalization from $4.6 million in October 1990, to $90.0 million at the close
of this fiscal year. Put another way, an initial investment of $10,000 in
October of 1990 would have grown to $164,300 at September 30, 1999.
<PAGE>
Equally as impressive is the fact that, since 1990, our operating earnings have
increased at a compound annualized rate in excess of 19%.
One of the best indicators of performance is Return On Shareholders' Equity, and
this measure for 1999 was, again, outstanding. Our Return On Average
Shareholders' Equity measure of 19.30% ranks us among the top performing
financial services companies in America.
While we certainly believe that financial results such as these are worth
cheering, during fiscal 1999 we continued to receive even more public
recognition of our progress toward 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:
In its November 17, 1998 edition, The State newspaper published an article
titled "Myrtle Beach bank leads US," describing Coastal Financial Corporation as
the nation's best savings bank investment this decade.
Coastal Financial Corporation, for the second consecutive year, was listed as #1
in Return on Equity for all publicly held banks in North and South Carolina in
the 1999/2000 edition of Corporate Carolina, published by the editors of
Business North Carolina.
Coastal Federal, for the second consecutive year, placed 1st in voting by the
readers of the (Myrtle Beach) SUN NEWS in the Financial Institutions category of
the SUN NEWS Best Of The Beach Competition for 1999.
Coastal Federal placed 1st in voting by the readers of the SUN NEWS in the
Mortgage Company category of the SUN NEWS Best of The Beach Competition for
1999.
We are extremely proud of the performance evidenced by these results because
they are indicative of how our Associates feel about our commitment to them and
to our Customers.
5
<PAGE>
Our best year yet
This was indeed a year of significant achievement for Coastal Financial
Corporation. Our ongoing commitment to our Associates, Customers and Communities
continues to pay significant dividends and has enabled the financial performance
during fiscal 1999 which, again, met our high expectations and well positions us
to aggressively pursue future opportunities.
Noteworthy Financial Results
for Fiscal 1999:
EARNINGS PER SHARE
[GRAPHIC-GRAPH DEPICTING NUMBERS BELOW]
o Net earnings of $7.7 million or $1.12 per diluted share. Net earnings for
fiscal 1999 increased 12.6% over the prior year.
BOOK VALUE PER SHARE
[GRAPHIC-GRAPH DEPICTING NUMBERS BELOW]
o Book value per share grew 6.1% to $6.10.
o Shareholders' equity advanced 9.0% to $41.2
million.
ASSETS
[GRAPHIC-GRAPH DEPICTING NUMBERS BELOW]
o A 10.8% growth in total assets to $713.0 million.
o Loans receivable increased 11.1% to $472.0
million.
o Deposits were up 3.5% to the highest level in the Company's history, led by
core deposit growth of 14%.
o Transaction deposits grew by 16.7% in fiscal 1999.
6
<PAGE>
[GRAPHIC-THREE PHOTOS]
TOURISM, RETIREMENT AND BUSINESS CONTINUE TO FUEL THE AREA'S GROWTH
[GRAPHIC-GRAPH DEPICTING ALLOWANCE FOR LOAN LOSSES]
ALLOWANCE FOR LOAN LOSSES
TO NET LOANS
o Allowance for Loan Losses to Net Loans
increased to 1.36%.
o The Company had Net Loan Charge Offs of .02%
in 1999.
Coastal Financial Corporation's outstanding operating results are the product of
the commitment, dedication and aligned effort of our wonderful team and have
been a major factor in the more than 1,643% increase in our stock price since
becoming a public company in October of 1990 vs. 412% for the Standard & Poors
500 Index.
These results put Coastal Financial among the top performing financial services
companies in the nation and, when considered in the context of our impressive
record of performance over the past decade, it is easy to see why I am so proud
of this great Company.
It really was quite a year. Our business prospered and our Associates
flourished, growing both personally and professionally as never before. But, as
good as these results are, it's always the future that we are most interested
in, and it always leads to the question we're most often asked: "Can we keep it
up?"
We continue to believe the answer is a resounding "Yes," as long as we remain
focused on BUILDING LASTING RELATIONSHIPS with our Associates, Customers and
Communities. That's what really sets us apart from the competition.
7
<PAGE>
A look back at 1999
Albert Einstein once said, "The significant problems we face today cannot be
solved at the same level of thinking we were at when we created them."
Einstein was describing paradigms . . . the way individuals perceive,
understand and interpret the surrounding world. In that we are all products of
what we have learned and experienced, we are all different, because no two of
us share the the same learning or life experiences. Therefore, no two people
share identical paradigms.
Our culture, as a learning organization, embraces change as the essential
ingredient for growth and progress. Consequently, we have learned that, if we
want to achieve significant change, we must first change our paradigms.
A significant element of the Five Year Plan, which was developed in the 1995
strategic planning session, related to our need to build a workplace which was
designed to teach our Leadership Group and Associates the principles which are
essential in better serving our Customers and in assuring their own personal
and professional success. This paradigm shift has enabled our Associates to
grow, both personally and professionally, toward the attainment of their full
potential and further leveraged our ever-increasing ability to work together
as a team. And though we are still far from being the ideal workplace we
intend to be, we endeavor daily to make our work environment a better place
for our Associates, to make sure they know we care about them personally, and
to assure that they understand how critical they are to our team's success. We
believe this approach is both fundamental and essential to assuring that our
best days are yet to come.
This formula for success is clearly defined in our QUEST FOR EXCELLENCE
Operating Philosophy and is fully developed and masterfully articulated
through our course offerings at Coastal Federal University. This well focused
and in-depth curriculum teaches our Leaders that it all begins with our
commitment to BUILDING LASTING RELATIONSHIPS, with our Associates, our
Customers, and our Communities, and ends with added value for all of our
stakeholders.
And while there are those who say that a success formula can't possibly be as
simple as our QUEST FOR EXCELLENCE Operating Philosophy, our results have
absolutely convinced us that it is just that simple.
During fiscal 1999, we established The Pledge To Excellence Program at Coastal
Federal University and began offering the renowned course "The 7 Habits of
Highly Effective People," in conjunction with the Covey Learning Institute.
These two leadership development opportunities are designed to assure that
every Leader in our organization can effectively deliver our most important
message - that exceeding the expectations of our internal and external
Customers is our first consideration in every decision we make.
These curriculum offerings have become the cornerstones of our initiative of
making Coastal Financial Corporation a learning organization. That is, an
organization which views change and constant improvement as essential to the
achievement of its long-term objectives.
[GRAPHIC-PHOTO OF COASTAL FINANCIAL CORPORATION CORPORATE GROUP LEADERS]
<PAGE>
I was extremely pleased when the first Pledge To Excellence class convened in
late 1998, and began teaching our Leaders the skills they need to successfully
respond to the challenges they face. In that course, we teach them the history
of our Company and the values on which it is built. They learn to commit
themselves to their team members and share with their team our vision for the
future and the goals we have established. We show them how to effectively lead
8
<PAGE>
their teams toward the successful execution of their parts of our business,
and, very importantly, how each piece is an essential part of the whole. And
we help them understand that their success is highly dependent upon the
success of their teams and that it is incumbent upon them, as leaders, to make
others successful so that we might, in the future, pass along a very
successful and continuously improving Company to the next generation of
leaders.
I believe that Coastal Federal University, and the curriculum which is
constantly being developed and updated, are among the most important
investments Coastal Financial will ever make. And because these initiatives
will enable each of our Leaders and Associates to reach their full potential,
it is my firm belief that Coastal Federal University and our commitment to
becoming a learning organization will produce the greatest returns of any
investment we have ever made.
Those returns will be achieved by teaching our leaders principles which can
shift their paradigms and leverage their potential, such as . . . our
philosophy that the single most important thing they must do is to attract,
develop and retain the very best people. This principle is fundamental to
attracting, developing and retaining profitable Customer relationships. The
list of principles could go on and on, but the point is that every offering in
our curriculum is designed to equip our team members to serve our Customers
better . . . to BUILD LASTING RELATIONSHIPS.
Over four years have passed since I challenged this exceptional team to
explore our options and, during that time, many good things have happened in
preparing our Company for the future.
In continuing to better position our organization for the challenges that lie
ahead, we undertook many significant endeavors during 1999. Some of the
initiatives and accomplishments aimed at increasing the long-term value of the
Company by maximizing our ability to capitalize on opportunities in the years
ahead were:
o The development and adoption of our Vision 2005 strategic plan. This document
provides us with a broad and in-depth strategic framework, delineating both the
transformational and linear aspects of our development designs, from which to
develop annual tactical plans in support of the attainment of those long-term
objectives.
o The further expansion of Coastal Federal University to assure that we remain
focused on becoming a learning organization. The Mission of Coastal Federal
University is to foster a learning environment, centered around Coastal
Financial Corporation's QUEST FOR EXCELLENCE Operating Philosophy. The success
of this endeavor to-date has significantly increased our individual and
organizational production capability and created an empowered culture with a
true competitive distinction.
o Our recent partnership with the Waccamaw Community Foundation in sponsoring a
Flood Relief Fund for flood victims. This effort, together with the
approximately 300 other charitable causes which we support annually with our
time, talent and resources, reflects our strong belief that community members
have a basic responsibility to take care of their communities and each other.
<PAGE>
o The continued expansion of our financial services franchise. Our newest Sales
Center in Little River, South Carolina, the commencement of construction on our
Carolina Forest Sales Center, the acquisition of a Sales Center site in North
Conway with plans to begin construction in fiscal 2000, and the acquisition of a
location for a lending office in Wilmington, North Carolina, are activities
consistent with our efforts to expand our presence and market awareness along
the South Carolina coast and build a significant presence in coastal North
Carolina.
9
<PAGE>
Our commitment to our customers combines the efficiencies of new technologies
with the highest level of personal service.
o Insuring that we are ready for the Year 2000. Our Coastal Year 2000 Team has
spent more than three years, with the outside assistance of one of the top
accounting/information systems consulting firms in the nation, assuring that we
are totally prepared for Year 2000. Our Team has identified equipment, products,
services and programs that depend on date-related data to function, both within
the Coastal Financial family of companies, as well as verifying the same for
outside vendors and subcontractors. Those efforts have included personal
computers, copiers, printers, vaults, elevators, heating and cooling systems,
facsimile machines and much, much more. We have tested, confirmed, validated,
retested, reconfirmed and revalidated. We are ready.
o The repositioning of Coastal Investor Services to create more connectivity
with Bank Associates and Customers resulted in Coastal Investor Services ranking
#21 out of over 600 brokerage affiliates in the Raymond James Financial Services
system. The ability of Coastal Financial to offer our Customers a comprehensive
financial planning service together with a full array of financial services . .
. from checking and savings accounts, to annuities, trust services, mortgage
lending, securities brokerage, commercial lending, asset management accounts and
insurance products, through conveniently located financial Sales Centers,
drive-up ATMs, telephones or internet access is critical to BUILDING LASTING
RELATIONSHIPS . . . because it allows our Customers to conduct their business
when they wish, how they wish and where they wish.
o Our organization was fundamentally realigned in 1999 to better enable our
concept of operating as a series of community banks. Jerry Rexroad now directs
the Company's Operations and Finance Groups, and Phil Stalvey, Doug Shaffer and
Scott Lander lead the sales efforts in the three market areas which were created
during fiscal 1999. We believe this realignment provides new clarity, focus and
direction for the entire Company and will provide even more support for our
commitment to local decision-making and more responsive, reliable and empathetic
Customer service. These individuals are a part of the most experienced, most
effective team of senior leaders our Company has ever had.
These initiatives well reflect our culture of viewing change and constant
improvement as essential to the achievement of our long-term objectives.
Directors
Our extraordinary success over the years is the result of many things, not the
least of which is an excellent Board of Directors. Let me say just a few words
about two wonderful directors who retire this year and a new outside director
who joins us:
o Wilson Springs, Vice Chairman, is retiring after thirty-two years on our
Board. Next to our founders, Wilson probably had the most to do with making
Coastal Financial Corporation the Company it is today. He has been a source of
great vision, excellent judgment and wonderful good cheer.
o Harold Clardy is retiring from our Board after having provided twenty-four
years of exemplary leadership. Harold has been a reliable source of historical
perspective, sound wisdom and good advice.
We will greatly miss the service of these fine gentlemen who symbolized those
ideals and values which we strive daily to live up to. We thank each of them
for all they have done, and continue to do on our behalf, and know that they
will always be among our best ambassadors.
10
<PAGE>
Looking ahead
o Frank Thompson, President of Peoples Underwriters, joins us as a new director
in 2000. Frank is an outstanding executive who brings unique experience and a
special viewpoint to our Board and we are extremely pleased to welcome him to
what I consider the best Board of Directors in America.
On a sad note, just prior to the publication of this report, Samuel A. Smart,
a member of our Board of Directors for the past sixteen years, passed away.
Sam made many significant contributions and provided sound guidance and
responsible oversight to our efforts. He was an extraordinary gentleman and a
great friend.
Looking Ahead
The future looks good. Consider these two critical elements: We are located in
one of the best markets in America, with Horry County being the second fastest
growing real estate market in the nation and New Hanover County being ranked
fourth in that measure. And we have the best team imaginable. Our 1999 results
speak volumes about their commitment to Our Basic Corporate Objective Of
Maximizing The Value Of Our Shareholders' Investment and Our Long-Term Goal Of
Being The Best Financial Services Company In Our Marketplace.
Both sales and earnings reached record levels in 1999 and 1998. In fact, in
these two years alone, our net income has surged 33%.
And we still have tremendous potential for further growth. In the last four
years, our net income has more than doubled. Since becoming a publicly owned
Company in 1990, we have roughly doubled our earnings every 4 years.
Everyone in the Coastal Financial family relishes these achievements and looks
forward to even greater accomplishments in the years ahead. And while we
certainly have no crystal ball, we do have dedicated Associates, great
markets, excellent products, tremendous momentum and unshakable confidence in
our ability, as a team, to BUILD LASTING RELATIONSHIPS with our Customers and
Communities and achieve even higher returns for our Shareholders in the
future.
All of us at Coastal Financial Corporation appreciate your continued
encouragement, loyalty and support, and look to the future with great
enthusiasm and excitement.
/s/Michael C. Gerald
--------------------
Michael C. Gerald
President and Chief Executive Officer
11
<PAGE>
<TABLE>
<CAPTION>
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Financial Condition
September 30, 1998 and 1999
1998 1999
--------- ----------
(Dollars in thousands)
ASSETS
<S> <C> <C>
Cash and amounts due from banks $ 11,978 21,988
Short-term interest-bearing deposits 3,688 2,245
Investment securities available for sale 9,841 6,063
Mortgage-backed securities available for sale 170,181 182,115
Loans receivable (net of allowance for loan losses of $5,668
at September 30, 1998 and $6,430 at September 30, 1999) 414,264 455,351
Loans receivable held for sale 10,486 16,636
Real estate acquired through foreclosure, net 35 96
Office property and equipment, net 9,001 11,236
Federal Home Loan Bank (FHLB) stock, at cost 7,266 8,201
Accrued interest receivable on loans 2,546 2,861
Accrued interest receivable on securities 1,324 1,333
Other assets 2,950 4,888
--------- ----------
$ 643,560 $ 713,013
========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits 386,321 399,673
Securities sold under agreements to repurchase 59,214 96,948
Advances from FHLB 144,909 164,024
Other borrowings 6,437 1,569
Drafts outstanding 1,615 1,383
Advances by borrowers for property taxes and insurance 1,329 1,346
Accrued interest payable 1,352 1,156
Other liabilities 4,532 5,677
--------- ----------
Total liabilities 605,709 671,776
--------- ----------
Stockholders' equity:
Serial preferred stock, 1,000,000 shares authorized and unissued -- --
Common stock $.01 par value, 15,000,000 shares authorized;
6,576,966 shares at September 30, 1998 and 6,751,389
shares at September 30, 1999 issued and outstanding 66 67
Additional paid-in capital 8,980 9,320
Retained earnings, restricted 28,369 34,288
Treasury stock, at cost (23,100 shares) -- (356)
Accumulated other comprehensive income (loss), net of tax 436 (2,082)
--------- ----------
Total stockholders' equity 37,851 41,237
--------- ----------
$ 643,560 $ 713,013
========= ==========
</TABLE>
See accompanying notes to consolidated financial statements.
12
<PAGE>
<TABLE>
<CAPTION>
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended September 30, 1997, 1998 and 1999
1997 1998 1999
------------ --------- ---------
(In thousands, except share data)
<S> <C> <C> <C>
Interest income:
Loans receivable $ 33,769 36,314 38,541
Investment securities 1,574 1,309 1,476
Mortgage-backed securities 2,446 5,972 9,205
Other 276 299 337
------------ --------- ---------
Total interest income 38,065 43,894 49,559
------------ --------- ---------
Interest expense:
Deposits 13,650 14,559 14,627
Securities sold under agreements to repurchase 1,130 3,404 3,869
Advances from FHLB 5,366 6,488 8,495
------------ --------- ---------
Total interest expense 20,146 24,451 26,991
------------ --------- ---------
Net interest income 17,919 19,443 22,568
Provision for loan losses 760 865 750
------------ --------- ---------
Net interest income after provision for loan losses 17,159 18,578 21,818
------------ --------- ---------
Other income:
Fees and service charges on loans and deposit accounts 1,593 1,639 2,025
Gain on sales of loans held for sale 931 1,579 979
Gain on sales of investment securities, net 7 96 73
Gain on sales of mortgage-backed securities, net 235 521 191
Loss from real estate acquired through foreclosure (137) (72) (29)
Income from real estate partnerships 278 221 --
Income from sale of non-depository products 797 535 745
Federal Home Loan Bank stock dividends 342 454 616
Other income 653 906 973
------------ --------- ---------
Total other income 4,699 5,879 5,573
------------ --------- ---------
General and administrative expenses:
Salaries and employee benefits 6,841 7,355 8,604
Net occupancy, furniture and fixtures and data processing expense 2,891 3,260 3,563
FDIC insurance premium 283 213 220
Other expense 2,701 2,790 2,899
------------ --------- ---------
Total general and administrative expense 12,716 13,618 15,286
------------ --------- ---------
Income before income taxes 9,142 10,839 12,105
Income taxes 3,351 3,987 4,390
------------ --------- ---------
Net income $ 5,791 6,852 7,715
============ ========= =========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Earnings per common share
Basic $ 0.89 1.04 1.15
============ ========= =========
Diluted $ 0.85 0.99 1.12
============ ========= =========
Average common shares outstanding
Basic 6,538,000 6,600,000 6,700,000
============ ========= =========
Diluted 6,828,000 6,914,000 6,895,000
============ ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
13
<PAGE>
<TABLE>
<CAPTION>
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
and Comprehensive Income
Years ended September 30, 1997, 1998 and 1999
Accumulated
Other
Additional Comprehensive Total
Common Paid-in Retained Treasury Income Stockholders'
Stock Capital Earnings Stock (Loss) Equity
----- ------- -------- ----- ------ ------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1996 $65 $8,679 $20,015 $(1,185) 107 $27,681
Exercise of stock options -- -- (786) 1,003 -- 217
Cash paid for fractional shares -- -- (18) -- -- (18)
Cash dividends -- -- (1,600) -- -- (1,600)
Net income -- -- 5,791 -- -- 5,791
Other comprehensive income, net of tax:
Unrealized gains arising during period, net of
taxes of $186 -- -- -- -- 465 --
Less: reclassification adjustment for gains
included in net income, net of taxes of $97 -- -- -- -- (145) --
--- ------ ------- ----- ------- -------
Other comprehensive income -- -- -- -- 320 320
--- ------ ------- ----- ------- -------
Comprehensive income -- -- -- -- -- 6,111
--- ------ ------- ----- ------- -------
Balance at September 30, 1997 65 8,679 23,402 (182) 427 32,391
Exercise of stock options 1 301 (161) 182 -- 323
Cash paid for fractional shares -- -- (9) -- -- (9)
Cash dividends -- -- (1,715) -- -- (1,715)
Net income -- -- 6,852 -- -- 6,852
Other comprehensive income, net of tax:
Unrealized gains arising during period,
net of taxes of $152 -- -- -- -- 379 --
Less: reclassification adjustment for gains
included in net income, net of taxes of $247 -- -- -- -- (370) --
--- ------ ------- ----- ------- -------
Other comprehensive income -- -- -- -- 9 9
--- ------ ------- ----- ------- -------
Comprehensive income -- -- -- -- -- 6,861
--- ------ ------- ----- ------- -------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1998 66 8,980 28,369 -- 436 37,851
Exercise of stock options 1 340 -- -- -- 341
Cash dividends -- -- (1,796) -- -- (1,796)
Net income -- -- 7,715 -- -- 7,715
Other comprehensive income, net of tax:
Unrealized losses arising during period,
net of taxes of $1,499 -- -- -- -- (2,354) --
Less: reclassification adjustment for gains
included in net income, net of taxes of $100 -- -- -- -- (164) --
--- ------ ------- ----- ------- -------
Other comprehensive loss -- -- -- -- (2,518) (2,518)
--- ------ ------- ----- ------- -------
Comprehensive income -- -- -- -- -- 5,197
--- ------ ------- ----- ------- -------
Treasury stock repurchases -- -- -- (356) -- (356)
--- ------ ------- ----- ------- -------
Balance at September 30, 1999 $67 $9,320 $34,288 $(356) $(2,082) $41,237
=== ====== ======= ===== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
14
<PAGE>
<TABLE>
<CAPTION>
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended September 30, 1997, 1998 and 1999
1997 1998 1999
--------- -------- --------
(In thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ................................................................... $ 5,791 6,852 7,715
Adjustments to reconcile net income to net cash provided
by operating activities:
Income from real estate partnerships ....................................... (278) (221) --
Depreciation ............................................................... 865 1,030 1,206
Provision for loan losses .................................................. 760 865 750
Origination of loans receivable held for sale .............................. (45,717) (69,546) (66,930)
Proceeds from sales of loans receivable held for sale ...................... 44,160 71,674 60,781
(Increase) decrease in:
Other assets ............................................................. 149 (176) (1,938)
Accrued interest receivable .............................................. (296) (604) (324)
Increase (decrease) in:
Accrued interest payable ................................................. 154 400 (196)
Other liabilities ........................................................ 220 (248) 2,744
--------- -------- --------
Net cash provided by operating activities .............................. 5,808 10,026 3,808
Cash flows from investing activities:
Proceeds from sale of investment securities available for sale ............... 5,693 4,500 9,735
Proceeds from maturities of investment securities available for sale ......... 17,839 25,596 5,165
Purchases of investment securities available for sale ........................ (32,022) (13,798) (11,360)
Purchases of loans receivable ................................................ (9,948) (10,442) (9,078)
Proceeds from sale of mortgage-backed securities available for sale .......... 25,678 86,547 95,173
Purchases of mortgage-backed securities available for sale ................... (26,636) (279,141) (183,590)
Principal collected on mortgage-backed securities available for sale ......... 4,850 45,505 72,177
Origination of loans receivable, net ......................................... (132,786) (135,706) (189,427)
Principal collected on loans receivable ...................................... 109,946 130,286 156,518
Proceeds from sales of real estate acquired through foreclosure .............. 456 263 88
Purchases of office properties and equipment ................................. (2,690) (2,470) (3,441)
Purchases of FHLB stock ...................................................... (390) (1,648) (935)
Other investing activities, net .............................................. 914 193 427
--------- -------- --------
Net cash used by investing activities .................................. (39,096) (150,315) (58,848)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Cash flows from financing activities:
Increase in deposits ......................................................... 33,686 39,205 13,352
Increase (decrease) in securities sold under agreements to repurchase ........ (2,666) 56,548 37,734
Proceeds from FHLB advances .................................................. 198,170 242,625 353,900
Repayment of FHLB advances ................................................... (201,245) (199,194) (334,785)
Proceeds (repayments) from other borrowings, net ............................. 224 4,244 (4,868)
Increase (decrease) in advance payments by borrowers for property
taxes and insurance ........................................................ (26) (80) 17
Increase (decrease) in drafts outstanding, net ............................... (904) 597 (232)
Repurchase of treasury stock, at cost ........................................ -- -- (356)
Cash dividends to stockholders and cash for fractional shares ................ (1,618) (1,724) (1,796)
Exercise of stock options .................................................... 217 323 341
--------- -------- --------
Net cash provided by financing activities .............................. 25,838 142,544 63,307
--------- -------- --------
Net increase (decrease) in cash and cash equivalents ............................ (7,450) 2,255 8,567
--------- -------- --------
Cash and cash equivalents at beginning of year .................................. 20,861 13,411 15,666
--------- -------- --------
Cash and cash equivalents at end of year ........................................ $ 13,411 15,666 24,233
========= ======== ========
Supplemental information:
Interest paid ................................................................ $ 19,992 24,051 27,187
========= ======== ========
Income taxes paid ............................................................ $ 2,687 4,112 2,085
========= ======== ========
Supplemental schedule of non-cash investing and financing transactions:
Securitization of mortgage loans held for sale into mortgage-backed securities $ -- 4,997 27,713
========= ======== ========
Transfer of mortgage loans to real estate acquired through foreclosure ....... $ 383 48 149
========= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
15
<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 Investor Services, Inc.
and Coastal Federal Savings Bank (the "Bank"), and the Bank's wholly-owned
subsidiaries, Coastal Federal Holding Company (and Coastal Real Estate
Investment Corporation) and Coastal Mortgage Bankers and Realty Co., Inc. (and
Coastal Mortgage Bankers and Realty Co. Inc.'s wholly-owned subsidiaries, Shady
Forest Development Corporation, Sherwood Development Corporation, Ridge
Development Corporation, 501 Development Corporation, North Beach Investments,
Inc. and North Strand Property Management, Inc.). In consolidation, all
significant intercompany balances and transactions have been eliminated. Coastal
Financial Corporation is a unitary thrift holding company organized under the
laws of the state of Delaware.
(b) Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include
cash and amounts due from banks, short-term interest-bearing deposits and
federal funds sold. Cash and cash equivalents have maturities of three months or
less. Accordingly, the carrying amount of such instruments is considered to be a
reasonable estimate of fair value.
(c) Investment and Mortgage-Backed Securities
Investment and mortgage-backed securities are accounted for in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting
for Certain Investments in Debt and Equity Securities". Investments are
classified into three categories as follows: (1) Held to Maturity - debt
securities that the Company has the positive intent and ability to hold to
maturity, which are reported at amortized cost; (2) Trading - debt and equity
securities that are bought and held principally for the purpose of selling them
in the near term, which are reported at fair value, with unrealized gains and
losses included in earnings and (3) Available for Sale - debt and equity
securities that may be sold under certain conditions, which are reported at fair
value, with unrealized gains and losses excluded from earnings and reported as a
separate component of stockholders' equity, net of income taxes.
<PAGE>
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.
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.
(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 portfolio, the relationship of the allowance for loan
losses to outstanding loans, loss experience, delinquency trends, and local and
regional economic conditions. Management evaluates the carrying value of loans
periodically and the allowance is adjusted accordingly. While management uses
the best information available to make evaluations, future adjustments to the
allowance may be necessary if economic conditions differ substantially from the
assumptions used in making the evaluation. The allowance for loan losses is
subject to periodic evaluation by various regulatory authorities and may be
subject to adjustment upon their examination.
16
<PAGE>
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
(d) Allowance for Loan Losses - Continued
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. Accrual of interest income on loans (including impaired
loans) is suspended when, in management's judgment, doubt exists as to the
collectibility of principal and interest. If amounts are received on loans for
which the accrual of interest has been discontinued, a determination is made as
to whether payments received should be recorded as a reduction of the principal
balance or as interest income depending on management's judgment as to the
collectibility of principal. The loan is returned to accrual status when, in
management's judgment, the borrower has demonstrated the ability to make
periodic interest and principal payments on a timely basis.
(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, 1998 and 1999, the Company had approximately $10.5
million and $16.6 million in mortgage loans held for sale, respectively.
(f) Real Estate Owned
Real estate acquired in settlement of loans is initially recorded at the
lower of cost or net fair value (less estimated costs to sell). If cost exceeds
net fair value, the asset is written down to net fair value with the difference
being charged against the allowance for loan losses. Subsequent to foreclosure,
such assets are carried at the lower of cost or net fair value with any
additional write downs being charged as real estate losses.
(g) Office Properties and Equipment
Office properties and equipment are carried at cost less accumulated
depreciation. Depreciation is computed primarily on the straight-line method
over estimated useful lives. Estimated lives range up to thirty years for
buildings and improvements and up to ten years for furniture, fixtures and
equipment. Maintenance and repairs are charged to expense as incurred.
Improvements which extend the lives of the respective assets are capitalized.
When property or equipment is sold or otherwise disposed of, the cost and
related accumulated depreciation are removed from the respective accounts and
the resulting gain or loss is reflected in income.
(h) Uncollected Interest
The Company maintains an allowance for the loss of uncollected interest
<PAGE>
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.
<PAGE>
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
(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 for certain customers who wish to deposit
amounts greater than $100,000. These agreements function similarly to a
certificate of deposit in that the agreement is for a fixed length of time at a
fixed interest rate. However, these deposits are not insured by the Federal
Deposit Insurance Corporation (the "FDIC"), but are collateralized by an
interest in the pledged securities. The Company has classified these borrowings
separately from deposits.
(n) Reclassifications
Certain amounts in the 1997 and 1998 consolidated financial statements have
been reclassified to conform with the 1999 presentation. Such reclassifications
did not change net income or equity as previously reported.
(o) Stock Based Compensation
In 1996, the Company adopted the disclosure provisions of SFAS No. 123
"Accounting for Stock Based Compensation." The statement permits the Company to
continue accounting for stock based compensation as set forth in APB Opinion No.
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 No. 25 and has provided the required
proforma disclosures.
(p) Comprehensive Income
On October 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income". SFAS No. 130 established standards for reporting and
presentation of comprehensive income and its components in a full set of
financial statements. Comprehensive income consists of net income and net
<PAGE>
unrealized gains (losses) on securities and is presented in the statements of
stockholders' equity and comprehensive income. The Statement requires only
additional disclosures in the consolidated financial statements; it does not
affect the Company's financial position or results of operations. Prior year
financial statements have been reclassified to conform to the requirements of
SFAS No. 130.
The Company's other comprehensive income for the years ended September 30,
1999 and 1998 and accumulated other comprehensive income as of September 30,
1999 and 1998 are comprised solely of unrealized gains and losses on certain
investments in debt and equity securities.
(q) Disclosures Regarding Segments
The Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" in fiscal year 1999. SFAS No. 131
established standards for the way that public businesses report information
about operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports issued to shareholders. It also establishes standards for
related disclosures about products and services, geographic areas, and major
customers. The Company adopted SFAS No. 131 without any impact on their
consolidated financial statements.
18
<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, 1998 is summarized as follows:
<TABLE>
<CAPTION>
1998
----------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
(In thousands)
<S> <C> <C> <C> <C>
U.S. Government and agency obligations:
Due after one but within five years .................... $ 3,053 44 -- 3,097
Due after five years ................................... 6,699 45 -- 6,744
-------- -- --- -----
$ 9,752 89 -- 9,841
======== == === =====
</TABLE>
The amortized cost and market value of investment securities available for
sale at September 30, 1999 is summarized as follows:
<TABLE>
<CAPTION>
1999
----------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
(In thousands)
<S> <C> <C> <C> <C>
U.S. Government and agency obligations:
Due after one but within five years .................... $ 2,770 -- (16) 2,754
Due after five years ................................... 3,445 -- (136) 3,309
-------- -- --- -----
$ 6,215 -- (152) 6,063
======== == === =====
</TABLE>
The Company had gross realized losses of $58,000 and gross realized gains
of $65,000 for the year ended September 30, 1997. For the year ended September
30, 1998, gross realized gains were $96,000 and there were no realized losses.
For the year ended September 30, 1999, gross realized gains were $73,000 and
there were no realized losses.
Certain investment and mortgage-backed securities are pledged to secure
other borrowed money and customer deposits in excess of FDIC insurance coverage.
The carrying value of the securities pledged at September 30, 1999 was $110.4
million with a market value of $109.0 million.
<PAGE>
(3) MORTGAGE-BACKED SECURITIES
Mortgage-backed securities available for sale at September 30, 1998
consisted of the following:
<TABLE>
<CAPTION>
1998
----------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
(In thousands)
<S> <C> <C> <C> <C>
FNMA ..................................................... $ 95,024 413 (156) 95,281
GNMA ..................................................... 49,586 68 (95) 49,559
FHLMC .................................................... 24,901 479 (39) 25,341
--------- --- ---- -------
$ 169,511 960 (290) 170,181
========= === ==== =======
</TABLE>
19
<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, 1999
consisted of the following:
<TABLE>
<CAPTION>
1999
----------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
(In thousands)
<S> <C> <C> <C> <C>
Collateralized Mortgage Obligations ...................... $ 23,680 -- (806) 22,874
FNMA ..................................................... 103,117 282 (1,629) 101,770
GNMA ..................................................... 23,349 31 (588) 22,792
FHLMC .................................................... 35,175 202 (698) 34,679
--------- --- ------ -------
$ 185,321 515 (3,721) 182,115
========= === ====== =======
</TABLE>
For the year ended September 30, 1997, there were gross realized gains of
$258,000 and realized losses of $23,000. The Company had gross realized gains of
$533,000 and realized losses of $12,000 for the year ended September 30, 1998.
For the year ended September 30, 1999, the Company had gross realized gains of
$336,000 and realized losses of $145,000.
(4) LOANS RECEIVABLE, NET
Loans receivable, net at September 30 consisted of the following:
<TABLE>
<CAPTION>
1998 1999
-------- -------
(In thousands)
<S> <C> <C>
First mortgage loans:
Single family to 4 family units ........................................ $248,781 248,433
Other, primarily commercial real estate ................................ 95,420 114,931
Construction loans ..................................................... 31,261 46,766
Consumer and commercial loans:
Installment consumer loans ............................................. 19,489 20,026
Mobile home loans ...................................................... 990 1,166
Savings account loans .................................................. 1,078 1,521
Equity lines of credit ................................................. 18,655 21,081
Commercial and other loans ............................................. 14,848 22,818
-------- -------
430,522 476,742
Less:
Allowance for loan losses .............................................. 5,668 6,430
Deferred loan fees (costs) ............................................. (702) (354)
Undisbursed portion of loans in process ................................ 11,292 15,315
-------- -------
$414,264 455,351
======== =======
</TABLE>
<PAGE>
The changes in the allowance for loan losses for the years ended September
30 consisted of the following:
<TABLE>
<CAPTION>
1997 1998 1999
--------- ----- -----
(In thousands)
<S> <C> <C> <C>
Beginning allowance ........................................... $ 4,172 4,902 5,668
Provision for loan losses ..................................... 760 865 750
Allowance recorded on acquired loans .......................... 110 109 112
Loan recoveries ............................................... 72 64 252
Loan charge-offs .............................................. (212) (272) (352)
--------- ----- -----
$ 4,902 5,668 6,430
========= ===== =====
</TABLE>
Non-accrual loans which were over ninety days delinquent totaled
approximately $2.3 million and $1.4 million at September 30, 1998 and 1999,
respectively. In fiscal years 1997, 1998 and 1999, interest income which would
have been recorded would have been approximately $9,000, $181,000 and $46,000,
respectively, had non-accruing loans been current in accordance with their
original terms. At September 30, 1998 and 1999 and during the years then ended
there are no loans considered to be impaired.
20
<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,
1998 and 1999 are as follows (In thousands):
<TABLE>
<CAPTION>
1998 1999
---------------------- ---------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
--------- ------- ------- -------
<S> <C> <C> <C> <C>
Mortgage loans .................................... $ 382,572 393,667 395,169 398,330
Consumer loans .................................... 10,513 10,587 22,713 23,440
Equity lines of credit ............................ 18,655 18,468 21,081 21,397
Commercial loans .................................. 8,192 8,280 22,818 23,115
Allowance for loan losses ......................... (5,668) (5,668) (6,430) (6,430)
--------- ------- ------- -------
$ 414,264 425,334 455,351 459,852
========= ======= ======= =======
</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, 1998 and 1999. Changes in
market interest and prepayment rates since September 30, 1998 and 1999 could
have a 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 value
was assigned for these interest rate floors.
At September 30, 1998 and 1999, the Company had commitments outstanding to
originate loans totaling approximately $11.5 million and $5.6 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, 1998 and 1999, the Company had undisbursed lines of credit of
approximately $35.1 million and $31.2 million, respectively.
Loans serviced for the benefit of others amounted to approximately $104.5
million, $88.0 million and $99.4 million at September 30, 1997, 1998 and 1999,
respectively. Mortgage servicing rights were not material for any of the periods
presented.
As disclosed in note 8, certain mortgage loans are pledged to secure
advances from the Federal Home Loan Bank ("FHLB") of Atlanta.
<PAGE>
The Bank offers mortgage and consumer loans to its directors, and
Associates for the financing of their personal residences and for other personal
purposes. The Bank also offers commercial loans to companies affiliated with
directors. These loans are made in the ordinary course of business and, in
management's opinion, are made on substantially the same terms, including
interest rates and collateral, prevailing at the time for comparable
transactions with other persons and companies. Management does not believe these
loans involve more than the normal risk of collectibility or present other
unfavorable features. At September 30, 1999, such loans were current with
respect to their payment terms.
The following is a summary of the activity of loans outstanding to certain
executive officers, directors and their affiliates for the year ended September
30, 1999:
<TABLE>
<CAPTION>
<S> <C>
Balance at September 30, 1998 ..................... $ 953
New loans ......................................... 3,000
Repayments ........................................ 155
---------
Balance at September 30, 1999 ..................... $ 3,798
=========
</TABLE>
21
<PAGE>
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
(5) OFFICE PROPERTY AND EQUIPMENT, NET
Office property and equipment, net at September 30 consisted of the
following:
<TABLE>
<CAPTION>
1998 1999
--------- ------
(In thousands)
<S> <C> <C>
Land .......................................................... $ 2,311 2,870
Building and improvements ..................................... 7,395 8,795
Furniture, fixtures and equipment ............................. 7,398 8,811
--------- ------
17,104 20,476
Less accumulated depreciation ................................. 8,103 9,240
--------- ------
$ 9,001 11,236
========= ======
</TABLE>
The Company leases office space and various equipment. Total rental expense
for the years ended September 30, 1997, 1998 and 1999 was approximately
$112,000, $153,000, and $212,000, respectively.
Future minimum rental payments for operating leases having remaining
noncancelable lease terms in excess of one year at September 30, 1999 are as
follows (In thousands):
<TABLE>
<CAPTION>
<S> <C> <C>
2000 .................................. $ 178
2001 .................................. 153
2002 .................................. 128
2003 .................................. 83
2004 .................................. 38
---------
$ 580
=========
</TABLE>
(6) INVESTMENT REQUIRED BY LAW
Investment in stock of the FHLB of Atlanta is required by law of every
Federally-insured savings institution. No ready market exists for this stock and
it has no quoted market value. However, redemption of this stock has
historically 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 $8.2 million at September 30, 1999.
<PAGE>
(7) DEPOSITS
Deposits at September 30 consisted of the following:
<TABLE>
<CAPTION>
1998 1999
------------------- -------------------
Weighted Weighted
Amount Rate Amount Rate
--------- ---- --------- ----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Transaction accounts:
Noninterest bearing .......................... $ 27,285 --% $ 37,256 --%
NOW .......................................... 42,434 1.19 50,774 1.16
Money market checking ........................ 124,207 4.47 138,188 4.25
--------- ---- --------- ----
Total transaction accounts ............... 193,926 3.12 226,218 2.85
--------- ---- --------- ----
Passbook accounts:
Regular passbooks ............................ 34,652 2.53 37,115 2.67
Money market ................................. 2,590 2.35 2,097 2.22
--------- ---- --------- ----
Total passbook accounts .................. 37,242 2.52 39,212 2.65
--------- ---- --------- ----
Certificate accounts:
0.00 - 5.99% ................................ 128,727 133,651
6.00 - 8.00% ................................ 26,017 217
8.00 - 10.00% ................................ 409 375
--------- ---- --------- ----
Total certificate accounts ................ 155,153 5.38 134,243 4.94
--------- ---- --------- ----
$ 386,321 3.96% $ 399,673 3.54%
========= ==== ========= ====
</TABLE>
22
<PAGE>
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
(7) DEPOSITS - Continued
The aggregate amount of deposit accounts with a minimum denomination of
$100,000 or more was $95.5 million and $115.0 million at September 30, 1998 and
1999, respectively. Included in certificate accounts were $5.3 million at
September 30, 1999, originated by brokers for a fee.
The amounts and scheduled maturities of certificate accounts at September
30 are as follows:
<TABLE>
<CAPTION>
1998 1999
--------- -------
(In thousands)
<S> <C> <C>
Within 1 year ......................................... $ 127,206 108,135
After 1 but within 2 years ............................ 20,943 19,785
After 2 but within 3 years ............................ 5,001 5,200
Thereafter ............................................ 2,003 1,123
--------- -------
$ 155,153 134,243
========= =======
</TABLE>
Interest expense on deposits for the years ended September 30 consisted of
the following:
<TABLE>
<CAPTION>
1997 1998 1999
--------- ------ ------
(Dollars in thousands)
<S> <C> <C> <C>
Transaction accounts ...................... $ 4,894 5,756 6,368
Passbook accounts ......................... 1,015 924 962
Certificate accounts ...................... 7,741 7,879 7,297
--------- ------ ------
$ 13,650 14,559 14,627
========= ====== ======
</TABLE>
The fair value of transaction and passbook accounts is $231.2 million and
$265.4 million which was the amount currently payable at September 30, 1998 and
1999, respectively. The fair value of certificate accounts was $156.0 million
and $133.5 million compared to a book value of $155.2 million and $134.2 million
and was estimated by discounting the amounts payable at the certificate rates
currently offered for deposits of similar remaining maturities. The fair value
estimates above did not include the substantial benefit that results from the
low cost funding provided by the deposit liabilities compared to the cost of
borrowing funds in the market.
<PAGE>
(8) ADVANCES FROM FHLB
Advances from the FHLB at September 30 consisted of the following:
<TABLE>
<CAPTION>
1998 1999
-------------------- --------------------
Weighted Weighted
Amount Rate Amount Rate
--------- ---- --------- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Fiscal Year Maturity
1999 ...................................... $ 28,235 5.74% $ -- --%
2000 ...................................... 6,961 6.19 15,461 5.85
2001 ...................................... 32,146 4.83 38,946 5.56
2002 ...................................... 4,261 6.62 4,761 6.82
2003 ...................................... 37,806 5.29 37,357 5.28
2004 or greater ........................... 35,500 5.12 67,499 5.00
--------- ---- --------- ----
$ 144,909 5.32% $ 164,024 5.33%
========= ==== ========= ====
</TABLE>
Stock in the FHLB of Atlanta and specific first mortgage loans of
approximately $231.2 million and $212.1 million at September 30, 1998 and 1999,
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, 1999, the excess first mortgage loan collateral pledged to the
FHLB will support additional borrowings of approximately $7.4 million. At
September 30, 1999, included in the two, four and five years or greater
maturities were $101.5 million subject to call provisions. Call provisions are
more likely to be exercised by the FHLB when rates rise.
The estimated fair value of the FHLB advances at September 30, 1998 and
1999 is $145.3 million and $160.9 million. This estimate is based on discounting
amounts payable at contractual rates using current market rates for advances
with similar maturities.
23
<PAGE>
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
(9) REPURCHASE AGREEMENTS
The following tables set forth certain information regarding repurchase
agreements by the Bank at the end of and during the periods indicated:
<TABLE>
<CAPTION>
At September 30,
-------------------------------
1997 1998 1999
------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C>
Outstanding balance:
Securities sold under agreements to repurchase:
Customer .............................................. $ 2,666 $ 4,214 $ 4,848
Broker ................................................ -- 55,000 92,100
Weighted average rate (at month end) paid on:
Securites sold under agreements to repurchase:
Customer .............................................. 3.16% 3.43% 3.37%
Broker ................................................ -- 5.69 5.53
Maximum amount of borrowings outstanding at any month end:
Securities sold under agreements to repurchase:
Customer .............................................. $ 3,257 $ 4,214 $ 4,848
Broker ................................................ 37,516 86,250 92,100
Approximate average outstanding with respect to:
Securities sold under agreements to repurchase:
Customer .............................................. $ 2,100 $ 2,989 $ 3,199
Broker ................................................ 17,200 56,262 67,100
Weighted average rate (year to date) paid on:
Securities sold under agreements to repurchase:
Customer .............................................. 3.36% 3.61% 3.09%
Broker ................................................ 5.60 5.68 5.30
</TABLE>
<PAGE>
(10) INCOME TAXES
Income tax expense (benefit) for the years ended September 30 consisted of
the following:
<TABLE>
<CAPTION>
Current Deferred Total
------- -------- -----
(In thousands)
<S> <C> <C> <C>
1997:
Federal ................................................ $ 2,646 331 2,977
State .................................................. 311 63 374
-------- --- -----
$ 2,957 394 3,351
======== === =====
1998:
Federal ................................................ $ 3,397 138 3,535
State .................................................. 430 22 452
-------- --- -----
$ 3,827 160 3,987
======== === =====
1999:
Federal ................................................ $ 1,650 2,305 3,955
State .................................................. 486 (51) 435
-------- --- -----
$ 2,136 2,254 4,390
======== === =====
</TABLE>
24
<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 (liability) at September 30, 1998 and 1999
relate to the following:
<TABLE>
<CAPTION>
1998 1999
--------- ------
(In thousands)
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses .............................................. $ 2,140 2,375
Accrued medical reserves ............................................... 121 124
Other real estate reserves and deferred gains on other real estate ..... 87 86
Net operating loss carryforwards ...................................... 135 134
Unrealized loss on securities available for sale ....................... -- 1,307
Other .................................................................. 121 40
--------- ------
Total deferred tax assets ................................................... 2,604 4,066
Less valuation allowance .................................................... (135) (134)
--------- ------
Net deferred tax assets .................................................... 2,469 3,932
--------- ------
Deferred tax liabilities:
Tax bad debt reserve in excess of base year amount .................... 581 484
Property and equipment principally due to differences in depreciation . 237 202
FHLB stock, due to stock dividends not recognized for tax purposes .... 356 356
Unrealized gain on securities available for sale ...................... 292 --
Deferred loan fees .................................................... 335 356
Book over tax basis in investment in unconsolidated subsidiary ........ 309 2,661
Other ................................................................. 260 429
--------- ------
Total deferred tax liabilities ............................................. 2,370 4,488
--------- ------
Net deferred tax asset (liability) ......................................... $ 99 (556)
========= ======
</TABLE>
The net deferred tax liability is included in other liabilities 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 benefit of $1.6 million 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 $2.2 million. 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:
<PAGE>
<TABLE>
<CAPTION>
1997 1998 1999
--------- ----- -----
(In thousands)
<S> <C> <C> <C>
Computed federal income taxes ............... $ 3,108 3,685 4,116
State tax, net of federal benefit ........... 247 298 287
Other, net .................................. (4) 4 (13)
--------- ----- -----
Total income tax expense ..................... $ 3,351 3,987 4,390
========= ===== =====
</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 prior to 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, 1999 includes approximately $5.2 million
representing pre-1988 tax bad debt base year reserve amounts for which no
deferred income tax liability has been provided since these reserves are not
expected to reverse until indefinite future periods and may never reverse.
Circumstances that would require an accrual of a portion or all of this
unrecorded tax liability are a reduction in qualifying loan levels relative to
the end of 1987, failure to meet the tax definition of a savings 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.
25
<PAGE>
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
(11) BENEFIT PLANS
The Company participates in a multiple-employer defined benefit pension
plan covering substantially all Associates. Separate actuarial valuations are
not available for each participating employer, nor are plan assets segregated.
Pension expense for the years ended September 30, 1997, 1998 and 1999 was minor.
Plan assets exceeded the present value of accumulated plan benefits at June 30,
1999, the latest actuarial valuation date.
The Company has a defined contribution plan covering substantially all
Associates. The Company matches Associate contributions based upon the Company
meeting certain return on equity operating results. Matching contributions made
by the Company were approximately $245,000, $221,000 and $251,000 for fiscal
years 1997, 1998 and 1999, respectively.
(12) REGULATORY MATTERS
At September 30, 1999, the Bank's loans-to-one borrower limit was
approximately $7.4 million. The Bank may apply to have this amount increased to
$14.8 million for borrowers who have loans secured by residential collateral. At
September 30, 1999, the Bank had applied for this limit increase for three
borrowers with a maximum aggregate exposure to the three borrowers of $24.6
million. At September 30, 1999, the Bank is in compliance with the core,
tangible and risk-based capital requirements and loans-to-one borrower limits.
To be categorized as "Well Capitalized" under the prompt corrective action
regulations adopted by the Federal Banking Agencies, the Bank must maintain a
total risk-based capital ratio as set forth in the following table and not be
subject to a capital directive order.
<TABLE>
<CAPTION>
Categorized as "Well
Capitalized" Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provision
---------------- ----------------- ----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
As of September 30, 1999:
Total Capital: .................... $49,204 12.64% $31,131 8.00% $38,914 10.00%
(To Risk Weighted Assets)
Tier 1 Capital: ................... $44,930 11.55% N/A N/A $23,348 6.00%
(To Risk Weighted Assets)
Tier 1 Capital: ................... $44,930 6.30% $28,520 4.00% $35,651 5.00%
(To Total Assets)
Tangible Capital: ................. $44,930 6.30% $10,695 1.50% N/A N/A
(To Total Assets)
As of September 30, 1998:
Total Capital: .................... $43,116 12.67% $27,215 8.00% $34,018 10.00%
(To Risk Weighted Assets)
Tier 1 Capital: ................... $38,989 11.46% N/A N/A $20,411 6.00%
(To Risk Weighted Assets)
Tier 1 Capital: ................... $38,989 6.06% $25,742 4.00% $32,178 5.00%
(To Total Assets)
Tangible Capital: ................. $38,989 6.06% $ 9,653 1.50% N/A N/A
(To Total Assets)
</TABLE>
<PAGE>
(13) LIQUIDATION ACCOUNT
In conjunction with the Bank's conversion to stock form on October 6, 1990,
the Bank established, as required by Office of Thrift Supervision (the "OTS")
regulations, a liquidation account and will maintain this account for the
benefit of the remaining eligible account holders as defined under the Bank's
plan of conversion. 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
26
<PAGE>
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
(13) LIQUIDATION ACCOUNT - Continued
the Bank's net worth below either the balance of the liquidation account or the
statutory net worth requirements set by the OTS.
(14) EARNINGS PER SHARE
The Company adopted the provisions of SFAS 128, "Earnings per Share"
("EPS"), in fiscal year 1998. Basic earnings per share are computed by dividing
net income by the weighted-average number of common shares outstanding. Diluted
earnings per share are computed by dividing net income by the weighted average
number of common shares and potential common shares outstanding. Potential
common shares consist of dilutive stock options determined using the treasury
stock method and the average market price of common stock. All share and per
share data have been retroactively restated for all common stock dividends.
The following is a summary of the earnings per share calculation for the
years ended September 30:
<TABLE>
<CAPTION>
(In thousands, except share and per share data) 1997 1998 1999
---------------------------------------------- --------- ---------- ----------
<S> <C> <C> <C>
Basic:
Net income (numerator) ....................................... $ 5,791 6,852 7,715
========= ========== ==========
Average common shares outstanding (denominator) .............. 6,538,000 6,600,000 6,700,000
========= ========== ==========
Per share amount ............................................. $ 0.89 $ 1.04 $ 1.15
========= ========== ==========
Diluted:
Net Income (numerator) ....................................... $ 5,791 6,852 7,715
========= ========== ==========
Average common shares outstanding ............................ 6,538,000 6,600,000 6,700,000
Dilutive common stock options ................................ 290,000 314,000 195,000
--------- ---------- ----------
Average diluted shares outstanding (denominator) ............. 6,828,000 6,914,000 6,895,000
========= ========== ==========
Per share amount ............................................. $ 0.85 $ 0.99 $ 1.12
========= ========== ==========
</TABLE>
(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, 1999 amounted to approximately 83,000 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, 1999, the Company had the following
options outstanding:
<PAGE>
<TABLE>
<CAPTION>
Options
Options Available for Option Expiration
Grant Date (Calendar Year) Granted Exercise Price Date
-------------------------- ------- -------- ----- ----
<S> <C> <C> <C> <C> <C>
1990 ............................. 3,735 100% $ .76 2000
1992 ............................. 1,365 100 2.02 2002
1994 ............................. 8,300 100 6.37 2004
1995 ............................. 147,500 80 6.94 2005
1996 ............................. 60,300 60 10.99 2006
1997 ............................. 172,862 40 15.51 2007
1998 ............................. 180,283 20 16.74 2008
1999 ............................. 32,780 -- 18.23 2009
</TABLE>
During the years ended September 30, 1997, 1998 and 1999, options for 84,663,
65,170, and 203,825 shares, at an average exercise price of $2.58, $4.00, and
$2.10 per share, respectively, were exercised.
27
<PAGE>
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
(15) STOCK OPTION PLAN - Continued
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 SFAS 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 data):
<TABLE>
<CAPTION>
1997 1998 1999
------- ------- --------
<S> <C> <C> <C> <C>
Net income As reported $ 5,791 $ 6,852 $ 7,715
Proforma 5,693 6,516 7,222
Diluted earnings per share As reported $ 0.85 $ 0.99 $ 1.12
Proforma 0.84 0.94 1.05
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1997, 1998 and 1999, respectively: dividend yield
of approximately 1.57%, 1.65% and 2.00%, expected volatility of approximately
35%, 30% and 33%, risk-free interest rate of 6.08%, 4.70% and 5.90%, expected
lives of 10 years and a vesting period of 5 years.
(16) COMMON STOCK DIVIDENDS
On April 30, 1997 and May 6, 1998, the Company declared a four for three
stock split in the form of a 33% stock dividend, aggregating approximately
1,547,000 and 1,562,000 shares respectively. On November 10, 1999, the Company
declared a 5% stock dividend aggregating approximately 321,000 shares. All share
data has been retroactively restated to give effect to the common stock
dividends.
(17) CASH DIVIDENDS
On December 18, 1996, and March 26,1997, the Company declared quarterly
cash dividends per share of $.059, respectively. On June 25, 1997, September 24,
1997, December 16, 1997, and March 25, 1998, the Company declared quarterly cash
dividends of $.064, respectively. On June 24, 1998, September 23, 1998, December
16, 1998, March 24, 1999, June 30, 1999, and September 22, 1999, the Company
declared quarterly cash dividends of $.066, respectively.
(18) LEGAL MATTERS
The Company is not a defendant in any lawsuits. The Bank is a defendant in
one significant lawsuit. The action commenced on December 1, 1997, and the
Plaintiffs are seeking approximately $1.5 million in actual damages as well as
punitive damages. The cause of action is breach of fiduciary duties, negligence,
fraud, civil conspiracy and breach of contract arising out of a lending
relationship. At this date, the Bank does not know if or when the action will go
to trial. The Bank will vigorously defend this suit. Based upon discussions with
its counsel, the Bank does not expect the results of this action to be material
to its financial results.
28
<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>
1998:
Total interest income .......................... $ 10,177 10,773 11,294 11,648
Total interest expense ......................... 5,447 5,955 6,329 6,719
----------- --------- --------- ---------
Net interest income ........................... 4,730 4,818 4,965 4,929
Provision for loan losses ...................... 190 250 240 185
----------- --------- --------- ---------
Net interest income after provision for
loan losses ................................. 4,540 4,568 4,725 4,744
Other income ................................... 1,515 1,576 1,521 1,438
General and administrative expenses ............ 3,478 3,504 3,444 3,361
----------- --------- --------- ---------
Earnings before income taxes ................... 2,577 2,640 2,802 2,821
Income taxes ................................... 950 961 1,040 1,038
----------- --------- --------- ---------
Net income ...................................... $ 1,627 1,679 1,762 1,783
Earnings per common share - diluted ............ $ .24 .24 .25 .26
=========== ========= ========= =========
Weighted average shares outstanding - diluted .. 6,875,000 6,880,000 6,910,000 6,912,000
=========== ========= ========= =========
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
----------- --------- --------- ---------
<S> <C> <C> <C> <C>
1999:
Total interest income .......................... $ 11,931 12,452 12,434 12,741
Total interest expense ......................... 6,828 6,692 6,641 6,829
----------- --------- --------- ---------
Net interest income ............................ 5,103 5,760 5,793 5,912
Provision for loan losses ...................... 185 225 190 150
----------- --------- --------- ---------
Net interest income after provision for
loan losses ................................. 4,918 5,535 5,603 5,762
Other income ................................... 1,482 1,515 1,316 1,260
General and administrative expenses ............ 3,604 3,994 3,775 3,913
----------- --------- --------- ---------
Earnings before income taxes ................... 2,796 3,056 3,144 3,109
Income taxes ................................... 1,006 1,117 1,159 1,107
----------- --------- --------- ---------
Net income ...................................... $ 1,790 1,939 1,985 2,002
=========== ========= ========= =========
Earnings per common share - diluted ............. $ .26 .28 .29 .29
=========== ========= ========= =========
Weighted average shares outstanding - diluted .. 6,932,000 6,870,000 6,906,000 6,873,000
=========== ========= ========= =========
</TABLE>
29
<PAGE>
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
(20) COASTAL FINANCIAL CORPORATION FINANCIAL STATEMENTS (PARENT COMPANY ONLY)
The following is condensed financial information of Coastal Financial
Corporation (parent company only), the primary asset of which is its investment
in its bank subsidiary, for the periods indicated. (In thousands):
<TABLE>
<CAPTION>
Coastal Financial Corporation
Condensed Balance Sheets
September 30, 1998 and 1999
1998 1999
---------- ------
<S> <C> <C>
Assets
Cash ..................................................................... $ 220 98
Investment in subsidiaries ............................................... 40,785 43,203
Deferred tax asset ....................................................... 68 78
Other assets ............................................................. 86 114
---------- ------
Total assets .................................................... $ 41,159 43,493
========== ======
Liabilities and Stockholders' Equity
Accounts payable (principally dividends) ................................. 739 687
Note payable ............................................................. 2,569 1,569
Total stockholders' equity ............................................... 37,851 41,237
---------- ------
Total liabilities and stockholders' equity ...................... $ 41,159 43,493
========== ======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Coastal Financial Corporation
Condensed Statements of Operations
Years ended September 30, 1997, 1998 and 1999
1997 1998 1999
---------- ------- ------
<S> <C> <C> <C>
Income:
Interest income ............................................ $ 1 -- 6
Management fees ............................................ 108 244 331
Dividends from subsidiary .................................. 1,850 850 2,793
Equity in undistributed earnings of subsidiaries ........... 3,969 6,033 4,934
---------- ------- ------
Total income ........................................ 5,928 7,127 8,064
---------- ------- ------
Expenses:
Amortization of organization cost .......................... 16 16 --
Professional fees .......................................... 40 75 64
Supplies and printing ...................................... 29 11 56
Other expenses ............................................. 66 191 239
Income tax benefit ......................................... (14) (18) (10)
---------- ------- ------
Total expenses ...................................... 137 275 349
---------- ------- ------
Net income ................................................... $ 5,791 6,852 7,715
========== ===== =====
</TABLE>
30
<PAGE>
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
(20) COASTAL FINANCIAL CORPORATION FINANCIAL STATEMENTS (PARENT COMPANY ONLY),
CONTINUED
<TABLE>
<CAPTION>
Coastal Financial Corporation
Condensed Statement of Cash Flows
Years ended September 30, 1997, 1998 and 1999
1997 1998 1999
--------- ------ ------
<S> <C> <C> <C>
Operating activities:
Net income ................................................... $ 5,791 6,852 7,715
Adjustments to reconcile net income to net cash provided by:
Equity in undistributed net income of subsidiary .......... (3,969) (6,033) (4,934)
(Increase) decrease in other assets ....................... 3 (87) (38)
Increase (decrease) in other liabilities .................. 639 (289) (52)
--------- ------ ------
Total cash provided by operating activities .......... 2,464 443 2,691
--------- ------ ------
Financing activities:
Capital contributions to subsidiary .......................... (500) (2,000) --
Cash dividend to shareholders ................................ (1,600) (1,715) (1,796)
Proceeds from stock options .................................. 217 323 341
Proceeds (repayments) from line of credit .................... 500 2,069 (1,000)
Other financing activities, net .............................. (18) (108) (358)
--------- ------ ------
Total cash used by financing activities .............. (1,401) (1,431) (2,813)
--------- ------ ------
Net increase (decrease) in cash and cash equivalents ........... 1,063 (988) (122)
Cash and cash equivalents at beginning of the year ............. 145 1,208 220
--------- ------ ------
Cash and cash equivalents at end of the year ................... $ 1,208 220 98
========= ====== ======
</TABLE>
<PAGE>
(21) CARRYING AMOUNTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts and fair value of financial instruments as of
September 30, 1998 and 1999 are summarized below:
<TABLE>
<CAPTION>
1998 1999
---------------------- ----------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------ ---------- ------ ----------
(In thousands) (In thousands)
<S> <C> <C> <C> <C>
Financial Assets
Cash and cash equivalents .................... $ 15,666 15,666 24,233 24,233
Investment securities ........................ 9,841 9,841 6,063 6,063
Mortgage-backed securities ................... 170,181 170,181 182,115 182,115
Loans receivable held for sale ............... 10,486 10,486 16,636 16,636
Loans receivable, net ........................ 414,264 425,334 455,351 459,852
FHLB stock ................................... 7,266 7,266 8,201 8,201
--------- ------- ------- -------
$ 627,704 638,774 692,599 697,100
========= ======= ======= =======
Financial Liabilities
Deposits:
Demand accounts ........................... 231,168 231,168 265,430 265,430
Certificate accounts ...................... 155,153 156,037 134,243 133,438
Advances from Federal Home Loan Bank ......... 144,909 145,298 164,024 160,855
Securities sold under agreements to repurchase 59,214 59,214 96,948 96,948
Other borrowings ............................. 6,437 6,437 1,569 1,569
--------- ------- ------- -------
$ 596,881 598,154 662,214 658,240
========= ======= ======= =======
</TABLE>
31
<PAGE>
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
(21) CARRYING AMOUNTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS - Continued
The Company had $52.1 million of off-balance sheet financial commitments as
of September 30, 1999, 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.
The Bank has entered into two interest rate cap agreements aggregating $12
million notional amount with an interest rate cap on the 10 year treasury of
6.40% expiring in February 2001 to protect the value of certain mortgage-backed
securities. In addition, the Bank has entered into interest rate floor
agreements with correspondent banks to protect certain callable liabilities
negative effects in the event of a decreasing rate environment. The total
notional amount of all interest rate floor agreements is $75 million. The
agreements require the correspondent banks to pay to the Bank the difference
between the floor rate of interest and the market rate of interest at each
calendar year end. The agreements are summarized as follows:
Expiration Date Notional Amount Floor Rate Index
--------------- --------------- ---------- -----
February 24, 2000 $20 million 5.00% 3 month LIBOR
July 31, 2000 $10 million 5.00% 3 month LIBOR
February 26, 2001 $20 million 4.50% 3 month LIBOR
February 25, 2001 $15 million 4.75% 5 year treasury
April 16, 2001 $10 million 4.50% 3 month LIBOR
Any payments received under the agreements, net of premium amortization
will be treated as an adjustment of interest expense on borrowings. The Bank's
exposure to credit risk is limited to the ability of the counterparty to make
potential future payments to the Bank that are required pursuant to the
agreements. The Bank's exposure to market risk of loss is limited to the amount
of the unamortized premium. At September 30, 1999, the unamortized premium
related to the interest rate agreements amounted to approximately $35,000 which
approximated the fair value.
Fair value estimates are made based on relevant market information and
information about the financial instrument. These estimates do not reflect any
premium or discount that could result from offering for sale the Company's
entire holdings of a particular financial instrument. Because no active market
exists for a significant portion of the Company's financial instruments, fair
value estimates are based on judgments regarding future expected loss
experience, current economic conditions, current interest rates and prepayment
trends, risk characteristics of various financial instruments, and other
factors. These estimates are subjective in nature and involve uncertainties and
matters of significant judgment and therefore cannot be determined with
precision. Changes in any of these assumptions used in calculating fair value
would also significantly affect the estimates. Changes in market interest rates
and prepayment assumptions could significantly change the fair value.
Fair value estimates are based on existing on and off-balance sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and liabilities that are not considered
financial instruments. For example, the Company has significant assets and
<PAGE>
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 $16.0 million outstanding line of credit with a
commercial bank. The line of credit is secured by 100% of the stock of the Bank.
At September 30, 1999, the outstanding balance was approximately $1.6 million.
(23) SUBSEQUENT EVENTS
On November 4, 1999, the Bank entered into a definitive agreement to sell
its Florence, South Carolina branch office to another financial institution. The
Florence branch office has total deposits of approximately $23 million. The
transaction is expected to be completed during the first calendar quarter of
2000, pending regulatory approvals and certain other conditions of closing. On
November 10, 1999, the Company declared a 5% stock dividend aggregating
approximately 321,000 shares. All share data has been retroactively restated to
give effect to the common stock dividends.
32
<PAGE>
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis
Forward Looking Statements
This report may contain certain "forward-looking statements" within the
meaning of Section 27A of the Securities Exchange Act of 1934, as amended, that
represent the Company's expectations or beliefs concerning future events. Such
forward-looking statements are about matters that are inherently subject to
risks and uncertainties. Factors that could influence the matters discussed in
certain forward-looking statements include the timing and amount of revenues
that may be recognized by the Company, continuation of current revenue and
expense trends (including trends affecting charge-offs), absence of unforeseen
changes in the Company's markets, legal and regulatory changes, and general
changes in economy (particularly in the markets served by the Company). Because
of the risks and uncertainties inherent in forward looking statements, readers
are cautioned not to place undue reliance on them, whether included in this
report or made elsewhere from time to time by the Company or on its behalf. The
Company assumes no obligation to update any forward looking statements.
General
Coastal Financial Corporation (the "Company") reported $7.7 million in net
income for the year ended September 30, 1999, compared to $6.9 million for the
year ended September 30, 1998. Net interest income increased $3.1 million as a
result of increased interest income of $5.7 million offset by an increase of
$2.5 million in interest expense. Provision for loan losses decreased from
$865,000 for the year ended September 30, 1998, to $750,000 for the year ended
September 30, 1999. Other income decreased slightly from $5.9 million in fiscal
1998, to $5.6 million in 1999. General and administrative expenses increased
$1.7 million, or 12.2%, for fiscal 1999, as compared to fiscal 1998.
Total assets increased from $643.6 million at September 30, 1998 to $713.0
million at September 30, 1999, or 10.8%. Liquid assets, consisting of cash,
interest-bearing deposits, and securities, increased from $195.7 million at
September 30, 1998 to $212.4 million at September 30, 1999. Loans receivable
increased 9.9% from $414.3 million at September 30, 1998, to $455.4 million at
September 30, 1999. Total loan originations for fiscal 1999 were $256.4 million
as compared to $205.3 million for fiscal 1998.
The growth in loans receivable and liquid assets was funded by increased
deposits of $13.4 million, increased advances from the Federal Home Loan Bank
("FHLB") of Atlanta of $19.1 million and increased repurchase agreements of
$37.7 million. During fiscal 1999, deposits increased from $386.3 million at
September 30, 1998, to $399.7 million at September 30, 1999. During this same
period, transaction deposits (defined as noninterest bearing checking accounts,
NOW accounts and money market checking accounts) increased $32.3 million and
certificate accounts decreased $20.9 million. The Company's continuing strategy
is to increase its reliance on core transaction deposits as opposed to
certificates of deposits.
As a result of $7.7 million in net earnings, less the cash dividends paid
to stockholders of approximately $1.8 million, and the net change in unrealized
gain (loss) on securities available for sale, net of income tax of $2.5 million,
stockholders' equity increased from $37.9 million at September 30, 1998 to $41.2
million at September 30, 1999.
<PAGE>
Liquidity and Capital Resources
Historically, the Company has maintained its liquidity at levels believed
by management to be adequate to meet requirements of normal operations,
potential deposit outflows and strong loan demand and still allow for optimal
investment of funds and return on assets.
The principal sources of funds for the Company are cash flows from
operations, consisting mainly of mortgage, consumer and commercial loan
payments, retail customer deposits, repurchase agreements securitized by
mortgage-backed securities and advances from the FHLB of Atlanta.
The principal use of cash flows is the origination of loans receivable. The
Company originated loans receivable of $178.5 million, $205.3 million and $256.4
million for the years ended September 30, 1997, 1998 and 1999, respectively. A
large portion of these loan originations were financed through loan principal
repayments which amounted to $109.9 million, $130.3 million and $156.5 million
for the years ended September 30, 1997, 1998 and 1999, respectively. In
addition, the Company has generally sold conforming fixed rate mortgage loans to
correspondent financial institutions in the secondary market to finance future
loan originations. For the years ended September 30, 1997, 1998 and 1999, the
Company sold loans amounting to $44.2 million, $71.7 million and $60.8 million,
respectively.
34
<PAGE>
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis - Continued
During 1999, the Company used deposit growth to fund its loan growth. In
fiscal 1999, deposits increased from $386.3 million at September 30, 1998, to
$399.7 million at September 30, 1999. The increase was attributed to transaction
accounts which increased approximately $32.3 million, and passbook accounts
which increased $2.0 million. This was offset by a decrease in certificate
accounts of $20.9 million.
At September 30, 1999, the Company had commitments to originate $5.6
million in loans and $31.2 million in unused lines of credit, which the Company
expects to fund from normal operations. Traditionally, a significant portion of
the unused lines of credit may never be used by the Customer.
At September 30, 1999, the Company had $108.1 million of certificates of
deposit which were due to mature within one year. Based upon previous
experience, the Company believes that a major portion of these certificates will
be redeposited. At September 30, 1999, the Company had excess collateral pledged
to the FHLB which would support additional FHLB advance borrowings of $7.4
million. Additionally, at September 30, 1999, the Company had repurchase
agreement lines of credit and available collateral consisting of investment
securities and mortgage-backed securities of $82.2 million as well as federal
funds lines available of $5.0 million.
As a condition of deposit insurance, current FDIC regulations require that
Coastal Federal Savings Bank (the "Bank") calculate and maintain a minimum
regulatory capital requirement on a quarterly basis and satisfy such requirement
at the calculation date and throughout the ensuing quarter. The Bank's tangible
and core capital approximated $44.9 million at September 30, 1999, exceeding the
Bank's tangible and core requirements by $34.2 million and $16.3 million,
respectively. At September 30, 1999, the Bank's capital exceeded its current
risk-based minimum capital requirement by $18.1 million. The risk-based capital
requirement may increase in the future. Also see Note 12 of the Notes to
Consolidated Financial Statements.
Results of Operations
Comparison of the Years Ended September 30, 1998 and 1999
General
Net earnings were $7.7 million ($1.12 per diluted share) for the year ended
September 30, 1999, an increase of 12.6% compared to $6.9 million ($0.99 per
diluted share) for the year ended September 30, 1998. Net interest income
increased $3.1 million primarily as a result of an increase in interest income
of $5.7 million which was offset by an increase in interest expense of $2.5
million.
Interest Income
Interest income for the year ended September 30, 1999, increased 12.9% to
$49.6 million as compared to $43.9 million for the year ended September 30, 1998
primarily due to a 16.6% increase in average interest-earning assets. The yield
on interest-earning assets for the year ended September 30, 1998 was 8.11%
compared to 7.88% for the year ended September 30, 1999. The average yield on
loans receivable for fiscal year 1999 was 8.55% compared to 8.75% in 1998.
Yields on loans receivable decreased primarily due to the downward repricing of
adjustable rate mortgages in the first half of fiscal 1999. The constant
<PAGE>
maturity yield of the one-year treasury was 5.26% in fiscal 1998 versus 4.82% in
fiscal 1999. The yield on investments which includes Investments,
Mortgage-Backed Securities, Overnight Funds and Federal Funds, decreased to
6.15% for the fiscal year 1999 from 6.69% for fiscal year 1998. Total
interest-earning assets for fiscal year 1999 averaged $637.0 million compared to
$546.6 million for the year ended September 30, 1998. The increase in average
interest-earning assets is due to an increase in average loans receivable of
approximately $36.0 million and mortgage-backed and investment securities of
approximately $51.5 million.
Interest Expense
Interest expense on interest-bearing liabilities was $27.0 million for the
year ended September 30, 1999, as compared to $24.5 million in fiscal 1998. The
cost of interest-bearing liabilities was 4.32% for the year ended September 30,
1999, compared to 4.60% in fiscal year 1998. The average cost of deposits for
the year ended September 30, 1999, was 3.77% compared to 4.10% for the year
ended September 30, 1998. The average cost of deposits decreased due to healthy
growth in low cost transaction deposits which increased 16.7% and general
declining deposit rates in the first half of fiscal 1999. The cost of FHLB
advances and reverse repurchase agreements for fiscal 1999 was 5.28% and 5.30%,
respectively, compared to 5.62% and 5.68%, respectively, for fiscal 1998. Total
average interest-bearing liabilities increased 16.5% from
34
<PAGE>
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis - Continued
$531.7 million at September 30, 1998, to $619.4 million at September 30, 1999.
The increase in average interest-bearing liabilities is due to an increase in
average deposits of approximately $32.8 million, FHLB advances of $45.6 million
and reverse repurchase agreements of $8.9 million.
Net Interest Income
Net interest income was $22.6 million for the year ended September 30,
1999, an increase of $3.1 million, compared to $19.4 million for the year ended
September 30, 1998. The net interest margin increased slightly to 3.55% for
fiscal 1999 compared to 3.51% for fiscal 1998. Average interest-earning assets
increased $90.5 million while average interest-bearing liabilities increased
$87.7 million.
Provision for Loan Losses
The Company's provision for loan losses decreased from $865,000 for fiscal
1998 to $750,000 for fiscal 1999. The allowance for loan losses as a percentage
of loans was 1.36% at September 30, 1999, compared to 1.33% at September 30,
1998. Loans delinquent 90 days or more were .30% of total loans at September 30,
1999, compared to .54% at September 30, 1998. The allowance for loan losses was
449% of loans delinquent more than 90 days at September 30, 1999, compared to
251% at September 30, 1998. 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 1999, total other income decreased from $5.9 million for the
period ended September 30, 1998, to $5.6 million for the period ended September
30, 1999. Primarily as a result of a 17% increase in transaction accounts, fees
and service charges on loans and deposit accounts was $2.0 million for fiscal
1999, compared to $1.6 million for fiscal 1998. Due to an increasing long-term
interest rate environment which has resulted in decreased mortgage originations,
gain on sale of loans was $979,000 for the year ended September 30, 1999,
compared to $1.6 million for the year ended September 30, 1998. Gain on sale of
securities was $264,000 for fiscal 1999, compared to $617,000 for fiscal 1998.
Other income increased from $906,000 for the year ended September 30, 1998, to
$973,000 for the year ended September 30, 1999. This was offset by decreased
income from real estate held for investment which was $221,000 for the year
ended September 30, 1998. This was due to a land sale by one of the Bank's
subsidiaries. As of October 1, 1998, all remaining real estate held for
investment had been sold. Consequently, there was no income from land sales
during the year ended September 30, 1999.
Other Expense
General and administrative expenses were $15.3 million for fiscal 1999 as
compared to $13.6 million for fiscal 1998. Salaries and employee benefits were
$8.6 million for fiscal 1999 as compared to $7.4 million for fiscal 1998, or a
17.0% increase. During fiscal 1999, the Company staffed for the preparation of
opening the Little River office. Other staffing additions include increased
<PAGE>
lending personnel and several additions in operations. The remainder of the
increase in compensation is due to normal salary increases which averaged
approximately five percent. Net occupancy, furniture and fixtures and data
processing expense increased $303,000 for fiscal 1999, as compared to fiscal
1998. This is primarily attributed to increased depreciation expense due to the
addition of the Coastal Federal University facility and the North Carolina
Office in Sunset Beach, NC. Other expenses increased slightly from $2.8 million
in 1998 to $2.9 million in 1999, primarily due to increased marketing
expenditures of brand awareness and new product brochures.
Income Taxes
Income taxes increased from $4.0 million in fiscal 1998 to $4.4 million in
fiscal 1999 as a result of increased earnings before income taxes.
35
<PAGE>
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis - Continued
Results of Operations
Comparison of the Years Ended September 30, 1997 and 1998
General
Net earnings were $6.9 million ($0.99 per diluted share) for the year ended
September 30, 1998 compared to $5.8 million ($0.85 per diluted share) for the
year ended September 30, 1997. Net interest income increased $1.5 million
primarily as a result of an increase in interest income of $5.8 million which
was offset by an increase in interest expense of $4.3 million.
Interest Income
Interest income for the year ended September 30, 1998, increased 15.3% to
$43.9 million as compared to $38.1 million for the year ended September 30, 1997
primarily due to a 20.8% increase in average interest-earning assets. The net
yield on interest-earning assets for the year ended September 30, 1997 was 8.46%
compared to 8.11% for the year ended September 30, 1998. The average yield on
loans receivable for fiscal year 1998 was 8.75% compared to 8.70% in 1997. The
yield on investments which includes Investments, Overnight Funds and Federal
Funds, decreased slightly to 6.69% for the fiscal year 1998 from 6.70% for
fiscal year 1997. Total interest-earning assets for fiscal year 1998 averaged
$546.6 million compared to $452.5 million for the year ended September 30, 1997.
The increase in average interest-earning assets is due to an increase in average
loans receivable of approximately $27.9 million and mortgage-backed securities
of approximately $68.9 million.
Interest Expense
Interest expense on interest-bearing liabilities was $24.5 million for the
year ended September 30, 1998, as compared to $20.1 million in fiscal 1997. The
cost of interest-bearing liabilities was 4.60% for the year ended September 30,
1998, compared to 4.57% in fiscal year 1997. The average cost of deposits for
the year ended September 30, 1998, was 4.10% compared to 4.15% for the year
ended September 30, 1997. The cost of FHLB advances and reverse repurchase
agreements for fiscal 1998 was 5.62% and 5.68%, respectively, compared to 5.95%
and 5.60%, respectively, for fiscal 1997. Total average interest-bearing
liabilities increased 21.2% from $438.6 million at September 30, 1997, to $531.7
million at September 30, 1998. The increase in average interest-bearing
liabilities is due to an increase in average deposits of approximately $26.2
million, FHLB advances of $25.2 million and reverse repurchase agreements of
$40.9 million.
Net Interest Income
Net interest income was $19.4 million for the year ended September 30,
1998, compared to $17.9 million for the year ended September 30, 1997. The net
interest margin decreased to 3.51% for fiscal 1998 compared to 3.89% for fiscal
1997. During the second quarter of fiscal 1998, the Bank entered into a leverage
strategy by purchasing ARM mortgage-backed securities which were funded by
repurchase agreements and short-term advances. This strategy has had an expected
spread of approximately fifty to seventy-five basis points during the first
year. Should the yield curve continue to flatten and mortgage prepayment speeds
continue to increase, the net spread on this strategy could decline.
<PAGE>
Average interest-earning assets increased $94.1 million while average
interest-bearing liabilities increased $93.1 million. At September 30, 1998, the
yield on the one year treasury security was approximately 4.6%, compared to
approximately 4.7% which was the yield on the 10 year treasury security. Should
the yield curve continue to remain relatively flat, the Company may continue to
experience a high amount of mortgage loan repayments and refinancings and may
experience a declining net interest margin in fiscal 1999.
Provision for Loan Losses
The Company's provision for loan losses increased from $760,000 for fiscal
1997 to $865,000 for fiscal 1998. The allowance for loan losses as a percentage
of loans was 1.33% at September 30, 1998, compared to 1.19% at September 30,
1997. Loans delinquent 90 days or more were .54% of total loans at September 30,
1998, compared to .06% at September 30, 1997. The allowance for loan losses was
251% of loans delinquent more than 90 days at September 30, 1998, compared to
1,906% at September 30, 1997. Management believes that the current level of the
allowance for loan losses is adequate considering the composition of the loan
portfolio, the portfolio's loss experience, delinquency trends, current regional
and local economic conditions and other factors. Also see "Nonperforming Assets"
and "Allowance for Loan Losses."
36
<PAGE>
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis - Continued
Other Income
In fiscal 1998, total other income increased from $4.7 million for the
period ended September 30, 1997, to $5.9 million for the period ended September
30, 1998. Due to a decreasing long-term interest rate environment which has
resulted in increased mortgage originations, gain on sale of loans was $1.6
million for the year ended September 30, 1998, compared to $931,000 for the year
ended September 30, 1997. Gain on sale of securities was $617,000 for fiscal
1998, compared to $242,000 for fiscal 1997. Other income increased slightly from
$1.8 million for the year ended September 30, 1997, to $1.9 million for the year
ended September 30, 1998.
Other Expense
General and administrative expenses were $13.6 million for fiscal 1998 as
compared to $12.7 million for fiscal 1997. Salaries and employee benefits were
$7.4 million for fiscal 1998 as compared to $6.8 million for fiscal 1997, or a
7.5% increase. Normal salary increases and increased lending personnel accounted
for a significant portion of this increase. Net occupancy, furniture and
fixtures and data processing expense increased $369,000 for fiscal 1998, as
compared to fiscal 1997. This is primarily attributed to increased depreciation
expense on Coastal Federal University and the North Carolina office. FDIC
insurance premiums decreased from $283,000 for the year ended September 30, 1997
to $213,000 for the year ended September 30, 1998. Other expenses increased
slightly from $2.7 million in 1997 to $2.8 million in 1998.
Income Taxes
Income taxes increased from $3.4 million in fiscal 1997 to $4.0 million in
fiscal 1998 as a result of increased earnings before income taxes.
Non-performing Assets
Non-performing assets were $1.5 million at September 30, 1999 compared to
$2.3 million at September 30, 1998. Loans past due 90 days or more decreased
from $2.3 million at September 30, 1998, to $1.4 million at September 30, 1999.
Real estate acquired through foreclosure increased from $35,000 at September 30,
1998, to $96,000 at September 30, 1999.
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 placed
on non-accrual status. 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.
<PAGE>
The Company established provisions for loan losses for the years ended
September 30, 1997, 1998 and 1999, of $760,000, $865,000 and $750,000,
respectively. For the years ended September 30, 1997, 1998 and 1999, the Company
had net charge-offs of $140,000, $208,000 and $100,000, respectively. Net charge
offs as a percentage of average outstanding loans were .04%, .05%, and .02% for
fiscal years ended 1997, 1998 and 1999. During fiscal 1999, the Company received
recoveries of $252,000 (or .06% of average loans outstanding) from loans charged
off in previous years. At September 30, 1999, the Company had an allowance for
loan losses of $6.4 million, which was 1.36% of net loans compared to 1.33% at
September 30, 1998.
Management believes that the current level of the allowance for loan losses
is presently adequate considering the composition of the loan portfolio, the
portfolio's loss experience, delinquency trends, current regional and local
economic conditions and other factors. While management uses the best
information available to make evaluations, future adjustments to the allowance
may be necessary if economic conditions differ substantially from the
assumptions used in making the evaluation. The allowance for loan losses is
subject to periodic evaluation by various regulatory authorities and may be
subject to adjustment upon their examination.
37
<PAGE>
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis - Continued
Interest Rate Risk Disclosure
The Bank's Asset Liability Management Committee ("ALCO") monitors and
considers methods of managing exposure to interest rate risk. The ALCO committee
consists of members of the Board of Directors and Senior Leadership of the
Company and meets quarterly. The Bank's exposure to interest rate risk is
reviewed on at least a quarterly basis by 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,
1999.
<TABLE>
<CAPTION>
Board Limit Board Limit Market Value Market Value
Minimum NPV Maximum of Assets Portfolio Equity NPV
Change in Interest Rates Ratio Decline in NPV 9/30/99 9/30/99 Ratio
- --------- -------- ----- ----- -------------- ------- ------- -----
<S> <C> <C> <C> <C> <C>
300 basis point rise 5.00% 350 BPS $ 670,739 $ 49,224 7.34%
200 basis point rise 6.00% 300 BPS $ 688,238 $ 58,398 8.49%
100 basis point rise 6.00% 250 BPS $ 705,045 $ 66,442 9.42%
No Change 6.00% $ 720,550 $ 72,749 10.10%
100 basis point decline 6.00% 250 BPS $ 734,790 $ 77,518 10.55%
200 basis point decline 6.00% 300 BPS $ 746,869 $ 81,008 10.85%
300 basis point decline 6.00% 350 BPS $ 756,327 $ 82,712 10.94%
</TABLE>
The preceding table indicates that at September 30, 1999, 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, 1999, the Bank's estimated changes in NPV were
within the limits established by the Board of Directors.
Computation of prospective effects of hypothetical interest rate changes
are based on numerous assumptions, including relative levels of market interest
rates, loan prepayments and deposit decay, and should not be relied upon as
indicative of actual results. Further, the computations do not contemplate any
actions the ALCO could undertake in response to sudden changes in interest
rates.
The Bank also uses interest rate sensitivity gap analysis to monitor the
relationship between the maturity and repricing of its interest-earning assets
and interest-bearing liabilities. Interest rate sensitivity gap is defined as
the difference between the amount of interest-earning assets maturing or
<PAGE>
repricing within a specific time period and the amount of interest-bearing
liabilities maturing or repricing within the same time period. A gap is
considered positive when the amount of interest-rate-sensitive assets exceeds
the amount of interest-rate-sensitive liabilities. Generally, during a period of
rising rates, a positive gap would result in an increase in net interest income.
Conversely, during a period of falling interest rates, a positive gap would
result in a decrease in net interest income. It is management's goal to maintain
reasonable balance between exposure to interest rate fluctuations and earnings.
Impact of New Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income" (Statement 130). Statement 130 establishes standards for reporting and
display of comprehensive income and its components in a full set of general
purpose financial statements. Enterprises are required to classify items of
"other comprehensive income" by their nature in the financial statement and
display the balance of other comprehensive income separately in the equity
section of a statement of financial position. SFAS No. 130 is effective for
fiscal periods beginning after December 15, 1997. Comparative
38
<PAGE>
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis - Continued
financial statements provided for earlier periods are required to be
reclassified to reflect the provisions of this statement. The Company adopted
Statement 130 in its fiscal 1999 consolidated financial statements.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS 133 changes the previous
accounting definition of a derivative and discusses the appropriateness of hedge
accounting for various forms of hedging activities. Under this standard, all
derivatives are measured at fair value and recognized in the statement of
financial position as assets or liabilities. This standard is effective for all
fiscal quarters of all fiscal years beginning after June 15, 2000, with earlier
adoption permitted, as amended by SFAS 137.
Management does not expect that this standard will have a significant effect on
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.
Capital Standards and Regulatory Matters
The Bank's capital standards include (1) a leverage limit requiring all OTS
chartered financial institutions to maintain core capital in an amount not less
than 4% of the financial institution's total assets; (2) a tangible capital
requirement of not less than 1.5% of total assets; and (3) a risk-based capital
requirement of not less than 8.0% of risk weighted assets. For further
information concerning the Bank's capital standards, refer to Note 12.
Year 2000 Compliance
The Company is a user of computers, computer software and equipment
utilizing embedded microprocessors that will be effected by the year 2000 issue.
The year 2000 issue exists because many computer systems and applications use
two-digit date fields to designate a year. As the century date change occurs,
date-sensitive systems may recognize the year 2000 as 1900, or not at all. This
inability to recognize or properly treat the year 2000 may cause erroneous
results, ranging from system malfunctions to incorrect or incomplete processing.
The Company's Year 2000 Committee consists of Senior management members of
the Company. The Committee makes a monthly progress report to the Board of
Directors. The Committee has developed and is implementing a comprehensive plan
to make all information and non-information technology assets year 2000
compliant. The plan is comprised of the following phases:
<PAGE>
1. Awareness - Educational initiatives on year 2000 issues and concerns. This
phase is ongoing, especially as it relates to informing customers of the
Company's year 2000 preparedness.
2. Assessment - Inventory of all technology assets and identification of
third-party vendors and service providers. This phase was completed as of August
31, 1998.
3. Renovation - Review of vendor and service providers responses to the
Company's year 2000 inquires and development of a follow-up plan and timeline.
This phase was completed as of October 15, 1998.
4. Validation - Testing all systems and third-party vendors for year 2000
compliance. The Company has currently completed this phase of its plan. A
third-party service bureau processes all customer transactions and has completed
upgrades to its systems to be year 2000 compliant. The Company tested the
third-party systems by reviewing the results of transactions of different test
dates before and after the year 2000 date change covering all of the
applications used by the Company. Testing was completed as of November 16, 1998.
The results of the test were all positive. Other parties whose year 2000
compliance may effect the Company include the FHLB of Atlanta, brokerage firms,
the operator of the Company's ATM network and the Company's 401K administrator.
These third-parties have
39
<PAGE>
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis - Continued
indicated their compliance or intended compliance. Where it is possible to do
so, the Company has tested with these third-parties. All the test results were
positive. Where testing is not possible, the Company will rely on certifications
from vendors and service providers.
5. Implementation - Replacement or repair of non-compliant technology has been
completed.
The Company estimates its total cost to replace computer equipment,
software programs or other equipment containing embedded microprocessors that
were not year 2000 compliant to be $200,000, of which $172,000 has been incurred
as of September 30, 1999. System maintenance or modification costs are charged
to expense as incurred, while the cost of new hardware, software or other
equipment is capitalized and amortized over their estimated useful lives. The
Company does not separately track the internal costs and time that its own
employees spend on year 2000 issues, which are principally payroll costs.
Because the Company depends substantially on its computer systems and those
of third-parties, the failure of these systems to be year 2000 compliant could
cause substantial disruption of the Company's business and could have a material
adverse financial impact on the Company. Failure to resolve year 2000 issues
presents the following risks to the Company: (1) the Company could lose
customers to other financial institutions, resulting in a loss of revenue, if
the Company's third-party service bureau is unable to properly process customer
transactions; (2) governmental agencies, such as the Federal Home Loan Bank, and
correspondent institutions could fail to provide funds to the Company, which
could materially impair the Company's liquidity and affect the Company's ability
to fund loans and deposit withdrawals; (3) concern on the part of depositors
that year 2000 issues could impair access to their deposit account balances
could result in the Company experiencing deposit outflows prior to December 31,
1999; and (4) the Company could incur increased personnel costs if additional
staff is required to perform functions that inoperative systems would have
otherwise performed. Management believes that it is not possible to estimate the
potential lost revenue due to the year 2000 issue, as the extent and longevity
of any potential problem cannot be predicted. Because substantially all of the
Company's loan portfolio consists of loans primarily secured by real estate,
management believes that year 2000 issues will not impair the ability of the
Company's borrowers to repay their debt.
There can be no assurances that the Company's year 2000 plan will
effectively address the year 2000 issues, that the Company's estimates of the
timing and costs of completing the plan will ultimately be accurate or that the
impact of any failure of the Company or its third-party vendors and service
providers to be year 2000 compliant will not have a material adverse effect on
the Company's business, financial condition or results of operations. The
Company has developed a contingency plan for year 2000 in the event there is a
malfunction in any of the critical application software. The plan provides for
alternative methods to conduct business until application problems can be
rectified. The Company has recognized that its commercial borrowers may also
face risks from year 2000 issues. The Company has identified its material loan
relationships and completed year 2000 surveys of those customers to assess their
vulnerability to year 2000 problems and their readiness for year 2000
compliance. The Company is continuing to monitor its commercial borrowers for
year 2000 risk and feels that its commercial relationships do not pose an
inordinate risk at this time.
40
<PAGE>
Independent Auditor's 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, 1998 and 1999, and the related consolidated statements of operations,
stockholders' equity and comprehensive income, and cash flows for each of the
years in the three-year period ended September 30, 1999. 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, 1998 and 1999, and the results of its operations and its cash
flows for each of the years in the three-year period ended September 30, 1999,
in conformity with generally accepted accounting principles.
Greenville, South Carolina /s/KPMG LLP
October 27, 1999 -----------
KPMG LLP
Board of Directors
Coastal Financial Corporation and Coastal Federal Savings Bank
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
<PAGE>
James P. Creel
President
Creel Corporation
James H. Dusenbury
Attorney
Dusenbury Law Firm
Attorneys at Law
Michael C. Gerald
President and Chief Executive Officer
Coastal Financial Corporation
Wilson B. Springs
Owner
H. B. Springs Company
Coastal Investor Services, Inc.
G. David Bishop
Chairman
WCI Management Group Inc.
James P. Creel
President
Creel Corporation
James H. Dusenbury
Attorney
Dusenbury Law Firm
Attorneys at Law
Michael C. Gerald
President and Chief Executive Officer
Coastal Financial Corporation
E. Haden Hamilton, Jr.
President and Chief Executive Officer
Coastal Investor Services, Inc.
Jerry L. Rexroad, CPA
Chief Financial Officer
Coastal Investor Services, Inc.
Phillip G. Stalvey
Executive Vice President
Coastal Financial Corporation
41
<PAGE>
Coastal Federal Savings Bank
Leadership Group
Sherri J. Adams
Personal Banking Leader
North Myrtle Beach
James R. Baker
Assistant Vice President
Systems Engineer
Nancy Baker
Personal Banking Leader
Florence
Jeffrey A. Benjamin
Senior Vice President
Credit Administration Leader
Denise F. Brown
Assistant Vice President
Personal Banking Leader
Surfside
Rebecca L. Brown
Senior Closing Specialist
Stephen L. Brunson, Jr.
Assistant Vice President
Residential Banking Leader
Cynthia L. Buffington
Assistant Vice President
Item Processing Leader
Glenn T. Butler
Vice President
Management Information
Systems Leader
Susan R. Cammons
Residential Banking Leader
Murrells Inlet
Pamela D. Collins
Personal Banking Leader
Dunes
Susan J. Cooke
Vice President
Corporate Support Leader
Corporate Secretary
Phillip P. Cooper
Corporate Services Leader
<PAGE>
Patricia A. Coveno
Personal Banking Leader
Conway
Robert D. Douglas
Senior Vice President
Human Resources Leader
G. Stephen Emswiler
Facilities/Maintenance Leader
Barbara R. Faber, CPA
Assistant Vice President
Banking Administration Leader
James T. Faulk
Assistant Vice President
Collections Leader
Rita E. Fecteau
Vice President
Controller
Trina S. Ferguson
Vice President
Residential Loan
Administration Leader
J. Daniel Fogle
Vice President
Community Banking Leader
Carolina Forest/Waccamaw
Joel P. Foster
Assistant Vice President
Business Banking Officer
Mary L. Geist
Vice President
Data Services Leader
Michael C. Gerald
President and Chief Executive
Officer
Jimmy R. Graham
Executive Vice President
Information Systems Leader
Richard L. Granger
Vice President
Residential Banking Leader
Florence
Lisa B. James
Assistant Vice President
Deposit Servicing Leader
<PAGE>
Ruth S. Kearns
Senior Vice President
Customer Recognition Officer
Assistant Corporate Secretary
Scott W. Lander
Senior Vice President
Area Leader
North Carolina Region
Edward L. Loehr
Vice President
Budgeting and Treasury
Sandy L. Louden
Personal Banking Leader
Socastee
Kathleen M. Lutes
Senior Loan Underwriter
Sherry A. Maloni
Assistant Vice President
Personal Banking Leader
Waccamaw Medical Park
Janice B. Metz
Marketing Programs
Coordinator
Cindy L. Milardo
Assistant Vice President
Loan Servicing Leader
Lauren E. Miller
Assistant Vice President
Dean of Associate Development
Coastal Federal University
Erin P. Mitchell
Assistant Vice President
Business Banking Officer
John T. Powell
Assistant Vice President
Community Banking Leader
New Hanover
Jerry L. Rexroad, CPA
Executive Vice President
Chief Financial Officer
Eulette W. Sauls
Customer Account
Relationship System Leader
Douglas E. Shaffer
Senior Vice President
Area Leader
North/West Regions
<PAGE>
Steven J. Sherry
Executive Vice President
Chief Marketing Officer
Cathe P. Singleton
Assistant Vice President
Personal Banking Leader
Murrells Inlet
Ashley M. Smith
Assistant Vice President
Personal Banking Leader
South Brunswick
J. Marcus Smith, Jr.
Vice President
Account Servicing Leader
Phillip G. Stalvey
Executive Vice President
Sales Leader
H. Delan Stevens
Assistant Vice President
Community Banking Leader
Conway/North Conway
Donna P. Todd
Assistant Vice President
Personal Banking Support
Leader
John L. Truelove
Vice President
Community Banking Leader
Surfside, Murrells Inlet,
Socastee
Jerry A. Vereen
Vice President
Community Banking Leader
Oak Street, Dunes
Stephanie L. Vickers, CPA
Vice President
Product Development
Douglas W. Walters
Vice President
Residential Banking Leader
North Myrtle Beach
David E. Williams
Assistant Vice President
Personal Banking Leader
Oak Street
42
<PAGE>
Locations
Coastal Federal Savings Bank
Oak Street Office
2619 Oak Street
Myrtle Beach, SC 29577-3129
843.448.5151
Carolina Forest Office
3894 Renee Drive
Myrtle Beach, SC 29579
(Opening in early 2000)
Conway Office
310 Highway 378
Conway, SC 29526
843.444.0225
Dunes Office
7500 North Kings Highway
Myrtle Beach, SC 29572
843.444.0241
Florence Office
1385 Alice Drive
Florence, SC 29505
843.444.1299
Little River Office
1602 Highway 17
Little River, SC 29566
843.444.1210
Murrells Inlet Office
3348 Highway 17 South
& Inlet Crossing
Murrells Inlet, SC 29576
843.444.0200
North Myrtle Beach Office
521 Main Street
North Myrtle Beach, SC 29582
843.444.0265
Socastee Office
4801 Socastee Boulevard
Myrtle Beach, SC 29575
843.444.0281
Surfside Office
112 Highway 17 South
& Glenns Bay Road
Surfside Beach, SC 29575
843.444.0250
Waccamaw Medical Park Office
112 Waccamaw Medical Park Drive
Conway, SC 29526
843.444.0216
<PAGE>
South Brunswick Office
1625 Seaside Road, SW
Sunset Beach, NC 28468
843.444.1258
910.579.8160
Wilmington Office
Lending Center
5710 Oleander Drive, Suite 209
Wilmington, NC 28403
910.313.1161
Coastal Investor Services, Inc.
Coastal Investor Services, Inc.
843.918.7600
Susan J. Cooke
Corporate Secretary
Myrtle Beach Investment Center
843.448.5151
Victoria J. Damore
Financial Advisor
Conway Investment Center
843.918.7604
Fred W. Elmore
Financial Advisor
Florence Investment Center
843.679.9020
E. Haden Hamilton, Jr.
President, Chief Executive Officer
and Financial Advisor
Myrtle Beach Investment Center
843.918.7603
John Michael Hill
Vice President and Financial Advisor
Myrtle Beach Investment Center
843.918.7602
Deborah A. Hinson
Sales Assistant
Myrtle Beach Investment Center
843.918.7600
Jennifer H. Ivey
Sales Assistant
Myrtle Beach Investment Center
843.918.7600
Jerry L. Rexroad, CPA
Chief Financial Officer
Myrtle Beach Investment Center
843.448.5151
43
<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:
Herzog, Heine, Geduld, Inc. at 1.800.523.4936,
First Union Capital Markets at 1.800.446.1016,
Knights Securities at 212.336.8690,
Sprear, Leeds & Kellogg at 1.800.526.3160,
Edgar M. Norris & Company at 864.235.5991 or
Trident Securities at 1.800.222.2618.
As of November 30, 1999, the Corporation had 965 shareholders and 6,433,193
shares of common stock outstanding. This does not reflect the number of persons
or entities who hold stock in nominee or "street name." The prices have been
adjusted to reflect the stock dividends.
Market Price of Common Stock
The table below reflects the high and low bid stock prices published by Nasdaq
for each quarter.
High Low
Bid Bid
Fiscal Year 1999:
First Quarter $21.13 $15.95
Second Quarter 19.29 14.29
Third Quarter 17.56 12.50
Fourth Quarter 16.13 12.03
Fiscal Year 1998:
First Quarter 17.50 14.65
Second Quarter 17.14 13.84
Third Quarter 19.70 15.71
Fourth Quarter 19.70 15.84
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, 1999,
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 24, 2000 at 2:00 p.m., Eastern Standard Time.
<PAGE>
Additional Information
If you are receiving duplicate mailing of shareholder reports due to multiple
accounts, we can consolidate the mailings without affecting your account
registration. To do this, or for additional information, contact the Shareholder
Relations Office, at the Corporate address shown below.
Corporate Offices
Coastal Financial Corporation
2619 Oak Street
Myrtle Beach, South Carolina 29577
843.448.5151
Transfer Agent and Registrar
Registrar and Transfer Company
P.O. Box 1010
Cranford, NJ 07016
1.800.866.1340 Ext. 2511
Independent Certified Public Accountants
KPMG LLP
P.O. Box 10529
Greenville, South Carolina 29603
General Counsel
James H. Dusenbury
Dusenbury Law Firm
602 27th Avenue
Myrtle Beach, South Carolina 29577
Special Counsel
Muldoon, Murphy & Faucette LLP
5101 Wisconsin Avenue
Washington, DC 20016
Shareholder Relations Officer
Susan J. Cooke
Coastal Financial Corporation
2619 Oak Street
Myrtle Beach, South Carolina 29577
843.448.5151
Coastal Financial Corporation is an equal opportunity employer and pledges equal
opportunities without regard to religion, citizenship, race, color, creed, sex,
age, national origin, disability or status as a disabled or Vietnam-Era veteran.
44
<PAGE>
Coastal Financial Corporation
1999 Annual Report
Coastal
Financial
Corporation
Corporate Office: 2619 Oak Street
Myrtle Beach, South Carolina 29577-3129
(803) 448-5151
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Parent
- ------
Coastal Financial Corporation
State of
Subsidiary Percentage Owned Incorporation
- ---------- ---------------- -------------
Coastal Federal Savings Bank 100% United States
Coastal Federal Mortgage, Inc. 100% South Carolina
Coastal Investor Services, Inc. 100% South Carolina
Coastal Technology Solutions 100% South Carolina
Coastal Real Estate Investment
Corporation (3) 100% North Carolina
Coastal Federal Holding
Corporation (1) 100% Delaware
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.
(3) First tier subsidiary of Coastal Federal Holding Corporation,
consolidated with Coastal Federal Savings Bank for Regulatory
Reporting.
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Coastal Financial Corporation:
We consent to incorporation by reference in the registration statement on Form
S-8 of Coastal Financial Corporation of our report dated October 27, 1999,
relating to the consolidated statements of financial condition of Coastal
Financial Corporation and subsidiaries as of September 30, 1999 and 1998, and
the related consolidated statements of operations, stockholders' equity and
comprehensive income, and cash flows for each of the years in the three-year
period ended September 30, 1999, which report is incorporated by reference in
the September 30, 1999, Annual Report on Form 10-K of Coastal Financial
Corporation.
/s/KPMG LLP
-----------
KPMG LLP
Greenville, South Carolina
December 29, 1999
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