COASTAL FINANCIAL CORPORATION
2000 ANNUAL REPORT
COASTAL FINANCIAL CORPORATION
ANNUAL REPORT
------------ COMMITTED TO OUR CUSTOMERS & COMMUNITIES -------------
OUR ONGOING FOCUS ON OUR QUEST FOR EXCELLENCE OPERATING PHILOSOPHY AND
OVERRIDING COMMITMENT TO OUR CUSTOMERS AND COMMUNITIES HAS CONTINUED TO PRODUCE
OUTSTANDING FINANCIAL RESULTS AND, WE ARE CONVINCED THAT THIS APPROACH WILL HELP
TO INSURE THAT OUR BEST YEARS ARE YET TO COME.
October 4, 2000 marked the tenth anniversary of our conversion to public
ownership. During that period, we have achieved much in terms of preparing our
organization for the future and, in the process, have received significant
public attention for our outstanding financial performance.
One recent form of national recognition came with U.S.Banker Magazine, in its
July 2000 edition, ranking us #1 in the Southeast and #16 nationally in
financial performance among Community Banks.
And while that is, indeed, quite impressive, we felt much more satisfaction in
learning that our Customers had voted us Best of the Beach, in the Financial
Institution category of the 2000 Sun News readers' poll, for an unprecedented
third year in a row.
It is our belief that this recognition is a direct result of our philosophy of
giving back to the Communities we serve.
Being a good neighbor and friend goes far beyond providing financial services.
It requires each of us to get involved, to volunteer our time and to provide
meaningful contributions to make our Community a better place to live, work and
raise our families.
That's why, at Coastal Financial, we support, with our time, talent and
financial resources, over 300 civic and charitable institutions in the
Communities we serve. These organizations are important contributors to the
quality of life we enjoy.
Coastal Financial has a long history of attracting Associates who care, who are
Committed to Exceeding our Customers' Expectations, and who build relationships
which last a lifetime.
We believe that when you have good people working together for the common goals
of the Community, there is no limit to the growth and prosperity we can achieve.
[Share Price Performance Graph appears here]
Initial Public Offering
October 4, 1990 $10.00
September 30, 1991 $10.00
September 30, 1992 $27.20
September 30, 1993 $68.31
September 30, 1994 $85.56
September 30, 1995 $85.92
September 30, 1996 $134.94
September 30, 1997 $217.16
September 30, 1998 $215.52
September 30, 1999 $177.72
September 30, 2000 $113.80
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 $113.80 based upon
Nasdaq Quotations at September 30, 2000. The foregoing reflects historical
results and may not be indicative of future stock prices.
2
[PHOTO] Central Community Banking Team
Coastal Federal blends together the full financial resources of Personal Banking
Services, Residential Banking, Business Banking and Investment Services into one
financial team that is motivated to Exceed our Customers' Expectations. Thomas
Kennedy oversees the Personal Banking Services offered at Oak Street, Dunes and
our newest location, the Bi-Lo Supermarket on 38th Avenue North in Myrtle Beach.
Joel Foster leads the Business Banking Services Team, with Haden Hamilton as
President & CEO of our Investment Services subsidiary.
[PHOTO] South Strand Community Banking Team
Coastal Federal is strategically located in one of the fastest growing areas of
our market, with locations in Murrell's Inlet, Socastee and Surfside. With a
full range of financial services, including Personal Banking, Business Banking,
Residential Banking and Investment Services, the South Strand Community Banking
Team is well positioned to serve the future needs of this growing area. Eric
Keys oversees the delivery of products and services that Exceed the Expectations
of our Customers. Lynn Berry will be leading our efforts in expanding Banking
services into Litchfield, Pawleys Island and Georgetown.
[PHOTO] Conway Community Banking Team
Conway has a character of its own. Coastal Federal recognizes its uniqueness and
has assembled a Banking Team that can best meet the needs of this Community.
With a full range of financial tools including PC Internet Banking, a strong
penetration of ATM locations and 24-hour Access Bank-by-Phone service, we
provide a combination of friendly, hometown service with round-the-clock account
access that our busy Customers demand. Delan Stevens, complemented with the
support of our newest Board Member Frank Thompson, leads the growth of our
products and services in this important market.
[PHOTO] North Strand Community Banking Team
The spectacular growth in the overall market is accentuated in North Myrtle
Beach. This fast growing residential and retail area demands a Banking Team that
can quickly adjust to the needs of our Customers. Doug Shaffer, who for over 12
years has been servicing the needs of Customers in North Myrtle Beach, leads
that Team. Complemented by strong support in Residential Banking, Business
Banking, Investment Services and Personal Banking, Coastal Federal's offices in
North Myrtle Beach and Little River are well equipped to meet the future needs
of this fast-paced area.
[PHOTO] North Carolina Community Banking Team
With continued expansion in strategic coastal markets in North Carolina, Coastal
Federal has built a quality Team to manage that growth. Led by Scott Lander, we
have aggressive plans to accelerate growth in our existing Sales Center in
Sunset Beach, strengthen our market penetration in Wilmington and expand with a
new Sales Center in Southport. Coastal Federal will provide its full array of
Personal, Business, and Residential Banking products along with Investment
Services.
3
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.
At or for Years Ended September 30,
------------------------------------------------------
1996 1997 1998 1999 2000
-------- -------- -------- -------- ---------
(Dollars in thousands, except per share data)
Financial Condition Data:
Total assets . . . . . . . . . . . . . . . . . . . . . . . . $459,712 $494,003 $643,560 $713,013 $768,838
Loans receivable, net . . . . . . . . . . . . . . . . . . . 370,368 403,570 414,264 455,351 511,701
Mortgage-backed securities . . . . . . . . . . . . . . . . . 27,029 23,023 170,181 182,115 189,239
Cash, interest-bearing deposits and investment securities . 38,332 39,582 25,507 30,296 25,715
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . 313,430 347,116 386,321 399,673 406,217
Borrowings . . . . . . . . . . . . . . . . . . . . . . . . . 109,886 106,337 210,560 262,541 303,151
Stockholder's equity . . . . . . . . . . . . . . . . . . . . 27,681 32,391 37,851 41,237 46,945
Operating Data:
Interest income. . . . . . . . . . . . . . . . . . . . . . . $ 34,720 $ 38,065 $ 43,894 $ 49,559 $ 58,079
Interest expense . . . . . . . . . . . . . . . . . . . . . . 19,091 20,146 24,451 26,991 33,636
-------- -------- -------- -------- ---------
Net interest income . . . . . . . . . . . . . . . . . . . . 15,629 17,919 19,443 22,568 24,443
Provision for loan losses . . . . . . . . . . . . . . . . . 790 760 865 750 978
-------- -------- -------- -------- ---------
Net interest income after provision for loan losses. . . . . 14,839 17,159 18,578 21,818 23,465
-------- -------- -------- -------- ---------
Other Income:
Fees and service charges on loans and deposit accounts . . . 1,415 1,593 1,639 2,025 2,126
Gain on sales of loans held for sale. . . . . . . . . . . . 990 931 1,579 979 631
Gain (loss) on sales of investment securities. . . . . . . . (6) 7 96 73 (17)
Gain (loss) on sales of mortgage-backed securities, net . . 189 235 521 191 (1,554)
Real estate operations . . . . . . . . . . . . . . . . . . . 345 141 149 (29) (64)
Other income . . . . . . . . . . . . . . . . . . . . . . . . 1,699 1,792 1,895 2,334 4,759
-------- -------- -------- -------- ---------
Total other income. . . . . . . . . . . . . . . . . . . . . 4,632 4,699 5,879 5,573 5,881
Total general and administrative expense . . . . . . . . . . 13,586 12,716 13,618 15,286 16,191
-------- -------- -------- -------- ---------
Earnings before income taxes. . . . . . . . . . . . . . . . 5,885 9,142 10,839 12,105 13,155
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . 2,164 3,351 3,987 4,390 4,698
-------- -------- -------- -------- ---------
Net income. . . . . . . . . . . . . . . . . . . . . . . . . $ 3,721 $ 5,791 $ 6,852 $ 7,715 $ 8,457
======== ======== ======== ======== =========
Net earnings per common diluted share . . . . . . . . . . . $ .50 $ .77 $ .90 $ 1.02 $ 1.13
======== ======== ======== ======== =========
Cash dividends per common share. . . . . . . . . . . . . . . $ .20 $ .23 $ .25 $ .25 $ .26
======== ======== ======== ======== =========
Weighted average shares outstanding diluted . . . . . . . . 7,382 7,511 7,605 7,585 7,477
======== ======== ======== ======== =========
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, a 5% stock
dividend declared on November 10, 1999, and a 10% stock dividend declared on
March 14, 2000.
Key Operating Ratios:
The table below sets forth certain performance ratios of the Company at the
dates or for the periods indicated.
At or for Years Ended September 30,
--------------------------------------------------
1996 1997 1998 1999 2000
-------- --------- -------- -------- ---------
Other Data:
Return on assets (net income divided by average assets) ... 0.85% 1.21% 1.13% 1.14% 1.13%
Return on average equity (net income divided by average
equity) .................................................. 13.97% 19.36% 19.52% 19.30% 19.52%
Average equity to average assets .......................... 6.10% 6.24% 6.05% 5.93% 5.80%
Tangible book value per share ............................. $ 3.91 $ 4.53 $ 5.23 $ 5.55 $ 6.44
Dividend payout ratio ..................................... 38.51% 27.63% 25.14% 23.28% 22.61%
Interest rate spread (difference between average yield on
interest-earning assets and average cost of
interest-bearing liabilities). . .......................... 3.76% 3.89% 3.51% 3.55% 3.50%
Net interest margin (net interest income as a percentage of
average interest-earning assets) .......................... 3.86% 4.03% 3.64% 3.67% 3.57%
Allowance for loan losses to total loans at end of period .. 1.11% 1.19% 1.33% 1.36% 1.35%
Ratio of non-performing assets to total assets (1) ......... 0.17% 0.10% 0.36% 0.21% 0.73%
Tangible capital ratio ..................................... 5.93% 6.31% 6.10% 6.29% 6.56%
Core capital ratio ......................................... 5.93% 6.31% 6.10% 6.29% 6.56%
Risk-based capital ratio ................................... 10.41% 11.05% 12.67% 12.64% 12.45%
Number of:
Real estate loans outstanding ............................ 5,741 6,752 6,666 6,637 6,748
Deposit accounts ......................................... 41,755 43,544 43,720 41,608 40,788
Full service offices ..................................... 9 9 10 10 12
(1) Nonperforming assets consist of nonaccrual loans 90 days or more past due
and real estate acquired through foreclosure.
4
Record Financial Results
Dear Friends
As we look back on the ten years which have passed since becoming a publicly
owned company, we can see and take great pride in the significant growth and
progress that we have made 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 the early fifties, our founders saw the need in our Community for a financial
services provider which truly understood and identified with the residents and
businesses of our area. These civic-minded individuals envisioned a Community
based and owned banking organization, and established Coastal Federal to meet
that need in 1954. This outgrowth of a Community need was accomplished by
soliciting support, in the form of deposits, from the residents and businesses
of the Community. They believed then, as we do today, that the success of our
organization is inextricably tied to the success of our Community and that
Coastal Federal should be a catalyst for enabling our Community, its residents
and businesses to reach their full potential. And, as we opened our doors for
business in 1954, it was with a firm belief that we were, and always would be,
linked as partners with our Community.
That vision has provided great insight to us as we have endeavored to create and
sustain a mission which was in keeping with our founders' intentions of ensuring
that we worked in perfect harmony with our Communities toward creating a
mutually beneficial relationship.
The Board of Directors, Leadership Group and Associates which resulted from this
early guidance have continued to follow that course and, in so doing, have
guided this Company through these ten years of exceptional achievement since
becoming a public company, the most current of which yielded another year of
record financial results.
Coastal Financial Corporation's net income for the year totaled $8.5 million, or
$1.13 per diluted share, an increase of 9.6% compared to $7.7 million, or $1.02
per diluted share in 1999. These results produced a return on average
Shareholders' equity of 19.52% and a return on average assets of 1.13% in fiscal
2000.
Total assets increased over 7.8%, to $768.8 million at year end, and asset
quality remained very good compared to industry standards.
Unfortunately, despite these excellent financial results, our stock price
declined during 2000. While the market, as a whole, has performed poorly over
the past year, bank stocks, in general, have been particularly depressed by
fears that rising interest rates will have an adverse effect on future earnings
and by the disappointing results reported by some banking companies. At the
close of this fiscal year, the relative price to earnings ratio of financial
services companies, compared to the Nasdaq, Dow and S&P 500 indices, was the
lowest in many years. Our business continues to flourish and we are hopeful that
stock performance for financial services companies will improve, particularly
for high-performing companies such as Coastal Financial.
Since becoming a publicly owned company in 1990, Coastal Financial Corporation's
stock price has grown at a compound annual rate of over 27%, taking our market
capitalization from $4.6 million in October 1990, to $56.5 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 approximately $110,000.
Equally as impressive is the fact that, since 1990, our operating earnings have
increased at a compound annualized rate in excess of 18.8%.
One of the best indicators of performance is Return On Shareholders' Equity, and
this measure for 2000 was, again, outstanding. Our Return On Average
Shareholders' Equity measure of 19.52% continues to rank us among the top
performing financial services companies in America.
During fiscal 2000, we continued to receive significant 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. Among those were:
o U.S.Banker, in its July 2000 edition, listed Coastal Financial
Corporation #1 in the Southeast and #16 in the nation in terms of
earnings per share growth and return on equity, based on the past
three years averaged.
o The State Newspaper, in its annual Palmetto 50 edition, listed the
state's fifty largest public corporations, and ranked Coastal
Financial 33rd in fiscal 1999 revenue and 19th in percentage change in
revenue from fiscal 1998 to fiscal 1999.
o In its November 14, 1999 edition, The State Newspaper, published an
article titled "Myrtle Beach-based company is a financial pacesetter -
Coastal Financial is fastest growing new public financial services
company of the 1990s"
o Coastal Federal, for the third 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 2000.
We are extremely proud of the performance evidenced by these results because
they reflect well on our COMMITMENT TO OUR CUSTOMERS AND COMMUNITIES.
5
Our best year yet 2000 Financial Results
This was indeed a year of significant achievement for Coastal Financial
Corporation. Our ever increasing focus on our QUEST FOR EXCELLENCE Operating
Philosophy continues to pay significant dividends and has enabled the financial
performance during fiscal 2000 which, again, met our high expectations and well
positions us to aggressively pursue future opportunities. Noteworthy Financial
Results for Fiscal 2000:
EARNINGS PER SHARE
o Net earnings of $8.5 million or $1.13 per diluted share. Earnings per
share for fiscal 2000 increased 10.8% over the prior year.
o Shareholders' equity advanced 13.8% to $46.9 million.
o During the year, the Company repurchased approximately 184,000 shares
at an average price of $10.65 per share, adjusted for the stock
dividends.
[EARNINGS PER SHARE GRAPH APPEARS HERE]
$0.50 $0.77 $0.90 $1.02 $1.13
----- ----- ----- ----- -----
1996 1997 1998 1999 2000
BOOK VALUE PER SHARE
o Book value per share grew 16.0% to $6.44
[BOOK VALUE PER SHARE GRAPH APPEARS HERE]
$3.91 $4.53 $5.23 $5.55 $6.44
----- ----- ----- ----- -----
1996 1997 1998 1999 2000
ASSETS
o A 7.8% growth in total assets to $768.8 million.
o Loans receivable increased 10.6% to $521.9 million.
o Deposits rose to $406.2 million, the highest level in the Company's
history.
[ASSET GRAPH APPEARS HERE]
(IN MILLIONS)
$459.70 $494.00 $643.60 $713.01 $768.80
------- ------- ------- ------- -------
1996 1997 1998 1999 2000
6
Our best year yet 2000 Financial Results
ALLOWANCE FOR LOAN LOSSES TO NET LOANS
o Allowance for Loan Losses to Net Loans decreased slightly to 1.35%.
o The Company had Loan Charge Offs of .06% in 2000.
[ALLOWANCE FOR LOAN LOSSES TO NET LOANS GRAPH APPEARS HERE]
1.11% 1.19% 1.33% 1.36% 1.35%
----- ----- ----- ----- -----
1996 1997 1998 1999 2000
Coastal Financial Corporation's outstanding operating results are the product of
the commitment, dedication and aligned effort of our exceptional team and have
been a major factor in the more than 1123.2% increase in our stock price since
becoming a public company in October of 1990 vs. approximately 450% for the
Standard & Poors 500 Index.
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 our COMMITMENT TO OUR CUSTOMERS AND COMMUNITIES and maintain our
philosophy of viewing change and constant improvement as essential to the
achievement of our Corporate Objectives. That's what really sets us apart from
the competition.
7
A look back at 2000
THIS LEVEL OF PERFORMANCE IS IN KEEPING WITH OUR BASIC CORPORATE OBJECTIVE OF
MAXIMIZING THE VALUE OF OUR SHAREHOLDERS' INVESTMENT AND IS THE RESULT OF
CONDUCTING OUR ACTIVITIES IN ALIGNMENT WITH OUR QUEST FOR EXCELLENCE OPERATING
PHILOSOPHY.
Over the ten years which have passed since we became a publicly owned Company,
we have repositioned our organization in order to assure continued 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.
These actions have been rewarded in the financial markets by a 1123.2% increase
in the price of our shares since October 4, 1990, the date of our initial public
offering.
But the real question as to whether we have indeed made progress toward the
attainment of our Basic Corporate Objective Of Maximizing The Value Of Our
Shareholders' Investment must be answered by comparing the share price
performance of Coastal Financial Corporation, since the date of its public
offering, to the share price performance of other established financial services
companies operating within our marketplace and to the markets as a whole. In the
following graphs, we have compared the share price performance of Coastal
Financial Corporation to the Nasdaq, S&P 500 and Dow indices, and to (TSFG) The
South Financial Group, the parent company of Carolina First Bank, (WB) Wachovia
Corporation, the parent company of Wachovia Bank, (SNV) Synovus Financial
Corporation, the parent company of NBSC, (BBT) BB&T Corporation, the parent
company of BB&T, (BAC) Bank of America Corporation, the parent of Bank of
America, (FTU) First Union Corporation, the parent company of First Union,
(FFCH) First Financial Holdings, Inc., the parent company of Peoples Federal
Savings and Loan Association and First Federal Savings and Loan Association of
Charleston, and (COOP) Cooperative Bankshares, Inc., the parent company of
Cooperative Bank.
[10 Year Peer Group Price Performance Appears Here]
As demonstrated in this graph, which looks back over our history as a publicly
owned company, the price of Coastal Financial's shares has outperformed the
price of the shares of the other publicly traded banks in our marketplace, as
well as the Nasdaq, S&P 500 and Dow indices.
[CFCP Relative Price Performance Appears Here]
These exceptional results have not only served to validate our QUEST FOR
EXCELLENCE philosophy, but have also given us great confidence that our tactical
strategies are sound and that the future can be even brighter if we continue to
be passionate about OUR COMMITMENT TO OUR CUSTOMERS AND COMMUNITIES.
In looking back over the past year, we undertook many significant initiatives
designed to better prepare our organization for the future. Some of the
initiatives and accomplishments aimed at increasing the long-term value of the
Company by maximizing our ability to capitalize on opportunities in the years
ahead were:
The further development of our organization to support the attainment of our
Vision 2005 strategic plan. We experienced significant growth and progress in
both the transformational and linear aspects of our development plans.
8
Our continued growth depends upon building long term relationships with our
Customers.
Relationships
The transformational element of our plan deals with becoming a Sales
Organization and the linear element of our plans addresses the extension of our
financial services delivery channels.
Initiatives designed to facilitate our transformational progress:
- - The continued expansion of our curriculum at Coastal Federal University to
better assure that the development of our sales and service culture is based
upon a foundation which embraces the formation of long-term relationships. In
this regard, I am very pleased that all of the members of our Leadership Group
have now successfully completed "The 7 Habits of Highly Successful People." This
offering, made available to all of our Associates through Coastal Federal
University, presents a method for achieving internal peace of mind within while
building external trust without by seeking the roots of human behavior in
character and by learning principles rather than merely practices.
Through this curriculum offering and our foundational Pledge To Excellence
course, we are enabling our Associates to transform their understanding of their
roles as Lenders, Deposit Gatherers or Financial Advisors, to that of arrangers
of financial relationships.
Coastal Federal University is a critical ingredient in our recipe for ensuring
that our culture is truly aligned with our QUEST FOR EXCELLENCE Operating
Philosophy and focused on our Mission of Exceeding The Expectations of our
Customer.
- - During this past year, Coastal Investor Services, Inc.*, worked closer than
ever with Coastal Federal to create more relationships with Customers, resulting
in the improvement of Coastal Investor Services, Inc., ranking from #21 last
year to #8 this year out of over 600 brokerage affiliates in the Raymond James
Financial Services system.
This increased focus on our Mission and the opportunities which were created
through this effort enabled a 41% growth in Assets under management, from $112.3
Million to $158.2 Million, and a corresponding increase of 27% in net income.
At Coastal Investor Services, Inc., our Mission of Exceeding the Expectations of
our Customer is implemented through empowering our Financial Advisors to select
from a broad array of financial alternatives and services coupled with a
compensation system which ensures that they are incented to make decisions only
in the Client's best interests.
The ability of Coastal Financial, through Coastal Federal and Coastal Investor
Services, 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, 24-hour telephone
or internet access well demonstrates our COMMITMENT TO OUR CUSTOMERS AND
COMMUNITIES. . .because it allows our Customers to conduct their business when,
how and where they wish.
- - During 2000, we began a reorganizational initiative, termed "Strategic Teams,"
which is designed to better focus our sales and servicing efforts on the great
opportunities we have to earn more of our Customers' business in each of our
four business lines - Business Banking, Personal Banking, Residential Banking
and Investment Services, Inc.
We serve more than 35,000 Customers. The vast majority consider Coastal
Financial their primary financial services provider. On the surface, that seems
impressive. But, in taking a closer look, on average, we have only about
one-fourth of the financial services business of those 35,000 Customers. That
means every day our own Customers are giving three-fourths of their business to
our competitors.
Through the use of these "Strategic Teams," we will explore in depth what it
means to be "arrangers" of financial relationships and better develop the
understanding of our role as "Financial Partner." It means not just handling
transactions for our Customers, it means helping our Customers become
financially successful through establishing full-service relationships.
COASTAL FINANCIAL CORPORATION
EXECUTIVE LEADERSHIP GROUP
AT COASTAL FINANCIAL CORPORATION, WE VIEW CHANGE AND CONSTANT IMPROVEMENT AS
ESSENTIAL TO THE ACHIEVEMENT OF OUR LONG-TERM OBJECTIVES AND BELIEVE THAT OUR
COMMITMENT TO BEING A LEARNING ORGANIZATION WILL PRODUCE THE GREATEST RETURNS OF
ANY INVESTMENT WE HAVE EVER MADE.
9
Our commitment to our Customers centers on the highest level of personal
service.
INITIATIVES FOR GROWTH:
VISION 2005 STRATEGIC PLAN
FOCUS ON LEARNING
COMMUNITY COMMITMENT
CONTINUED EXPANSION
USING TECHNOLOGY TO INCREASE CUSTOMER CONVENIENCE AND ACCESS
Initiatives designed to facilitate our linear progress:
- - The continued expansion of our financial services franchise during this past
year included the opening of the Carolina Forest and Little River Sales Centers,
the opening of our first grocery store Sales Center, located in the BI-LO
Supermarket at 38th Avenue North in Myrtle Beach, the establishment of a lending
office in Wilmington, North Carolina, and the subsequent commencement of
renovations to our Wilmington lending office in order to offer our full array of
financial services.
During this past year, we also added several features to our PC/Internet Banking
facility, www.coastalfederal.com, to make managing money even easier for our
Customers.
Through activities such as these, we are expanding our presence and market
awareness along the South Carolina coast and working toward the establishment of
a significant presence in coastal North Carolina.
These initiatives are reflective of our culture of viewing change and constant
improvement as essential to the achievement of our long-term objectives.
LOOKING AHEAD
Why are we so confident that Coastal Financial has what it takes to capitalize
on significant opportunities in the future? Consider these critical elements:
GEOGRAPHY: 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. Add to that the rapidly
growing counties of Georgetown in South Carolina and Brunswick in North Carolina
and you couldn't ask for a better place to do business.
BRAND: At almost fifty years of age, it has stood the test of time. Our brand
COASTAL FEDERAL is one of the most widely recognized symbols of Trust and
expertise in the delivery of financial services in one of the best markets in
America. Our brand stands for Commitment, Leadership, Integrity and Quality in
Exceeding The Expectations of our Customer. In other words, being totally
COMMITTED TO OUR CUSTOMERS AND COMMUNITIES.
BUSINESS LINES AND PRODUCTS: Our business lines and product offerings are
designed to meet the needs of our Customers and our Communities. We offer a full
line of Business Banking, Personal Banking, Residential Banking and Investment
Services. Our product diversification also helps to create earnings stability.
This element of our operational platform better enables us to weather downturns
that inevitably affect singular segments of our industry. We rely on an
operating strategy which produces a significant amount of our revenue from a
stream of fees we receive from operations, such as mortgage servicing, treasury
management and investment security sales.
DELIVERY CHANNELS: As important as products are, competitors can copy them
quickly. The only method we have to create real value for our Customers is in
the way we distribute products. We have the best locations and most extensive
distribution system in our marketplace. We currently have thirteen Sales Centers
and nineteen ATMs. We have just opened our first supermarket Sales Center and
plan to open our second in the Socastee BI-LO Supermarket in fiscal 2001. Our
Bank by Phone delivery channel last year handled more than 350,000 calls, and
our PC/Internet Banking facility handled more than 75,000 Internet banking
sessions last year, almost double the previous year. Also, last year we
continued to develop www.coastalfederal.com as a destination site and plan for
its significant future expansion.
SALES AND SERVICE CULTURE: In the Financial Institution category of the 2000 Sun
News Readers' Poll, for the third consecutive year, our Customers voted us "Best
of the Beach." Recent Customer surveys, conducted by an independent group, shows
that 95% of our Customers, based upon recent transactions, rank Coastal Federal
"Excellent," in terms of Service Delivery.
10
Looking ahead
Over the years, we have built a reputation for having a strong sales and service
culture. This reputation is being reinforced today through the addition of
systems for tracking sales, Customer profitability and Customer information -
using technology to personalize Customer service. We intend to propagate
effective technology and a superior sales and service culture. Our goal is to
earn all the business of every creditworthy Customer. We intend to sell at least
one more product to every Customer every year. The more products we sell
Customers, the better deal they receive, the more loyal they become, the more we
get to know about them in order to serve them better, and the higher the return
for Coastal Financial Corporation Shareholders. All of our stakeholders win -
our Customers, our Communities, our Associates and our Shareholders.
OUR ASSOCIATES: As important as all of these competitive advantages are, they
are meaningless without talented team members who care. Our brand does not serve
our Customers. Our Associates serve our Customers. Coastal Financial team
members put their Customers first. Products and technology can be duplicated -
but we believe that our Associates are more talented, more motivated and more
energized than our competitors. They care about each other, care about their
Customers, care about their Communities and care about their Company. We are
firmly convinced that it's our Associates who give Coastal Financial a real
competitive advantage. That's why we will continue to invest significantly in
attracting, developing and retaining the very best people in the financial
services industry for our team.
And we have the best team imaginable. Our 2000 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 2000 and 1999. In fact, in
these two years alone, our net income has grown by over 23%.
And we still have tremendous potential for further gains. In the last five
years, our net income has more than doubled. Since becoming a publicly owned
Company in 1990, we have roughly doubled our earnings every four years.
Our Coastal Financial team is very proud of these achievements and looks forward
to even greater success in the years ahead. And while we certainly cannot
predict the future, we can take pride in the fact that we have the Geography,
Brand, Business Lines and Products, Delivery Channels, Sales and Servicing
Culture, and dedicated Associates who are aligned with our QUEST FOR EXCELLENCE
Operating Philosophy and COMMITTED TO OUR CUSTOMERS AND COMMUNITIES.
These significant advantages have produced our exceptional results and give us
great confidence and optimism that we can continue to 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
Independent Auditors' Report
The Board of Directors
Coastal Financial Corporation
Myrtle Beach, South Carolina
We have audited the consolidated statements of financial condition of Coastal
Financial Corporation and subsidiaries (the "Company") as of September 30, 1999
and 2000, 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, 2000. 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 auditing standards generally accepted
in the United States of America. 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, 1999 and 2000, and the results of its operations and its cash
flows for each of the years in the three-year period ended September 30, 2000,
in conformity with accounting principles generally accepted in the United States
of America.
Greenville, South Carolina /s/ KPMG LLP
October 25, 2000
12
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Financial Condition
September 30, 1999 and 2000
1999 2000
---------- ---------
(Dollars in thousands)
ASSETS
Cash and amounts due from banks . . . . . . . . . . . . . . . . . . . . . . . . $ 21,988 14,999
Short-term interest-bearing deposits . . . . . . . . . . . . . . . . . . . . . 2,245 2,168
Investment securities available for sale . . . . . . . . . . . . . . . . . . . 6,063 8,548
Mortgage-backed securities available for sale . . . . . . . . . . . . . . . . . 182,115 189,239
Loans receivable (net of allowance for loan losses of $6,430
at September 30, 1999 and $7,064 at September 30, 2000) . . . . . . . . . . . 455,351 511,701
Loans receivable held for sale . . . . . . . . . . . . . . . . . . . . . . . . 16,636 10,194
Real estate acquired through foreclosure, net . . . . . . . . . . . . . . . . . 96 867
Office property and equipment, net . . . . . . . . . . . . . . . . . . . . . . 11,236 11,518
Federal Home Loan Bank (FHLB) stock, at cost . . . . . . . . . . . . . . . . . 8,201 11,899
Accrued interest receivable on loans . . . . . . . . . . . . . . . . . . . . . 2,861 3,117
Accrued interest receivable on securities.. . . . . . . . . . . . . . . . . . . 1,333 1,555
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,888 3,033
---------- ---------
$713,013 $768,838
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 399,673 406,217
Securities sold under agreements to repurchase . . . . . . . . . . . . . . . . 96,948 75,858
Advances from FHLB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 164,024 225,224
Other borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,569 2,069
Drafts outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,383 2,475
Advances by borrowers for property taxes and insurance. . . . . . . . . . . . 1,346 1,257
Accrued interest payable. . . . . . . . . . . . . . . . . . . . . . . . . . . 1,156 2,531
Other liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,677 6,262
---------- ---------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 671,776 721,893
---------- ---------
Stockholders' equity:
Serial preferred stock, 1,000,000 shares authorized and unissued . . . . . . . -- --
Common stock $.01 par value, 15,000,000 shares authorized;
7,426,528 shares at September 30, 1999 and 7,287,498
shares at September 30, 2000 issued and outstanding . . . . . . . . . . . . 74 73
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . 9,313 9,780
Retained earnings, restricted . . . . . . . . . . . . . . . . . . . . . . . . 34,288 40,319
Treasury stock, at cost (23,100 and 161,316) shares, respectively . . . . . . (356) (1,702)
Accumulated other comprehensive loss, net of tax . . . . . . . . . . . . . . (2,082) (1,525)
---------- ---------
Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . 41,237 46,945
---------- ---------
$713,013 $768,838
========== =========
See accompanying notes to consolidated financial statements.
13
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended September 30, 1998, 1999 and 2000
1998 1999 2000
---------- --------- ---------
(In thousands, except share data)
Interest income:
Loans receivable . . . . . . . . . . . . . . . . . . . . . . . . . . $ 36,314 38,541 44,005
Investment securities . . . . . . . . . . . . . . . . . . . . . . . . 1,309 1,476 2,484
Mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . 5,972 9,205 10,987
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 299 337 603
---------- --------- ---------
Total interest income. . . . . . . . . . . . . . . . . . . . . . . . . 43,894 49,559 58,079
---------- --------- ---------
Interest expense:
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,559 14,627 15,769
Securities sold under agreements to repurchase . . . . . . . . . . . 3,404 3,869 6,993
Advances from FHLB . . . . . . . . . . . . . . . . . . . . . . . . . 6,488 8,495 10,874
---------- --------- ---------
Total interest expense . . . . . . . . . . . . . . . . . . . . . . 24,451 26,991 33,636
---------- --------- ---------
Net interest income . . . . . . . . . . . . . . . . . . . . . . . 19,443 22,568 24,443
Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . 865 750 978
---------- --------- ---------
Net interest income after provision for loan losses . . . . . . . 18,578 21,818 23,465
---------- --------- ---------
Other income:
Fees and service charges on loans and deposit accounts . . . . . . . 1,639 2,025 2,126
Gain on sales of loans held for sale . . . . . . . . . . . . . . . . 1,579 979 631
Gain (loss) on sales of investment securities, net . . . . . . . . . 96 73 (17)
Gain (loss) on sales of mortgage-backed securities, net . . . . . . . 521 191 (1,554)
Gain on sale of deposits . . . . . . . . . . . . . . . . . . . . . . -- -- 1,746
Loss from real estate acquired through foreclosure . . . . . . . . . (72) (29) (64)
Income from real estate partnerships. . . . . . . . . . . . . . . . . 221 -- --
Income from sale of non-depository products . . . . . . . . . . . . . 535 745 834
Federal Home Loan Bank stock dividends . . . . . . . . . . . . . . . 454 616 711
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . 906 973 1,468
---------- --------- ---------
Total other income . . . . . . . . . . . . . . . . . . . . . . . . 5,879 5,573 5,881
---------- --------- ---------
General and administrative expenses:
Salaries and employee benefits . . . . . . . . . . . . . . . . . . . 7,355 8,604 9,149
Net occupancy, furniture and fixtures and data processing expense . . 3,260 3,563 3,946
FDIC insurance premium . . . . . . . . . . . . . . . . . . . . . . . 213 220 121
Other expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,790 2,899 2,975
---------- --------- ---------
Total general and administrative expense. . . . . . . . . . . . . . 13,618 15,286 16,191
---------- --------- ---------
Income before income taxes . . . . . . . . . . . . . . . . . . . . 10,839 12,105 13,155
Income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,987 4,390 4,698
---------- --------- ---------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,852 7,715 8,457
========== ========= =========
Earnings per common share
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.94 1.05 1.15
========== ========= =========
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.90 1.02 1.13
========== ========= =========
Average common shares outstanding
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,260,000 7,370,000 7,385,000
========== ========= =========
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,605,000 7,585,000 7,477,000
========== ========= =========
See accompanying notes to consolidated financial statements.
14
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity and Comprehensive Income
Years ended September 30, 1998, 1999 and 2000
Accumulated
Other
Additional Comprehensive Total
Common Paid-in Retained Treasury Income Stockholders'
Stock Capital Earnings Stock (Loss) Equity
----- ------- -------- -------- ------------- -------------
(In thousands)
Balance at September 30, 1997 . . . . . . . . . . . $72 $8,672 $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
----- ------- -------- -------- ------------- -------------
Balance at September 30, 1998 . . . . . . . . . . . 73 8,973 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 . . . . . . . . . . . 74 9,313 34,288 (356) (2,082) 41,237
Exercise of stock options . . . . . . . . . . . . . -- 467 (514) 617 -- 570
Cash dividends . . . . . . . . . . . . . . . . . . -- -- (1,912) -- -- (1,912)
Net income . . . . . . . . . . . . . . . . . . . . -- -- 8,457 -- -- 8,457
Other comprehensive income, net of tax:
Unrealized losses arising during period,
net of taxes of $255 . . . . . . . . . . . . . . -- -- -- -- (417) --
Less: reclassification adjustment for losses
included in net income, net of taxes of $597 -- -- -- -- 974 --
----- ------- -------- -------- ------------- -------------
Other comprehensive income . . . . . . . . . . . . -- -- -- -- 557 557
----- ------- -------- -------- ------------- -------------
Comprehensive income . . . . . . . . . . . . . . . -- -- -- -- -- 9,014
----- ------- -------- -------- ------------- -------------
Treasury stock repurchases . . . . . . . . . . . . (1) -- -- (1,963) -- (1,964)
----- ------- -------- -------- ------------- -------------
Balance at September 30, 2000 . . . . . . . . . . . $73 $9,780 $40,319 $(1,702) $(1,525) $46,945
===== ======= ======== ======== ============= =============
See accompanying notes to consolidated financial statements.
15
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended September 30, 1998, 1999 and 2000
1998 1999 2000
---------- --------- ----------
(In thousands)
Cash flows from operating activities:
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,852 7,715 8,457
Adjustments to reconcile net income to net cash provided by operating activities:
Income from real estate partnerships. . . . . . . . . . . . . . . . . . . . (221) -- --
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,030 1,206 1,419
Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . 865 750 978
(Gain) loss on sale of mortgage-backed securities available for sale . . . . (521) (191) 1,554
Origination of loans receivable held for sale . . . . . . . . . . . . . . . (69,546) (66,930) (27,253)
Proceeds from sales of loans receivable held for sale . . . . . . . . . . . 71,674 60,781 33,695
(Increase) decrease in:
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (176) (1,938) 1,855
Accrued interest receivable . . . . . . . . . . . . . . . . . . . . . . . (604) (324) (478)
Increase (decrease) in:
Accrued interest payable . . . . . . . . . . . . . . . . . . . . . . . . 400 (196) 1,375
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . (248) 2,744 243
---------- --------- ----------
Net cash provided by operating activities. . . . . . . . . . . . . . . 9,505 3,617 21,845
---------- --------- ----------
Cash flows from investing activities:
Proceeds from sale of investment securities available for sale. . . . . . . . 4,500 9,735 10,283
Proceeds from maturities of investment securities available for sale . . . . . 25,596 5,165 --
Purchases of investment securities available for sale . . . . . . . . . . . . (13,798) (11,360) (12,737)
Purchases of loans receivable. . . . . . . . . . . . . . . . . . . . . . . . . (10,442) (9,078) (4,027)
Proceeds from sale of mortgage-backed securities available for sale . . . . . 87,068 95,364 106,367
Purchases of mortgage-backed securities available for sale . . . . . . . . . . (274,144) (155,877) (124,502)
Principal collected on mortgage-backed securities available for sale . . . . . 45,505 72,177 25,219
Origination of loans receivable, net. . . . . . . . . . . . . . . . . . . . . (135,706) (189,427) (219,943)
Principal collected on loans receivable. . . . . . . . . . . . . . . . . . . . 125,289 128,805 139,900
Disposition of Florence office assets and liabilities, net. . . . . . . . . . -- -- (13,265)
Proceeds from sales of real estate acquired through foreclosure . . . . . . . 263 88 180
Purchases of office properties and equipment . . . . . . . . . . . . . . . . . (2,470) (3,441) (2,392)
Purchases of FHLB stock . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,648) (935) (3,698)
Other investing activities, net . . . . . . . . . . . . . . . . . . . . . . . 193 427 --
---------- --------- ----------
Net cash used by investing activities . . . . . . . . . . . . . . . . (149,794) (58,357) (98,615)
---------- --------- ----------
Cash flows from financing activities:
Increase in deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39,205 13,352 31,397
Increase (decrease) in securities sold under agreements to repurchase . . . . 56,548 37,734 (21,090)
Proceeds from FHLB advances . . . . . . . . . . . . . . . . . . . . . . . . . 242,625 353,900 890,404
Repayment of FHLB advances. . . . . . . . . . . . . . . . . . . . . . . . . . (199,194) (334,785) (829,204)
Proceeds (repayments) from other borrowings, net . . . . . . . . . . . . . . . 4,244 (4,868) 500
Increase (decrease) in advance payments by borrowers for property
taxes and insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (80) 17 (89)
Increase (decrease) in drafts outstanding, net. . . . . . . . . . . . . . . . 597 (232) 1,092
Repurchase of treasury stock, at cost. . . . . . . . . . . . . . . . . . . . . -- (356) (1,964)
Cash dividends to stockholders and cash for fractional shares . . . . . . . . (1,724) (1,796) (1,912)
Exercise of stock options. . . . . . . . . . . . . . . . . . . . . . . . . . . 323 341 570
---------- --------- ----------
Net cash provided by financing activities. . . . . . . . . . . . . . . 142,544 63,307 69,704
---------- --------- ----------
Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . 2,255 8,567 (7,066)
---------- --------- ----------
Cash and cash equivalents at beginning of year. . . . . . . . . . . . . . . . . 13,411 15,666 24,233
---------- --------- ----------
Cash and cash equivalents at end of year . . . . . . . . . . . . . . . . . . . . $ 15,666 24,233 17,167
========== ========= ==========
Supplemental information:
Interest paid. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 24,051 27,187 32,261
========== ========= ==========
Income taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,112 2,085 3,789
========== ========= ==========
Supplemental schedule of non-cash investing and financing transactions:
Securitization of mortgage loans held for sale into mortgage-backed securities $ 4,997 27,713 14,894
========== ========= ==========
Transfer of mortgage loans to real estate acquired through foreclosure . . . . $ 48 149 951
========== ========= ==========
See accompanying notes to consolidated financial statements.
16
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.
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 statement 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.
17
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, 1999 and 2000, the Company had approximately $16.6
million and $10.2 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
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
basis for assets and liabilities as compared to their tax basis. 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.
18
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) 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.
(o) 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
unrealized gains (losses) on securities and is presented in the statements of
stockholders' equity and comprehensive income.
(p) Disclosures Regarding Segments
The Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" in 1998. 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 its consolidated financial
statements.
(q) Reclassifications
Certain amounts in the 1998 and 1999 consolidated financial statements have
been reclassified to conform with the 2000 presentation. Such reclassifications
did not change net income or equity as previously reported.
19
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, 1999 is summarized as follows:
1999
-------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ------
(In thousands)
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
========= ========== ========== ======
The amortized cost and market value of investment securities available for
sale at September 30, 2000 is summarized as follows:
2000
-------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ------
(In thousands)
U.S. Government and agency obligations:
Due after one but within five years ............. $ 1,310 4 (1) 1,313
Due after five years ............................ 7,359 32 (156) 7,235
--------- ---------- ---------- ------
$ 8,669 36 (157) 8,548
========= ========== ========== ======
The Company had gross realized gains of $96,000 and there were no gross
realized losses for the year ended September 30, 1998. For the year ended
September 30, 1999, gross realized gains were $73,000 and there were no gross
realized losses. For the year ended September 30, 2000, gross realized gains
were $8,000 and gross realized losses were $25,000.
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, 2000 was $170.2
million with a market value of $166.5 million.
(3) MORTGAGE-BACKED SECURITIES
Mortgage-backed securities available for sale at September 30, 1999
consisted of the following:
1999
-------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- --------
(In thousands)
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
========= ========== ========== ========
20
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, 2000
consisted of the following:
2000
-------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- --------
(In thousands)
Collateralized Mortgage Obligations . . . . . . $ 31,023 102 (1,035) 30,090
FNMA . . . . . . . . . . . . . . . . . . . . . 122,665 522 (1,320) 121,867
GNMA . . . . . . . . . . . . . . . . . . . . . 18,698 86 (139) 18,645
FHLMC . . . . . . . . . . . . . . . . . . . . . 19,191 87 (641) 18,637
--------- ---------- ---------- --------
$191,577 797 (3,135) 189,239
========= ========== ========== ========
For the year ended September 30, 1998, there were gross realized gains of
$533,000 and gross realized losses of $12,000. The Company had gross realized
gains of $336,000 and gross realized losses of $145,000 for the year ended
September 30, 1999. For the year ended September 30, 2000, the Company had gross
realized gains of $370,000 and gross realized losses of $1.9 million.
(4) LOANS RECEIVABLE, NET
Loans receivable, net at September 30 consisted of the following:
1999 2000
-------- --------
(In thousands)
First mortgage loans:
Single family to 4 family units . . . . . . . . . $248,433 273,657
Other, primarily commercial real estate. . . . . . 114,931 133,569
Construction loans . . . . . . . . . . . . . . . . 46,766 54,905
Consumer and commercial loans:
Installment consumer loans. . . . . . . . . . . . 20,026 20,641
Mobile home loans . . . . . . . . . . . . . . . . . 1,166 1,374
Savings account loans . . . . . . . . . . . . . . . 1,521 1,063
Equity lines of credit . . . . . . . . . . . . . . 21,081 23,009
Commercial and other loans . . . . . . . . . . . . 22,818 23,357
-------- --------
476,742 531,575
Less:
Allowance for loan losses . . . . . . . . . . . . . 6,430 7,064
Deferred loan fees (costs) . . . . . . . . . . . . (354) (519)
Undisbursed portion of loans in process. . . . . . 15,315 13,329
-------- --------
$455,351 511,701
======== ========
The changes in the allowance for loan losses for the years ended September 30
consisted of the following:
1998 1999 2000
-------- ------- ------
(In thousands)
Beginning allowance . . . . . . . . . . . .. $ 4,902 5,668 6,430
Provision for loan losses . . . . . . . . .. 865 750 978
Allowance recorded on acquired loans. . . .. 109 112 50
Disposition of Florence office loans . . . . -- -- (75)
Loan recoveries . . . . . . . . . . . . . .. 64 252 77
Loan charge-offs . . . . . . . . . . . . . . (272) (352) (396)
-------- ------- ------
$ 5,668 6,430 7,064
======== ======= ======
Non-accrual loans which were over ninety days delinquent totaled
approximately $1.4 million and $4.8 million at September 30, 1999 and 2000,
respectively. In fiscal years 1998, 1999 and 2000, interest income which would
have been recorded would have been approximately $181,000, $46,000 and $220,000,
respectively, had non-accruing loans been current in accordance with their
original terms.
21
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
(4) LOANS RECEIVABLE, NET - Continued
At September 30, 2000, impaired loans totaled $1.4 million. There were no
impaired loans at September 30, 1999. Included in the allowance for loan losses
at September 30, 2000 was $345,000 related to impaired loans. The average
recorded investment in impaired loans for the year ended September 30, 2000 was
$1.5 million. No interest income was recognized on impaired loans in fiscal
2000.
At September 30, 1999 and 2000, the Company had commitments outstanding to
originate loans totaling approximately $5.6 million and $4.3 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, 1999 and 2000, the Company had undisbursed lines of credit of
approximately $31.2 million and $33.0 million, respectively.
Loans serviced for the benefit of others amounted to approximately $88.0
million, $99.4 million and $106.1 million at September 30, 1998, 1999 and 2000,
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.
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, 2000, 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, 2000:
Balance at September 30, 1999 . . . . . . . $3,798
New loans . . . . . . . . . . . . . . . . . 821
Repayments . . . . . . . . . . . . . . . . 21
------
Balance at September 30, 2000 . . . . . . . $4,598
======
22
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:
1999 2000
--------- --------
(In thousands)
Land . . . . . . . . . . . . . . . . . . . . . . $ 2,870 2,875
Building and improvements. . . . . . . . . . . . 8,795 8,926
Furniture, fixtures and equipment. . . . . . . . 8,811 10,180
--------- --------
20,476 21,981
Less accumulated depreciation. . . . . . . . . . 9,240 10,463
--------- --------
$ 11,236 11,518
========= ========
The Company leases office space and various equipment. Total rental expense
for the years ended September 30, 1998, 1999 and 2000 was approximately
$153,000, $212,000 and $213,000, respectively.
Future minimum rental payments for operating leases having remaining
noncancelable lease terms in excess of one year at September 30, 2000 are as
follows (In thousands):
2001 . . . . . . . . . . . . . . . $ 185
2002 . . . . . . . . . . . . . . . 146
2003 . . . . . . . . . . . . . . . 104
2004 . . . . . . . . . . . . . . . 73
2005 . . . . . . . . . . . . . . . 68
Thereafter . . . . . . . . . . . . 370
-----
$ 946
=====
(6) INVESTMENT REQUIRED BY LAW
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 stock of $11.9 million at September 30, 2000. 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.
(7) DEPOSITS
Deposits at September 30 consisted of the following:
1999 2000
Weighted Weighted
Amount Rate Amount Rate
--------- -------- -------- --------
(Dollars in thousands)
Transaction accounts:
Noninterest bearing . . . . . $ 37,256 --% $ 35,214 --%
NOW . . . . . . . . . . . . . 50,774 1.16 48,945 0.76
Money market checking . . . . 138,188 4.25 120,133 4.98
--------- -------- -------- --------
Total transaction accounts. 226,218 2.85 204,292 3.11
--------- -------- -------- --------
Passbook accounts:
Regular passbooks . . . . . . 37,115 2.67 34,503 2.65
Money market. . . . . . . . . 2,097 2.22 1,702 2.31
--------- -------- -------- --------
Total passbook accounts . . 39,212 2.65 36,205 2.63
--------- -------- -------- --------
Certificate accounts:
0.00 - 5.99% . . . . . . . . 133,651 75,883
6.00 - 8.00% . . . . . . . . 217 89,443
8.00 - 10.00% . . . . . . . . 375 394
--------- -------- -------- --------
Total certificate accounts. 134,243 4.94 165,720 6.03
--------- -------- -------- --------
$399,673 3.54% $406,217 4.26%
========= ======== ======== ========
23
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 $115.0 million and $146.6 million at September 30, 1999 and
2000, respectively. Included in certificate accounts were $5.3 million and $31.8
million at September 30, 1999 and 2000, respectively, originated by brokers for
a fee.
The amounts and scheduled maturities of certificate accounts at September
30, are as follows:
1999 2000
-------- -------
(In thousands)
Within 1 year. . . . . . . . . . . . . . . . $108,135 136,035
After 1 but within 2 years . . . . . . . . . 19,785 23,153
After 2 but within 3 years . . . . . . . . . 5,200 3,934
Thereafter. . . . .. . . . . . . . . . . . . 1,123 2,598
-------- -------
$134,243 165,720
======== =======
Interest expense on deposits for the years ended September 30 consisted of the
following:
1998 1999 2000
------- -------- --------
(Dollars in thousands)
Transaction accounts. . . . . . . . $ 5,756 6,368 6,283
Passbook accounts . . . . . . . . . 924 962 909
Certificate accounts. . . . . . . . 7,879 7,297 8,577
------- -------- --------
$14,559 14,627 15,769
======= ======== ========
The fair value of transaction and passbook accounts is $265.4 million and
$240.5 million which was the amount currently payable at September 30, 1999 and
2000, respectively. The fair value of certificate accounts was $133.5 million
and $165.3 million compared to a book value of $134.2 million and $165.7 million
and was estimated by discounting the amounts payable at the certificate rates
currently offered for deposits of similar remaining maturities. The fair value
estimates above did not include the substantial benefit that results from the
low cost funding provided by the deposit liabilities compared to the cost of
borrowing funds in the market.
(8) ADVANCES FROM FHLB
Advances from the FHLB at September 30 consisted of the following:
1999 2000
-------------------- ---------------------
Weighted Weighted
Amount Rate Amount Rate
--------- --------- -------- ---------
(Dollars in thousands)
Fiscal Year Maturity
2000 . . . . . . . . . . . . . . $15,461 5.85% $ -- --%
2001 . . . . . . . . . . . . . . 38,946 5.56 116,476 6.68
2002 . . . . . . . . . . . . . . 4,761 6.82 3,211 6.93
2003 . . . . . . . . . . . . . . 37,357 5.28 12,667 6.39
2004 . . . . . . . . . . . . . . 34,500 5.03 6,000 6.35
2005 or greater. . . . . . . . . 32,999 5.00 86,870 6.13
--------- --------- -------- ---------
$164,024 5.33% $225,224 6.44%
========= ========= ======== =========
Stock in the FHLB of Atlanta and specific first mortgage loans and
mortgage-backed securities of approximately $212.1 million and $247.3 million at
September 30, 1999 and 2000, 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, 2000, the excess first mortgage
loan collateral pledged to the FHLB will support additional borrowings of
approximately $22.1 million. At September 30, 2000, included in the four and
five years or greater maturities were $89.0 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, 1999 and
2000 is $160.9 million and $224.4 million. This estimate is based on discounting
amounts payable at contractual rates using current market rates for advances
with similar maturities.
24
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:
At September 30,
--------------------------------
1998 1999 2000
------- -------- --------
(Dollars in thousands)
Outstanding balance:
Securities sold under agreements to repurchase:
Customer . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,214 $ 4,848 $ 3,825
Broker . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55,000 92,100 72,033
Weighted average rate (at month end) paid on:
Securities sold under agreements to repurchase:
Customer . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.43% 3.37% 5.75%
Broker . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.69 5.53 6.59
Maximum amount of borrowings outstanding at any month end:
Securities sold under agreements to repurchase:
Customer . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,214 $ 4,848 $ 4,196
Broker . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86,250 92,100 122,700
Approximate average outstanding with respect to:
Securities sold under agreements to repurchase:
Customer . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,989 $ 3,199 $ 2,826
Broker . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56,262 67,100 107,737
Weighted average rate (year to date) paid on:
Securities sold under agreements to repurchase:
Customer . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.61% 3.09% 4.10%
Broker . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.68 5.30 6.38
Repurchase agreements represent borrowings by the Company with maturities
ranging from 1 to 28 months collateralized by securities of the United States
government or its agencies which are held by third-party safekeepers.
(10) INCOME TAXES
Income tax expense (benefit) for the years ended September 30 consisted of
the following:
Current Deferred Total
-------- -------- -------
(In thousands)
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
======== ======== =======
2000:
Federal . . . . . . . . . . .. $ 4,484 (116) 4,368
State . . . . . . . . . . . .. 325 5 330
-------- -------- -------
$ 4,809 (111) 4,698
======== ======== =======
25
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, 1999 and 2000
relate to the following:
1999 2000
------- ------
(In thousands)
Deferred tax assets:
Allowance for loan losses . . . . . . . . . . . . . . . . . . . . . . . $ 2,375 2,616
Accrued medical reserves . . . . . . . . . . . . . . . . . . . . . . . . 124 121
Other real estate reserves and deferred gains on other real estate . . . 86 58
Net operating loss carryforwards . . . . . . . . . . . . . . . . . . . . 134 135
Unrealized loss on securities available for sale . . . . . . . . . . . . 1,307 965
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 11
------- ------
Total deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . 4,066 3,906
Less valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . (134) (135)
------- ------
Net deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . 3,932 3,771
------- ------
Deferred tax liabilities:
Tax bad debt reserve in excess of base year amount . . . . . . . . . . . 484 387
Property and equipment principally due to differences in depreciation . . 202 168
FHLB stock, due to stock dividends not recognized for tax purposes . . . 356 356
Deferred loan fees . . . . . . . . . . . . . . . . . . . . . . . . . . . 356 435
Book over tax basis in investment in unconsolidated subsidiary . . . . . 2,661 2,772
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 429 440
------- ------
Total deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . 4,488 4,558
------- ------
Net deferred tax asset (liability) . . . . . . . . . . . . . . . . . . . . $ (556) (787)
======= ======
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 expense of $342,000 for the unrealized gains on securities
available for sale has been recorded directly to stockholders' equity. The
balance of the change in the deferred tax liability results from the current
period deferred tax benefit of $111,000. Income taxes of the Company differ from
the amounts computed by applying the Federal income tax rate of 34% for the
years ended September 30 to earnings before income taxes as follows:
1998 1999 2000
------- ------ ------
(In thousands)
Computed federal income taxes. . . . . . $ 3,685 4,116 4,473
State tax, net of federal benefit. . . . 298 287 218
Other, net . . . . . . . . . . . . . . . 4 (13) 7
------- ------ ------
Total income tax expense . . . . . . . . $ 3,987 4,390 4,698
======= ====== ======
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, 2000 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.
26
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, 1998, 1999 and 2000 was minor.
Plan assets exceeded the present value of accumulated plan benefits at June 30,
2000, 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 $221,000, $251,000 and $255,000 for fiscal
years 1998, 1999 and 2000, respectively.
(12) REGULATORY MATTERS
At September 30, 2000, the Bank's loans-to-one borrower limit was
approximately $8.4 million. The Bank may apply to have this amount increased to
$16.8 million for borrowers who have loans secured by residential collateral. At
September 30, 2000, the Bank had applied for this limit increase for three
borrowers with a maximum approved aggregate exposure to the three borrowers of
$27.9 million with aggregate outstanding and committed exposure of $19.9
million. At September 30, 2000, 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. (In thousands)
Categorized as "Well
Capitalized" Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provision
------------------ ------------------ --------------------
Amount Ratio Amount Ratio Amount Ratio
-------- ------- -------- ------- --------- --------
As of September 30, 2000:
Total Capital: . . . . . . . . . . . . . . $55,868 12.45% $35,896 8.00% $44,870 10.00%
(To Risk Weighted Assets)
Tier 1 Capital: . . . . . . . . . . . . . $50,537 11.26% N/A N/A $26,922 6.00%
(To Risk Weighted Assets)
Tier 1 Capital: . . . . . . . . . . . . . $50,537 6.56% $30,734 4.00% $38,417 5.00%
(To Total Assets)
Tangible Capital: . . . . . . . . . . . . $50,537 6.56% $11,525 1.50% N/A N/A
(To Total Assets)
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)
(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 maintains 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 the
27
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
(13) Liquidation Account - Continued
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
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:
(In thousands, except share and per share data) 1998 1999 2000
- ----------------------------------------------- --------- --------- ---------
Basic:
Net income (numerator) . . . . . . . . . . . . . . . . . . . $ 6,852 $ 7,715 $ 8,457
========= ========= =========
Average common shares outstanding (denominator). . . . . . . 7,260,000 7,370,000 7,385,000
========= ========= =========
Per share amount . . . . . . . . . . . . . . . . . . . . . . $ 0.94 $ 1.05 $ 1.15
========= ========= =========
Diluted:
Net Income (numerator) . . . . . . . . . . . . . . . . . . . $ 6,852 $ 7,715 $ 8,457
========= ========= =========
Average common shares outstanding . . . . . . . . . . . . . 7,260,000 7,370,000 7,385,000
Dilutive common stock options. . . . . . . . . . . . . . . . 345,000 215,000 92,000
--------- --------- ---------
Average diluted shares outstanding (denominator) . . . . . . 7,605,000 7,585,000 7,477,000
========= ========= =========
Per share amount . . . . . . . . . . . . . . . . . . . . . . $ 0.90 $ 1.02 $ 1.13
========= ========= =========
(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, 2000 amounted to approximately 592,000 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, 2000, the Company had the following
options outstanding:
Options
Options Available for Option Expiration
Grant Date (Calendar Year) Granted Exercise Price Date
- -------------------------- ------- ------------- ------ ----------
1992 . . . . . . . . . . . . . 1,478 100% $ 1.84 2002
1994 . . . . . . . . . . . . . 5,335 100 6.21 2004
1995 . . . . . . . . . . . . . 123,309 100 5.75 2005
1996 . . . . . . . . . . . . . 58,828 80 9.93 2006
1997 . . . . . . . . . . . . . 173,740 60 14.21 2007
1998 . . . . . . . . . . . . . 173,494 40 15.28 2008
1999 . . . . . . . . . . . . . 130,340 20 12.34 2009
2000 . . . . . . . . . . . . . 37,383 -- 10.78 2010
During the years ended September 30, 1998, 1999 and 2000, options for
71,048, 217,541, and 48,025 shares, at an average exercise price of $4.54,
$1.97, and $6.18 per share, respectively, were exercised.
28
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
(15) STOCK OPTION PLAN - Continued
The following is a summary of the activity of the stock option plans for
the years 1998, 1999, and 2000.
1998 1999 2000
-------------------- -------------------- -------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------- -------- ------- -------- ------- --------
Outstanding, October 1 . . . . 594,618 $ 7.38 731,840 $10.15 669,449 $14.15
Granted. . . . . . . . . . . . 227,006 15.66 161,664 15.84 154,913 11.16
Cancelled. . . . . . . . . . . (18,736) 10.32 (6,514) 13.52 (72,430) 12.86
Exercised. . . . . . . . . . . (71,048) 4.54 (217,541) 1.97 (48,025) 6.18
------- -------- ------- -------- ------- --------
Outstanding, September 30. . . 731,840 $10.15 669,449 $14.15 703,907 $14.17
======= ======== ======= ======== ======= ========
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 Statement
No. 123, the Company's net income and earnings per share would have been reduced
to the proforma amounts indicated below (in thousands except per share data):
1998 1999 2000
--------- --------- ---------
Net income As reported $ 6,852 $ 7,715 $ 8,457
Proforma 6,516 7,222 7,879
Diluted earnings per share As reported $ 0.90 $ 1.02 $ 1.13
Proforma 0.86 0.95 1.05
The weighted average fair value per share of options granted in 1998, 1999
and 2000 amounted to $5.27, $5.27 and $4.58, respectively. 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 1998, 1999 and 2000, respectively: dividend yield of approximately
1.65%, 2.00% and 3.35%, expected volatility of approximately 30%, 33% and 44%,
risk-free interest rate of 4.70%, 5.90% and 6.06%, 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. On March
14, 2000, the Company declared a 10% stock dividend aggregating approximately
671,000 shares. All share data has been retroactively restated to give effect to
the common stock dividends.
(17) CASH DIVIDENDS
On December 16, 1997, and March 25, 1998, the Company declared quarterly
cash dividends of $.058, 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 $.06, respectively. On December 23,
1999 the Company declared a quarterly cash dividend of $.063. On March 31, 2000,
June 23, 2000 and September 29, 2000, the Company declared quarterly cash
dividends of $.065, respectively.
(18) LEGAL MATTERS
The Company is not a defendant in any lawsuits. The subsidiaries are
defendants in lawsuits arising out of the normal course of business. None of the
lawsuits would have a material impact on the Company's financial status.
29
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):
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------- --------- --------- ---------
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 . . . . . $ .23 .26 .26 .26
========= ========= ========= =========
Weighted average shares outstanding-diluted . 7,625,000 7,557,000 7,597,000 7,560,000
========= ========= ========= =========
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------- --------- --------- ---------
2000:
Total interest income . . . . . . . . . . . . $ 13,643 14,098 14,886 15,452
Total interest expense . . . . . . . . . . . 7,619 7,966 8,737 9,315
--------- --------- --------- ---------
Net interest income . . . . . . . . . . . . . 6,024 6,132 6,149 6,137
Provision for loan losses . . . . . . . . . . 245 225 283 225
--------- --------- --------- ---------
Net interest income after provision for
loan losses . . . . . . . . . . . . . . . . 5,779 5,907 5,866 5,912
Other income . . . . . . . . . . . . . . . . 1,463 1,469 1,439 1,511
General and administrative expenses . . . . . 4,109 4,133 3,953 3,995
--------- --------- --------- ---------
Earnings before income taxes . . . . . . . . 3,133 3,243 3,352 3,428
Income taxes . . . . . . . . . . . . . . . . 1,128 1,153 1,200 1,218
--------- --------- --------- ---------
Net income . . . . . . . . . . . . . . . . . $ 2,005 2,090 2,152 2,210
========= ========= ========= =========
Earnings per common share - diluted . . . . . $ .27 .28 .29 .30
========= ========= ========= =========
Weighted average shares outstanding-diluted . 7,536,000 7,471,000 7,437,000 7,382,000
========= ========= ========= =========
30
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
(20) COASTAL FINANCIAL CORPORATION FINANCIAL STATEMENTS (PARENT COMPANY ONLY)
The following is condensed financial information of Coastal Financial
Corporation (parent company only), the primary asset of which is its investment
in its bank subsidiary, for the periods indicated. (In thousands):
Coastal Financial Corporation
Condensed Balance Sheets
September 30, 1999 and 2000
1999 2000
---------- --------
Assets
Cash . . . . . . . . . . . . . . . . . . . . . . . . . $ 98 472
Investment in subsidiaries . . . . . . . . . . . . . . 43,203 49,182
Deferred tax asset . . . . . . . . . . . . . . . . . . 78 98
Other assets . . . . . . . . . . . . . . . . . . . . . 114 100
---------- --------
Total assets . . . . . . . . . . . . . . . . . . . $ 43,493 49,852
========== ========
Liabilities and Stockholders' Equity
Accounts payable (principally dividends) . . . . . . . 687 838
Note payable . . . . . . . . . . . . . . . . . . . . . 1,569 2,069
Total stockholders' equity . . . . . . . . . . . . . . 41,237 46,945
---------- --------
Total liabilities and stockholders' equity . . . . $ 43,493 49,852
========== ========
Coastal Financial Corporation
Condensed Statements of Operations
Years ended September 30, 1998, 1999 and 2000
1998 1999 2000
------- ------ ------
Income:
Interest income . . . . . . . . . . . . . . . . . . . . $ -- 6 5
Management fees . . . . . . . . . . . . . . . . . . . . 244 331 304
Dividends from subsidiary . . . . . . . . . . . . . . . 850 2,793 3,090
Equity in undistributed earnings of subsidiaries . . . 6,033 4,934 5,423
------- ------ ------
Total income . . . . . . . . . . . . . . . . . . . . 7,127 8,064 8,822
------- ------ ------
Expenses:
Amortization of organization cost . . . . . . . . . . . 16 -- --
Professional fees . . . . . . . . . . . . . . . . . . . 75 64 71
Supplies and printing . . . . . . . . . . . . . . . . . 11 56 62
Other expenses. . . . . . . . . . . . . . . . . . . . . 191 239 252
Income tax benefit (credit) . . . . . . . . . . . . . . (18) (10) (20)
------- ------ ------
Total expenses . . . . . . . . . . . . . . . . . . . 275 349 365
------- ------ ------
Net income . . . . . . . . . . . . . . . . . . . . . . . $ 6,852 7,715 8,457
======= ====== ======
31
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
(20) COASTAL FINANCIAL CORPORATION FINANCIAL STATEMENTS (PARENT COMPANY ONLY),
CONTINUED
Coastal Financial Corporation
Condensed Statement of Cash Flows
Years ended September 30, 1998, 1999 and 2000
1998 1999 2000
-------- -------- --------
Operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,852 7,715 8,457
Adjustments to reconcile net income to net cash provided by:
Equity in undistributed net income of subsidiary . . . . . . (6,033) (4,934) (5,423)
(Decrease) in other assets . . . . . . . . . . . . . . . . . (87) (38) (6)
Increase (decrease) in other liabilities . . . . . . . . . . (289) (52) 151
-------- -------- --------
Total cash provided by operating activities . . . . . . . 443 2,691 3,179
-------- -------- --------
Financing activities: . . . . . . . . . . . . . . . . . . . . . .
Capital contributions to subsidiary . . . . . . . . . . . . . . (2,000) -- --
Cash dividend to shareholders . . . . . . . . . . . . . . . . . (1,715) (1,796) (1,912)
Proceeds from stock options . . . . . . . . . . . . . . . . . . 323 341 570
Proceeds (repayments) from line of credit . . . . . . . . . . . 2,069 (1,000) 500
Other financing activities, net . . . . . . . . . . . . . . . . (108) (358) (1,963)
-------- -------- --------
Total cash used by financing activities . . . . . . . . . (1,431) (2,813) (2,805)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents . . . . . . (988) (122) 374
Cash and cash equivalents at beginning of the year . . . . . . . 1,208 220 98
-------- -------- --------
Cash and cash equivalents at end of the years . . . . . . . . . $ 220 98 472
======== ======== ========
(21) CARRYING AMOUNTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts and fair value of financial instruments as of
September 30, 1999 and 2000 are summarized below:
1999 2000
----------------------- -------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
---------- ----------- ---------- ------------
(In thousands) (In thousands)
Financial Assets
Cash and cash equivalents. . . . . . $ 24,233 24,233 17,167 17,167
Investment securities. . . . . . . . 6,063 6,063 8,548 8,548
Mortgage-backed securities . . . . . 182,115 182,115 189,239 189,239
Loans receivable held for sale . . . 16,636 16,636 10,194 10,194
Loans receivable, net. . . . . . . . 455,351 459,852 511,701 514,855
FHLB stock . . . . . . . . . . . . . 8,201 8,201 11,899 11,899
---------- ----------- ---------- ------------
$692,599 697,100 748,748 751,902
========== =========== ========== ============
Financial Liabilities
Deposits:
Demand accounts . . . . . . . . . . 265,430 265,430 240,497 240,497
Certificate accounts. . . . . . . . 134,243 133,438 165,720 165,306
Advances from Federal Home Loan Bank 164,024 160,855 225,224 224,391
Securities sold under agreements to
repurchase . . . . . . . . . . . . . 96,948 96,948 75,858 75,858
Other borrowings . . . . . . . . . . . 1,569 1,569 2,069 2,069
---------- ----------- ---------- ------------
$662,214 658,240 709,368 708,121
========== =========== ========== ============
Management has made estimates of fair value discount rates and estimated
prepayment rates that it believes to be reasonable based upon present market
conditions. Changes in market interest and prepayment
32
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
(21) CARRYING AMOUNTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS - Continued
rates since September 30, 1999 and 2000, could have a significant impact on the
fair value presented and should be considered when analyzing this financial
data.
The Company had $60.7 million of off-balance sheet financial commitments as
of September 30, 2000, 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 one interest rate cap agreement of $7 million
notional amount with an interest rate cap on the 10 year treasury of 6.50%
expiring in January 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 agreements is $55 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 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. At September 30, 2000, the fair value of these agreements was not
material. The agreements are summarized as follows:
Expiration Date Notional Amount Floor Rate Index
- ----------------- --------------- ---------- ---------------
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
December 31, 2001 $10 million 6.00% 3 month LIBOR
Fair value estimates are made at, based on relevant market information and
information about the financial instrument. These estimates do not reflect any
premium or discount that could result from offering for sale the Company's
entire holdings of a particular financial instrument. Because no active market
exists for a significant portion of the Company's financial instruments, fair
value estimates are based on judgments regarding future expected loss
experience, current economic conditions, current interest rates and prepayment
trends, risk characteristics of various financial instruments, and other
factors. These estimates are subjective in nature and involve uncertainties and
matters of significant judgment and therefore cannot be determined with
precision. Changes in any of these assumptions used in calculating fair value
would also significantly affect the estimates. Changes in market interest rates
and prepayment assumptions could significantly change the fair value.
Fair value estimates are based on existing on and off-balance sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and liabilities that are not considered
financial instruments. For example, the Company has significant assets and
liabilities that are not considered financial assets or liabilities including
deposit franchise value, loan servicing portfolio, real estate, deferred tax
liabilities, premises and equipment, and goodwill. In addition, the tax
ramifications related to the realization of the unrealized gains and losses can
have a significant effect on fair value estimates and have not been considered
in any of these estimates.
(22) SALE OF FLORENCE OFFICE
In the second fiscal quarter of 2000, the Company sold its Florence, South
Carolina office to First Federal Savings Association of Cheraw ("First
Federal"). The office had deposits of $24.9 million. The Company received a
deposit premium from First Federal and recorded a gain, net of selling expenses,
of $1.7 million. The Company funded the sale of the deposits through the sale of
loans, associated with this office of $10.9 million and increased borrowings,
primarily through brokered deposits. The Company recorded a gain on sale of
loans of $60,000 related to this sale. In conjunction with the sale of the
Florence office, the Company has agreed not to compete in the Florence market
for a period of four years.
(23) 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, 2000, the outstanding balance was approximately $2.1 million.
33
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 Coastal Financial Corporation's (the "Company") 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
The Company reported $8.5 million in net income for the year ended
September 30, 2000, compared to $7.7 million for the year ended September 30,
1999. Net interest income increased $1.9 million as a result of increased
interest income of $8.5 million offset by an increase of $6.6 million in
interest expense. Provision for loan losses increased from $750,000 for the year
ended September 30, 1999, to $978,000 for the year ended September 30, 2000.
Other income increased from $5.6 million in fiscal 1999, to $5.9 million in
2000. General and administrative expenses increased $905,000 or 5.9%, for fiscal
2000, as compared to fiscal 1999.
Total assets increased from $713.0 million at September 30, 1999 to $768.8
million at September 30, 2000, or 7.8%. Liquid assets, consisting of cash,
interest-bearing deposits, and securities, increased from $212.4 million at
September 30, 1999, to $215.0 million at September 30, 2000. Loans receivable
increased 12.4% from $455.4 million at September 30, 1999, to $511.7 million at
September 30, 2000. Total loan originations for fiscal 2000 were $247.2 million
as compared to $256.4 million for fiscal 1999.
The growth in loans receivable and liquid assets was funded by increased
deposits of $6.5 million, and increased advances from the Federal Home Loan Bank
("FHLB") of Atlanta of $61.2 million. During fiscal 2000, deposits increased
from $399.7 million at September 30, 1999, to $406.2 million at September 30,
2000. During this same period, transaction deposits (defined as noninterest
bearing checking accounts, NOW accounts and money market checking accounts)
decreased $21.9 million and certificate accounts increased $31.5 million. The
increase in certificate accounts is primarily due to a $31.8 million growth in
brokered deposits. In the second fiscal quarter, the Company sold its Florence,
South Carolina office to First Federal Savings Association of Cheraw ("First
Federal"). The office had deposits of $24.9 million. The Company received a
deposit premium from First Federal and recorded a gain, net of selling expenses,
of $1.7 million. The Company funded the sale of the deposits through the sale of
loans, associated with this office, of $10.9 million and increased borrowings,
primarily through brokered deposits. The Company recorded a gain on sale of
loans of $60,000 related to this sale. In conjunction with the sale of the
Florence office, the Company has agreed not to compete in the Florence market
for a period of four years.
As a result of $8.5 million in net income, less the cash dividends paid to
shareholders of approximately $1.9 million, treasury stock repurchases of
approximately $2.0 million, and the net change in unrealized gain (loss) on
securities available for sale, net of income tax of $557,000, stockholders'
equity increased from $41.2 million at September 30, 1999 to $46.9 million at
September 30, 2000.
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, brokered 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
34
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis - Continued
$205.3 million, $256.4 million and $247.2 million for the years ended September
30, 1998, 1999 and 2000, respectively. A large portion of these loan
originations were financed through loan principal repayments which amounted to
$125.3 million, $128.8 million and $139.9 million for the years ended September
30, 1998, 1999 and 2000, 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, 1998, 1999 and 2000, the Company sold loans
amounting to $71.7 million, $60.8 million and $33.7 million, respectively. The
Company experienced reduced sales as a result of rising interest rates during
fiscal 2000. Should interest rates continue to increase, this trend may
continue.
During 2000, the Company used deposit growth (primarily brokered deposits)
to fund its loan growth. In fiscal 2000, including the sale of the Florence
office deposits of $24.9 million, deposits increased from $399.7 million at
September 30, 1999, to $406.2 million at September 30, 2000.
At September 30, 2000, the Company had commitments to originate $4.3
million in loans and $33.0 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, 2000, the Company had $136.0 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, 2000, the Company had excess collateral pledged
to the FHLB which would support additional FHLB advance borrowings of $22.1
million. Additionally, at September 30, 2000, the Company had repurchase
agreement lines of credit and available collateral consisting of investment
securities and mortgage-backed securities of $24.9 million as well as federal
funds lines available of $10.0 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 $50.5 million at September 30, 2000, exceeding the
Bank's tangible and core requirements by $39.0 million and $19.7 million,
respectively. At September 30, 2000, the Bank's capital exceeded its current
risk-based minimum capital requirement by $20.0 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, 1999 and 2000
General
Net earnings were $8.5 million ($1.13 per diluted share) for the year ended
September 30, 2000, an increase of 9.6% compared to $7.7 million ($1.02 per
diluted share) for the year ended September 30, 1999. Net interest income
increased $1.9 million primarily as a result of an increase in interest income
of $8.5 million which was offset by an increase in interest expense of $6.6
million.
Interest Income
Interest income for the year ended September 30, 2000, increased 17.2% to
$58.1 million as compared to $49.6 million for the year ended September 30, 1999
primarily due to a 10.7% increase in average interest-earning assets. The yield
on interest-earning assets for the year ended September 30, 1999 was 7.88%
compared to 8.34% for the year ended September 30, 2000. The average yield on
loans receivable for fiscal year 2000 was 8.74% compared to 8.55% in 1999. The
yield on investments which includes Investments, Mortgage-Backed Securities,
Overnight Funds and Federal Funds, increased to 7.33% for the fiscal year 2000
from 6.15% for fiscal year 1999. Total interest-earning assets for fiscal year
2000 averaged $705.0 million compared to $637.0 million for the year ended
September 30, 1999. The increase in average interest-earning assets is due to an
increase in average loans receivable of approximately $52.4 million and
mortgage-backed and investment securities of approximately $10.0 million.
35
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis - Continued
Interest Expense
Interest expense on interest-bearing liabilities was $33.6 million for the
year ended September 30, 2000, as compared to $27.0 million in fiscal 1999. The
cost of interest-bearing liabilities was 4.84% for the year ended September 30,
2000, compared to 4.32% in fiscal year 1999. The average cost of deposits for
the year ended September 30, 2000, was 3.88% compared to 3.77% for the year
ended September 30, 1999. The cost of FHLB advances and reverse repurchase
agreements for fiscal 2000 was 6.12% and 6.38%, respectively, compared to 5.28%
and 5.30%, respectively, for fiscal 1999. Total average interest-bearing
liabilities increased 12.1% from $619.4 million at September 30, 1999, to $694.5
million at September 30, 2000. The increase in average interest-bearing
liabilities is due to an increase in average deposits of approximately $18.0
million, FHLB advances of $16.8 million and reverse repurchase agreements of
$40.6 million.
Net Interest Income
Net interest income was $24.4 million for the year ended September 30,
2000, an increase of $1.9 million, compared to $22.6 million for the year ended
September 30, 1999. The net interest margin decreased slightly to 3.50% for
fiscal 2000 compared to 3.55% for fiscal 1999. Average interest-earning assets
increased $67.9 million while average interest-bearing liabilities increased
$75.1 million. During fiscal 2000, interest rates have increased significantly.
At September 30, 1999 and September 30, 2000, the prime rate of interest was
8.25% and 9.50%, respectively. Should interest rates continue to increase,
certain of the Bank's adjustable rate loans may reach their lifetime interest
rate change cap. At September 30, 2000, $3.8 million of the Bank's adjustable
rate loans were within 200 basis points of their cap. In addition, a high
percentage of the Company's assets are adjustable rate mortgage loans which
reprice annually; whereas, many of the Company's liabilities reprice in 60 to
180 days. The Company expects that as a result of this rapidly rising interest
rate environment, its net interest margin may decrease materially in fiscal
2001.
Provision for Loan Losses
The Company's provision for loan losses increased from $750,000 for fiscal
1999 to $978,000 for fiscal 2000. The allowance for loan losses as a percentage
of loans was 1.35% at September 30, 2000, compared to 1.36% at September 30,
1999. Loans delinquent 90 days or more were .92% of total loans at September 30,
2000, compared to .30% at September 30, 1999. The allowance for loan losses was
148% of loans delinquent more than 90 days at September 30, 2000, compared to
449% at September 30, 1999. 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 2000, total other income increased from $5.6 million for the
period ended September 30, 1999, to $5.9 million for the period ended September
30, 2000. Fees and service charges on loans and deposit accounts was $2.1
million for fiscal 2000, compared to $2.0 million for fiscal 1999. Due to an
increasing long-term interest rate environment which has resulted in decreased
mortgage originations, gain on sale of loans was $631,000 for the year ended
September 30, 2000, compared to $979,000 for the year ended September 30, 1999.
Loss on sale of securities was $1.6 million for fiscal 2000, compared to gains
of $264,000 for fiscal 1999. This is a result of the restructuring of a portion
of the available for sale investment portfolio. The losses were offset by a gain
on the sale of the Florence office deposits of $1.7 million. Other income
increased from $973,000 for the year ended September 30, 1999, to $1.5 million
for the year ended September 30, 2000.
Other Expense
General and administrative expenses were $16.2 million for fiscal 2000 as
compared to $15.3 million for fiscal 1999. Salaries and employee benefits
increased from $9.1 million for fiscal 2000 to $8.6 million for fiscal 1999, or
6.3%, primarily due to staffing for four new offices. Also as a result of the
four office additions, net occupancy, furniture and fixtures and data processing
expense increased $383,000 for fiscal 2000, as compared to fiscal 1999. Other
expenses increased slightly from $2.9 million in 1998 to $3.0 million in 2000.
Income Taxes
Income taxes increased from $4.4 million in fiscal 1999 to $4.7 million in
fiscal 2000 as a result of increased earnings before income taxes.
36
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis - Continued
Results of Operations
Comparison of the Years Ended September 30, 1998 and 1999
General
Net earnings were $7.7 million ($1.02 per diluted share) for the year ended
September 30, 1999, an increase of 12.6% compared to $6.9 million ($0.90 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
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 $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."
37
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis - Continued
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
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.
Non-performing Assets
Non-performing assets were $5.6 million at September 30, 2000 compared to
$1.5 million at September 30, 1999. Loans past due 90 days or more increased
from $1.4 million at September 30, 1999, to $4.8 million at September 30, 2000.
This is primarily due to two commercial real estate lending relationships for
which foreclosure proceedings have been initiated. Real estate acquired through
foreclosure increased from $96,000 at September 30, 1999, to $867,000 at
September 30, 2000.
At September 30, 2000, impaired loans totaled $1.4 million. There were no
impaired loans at September 30, 1999. Included in the allowance for loan losses
at September 30, 2000 was $345,000 related to impaired loans. The average
recorded investment in impaired loans for the year ended September 30, 2000 was
$1.5 million. No interest income was recognized on impaired loans in fiscal
2000.
Loans are reviewed on a regular basis and an allowance for uncollectible
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
collectibility 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 collectibility 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.
38
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis - Continued
Allowance for Loan Losses - Continued
The Company established provisions for loan losses for the years ended
September 30, 1998, 1999 and 2000, of $865,000, $750,000 and $978,000,
respectively. For the years ended September 30, 1998, 1999 and 2000, the Company
had net charge-offs of $208,000, $100,000 and $319,000, respectively. Net charge
offs as a percentage of average outstanding loans were .05%, .02%, and .06% for
fiscal years ended 1998, 1999 and 2000. At September 30, 2000, the Company had
an allowance for loan losses of $7.1 million, which was 1.35% of net loans
compared to 1.36% at September 30, 1999.
Management believes that the current level of the allowance for loan losses
is adequate considering the composition of the loan portfolio, the portfolio's
loss experience, delinquency trends, current regional and local economic
conditions and other factors. While management uses the best information
available to make evaluations, future adjustments to the allowance may be
necessary if economic conditions differ substantially from the assumptions used
in making the evaluation. The allowance for loan losses is subject to periodic
evaluation by various regulatory authorities and may be subject to adjustment
upon their examination.
Interest Rate Risk Disclosure
The 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 (NPV) 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, 2000.
Board Limit Board Limit Market Value Market Value
Minimum NPV Maximum Of Assets Portfolio Equity NPV
Change in Interest Rates Ratio Decline in NPV 9/30/00 9/30/00 Ratio
- ------------------------ ----------- -------------- ------------ ---------------- -------
300 basis point rise 5.00% 400 BPS $ 746,692 $ 41,661 5.58%
200 basis point rise 6.00% 300 BPS $ 761,044 $ 51,952 6.83%
100 basis point rise 6.00% 250 BPS $ 774,678 $ 61,394 7.93%
No Change 6.00% $ 786,821 $ 69,379 8.82%
100 basis point decline 6.00% 250 BPS $ 796,575 $ 75,694 9.50%
200 basis point decline 6.00% 300 BPS $ 804,666 $ 80,277 9.98%
300 basis point decline 6.00% 350 BPS $ 813,641 $ 85,728 10.54%
The preceding table indicates that at September 30, 2000, 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, 2000, 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
39
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis - Continued
Interest Rate Risk Disclosure - Continued
between the amount of interest-earning assets maturing or repricing within a
specific time period and the amount of interest-bearing liabilities maturing or
repricing within the same time period. A gap is considered positive when the
amount of interest-rate-sensitive assets exceeds the amount of
interest-rate-sensitive liabilities. Generally, during a period of rising rates,
a positive gap would result in an increase in net interest income. Conversely,
during a period of falling interest rates, a positive gap would result in a
decrease in net interest income. It is management's goal to maintain reasonable
balance between exposure to interest rate fluctuations and earnings.
Impact of New Accounting Pronouncements
SFAS 133, "Accounting for Derivative Instruments and Hedging Activities",
SFAS 137, "Accounting for Derivative Instruments and Hedging Activities-Deferral
of the Effective Date of FASB Statement No. 133-an amendment of FASB Statement
No. 133", and SFAS 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities-an amendment of FASB Statement No. 133", establish
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts and hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position, and measure those
instruments at fair value. If certain conditions are met, a derivative may be
specifically designated as (a) a hedge of the exposure to changes in the fair
value of a recognized asset or liability or a firm commitment, (b) a hedge of
the exposure to variable cash flows of a forecasted transaction, or (c) a hedge
of the foreign currency exposure of a net investment in a foreign corporation.
SFAS 137 amends SFAS 133 to delay the required adoption date by one year. SFAS
138 amends SFAS 133 to address a limited number of issues causing implementation
difficulties. This statement is effective for fiscal quarters in fiscal years
beginning after June 15, 2000. The Company adopted this statement October 1,
2000, with no material impact on its financial statements.
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 of the
Notes to the Consolidated Financial Statements.
40
Board of Directors
Coastal Financial Corporation and Coastal Federal Savings Bank
James C. Benton James C. Benton
President, C.L. Benton & Sons, Inc. President, C.L. Benton & Sons, Inc.
G. David Bishop G. David Bishop
Chairman, WCI Chairman, WCI
Management Group Inc. Management Group Inc.
James T. Clemmons James T. Clemmons
Chairman Chairman
Coastal Financial Corporation Coastal Federal Savings Bank
James P. Creel James P. Creel
President President
Creel Corporation Creel Corporation
James H. Dusenbury James H. Dusenbury
Retired - Attorney Retired - Attorney
Dusenbury and Clarkson Law Firm Dusenbury and Clarkson Law Firm
Michael C. Gerald Michael C. Gerald
President and Chief Executive Officer President and Chief Executive Officer
Coastal Financial Corporation Coastal Federal Savings Bank
Frank A. Thompson, II Frank A. Thompson, II
President President
Peoples Underwriters, Inc. Peoples Underwriters, Inc.
Coastal Investor Services, Inc.
G. David Bishop
Chairman, WCI
Management Group Inc.
James P. Creel
President, Creel Corporation
James H. Dusenbury
Retired - Attorney
Dusenbury and Clarkson Law Firm
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
Frank A. Thompson, II
President
Peoples
Underwriters, Inc.
41
COASTAL FEDERAL SAVINGS BANK
Leadership Group
Sherri J. Adams J. Daniel Fogle Edward L. Loehr Douglas E. Shaffer
Personal Banking Leader Vice President Vice President Senior Vice President
N. Myrtle Beach Residential Banking Leader Budgeting and Treasury Area Leader
West Community North and West Communities
James R. Baker, MCP Sandy L. Louden
Assistant Vice President Joel P. Foster Personal Banking Leader Steven J. Sherry
Systems Engineer Vice President Socastee Executive Vice President
Business Banking Leader Chief Marketing Officer
Jeffrey A. Benjamin Myrtle Beach Community Kathleen M. Lutes
Senior Vice President Senior Loan Underwriter Cathe P. Singleton
Credit Administration Leader Mary L. Geist Assistant Vice President
Vice President Sherry A. Maloni Personal Banking Leader
Lynn U. Berry Data Services Leader Assistant Vice President Murrells Inlet
Vice President Personal Banking Leader
Community Banking Leader Michael C. Gerald Conway Ashley M. Smith
Litchfield Community President and Chief Vice President
Executive Officer Michael C. Mauney Community Banking Leader
Collections Group Leader Sunset Beach
Rebecca L. Brown Kenan D. Godwin
Senior Closing Specialist Personal Banking Leader Marcus G. McDowell J. Marcus Smith, Jr.
Oak Street Vice President Vice President
Cynthia L. Buffington Business Banking Leader Account Servicing Leader
Assistant Vice President Jimmy R. Graham Little River
Item Processing Leader Executive Vice President Phillip G. Stalvey
CIO Amy E. McLaurin Executive Vice President
Richard N. Burch Personal Banking Leader Sales Leader
Senior Vice President Nancy C. Hall Sunset Beach
IT Planning Assistant Vice President H. Delan Stevens
Personal Banking Leader Janice B. Metz Vice President
Glenn T. Butler, MCSE Dunes Marketing Programs Community Banking Leader
Vice President Coordinator West Community
Network Services Leader Lisa B. James
Vice President Lauren E. Miller Sandra J. Szarek
Anne R. Caldwell Account Servicing Leader Assistant Vice President Business Banking Servicing
Deposit Servicing Leader Dean of Associate Leader
Ruth S. Kearns Development
Shonda C. Chestnut Senior Vice President Coastal Federal University Regina C. Taylor
Personal Banking Leader Customer Recognition Officer Marketing Systems Analyst
Surfside Assistant Corporate Secretary Ronald A. Nolan
Security Officer Donna P. Todd
Susan J. Cooke Thomas W. Kennedy Assistant Vice President
Vice President Vice President John T. Powell Associate Dean of Career
Corporate Support Leader Senior Personal Banking Assistant Vice President Development
Corporate Secretary Leader Community Banking Leader
Myrtle Beach Community Wilmington Matthew J. Towns
Robert D. Douglas Assistant Vice President
Executive Vice President L. Eric Keys Jerry L. Rexroad, CPA Credit Administration
Human Resources Leader Vice President Executive Vice President
Community Banking Leader Chief Financial Officer C. Scott Tripp
S. Lynn Dyson South Strand Community Personal Banking Leader
Personal Banking Leader W. Bryan Rountree 38th Avenue/Bi-Lo
Waccamaw Gregory J. Kreger Personal Banking Leader
Corporate Services Leader Southport Douglas W. Walters
Barbara R. Faber, CPA Vice President
Assistant Vice President Scott W. Lander Eulette W. Sauls Residential Banking Leader
Banking Administration Senior Vice President Customer Account N. Myrtle Beach
Leader Area Leader Relationship System Leader
North Carolina Communities
Rita E. Fecteau Sherry G. Schoolfield
Vice President Stacey M. Lee Assistant Vice President
Controller Personal Banking Leader Compliance Officer
Carolina Forest
Trina S. Ferguson
Vice President
Residential Loan
Administration
Leader
42
Locations
Coastal Federal Savings Bank Coastal Investor Services, Inc.
38th Avenue Office North Myrtle Beach Office Cynthia M. Clark
1245 38th Avenue North 521 Main Street Registered Sales Assistant
Myrtle Beach, SC 29577 North Myrtle Beach, SC 29582 843.918.7600
843.205.2041 843.205.2002
Susan J. Cooke
Oak Street Office Socastee Office Corporate Secretary
2619 Oak Street 4801 Socastee Boulevard 843.205.2000
Myrtle Beach, SC 29577-3129 Myrtle Beach, SC 29575
843.205.2000 843.205.2007 John L. Creamer
Vice President and Financial Advisor
Carolina Forest Office Sunset Beach Office 843.918.7610
3894 Renee Drive 1625 Seaside Road S.W.
Myrtle Beach, SC 29579 Sunset Beach, NC 28468 E. Haden Hamilton, Jr.
843.205.2016 843.205.2012 President, Chief Executive Officer
910.579.8160 and Financial Advisor
Conway Office 843.918.7603
310 Highway 378 Surfside Office
Conway, SC 29526 112 Highway 17 South John Michael Hill
843.205.2005 & Glenns Bay Road Vice President and Financial Advisor
Surfside Beach, SC 29575 843.918.7602
Dunes Office 843.205.2003
7500 North Kings Highway Debra Hinson
Myrtle Beach, SC 29572 Waccamaw Medical Park Office Sales Assistant
843.205.2001 112 Waccamaw Medical Park Drive 843.918.7600
Conway, SC 29526
Little River Office 843.205.2009 Jerry L. Rexroad, CPA
1602 Highway 17 Chief Financial Officer
Little River, SC 29566 Wilmington Office 843.205.2000
843.205.2014 Lending Center
5710 Oleander Drive, Suite 209 Kaye S. Williamson
Murrells Inlet Office Wilmington, NC 28403 Financial Advisor
3348 Highway 17 South 843.205.2031 843.918.7609
& Inlet Crossing 910.313.1161
Murrells Inlet, SC 29576
843.205.2008
43
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
Trident Securities at 1.800.222.2618
As of November 30, 2000, the Corporation had 918 shareholders and 7,267,018
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 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 CASH
BID BID DIVIDEND
Fiscal Year 2000:
First Quarter $13.71 $10.23 $0.063
Second Quarter 12.11 8.33 0.065
Third Quarter 11.58 9.44 0.065
Fourth Quarter 11.50 5.00 0.065
Fiscal Year 1999:
First Quarter 20.17 15.23 0.06
Second Quarter 18.41 13.64 0.06
Third Quarter 16.76 11.94 0.06
Fourth Quarter 15.40 11.48 0.06
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,
2000, 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 Wednesday, January 24, 2001 at 2:00 p.m., Eastern Standard
Time.
Additional Information
If you are receiving duplicate mailing of shareholder reports due to
multiple accounts, we can consolidate the mailings without affecting your
account registration. To do this, or for additional information, contact the
Shareholder Relations Office, at the Corporate address shown below.
Corporate Offices
Coastal Financial Corporation
2619 Oak Street
Myrtle Beach, South Carolina 29577
843.205.2000
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
55 Beattie Place, Suite 900
Greenville, South Carolina 29601
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
843.205.2000
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.