COASTAL FINANCIAL CORPORATION
2001
ANNUAL REPORT
COASTAL FINANCIAL CORPORATION
2001
ANNUAL REPORT
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Notice
Concerning
Quarterly
Shareholder
Reports
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----------------
PLACE
STAMP
HERE
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ATTN: SUSAN COOKE
COASTAL FINANCIAL CORPORATION
2619 OAK STREET
MYRTLE BEACH, SC 29577-3129
NOTICE CONCERNING QUARTERLY
SHAREHOLDER REPORTS
With the rising costs of publishing and mailing quarterly
reports and concurrent timeliness of providing these via the
Internet on our website at www.coastalfederal.com, we will be
sending printed versions of our quarterly shareholder reports
only to shareholders who request them. All shareholders will
continue to receive the annual report and proxy statement in
printed form.
Shareholders and other interested parties can obtain quarterly
reports and our Chairman's letter from the previous year annual
report through Coastal Federal's home page. In addition, our
revised website will enable you to learn more about our products
and services.
For your convenience, we are providing this business reply card,
which should be completed and returned to us if you wish to be
placed on our quarterly report mailing list. We urge you to help
us lower our costs by using the more efficient electronic method
of accessing this information.
I wish to continue to receive
Coastal Financial Corporation's
|X| Quarterly Shareholders Reports
(Please print clearly)
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First Name MI Last
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Address
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DEDICATION
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A QUEST FOR EXCELLENCE
2001 - A YEAR OF TRANSFORMATION
Probably the first Transformation you noticed in picking up this Annual Report
is the significant change in the form of the document.
Like all Americans, we at Coastal Financial Corporation have been deeply
saddened by the tragic events of September 11th. At this time of national
sorrow, and in attempting to grasp the enormity of the needs faced by so many of
those directly impacted by this tragedy, we decided to reduce our planned
expenditure for the production of this document and to use those savings to make
a challenge pledge, through the Waccamaw Community Foundation, to the September
11th Fund. This fund was created by the United Way and the New York Community
Trust to help the victims of the September 11th terrorist attacks by mobilizing
financial resources to respond to the pressing needs of the victims and their
families and all those affected by this tragedy.
Our pledge was to match contributions to the September 11th Fund, made through
the Waccamaw Community Foundation, up to a maximum of $10,000. Thanks to our
funding and the generous financial donations from concerned local citizens, the
Waccamaw Community Foundation has made a $23,250 contribution to assist the
victims, their families and others affected by the September 11th tragedy.
Well before the events of September 11th changed many of the elements of life as
we have come to know it, our 2001 operations had, far more effectively than in
any prior year, focused our organizational initiatives on the Transformational
element of our Vision 2005 Plan. This critical part of our strategic plan is the
essential ingredient for ensuring that our culture continues to evolve
systemically toward the attainment of Our Basic Corporate Objective Of
Maximizing The Value Of Our Shareholders' Investment by making continual
progress toward Our Long-Term Goal Of Being The Best Financial Services Company
In Our Marketplace.
Our overriding commitment to our QUEST FOR EXCELLENCE operating philosophy and
our Vision 2005 Plan has again produced outstanding results for our Shareholders
and we are absolutely convinced that this approach will help to insure that our
best years are yet to come.
Share Price
Performance
[PERFORMANCE BAR GRAPH APPEARS HERE]
$10.00 $10.00 $27.20 $68.31 $85.56 $85.92 $134.94 $217.16 $215.52 $177.72 $113.80 $217.36
- ------ ------ ------ ------ ------ ------ ------- ------- ------- ------- ------- -------
Initial Sept. Sept. Sept. Sept. Sept. Sept. Sept. Sept. Sept. Sept. Sept.
Public 30, 30, 30, 30, 30, 30, 30, 30, 30, 30, 30,
Offering 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
October 4,
1990
The value of one share of Coastal Financial Corporation's Common Stock purchased
at $10.00 in the initial public offering, and affected by stock dividends, stock
splits, and reinvested cash dividends, was $217.36 based upon Nasdaq Quotations
at September 30, 2001. The foregoing reflects historical results and may not be
indicative of future stock prices.
2
- ---------------------------------------------------------- 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,
------------------------------------------------------------
1997 1998 1999 2000 2001
---- ---- ---- ---- ----
(Dollars in thousands, except per share data)
Financial Condition Data:
Total assets ........................................................ $ 494,003 $ 643,560 $ 713,013 $ 768,838 $ 763,214
Loans receivable, net ............................................... 403,570 414,264 455,351 511,701 488,754
Mortgage-backed securities .......................................... 23,023 170,181 182,115 189,239 190,553
Cash, interest-bearing deposits and investment securities ........... 39,582 25,507 30,296 25,715 36,320
Deposits ............................................................ 347,116 386,321 399,673 406,217 530,364
Borrowings .......................................................... 106,337 210,560 262,541 303,151 160,808
Stockholder's equity ................................................ 32,391 37,851 41,237 46,945 57,248
Operating Data:
Interest income ..................................................... $ 38,065 $ 43,894 $ 49,559 $ 58,079 $ 60,255
Interest expense .................................................... 20,146 24,451 26,991 33,636 33,323
--------- --------- --------- --------- ---------
Net interest income ................................................. 17,919 19,443 22,568 24,443 26,932
Provision for loan losses ........................................... 760 865 750 978 955
--------- --------- --------- --------- ---------
Net interest income after provision for loan losses ................. 17,159 18,578 21,818 23,465 25,977
--------- --------- --------- --------- ---------
Other Income:
Fees and service charges on loans and deposit accounts .............. 1,593 1,639 2,025 2,126 2,634
Gain on sales of loans held for sale ................................ 931 1,579 979 631 1,295
Gain (loss) on sales of investment securities ....................... 7 96 73 (17) (56)
Gain (loss) on sales of mortgage-backed securities, net ............. 235 521 191 (1,554) 727
Real estate operations .............................................. 141 149 (29) (64) (453)
Other income ........................................................ 1,792 1,895 2,334 4,759 3,755
--------- --------- --------- --------- ---------
Total other income .................................................. 4,699 5,879 5,573 5,881 7,902
Total general and administrative expense ............................ 12,716 13,618 15,286 16,191 18,179
--------- --------- --------- --------- ---------
Earnings before income taxes and extraordinary item ................. 9,142 10,839 12,105 13,155 15,700
Income taxes ........................................................ 3,351 3,987 4,390 4,698 5,688
--------- --------- --------- --------- ---------
Net income before extraordinary item ................................ 5,791 6,852 7,715 8,457 10,012
--------- --------- --------- --------- ---------
Extraordinary loss on extinguishment of debt, net of income
taxes ............................................................. -- -- -- -- 712
--------- --------- --------- --------- ---------
Net income .......................................................... $ 5,791 $ 6,852 $ 7,715 $ 8,457 $ 9,300
========= ========= ========= ========= =========
Net earnings per common diluted share before extraordinary
item .............................................................. $ .51 $ .60 $ .68 $ .75 $ .91
========= ========= ========= ========= =========
Net earnings per common diluted share after extraordinary
item .............................................................. $ .51 $ .60 $ .68 $ .75 $ .85
========= ========= ========= ========= =========
Cash dividends per common share ..................................... $ .15 $ .17 $ .17 $ .17 $ .19
========= ========= ========= ========= =========
Weighted average shares outstanding diluted ......................... 11,267 11,408 11,378 11,216 10,995
========= ========= ========= ========= =========
All share and per share data have been restated to reflect two 4 for 3 stock
dividends declared on April 30, 1997 and May 6, 1998, a 5% stock dividend
declared on November 10, 1999, a 10% stock dividend declared on March 14, 2000,
and a 3 for 2 stock dividend declared on July 31, 2001.
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,
------------------------------------------------------------------
1997 1998 1999 2000 2001
---- ---- ---- ---- ----
Other Data:
Return on assets (net income divided by average assets) ...... 1.21% 1.13% 1.14% 1.13% 1.20%
Return on average equity (net income divided by average
equity) .................................................... 19.36% 19.52% 19.30% 19.52% 17.75%
Average equity to average assets ............................. 6.24% 6.05% 5.93% 5.80% 6.59%
Book value per share ......................................... $ 3.02 $ 3.49 $ 3.70 $ 4.29 $ 5.34
Dividend payout ratio ........................................ 27.63% 25.14% 23.28% 22.61% 21.58%
Interest rate spread (difference between average yield on
interest-earning assets and average cost of interest-
bearing liabilities) ....................................... 3.89% 3.51% 3.55% 3.50% 3.64%
Net interest margin (net interest income as a percentage of
average interest-earning assets) ........................... 4.03% 3.64% 3.67% 3.57% 3.77%
Allowance for loan losses to total loans at end of period .... 1.19% 1.33% 1.36% 1.35% 1.42%
Ratio of non-performing assets to total assets (1) ........... 0.10% 0.36% 0.21% 0.73% 0.74%
Tangible capital ratio ....................................... 6.31% 6.10% 6.29% 6.56% 7.28%
Core capital ratio ........................................... 6.31% 6.10% 6.29% 6.56% 7.28%
Risk-based capital ratio ..................................... 11.05% 12.67% 12.64% 12.45% 13.30%
Number of:
Real estate loans outstanding .............................. 6,752 6,666 6,637 6,748 6,745
Deposit accounts ........................................... 43,544 43,720 41,608 40,788 43,560
Full service offices ....................................... 9 10 10 12 16
(1) Nonperforming assets consist of nonaccrual loans 90 days or more past due
and real estate acquired through foreclosure.
3
DEAR FRIENDS ------------------------------------------------------------------
The year 2001 was certainly a year of Transformation, both globally and for
Coastal Financial Corporation.
While the significant changes which have taken place globally have shaken our
nation and the world, the Transformation of Coastal Financial Corporation was an
outgrowth of our 1998 strategic planning initiative. The workproduct of this
effort, our Vision 2005 Plan, has provided a solid foundation for ensuring that
our culture continues to evolve systemically toward the attainment of our Basic
Corporate Objective Of Maximizing The Value Of Our Shareholders' Investment by
making continual progress toward Our Long-Term Goal Of Being The Best Financial
Services Company In our Marketplace.
With the creation of our Vision 2005 Plan, we have articulated a view of Coastal
Financial Corporation as we envision it through the year 2005. And, through that
exercise, we have determined that the realization of that vision can only be
achieved by a very successful Transformation of Coastal Financial Corporation to
a Sales Organization.
Our definition of a Sales Organization is worlds away from the stereotypical
image of high-pressure "forced" selling. Rather, we use the term Sales
Organization to describe our vision of Coastal Financial Corporation as an
organization which has such strong relationships with both its internal and
external Customers that its financial services offerings are always in alignment
with its Mission of being totally committed to Exceeding the Expectations of its
Customer.
This concept envisions the attraction, development and retention of the very
best people, who are supported by the very best resources and aligned with the
goal of attracting, developing and retaining exceptionally profitable Customer
relationships.
The creation of this Transformational element of our Vision 2005 Plan resulted
from our firm belief that, with the rapid changes occurring throughout the
financial services industry, it was imprudent to attempt to envision its
evolution by the use of conventional wisdom. The logic which followed that
premise led us to conclude that the only course of action which could ensure
that our best days were always before us, was to allocate significant resources
toward initiatives which were designed to ensure a very successful
Transformation of Coastal Financial Corporation to a Sales Organization.
The strong foundation and lever for this paradigm shifting strategic planning
initiative was our QUEST FOR EXCELLENCE Operating Philosophy. Through the
establishment of our principles and values, we were able to think creatively,
and in varying degrees of abstraction, about the possibilities for Transforming
Coastal Financial Corporation into an organization which would be continually
focused on achieving a better understanding of the present and future financial
services needs of our Customers.
The team that created this roadmap to the future in 1998 has since guided this
Company through three more exceptional years of Transformation and achievement,
the most current of which yielded another year of excellent financial results.
Coastal Financial Corporation's net income for 2001 totaled $9.3 million,
compared to $8.5 million in 2000. On a fully diluted basis, these results
equated to a 13.3% increase, from $0.75 per share in 2000 to $0.85 per share in
2001.
The Transformation in our balance sheet during 2001 was quite obvious, with
deposits derived from the residents and businesses of the Communities we serve
increasing by approximately $150 million, or 41.6%, and commercial loan
portfolio growth of 6.3%. Offsetting that significant commercial loan portfolio
growth was a decline in our residential loan portfolio caused by the substantial
decrease in long-term interest rates. The net result was a negligible decrease
in total assets at the close of this year. Despite the very challenging business
environment resulting from the varying and complex dynamics of this year, asset
quality remained excellent compared to both industry standards and historical
norms.
In addition to our excellent operating results, the market price of Coastal
Financial's common stock, at September 30, 2001, was 90.5% higher than the
market price at September 30, 2000.
Equally as impressive is the fact that, since 1990, our operating earnings have
increased at a compound annualized rate in excess of 17.9%.
One of the best indicators of performance is Return On Shareholders' Equity, and
this measure for 2001 was, again, outstanding. Our Return On Average
Shareholders' Equity measure of 17.75% ranks us among the top performing
financial services companies in America.
In addition to our own sense of satisfaction with these financial results,
during 2001, 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. Two very good examples
follow:
o Coastal Financial Corporation received national attention in the July
2001 edition of U.S. Banker Magazine. This publication featured a
listing of the Community Banking companies in the United States with
assets between $673 million and $1.12 billion, ranked in order, based
upon return on equity and growth in per-share earnings over the past
five years. Coastal Financial placed 1st in the Carolinas and 5th
nationally in these measures.
o Coastal Federal, for the fourth 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 2001.
We are extremely proud of these forms of recognition because each, in its own
way, represents tangible evidence that our Customers are well-satisfied with our
focus on Exceeding Their Expectations in the presentation, sale and delivery of
financial services.
4
- ------------------------------------------------------------ 2001 OUR BEST YEAR
This was indeed a year of significant Transformation for Coastal Financial
Corporation. Our never-ending quest to better understand and exceed the
Expectations of our Associates, our Customers and our Communities continues to
pay significant dividends and has enabled the financial performance during
fiscal 2001 to, again, meet our high expectations and well positions us to
aggressively pursue future opportunities.
Noteworthy Historical Financial Results
EARNINGS PER SHARE
[BAR GRAPH APPEARS HERE]
$0.51 $0.60 $0.68 $0.75 $0.85
----- ----- ----- ----- -----
1997 1998 1999 2000 2001
ASSETS
(IN MILLIONS)
[BAR GRAPH APPEARS HERE]
$494.00 $643.56 $713.01 $768.84 $763.21
------- ------- ------- ------- -------
1997 1998 1999 2000 2001
DEPOSITS
(IN MILLIONS)
[BAR GRAPH APPEARS HERE]
$347.12 $386.32 $399.67 $406.22 $530.36
------- ------- ------- ------- -------
1997 1998 1999 2000 2001
BOOK VALUE PER SHARE
[BAR GRAPH APPEARS HERE]
$3.02 $3.49 $3.70 $4.29 $5.34
----- ----- ----- ----- -----
1997 1998 1999 2000 2001
NON-PERFORMING ASSETS TO TOTAL ASSETS
[BAR GRAPH APPEARS HERE]
0.10% 0.36% 0.21% 0.73% 0.74%
---- ----- ----- ----- -----
1997 1998 1999 2000 2001
ALLOWANCE FOR LOAN LOSSES
TO NET LOANS
[BAR GRAPH APPEARS HERE]
1.19% 1.33% 1.36% 1.35% 1.42%
----- ----- ----- ----- -----
1997 1998 1999 2000 2001
Coastal Financial Corporation's outstanding operating results are the product of
a great team effort and have been rewarded in the financial markets by a 2,009%
increase in the price of our shares since becoming a public company in October
of 1990, vs. 349% for the Standard & Poors 500 Index over the same period.
5
- --------------------------------------------------------------------------------
Over these eleven years,we have worked diligently toward the attainment of Our
Basic Corporate Objective Of Maximizing The Value Of Our Shareholders'
Investment by making continual progress toward Our Long-Term Goal Of Being The
Best Financial Services Company In Our Marketplace.
In considering whether we have made real progress toward the attainment of Our
Basic Corporate Objective Of Maximizing The Value Of Our Shareholders'
Investment during this period, it is both illustrative and revealing to compare
the share price performance of Coastal Financial Corporation to the share price
performance of other publicly traded financial services companies operating
within our marketplace, and to the equity 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 and First Union banks, which have
recently been merged, (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 company of Bank of America, (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.
11 Year Peer Group Price Performance
As demonstrated by these graphic representations, which take a look back over
our history as a publicly owned company, the price of Coastal Financial
Corporation's shares has significantly 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. These historical results may not be indicative of future
stock price performance.
2001 really was quite a year. Our operating and share price performance results
clearly put Coastal Financial among the top performing financial services
companies in the nation, our business prospered and our Associates flourished,
growing both personally and professionally as never before. But, as good as
these results are, it's always the future that we are most interested in, and it
always leads to the question we're most often asked: "Can we keep it up?"
We continue to believe the answer is a resounding "Yes," as long as we remain
focused on our QUEST FOR EXCELLENCE Operating Philosophy and the goals
established under the Transformational element of our Vision 2005 Plan. That's
what really sets us apart from the competition.
CFCP Relative Price Performance
6
- ------------------------------------------------------------------ A LOOK BACK
Two of my favorite adages, the first by an anonymous author, "What lies behind
us is nothing compared to what lies within us and ahead of us," and the second
by Steven R. Covey, "If we live out of our memory, we're tied to the past and to
that which is finite. When we live out of our imagination, we're tied to that
which is infinite," each, in its own way, describes the Transformation process.
. . the way we, as individuals, perceive, understand and interpret the
surrounding world and how we adapt and respond to the challenges we face.
Our culture, as a learning organization, is founded on the concept of embracing
change as the essential ingredient for growth and progress by establishing as
unchanging, those principles and values which are the cornerstones of our QUEST
FOR EXCELLENCE Operating Philosophy. Consequently, we have learned that, if we
want to achieve significant results, we must first Transform the way we think so
as to understand that we, as individuals, are not in control, but rather, that
principles are in control.
A significant part of our Vision 2005 Plan relates to initiatives which are
designed to teach our Leadership Group and Associates those principles which are
essential in achieving the objectives of our Shareholders' by better
understanding and serving the financial needs of our Customers. The paradigm
shift resulting from this Transformation has enabled our Associates to grow,
both personally and professionally, toward the attainment of their full
potential and further leveraged our ever-increasing ability to work together as
a team toward Exceeding The Expectations Of Our Customers. We believe this
approach is both fundamental and essential to assuring that our best days are
yet to come.
This formula for success is clearly defined in Our QUEST FOR EXCELLENCE
Operating Philosophy, further developed and articulated through our Vision 2005
Plan and taught through course offerings at Coastal Federal University. This
well focused and comprehensive curriculum teaches our Leaders that it all begins
with our commitment to building durable and profitable relationships with our
Associates, our Customers, and our Communities, and ends with added value for
all of our stakeholders.
Over the three years which have passed since this exceptional team created our
Vision 2005 Plan, many good things have happened in preparing our Company for
the future.
Some of the 2001 initiatives, aimed at increasing the long-term value of the
Company by maximizing our ability to capitalize on opportunities in the years
ahead, were:
o COASTAL FEDERAL UNIVERSITY The further expansion of Coastal Federal
University ensures that we continue to advance our philosophy of becoming a
learning organization. The Mission of Coastal Federal University is to
foster a learning environment, centered around Coastal Financial
Corporation's QUEST FOR EXCELLENCE Operating Philosophy. And, during 2001,
we have continued to invest in that Mission with the addition of very
qualified faculty members, bringing the total number of full-time educators
to three with three part time assistant instructors. Also, several "Degree
of Excellence" and other "on campus" and outsourced offerings have been
added to our curriculum. With the support of strong Leadership example and
our Letters of Expectation Performance Alignment system, our educational
offerings through Coastal Federal University have significantly increased
our individual and organizational production capability and aided
immeasurably in the creation of an empowered culture with a true
competitive distinction.
o 2002 TACTICAL PLAN The completion of an in-depth assessment of our progress
to-date toward the goals established in our Vision 2005 Plan provided a
comprehensive review of the Philosophical, Transformational, Linear and
Financial elements of our Vision 2005 Plan. The product of this endeavor
has provided us with the foundational information and diagnostics necessary
for the development of our 2002-2003 Tactical Planning initiatives. A
similar review process will be undertaken prior to the 2004-2005 Planning
process.
o COMMUNITY Our recent partnership with the Waccamaw Community Foundation in
sponsoring a vehicle for local residents to make financial contributions to
the September 11th Fund for the victims of the September 11th tragedy and
their families, together with our commitment to the approximately 300 other
charitable causes which we support annually with our time, talent and
resources, reflects our strong belief that Community members have a basic
responsibility to take care of their Communities and each other.
7
A LOOK BACK --------------------------------------------------------------------
o DISTRIBUTION CHANNELS Significant progress toward the objectives
established in the Linear Element of our Vision 2005 Plan was evidenced by
the continued expansion of our financial services franchise. During 2001,
we established our second grocery store banking facility in the Socastee
BI-LO in Socastee, South Carolina, expanded our Wilmington, North Carolina
Lending Office into a full service banking facility, and established new
full service banking facilities in Southport, North Carolina and downtown
Wilmington, North Carolina.
Another important component of our distribution channel expansion efforts
occurred with the introduction of our completely redesigned website portal
offering. Accessing www.coastalfederal.com now provides Customers with the
tools and flexibility to personalize Community-centric sources of
information for not only the complete array of financial services provided
through Coastal Financial Corporation, but also virtually any level of
information about their Community or the world. In addition, though special
links and the addition of on-line product sign-up webpages, we have made it
easier for our Customers to access and acquire specific banking services,
such as mortgage loans, credit card offerings, investment services and
Business Cash Management services.
These activities are consistent with our efforts to expand our presence and
market awareness along the South Carolina coast and build a significant
presence in coastal North Carolina.
o COASTAL INVESTOR SERVICES / COASTAL FEDERAL The continued synergy resulting
from the effective execution of our Vision 2005 Plan initiatives relating
to the better alignment of the activities of Coastal Investor Services and
Coastal Federal has resulted in the improvement of Coastal Investor
Services national ranking from #21 in 1999, to #8 in 2000, to #3 in 2001
out of over 600 branch offices in the Raymond James Financial Services
system. This progress by Coastal Investor Services has produced a
significant increase in the level of assets under management during this
period and enabled Coastal Investor Services to realize a 103.8% increase
in net income from 2000 to 2001.
And, as previously noted, Coastal Financial Corporation received national
attention in the July 2001 edition of U.S. Banker Magazine. This
publication featured a listing of the Community Banking companies in the
United States with assets between $673 million and $1.12 billion, ranked in
order, based upon return on equity and growth in per-share earnings over
the past five years. Coastal Financial placed 1st in the Carolinas and 5th
nationally in these measures. In the July 2000 edition of U.S. Banker
Magazine, Coastal Financial was ranked #1 in the Carolinas and #16 in the
nation in these same measures over the past three years.
The continuing success of Coastal Financial in offering the businesses and
residents of the Communities we serve a comprehensive financial planning
service and full array of financial services, which are easily accessed
through conveniently located financial Sales Centers, and our Internet
Banking channel, is the result of our never-ending focus on Our Long-Term
Goal of Being the Best Financial Services Company in Our Marketplace.
o ALIGNMENT Progress toward the goals established in the Transformational
element of our Vision 2005 Plan allowed us to identify many new ways to
better enable our concept of operating as a series of Community banks and
resulted in numerous operational efficiencies and improvements during 2001.
We believe these enhancements to our processes and systems have provided
new clarity, focus and direction for the entire Company and will provide
even greater support for our commitment to local decision-making and more
responsive, reliable and empathetic Customer service. This progress is
directly linked to the commitment of our entire organization to the concept
of "Empowerment," as the key to a great future, by enabling all of our
Associates to Exceed the Expectations of our Customers at each opportunity.
These initiatives well reflect our culture of viewing change and constant
improvement as essential to the achievement of our long-term objectives.
8
- ----------------------------------------------------------------- LOOKING AHEAD
Looking ahead, we see a future filled with even more opportunity than the past
and firmly believe that we can achieve the goals established in our Vision 2005
Plan, if we maintain our values and continually Transform ourselves and our
business.
Our pledge to our Shareholders is to do exactly that . . . to do everything in
our power to remain focused on our QUEST FOR EXCELLENCE Operating Philosophy as
the Guiding Vision and unchanging value system . . . and to view change and
constant improvement as the catalysts for reaching our full potential.
We have the best team imaginable. I just can't thank our Board Of Directors,
Leadership Group Members and Associates enough for all they do for all of us on
a daily basis. Our 2001 results speak volumes about their commitment to Our
Basic Corporate Objective Of Maximizing The Value Of Our Shareholders'
Investment by being focused on Our Long-Term Goal Of Being The Best Financial
Services Company In Our Marketplace.
Both revenue and earnings reached record levels in 2000 and 2001. In fact, in
these two years alone, our net income has grown over 20%.
In the last five years, our net income has increased by more than 150%. Since
becoming a publicly owned Company in 1990, we have roughly doubled our earnings
every 4 years. And we still have significant potential for further gains.
Everyone in the Coastal Financial family is very proud of these achievements and
looks forward to even greater accomplishments in the years ahead. And while we
make no attempt to predict the future, we take great comfort in the fact that we
have dedicated Associates, great markets, excellent products, tremendous
momentum and unshakable confidence in our ability, as a team, to continue to
Transform our organization toward building even stronger relationships with our
Customers and our Communities and to continue to achieve superior 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.
Michael C. Gerald
President and
Chief Executive Officer
9
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, 2000
and 2001, 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, 2001. 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, 2000 and 2001, and the results of its operations and its cash
flows for each of the years in the three-year period ended September 30, 2001,
in conformity with accounting principles generally accepted in the United States
of America.
/s/ KPMG LLP
- ------------
KPMG LLP
Greenville, South Carolina
October 24, 2001
10
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Financial Condition
September 30, 2000 and 2001
2000 2001
---- ----
(Dollars in thousands)
ASSETS
Cash and amounts due from banks .................................. $ 14,999 24,966
Short-term interest-bearing deposits ............................. 2,168 9,354
Investment securities available for sale ......................... 8,548 2,000
Mortgage-backed securities available for sale .................... 189,239 190,553
Loans receivable (net of allowance for loan losses of $7,064
at September 30, 2000 and $7,159 at September 30, 2001) ........ 511,701 488,754
Loans receivable held for sale ................................... 10,194 16,274
Real estate acquired through foreclosure, net .................... 867 2,363
Office property and equipment, net ............................... 11,518 13,150
Federal Home Loan Bank (FHLB) stock, at cost ..................... 11,899 7,624
Accrued interest receivable on loans ............................. 3,117 2,783
Accrued interest receivable on securities ........................ 1,555 1,341
Other assets ..................................................... 3,033 4,052
--------- ---------
$ 768,838 $ 763,214
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits ....................................................... 406,217 530,364
Securities sold under agreements to repurchase ................. 75,858 18,703
Advances from FHLB ............................................. 225,224 140,036
Other borrowings ............................................... 2,069 2,069
Drafts outstanding ............................................. 2,475 2,577
Advances by borrowers for property taxes and insurance ......... 1,257 1,250
Accrued interest payable ....................................... 2,531 1,184
Other liabilities .............................................. 6,262 9,783
--------- ---------
Total liabilities ............................................ 721,893 705,966
--------- ---------
Stockholders' equity:
Serial preferred stock, 1,000,000 shares authorized and unissued -- --
Common stock $.01 par value, 15,000,000 shares authorized;
10,931,247 shares at September 30, 2000 and 10,693,325
shares at September 30, 2001 issued and outstanding .......... 109 107
Additional paid-in capital ..................................... 9,744 9,744
Retained earnings, restricted .................................. 40,319 47,496
Treasury stock, at cost (161,316 shares at September 30,
2000 and 324,483 shares at September 30, 2001) ............... (1,702) (3,620)
Accumulated other comprehensive income (loss), net of tax ...... (1,525) 3,521
--------- ---------
Total stockholders' equity ................................... 46,945 57,248
--------- ---------
$ 768,838 $ 763,214
========= =========
See accompanying notes to consolidated financial statements.
11
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended September 30, 1999, 2000 and 2001
1999 2000 2001
---- ---- ----
(In thousands, except share data)
Interest:
Loans receivable ........................................................... $ 38,541 44,005 45,899
Investment securities ...................................................... 1,476 2,484 2,479
Mortgage-backed securities ................................................. 9,205 10,987 11,261
Other ...................................................................... 337 603 616
------------ ------------ ------------
Total interest income ........................................................ 49,559 58,079 60,255
------------ ------------ ------------
Interest expense:
Deposits ................................................................... 14,627 15,769 19,380
Securities sold under agreements to repurchase ............................. 3,869 6,993 2,810
Advances from FHLB ......................................................... 8,495 10,874 11,133
------------ ------------ ------------
Total interest expense ................................................... 26,991 33,636 33,323
------------ ------------ ------------
Net interest income ...................................................... 22,568 24,443 26,932
Provision for loan losses .................................................. 750 978 955
------------ ------------ ------------
Net interest income after provision for loan losses ...................... 21,818 23,465 25,977
------------ ------------ ------------
Other income:
Fees and service charges on loans and deposit accounts ..................... 2,025 2,126 2,634
Gain on sales of loans held for sale ....................................... 979 631 1,295
Gain (loss) on sales of investment securities, net ......................... 73 (17) (56)
Gain (loss) on sales of mortgage-backed securities, net .................... 191 (1,554) 727
Gain on sale of deposits ................................................... -- 1,746 --
Loss from real estate acquired through foreclosure ......................... (29) (64) (453)
Income from sales of non-depository products ............................... 745 834 1,269
Federal Home Loan Bank stock dividends ..................................... 616 711 750
Other income ............................................................... 973 1,468 1,736
------------ ------------ ------------
Total other income ....................................................... 5,573 5,881 7,902
------------ ------------ ------------
General and administrative expenses:
Salaries and employee benefits ............................................. 8,604 9,149 10,546
Net occupancy, furniture and fixtures and data processing expense .......... 3,563 3,946 4,029
FDIC insurance premium ..................................................... 220 121 84
Other expense .............................................................. 2,899 2,975 3,520
------------ ------------ ------------
Total general and administrative expense ................................. 15,286 16,191 18,179
------------ ------------ ------------
Income before income taxes and extraordinary item ........................ 12,105 13,155 15,700
Income taxes ................................................................. 4,390 4,698 5,688
------------ ------------ ------------
Net income before extraordinary item ......................................... 7,715 8,457 10,012
------------ ------------ ------------
Extraordinary loss on extinguishment of debt, net income taxes of $401 ....... -- -- 712
------------ ------------ ------------
Net income ................................................................... $ 7,715 8,457 9,300
============ ============ ============
Earnings per common share before extraordinary item
Basic ...................................................................... $ 0.70 0.76 0.92
============ ============ ============
Diluted .................................................................... $ 0.68 0.75 0.91
============ ============ ============
Effect of extraordinary item on earnings per common share
Basic ...................................................................... $ -- -- (0.06)
============ ============ ============
Diluted .................................................................... $ -- -- (0.06)
============ ============ ============
Earnings per common share
Basic ...................................................................... $ 0.70 0.76 0.86
============ ============ ============
Diluted .................................................................... $ 0.68 0.75 0.85
============ ============ ============
Average common shares outstanding
Basic ...................................................................... 11,055,000 11,078,000 10,848,000
============ ============ ============
Diluted .................................................................... 11,378,000 11,216,000 10,995,000
============ ============ ============
See accompanying notes to consolidated financial statements.
12
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity and Comprehensive Income
Years ended September 30, 1999, 2000 and 2001
Accumulated
Other
Additional Comprehensive Total
Common Paid-in Retained Treasury Income Stockholders'
Stock Capital Earnings Stock (Loss) Equity
----- ------- -------- ----- ------ ------
(In thousands)
Balance at September 30, 1998 ...................... $ 109 $ 8,937 $ 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 ...................... 110 9,277 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 ...................... 109 9,744 40,319 (1,702) (1,525) 46,945
Exercise of stock options .......................... -- -- (108) 214 -- 106
Cash dividends ..................................... -- -- (2,015) -- -- (2,015)
Net income ......................................... -- -- 9,300 -- -- 9,300
Other comprehensive income, net of tax:
Unrealized gains arising during period,
net of taxes of $3,348 ........................... -- -- -- -- 5,462 --
Less: reclassification adjustment for gains
included in net income, net of taxes of $255 ..... -- -- -- -- (416) --
-------- -------- -------- -------- -------- --------
Other comprehensive income ......................... -- -- -- -- 5,046 5,046
-------- -------- -------- -------- -------- --------
Comprehensive income ............................... -- -- -- -- -- 14,346
-------- -------- -------- -------- -------- --------
Treasury stock repurchases ......................... (2) -- -- (2,132) -- (2,134)
-------- -------- -------- -------- -------- --------
Balance at September 30, 2001 ...................... $ 107 $ 9,744 $ 47,496 $ (3,620) $ 3,521 $ 57,248
======== ======== ======== ======== ======== ========
See accompanying notes to consolidated financial statements.
13
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended September 30, 1999, 2000 and 2001
1999 2000 2001
---- ---- ----
(In thousands)
Cash flows from operating activities:
Net income ............................................................................. $ 7,715 8,457 9,300
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation ......................................................................... 1,206 1,419 1,556
Provision for loan losses ............................................................ 750 978 955
(Gain) loss on sale of mortgage-backed securities available for sale ................. (191) 1,554 (727)
(Gain) loss on sale of investment securities available or sale ....................... (73) 17 56
Origination of loans receivable held for sale ........................................ (66,930) (27,253) (81,778)
Proceeds from sales of loans receivable held for sale ................................ 60,781 33,695 75,698
Extraordinary item ................................................................... -- -- 712
(Increase) decrease in:
Other assets ...................................................................... (1,938) 1,855 (1,019)
Accrued interest receivable ....................................................... (324) (478) 548
Increase (decrease) in:
Accrued interest payable .......................................................... (196) 1,375 (1,347)
Other liabilities ................................................................. 2,744 243 829
--------- --------- ---------
Net cash provided by operating activities ....................................... 3,544 21,862 4,783
--------- --------- ---------
Cash flows from investing activities:
Proceeds from sales of investment securities available for sale ........................ 9,808 10,266 5,125
Proceeds from maturities of investment securities available for sale ................... 5,165 -- 1,595
Purchases of investment securities available for sale .................................. (11,360) (12,737) --
Purchases of loans receivable .......................................................... (9,078) (4,027) (20)
Proceeds from sales of mortgage-backed securities available for sale ................... 95,364 106,367 164,919
Purchases of mortgage-backed securities available for sale ............................. (155,877) (124,502) (158,004)
Principal collected on mortgage-backed securities available for sale ................... 72,177 25,219 47,566
Origination of loans receivable, net ................................................... (189,427) (219,943) (214,296)
Principal collected on loans receivable ................................................ 128,805 139,900 186,496
Disposition of Florence office assets and liabilities, net ............................. -- (13,265) --
Proceeds from sales of real estate acquired through foreclosure ........................ 88 180 1,159
Purchases of office properties and equipment ........................................... (3,441) (2,392) (3,188)
Sales (purchases) of FHLB stock, net ................................................... (935) (3,698) 4,275
Other investing activities, net ........................................................ 427 -- --
--------- --------- ---------
Net cash provided by (used in) investing activities ............................. (58,284) (98,632) 35,627
--------- --------- ---------
Cash flows from financing activities:
Increase in deposits ................................................................... 13,352 31,397 124,147
Increase (decrease) in securities sold under agreements to repurchase .................. 37,734 (21,090) (57,155)
Proceeds from FHLB advances ............................................................ 353,900 890,404 358,771
Repayment of FHLB advances ............................................................. (334,785) (829,204) (443,959)
Proceeds (repayments) from other borrowings, net ....................................... (4,868) 500 --
Prepayment penalty on early extinguishment of debt ..................................... -- -- (1,113)
Increase (decrease) in advance payments by borrowers for property
taxes and insurance .................................................................. 17 (89) (7)
Increase (decrease) in drafts outstanding, net ......................................... (232) 1,092 102
Repurchase of treasury stock, at cost .................................................. (356) (1,964) (2,134)
Cash dividends to stockholders and cash for fractional shares .......................... (1,796) (1,912) (2,015)
Exercise of stock options .............................................................. 341 570 106
--------- --------- ---------
Net cash provided by (used in) financing activities ............................. 63,307 69,704 (23,257)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents ..................................... 8,567 (7,066) 17,153
--------- --------- ---------
Cash and cash equivalents at beginning of year ........................................... 15,666 24,233 17,167
--------- --------- ---------
Cash and cash equivalents at end of year ................................................. $ 24,233 17,167 34,320
========= ========= =========
Supplemental information:
Interest paid .......................................................................... $ 27,187 32,261 34,670
========= ========= =========
Income taxes paid ...................................................................... $ 2,085 3,789 5,249
========= ========= =========
Supplemental schedule of non-cash investing and financing transactions:
Securitization of mortgage loans into mortgage-backed securities ....................... $ 27,713 14,894 47,157
========= ========= =========
Transfer of mortgage loans to real estate acquired through foreclosure ................. $ 149 951 2,655
========= ========= =========
See accompanying notes to consolidated financial statements.
14
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 Federal Holding
Company's wholly-owned subsidiary, 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 and North Beach Investments, Inc.). In
consolidation, all significant intercompany balances and transactions have been
eliminated. Coastal Financial Corporation is a unitary thrift holding company
organized under the laws of the state of Delaware.
(b) Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include
cash and amounts due from banks, short-term interest-bearing deposits and
federal funds sold. Cash and cash equivalents have maturities of three months or
less. Accordingly, the carrying amount of such instruments is considered to be a
reasonable estimate of fair value.
(c) Investment and Mortgage-backed Securities
Investment and mortgage-backed securities are accounted for in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting
for Certain Investments in Debt and Equity Securities". Investments are
classified into three categories as follows: (1) Held to Maturity - debt
securities that the Company has the positive intent and ability to hold to
maturity, which are reported at amortized cost; (2) Trading - debt and equity
securities that are bought and held principally for the purpose of selling them
in the near term, which are reported at fair value, with unrealized gains and
losses included in earnings and (3) Available for Sale - debt and equity
securities that may be sold under certain conditions, which are reported at fair
value, with unrealized gains and losses excluded from earnings and reported as a
separate component of stockholders' equity, net of income taxes.
The Company determines investment and mortgage-backed securities
classification at the time of purchase. Premiums and discounts on securities are
accreted or amortized as an adjustment to income over the estimated life of the
security using a method which approximates a level yield. Unrealized losses on
securities, reflecting a decline in value judged by the Company to be other than
temporary, are charged to income in the consolidated statements of operations.
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, 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.
15
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, 2000 and 2001, the Company had approximately $10.2
million and $16.3 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 bases. A current tax
liability or asset is established for taxes presently payable or refundable and
a deferred tax liability or asset is established for future taxable (deductible)
items.
16
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. 140 "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
The Company follows 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
SFAS No. 130, "Reporting Comprehensive Income" establishes standards for
the 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
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" establishes 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 in fiscal 1999 without any impact on
its consolidated financial statements.
(q) Derivative Instruments and Hedging
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," and SFAS No. 138 "Accounting for Certain Derivative Instruments and
Certain Hedging Activities, an Amendment of SFAS No. 133" establishes
comprehensive accounting and reporting standards for derivative instruments and
hedging activities. The Company adopted SFAS No. 133 effective October 1, 2000
with no material impact on its financial statements.
(r) Reclassifications
Certain amounts in the 1999 and 2000 consolidated financial statements have
been reclassified to conform with the 2001 presentation. Such reclassifications
did not change net income or equity as previously reported.
17
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
(2) INVESTMENT SECURITIES
The amortized cost and fair value of investment securities available for
sale at September 30, 2000 is summarized as follows:
2000
--------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
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 amortized cost and market value of investment securities available for
sale at September 30, 2001 is summarized as follows:
2001
--------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
(In thousands)
U.S. Government and agency obligations:
Due after one but within five years ....................... $ -- -- -- --
Due after five years ...................................... 1,893 107 -- 2,000
------ ---- ------ -----
$1,893 107 -- 2,000
====== ==== ====== ======
The Company had gross realized gains of $73,000 and there were no gross
realized losses for the year ended September 30, 1999. For the year ended
September 30, 2000, gross realized gains were $8,000 and gross realized losses
were $25,000. For the year ended September 30, 2001, gross realized gains were
$17,000 and gross realized losses were $73,000.
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, 2001 was $71.3
million with a fair value of $73.3 million.
(3) MORTGAGE-BACKED SECURITIES
Mortgage-backed securities available for sale at September 30, 2000
consisted of the following:
2000
--------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
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
======== === ====== =======
18
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, 2001
consisted of the following:
2001
--------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
(In thousands)
Collateralized Mortgage Obligations ................. $ 28,856 859 -- 29,715
FNMA ................................................ 123,271 3,899 (6) 127,164
GNMA ................................................ 20,630 507 -- 21,137
FHLMC ............................................... 12,223 314 -- 12,537
-------- ----- ------ -------
$184,980 5,579 (6) 190,553
======== ===== ====== =======
For the year ended September 30, 1999, there were gross realized gains of
$336,000 and gross realized losses of $145,000. The Company had gross realized
gains of $370,000 and gross realized losses of $1.9 million for the year ended
September 30, 2000. For the year ended September 30, 2001, the Company had gross
realized gains of $1.0 million and gross realized losses of $312,000.
(4) LOANS RECEIVABLE, NET
Loans receivable, net at September 30 consisted of the following:
2000 2001
---- ----
(In thousands)
First mortgage loans:
Single family to 4 family units ............................................ $ 273,657 252,396
Other, primarily commercial real estate .................................... 133,569 137,282
Residential construction loans ............................................. 17,988 16,798
Commercial construction loans .............................................. 36,917 43,967
Consumer and commercial loans:
Installment consumer loans ................................................. 20,641 14,539
Mobile home loans .......................................................... 1,374 2,056
Savings account loans ...................................................... 1,063 1,221
Equity lines of credit ..................................................... 23,009 22,379
Commercial and other loans ................................................. 23,357 18,886
--------- ---------
531,575 509,524
Less:
Allowance for loan losses .................................................. 7,064 7,159
Deferred loan cost, net .................................................... (519) (372)
Undisbursed portion of loans in process .................................... 13,329 13,983
--------- ---------
$ 511,701 488,754
========= =========
The changes in the allowance for loan losses for the years ended September
30 consisted of the following:
1999 2000 2001
---- ---- ----
(In thousands)
Beginning allowance ........................ $ 5,668 6,430 7,064
Provision for loan losses .................. 750 978 955
Allowance recorded on acquired loans ....... 112 50 --
Disposition of Florence office loans ....... -- (75) --
Loan recoveries ............................ 252 77 60
Loan charge-offs ........................... (352) (396) (920)
------- ------- -------
$ 6,430 7,064 7,159
======= ======= =======
Non-accrual loans which were over ninety days delinquent totaled
approximately $4.8 million and $3.3 million at September 30, 2000 and 2001,
respectively. In fiscal years 1999, 2000 and 2001, interest income which would
have been recorded would have been approximately $46,000, $220,000 and $377,000,
respectively, had non-accruing loans been current in accordance with their
original terms.
19
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
(4) LOANS RECEIVABLE, NET -Continued
At September 30, 2001, impaired loans totaled $3.4 million. There were $1.4
million in impaired loans at September 30, 2000. Included in the allowance for
loan losses at September 30, 2001 was $281,000 related to impaired loans
compared to $345,000 at September 30, 2000. The average recorded investment in
impaired loans for the year ended September 30, 2001 was $3.6 million compared
to $1.5 million for the year ended September 30, 2000. Interest income
recognized on impaired loans in fiscal 2001 was $120,000. No interest income was
recognized on impaired loans in fiscal 2000.
At September 30, 2000 and 2001, the Company had commitments outstanding to
originate loans totaling approximately $4.3 million and $14.8 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, 2000 and 2001, the Company had undisbursed lines of credit of
approximately $33.0 million and $34.4 million, respectively.
Loans serviced for the benefit of others amounted to approximately $99.4
million, $106.1 million and $143.3 million at September 30, 1999, 2000 and 2001,
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, 2001, 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, 2001. (In thousands):
Balance at September 30, 2000 .... $1,186
New loans ........................ 231
Repayments ....................... 316
------
Balance at September 30, 2001 .... $1,101
======
20
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:
2000 2001
---- ----
(In thousands)
Land ........................................... $ 2,875 3,120
Building and improvements ...................... 8,926 9,320
Furniture, fixtures and equipment .............. 10,180 12,606
------- -------
21,981 25,046
Less accumulated depreciation .................. 10,463 11,896
------- -------
$11,518 13,150
======= =======
The Company leases office space and various equipment. Total rental expense
for the years ended September 30, 1999, 2000 and 2001 was approximately
$212,000, $213,000 and $291,000 respectively.
Future minimum rental payments for operating leases having remaining
noncancelable lease terms in excess of one year at September 30, 2001 are as
follows (In thousands):
2002 ............. $ 181
2003 ............. 160
2004 ............. 130
2005 ............. 119
2006 ............. 44
Thereafter ............. 252
------
$ 886
======
(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 $7.6 million at September 30, 2001. 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:
2000 2001
------------------------ ------------------------
Weighted Weighted
Amount Rate Amount Rate
------ ---- ------ ----
(Dollars in thousands)
Transaction accounts:
Noninterest bearing .............. $ 35,214 --% $ 49,098 --%
NOW .............................. 48,945 0.76 55,926 0.44
Money market checking ............ 120,133 4.98 193,631 2.90
--------- ---- -------- ----
Total transaction accounts ..... 204,292 3.11 298,655 1.96
--------- ---- -------- ----
Passbook accounts:
Regular passbooks ................ 34,503 2.65 32,268 1.69
Money market ..................... 1,702 2.31 1,049 1.94
--------- ---- -------- ----
Total passbook accounts ........ 36,205 2.63 33,317 1.70
--------- ---- -------- ----
Certificate accounts:
0.00 - 5.99% .................... 75,883 164,306
6.00 - 8.00% .................... 89,443 33,648
8.00 - 10.00% .................... 394 438
--------- ---- -------- ----
Total certificate accounts ..... 165,720 6.03 198,392 4.82
--------- ---- -------- ----
$ 406,217 4.26% $530,364 3.01%
========= ==== ======== ====
21
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
(7) DEPOSITS - Continued
The aggregate amount of all deposit accounts with a minimum denomination of
$100,000 or more was $146.6 million and $201.2 million at September 30, 2000 and
2001, respectively. Included in certificate accounts were $31.8 million and $2.4
million at September 30, 2000 and 2001, respectively, originated by brokers for
a fee.
The amounts and scheduled maturities of certificate accounts at September
30, are as follows:
2000 2001
---- ----
(In thousands)
Within 1 year ................................ $136,035 162,305
After 1 but within 2 years ................... 23,153 26,251
After 2 but within 3 years ................... 3,934 4,067
Thereafter ................................... 2,598 5,769
-------- -------
$165,720 198,392
======== =======
Interest expense on deposits for the years ended September 30 consisted of
the following:
1999 2000 2001
---- ---- ----
(In thousands)
Transaction accounts .............. $ 6,368 6,283 7,404
Passbook accounts ................. 962 909 741
Certificate accounts .............. 7,297 8,577 11,235
------- ------ ------
$14,627 15,769 19,380
======= ====== ======
The fair value of transaction and passbook accounts is $240.5 million and
$332.0 million which was the amount currently payable at September 30, 2000 and
2001, respectively. The fair value of certificate accounts was $165.3 million
and $199.9 million compared to a book value of $165.7 million and $198.4 million
at September 30, 2000 and 2001, respectively, 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:
2000 2001
----------------------- ------------------------
Weighted Weighted
Amount Rate Amount Rate
------ ---- ------ ----
(Dollars in thousands)
Fiscal Year Maturity
2001 ................ $116,476 6.68% $ -- --%
2002 ................ 3,211 6.93 1,400 4.15
2003 ................ 12,667 6.39 23,231 4.30
2004 ................ 6,000 6.35 2,220 5.21
2005 ................ 3,870 6.95 400 5.24
2006 or greater ..... 83,000 6.09 112,785 5.73
-------- ---- -------- ----
$225,224 6.44% $140,036 5.46%
======== ==== ======== ====
Stock in the FHLB of Atlanta and specific first mortgage loans and
mortgage-backed securities of approximately $247.3 million and $204.0 million at
September 30, 2000 and 2001, 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, 2001, the excess first mortgage
loan collateral pledged to the FHLB will support additional borrowings of
approximately $63.9 million. At September 30, 2001, included in the one, two and
four years maturities were $109.0 million subject to call provisions. Call
provisions are more likely to be exercised by the FHLB when rates rise.
During fiscal 2001, the Company prepaid approximately $37.7 million of
advances from FHLB and incurred gross penalties of approximately $1.1 million
which was recorded as an extraordinary loss in the statement of operations.
The estimated fair value of the FHLB advances at September 30, 2000 and
2001 is $224.4 million and $137.2 million. This estimate is based on discounting
amounts payable at contractual rates using current market rates for advances
with similar maturities.
22
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,
------------------------------------------
1999 2000 2001
---- ---- ----
(Dollars in thousands)
Outstanding balance:
Securities sold under agreements to repurchase:
Customer ........................................... $ 4,848 $ 3,825 $ 3,703
Broker ............................................. 92,100 72,033 15,000
Weighted average rate (at month end) paid on:
Securities sold under agreements to repurchase:
Customer ........................................... 3.37% 5.75% 3.36%
Broker ............................................. 5.53 6.59 2.97
Maximum amount of borrowings outstanding at any month end:
Securities sold under agreements to repurchase:
Customer ........................................... $ 4,848 $ 4,196 $ 3,726
Broker ............................................. 92,100 122,700 67,099
Approximate average outstanding with respect to:
Securities sold under agreements to repurchase:
Customer ........................................... $ 3,199 $ 2,826 $ 2,361
Broker ............................................. 67,100 107,737 45,461
Weighted average rate (year to date) paid on:
Securities sold under agreements to repurchase:
Customer ........................................... 3.09% 4.10% 3.73%
Broker ............................................. 5.30 6.38 5.65
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)
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
======== ======= =======
2001:
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,193 196 5,389
State . . . . . . . . . . . . . . . . . . . . . . . . . . . 308 (9) 299
-------- ------- -------
$ 5,501 187 5,688
======== ======= =======
Additionally, the year ended September 30, 2001 includes a current tax
benefit of $401,000 related to the extinguishment of debt shown as an
extraordinary item.
23
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, 2000 and 2001
relate to the following:
2000 2001
---- ----
(In thousands)
Deferred tax assets:
Allowance for loan losses ................................................................ $ 2,616 2,644
Accrued medical reserves ................................................................. 121 95
Other real estate reserves and deferred gains on other real estate ....................... 58 69
Net operating loss carryforwards ......................................................... 135 135
Unrealized loss on securities available for sale ......................................... 965 --
Other .................................................................................... 11 135
------- -------
Total deferred tax assets .................................................................... 3,906 3,078
Less valuation allowance ..................................................................... (135) (135)
------- -------
Net deferred tax assets ...................................................................... 3,771 2,943
------- -------
Deferred tax liabilities:
Tax bad debt reserve in excess of base year amount ....................................... 387 290
Property and equipment principally due to differences in depreciation .................... 168 356
FHLB stock, due to stock dividends not recognized for tax purposes ....................... 356 227
Deferred loan fees ....................................................................... 435 466
Book over tax basis in investment in unconsolidated subsidiary ........................... 2,772 2,823
Unrealized gain on securities available for sale ......................................... -- 2,128
Mortgage servicing rights ................................................................ 257 496
Other .................................................................................... 183 224
------- -------
Total deferred tax liabilities ............................................................... 4,558 7,010
------- -------
Net deferred tax liability ................................................................... $ (787) (4,067)
======= =======
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 $3.1 million for the unrealized gains on securities
available for sale has been recorded directly to stockholders' equity. The
balance of the change in the deferred tax liability results from the current
period deferred tax expense of $187,000. Income taxes of the Company
attributable to income before extraordinary items 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:
1999 2000 2001
---- ---- ----
(In thousands)
Computed federal income taxes ................................... $ 4,116 4,473 5,338
State tax, net of federal benefit ............................... 287 218 197
Other, net ...................................................... (13) 7 153
------- ------- -------
Total income tax expense ........................................ $ 4,390 4,698 5,688
======= ======= =======
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, 2001 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.
24
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, 1999, 2000 and 2001 was
immaterial. Plan assets exceeded the present value of accumulated plan benefits
at June 30, 2001, 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 $251,000, $255,000 and $245,000 for fiscal
years 1999, 2000 and 2001, respectively.
(12) REGULATORY MATTERS
At September 30, 2001, the Bank's loans-to-one borrower limit was
approximately $9.1 million. At September 30, 2001, the Bank had no lending
relationship which exceeded the loan-to-one borrow limit. At September 30, 2001,
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, 2001:
Total Capital: .......................... $60,711 13.30% $36,511 8.00% $45,639 10.00%
(To Risk Weighted Assets)
Tier 1 Capital: ......................... $55,252 12.11% N/A N/A $27,383 6.00%
(To Risk Weighted Assets)
Tier 1 Capital: ......................... $55,252 7.28% $30,515 4.00% $38,144 5.00%
(To Total Assets)
Tangible Capital: ....................... $55,252 7.28% $11,443 1.50% N/A N/A
(To Total Assets)
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)
(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
25
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 reconciliation of average shares outstanding
for the years ended September 30:
For the Year Ended September 30
-------------------------------
1999 2000 2001
---- ---- ----
Basic Diluted Basic Diluted Basic Diluted
----- ------- ----- ------- ----- -------
Weighted average shares outstanding ............ 11,055,000 11,055,000 11,078,000 11,078,000 10,848,000 10,848,000
---------- ---------- ---------- ---------- ---------- ----------
Effective of dilutive securities:
Stock options ................................ -- 323,000 -- 138,000 -- 147,000
---------- ---------- ---------- ---------- ---------- ----------
Average shares outstanding ..................... 11,055,000 11,378,000 11,078,000 11,216,000 10,848,000 10,995,000
========== ========== ========== ========== ========== ==========
(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, 2001 amounted to approximately 626,000 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, 2001, the Company had the following
options outstanding:
Weighted
Average Weighted
Number Remaining Average Number Average
Fiscal Options Contractual Exercise Options Exercise
Year Range of exercise prices: Outstanding Life Price Exercisable Price
---- ------------------------- ----------- ---- ----- ----------- -----
1992 $1.23 .................... 2,217 11 Months $ 1.23 2,217 $ 1.23
1994 $3.86 - $4.36 ............ 4,691 2.5 Years $ 4.11 4,691 $ 4.11
1995 $3.57 - $3.96 ............ 148,239 3.8 Years $ 3.79 148,239 $ 3.79
1996 $4.21 .................... 17,818 4.1 Years $ 4.21 17,818 $ 4.21
1997 $6.42 - $6.66 ............ 149,466 5.2 Years $ 6.55 135,330 $ 6.56
1998 $9.37 - $14.29 ........... 269,903 6.2 Years $ 10.52 199,475 $ 10.53
1999 $9.49 - $11.25 ........... 206,969 7.1 Years $ 10.52 117,028 $ 10.48
2000 $6.33 - $7.57 ............ 204,014 8.2 Years $ 7.48 40,802 $ 7.47
2001 $6.08 - $9.97 ............ 211,187 9.1 Years $ 6.28 -- N/A
--------- --------- -------- ------- --------
$1.23 - $14.29 ........... 1,214,504 6.7 Years $ 7.83 665,600 $ 7.78
========= ========= ======== ======= ========
26
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 1999, 2000, and 2001.
1999 2000 2001
--------------------------- -------------------------- ---------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
Outstanding, October 1 .................. 1,097,760 $ 6.77 1,004,173 $ 9.43 1,055,860 $ 9.45
Granted ................................. 242,496 10.56 232,370 7.44 213,347 6.27
Cancelled ............................... (9,771) 9.01 (108,645) 8.57 (23,855) 7.92
Exercised ............................... (326,312) 1.31 (72,038) 4.12 (30,848) 4.68
--------- --------- --------- -------- --------- --------
Outstanding, September 30 ............... 1,004,173 $ 9.43 1,055,860 $ 9.45 1,214,504 $ 7.83
========= ========= ========= ======== ========= ========
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):
1999 2000 2001
---- ---- ----
Net income As reported ...... $ 7,715 $ 8,457 $ 9,300
Proforma ......... 7,222 7,879 8,805
Diluted earnings per share As reported ...... $ 0.68 $ 0.75 $ 0.85
Proforma ......... 0.63 0.70 0.80
The weighted average fair value per share of options granted in 1999, 2000
and 2001 amounted to $3.51, $3.05 and $2.98, 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 1999, 2000 and 2001, respectively: dividend yield of approximately
2.00%, 3.35% and 2.03%, expected volatility of approximately 30%, 33% and 42%,
risk-free interest rate of 5.90%, 6.06% and 5.60%, expected lives of 10 years
and a vesting period of 5 years.
(16) COMMON STOCK DIVIDENDS
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. On July 31, 2001, the
Company declared a 3 for 2 stock split in the form of a 50% stock dividend
aggregating approximately 3,579,000 shares. All share and per share data has
been retroactively restated to give effect to the common stock dividends.
(17) CASH DIVIDENDS
On each of December 16, 1998, March 24, 1999, June 30, 1999 and September
22, 1999, the Company declared quarterly cash dividends of $.04 per share. On
December 23, 1999 the Company declared a quarterly cash dividend of $.042 per
share. On each of March 31, 2000, June 23, 2000, September 29, 2000, December
29, 2000 and March 21, 2001 the Company declared quarterly cash dividends of
$.043 per share. On each of June 27, 2001 and September 26, 2001, the Company
declared quarterly cash dividends of $.05 per share.
(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. Based
upon current information received from counsel representing the subsidiaries
in these matters, the Company believes none of the lawsuits would have a
material impact on the Company's financial status.
27
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
------- ------- ------- -------
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 ...................... $ .18 .19 .19 .20
=========== ========== ========== ==========
Weighted average shares outstanding-diluted .............. 11,304,000 11,207,000 11,156,000 11,073,000
=========== ========== ========== ==========
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
2001:
Total interest income .................................... $ 15,655 15,409 15,003 14,188
Total interest expense ................................... 9,445 9,046 7,912 6,920
----------- ---------- ---------- ----------
Net interest income ...................................... 6,210 6,363 7,091 7,268
Provision for loan losses ................................ 270 225 235 225
----------- ---------- ---------- ----------
Net interest income after provision for
loan losses ............................................ 5,940 6,138 6,856 7,043
Other income ............................................. 1,638 2,247 2,080 1,937
General and administrative expenses ...................... 4,100 4,555 4,663 4,861
----------- ---------- ---------- ----------
Earnings before income taxes and
extraordinary item ..................................... 3,478 3,830 4,273 4,119
Income taxes ............................................. 1,261 1,344 1,579 1,504
----------- ---------- ---------- ----------
Net income before extraordinary item ..................... 2,217 2,486 2,694 2,615
----------- ---------- ---------- ----------
Extraordinary loss on extinguishment of debt,
net of income taxes .................................... -- 256 299 157
----------- ---------- ---------- ----------
Net income ............................................... $ 2,217 2,230 2,395 2,458
=========== ========== ========== ==========
Earnings per common share
before extraordinary item - diluted .................... $ .20 .23 .25 .23
=========== ========== ========== ==========
Earnings per common share
after extraordinary item - diluted ..................... $ .20 .21 .22 .22
=========== ========== ========== ==========
Weighted average shares outstanding-diluted .............. 10,997,000 10,964,000 10,958,000 10,985,000
=========== ========== ========== ==========
28
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, 2000 and 2001
2000 2001
---- ----
Assets
Cash ................................................................ $ 472 141
Investment in subsidiaries .......................................... 49,182 58,961
Deferred tax asset .................................................. 98 125
Other assets ........................................................ 100 820
------- ------
Total assets ................................................... $49,852 60,047
======= ======
Liabilities and Stockholders' Equity
Accounts payable (principally dividends) ............................ 838 730
Note payable ........................................................ 2,069 2,069
Total stockholders' equity .......................................... 46,945 57,248
------- ------
Total liabilities and stockholders' equity ..................... $49,852 60,047
======= ======
Coastal Financial Corporation
Condensed Statements of Operations
Years ended September 30, 1999, 2000 and 2001
1999 2000 2001
---- ---- ----
Income:
Interest income .................................................. $ 6 5 3
Management fees .................................................. 331 304 300
Dividends from subsidiary ........................................ 2,793 3,090 4,600
Equity in undistributed earnings of subsidiaries ................. 4,934 5,423 4,732
------- ----- -----
Total income .................................................. 8,064 8,822 9,635
------- ----- -----
Expenses:
Professional fees ................................................ 64 71 80
Supplies and printing ............................................ 56 62 39
Interest expense ................................................. 171 162 152
Other expenses ................................................... 68 90 91
Income tax benefit (credit) ...................................... (10) (20) (27)
------- ----- -----
Total expenses ................................................ 349 365 335
------- ----- -----
Net income ......................................................... $ 7,715 8,457 9,300
======= ===== =====
29
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, 1999, 2000 and 2001
1999 2000 2001
---- ---- ----
Operating activities:
Net income ................................................................ $ 7,715 8,457 9,300
Adjustments to reconcile net income to net cash provided by:
Equity in undistributed net income of subsidiary .......................... (4,934) (5,423) (4,732)
(Increase) in other assets ................................................ (38) (6) (747)
Increase (decrease) in other liabilities .................................. (52) 151 (108)
------- ------- -------
Total cash provided by operating activities ............................... 2,691 3,179 3,713
------- ------- -------
Financing activities: .....................................................
Cash dividends to shareholders ............................................ (1,796) (1,912) (2,015)
Treasury stock repurchases ................................................ (356) (1,964) (2,134)
Proceeds from stock options ............................................... 341 570 106
Proceeds (repayments) from line of credit ................................. (1,000) 500 --
Other financing activities, net ........................................... (2) 1 (1)
------- ------- -------
Total cash used by financing activities ................................... (2,813) (2,805) (4,044)
------- ------- -------
Net increase (decrease) in cash and cash equivalents ...................... (122) 374 (331)
Cash and cash equivalents at beginning of the year ........................ 220 98 472
------- ------- -------
Cash and cash equivalents at end of the years ............................. $ 98 472 141
======= ======= =======
(21) CARRYING AMOUNTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts and fair value of financial instruments as of September 30,
2000 and 2001 are summarized below:
2000 2001
--------------------- --------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
---------- ---------- ---------- ----------
(In thousands) (In thousands)
Financial Assets
Cash and cash equivalents .............................. $ 17,167 17,167 34,320 34,320
Investment securities .................................. 8,548 8,548 2,000 2,000
Mortgage-backed securities ............................. 189,239 189,239 190,553 190,553
Loans receivable held for sale ......................... 10,194 10,194 16,274 16,274
Loans receivable, net .................................. 511,701 514,855 488,754 508,802
FHLB stock ............................................. 11,899 11,899 7,624 7,624
Financial Liabilities
Deposits:
Demand accounts ........................................ 240,497 240,497 331,972 331,972
Certificate accounts ................................... 165,720 165,306 198,392 199,908
Advances from Federal Home Loan Bank ................... 225,224 224,391 140,036 137,166
Securities sold under agreements to repurchase ......... 75,858 75,858 18,703 18,703
Other borrowings ....................................... 2,069 2,069 2,069 2,069
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
30
(21) CARRYING AMOUNTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS - Continued
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 rates since September 30,
2000 and 2001, could have a significant impact on the fair value presented and
should be considered when analyzing this financial data.
The Company had $60.6 million of off-balance sheet financial commitments
as of September 30, 2001, 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 Company originates certain fixed rate residential loans with the
intention of selling these loans. Between the time that the Company enters into
an interest rate lock or a commitment to originate a fixed rate residential loan
with a potential borrower and the time the closed loan is sold, the Company is
subject to variability in the market prices related to these commitments. The
Company believes that it is prudent to limit the variability of expected
proceeds from the sales through forward sales of "to be issued" mortgage backed
securities and loans ("forward sales commitments"). The commitment to originate
fixed rate residential loans and forward sales commitments are freestanding
derivative instruments. They do not generally qualify for hedge accounting
treatment so their fair value adjustments are recorded through the income
statement in net gains on sale of loans. The commitments to originate fixed rate
conforming loans totaled $13.2 million at September, 30 2001. The fair value of
these commitments was a gain of $177,000 at September 30, 2001. The forward
sales commitments totaled $13.0 million at September 30, 2001. The fair value of
these commitments was a loss of $148,000 at September 30, 2001.
Fair value estimates are made at the dates indicated above, based on
relevant market information and information about the financial instrument.
These estimates do not reflect any premium or discount that could result from
offering for sale the Company's entire holdings of a particular financial
instrument. Because no active market exists for a significant portion of the
Company's financial instruments, fair value estimates are based on judgments
regarding future expected loss experience, current economic conditions, current
interest rates and prepayment trends, risk characteristics of various financial
instruments, and other factors. These estimates are subjective in nature and
involve uncertainties and matters of significant judgment and therefore cannot
be determined with precision. Changes in any of these assumptions used in
calculating fair value would also significantly affect the estimates. Changes in
market interest rates and prepayment assumptions could significantly change the
fair value.
Fair value estimates are based on existing on and off-balance sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and liabilities that are not considered
financial instruments. For example, the Company has significant assets and
liabilities that are not considered financial assets or liabilities including
deposit franchise value, loan servicing portfolio, real estate, deferred tax
liabilities, premises and equipment, and goodwill. In addition, the tax
ramifications related to the realization of the unrealized gains and losses can
have a significant effect on fair value estimates and have not been considered
in any of these estimates.
(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, 2001, the outstanding balance was approximately $2.1 million.
31
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 and
provisions for loan losses), absence of unforeseen changes in the Company's
markets, legal and regulatory changes, and general changes in the 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 $9.3 million in net income for the year ended
September 30, 2001, compared to $8.5 million for the year ended September 30,
2000. Net interest income increased $2.5 million as a result of increased
interest income of $2.2 million offset by a decrease of $313,000 in interest
expense. Provision for loan losses decreased from $978,000 for the year ended
September 30, 2000, to $955,000 for the year ended September 30, 2001. Other
income increased from $5.9 million in fiscal 2000, to $7.9 million in 2001.
General and administrative expenses increased $2.0 million or 12.3%, for fiscal
2001, as compared to fiscal 2000.
Total assets decreased from $768.8 million at September 30, 2000 to
$763.2 million at September 30, 2001, or .73%. Liquid assets, consisting of
cash, interest-bearing deposits, and securities, increased from $215.0 million
at September 30, 2000, to $226.9 million at September 30, 2001. Loans receivable
decreased 4.5% from $511.7 million at September 30, 2000, to $488.8 million at
September 30, 2001. Total loan originations for fiscal 2001 were $296.1 million
as compared to $247.2 million for fiscal 2000.
The growth in liquid assets was funded by increased deposits of $124.1
million. This was offset by decreased advances from the Federal Home Loan Bank
("FHLB") of Atlanta of $85.2 million and securities sold under agreements to
repurchase of $57.2 million. As a result of increased Sales Centers and a strong
emphasis on growing local deposits during fiscal 2001, deposits increased from
$406.2 million at September 30, 2000, to $530.4 million at September 30, 2001.
During this same period, transaction deposits (defined as noninterest bearing
checking accounts and NOW accounts) increased $20.9 million, money market
checking accounts increased $73.5 million and certificate accounts increased
$32.7 million.
As a result of $9.3 million in net earnings, less the cash dividends
paid to shareholders of approximately $2.0 million, treasury stock repurchases
of approximately $2.1 million, and the net change in unrealized gain (loss) on
securities available for sale, net of income tax of $5.0 million, stockholders'
equity increased from $46.9 million at September 30, 2000 to $57.2 million at
September 30, 2001.
Liquidity and Capital Resources
Historically, the Company has maintained its liquidity at levels
believed by management to be adequate to meet requirements of normal operations,
potential deposit outflows and strong loan demand and still allow for optimal
investment of funds and return on assets.
The principal sources of funds for the Company are cash flows from
operations, consisting mainly of mortgage, consumer and commercial loan
payments, retail customer deposits, repurchase agreements securitized by
mortgage-backed securities and advances from the FHLB of Atlanta.
The principal use of cash flows is the origination of loans receivable.
The Company originated loans receivable of $256.4 million, $247.2 million and
$296.1 million for the years ended September 30, 1999, 2000 and 2001,
respectively. A large portion of these loan originations were financed through
loan principal repayments which amounted to $128.8 million, $139.9 million and
$186.5 million for the years ended September 30, 1999, 2000 and 2001,
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, 1999,
2000 and 2001, the Company sold loans amounting to $60.8 million, $33.7 million
and $75.7 million, respectively. The Company experienced
32
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis - Continued
increased sales as a result of lower interest rates during fiscal 2001. Should
interest rates continue at their historical low levels, this trend may continue.
During 2001, the Company used deposit growth to restructure and reduce
its debt. In fiscal 2001 deposits increased from $406.2 million at September 30,
2000, to $530.4 million at September 30, 2001. During fiscal 2001, the Company
prepaid approximately $37.7 million of advances from FHLB and incurred gross
penalties of approximately $1.1 million which was recorded as an extraordinary
item in the statement of operations. As a result of this and the repayment of
other short-term advances, the weighted average rate on FHLB advances decreased
to 5.46% at September 30, 2001, compared to 6.44% at September 30, 2000. In
addition, the Company paid off approximately $57.2 million in reverse repurchase
agreements during fiscal 2001.
At September 30, 2001, the Company had commitments to originate $14.8
million in loans and $34.4 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, 2001, the Company had $162.3 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, 2001, the Company had excess collateral
pledged to the FHLB which would support additional FHLB advance borrowings of
$63.9 million. Additionally, at September 30, 2001, the Company had repurchase
agreement lines of credit and available collateral consisting of investment
securities and mortgage-backed securities of $113.5 million as well as federal
funds lines available of $10.0 million.
As a condition of deposit insurance, current FDIC regulations require
that 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 $55.3 million at September 30, 2001, exceeding the Bank's tangible
and core requirements by $43.8 million and $24.7 million, respectively. At
September 30, 2001, the Bank's capital exceeded its current risk-based minimum
capital requirement by $24.2 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, 2000 and 2001
General
Net earnings were $9.3 million ($0.85 per diluted share) for the year
ended September 30, 2001, an increase of 10.0% compared to $8.5 million ($0.75
per diluted share) for the year ended September 30, 2000. As a result of share
repurchases, diluted earnings per share increased 13.3%. Net interest income
increased $2.5 million primarily as a result of an increase in interest income
of $2.2 million which was accompanied by a decrease in interest expense of
$313,000.
Interest Income
Interest income for the year ended September 30, 2001, increased 3.7% to
$60.3 million as compared to $58.1 million for the year ended September 30,
2000. The yield on interest-earning assets for the year ended September 30, 2000
was 8.34% compared to 8.26% for the year ended September 30, 2001. The average
yield on loans receivable for fiscal year 2001 was 8.80% compared to 8.74% in
2000. The yield on investments which includes Investments, Mortgage-Backed
Securities, Overnight Funds and Federal Funds, decreased to 7.00% for the fiscal
year 2001 from 7.33% for fiscal year 2000. Total interest-earning assets for
fiscal year 2001 averaged $738.5 million compared to $705.0 million for the year
ended September 30, 2000. The increase in average interest-earning assets is
primarily due to an increase in average loans receivable of approximately $18.3
million and mortgage-backed and investment securities of approximately $12.6
million.
33
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis - Continued
Interest Expense
Interest expense on interest-bearing liabilities was $33.3 million for the
year ended September 30, 2001, as compared to $33.6 million in fiscal 2000. The
cost of interest-bearing liabilities was 4.62% for the year ended September 30,
2001, compared to 4.84% in fiscal year 2000. The average cost of deposits for
the year ended September 30, 2001, was 4.03% compared to 3.88% for the year
ended September 30, 2000. The cost of FHLB advances and reverse repurchase
agreements for fiscal 2001 was 5.90% and 5.65%, respectively, compared to 6.12%
and 6.38%, respectively, for fiscal 2000. Total average interest-bearing
liabilities increased 3.4% from $694.5 million at September 30, 2000, to $717.9
million at September 30, 2001. The increase in average interest-bearing
liabilities is due to an increase in average deposits of approximately $75.3
million and in average FHLB advances of $10.8 million. This was offset by a
decrease in average reverse repurchase agreements of $62.3 million.
Net Interest Income
Net interest income was $26.9 million for the year ended September 30,
2001, an increase of $2.5 million, compared to $24.4 million for the year ended
September 30, 2000. The net interest margin increased to 3.64% for fiscal 2001
compared to 3.50% for fiscal 2000. Average interest-earning assets increased
$33.5 million while average interest-bearing liabilities increased $23.4
million. During fiscal 2001, interest rates have decreased significantly. At
September 30, 2000 and September 30, 2001, the prime rate of interest was 9.50%
and 6.0%, respectively. With the reduction in interest rates, resulting from the
Federal Reserve Board's decision to reduce the prime rate by 350 basis points,
it is expected that the Company's yield on interest earning assets and cost of
deposits and borrowing will decline in fiscal 2002. Consequently, it is expected
that a substantial portion of the Company's loan portfolio will be subject to
refinancing at lower rates. Should, as a result of continued rate reductions by
the Federal Reserve, refinancing of loans at lower rates and repricing of loans
tied to prime or treasury rates outpace the repricing of deposits and borrowings
the Company could experience a significantly reduced net interest margin in the
future.
Provision for Loan Losses
The Company's provision for loan losses decreased from $978,000 for fiscal
2000 to $955,000 for fiscal 2001. The allowance for loan losses as a percentage
of loans was 1.42% at September 30, 2001 compared to 1.35% at September 30,
2000. Loans delinquent 90 days or more were .64% of total loans at September 30,
2001, compared to .92% at September 30, 2000. The allowance for loan losses was
220% of loans delinquent more than 90 days at September 30, 2001, compared to
148% at September 30, 2000. 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 2001, total other income increased from $5.9 million for the
period ended September 30, 2000, to $7.9 million for the period ended September
30, 2001. Fees and service charges on loans and deposit accounts was $2.6
million for fiscal 2001, compared to $2.1 million for fiscal 2000. Due to a
decreasing long-term interest rate environment which has resulted in increased
fixed-rate mortgage originations, gain on sale of loans was $1.3 million for the
year ended September 30, 2001, compared to $631,000 for the year ended September
30, 2000. Gain on sale of mortgage-backed securities, net was $727,000 for
fiscal 2001, compared to losses of $1.6 million for fiscal 2000. This was 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 in fiscal 2000. Other income increased from $1.5
million for the year ended September 30, 2000, to $1.7 million for the year
ended September 30, 2001.
Other Expense
General and administrative expenses were $18.2 million for fiscal 2001 as
compared to $16.2 million for fiscal 2000. Salaries and employee benefits
increased to $10.5 million for fiscal 2001 as compared to $9.1 million for
fiscal 2000, or 15.3%, primarily due to normal increases and the costs of
staffing for four new offices. Also as a result of the four office additions,
net occupancy, furniture and fixtures and data processing expense increased
$83,000 for fiscal 2001, as compared to fiscal 2000. Other expenses increased
from $3.0 million in fiscal 2000 to $3.5 million in fiscal 2001. The increase is
primarily due to increased expenses related to the servicing of deposit
accounts.
Income Taxes
Income taxes increased from $4.7 million in fiscal 2000 to $5.7 million in
fiscal 2001 as a result of increased earnings before income taxes.
34
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis - Continued
Results of Operations
Comparison of the Years Ended September 30, 1999 and 2000
General
Net earnings were $8.5 million ($0.75 per diluted share) for the year
ended September 30, 2000, an increase of 9.6% compared to $7.7 million ($0.68
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.
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."
35
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis - Continued
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 to $9.1 million for fiscal 2000 from $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.
Non-performing Assets
Non-performing assets were $5.6 million at September 30, 2001 and 2000.
Loans past due 90 days or more decreased from $4.8 million at September 30,
2000, to $3.3 million at September 30, 2001. Real estate acquired through
foreclosure increased from $867,000 at September 30, 2000, to $2.4 million at
September 30, 2001.
At September 30, 2001, impaired loans totaled $3.4 million. There were $1.4
million in impaired loans at September 30, 2000. Included in the allowance for
loan losses at September 30, 2001 was $281,000 related to impaired loans
compared to $345,000 at September 30, 2000. The average recorded investment in
impaired loans for the year ended September 30, 2001 was $3.6 million compared
to $1.5 million for the year ended September 30, 2000. Interest income
recognized on impaired loans in fiscal 2001 was $120,000. No interest income was
recognized on impaired loans in fiscal 2000.
Loans are reviewed on a regular basis and an allowance for uncollectable
interest is established on loans where collection is questionable, generally
when such loans become 90 days delinquent. Loan balances for which interest
amounts have been reserved and all loans more than 90 days delinquent are placed
on non-accrual status. Typically, payments received on a non-accrual loan are
applied to the outstanding principal or recognized as interest based upon the
collectability of the loan as determined by management.
Allowance for Loan Losses
The Company's management evaluates the need to establish additional
allowances against losses on loans quarterly. Such an evaluation includes a
review of all loans for which full collectability may not be reasonably assured
and considers, among other matters, the estimated market value of the underlying
collateral of problem loans, composition of the loan portfolio, prior loss
experience, economic conditions, etc.
The Company established provisions for loan losses for the years ended
September 30, 1999, 2000 and 2001, of $750,000, $978,000 and $955,000,
respectively. For the years ended September 30, 1999, 2000 and 2001, the Company
had net charge-offs of $100,000, $319,000 and $860,000, respectively. Net charge
offs as a percentage of average outstanding loans were .02%, .06%, and .17% for
fiscal years ended 1999, 2000 and 2001. During fiscal 2001, the markets the
Company serves began experiencing an economic slow down in the areas of tourism
and real estate development. As a result of the economic slow down, the Company
has experienced an increase in charge-offs from its consumer loan and credit
card portfolios. In addition, the Company had a $153,000 charge-off related to
one commercial relationship. At September 30, 2001, the Company had an allowance
for loan losses of $7.2 million, which was 1.42% of net loans compared to 1.35%
at September 30, 2000.
36
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis - Continued
Allowance for Loan Losses - Continued
Management believes that the current level of the allowance for loan
losses is presently adequate considering the composition of the loan portfolio,
the portfolio's loss experience, delinquency trends, current regional and local
economic conditions and other factors. While management uses the best
information available to make evaluations, future adjustments to the allowance
may be necessary if economic conditions differ substantially from the
assumptions used in making the evaluation. The allowance for loan losses is
subject to periodic evaluation by various regulatory authorities and may be
subject to adjustment upon their examination.
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 as computed by the OTS for the
various rate shock levels as of September 30, 2001.
Board Limit Board Limit Market Value Market Value
Minimum NPV Maximum Of Assets Portfolio Equity NPV
Change in Interest Rates Ratio Decline in NPV 9/30/01 9/30/01 Ratio
- ------------------------ ----- -------------- ------- ------- -----
300 basis point rise 5.00% 400 BPS $ 775,684 $ 97,637 12.59%
200 basis point rise 6.00% 300 BPS $ 786,740 $ 103,258 13.12%
100 basis point rise 6.00% 250 BPS $ 797,161 $ 105,914 13.29%
No Change 6.00% $ 805,251 $ 107,483 13.35%
100 basis point decline 6.00% 250 BPS $ 809,913 $ 106,549 13.16%
200 basis point decline 6.00% 300 BPS $ 813,963 $ 105,881 13.01%
300 basis point decline 6.00% 350 BPS N/A N/A N/A
The preceding table indicates that at September 30, 2001, 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. Values for the 300 basis point decline are not indicated
due to the current level of interest rates. At September 30, 2001, the Bank's
estimated changes in NPV were within the limits established by the Board of
Directors.
Computation of prospective effects of hypothetical interest rate changes
are based on numerous assumptions, including relative levels of market interest
rates, loan prepayments and deposit decay, and should not be relied upon as
indicative of actual results. Further, the computations do not contemplate any
actions the ALCO could undertake in response to sudden changes in interest
rates.
The Bank also uses interest rate sensitivity gap analysis to monitor the
relationship between the maturity and repricing of its interest-earning assets
and interest-bearing liabilities. Interest rate sensitivity gap is defined as
the difference between the amount of interest-earning assets maturing or
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.
37
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis - Continued
Impact of New Accounting Pronouncements
SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities and SFAS No. 138, Accounting for Certain Derivative Instruments and
Certain Hedging Activities, an Amendment of SFAS No. 133 establishes accounting
and reporting standards for derivative 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.
Changes in the fair value of those derivatives are reported in earnings or other
comprehensive income depending on the use of the derivative and whether the
derivative qualifies for hedge accounting. The Company adopted SFAS No. 133, as
amended by SFAS No. 138, on October 1, 2000. The adoption of SFAS No. 133 on
October 1, 2000 as well as the impact of applying SFAS No. 133 for the year
ended September 30, 2001 was not material to the Company's consolidated
financial statements.
In September 2000, the FASB issued SFAS No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.
This new statement replaces SFAS No. 125 and provides further standards on
accounting and reporting for transfers and servicing of financial assets and
extinguishments of liabilities. SFAS No. 140 was effective for transfers
occurring after March 31, 2001 and for disclosures relating to securitization
transactions and collateral for fiscal years ending after December 15, 2000. The
Company adopted this statement on July 1, 2001 and the impact was not material
to its financial statements.
In July 2001, the FASB issued Statement No. 141, Business Combinations,
and Statement No. 142, Goodwill and Other Intangible Assets. Statement 141
requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001 as well as all purchase method
business combinations completed after June 30, 2001. Statement 141 also
specifies criteria intangible assets acquired in a purchase method business
combination must meet to be recognized and reported apart from goodwill.
Statement 142 will require that goodwill and intangible assets with indefinite
useful lives no longer be amortized, but instead tested for impairment at least
annually in accordance with the provisions of Statement 142. Statement 142 will
also require that intangible assets with estimable useful lives be amortized
over their respective estimated useful lives to their estimated residual values,
and reviewed for impairment in accordance with FAS statement No. 121, Accounting
for Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.
The Company adopted statement 141 in July 2001 and plans to adopt statement 142
on October 1, 2001. The Company does not have any intangible assets affected by
these standards.
In August 2001, the Financial Accounting Standards Board issued SFAS
144, Accounting for the Impairment or Disposal of Long-Lived Assets which
addresses the financial accounting and reporting for the impairment or disposal
of long-lived assets. While SFAS 144 supercedes SFAS 121, Accounting for the
Impaiment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, it
retains many of the fundamental provisions of that Statement. The provisions of
SFAS 144 are effective for financial statements issued for fiscal years
beginning after December 15, 2001, and interim periods within those fiscal
years. The Company will adopt SFAS 144 on October 1, 2002 and has not yet
determined the impact from adoption.
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.
38
Board of Directors
Coastal Financial Corporation Coastal Federal Savings Bank Coastal Investor Services, Inc.
James C. Benton James C. Benton G. David Bishop
President, C.L. Benton & Sons, Inc. President, C.L. Benton & Sons, Inc. President, Waccamaw Community
Foundation
G. David Bishop G. David Bishop
President, Waccamaw Community President, Waccamaw Community James P. Creel
Foundation Foundation President, Creel Corporation
James T. Clemmons James T. Clemmons James H. Dusenbury
Chairman Chairman Retired - Attorney
Coastal Financial Corporation Coastal Federal Savings Bank Dusenbury and Clarkson Law Firm
James P. Creel James P. Creel Michael C. Gerald
President President President and Chief Executive Officer
Creel Corporation Creel Corporation Coastal Financial Corporation
James H. Dusenbury James H. Dusenbury E. Haden Hamilton, Jr.
Retired - Attorney Retired - Attorney President and Chief Executive Officer
Dusenbury and Clarkson Law Firm Dusenbury and Clarkson Law Firm Coastal Investor Services, Inc.
Michael C. Gerald Michael C. Gerald Jerry L. Rexroad, CPA
President and Chief Executive Officer President and Chief Executive Officer Chief Financial Officer
Coastal Financial Corporation Coastal Federal Savings Bank Coastal Investor Services, Inc.
Frank A. Thompson, II Frank A. Thompson, II Phillip G. Stalvey
Peoples Underwriters, Inc. Peoples Underwriters, Inc. Executive Vice President
Coastal Financial Corporation
Frank A. Thompson, II
Peoples Underwriters, Inc.
39
COASTAL FEDERAL SAVINGS BANK
Leadership Group
Sherri J. Adams Rita E. Fecteau Thomas W. Kennedy Jerry L. Rexroad, CPA
Personal Banking Leader Vice President Vice President Executive Vice President
N. Myrtle Beach Controller Loan Review Chief Financial Officer
Ginger Allen Trina S. Ferguson L. Eric Keys W. Bryan Roundtree
Senior Underwriter Vice President Vice President Personal Banking Leader
Residential Loan Community Banking Leader Southport
Donna P. Bailey Administration South Strand Community
Assistant Vice President Leader Stacy M. Sansbury
Associate Dean of Career Gregory J. Kreger Personal Banking Leader
Development J. Daniel Fogle Corporate Services Leader Carolina Forest
Vice President
James R. Baker, MCSE Residential Banking Leader Scott W. Lander Eulette W. Sauls
Assistant Vice President Carolina Forest / Waccamaw / Senior Vice President Customer Account
Systems Engineer Conway Area Leader Relationship System Leader
North Carolina Region
Jeffrey A. Benjamin Joel P. Foster Sherry G. Schoolfield
Senior Vice President Vice President Edward L. Loehr Assistant Vice President
Credit Administration Leader Community Banking Leader Vice President Compliance Officer
Myrtle Beach Community Budgeting and Treasury
Lynn U. Berry Douglas E. Shaffer
Vice President Andrew D. Gable Sandra L. Louden Senior Vice President
Community Banking Leader Construction Loan Servicing Personal Banking Leader Area Leader
Litchfield Community Leader Socastee North and West Communities
Rebecca L. Brown Mary L. Geist Kathleen M. Lutes L. Christopher Shannon
Assistant Vice President Vice President Assistant Vice President Business Banking Leader
Senior Closing Specialist Data Services Leader Senior Underwriter Dunes
Cynthia L. Buffington Michael C. Gerald Sherry A. Maloni Steven J. Sherry
Assistant Vice President President and Chief Executive Assistant Vice President Executive Vice President
Item Processing Leader Officer Personal Banking Leader Chief Marketing Officer
Conway
Ronnie Burbank Kenan D. Godwin Cathe P. Singleton
Vice President Personal Banking Leader Michael C. Mauney Assistant Vice President
Business Banking Leader Oak Street Assistant Vice President Personal Banking Leader
Collections Leader Murrells Inlet
Glenn T. Butler, MCSE, CCNA Amy M. Gore
Vice President Personal Banking Leader Marcus G. McDowell J. Marcus Smith, Jr.
Network Services Leader Wilmington Vice President Senior Vice President
Business Banking Leader Internal Audit
Anne R. Caldwell Jimmy R. Graham
Assistant Vice President Executive Vice President Amy E. McLaurin Phillip G. Stalvey
Deposit Servicing Leader Chief Information Officer Personal Banking Leader Executive Vice President
Sunset Beach Sales Leader
Shonda C. Chestnut Laurie Ann Grubb
Assistant Vice President Personal Banking Leader Janice B. Metz H. Delan Stevens
Personal Banking Leader Socastee Community Marketing Programs Vice President
Surfside Coordinator Community Banking Leader
Lisa Moore Harris West Community
Susan J. Cooke Vice President Lauren E. Miller
Vice President Community Banking Leader Assistant Vice President Sandra J. Szarek
Administrative Services Wilmington Community Dean of Coastal Federal Loan Servicing Leader
Leader University
Corporate Secretary Glenn D. Humbert Regina C. Taylor
Vice President Deborah J. Myers Sales Resource Specialist
Robert D. Douglas Community Banking Leader Electronic Banking Leader
Executive Vice President Sunset Beach Community Matthew J. Towns
Human Resources Leader Ronald A. Nolan Vice President
Lisa B. James Assistant Vice President Credit Administration
S. Lynn Dyson Vice President Security Officer
Personal Banking Leader Account Servicing Leader Douglas W. Walters
Waccamaw John O. Perritt, III Vice President
Ruth S. Kearns Vice President Residential Banking Leader
Barbara R. Faber, CPA Senior Vice President Residential Banking Leader N. Myrtle Beach
Assistant Vice President Customer Recognition Officer Wilmington
Banking Administration Assistant Corporate Secretary Sandra R. Zanfini
Leader Corporate Support Leader
40
Locations
Coastal Federal Savings Bank Coastal Investor Services, Inc.
Oak Street Office Southport Office Cynthia M. Clark
2619 Oak Street 4956-1 Long Beach Road SE Financial Advisor
Myrtle Beach, SC 29577-3129 Southport, NC 28461 843.918.7600
843.205.2000 843.205.2032
910.454.4173
Susan J. Cooke
Carolina Forest Office Sunset Beach Office Corporate Secretary
3894 Renee Drive 1625 Seaside Road S.W. 843.205.2000
Myrtle Beach, SC 29579 Sunset Beach, NC 28468
843.205.2016 843.205.2012 John L. Creamer
910.579.8160 Vice President and Financial Advisor
843.918.7600
Conway Office Surfside Office
310 Wright Boulevard 112 Highway 17 South
Conway, SC 29526 & Glenns Bay Road E. Haden Hamilton, Jr.
843.205.2005 Surfside Beach, SC 29575 President, Chief Executive Officer
843.205.2003 and Financial Advisor
Dunes Office 843.918.7603
7500 North Kings Highway Waccamaw Medical Park Office
Myrtle Beach, SC 29572 112 Waccamaw Medical Park Drive John Michael Hill
843.205.2001 Conway, SC 29526 Vice President and Financial Advisor
843.205.2009 843.918.7600
Little River Office
1602 Highway 17 38th Avenue Office (Bi-Lo) Debra Hinson
Little River, SC 29566 1245 38th Avenue North Operations Leader
843.205.2014 Myrtle Beach, SC 29577 843.918.7600
843.205.2041
Murrells Inlet Office Jennifer H. Ivey
3348 Highway 17 South Wilmington Office Registered Sales Assistant
& Inlet Crossing 5710 Oleander Drive, Suite 209 843.918.7600
Murrells Inlet, SC 29576 Wilmington, NC 28403
843.205.2008 843.205.2031 Jerry L. Rexroad,
910.313.1161 CPA Chief Financial Officer
North Myrtle Beach Office 843.205.2000
521 Main Street Wilmington Downtown Office
North Myrtle Beach, SC 29582 109 Market Street
843.205.2002 Wilmington, NC 28401
843.205.2033
Socastee Office 910.763.2372
4801 Socastee Boulevard
Myrtle Beach, SC 29575
843.205.2007
Socastee Office (Bi-Lo)
5020 Dick Pond Road
Myrtle Beach, SC 29588
843.205.2042
41
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
BB&T Investment Services at 1.800.446.7074
Hofer & Arnett, Inc. at 1.800.774.8723
Raymond James Financial Services at 1.843.918.7600
Monroe Securities, Inc. at 1.800.766.5560
Knights Securities at 212.336.8690
Spear, 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, 2001, the Corporation had 1,029 shareholders and
10,643,646 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 2001:
First Quarter $ 7.33 $ 5.25 $0.043
Second Quarter 10.50 6.17 0.043
Third Quarter 9.33 7.11 0.050
Fourth Quarter 10.25 8.00 0.050
Fiscal Year 2000:
First Quarter $ 9.14 $ 6.82 $0.042
Second Quarter 8.07 5.55 0.043
Third Quarter 7.72 6.29 0.043
Fourth Quarter 7.67 3.33 0.043
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,
2001, 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 Ocean Reef Resort (formerly Myrtle Beach Martinique), 7100 North
Ocean Boulevard, Myrtle Beach, South Carolina, on Wednesday, January 30, 2002 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.
* Securities offered exclusively through Securities are:
---------------------------------------
Raymond James o NOT FDIC Insured
Financial Services, Inc. o NOT GUARANTEED by Coastal Financial
Member NASD/SIPC Corporation or Coastal Federal
an independent broker/ dealer. o Subject to risk and may lose value
COASTAL INVESTOR SERVICES, INC. ---------------------------------------
A subsidiary of Coastal Financial Corporation
42
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COASTAL FINANCIAL CORPORATION
Corporate Office: 2619 Oak Street o Myrtle Beach, South Carolina o 29577-3129
2001 ANNUAL REPORT
843.205.2000