COASTAL FINANCIAL CORPORATION
2002
ANNUAL REPORT
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~ DEDICATION ~
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A QUEST FOR EXCELLENCE
THANKS TO OUR PEOPLE, OUR MISSION, OUR VALUES AND OUR GUIDING PRINCIPLES
U.S.BANKER MAGAZINE HAS RANKED COASTAL FINANCIAL CORPORATION
#1 IN THE CAROLINAS AND #3 IN THE NATION
Over the twelve years since becoming a publicly owned company, all of us at
Coastal Financial Corporation have worked diligently toward achieving our Basic
Corporate Objective of Maximizing The Value Of Our Shareholders' Investment by
focusing on our Long-Term Goal of Being The Best Financial Services Company In
Our Marketplace. And, over that period of time, we have received continuing
evidence of progress in those quests.
Related to our Basic Corporate Objective Of Maximizing The Value Of Our
Shareholders' Investment:
- The January 3, 1994 edition of INVESTORS BUSINESS DAILY recognized
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Coastal Financial Corporation's shares as having the largest price
increase of any bank stock listed on the New York, American or Nasdaq
stock markets during the year ended December 31, 1993.
- Coastal Financial Corporation was listed as #1 in Return on Equity for
all publicly-held financial institutions in North and South Carolina
in the 1998/1999 edition of CORPORATE CAROLINA published by the
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editors of BUSINESS NORTH CAROLINA.
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- In its November 17, 1998 edition, THE STATE newspaper published an
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article titled "Myrtle Beach bank leads US," describing Coastal
Financial Corporation as the nation's best savings bank investment
this decade.
- In its November 14, 1999 edition, THE STATE newspaper published an
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article titled "Myrtle Beach-based company is a financial pacesetter -
Coastal Financial is the fastest growing new public financial services
company of the 1990s."
- Coastal Financial Corporation was listed as #1 in Return on Equity for
all publicly-held financial institutions in North and South Carolina
in the 1999/2000 edition of CORPORATE CAROLINA published by the
-------------------
editors of BUSINESS NORTH CAROLINA.
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- U.S. Banker, in its July 2000 edition, listed Coastal Financial
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Corporation #1 in the Carolinas and #16 in the nation in terms of
earnings per share growth and return on equity, based on the past
three years averaged.
- 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.
- The July 2002 edition of U.S. Banker Magazine featured a listing of
----------------------
the Community Banks in the United States with less than one billion
dollars in assets, ranked in order, based upon return on equity over
the past three years. Coastal Financial Corporation placed 1st in the
Carolinas and 3rd nationally in these measures.
- Coastal Financial Corporation was added to the Russell 2000 Index, and
the broader Russell 3000 Index, effective as of July 1, 2002.
Related to our Long-Term Goal Of Being The Best Financial Services Company In
Our Marketplace:
- The 1997 SHESHUNOFF MARKET SHARE REPORT ranked Coastal Federal Bank
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the leader in deposit market share for Horry County for the twelve
months ended June 30, 1996.
- The 1998 SHESHUNOFF MARKET SHARE REPORT ranked Coastal Federal Bank
-------------------------------
the leader in deposit market share for Horry County for the twelve
months ended June 30, 1997.
- Coastal Federal Bank placed 1st in voting by the readers of the SUN
---
NEWS in the Financial Institutions category of the SUN NEWS Best Of
---- --------
The Beach Competition for 1998.
- Coastal Federal Bank placed 1st in voting by the readers of the SUN
---
NEWS in the Financial Institutions category of the SUN NEWS Best Of
---- --------
The Beach Competition for 1999.
- Coastal Federal Bank placed 1st in voting by the readers of the SUN
---
NEWS in the Financial Institutions category of the SUN NEWS Best Of
---- --------
The Beach Competition for 2000.
2
- Coastal Federal Bank placed 1st in voting by the readers of the SUN
---
NEWS in the Financial Institutions category of the SUN NEWS Best Of
---- --------
The Beach Competition for 2001.
- The 2002 SHESHUNOFF MARKET SHARE REPORT ranked Coastal Federal Bank
-------------------------------
the leader in deposit market share for Horry County for the twelve
months ended June 30, 2001.
- The 2002 FDIC/OTS SUMMARY OF DEPOSITS REPORT ranked Coastal Federal
-------------------------------------
Bank the leader in deposit market share for Horry County for the
twelve months ended June 30, 2002.
- Coastal Federal Bank placed 1st in voting by the readers of the SUN
---
NEWS in the Financial Institutions and Mortgage Company categories and
----
Coastal Investor Services, Inc.,* placed 1st in the Financial Planning
category of the SUN NEWS Best Of The Beach Competition for 2002.
How does an organization create such superior long-term results? We believe that
our ever-increasing focus on our People, our Mission, our Values and our Guiding
Principles has enabled these results.
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.
[GRAPHIC - CHART - SHARE PRICE PERFORMANCE]
The price of Coastal Financial Corporation's common stock increased 37.6% since
September 30, 2001 and has grown at a compound annual rate of over 32% since
1990. The foregoing reflects historical results and may not be indicative of
future performance.
3
FINANCIAL HIGHLIGHTS
The following table sets forth certain information concerning the financial
position of the Company (including data from operations of its subsidiaries) as
of and for the dates indicated. The consolidated data is derived in part from,
and should be read in conjunction with, the Consolidated Financial Statements of
the Company and its subsidiaries presented herein.
At or for Years Ended September 30,
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1998 1999 2000 2001 2002
--------- -------- ------- ------- --------
(Dollars in thousands, except per share data)
Financial Condition Data:
Total assets. . . . . . . . . . . . . . . . . . . . . . . . $ 643,560 $713,013 $ 768,838 $ 763,214 $ 950,796
Loans receivable, net . . . . . . . . . . . . . . . . . . . 414,264 455,351 511,701 488,754 536,851
Mortgage-backed securities . . . . . . . . . . . . . . . . . 170,181 182,115 189,239 190,553 331,808
Cash, interest-bearing deposits and investment securities. . 25,507 30,296 25,715 36,320 27,816
Deposits. . . . . . . . . . . . . . . . . . . . . . . . . . 386,321 399,673 406,217 530,364 637,081
Borrowings . . . . . . . . . . . . . . . . . . . . . . . . . 210,560 262,541 303,151 160,808 228,622
Stockholder's equity . . . . . . . . . . . . . . . . . . . . 37,851 41,237 46,945 57,248 66,386
Operating Data:
Interest income . . . . . . . . . . . . . . . . . . . . . . $ 43,894 $ 49,559 $ 58,079 $ 60,255 $ 53,873
Interest expense . . . . . . . . . . . . . . . . . . . . . . 24,451 26,991 33,636 33,323 21,846
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Net interest income . . . . . . . . . . . . . . . . . . . . 19,443 22,568 24,443 26,932 32,027
Provision for loan losses . . . . . . . . . . . . . . . . . 865 750 978 955 1,235
--------- -------- ------- ------- --------
Net interest income after provision for loan losses . . . . 18,578 21,818 23,465 25,977 30,792
--------- -------- ------- ------- --------
Other Income:
Fees and service charges on loans and deposit accounts . . . 1,639 2,025 2,126 2,634 3,148
Gain on sales of loans held for sale . . . . . . . . . . . . 1,579 979 631 1,295 1,462
Gain (loss) on sales of investment securities. . . . . . . . 96 73 (17) (56) 102
Gain (loss) on sales of mortgage-backed securities, net. . . 521 191 (1,554) 727 238
Real estate operations . . . . . . . . . . . . . . . . . . . 149 (29) (64) (453) (137)
Other income . . . . . . . . . . . . . . . . . . . . . . . . 1,895 2,334 4,759 3,755 3,326
--------- -------- ------- ------- --------
Total other income . . . . . . . . . . . . . . . . . . . . . 5,879 5,573 5,881 7,902 8,139
Total general and administrative expense . . . . . . . . . . 13,618 15,286 16,191 19,292 22,824
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Earnings before income taxes . . . . . . . . . . . . . . . . 10,839 12,105 13,155 14,587 16,107
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . 3,987 4,390 4,698 5,287 5,901
--------- -------- ------- ------- --------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,852 $ 7,715 $ 8,457 $ 9,300 $ 10,206
========= ======== ======= ======= ========
Net earnings per common diluted share . . . . . . . . . . . $ .60 $ .68 $ .75 $ .85 $ .93
========= ======== ======= ======= ========
Cash dividends per common share . . . . . . . . . . . . . . $ .17 $ .17 $ .17 $ .19 $ .21
========= ======== ======= ======= ========
Weighted average shares outstanding diluted . . . . . . . . 11,408 11,378 11,216 10,995 10,940
========= ======== ======= ======= ========
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,
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1998 1999 2000 2001 2002
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Other Data:
Return on assets (net income divided by average assets) . . 1.13% 1.14% 1.13% 1.20% 1.23%
Return on average equity (net income divided by average 19.52% 19.30% 19.52% 17.75% 16.92%
equity)
Average equity to average assets . . . . . . . . . . . . . . 6.05% 5.93% 5.80% 6.59% 7.29%
Book value per share . . . . . . . . . . . . . . . . . . . . $ 3.49 $ 3.70 $ 4.29 $ 5.34 $ 6.27
Dividend payout ratio . . . . . . . . . . . . . . . . . . . 25.14% 23.28% 22.61% 21.58% 21.77%
Interest rate spread (difference between average yield on
interest-earning
assets and average cost of interest-bearing liabilities) . . 3.51% 3.55% 3.50% 3.64% 4.14%
Net interest margin (net interest income as a percentage of
average
interest-earning assets) . . . . . . . . . . . . . . . . . 3.64% 3.67% 3.57% 3.77% 4.24%
Allowance for loan losses to total loans at end of period . 1.33% 1.36% 1.35% 1.42% 1.42%
Ratio of non-performing assets to total assets (1) . . . . . 0.36% 0.21% 0.73% 0.74% 0.48%
Tangible capital ratio . . . . . . . . . . . . . . . . . . . 6.10% 6.29% 6.56% 7.28% 6.57%
Core capital ratio . . . . . . . . . . . . . . . . . . . . 6.10% 6.29% 6.56% 7.28% 6.57%
Risk-based capital ratio . . . . . . . . . . . . . . . . . . 12.67% 12.64% 12.45% 13.30% 12.74%
Number of:
Real estate loans outstanding . . . . . . . . . . . . . . . 6,666 6,637 6,748 6,745 6,666
Deposit accounts . . . . . . . . . . . . . . . . . . . . . . 43,720 41,608 40,788 43,560 46,564
Full service offices . . . . . . . . . . . . . . . . . . . . 10 10 12 16 18
(1) Nonperforming assets consist of nonaccrual loans 90 days or more past due
and real estate acquired through foreclosure.
4
DEAR FRIENDS
Approximately ten years ago, when we adopted our QUEST FOR EXCELLENCE Operating
Philosophy, we could not have possibly envisioned the power that could be
created by an organization of exceptional People, who were united by a shared
sense of purpose and mission and who felt a strong bond with our Values and
Guiding Principles. This solid foundation has served to focus our undivided
attention on the development of broad and durable relationships with our
Customers and Communities and has lead to positive results and impressive
returns on a number of different measures.
Over that same ten year period, many cultural, economic and social changes have
occurred. And, during the course of the past two years particularly, many
significant events have taken place which have shaken our nation and the world.
At Coastal Financial Corporation, we have had the same QUEST FOR EXCELLENCE
Operating Philosophy over that ten year horizon, because we operate our Company
from a long-term perspective and focus on doing the right things for our
Associates, our Customers and our Communities. It is our strong view that
constancy of purpose is critical to 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.
The result of this continued focus on our People, our Mission, our Values and
our Guiding Principles is a culture which has continued to thrive and prosper
despite the volatility of the environment in which we operate. And, I'm happy to
report that, despite the very difficult circumstances for our country and the
world, 2002 was another year of growth and progress that has enabled us to enter
2003 in a position of strength.
Our never-ending focus on our QUEST FOR EXCELLENCE Operating Philosophy and
Vision 2005 Plan has continued to guide Coastal Financial Corporation through
this sea of ever-increasing change and has produced another year of exceptional
financial results.
Coastal Financial Corporation's net income for 2002 totaled $10.2 million,
compared to $9.3 million in 2001. On a fully diluted basis, these results
equated to a 9.4% increase, from $0.85 per share in 2001 to $0.93 per share in
2002.
The changes in our balance sheet during 2002 continued to reflect healthy growth
with deposits derived from the residents and businesses of the Communities we
serve increasing by approximately $107 million, or 20%, and loan portfolio
growth of 10%. The primary component of the gains in our loans receivable
portfolio was the significant increase in commercial loans which has resulted
from our strong focus on the Business Banking element of our operations. Despite
the very challenging business environment resulting from the varied 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 for 2002, which again met our
high expectations, the market price of Coastal Financial's common stock, at
September 30, 2002, was 37.6% higher than the market price at September 30,
2001.
Equally as impressive is the fact that, since 1990, our operating earnings have
increased at a compound annualized rate in excess of 17%.
Since becoming a publicly owned company in 1990, Coastal Financial Corporation's
stock has grown at a compound annual rate of over 32%, taking our market
capitalization from $4.6 million in October 1990, to $143.4 million at the close
of this fiscal year. Put another way, an initial investment of $10,000 in
October of 1990 would have grown to $294,000 at September 30, 2002.
One of the best indicators of performance is Return On Shareholders' Equity, and
this measure for 2002 was, again, outstanding. Our Return On Average
Shareholders' Equity of 16.9% ranks us among the top performing financial
services companies in America.
In addition to our own sense of satisfaction with these financial results,
during 2002, 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. Several very good examples
follow:
o Coastal Financial Corporation received national attention in the July
2002 edition of U.S. Banker Magazine. This publication featured a
-----------------------
listing of the Community Banking companies in the United States with
assets less than $1 billion, ranked in order, based upon return on
equity over the past three years. Coastal Financial Corporation placed
1st in the Carolinas and 3rd nationally in these measures.
o Coastal Financial Corporation was added to the Russell 2000 Index, and
the broader Russell 3000 Index, effective as of July 1, 2002.
o Coastal Federal Bank, for the fifth 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 2002.
o Coastal Federal Bank placed 1st in voting by the readers of the SUN
---
NEWS in the Mortgage Company category of the SUN NEWS Best Of The
---- --------
Beach Competition for 2002.
o Coastal Investor Services, Inc. placed 1st in voting by the readers of
\ the SUN NEWS in the Financial Planning category of the SUN NEWS Best
-------- --------
Of The Beach Competition for 2002.
o The 2002 SHESHUNOFF MARKET SHARE REPORT ranked Coastal Federal Bank
-------------------------------
the leader in deposit market share for Horry County for the twelve
months ended June 30, 2001.
o The 2002 FDIC/OTS SUMMARY OF DEPOSITS REPORT ranked Coastal Federal
-------------------------------------
Bank the leader in deposit market share for Horry County for the
twelve months ended June 30, 2002.
We are extremely proud of these forms of recognition because each, in its own
way, represents tangible evidence that our focus on our People, our Mission, our
Values and our Guiding Principles has been effective in delivering value to all
of our stakeholders.
5
2002 OUR BEST YEAR
The results we experienced during 2002 would have been impressive even in the
best of market conditions. But following a year marked by national crisis and
consternation, these success stories have special meaning in affirming what can
be achieved through the aligned effort of individuals who are united by a shared
sense of purpose and mission. Just over two weeks after the tragedy of September
11, 2001, we began our fiscal 2002 year and, despite almost unprecedented
economic uncertainties, achieved another year of significant growth and
development. The passion our People have for following the Mission, Values and
Guiding Principles of our QUEST FOR EXCELLENCE Operating Philosophy has enabled
the financial performance during fiscal 2002 which, again, met our high
expectations and well positions us to aggressively pursue future opportunities.
Noteworthy Financial Results for Fiscal 2002:
[GRAPHIC - CHART]
EARNINGS PER SHARE
o Net income for 2002 totaled $10.2 million, compared to $9.3 million in
2001. On a fully diluted basis, these results equated to a 9.4%
increase, from $0.85 per share in 2001 to $0.93 per share in 2002.
o Shareholders' equity advanced 16.0% to $66.4 million.
[GRAPHIC - CHART]
BOOK VALUE PER SHARE
o Book value per share grew 17.4% to $6.27
6
2002 OUR BEST YEAR
[GRAPHIC - CHART]
ASSETS
o Deposits derived from the residents and businesses of the Communities
we serve increased 20.1%, from $530.4 million to $637.1 million, the
highest level in the Company's history.
o Loans receivable increased 10.0%, from $505.0 million to $555.5
million.
o Total assets increased 24.6%, from $763.2 million to $950.8 million.
[GRAPHIC - CHART]
NON-PERFORMING ASSETS TO TOTAL ASSETS
o Non-performing Assets to Total Assets declined from 0.74% to 0.48%.
[GRAPHIC - CHART]
ALLOWANCE FOR LOAN LOSSES TO NET LOANS
o Allowance for Loan Losses to Net Loans remained the same at 1.42%.
o The Company had Net Loan Charge Offs as a percentage of Average Loans
of 0.10% in 2002.
Results such as these are possible only through the commitment, dedication and
aligned effort of a great team. Our tradition of exceptional performance has
been rewarded in the financial markets by a 3,091% increase in the price of our
shares since becoming a public company in October of 1990, vs. 291% for the
Standard & Poors 500 Index over the same period.
7
Since becoming publicly owned twelve years ago, we have methodically focused our
individual and collective efforts on 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 during this period, it is informative 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 financial 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 are
being 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 First Federal Savings and Loan Association
of Charleston and (COOP) Cooperative Bankshares, Inc., the parent company of
Cooperative Bank. Their historical results may not be indicative of future stock
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 financial services companies in our marketplace,
12 Year Peer Group Price Performance
[GRAPHIC - CHART]
as well as the Nasdaq, S&P 500 and Dow Indices.
We're very pleased with our performance from the past year. Our 2002 operating
and share price performance results clearly put Coastal Financial among the top
performing financial services companies in the nation. Thanks to our long-term
focus on our People, our Mission, our Values and our Guiding Principles, our
business has continued to prosper and our Associates have 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 an unequivocal "Yes," as long as we remain
focused on our QUEST FOR EXCELLENCE Operating Philosophy and the goals
established in our Vision 2005 Plan.
CFCP Relative Price Performance
[GRAPHIC - CHART]
8
A LOOK BACK
There is a far eastern adage which is one of my favorites. It is attributed to
the ancient Chinese philosopher Lao-Tzu and it reads, "Give a man a fish, you
feed him for a day; teach him how to fish, and you feed him for a lifetime."
Over the past ten years, our philosophy of viewing change and constant
improvement as essential to the achievement of our long-term objectives has
continuously focused our attention and efforts on building a workplace
environment which could enable our Leadership Group and Associates to learn
those principles which support the practices we employ in serving our Customers.
This philosophy, which has been the essence of our educational curriculum at
Coastal Federal University, and which has been cultivated and sustained through
Leadership example, has served as the cornerstone for enabling our Associates to
grow, both personally and professionally, toward the attainment of their full
potential and has further leveraged our ever-increasing ability to work together
as a team toward Exceeding the Expectations of our Customers. We believe this
approach has been both fundamental and essential to assuring that our best days
are yet to come.
In looking back at our progress over these years, one might ask why we have
remained so confident that Coastal Financial Corporation would be prepared to
capitalize on future opportunities? We have long believed that to achieve true
success in our industry an organization had to have competitive advantages in
several key areas: education, corporate culture, geographic location, products,
distribution channels, sales culture, brand image and, most importantly, people.
Education: During 2002, we continued to allocate significant resources to
Coastal Federal University in order to ensure that we continue to advance our
philosophy of becoming a learning organization.
Some time ago, we asked ourselves the following question . . . Why should we
build a learning organization? Why commit ourselves to a lifelong attempt to
understand and shift the ways we think and behave?
The answer was self evident . . . because we want superior performance!
Knowing that Our Basic Corporate Objective is To Maximize The Value Of Our
Shareholders' Investment and that our Long-Term Goal is To Be The Best Financial
Services Company In Our Marketplace, it is easy to understand that the primary
goal of our educational initiatives at Coastal Federal University must be to
achieve the proper balance between the personal and professional growth and
development of our Associates and the economic performance of our organization.
The two can never be separated because they are innately linked.
The reason that we at Coastal Financial Corporation have achieved superior
performance, relative to our Community Banking peers, is due to our QUEST FOR
EXCELLENCE Operating Philosophy. Most organizations believe that the essence of
"management" is to extract ideas from the heads of the "managers" of their
organization and place them into the hands of the "employees" of their
organization.
Our Operating Philosophy has, at its core, the goal of marrying the personal and
professional development of every Associate in our organization with the
superior economic performance of our Company.
It has been our very strong belief that, if we could genuinely Exceed The
Expectations of our Customers by providing exceptional service and becoming a
valued financial and business partner and, at the same time be a real resource
to our Associates and the Communities we serve, then we could all feel good
about the future of our organization.
In the long run, the only sustainable source of competitive advantage we have is
our ability, as an organization, to learn faster than our competitors and to
replace incomplete or obsolete paradigms with new paradigms which can enable us,
both as individuals and as an organization, to reach our full potential. No
outside force can take the momentum of that advantage away from us.
Without learning about our business, as well as their own tasks, our Associates
cannot make the contributions of which they are capable. This requires dramatic
learning efforts, both for our Associates who must learn to act in the interest
of the whole enterprise and for our Leadership Group members who must learn how
to extend mastery and self-determination throughout the organization.
If there is one single thing a learning organization does well, it is helping
people embrace change. People in learning organizations react more quickly when
their environment changes because they know how to anticipate changes that are
going to occur (which is far different than trying to predict the future), and
how to create the kinds of changes they want. We are firmly convinced that,
while change and learning may not exactly be synonymous, they are inextricably
linked.
During 2002, Coastal Federal University's Dean of Associate Development and each
of the members of our outstanding faculty have maintained a strong focus on the
effective execution of our Coastal Federal University Vision 2005 Plan, which is
designed to ensure the continued diversification and expansion of our curriculum
in order to keep it truly distinctive to our Associates and our Community.
We:
o made available to our Associates, on a 24/7 basis, 170 courses through
an E-Training and development website addition to the Coastal Federal
Bank intranet channel;
o introduced the Bank Team Service Plus development program;
9
A LOOK BACK
o implemented The Account Servicing Degree Of Excellence curriculum
offering;
o in cooperation with the Covey Institute For Learning, added the What
Matters Most course to our curriculum;
o delivered over 3,500 credit hours of instruction;
o passed the milestone of having in excess of 70% of our Associates
recorded as graduates of our Pledge To Excellence program; and
o hosted, at Coastal Federal University's Conference Center, fourteen
Community seminars featuring a variety of topics from Financial,
Estate and Tax Planning to a lecture by a nationally renowned Melanoma
Cancer research physician.
CORPORATE CULTURE: Our success at making continual progress toward Our Basic
Corporate Objective Of Maximizing The Value Of Our Shareholders' Investment by
striving to achieve our Long-Term Goal of Being The Best Financial Services In
Our Marketplace is largely a function of maintaining a laser-like focus on Who
We Are and What We Are About . . . that is, having all of our Associates clearly
understand our Character and our Competency. Maintaining the necessary balance
of Character and Competency enables our organization to be viewed as
Trustworthy, and, therefore, properly positioned to develop broad and durable
relationships with our Customers.
All of us at Coastal Financial are unwavering in the values which are the
foundation of our QUEST FOR EXCELLENCE Operating Philosophy and our Vision 2005
Strategic Plan. Our Values are: Commitment, Leadership, Integrity and Quality.
We do not view these as mere platitudes hanging on our walls. Rather, we view
them as our Character. We absolutely will not compromise these values under any
circumstances.
Our goal is to create an organization which our Associates believe is the best
possible place for enabling them to reach their full personal and professional
potential. Our Associates deserve a workplace environment which is inviting,
engaging and challenging, while being a haven from discrimination, harassment
and manipulation. Through Leadership example and curriculum offerings at Coastal
Federal University, our Associates are assured of our commitment to providing
the resources and support needed to further develop their skills and enable them
to reach their full potential. Maintaining an inviting, engaging and challenging
environment requires continuous effort and will remain a major focus for 2003.
Our Mission Statement reads: We are Totally Committed To Exceeding The
Expectations Of Our Customer. We believe that responsive and consistent Customer
service is essential to the attainment of our long-term goals and take personal
pride in assuring that our Customers receive nothing less than our best possible
service. In working toward continually raising that bar, during 2002 we
introduced the Bank Team Service Plus development program. This Customer-centric
program is an outgrowth of our Mission of Exceeding The Expectations Of Our
Customer and has been the largest and most formal Customer Service program ever
introduced. Also, during this past year, we reached a milestone in that, for the
first time ever, over seventy percent of our Associates have completed our
Pledge To Excellence curriculum offering at Coastal Federal University. This
intense eight week course fully defines, illustrates and builds individual
support for the type of service organization we aspire to be. The Associates who
have completed this course feel a sense of ownership and personal responsibility
for providing exceptional service to our Customers.
GEOGRAPHIC LOCATION: We simply could not ask for a better location to do
business. The four counties in which we distribute financial services products
through our Banking Centers and ATMs include Horry County, South Carolina, which
is the second fastest growing real estate market in the nation, New Hanover
County, North Carolina, which is ranked fourth in that measure, and the rapidly
growing counties of Georgetown in South Carolina and Brunswick in North
Carolina. We are first in share of banking deposits in Horry County, South
Carolina.
PRODUCTS: Our business lines and wide array of financial services product
offerings makes us much more than a bank. We are a rapidly growing diversified
financial services company.
We offer a full line of Business Banking, Personal Banking, Residential Banking
and Investment Services. And we continue to add the expertise of outside
financial services professionals in an ongoing effort to provide our Customers
with seamless delivery of a full range of financial products and services.
Coastal Financial Corporation, through Coastal Federal Bank and Coastal Investor
Services, Inc., offers our Customers a comprehensive array of financial services
products, including Financial Planning, Business Banking, Investments, Life
Insurance, Trust Services, Commercial Mortgage Loans, Residential Mortgage
Loans, Home Equity Lines of Credit, Consumer Loans, Commercial Loans, Venture
Capital and Capital Markets Transactions.
DISTRIBUTION CHANNELS: While products are important, they can easily be copied
by competitors. Real Customer value is created in the way that they are
distributed. We have the best locations and most extensive distribution system
in our marketplace.
Through our financial services distribution channels, we offer a full range of
financial services products to each of the Communities we serve. During 2002, we
added Banking Centers in Loris and Pawleys Island, South Carolina, bringing our
total number of full service Banking Centers to sixteen. In addition, we
currently have two BI-LO Grocery Store Banking Centers offering extended weekday
and Saturday banking hours, and twenty two ATMs. Our Bank By Phone delivery
channel last year handled more than 442,000 calls and our Internet Banking
facility handled more than 500,000 Internet banking sessions last year, almost 1
1/2 times the previous year.
10
LOOKING AHEAD
SALES CULTURE: In the Financial Institution category of the 2002 SUN NEWS
--------
Readers' Poll, for the fifth consecutive year, our Customers voted us "Best
of the Beach."
The 2002 FDIC/OTS SUMMARY OF DEPOSITS REPORT ranked Coastal Federal Bank the
-------------------------------------
leader in deposit market share for Horry County for the twelve months ended June
30, 2002.
These measures indicate some degree of success in our quest for the
transformation of Coastal Federal Bank and Coastal Investor Services, Inc. to
Sales Organizations which are focused on needs-based selling.
This early indication of positive results from the Transformational Element of
our Vision 2005 Plan, which has huge potential, will get much stronger over
time. Our definition of selling 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 its Customers that its financial services
offerings are always in alignment with its Mission of Being Totally Committed to
Exceeding The Expectations Of Its Customer. Our approach is both proactive and
in the spirit of partnership with our Customers. Our interest is in matching a
Customer's needs with the right products and services through the development of
broad and durable relationships which allow us to better enable them to
understand and address their financial services needs at every stage of their
lives. Our philosophy reflects on the financial services needs of our Customers,
not about "specials of the month" marketing campaigns which probably bear little
relevance to their legitimate needs.
BRAND IDENTITY: At almost fifty years of age, it has stood the test of time. Our
brand, COASTAL FEDERAL BANK, is one of the most widely recognized symbols of
Trust and expertise in the delivery of financial services in one of the best
markets in America. Our brand stands for Commitment, Leadership, Integrity and
Quality in Exceeding The Expectations Of Our Customer. In other words, being
totally committed to our Associates, our Customers and our Communities.
OUR PEOPLE: While all these competitive advantages are very important, they are
meaningless without talented team members, who believe in Who We Are and What We
Are About, and who truly care about their Customers. Our brand does not serve
Customers. Our People serve Customers. Coastal Financial team members put their
Customers first. Products and technology can be duplicated, but we believe our
people are more talented, more motivated and more energized than our
competitors. They care about each other, they care about their Customers, they
care about their Communities and they care about their Company. It is our firm
belief that it is our People who give Coastal Financial Corporation a
competitive edge. We will continue to invest in attracting, developing and
retaining the very best People who share a passion for our Mission, our Values
and our Guiding Principles.
LOOKING AHEAD: The success we have enjoyed over the past twelve years is not by
chance. While we are very fortunate to be located in one of the best markets in
America, all of the success that Coastal Financial has achieved has come about
because of the hard work and mental focus of our Associates. And we have the
best team imaginable.
I just can't thank our Board Of Directors, Leadership Group and Associates
enough for all they do for all of us on a daily basis. Our 2002 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.
Our Coastal Financial Leadership Group, which has created and reinforced the
culture that has enabled our success and our QUEST FOR EXCELLENCE Operating
Philosophy and Vision 2005 Plan, which are reflective of our long-term focus on
our People, our Mission, our Values and our Guiding Principles, are the primary
ingredients and the essential components for ensuring a great future.
During 2001 and 2002, both revenue and earnings reached record levels. In fact,
in these two years alone, our net income has surged over 20%. And, as a result
of this level of earnings, combined with our share repurchase program, earnings
per share has increased 24% over the last two years.
And we still have significant potential for further gains. In the last five
years, our net income has increased by more than 76%. Since becoming a publicly
owned Company in 1990, we have roughly doubled our earnings every five years.
Everyone in the Coastal Financial family is very proud of these achievements and
looks forward to even greater accomplishments in the years ahead. And, although
we do not have a crystal ball to predict the future, we do take comfort in the
fact that we have exceptional Associates who believe in who we are and what we
are about, great markets, excellent products, tremendous momentum and unshakable
confidence in our ability, as a team, to continue to focus our efforts on
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.
/s/ Michael C. Gerald
------------------------
Michael C. Gerald
President and
Chief Executive Officer
11
Independent Auditors' Report
The Board of Directors Coastal Financial Corporation Myrtle Beach, South
Carolina
We have audited the consolidated statements of financial condition of Coastal
Financial Corporation and subsidiaries (the "Company") as of September 30, 2001
and 2002, 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, 2002. 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, 2001 and 2002, and the results of its operations and its cash
flows for each of the years in the three-year period ended September 30, 2002,
in conformity with accounting principles generally accepted in the United States
of America.
/s/ KPMG LLP
---------------
KPMG LLP
Greenville, South Carolina October 28, 2002
12
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Financial Condition
September 30, 2001 and 2002
2001 2002
---- ----
(Dollars in thousands)
ASSETS
Cash and amounts due from banks . . . . . . . . . . . . . . . . . . . . . . . . . . $ 24,966 25,802
Short-term interest-bearing deposits . . . . . . . . . . . . . . . . . . . . . . . . 9,354 --
Investment securities available for sale . . . . . . . . . . . . . . . . . . . . . . 2,000 2,014
Mortgage-backed securities available for sale . . . . . . . . . . . . . . . . . . . 190,553 331,808
Loans receivable (net of allowance for loan losses of $7,159 . . . . . . . . . . . .
at September 30, 2001 and $7,883 at September 30, 2002) . . . . . . . . . . . . . . 488,754 536,851
Loans receivable held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,274 18,694
Real estate acquired through foreclosure, net . . . . . . . . . . . . . . . . . . . 2,363 1,046
Office property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . 13,150 13,713
Federal Home Loan Bank (FHLB) stock, at cost . . . . . . . . . . . . . . . . . . . . 7,624 10,559
Accrued interest receivable on loans . . . . . . . . . . . . . . . . . . . . . . . . 2,783 2,232
Accrued interest receivable on securities.. . . . . . . . . . . . . . . . . . . . . 1,341 2,019
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,052 6,058
-------- --------
$763,214 $950,796
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 530,364 637,081
Federal funds purchased and securities sold under agreements to repurchase . . . . . 18,703 36,884
Advances from FHLB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140,036 189,669
Other borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,069 2,069
Drafts outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,577 2,517
Advances by borrowers for property taxes and insurance. . . . . . . . . . . . . . . 1,250 1,386
Accrued interest payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,184 1,473
Other liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,783 13,331
-------- --------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 705,966 884,410
-------- --------
Stockholders' equity:
Serial preferred stock, 1,000,000 shares authorized and unissued . . . . . . . . . . -- --
Common stock $.01 par value, 15,000,000 shares authorized;
10,693,325 shares at September 30, 2001 and 10,587,726
shares at September 30, 2002 issued and outstanding . . . . . . . . . . . . . . . . 107 106
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,744 9,944
Retained earnings, restricted . . . . . . . . . . . . . . . . . . . . . . . . . . . 47,496 54,954
Treasury stock, at cost (324,483 shares at September 30, . . . . . . . . . . . . . .
2001 and 430,082 shares at September 30, 2002) . . . . . . . . . . . . . . . . . . . (3,620) (4,376)
Accumulated other comprehensive income, net of tax . . . . . . . . . . . . . . . . . 3,521 5,758
-------- --------
Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57,248 66,386
-------- --------
$763,214 $950,796
======== ========
See accompanying notes to consolidated financial statements.
13
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended September 30, 2000, 2001 and 2002
2000 2001 2002
---------- ---------- ----------
(In thousands, except share data)
Interest:
Loans receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 44,005 45,899 40,261
Investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,484 2,479 2,030
Mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . . . . 10,987 11,261 11,348
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 603 616 234
---------- ---------- ----------
Total interest income. . . . . . . . . . . . . . . . . . . . . . . . . . . 58,079 60,255 53,873
---------- ---------- ----------
Interest expense:
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,769 19,380 13,750
Securities sold under agreements to repurchase . . . . . . . . . . . . . . . 6,993 2,810 414
Advances from FHLB . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,874 11,133 7,682
---------- ---------- ----------
Total interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . 33,636 33,323 21,846
---------- ---------- ----------
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,443 26,932 32,027
Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . 978 955 1,235
---------- ---------- ----------
Net interest income after provision for loan losses . . . . . . . . . . . . 23,465 25,977 30,792
---------- ---------- ----------
Other income:
Fees and service charges on loans and deposit accounts . . . . . . . . . 2,126 2,634 3,148
Gain on sales of loans held for sale . . . . . . . . . . . . . . . . . . . 631 1,295 1,462
Gain (loss) on sales of investment securities, net . . . . . . . . . . . . (17) (56) 102
Gain (loss) on sales of mortgage-backed securities, net . . . . . . . . . . (1,554) 727 238
Gain on sale of deposits . . . . . . . . . . . . . . . . . . . . . . . . . 1,746 -- --
Loss from real estate acquired through foreclosure . . . . . . . . . . . . . (64) (453) (137)
Income from sales of non-depository products . . . . . . . . . . . . . . . . 834 1,269 1,281
Federal Home Loan Bank stock dividends . . . . . . . . . . . . . . . . . . 711 750 463
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,468 1,736 1,582
---------- ---------- ----------
Total other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,881 7,902 8,139
---------- ---------- ----------
General and administrative expenses:
Salaries and employee benefits . . . . . . . . . . . . . . . . . . . . . . 9,149 10,546 12,514
Net occupancy, furniture and fixtures and data processing expense . . 3,946 4,029 5,044
FDIC insurance premium . . . . . . . . . . . . . . . . . . . . . . . . . . 121 84 93
FHLB prepayment penalties . . . . . . . . . . . . . . . . . . . . . . . . . -- 1,113 1,083
Other expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,975 3,520 4,090
---------- ---------- ----------
Total general and administrative expense. . . . . . . . . . . . . . . . . . 16,191 19,292 22,824
---------- ---------- ----------
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . 13,155 14,587 16,107
Income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,698 5,287 5,901
---------- ---------- ----------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,457 9,300 10,206
========== ========== ==========
Earnings per common share
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.76 0.86 0.96
========== ========== ==========
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.75 0.85 0.93
========== ========== ==========
Average common shares outstanding
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,078,000 10,848,000 10,615,000
========== ========== ==========
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,216,000 10,995,000 10,940,000
========== ========== ==========
See accompanying notes to consolidated financial statements.
14
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
and Comprehensive Income
Years ended September 30, 2000, 2001 and 2002
Accumulated
Other
Additional Comprehensive Total
Common Paid-in Retained Treasury Income Stockholders'
Stock Capital Earnings Stock (Loss) Equity
------ ------- -------- ------- ------------ ------------
(In thousands)
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
Exercise of stock options . . . . . . . . . . . . . . . -- 200 (526) 1,529 -- 1,203
Cash dividends . . . . . . . . . . . . . . . . . . . . -- -- (2,222) -- -- (2,222)
Net income . . . . . . . . . . . . . . . . . . . . . . -- -- 10,206 -- -- 10,206
Other comprehensive income, net of tax:
Unrealized gains arising during period,
net of taxes of $1,500 . . . . . . . . . . . . . . . . . -- -- -- -- 2,449 --
Less: reclassification adjustment for gains
included in net income, net of taxes of $128 -- -- -- -- (212) --
---- ------ ------- ------- ------- -------
Other comprehensive income . . . . . . . . . . . . . . -- -- -- -- 2,237 2,237
---- ------ ------- ------- ------- -------
Comprehensive income . . . . . . . . . . . . . . . . . . -- -- -- -- -- 12,443
---- ------ ------- ------- ------- -------
Treasury stock repurchases . . . . . . . . . . . . . . (1) -- -- (2,285) -- (2,286)
---- ------ ------- ------- ------- -------
Balance at September 30, 2002 . . . . . . . . . . . . $106 $9,944 $54,954 $(4,376) $ 5,758 $66,386
==== ====== ======= ======= ======= =======
See accompanying notes to consolidated financial statements.
15
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended September 30, 2000, 2001 and 2002
2000 2001 2002
-------- -------- --------
(In thousands)
Cash flows from operating activities:
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,457 9,300 10,206
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,419 1,556 2,074
Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 978 955 1,235
(Gain) loss on sale of mortgage-backed securities available for sale . . . . 1,554 (727) (238)
(Gain) loss on sale of investment securities available or sale . . . . . . . . . 17 56 (102)
Origination of loans receivable held for sale . . . . . . . . . . . . . . . . . . (27,253) (81,778) (100,309)
Proceeds from sales of loans receivable held for sale . . . . . . . . . . . . . . 33,695 28,541 13,907
Loss on early extinguishment of debt. . . . . . . . . . . . . . . . . . . . . . . -- 1,113 1,083
(Increase) decrease in:
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,855 (1,019) (2,006)
Accrued interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . (478) 548 (127)
Increase (decrease) in:
Accrued interest payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,375 (1,347) 289
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 243 428 2,176
-------- -------- --------
Net cash provided by (used in) operating activities . . . . . . . . . . . . 21,862 (42,374) (71,812)
-------- -------- --------
Cash flows from investing activities:
Proceeds from sales of investment securities available for sale. . . . . . . . . . 10,266 5,125 --
Proceeds from maturities of investment securities available for sale . . . . . . -- 1,595 1,995
Purchases of investment securities available for sale . . . . . . . . . . . . . . (12,737) -- (1,998)
Purchases of loans receivable. . . . . . . . . . . . . . . . . . . . . . . . . . (4,027) (20) (233)
Proceeds from sales of mortgage-backed securities available for sale. . . . . . 106,367 164,919 128,169
Purchases of mortgage-backed securities available for sale . . . . . . . . . . . .(124,502) (158,004) (254,494)
Principal collected on mortgage-backed securities available for sale . . . . . . 25,219 47,566 72,990
Origination of loans receivable, net . . . . . . . . . . . . . . . . . . . . . . (219,943) (214,296) (317,899)
Principal collected on loans receivable. . . . . . . . . . . . . . . . . . . . . 139,900 233,653 268,120
Disposition of Florence office assets and liabilities, net. . . . . . . . . . . . (13,265) -- --
Proceeds from sales of real estate acquired through foreclosure . . . . . . . . . 180 1,159 1,997
Purchases of office properties and equipment . . . . . . . . . . . . . . . . . . (2,392) (3,188) (2,637)
Sales (purchases) of FHLB stock, net . . . . . . . . . . . . . . . . . . . . . . (3,698) 4,275 (2,935)
-------- -------- --------
Net cash provided by (used in) investing activities . . . . . . . . . . . . (98,632) 82,784 (106,925)
-------- -------- --------
Cash flows from financing activities:
Increase in deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,397 124,147 106,717
Increase (decrease) in securities sold under agreements to repurchase . . . . (21,090) (57,155) 18,181
Proceeds from FHLB advances . . . . . . . . . . . . . . . . . . . . . . . . . . . 890,404 358,771 312,426
Repayment of FHLB advances. . . . . . . . . . . . . . . . . . . . . . . . . . . . (829,204) (443,959) (262,793)
Proceeds (repayments) from other borrowings, net . . . . . . . . . . . . . . . . . 500 -- --
Prepayment penalties on early extinguishment of debt . . . . . . . . . . . . . . -- (1,113) (1,083)
Increase (decrease) in advance payments by borrowers for property
taxes and insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (89) (7) 136
Increase (decrease) in drafts outstanding, net. . . . . . . . . . . . . . . . . . 1,092 102 (60)
Repurchase of treasury stock, at cost. . . . . . . . . . . . . . . . . . . . . . (1,964) (2,134) (2,286)
Cash dividends to stockholders and cash for fractional shares . . . . . . . . . . (1,912) (2,015) (2,222)
Exercise of stock options. . . . . . . . . . . . . . . . . . . . . . . . . . . . 570 106 1,203
-------- -------- --------
Net cash provided by (used in) financing activities . . . . . . . . . . . . 69,704 (23,257) 170,219
-------- -------- --------
Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . (7,066) 17,153 (8,518)
-------- -------- --------
Cash and cash equivalents at beginning of year. . . . . . . . . . . . . . . . . . 24,233 17,167 34,320
-------- -------- --------
Cash and cash equivalents at end of year . . . . . . . . . . . . . . . . . . . . $ 17,167 34,320 25,802
======== ======== ========
Supplemental information:. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest paid. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 32,261 34,670 21,557
======== ======== ========
Income taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,789 5,249 5,726
======== ======== ========
Supplemental schedule of non-cash investing and financing transactions:
Securitization of mortgage loans into mortgage-backed securities. . . . . . . . $ 14,894 47,157 83,982
======== ======== ========
Transfer of mortgage loans to real estate acquired through foreclosure . . . . $ 951 2,655 680
======== ======== ========
See accompanying notes to consolidated financial statements.
16
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of the more significant accounting policies used
in the preparation and presentation of the accompanying consolidated financial
statements. The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions. These estimates and assumptions affect the reported amount of
assets and liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements. In addition, they affect the reported
amounts of income and expenses during the reporting period. Actual results could
differ from these estimates and assumptions.
(a) Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Coastal Financial Corporation (the "Company"), and its wholly-owned
subsidiaries, Coastal Federal Mortgage, Inc., Coastal Investor Services, Inc.
and Coastal Federal 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) 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, 2001 and 2002, the Company had approximately $16.3
million and $18.7 million in mortgage loans held for sale, respectively. Gains
or losses on sales of loans are recognized when control over these assets has
been surrendered in accordance with SFAS No. 140, "Accounting for Transfer and
Servicing of Financial Assets and Extinguishment of Liabilities" ("SFAS No.
140").
(e) Loans Receivable
Loans receivable are stated at unpaid principal balances adjusted for
unamortized premiums and unearned discounts. The Company recognizes interest
income on loans using the simple interest method.
17
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -Continued
(e) Loans Receivable - 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 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.
Loans are charged-off (if unsecured) or written-down (if secured) when the
amount of loss is reasonably quantifiable and the loss is likely to occur.
Commercial loans are generally placed in nonaccrual status when they become
90-days delinquent or earlier if full collection of principal and interest
becomes doubtful. Consumer and mortgage loans are placed in nonaccrual status
when they become 90 days delinquent or earlier if full collection of principal
and interest becomes doubtful. Interest payments received after a loan is placed
in nonaccrual are applied as a principal reduction until such time as the loan
is returned to accrual status. Generally, loans are returned to accrual status
when the loan is brought current and the ultimate collectibility of principal
and interest is no longer in doubt. 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.
(f) 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.
(g) 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, review of problem assets,
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.
(h) Concentration of Credit Risk
The Company's primary market area includes northeastern South Carolina and
southeastern North Carolina predominately along the coastal regions. At
September 30, 2002, the majority of the total loan portfolio, as well as a
substantial portion of the commercial and real estate loan portfolios, were to
borrowers within this region. No areas of significant concentrations of credit
risk have been identified.
(i) Loan Securitizations
The Company packages and sells loan receivables as securities to investors.
These transactions are recorded as sales in accordance with SFAS No. 140 when
control over these assets has been surrendered.
18
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -Continued
(j) 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.
(k) 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.
(l) Mortgage Servicing Rights
SFAS No. 140 requires the recognition of originated mortgage servicing
rights ("mortgage servicing rights" or "MSRs") as assets by allocating total
costs incurred between the originated loan and the servicing rights retained
based on their relative fair values. SFAS No. 140 also requires the recognition
of purchased mortgage servicing rights at fair value, which is presumed to be
the price paid for the rights. MSRs are amortized in proportion to the servicing
income over the estimated life of the related mortgage loan. The amortization
method is designed to approximate a level-yield method, taking into
consideration the estimated prepayment of the underlying loans. For purposes of
measuring impairment, MSRs are reviewed for impairment by management on a
quarterly basis. The Company establishes an impairment valuation allowance to
record any impairment for MSRs. Subsequent increases in value are recognized
only to the extent of the impairment valuation allowance.
(m) 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 or
deductible items.
(n) 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.
(o) 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.
(p) 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.
19
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -Continued
(q) 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.
(r) Disclosures Regarding Segments
The Company reports operating segments in accordance with SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS No.
131"). Operating segments are components of an enterprise about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and assess
performance. SFAS No. 131 requires that a public enterprise report a measure of
segment profit or loss, certain specific revenue and expense items, segment
assets, information about the way that the operating segments were determined
and other items. The Company has one reportable operating segment, Coastal
Federal Bank.
(s) 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. It requires an entity to recognize all derivatives as either
assets or liabilities in the balance sheet, and measure those instruments at
fair value. Changes in the fair value of those derivatives are reported in
current earnings or other comprehensive income depending on the purpose for
which the derivative is held and whether the derivative qualifies for hedge
accounting.
(t) Reclassification of Losses on Early Extinguishment of Debt
The Company adopted SFAS No. 145 "Recissions of FASB Statements No. 4, 44
and 64, Amendment of FASB Statement No. 13, and Technical Corrections" ("SFAS
No. 145") effective July 1, 2002. In connection with this adoption, the Company
reclassified losses on the early extinguishment of debt, which were incurred in
fiscal 2001 and 2002 and totaled $1.1 million for both years.
(u) Reclassifications
Certain amounts in the 2000 and 2001 consolidated financial statements have
been reclassified to conform with the 2002 presentation. Such reclassifications
did not change net income or equity as previously reported.
(2) INVESTMENT SECURITIES
The amortized cost and fair value of investment securities available for
sale at September 30, 2001 are 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
======== ==== ==== =====
20
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
(2) INVESTMENT SECURITIES - CONTINUED
The amortized cost and market value of investment securities available for
sale at September 30, 2002 are summarized as follows:
2002
-------------------------------------------------
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 . . . . . . . . . . . 1,998 16 -- 2,014
------- ----- ----- ------
$ 1,998 16 -- 2,014
======= ===== ===== ======
The Company had gross realized gains of $8,000 and gross realized losses
were $25,000 for the year ended September 30, 2000. For the year ended September
30, 2001, gross realized gains were $17,000 and gross realized losses were
$73,000. For the year ended September 30, 2002, gross realized gains were
$102,000 and there were no gross realized losses.
Certain investment and mortgage-backed securities are pledged to secure
other borrowed money and customer deposits in excess of FDIC insurance coverage.
The carrying value of the securities pledged at September 30, 2002 was $127.9
million with a fair value of $132.8 million.
(3) MORTGAGE-BACKED SECURITIES
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
------- ----- ----- -------
$184,980 5,579 (6) 190,553
======== ===== ===== =======
Mortgage-backed securities available for sale at September 30, 2002
consisted of the following:
2002
----------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
(In thousands)
Collateralized Mortgage Obligations . . . . .$ 36,320 398 (18) 36,700
FNMA . . . . . . . . . . . . . . . . . . 206,448 6,673 -- 213,121
GNMA . . . . . . . . . . . . . . . . . . 22,139 891 -- 23,030
FHLMC . . . . . . . . . . . . . . . . . . . . 57,628 1,332 (3) 58,957
-------- ----- ----- -------
$322,535 9,294 (21) 331,808
======== ===== ===== =======
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. For the year ended September 30, 2002, the
Company had gross realized gains of $462,000 and gross realized losses of
$224,000.
21
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
(4) LOANS RECEIVABLE, NET
Loans receivable, net at September 30 consisted of the following:
2001 2002
---- ----
(In thousands)
First mortgage loans:
Single family to 4 family units . . . . . . . . . . . . . . . .$ 252,396 242,602
Other, primarily commercial real estate . . . . . . . . . . . . 137,282 202,117
Residential construction loans . . . . . . . . . . . . . . . . 16,798 15,105
Commercial construction loans . . . . . . . . . . . . . . . . . 43,967 30,439
Consumer and commercial loans:
Installment consumer loans . . . . . . . . . . . . . . . . . . 14,539 12,882
Mobile home loans . . . . . . . . . . . . . . . . . . . . . . .. 2,056 3,446
Savings account loans . . . . . . . . . . . . . . . . . . . . . 1,221 1,613
Equity lines of credit . . . . . . . . . . . . . . . . . . . . 22,379 24,273
Commercial and other loans . . . . . . . . . . . . . . . . . . 18,886 18,377
--------- -------
509,524 550,854
Less:
Allowance for loan losses . . . . . . . . . . . . . . . . . . . 7,159 7,883
Deferred loan cost, net . . . . . . . . . . . . . . . . . . . . (372) (245)
Undisbursed portion of loans in process . . . . . . . . . . . . 13,983 6,365
--------- -------
$ 488,754 536,851
========= =======
The changes in the allowance for loan losses for the years ended September 30
consisted of the following:
2000 2001 2002
---- ---- ----
(In thousands)
Beginning allowance . . . . . . . . . $ 6,430 7,064 7,159
Provision for loan losses . . . . . . 978 955 1,235
Allowance recorded on acquired loans. 50 -- --
Disposition of Florence office loans . (75) -- --
Loan recoveries . . . . . . . . . . . 77 60 66
Loan charge-offs . . . . . . . . . . . (396) (920) (577)
--------- ----- -----
$ 7,064 7,159 7,883
========= ===== =====
Non-accrual loans which were over ninety days delinquent totaled
approximately $3.3 million and $3.5 million at September 30, 2001 and 2002,
respectively. In fiscal years 2000, 2001 and 2002, interest income which would
have been recorded would have been approximately $220,000, $377,000 and
$301,000, respectively, had non-accruing loans been current in accordance with
their original terms.
There were $3.4 million in impaired loans at September 30, 2001. At
September 30, 2002, impaired loans totaled $3.2 million. Included in the
allowance for loan losses at September 30, 2001 was $281,000 related to impaired
loans compared to $194,000 at September 30, 2002. The average recorded
investment in impaired loans for the year ended September 30, 2001 was $3.6
million compared to $3.1 million for the year ended September 30, 2002. Interest
income recognized on impaired loans in fiscal 2001 was $120,000. Interest income
recognized on impaired loans in fiscal 2002 was $36,000.
In the normal course of business, to meet the financing needs of its
Customers, the Company is a party to financial instruments with
off-balance-sheet risk. These financial instruments include commitments to
extend credit and stand by letters of credit. These instruments involve, to
varying degrees, elements of credit and interest rate risk in excess of the
amount recognized in the balance sheet.
The Company's exposure to credit loss in the event of non-performance by
the other party to the financial instrument is represented by the contractual
amount of these instruments. The Company uses the same credit policies in making
commitments and conditional obligations as it does for on-balance-sheet
instruments.
22
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
(4) LOANS RECEIVABLE, NET -Continued
Commitments to extend credit are agreements to lend as long as there is no
violation of any condition established in the contract. Commitments generally
have fixed expiration dates or other termination clauses and may require payment
of a fee. Since many of the commitments may expire without being drawn upon, the
total commitment amounts do not necessarily represent future cash requirements.
The Company evaluates each Customer's creditworthiness on a case-by-case basis.
The amount of collateral obtained, if deemed necessary by the Company upon
extension of credit, is based on management's credit evaluation.
Unfunded loan commitments and letters of credit at September 30, 2002 were
approximately $82.6 million and included the following (in thousands):
Loan Commitments:
Residential housing and land . . . . . . . . . . . . . . . . . . . $ 28,750
Home equity loans and consumer lines of credit . . . . . . . . . 37,182
Commercial lines of credit . . . . . . . . . . . . . . . . . . . . 1,286
Standby letters of credit . . . . . . . . . . . . . . . . . . . . . 3,952
Unused business and personal credit card lines . . . . . . . . . . 11,437
Loans serviced for the benefit of others amounted to approximately $106.1
million, $143.3 million and $192.1 million at September 30, 2000, 2001 and 2002,
respectively.
During fiscal 2002, the Company securitized $84.0 million of mortgage loans
and reclassed them to securities available for sale. In accordance with SFAS No.
140, no gain was recognized related to the securitization, and mortgage
servicing rights of approximately $1.4 million were recorded. The Company
subsequently sold $81.2 million of these mortgage-backed securities to outside
third parties and recognized a gain on sale of $1.1 million. The gain is
included in gains on sales of loans held for sale in the consolidated income
statement. The Company has no retained interest in the securities that were
sold.
As disclosed in note 9, 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, 2002, 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, 2002 (in thousands):
Balance at September 30, 2001. . . . . . . . . . . . . . . $ 1,178
New loans . . . . . . . . . . . . . . . . . . . . . . . . . 399
Repayments . . . . . . . . . . . . . . . . . . . . . . . . 458
--------
Balance at September 30, 2002. . . . . . . . . . . . . . . $ 1,119
========
23
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
(5) MORTGAGE SERVICING RIGHTS
MSRs which are included in other assets totaled $1.3 million and $2.2
million at September 30, 2001 and 2002, respectively. Amortization expense for
MSRs totaled $217,000 and $505,000 for the years ended September 30, 2001 and
2002, respectively. The estimated amortization expense for MSRs held as of
September 30, 2002, is $622,000, $606,000, $494,000, $396,000 and $85,000 for
fiscal 2003, 2004, 2005, 2006 and 2007 respectively. The estimated amortization
expense is based on current information regarding loan payments and prepayments.
Amortization expense could change in future periods based on changes in the
volume of prepayments and various economic factors.
2001 2002
---- ----
(In thousands)
Balance at beginning of year . . . . . . . . . . . . $ 677 1,310
MSRs capitalized . . . . . . . . . . . . . . . . 850 1,398
MSRs amortized . . . . . . . . . . . . . . . . . . . (217) (505)
-------- -----
Balance at end of year. . . . . . . . . . . . . . . . $ 1,310 2,203
======== =====
(6) OFFICE PROPERTY AND EQUIPMENT, NET
Office property and equipment, net at September 30 consisted of the following:
2001 2002
---- ----
(In thousands)
Land. . . .. . . . . . . . . . . . . . . $ 3,120 3,143
Building and improvements. . . . . . . . 9,320 10,127
Furniture, fixtures and equipment . . 12,606 14,297
-------- ------
25,046 27,567
Less accumulated depreciation. . . . . 11,896 13,854
-------- ------
$ 13,150 13,713
======== ======
The Company leases office space and various equipment. Total rental expense
for the years ended September 30, 2000, 2001 and 2002 was approximately
$213,000, $291,000 and $288,000 respectively.
Future minimum rental payments for operating leases having remaining
noncancelable lease terms in excess of one year at September 30, 2002 are as
follows (in thousands):
2003 . . . . . . . . . . . . . . . $ 166
2004 . . . . . . . . . . . . . . . 161
2005 . . . . . . . . . . . . . . . 151
2006 . . . . . . . . . . . . . . . 71
2007 . . . . . . . . . . . . . . . 20
Thereafter . . . . . . . . . . . . . . . 252
--------
$ 821
========
(7) 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 $10.6 million at September 30, 2002. 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.
24
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
(8) DEPOSITS
Deposits at September 30 consisted of the following:
2001 2002
--------------------- -----------------------
Weighted Weighted
Amount Rate Amount Rate
------ ---- ------ ----
(Dollars in thousands)
Transaction accounts:
Noninterest bearing . . . . . . . . . . . . . . . . . . . $ 49,098 --% 63,003 --%
NOW . . . . . . . . . . . . . . . . . . . . . . . . . . . 55,926 0.44 67,381 0.38
Money market checking . . . . . . . . . . . . . . . . . . 193,631 2.90 212,924 2.16
--------- ---- ------- ----
Total transaction accounts . . . . . . . . . . . . . . 298,655 1.96 343,308 1.41
--------- ---- ------- ----
Passbook accounts:
Regular passbooks . . . . . . . . . . . . . . . . . . . . 32,268 1.69 37,905 1.09
Money market . . . . . . . . . . . . . . . . . . . . . . . 1,049 1.94 1,187 1.95
--------- ---- ------- ----
Total passbook accounts . . . . . . . . . . . . . . 33,317 1.70 39,092 1.12
--------- ---- ------- ----
Certificate accounts:
0.00 -5.99% . . . . . . . . . . . . . . . . . . . . . . . 164,306 238,439
6.00 -8.00% . . . . . . . . . . . . . . . . . . . . . . . 33,648 15,758
8.00 -10.00% . . . . . . . . . . . . . . . . . . . . . . . 438 484
--------- ---- ------- ----
Total certificate accounts . . . . . . . . . . . . . . 198,392 4.82 254,681 3.46
--------- ---- ------- ----
$ 530,364 3.01% 637,081 2.21%
========= ==== ======= ====
The aggregate amount of all deposit accounts with a minimum denomination of
$100,000 or more was $201.2 million and $245.4 million at September 30, 2001 and
2002, respectively. Included in certificate accounts were $2.4 million at
September 30, 2001 and 2002, respectively, originated by brokers for a fee.
The amounts and scheduled maturities of certificate accounts at September
30, are as follows:
2001 2002
---- ----
(In thousands)
Within 1 year . . . . . . . . . . . .. . $ 162,305 201,370
After 1 but within 2 years . . . . . . . 26,251 27,484
After 2 but within 3 years. . . . . .. . . 4,067 20,358
Thereafter......... . . . . . . . . . .. . 5,769 5,469
--------- -------
$ 198,392 254,681
========= =======
Interest expense on deposits for the years ended September 30 consisted of
the following:
2000 2001 2002
-------- ------ ------
(In thousands)
Transaction accounts. . . . . . . . . $ 6,283 7,404 4,524
Passbook accounts.. . . . . . . . . . 909 741 459
Certificate accounts. . . . . . . . . 8,577 11,235 8,767
-------- ------ ------
$ 15,769 19,380 13,750
======== ====== ======
The fair value of transaction and passbook accounts is $332.0 million and
$382.4 million which was the amount currently payable at September 30, 2001 and
2002, respectively. The fair value of certificate accounts was $199.9 million
and $258.5 million compared to a book value of $198.4 million and $254.7 million
at September 30, 2001 and 2002, 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.
25
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
(9) ADVANCES FROM FHLB
Advances from the FHLB at September 30 consisted of the following:
2001 2002
------------------------ --------------------------
Weighted Weighted
Amount Rate Amount Rate
------ ---- ------ ----
Fiscal Year Maturity (Dollars in thousands)
2002 ............................................ $ 1,400 4.15% $ -- --%
2003 ............................................ 23,231 4.30 32,350 2.14
2004 ............................................ 2,220 5.21 11,235 2.34
2005 ............................................ 400 5.24 25,500 6.24
2006 ............................................ 4,220 5.06 3,270 4.98
2007 ............................................ -- -- 6,223 3.39
2008 or greater ................................. 108,565 5.75 111,091 5.23
- ---- -------- ---- -------- ----
$140,036 5.46% $189,669 4.61%
======== ==== ======== ====
Stock in the FHLB of Atlanta and specific first mortgage loans and
mortgage-backed securities of approximately $204.0 million and $219.8 million at
September 30, 2001 and 2002, 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, 2002, the excess first mortgage
loan collateral pledged to the FHLB will support additional borrowings of
approximately $37.8 million. At September 30, 2002, included in the three, four
and five years or greater 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.
During fiscal 2002, the Company prepaid approximately $59.3 million of advances
from FHLB and incurred gross penalties of approximately $1.1 million. Prepayment
penalties are included in general and administrative expenses in the statement
of operations. Also see note 1 (t).
The estimated fair value of the FHLB advances at September 30, 2001 and
2002 is $137.2 million and $197.9 million. This estimate is based on discounting
amounts payable at contractual rates using current market rates for advances
with similar maturities.
(10) 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,
2000 2001 2002
---- ---- ----
(Dollars in thousands)
Outstanding balance:
Securities sold under agreements to repurchase:
Customer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,825 $ 3,703 $ 4,070
Broker . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $72,033 15,000 30,000
Weighted average rate (at month end) paid on:
Securities sold under agreements to repurchase:
Customer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.75% 3.36% 1.37%
Broker . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.59 2.97 1.84
Maximum amount of borrowings outstanding at any month end:
Securities sold under agreements to repurchase:
Customer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,196 $ 3,726 $ 5,625
Broker. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122,700 67,099 30,000
Approximate average outstanding with respect to:
Securities sold under agreements to repurchase:
Customer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$ 2,826 $ 2,361 $ 3,600
Broker . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107,737 45,461 15,007
Weighted average rate (year to date) paid on: Securities sold under
agreements to repurchase:
Customer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.10% 3.73% 1.58%
Broker . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.38 5.65 2.39
26
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
(10) REPURCHASE AGREEMENTS - CONTINUED
Securities sold under agreements to repurchase 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 have been delivered to a
third party custodian for safekeeping. Assets pledged to collaterize securities
sold under agreements to repurchase had a fair value of $36.1 million at
September 30, 2002 and are included in mortgage-backed securities available for
sale in the consolidated balance sheet.
(11) INCOME TAXES
Income tax expense (benefit) for the years ended September 30 consisted of the
following:
Current Deferred Total
------- -------- -----
(In thousands)
2000:
Federal. . . . . . . . . . . . . . $ 4,484 (116) 4,368
State . . . . . . . . . . . . . 325 5 330
--------- ------- --------
$ 4,809 (111) 4,698
========= ======= ========
2001:
Federal . . . . . . . . . . . . . $ 4,792 196 4,988
State . . . . . . . . . . . . . 308 (9) 299
--------- ------- --------
$ 5,100 187 5,287
========= ======= ========
2002:
Federal. . . . . . . . . . . . . . $ 5,407 (13) 5,394
State . . . . . . . . . . . . . 507 -- 507
--------- ------- --------
$ 5,914 (13) 5,901
========= ======= ========
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, 2001 and 2002
relate to the following:
2001 2002
---- ----
(In thousands)
Deferred tax assets:
Allowance for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,644 2,900
Accrued medical reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95 94
Other real estate reserves and deferred gains on other real estate . . . . 69 101
Net operating loss carryforwards . . . . . . . . . . . . . . . . . . . . . . . . . 135 21
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135 276
--------- ------
Total deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,078 3,392
Less valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (135) (21)
--------- ------
Net deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,943 3,371
--------- ------
Deferred tax liabilities:
Tax bad debt reserve in excess of base year amount . . . . . . . . . . . . . 290 193
Property and equipment principally due to differences in depreciation . . 356 310
FHLB stock, due to stock dividends not recognized for tax purposes . . . 227 207
Deferred loan fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 466 565
Book over tax basis in investment in unconsolidated subsidiary . . . . . . 2,823 2,953
Unrealized gain on securities available for sale . . . . . . . . . . . . . . . . . 2,128 3,500
Mortgage servicing rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . 496 833
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 224 236
--------- ------
Total deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . 7,010 8,797
--------- ------
Net deferred tax liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (4,067) (5,426)
========= ======
27
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
(11) INCOME TAXES - CONTINUED
The valuation allowance for deferred tax assets as of September 30, 2001
and 2002 was $135,000 and $21,000, respectively. The net change in the total
valuation allowance for the years ended September 30, 2001 and 2002 was a
decrease of zero and $114,000, respectively. In assessing the realizability of
deferred tax assets, management considers whether it is more likely than not
that some portion or all of the deferred tax assets will not be realized. The
ultimate realization of deferred tax assets is dependent upon the generation of
future taxable income during the periods in which those temporary differences
become deductible. Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income, and tax planning strategies in
making this assessment. In order to fully realize the deferred tax asset, the
company will need to generate future taxable income prior to the expiration of
the deferred tax assets governed by the tax code. Based upon the level of
historical taxable income and projections for future taxable income over the
periods, which the deferred tax assets are deductible, management believes it
more likely than not the Company will realize the benefits of these deductible
differences, net of the existing valuation allowances at September 30, 2002. The
amount of the deferred tax asset considered realizable, however, could be
reduced in the near term if estimates of future taxable income during the
carryforward period are reduced.
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 liability relates to
unrealized gains and losses on securities available for sale. A current period
deferred tax expense of $1.4 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 benefit of $13,000. Income taxes of the Company attributable
to income before income taxes 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:
2000 2001 2002
---- ---- ----
(In thousands)
Computed federal income taxes................ $4,473 4,960 5,476
State tax, net of federal benefit ........... 218 197 335
Other, net .................................. 7 130 90
------ ----- -----
Total income tax expense . . . . . . . . . $4,698 5,287 5,901
====== ===== =====
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
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, 2002 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.
(12) 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, 2000, 2001 and 2002 was
immaterial. Plan assets exceeded the present value of accumulated plan benefits
at June 30, 2002, 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 contribution
expense was approximately $250,000, $245,000 and $384,000 for fiscal years 2000,
2001 and 2002, respectively.
28
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
(13) REGULATORY MATTERS
At September 30, 2002, the Bank's loans-to-one borrower limit was
approximately $10.3 million. At September 30, 2002, 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.
As of September 30, 2002, the most recent notification from federal banking
agencies categorized the Bank as "well capitalized" under the regulatory
framework. To be categorized as "well capitalized," the Bank must maintain
minimum total risk-based capital, tier 1 capital, and tier 1 leverage ratios as
set forth in the table. Since September 30, 2002, there have been no events or
conditions that management believes have changed the Bank's categories. (In
thousands)
Amount to be
For Capital Categorized as
Actual Adequacy Purposes "Well Capitalized"
----------------- ----------------- -------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
As of September 30, 2002:
Total Capital: . . . . . . . . . . . . . . $68,417 12.74% $42,965 8.00% $53,706 10.00%
(To Risk Weighted Assets)
Tier 1 Capital: . . . . . . . . . . . . . $62,028 11.55% N/A N/A $32,223 6.00%
(To Risk Weighted Assets)
Tier 1 Capital: . . . . . . . . . . . . . $62,028 6.57% $37,785 4.00% $47,231 5.00%
(To Total Assets)
Tangible Capital: . . . . . . . . . . . . $62,028 6.57% $14,170 1.50% N/A N/A
(To Total Assets)
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)
(14) 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 Bank's net worth below either the
balance of the liquidation account or the statutory net worth requirements set
by the OTS.
29
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
(14) LIQUIDATION ACCOUNT - CONTINUED
The Company's ability to pay dividends depends primarily on the Bank's
ability to pay dividends to the Company. The Bank is prohibited from declaring
cash dividends on its common stock or repurchasing its common stock if the
effect thereof would cause its net worth to be reduced below either the amount
required for the liquidation account or the minimum regulatory capital
requirement. In addition, the Bank is also prohibited from declaring cash
dividends and repurchasing its own stock without prior regulatory approval if
the total amount of all dividends and stock repurchases (including any proposed
dividends and stock repurchases) for the applicable year exceeds its current
year's net income plus its retained net income for the preceeding two years.
(15) 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 Company has no
antidilutive securities at September 30, 2002.
The following is a summary of the reconciliation of average shares outstanding
for the years ended September 30:
2000 2001 2002
------------------------ ----------------------- ------------------------
Basic Diluted Basic Diluted Basic Diluted
---------- ---------- ---------- ---------- ---------- ----------
Weighted average shares outstanding 11,078,000 11,078,000 10,848,000 10,848,000 10,615,000 10,615,000
---------- ---------- ---------- ---------- ---------- ----------
Effective of dilutive securities:
Stock options -- 138,000 -- 147,000 -- 325,000
---------- ---------- ---------- ---------- ---------- ----------
Average shares outstanding 11,078,000 11,216,000 10,848,000 10,995,000 10,615,000 10,940,000
========== ========== ========== ========== ========== ==========
(16) 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. Options are vested over a five year period and expire after ten years
from the date of grant. The remaining shares of stock reserved for the stock
option plan at September 30, 2002 amounted to approximately 455,000 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, 2002, 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
- ------ ------------------------- ----------- ----------- -------- ----------- ---------
1995 $3.57 - $3.96 . . . . . 106,511 2.8 Years $ 3.79 106,511 $ 3.79
1996 $4.21 . . . . . . . . . . 11,557 3.1 Years $ 4.21 11,557 $ 4.21
1997 $6.42 - $6.66 . . . . . 126,238 4.2 Years $ 6.53 126,238 $ 6.53
1998 $9.37 - $14.29 . . . . . 250,200 5.2 Years $ 10.55 200,160 $ 10.55
1999 $9.49 - $11.25 . . . . . 186,775 6.1 Years $ 10.51 112,065 $ 10.51
2000 $6.33 - $7.57 . . . . . 177,994 7.2 Years $ 7.50 71,197 $ 7.50
2001 $6.08 - $9.50 . . . . . 193,956 8.1 Years $ 6.23 38,791 $ 6.23
2002 $9.10 - $14.95 . . . . . 180,976 9.1 Years $ 9.25 -- N/A
--------- --------- ------- ------- -------
$3.57 - $14.95 . . . . . 1,234,207 6.3 Years $ 8.18 666,519 $ 8.01
========= ========= ======= ======= =======
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
(16) STOCK OPTION PLAN - CONTINUED
The following is a summary of the activity of the stock option plans for
the years 2000, 2001, and 2002.
2000 2001 2002
------------------- -------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------- -------- ---------- -------- --------- ---------
Outstanding, October 1 ...... 1,004,173 $ 9.43 1,055,860 $ 9.45 1,214,504 $7.83
Granted ..................... 232,370 7.44 213,347 6.27 183,276 9.25
Cancelled ................... (108,645) 8.57 (23,855) 7.92 (10,868) 8.54
Exercised ................... (72,038) 4.12 (30,848) 4.68 (152,705) 6.62
--------- ------- ---------- ------- --------- -----
Outstanding, September 30 ... 1,055,860 $ 9.45 1,214,504 $ 7.83 1,234,207 $8.18
========= ======= ========= ======= ========= =====
30
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 for the years ended September 30 (in
thousands except per share data):
2000 2001 2002
---- ---- ----
Net income As reported $ 8,457 $ 9,300 $ 10,206
Proforma 7,879 8,805 9,728
Diluted earnings per share As reported $ 0.75 $ 0.85 $ 0.93
Proforma 0.70 0.80 0.89
The weighted average fair value per share of options granted in 2000, 2001
and 2002 amounted to $3.05, $2.98 and $4.61, 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 2000, 2001 and 2002, respectively: dividend yield of approximately
3.35%, 2.03% and 1.62%, expected volatility of approximately 33%, 42% and 51%,
risk-free interest rate of 6.06%, 5.60% and 4.60%, expected lives of 7.5 years
and a vesting period of 5 years. For purposes of the proforma calculation,
compensation expense is recognized on a straight line basis over 5 years.
(17) 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.
(18) 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, September 26, 2001, December 19, 2001
and March 20, 2002 the Company declared quarterly cash dividends of $.05 per
share. On each of June 19, 2002 and September 18, 2002, the Company declared
quarterly cash dividends of $0.055 per share.
(19) LEGAL MATTERS
The Company is not a defendant in any lawsuits. The subsidiaries are
defendants in lawsuits arising out of the normal course of business. Based upon
current information received from counsel representing the subsidiaries in these
matters, the Company believes none of the lawsuits would have a material impact
on the Company's financial status.
31
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
(20) QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly operating data for the years ended September 30 is summarized as
follows (in thousands, except share data):
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
2001:
Total interest income . . . . . . . . . . . . . . . . .$ 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 4,948 5,122 5,122
---------- ----------- ----------- -----------
Earnings before income taxes . . . . . . . . . . . . . 3,478 3,437 3,814 3,858
Income taxes . . . . . . . . . . . . . . . . . . . . . 1,261 1,207 1,419 1,400
---------- ----------- ---------- ----------
Net income . . . . . . . . . . . . . . . . . . . . . . $ 2,217 2,230 2,395 2,458
========== ========== ========== ==========
Earnings per common share - diluted . . . . . . . . $ .20 .21 .22 .22
========== ========== ========== ==========
Weighted average shares outstanding-diluted . . . 10,997,000 10,964,000 10,958,000 10,985,000
========== ========== ========== ==========
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
2002:
Total interest income . . . . . . . . . . . . . . . . $ 13,368 12,987 13,498 14,020
Total interest expense . . . . . . . . . . . . . . . . 5,662 5,153 5,278 5,753
---------- ---------- ---------- ----------
Net interest income . . . . . . . . . . . . . . . . . 7,706 7,834 8,220 8,267
Provision for loan losses . . . . . . . . . . . . . . 250 255 350 380
---------- ---------- ---------- ----------
Net interest income after provision for
loan losses . . . . . . . . . . . . . . . . . . . . . . 7,456 7,579 7,870 7,887
Other income . . . . . . . . . . . . . . . . . . . . . 2,173 1,703 1,876 2,387
General and administrative expenses . . . . . . 5,730 5,422 5,640 6,032
---------- ---------- ---------- ----------
Earnings before income taxes . . . . . . . . . . . 3,899 3,860 4,106 4,242
Income taxes . . . . . . . . . . . . . . . . . . . . . 1,439 1,393 1,513 1,556
---------- ---------- ---------- ----------
Net income . . . . . . . . . . . . . . . . . . . . . . $ 2,460 2,467 2,593 2,686
========== ========== ========== ==========
Earnings per common share - diluted . . . . . . $ .23 .23 .24 .24
========== ========== ========== ==========
Weighted average shares outstanding-diluted . 10,927,000 10,826,000 10,859,000 11,104,000
========== ========== ========== ==========
32
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
(21) 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, 2001 and 2002
2001 2002
---- ----
Assets
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 141 738
Investment in subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . 58,961 67,946
Deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125 326
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 820 71
--------- ------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 60,047 69,081
========= ======
Liabilities and Stockholders' Equity
Accounts payable (principally dividends) . . . . . . . . . . . . . . . . . . . . 730 626
Note payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,069 2,069
Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . 57,248 66,386
--------- ------
Total liabilities and stockholders' equity . . . . . . . . . . . . . . . . . $ 60,047 69,081
========= ======
Coastal Financial Corporation
Condensed Statements of Operations
Years ended September 30, 2000, 2001 and 2002
2000 2001 2002
-------- ------- -------
Income:
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5 3 1
Management fees . . . . . . . . . . . . . . . . . . . . . . . . . . 304 300 300
Dividends from subsidiary . . . . . . . . . . . . . . . . . . . . . 3,090 4,600 3,470
Equity in undistributed earnings of subsidiaries . . . . . . . . . . 5,423 4,732 6,751
-------- ------- -------
Total income . . . . . . . . . . . . . . . . . . . . . . . . . 8,822 9,635 10,522
-------- ------- -------
Expenses:
Professional fees . . . . . . . . . . . . . . . . . . . . . . . . . 71 80 79
Supplies and printing . . . . . . . . . . . . . . . . . . . . . . . 62 39 58
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . 162 152 84
Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 90 91 96
Income tax benefit (credit) . . . . . . . . . . . . . . . . . . . . (20) (27) (1)
-------- ------- -------
Total expenses . . . . . . . . . . . . . . . . . . . . .. . . . 365 335 316
-------- ------- -------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,457 9,300 10,206
======== ======= =======
33
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
(21) COASTAL FINANCIAL CORPORATION FINANCIAL STATEMENTS (PARENT COMPANY ONLY),
CONTINUED
Coastal Financial Corporation
Condensed Statement of Cash Flows
Years ended September 30, 2000, 2001 and 2002
2000 2001 2002
---- ---- ----
Operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,457 9,300 10,206
Adjustments to reconcile net income to net cash provided by:
Equity in undistributed net income of subsidiary . . . . . . . . (5,423) (4,732) (6,751)
(Increase) decrease in other assets . . . . . . . . . . . . . . . (6) (747) 548
Increase (decrease) in other liabilities . . . . . . . . . . . . . 151 (108) (104)
-------- -------- --------
Total cash provided by operating activities . . . . . . . . . 3,179 3,713 3,899
-------- -------- --------
Financing activities: . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends to shareholders . . . . . . . . . . . . . . . . . . (1,912) (2,015) (2,222)
Treasury stock repurchases . . . . . . . . . . . . . . . . . . . . (1,964) (2,134) (2,286)
Proceeds from stock options . . . . . . . . . . . . . . . . . . . 570 106 1,203
Proceeds from line of credit . . . . . . . . . . . . . . . . . . . 500 -- --
Other financing activities, net . . . . . . . . . . . . . . . . . 1 (1) 3
-------- -------- --------
Total cash used by financing activities . . . . . . . . . . . (2,805) (4,044) (3,302)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents . . . . . . 374 (331) 597
Cash and cash equivalents at beginning of the year . . . . . . . 98 472 141
-------- -------- --------
Cash and cash equivalents at end of the years . . . . . . . . . . . $ 472 141 738
======== ======== ========
(22) CARRYING AMOUNTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts and fair value of financial instruments as of
September 30, 2001 and 2002 are summarized below:
2001 2002
----------------------- ------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------ ---------- ------ ----------
(In thousands)
Financial Assets
Cash and cash equivalents . . . . . . . . . . . . . $ 34,320 34,320 25,802 25,802
Investment securities . . . . . . . . . . . . . 2,000 2,000 2,014 2,014
Mortgage-backed securities . . . . . . . . . . . . . . . 190,553 190,553 331,808 331,808
Loans receivable held for sale . . . . . . . . . . . . . 16,274 16,274 18,694 18,694
Loans receivable, net . . . . . . . . . . . . . . . . . 488,754 508,802 536,851 541,697
FHLB stock . . . . . . . . . . . . . . . . . . . . . . 7,624 7,624 10,559 10,559
Financial Liabilities
Deposits:
Demand accounts . . . . . . . . . . . . . . . . . . . . 331,972 331,972 382,400 382,400
Certificate accounts . . . . . . . . . . . . . 198,392 199,908 254,681 258,509
Advances from Federal Home Loan Bank . . . . . . 140,036 137,166 189,669 197,918
Securities sold under agreements to repurchase . 18,703 18,703 36,884 36,884
Other borrowings . . . . . . . . . . . . . . . . . . . 2,069 2,069 2,069 2,069
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,
34
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
(22) CARRYING AMOUNTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS - Continued
2001 and 2002, could have a significant impact on the fair value presented and
should be considered when analyzing this financial data.
The Company had $82.6 million of off-balance sheet financial commitments as
of September 30, 2002, 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 $20.1 million at September, 30 2002. The fair value of
these commitments was a gain of approximately $188,000 at September 30, 2002.
The forward sales commitments totaled $18.0 million at September 30, 2002. The
fair value of these commitments was a loss of approximately $134,000 at
September 30, 2002. In addition, the Company had sold options to purchase
mortgage-backed securities of $8.0 million. The fair value of these options was
a loss of approximately $57,000.
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.
(23) 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.
(24) COMMITMENTS AND CONTINGENCIES
The Company has a $16.0 million outstanding line of credit with a
commercial bank at a variable rate of LIBOR plus two percent. The line of credit
is secured by 100% of the stock of the Bank. At September 30, 2002, the
outstanding balance was approximately $2.1 million.
35
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), 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. Except as may be required by applicable law or
regulation, the Company assumes no obligation to update any forward looking
statements.
Critical Accounting Policies
The Company's significant accounting policies are set forth in Note One of
the consolidated financial statements. Of these policies, the Company considers
its policy regarding the allowance for loan losses to be one of its most
critical accounting policies, because it requires many of management's most
subjective and complex judgments. The Company has developed appropriate policies
and procedures for assessing the adequacy of the allowance for loan losses,
recognizing that this process requires a number of assumptions and estimates
with respect to its loan portfolio. The Company's assessments may be impacted in
future periods by changes in economic conditions, the impact of regulatory
examinations and the discovery of information with respect to borrowers which
were not known by management at the time of the issuance of the consolidated
financial statements. For additional discussion concerning the Company's
allowance for loan losses and related matters, see "Allowance for Loan Losses".
General
The Company reported $10.2 million in net income for the year ended
September 30, 2002, compared to $9.3 million for the year ended September 30,
2001. Net interest income increased $5.1 million as a result of decreased
interest income of $6.4 million and a decrease of $11.5 million in interest
expense. Provision for loan losses increased from $955,000 for the year ended
September 30, 2001, to $1.2 million for the year ended September 30, 2002. Other
income increased from $7.9 million in fiscal 2001, to $8.1 million in 2002.
General and administrative expenses increased $3.5 million or 18.3%, for fiscal
2002, as compared to fiscal 2001.
Total assets increased from $763.2 million at September 30, 2001 to $950.8
million at September 30, 2002, or 24.6%. Liquid assets, consisting of cash,
interest-bearing deposits, and securities, increased from $226.9 million at
September 30, 2001, to $359.6 million at September 30, 2002. Loans receivable
increased 9.8% from $488.8 million at September 30, 2001, to $536.9 million at
September 30, 2002. Total loan originations for fiscal 2002 were $418.2 million
as compared to $296.1 million for fiscal 2001.
The growth in liquid assets was funded by increased deposits of $106.7
million, increased advances from the Federal Home Loan Bank ("FHLB") of Atlanta
of $49.6 million and securities sold under agreements to repurchase of $18.2
million. As a result of increased Sales Centers and a strong emphasis on growing
local deposits during fiscal 2002, deposits increased 20.1% from $530.4 million
at September 30, 2001, to $637.1 million at September 30, 2002. During this same
period, transaction deposits (defined as noninterest bearing checking accounts
and NOW accounts) increased $25.4 million, money market checking accounts
increased $19.3 million and certificate accounts increased $56.3 million.
As a result of $10.2 million in net earnings, less the cash dividends paid
to shareholders of approximately $2.2 million, treasury stock repurchases of
approximately $2.3 million, and the net change in unrealized gain (loss) on
securities available for sale, net of income tax of $2.2 million, stockholders'
equity increased from $57.2 million at September 30, 2001 to $66.4 million at
September 30, 2002.
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 following table summarizes future
contractual obligations as of September 30, 2002.
36
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis - Continued
Payment Due by Period
--------------------------------------------------------------
Less than 1-3 4-5 After 5
Total 1 Year Years Years Years
---------- ---------- ---------- --------- ----------
(Dollars in thousands)
Contractual Obligations
Time deposits. . . . . . . . . . . . . . $ 254,681 $ 201,370 $ 47,842 $ 5,450 $ 19
Short-term borrowings. . . . . . . . . . 69,234 69,234 -- -- --
Long-term debt . . . . . . . . . . . . . 159,388 -- 36,735 9,493 113,160
Operating leases . . . . . . . . . . . 821 166 312 91 252
---------- ---------- ---------- --------- ----------
Total contractual cash obligations . . . $ 484,124 $ 270,770 $ 84,889 $ 15,034 $ 113,431
========== ========== ========== ========= ===========
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 $247.2 million, $296.1 million and $418.2
million for the years ended September 30, 2000, 2001 and 2002, respectively. A
large portion of these loan originations were financed through loan principal
repayments which amounted to $139.9 million, $233.7 million and $268.1 million
for the years ended September 30, 2000, 2001 and 2002, 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, 2000, 2001 and 2002, the
Company sold loans amounting to $33.7 million, $28.5 million and $13.9 million,
respectively.
During fiscal 2002, the Company securitized $84.0 million of mortgage loans
and reclassed them to securities available for sale. In accordance with SFAS No.
140, no gain was recognized related to the securitization, and mortgage
servicing rights of approximately $1.4 million were recorded. The Company
subsequently sold $81.2 million of these mortgage-backed securities to outside
third parties and recognized a gain on sale of $1.1 million. The gain is
included in gains on sales of loans held for sale in the consolidated income
statement. The proceeds from sale are included in proceeds from sales of
mortgage-backed securities in the consolidated statement of cash flows. The
Company has no retained interest in the securities that were sold.
During 2002, the Company used deposit growth to restructure its debt. In
fiscal 2002 deposits increased from $530.4 million at September 30, 2001, to
$637.1 million at September 30, 2002. During fiscal 2002, the Company prepaid
approximately $59.3 million of advances from FHLB and incurred gross penalties
of approximately $1.1 million which were included in general and administrative
expenses 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 4.61% at September 30, 2002, compared to 5.46% at September 30,
2001.
At September 30, 2002, the Company had commitments to originate $28.8
million in loans and $53.8 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, 2002, the Company had $201.4 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, 2002, the Company had excess collateral pledged
to the FHLB which would support additional FHLB advance borrowings of $37.8
million. Additionally, at September 30, 2002, the Company had repurchase
agreement lines of credit and available collateral consisting of investment
securities and mortgage-backed securities of $200.4 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 $62.0 million at September 30, 2002, exceeding the Bank's tangible
and core requirements by $47.9 million and $24.2 million, respectively. At
September 30, 2002, the Bank's capital exceeded its current risk-based minimum
capital requirement by $25.5 million. The risk-based capital requirement may
increase in the future. Also see Note 13 of the Notes to Consolidated Financial
Statements.
37
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis - Continued
Results of Operations
Comparison of the Years Ended September 30, 2001 and 2002
General
Net earnings were $10.2 million ($0.93 per diluted share) for the year
ended September 30, 2002, an increase of 9.7% compared to $9.3 million ($0.85
per diluted share) for the year ended September 30, 2001. As a result of share
repurchases and the increase in net earnings, diluted earnings per share
increased 9.4%. Net interest income increased $5.1 million primarily as a result
of a decrease in interest income of $6.4 million which was accompanied by a
decrease in interest expense of $11.5 million.
Interest Income
Interest income for the year ended September 30, 2002, decreased 10.6% to
$53.9 million as compared to $60.3 million for the year ended September 30,
2001. The yield on interest-earning assets for the year ended September 30, 2001
was 8.26% compared to 7.10% for the year ended September 30, 2002. The average
yield on loans receivable for fiscal year 2002 was 7.58% compared to 8.80% in
2001. The yield on investments which includes Investments, Mortgage-Backed
Securities, Overnight Funds and Federal Funds, decreased to 6.15% for the fiscal
year 2002 from 7.00% for fiscal year 2001. Total interest-earning assets for
fiscal year 2002 averaged $765.8 million compared to $738.5 million for the year
ended September 30, 2001. The increase in average interest-earning assets is
primarily due to an increase in average loans receivable of approximately $9.7
million and average mortgage-backed and investment securities of approximately
$21.3 million.
Interest Expense
Interest expense on interest-bearing liabilities was $21.8 million for the
year ended September 30, 2002, as compared to $33.3 million in fiscal 2001. The
cost of interest-bearing liabilities was 2.96% for the year ended September 30,
2002, compared to 4.64% in fiscal year 2001. The average cost of deposits for
the year ended September 30, 2002, was 2.42% compared to 4.03% for the year
ended September 30, 2001. The cost of FHLB advances and reverse repurchase
agreements for fiscal 2002 was 5.11% and 2.39%, respectively, compared to 5.90%
and 5.99%, respectively, for fiscal 2001. Total average interest-bearing
liabilities increased 2.8% from $717.9 million at September 30, 2001, to $738.1
million at September 30, 2002. The increase in average interest-bearing
liabilities is due to an increase in average deposits of approximately $87.8
million. This was offset by a decrease in average FHLB advances of $38.4 million
and average reverse repurchase agreements of $30.5 million.
Net Interest Income
Net interest income was $32.0 million for the year ended September 30,
2002, an increase of $5.1 million, compared to $26.9 million for the year ended
September 30, 2001. The net interest margin increased to 4.14% for fiscal 2002
compared to 3.62% for fiscal 2001. Average interest-earning assets increased
$27.3 million while average interest-bearing liabilities increased $20.2
million. During fiscal 2002, interest rates have decreased. At September 30,
2001 and September 30, 2002, the prime rate of interest was 6.0% and 4.75%,
respectively. With the reduction in interest rates, resulting from the Federal
Reserve Board's decision to reduce the prime rate by 125 basis points, it is
expected that the Company's yield on interest earning assets and cost of
deposits and borrowing will decline in fiscal 2003. 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
As a result of growth in loans receivable, the Company's provision for loan
losses increased from $955,000 for fiscal 2001 to $1.2 million for fiscal 2002.
The allowance for loan losses as a percentage of loans was 1.42% at September
30, 2002 and 2001. Loans delinquent 90 days or more were .63% of total loans at
September 30, 2002, compared to .64% at September 30, 2001. The allowance for
loan losses was 224% of loans delinquent more than 90 days at September 30,
2002, compared to 220% at September 30, 2001. 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."
38
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis - Continued
Other Income
In fiscal 2001, total other income increased slightly from $7.9 million for
the period ended September 30, 2001, to $8.1 million for the period ended
September 30, 2002. As a result of increased transaction deposit accounts, fees
and service charges on loans and deposit accounts was $3.1 million for fiscal
2002, compared to $2.6 million for fiscal 2001. Due to a decreased long-term
interest rate environment which has resulted in increased fixed-rate mortgage
originations, gain on sale of loans was $1.5 million for the year ended
September 30, 2002, compared to $1.3 million for the year ended September 30,
2001. Gain on sale of mortgage-backed securities, net was $238,000 for fiscal
2002, compared to $727,000 for fiscal 2001. Other income decreased from $1.7
million for the year ended September 30, 2001, to $1.6 million for the year
ended September 30, 2002.
Other Expense
General and administrative expenses were $22.8 million for fiscal 2002 as
compared to $19.3 million for fiscal 2001. Salaries and employee benefits
increased to $12.5 million for fiscal 2002 as compared to $10.5 million for
fiscal 2001, or 18.7%, primarily due to normal increases and the costs of
staffing for new offices. During fiscal 2002, Coastal Federal Bank added offices
in Loris and Pawleys Island, South Carolina. Also as a result of the office
additions, net occupancy, furniture and fixtures and data processing expense
increased $1.0 million for fiscal 2002, as compared to fiscal 2001. Other
expenses increased from $3.5 million in fiscal 2001 to $4.1 million in fiscal
2002. The increase is primarily due to increased expenses related to the
servicing of deposit accounts.
Income Taxes
Income taxes increased from $5.3 million in fiscal 2001 to $5.9 million in
fiscal 2002 as a result of increased earnings before income taxes.
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 and the increase in net earnings, 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.
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 4.64% 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 5.99%, 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.
39
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis - Continued
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 3.62% 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 $19.3 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
due to increased expenses related to the servicing of deposit accounts. Included
in general and administrative expenses are penalties from the early repayment of
FHLB advances of $37.7 million during fiscal 2001.
Income Taxes
Income taxes increased from $4.7 million in fiscal 2000 to $5.3 million in
fiscal 2001 as a result of increased earnings before income taxes.
Non-performing Assets
Non-performing assets were $4.6 million at September 30, 2002 compared to
$5.6 million at September 30, 2001. Loans past due 90 days or more increased
from $3.3 million at September 30, 2001, to $3.5 million at September 30, 2002.
Real estate acquired through foreclosure decreased from $2.4 million at
September 30, 2001, to $1.0 million at September 30, 2002.
At September 30, 2001, impaired loans totaled $3.4 million. There were $3.2
million in impaired loans at September 30, 2002. Included in the allowance for
loan losses at September 30, 2001 was $281,000 related to impaired loans
compared to $194,000 at September 30, 2002. The average recorded investment in
impaired loans for the year ended September 30, 2001 was $3.6 million compared
40
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis - Continued
to $3.1 million for the year ended September 30, 2002. Interest income
recognized on impaired loans in fiscal 2001 was $120,000. Interest income
recognized on impaired loans in fiscal 2002 was $36,000.
Loans are reviewed on a regular basis and an allowance for uncollectible
interest is established on loans where collection is questionable, generally
when such loans become 90 days delinquent. Loan balances for which interest
amounts have been reserved and all loans more than 90 days delinquent are placed
on non-accrual status. Typically, payments received on a non-accrual loan are
applied to the outstanding principal or recognized as interest based upon the
collectability of the loan as determined by management.
Allowance for Loan Losses
The adequacy of the allowance is analyzed on a quarterly basis. For
purposes of this analysis, adequacy is defined as a level of reserves sufficient
to absorb probable losses inherent in the portfolio. The methodology employed
for this analysis considers historical loan loss experience, the results of loan
reviews, current economic conditions, and other qualitative and quantitative
factors that warrant current consideration in determining an adequate allowance.
The evaluation of the allowance is segregated into general allocations and
specific allocations. For general allocations, the portfolio is segregated into
risk-similar segments for which historical loss ratios are calculated and
adjusted for identified trends or changes in current portfolio characteristics.
Historical loss ratios are calculated by product type for consumer loans
(installment and revolving), mortgage loans, and commercial loans. To allow for
modeling error, a range of probable loss ratios is then derived for each
segment. The resulting percentages are then applied to the dollar amounts of the
loans in each segment to arrive at each segment's range of probable loss levels.
Certain nonperforming loans are individually assessed for impairment under
SFAS 114 and assigned specific allocations. Other identified high-risk loans or
credit relationships based on internal risk ratings are also individually
assessed and assigned specific allocations.
The general allocation also includes a component for probable losses
inherent in the portfolio, based on management's analysis, that are not fully
captured elsewhere in the allowance. This component serves to address the
inherent estimation and imprecision risk in the methodology as well as address
management's evaluation of various factors or conditions not otherwise directly
measured in the evaluation of the general and specific allocations. Such factors
or conditions may include evaluation of current general economic and business
conditions; geographic, collateral, or other concentrations; system, procedural,
policy, or underwriting changes; experience of lending staff; entry into new
markets or new product offerings; and results from internal and external
portfolio examinations.
The allocation of the allowance to the respective loan segments is an
approximation and not necessarily indicative of future losses or future
allocations. The entire allowance is available to absorb losses occurring in the
overall loan portfolio.
Assessing the adequacy of the allowance is a process that requires
considerable judgment. Management's methodology and judgments are based on the
information currently available and includes numerous assumptions about current
events, which we believe to be reasonable, but which may or may not be valid.
Thus, there can be no assurance that loan losses in future periods will not
exceed the current allowance amount or that future increases in the allowance
will not be required. No assurance can be given that management's ongoing
evaluation of the loan portfolio in light of changing economic conditions and
other relevant circumstances will not require significant future additions to
the allowance, thus adversely affecting the operating results of the Company.
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.
The allowance is also subject to examination and adequacy testing by
regulatory agencies, which may consider such factors as the methodology used to
determine adequacy and the size of the allowance relative to that of peer
institutions, and other adequacy tests. In addition, such regulatory agencies
could require us to adjust our allowance based on information available to them
at the time of their examination.
The Company established provisions for loan losses for the years ended
September 30, 2000, 2001 and 2002, of $978,000, $955,000 and $1.2 million,
respectively. For the years ended September 30, 2000, 2001 and 2002, the Company
had net charge-offs of $319,000, $860,000 and $511,000, respectively. Net
charge-offs as a percentage of average outstanding loans were .06%, .17%, and
..10% for fiscal years ended 2000, 2001 and 2002. At September 30, 2002, the
Company had an allowance for loan losses of $7.9 million, which was 1.42% of net
loans.
41
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis - Continued
Off-Balance Sheet Arrangements
In the normal course of operations, the Company engages in a variety of
financial transactions that, in accordance with generally accepted accounting
principles, are not recorded in the financial statements, or are recorded in
amounts that differ from the notional amounts. These transactions involve, to
varying degrees, elements of credit, interest rate, and liquidity risk. Such
transactions are used by the Company for general corporate purposes or for
Customer needs. Corporate purpose transactions are used to help manage credit,
interest rate, and liquidity risk or to optimize capital. Customer transactions
are used to manage Customers' requests for funding.
The Company's off-balance sheet arrangements, which principally include
lending commitments and derivatives are described below. At September 30, 2001
and 2002, the Company had no interests in non-consolidated special purpose
entities.
Lending Commitments. Lending commitments include loan commitments, standby
letters of credit and unused business credit card lines. These instruments are
not recorded in the consolidated balance sheet until funds are advanced under
the commitments. The Company provides these lending commitments to Customers in
the normal course of business.
Loan commitments for residential housing and land totaled $28.8 million.
For retail Customers, loan commitments are generally lines of credit secured by
residential property. At September 30, 2002 retail loan commitments totaled
$37.2 million. Standby letters of credit are conditional commitments to
guarantee performance, typically contract or financial integrity, of a Customer
to a third party and totaled $4.0 million at September 30, 2002. Commercial
lines of credit and unused business and personal credit card lines, which
totaled $12.7 million at September 30, 2002, are generally for short-term
borrowings.
The Company applies essentially the same credit policies and standards as
it does in the lending process when making these commitments.
Derivatives. In accordance with SFAS No. 133, the Company records
derivatives at fair value, as either assets or liabilities, on the consolidated
balance sheet. Derivative transactions are measured in terms of the notional
amount, but this amount is not recorded on the balance sheet and is not, when
viewed in isolation, a meaningful measure of the risk profile of the instrument.
The notional amount is not exchanged, but is used only as the basis upon which
interest and other payments are calculated.
At September 30, 2002, the fair value of derivative assets and liabilities
totaled $188,000 and $191,000 respectively. The related notional amounts, which
are not recorded on the consolidated balance sheet, totaled $20 million for the
derivative assets and $26 million for the derivative liabilities.
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 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, 2002.
42
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis - Continued
Board Limit Board Limit Market Value Market Value
Minimum NPV Maximum Of Assets Portfolio Equity NPV
Change in Interest Rates Ratio Decline in NPV 9/30/02 9/30/02 Ratio
300 basis point rise 5.00% 400 BPS $ 953,898 $ 82,297 8.63%
200 basis point rise 6.00% 300 BPS $ 972,427 $ 94,417 9.71%
100 basis point rise 6.00% 250 BPS $ 987,717 $ 101,322 10.26%
No Change 6.00% $ 996,837 $ 102,380 10.27%
100 basis point decline 6.00% 250 BPS $ 1,000,615 $ 97,457 9.74%
200 basis point decline 6.00% 300 BPS N/A N/A N/A
300 basis point decline 6.00% 350 BPS N/A N/A N/A
The preceding table indicates that at September 30, 2002, 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 200 and 300 basis point decline are not indicated due
to the current level of interest rates. At September 30, 2002, 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 ALCO's goal to maintain
reasonable balance between exposure to interest rate fluctuations and earnings.
Impact of New Accounting Pronouncement
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
requires 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 also requires
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 SFAS No. 144, 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 adopted 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
Impairment 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 adopted SFAS 144 on October 1, 2002 with no impact to its
financial statements.
In April 2002, The FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections" ("SFAS 145"). SFAS 145 rescinds SFAS No. 4, "Reporting Gains and
Losses from Extinguishments of Debt" ("SFAS 4"), and an amendment of SFAS 4,
SFAS No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements." SFAS 145 requires that gains and losses from extinguishment of
debt should be classified as an extraordinary item only if they meet the
criteria of FASB Opinion No. 30, "Reporting the Results of Operations-Reporting
the Effects of Disposal of a Segment of Business, and Extraordinary, Unusual and
43
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis - Continued
Infrequently Occurring Events and Transactions" ("FASB Opinion 30"). Applying
the provisions of FASB Opinion 30 will distinguish transactions that are part of
an entity's recurring operations from those that are unusual or infrequent or
that meet the criteria for classification as an extraordinary item. The
provisions of SFAS 145 are effective for financial statements issued for fiscal
years beginning after May 15, 2002 and interim periods within those fiscal
years. The Company adopted SFAS 145 on July 1, 2002. During fiscal 2001, the
Company prepaid approximately $37.7 million of advances from FHLB and incurred
gross penalties of approximately $1.1 million. During fiscal 2002, the Company
prepaid approximately $59.3 million of advances from FHLB and incurred gross
penalties of approximately $1.1 million. Prepayment penalties were included in
general and administrative expenses in the statement of operations.
In September 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS 146"), which addresses
financial accounting and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." SFAS 146
applies to costs associated with an exit activity that does not involve an
entity newly acquired in a business combination or with a disposal activity
covered by SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets." Those costs include, but are not limited to, the following:
a) termination benefits provided to current employees that are involuntarily
terminated under the terms of a benefit arrangement that, in substance, is not
an ongoing benefit arrangement or an individual deferred compensation contract
(hereinafter referred to as one-time termination benefits), b) costs to
terminate a contract that is not a capital lease, and c) costs to consolidate
facilities or relocate employees. This Statement does not apply to costs
associated with the retirement of a long-lived asset covered by SFAS No. 143,
"Accounting for Asset Retirement Obligations." A liability for a cost associated
with an exit or disposal activity shall be recognized and measured initially at
its fair value in the period in which the liability is incurred. A liability for
a cost associated with an exit or disposal activity is incurred when the
definition of a liability is met in accordance with FASB Concepts Statements No.
6, "Elements of Financial Statements." The provisions of this Statement are
effective for exit or disposal activities that are initiated after December 31,
2002, with early application encouraged. The impact of adoption on the Company
is not known at this time.
In October 2002, the FASB issued SFAS No. 147, "Acquisitions of Certain
Financial Institutions an amendment of FASB Statements No. 72 and 144 and FASB
Interpretation No. 9" ("SFAS 147"). SFAS 147 removes acquisitions of financial
institutions from the scope of both FASB Statements No. 72 ("SFAS 72") and FASB
Interpretation No. 9 and requires that those transactions be accounted for in
accordance with FASB Statements No. 141, "Business Combinations," and No. 142,
"Goodwill and Other Intangible Assets," except for transactions between two or
more mutual enterprises. Thus, the requirement in SFAS 72 to recognize (and
subsequently amortize) any excess of the fair value of liabilities assumed over
the fair value of tangible and identifiable assets acquired as an unidentifiable
intangible asset no longer applies to acquisitions within the scope of SFAS 72.
In addition, SFAS 147 amends FASB Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS 144"), to include in its
scope long-term customer-relationship intangible assets of financial
institutions such as depositor-and borrower-relationship intangible assets and
credit cardholder intangible assets. Consequently, those intangible assets are
subject to the same undiscounted cash flow recoverability test and impairment
loss recognition and measurement provisions that SFAS 144 requires for other
long-lived assets that are held and used.
The provisions of SFAS 147 are effective for financial statements issued on
or after October 1, 2002 and early adoption is permitted. The Company adopted
this statement on October 1, 2002 with no impact.
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 13 of the
Notes to the Consolidated Financial Statements.
44
Board of Directors
Coastal Financial Corporation Coastal Federal Bank Coastal Investor Services, Inc.
James C. Benton James C. Benton G. David Bishop
President President President
C.L. Benton & Sons, Inc. C.L. Benton & Sons, Inc. Waccamaw Community Foundation
G. David Bishop G. David Bishop James P. Creel
President, President President
Waccamaw Community Foundation Waccamaw Community Foundation Creel Corporation
James T. Clemmons James T. Clemmons James H. Dusenbury
Chairman Chairman Retired - Attorney
Coastal Financial Corporation Coastal Federal 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,
President and Chief Executive Officer President and Chief Executive Officer CPA Chief Financial Officer
Coastal Financial Corporation Coastal Federal Bank Coastal Investor Services, Inc.
Frank A. Thompson, II Frank A. Thompson, II Phillip G. Stalvey
President President Executive Vice President Coastal
Peoples Underwriters, Inc. Peoples Underwriters, Inc. Financial Corporation
Frank A. Thompson, II
President
Peoples Underwriters, Inc.
45
COASTAL FEDERAL BANK
Leadership Group
Sherri J. Adams S. Lynn Dyson Ruth S. Kearns Jerry L. Rexroad, CPA
Personal Banking Leader Personal Banking Leader Senior Vice President Executive Vice President
N. Myrtle Beach Banking Center Waccamaw Banking Center Customer Recognition Officer Chief Financial Officer
Ginger Allen Barbara R. Faber, L. Eric Keys Stacy M. Sansbury
Assistant Vice President CPA Assistant Vice President Vice President Personal Banking Leader Conway
Senior Underwriter Banking Administration Community Banking Leader Banking Center
Group Leader South Horry County Community
Donna P. Bailey Eulette W. Sauls
Assistant Vice President Rita E. Fecteau Debra M. Lambe Customer Account Relationship
Associate Dean of Career Development Vice President Facilities/Maintenance Leader Group Leader
Accounting
James R. Baker, MCSE Group Leader Scott W. Lander Sherry G. Schoolfield, CRCM
Assistant Vice President Senior Vice President Assistant Vice President
Systems Engineer J. Daniel Fogle Area Banking Leader Compliance Officer
Vice President North Carolina Area
Harry Bates IV Residential Banking Leader Douglas E. Shaffer
Personal Banking Leader Carolina Forest/Waccamaw/ Justin Lee Senior Vice President
Oak Street Banking Center Conway Banking Centers Personal Banking Leader Area Banking Leader
Socastee Banking Center/ North and West Horry
Jeffrey A. Benjamin Joel P. Foster Socastee BI-LO Convenience County Areas
Senior Vice President Vice President Center
Credit Administration Group Leader Community Banking Leader Steven J. Sherry
Myrtle Beach Community Edward L. Loehr Executive Vice President
Lynn Bernstein Vice President Marketing Group Leader
Item Processing Leader Andrew D. Gable Budgeting and Treasury
Assistant Vice President Liz C. Short
Amanda Brown Closing and Construction Kathleen M. Lutes Personal Banking Leader
Personal Banking Leader Group Leader Assistant Vice President Murrells Inlet Banking Center
Southport Banking Center Senior Underwriter
William Gehman, CPA Joe Shumbo
Cynthia Lee Buffington Senior Vice President Richard Marsh Vice President
Assistant Vice President Corporate Controller Personal Banking Leader Residential Banking Leader
Item Processing Group Leader Loris Banking Center Sunset Beach/Southport
Mary L. Geist Banking Centers
Ronnie Burbank Vice President Michael C. Mauney
Vice President Data Services Assistant Vice President J. Marcus Smith, Jr.
Senior Banking Leader Group Leader Collections Group Leader Senior Vice President
Wilmington Downtown Banking Center Internal Auditor
Michael C. Gerald Amy E. McLaurin
Glenn T. Butler, MCSE, CCNA President and Chief Executive Personal Banking Leader Carolyn Specht
Vice President Network Officer Sunset Beach Banking Center Purchasing Services Leader
Services Group Leader
Kenan D. Godwin Janice B. Metz Phillip G. Stalvey
Anne R. Caldwell Banking Center Leader Marketing Programs Coordinator Executive Vice President
Assistant Vice President Oak Street Banking Center Banking Group Leader
Deposit Servicing Leader Lauren Elaine Miller
Amy M. Gore Vice President Delan Stevens
Shonda C. Chestnut Personal Banking Leader Dean of Coastal Federal Vice President
Assistant Vice President Wilmington Oleander Banking University Community Banking Leader
Personal Banking Leader Center West Horry County Community
Surfside Beach Banking Center Deborah J. Myers
Jimmy R. Graham Electronic Banking Sandra J. Szarek
Susan J. Cooke Executive Vice President Group Leader Loan Servicing Group Leader
Senior Vice President Chief Information Officer
Administrative Services Ronald A. Nolan Regina C. Taylor
Group Leader Don C. Hamilton Assistant Vice President Sales Resource Leader
Vice Pesident Security Officer
Joe Cox Residential Brokerage Matthew J. Towns
Vice President Group Leader Deborah Ann Orobello Vice President
Community Banking Leader Banking Center Resource Group Personal Banking Leader Credit Administration
Loris Community Little River Banking Center
Lisa Moore Harris Douglas W. Walters
Robert D. Douglas Vice President Charles Page Vice President
Executive Vice President Community Banking Leader Vice President Residential Banking Leader
Human Resources Wilmington Community Senior Banking Leader N. Myrtle Beach/Myrtle
Carolina Forest/Waccamaw Beach/Surfside Beach/Murrells
Trina Dusenbury Glenn D. Humbert Banking Centers Inlet/Socastee Banking Centers
Vice President Vice President
Residential Loan Administrator Community Banking Leader Orit Perez Sandra R. Zanfini
Group Leader Brunswick County Community Personal Banking Leader Corporate Support
BI-LO 38th Convenience Center Group Leader/
Lisa B. James Assistant Corporate Secretary
Vice President Patricia Price
Account Servicing Group Leader Personal Banking Leader
Pawleys Island Banking Center
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Locations
Coastal Federal Bank Coastal Investor Services, Inc.
Oak Street Office Socastee Office (BI-LO) Steven Brockmann
2619 Oak Street 5020 Dick Pond Road Financial Advisor
Myrtle Beach, SC 29577-3129 Myrtle Beach, SC 29588 843.918.7600
843.205.2000 843.205.2042
Cynthia M. Clark
Carolina Forest Office Southport Office Financial Advisor
3894 Renee Drive Myrtle 4956-1 Long Beach Road SE 843.918.7600
Beach, SC 29579 Southport, NC 28461
843.205.2016 843.205.2032 910.454.4173 Susan J. Cooke
Corporate Secretary
Conway Office Sunset Beach Office 843.205.2000
310 Wright Boulevard 1625 Seaside Road S.W.
Conway, SC 29526 Sunset Beach, NC 28468 John L. Creamer
843.205.2005 843.205.2012 910.579.8160 Vice President and Financial Advisor
843.918.7600
Dunes Office Surfside Office
7500 North Kings Highway 112 Highway 17 Linda Doane
Myrtle Beach, SC 29572 South & Glenns Bay Road Sales Assistant
843.205.2001 Surfside Beach, SC 29575 843.916.7600
843.205.2003
Little River Office E. Haden Hamilton, Jr.
1602 Highway 17 Waccamaw Medical Park Office President, Chief Executive Officer
Little River, SC 29566 112 Waccamaw Medical Park and Financial Advisor
843.205.2014 Drive Conway, SC 29526 843.918.7600
843.205.2009
Loris Office John Michael Hill
4262 Main Street 38th Avenue Office (BI-LO) Vice President and Financial Advisor
Loris, SC 29569 1245 38th Avenue North 843.918.7600
843.756.4455 Myrtle Beach, SC 29577
843.205.2041 Debra Hinson Operations Leader/
Murrells Inlet Office Registered Sales Assistant
3348 Highway 17 Wilmington Office 843.918.7600
South & Inlet Crossing 5710 Oleander Drive, Suite 209
Murrells Inlet, SC 29576 Wilmington, NC 28403 Larry Hyams
843.205.2008 843.205.2031 910.313.1161 Financial Advisor
843.918.7600
North Myrtle Beach Office Wilmington Downtown Office
521 Main Street 109 Market Street Jennifer H. Ivey
North Myrtle Beach, SC 29582 Wilmington, NC 28401 Registered Sales Assistant
843.205.2002 843.205.2033 843.918.7600
910.763.2372
Pawleys Island Office Sandra Peterman
Coastal Federal Town Center Sales Assistant
11403 Ocean Highway 843.918.7600
Pawleys Island, SC 29585
843.205.2020 Jerry L. Rexroad, CPA
Chief Financial Officer
Socastee Office 843.205.2000
4801 Socastee Boulevard
Myrtle Beach, SC 29575
843.205.2007
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Corporate Information
Common Stock and Dividend Information
The common stock of Coastal Financial Corporation is quoted through the Nasdq
Stock Market under the symbol CFCP. For information contact:
Herzog, Heine, Geduld, Inc. at 1.800.523.4936
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
Trident Securities at 1.800.222.2618
As of November 29, 2002, the Corporation had 1,026 shareholders and
10,606,948 shares of common stock outstanding. This does not reflect the number
of persons or entities who hold stock in nominee or "street name."
The Company's ability to pay dividends depends primarily on the ability of
Coastal Federal Bank to pay dividends to the Company. See notes 13 and 14 of
Consolidated Financial Statements for further information.
Market Price of Common Stock The table below reflects the high and low bid
stock prices published by Nasdaq for each quarter. The prices have been adjusted
to reflect stock dividends.
HIGH LOW CASH
BID BID DIVIDEND
--- --- --------
Fiscal Year 2002:
First Quarter $ 9.90 $ 8.90 $0.050
Second Quarter 9.61 9.26 0.050
Third Quarter 15.04 9.14 0.055
Fourth Quarter 15.45 13.00 0.055
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
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, 2002,
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 Tuesday, January 28, 2003 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. 2514
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.
[GRAPHIC - COASTAL FEDERAL BANK] [GRAPHIC - COASTAL INVESTOR SERVICES]
[GRAPHIC - RAYMOND JAMES FINANCIAL SERVICES]
Securities are offered exclusively through Raymond James * Financial Services,
Inc., member NASD/SIPC, an independent broker/dealer, and are not insured by the
FDIC or any other bank insurance, are not deposits or obligations of the bank,
are not guaranteed by the bank, and are subject to risk, including the possible
loss of principal.
48