SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended September 30, 2003
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 0-19684
COASTAL FINANCIAL CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 57-0925911
- --------------------------------------------- ----------------------
(State or other jurisdiction of incorporation (I.R.S. Employer I.D.)
or organization)
2619 Oak Street, Myrtle Beach, South Carolina 29577-3129
- --------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (843) 205-2000
--------------
Securities registered pursuant to Section 12(b) of the Act: None
----
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
--------------------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES |X| NO |_|.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act. YES |X| NO |_|.
The aggregate market value of the voting and non-voting common equity held
by non affiliates of the registrant, based upon the closing sales price of the
registrant's common stock as quoted on the NASDAQ System under the symbol "CFCP"
as of the last business day of the registrant's most recently completed second
fiscal quarter, was $125,703,910 (12,879,499) shares at $9.76 per share. It is
assumed for purposes of this calculation that none of the registrant's officers,
directors and 5% stockholders are affiliates.
As of December 18, 2003, there were issued and outstanding 12,960,874 shares of
the registrant's Common Stock.
1
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Annual Report to Stockholders for the Fiscal Year Ended
September 30, 2003 (Parts I and II)
2. Portions of the Proxy Statement for the 2004 Annual Meeting of
Stockholders. (Part III)
2
PART I
Item 1. Business
General
Coastal Financial Corporation ("Coastal Financial" or the "Corporation")
was incorporated in the State of Delaware in June 1990, for the purpose of
becoming a savings and loan holding company for Coastal Federal Bank, formerly
named Coastal Federal Savings Bank, ("Coastal Federal" or the "Bank"). On
January 28, 1991, the stockholders of the Bank approved a plan to reorganize the
Bank into the holding company form of ownership. The reorganization was
completed on November 6, 1991, on which date the Bank became the wholly owned
subsidiary of the Corporation, and the stockholders of the Bank became
stockholders of the Corporation. Prior to completion of the reorganization, the
Corporation had no material assets or liabilities and engaged in no business
activities. On April 1, 1993, Coastal Federal's investment in Coastal Investor
Services, Inc., formerly named Coastal Investment Services, Inc., was
transferred to Coastal Financial and became a first tier subsidiary of the
Corporation. The financial results contained herein relate primarily to the
Corporation's principal subsidiary, Coastal Federal.
Coastal Federal was organized in 1953 as a mutual savings and loan
association and, since that time, its deposits have been federally insured. In
March 1989, Coastal Federal converted from a federally chartered mutual savings
and loan association to a federally chartered mutual savings bank. On October 4,
1990, Coastal Federal converted to the stock form of ownership ("Conversion")
through the sale and issuance of 492,541 shares of common stock at a price of
$10.00 per share, which resulted in gross proceeds to Coastal Federal of
$4,925,410.
Coastal Federal conducts its business from its main office in Myrtle
Beach, South Carolina, thirteen branch offices located in South Carolina, one
branch office located in Sunset Beach, North Carolina, one branch office in
Southport, North Carolina, one branch office in Shallotte, North Carolina and
two branch offices located in Wilmington, North Carolina. At September 30, 2003
Coastal Financial had total assets of $1.2 billion, total deposits of $697.0
million and stockholders' equity of $73.7 million. The deposits of the Bank are
insured by the Federal Deposit Insurance Corporation ("FDIC") under the Savings
Association Insurance Fund ("SAIF"). The corporate offices of the Bank are
located at 2619 Oak Street, Myrtle Beach, South Carolina and the telephone
number is (843) 205-2000.
Twelve of Coastal Federal's nineteen offices are in Horry County, South
Carolina and one office is in Georgetown County, South Carolina. The economy of
the Horry County area depends primarily on tourism. To the extent Horry County
area businesses rely heavily on tourism for business, decreased tourism would
have a significant adverse effect on Coastal Federal's primary deposit base and
lending area. Moreover, Coastal Federal would likely experience a higher degree
of loan delinquencies should the local economy be materially and adversely
affected.
3
Coastal Federal's principal business currently consists of attracting
deposits from the general public and using these funds to originate consumer,
commercial business loans, commercial real estate loans and residential mortgage
loans. Commercial real estate loans were 36.2% of total loans at September 30,
2003.
As part of its lending strategy, subject to market conditions, management
intends to continue emphasizing the origination of consumer and commercial
business loans in addition to residential mortgage loans. At September 30, 2003,
3.4% and 6.9% respectively, of the Bank's total loan portfolio consisted of
commercial business and consumer loans.
The Company maintains an Internet website at http://www.coastalfederal.com.
------------------------------
The Company makes available its annual reports on Form 10-K, quarterly reports
on Form 10-Q, current reports on Form 8-K and amendments to such reports filed
or furnished pursuant to Section 13(a) or 15(d) of the Securities and Exchange
Act of 1934, as amended, and other information related to the Company, free of
charge, on this site as soon as reasonably practicable after it electronically
files those documents with, or otherwise furnish them to, the SEC. The Company's
Internet website and the information contained therein or connected thereto are
not intended to be incorporated into this annual report on Form 10-K.
4
Rate/Volume Analysis
The following table sets forth certain information regarding changes to interest
income and interest expense of the Corporation for the periods indicated. For
each category of interest-earning asset and interest-bearing liability,
information is provided on changes attributed to (i) changes in rate (changes in
rate multiplied by old volume); (ii) changes in volume (changes in volume
multiplied by old rate), (iii) changes in rate-volume (change in rate multiplied
by change in volume), and (iv) the net change (the sum of the prior columns).
Non-accrual loans are included in the average volume calculations.
Year Ended September 30,
--------------------------------------------------------------------------------------
2001 Compared to 2000 2002 Compared to 2001
Increase (Decrease) Increase (Decrease)
Due to Due to
----------------------------------------- -----------------------------------------
Rate Volume Rate/ Net Rate Volume Rate/ Net
---- ------ ----- --- ---- ------ ----- ---
Volume Volume
-------- -------- -------- -------- -------- -------- -------- --------
(Dollars in thousands)
Interest-Earning Assets:
Loans ................. $ 286 $ 1,597 $ 10 $ 1,893 $ (6,372) $ 852 $ (118) $ (5,638)
Mortgage-backed
Securities/Investments (691) 1,024 (50) 283 (1,943) 1,386 (187) (744)
-------- -------- -------- -------- -------- -------- -------- --------
Total net change in
income on interest-
earning assets ........ (405) 2,621 (40) 2,176 (8,315) 2,238 (305) (6,382)
-------- -------- -------- -------- -------- -------- -------- --------
Interest-Bearing
Liabilities:
Deposits .............. 135 3,435 40 3,610 (7,799) 3,629 (1,460) (5,630)
FHLB advances ......... (380) 662 (23) 259 (1,486) (2,268) 303 (3,451)
Repurchase
Agreements .......... (766) (3,837) 420 (4,183) (1,811) (1,645) 1,060 (2,396)
-------- -------- -------- -------- -------- -------- -------- --------
Total net change in
expense on interest-
bearing liabilities ... (1,011) 260 437 (314) (11,096) (284) (97) (11,477)
-------- -------- -------- -------- -------- -------- -------- --------
Net change in net
Interest income ....... $ 606 $ 2,361 $ (477) $ 2,490 $ 2,781 $ 2,522 $ (208) $ 5,095
======== ======== ======== ======== ======== ======== ======== ========
Year Ended September 30,
----------------------------------------
2003 Compared to 2002
Increase (Decrease)
Due to
----------------------------------------
Rate Volume Rate/ Net
---- ------ ----- ---
Volume
-------- -------- -------- --------
(Dollars in thousands)
Interest-Earning Assets:
Loans ................. $ (4,869) $ 7,469 $ (903) $ 1,697
Mortgage-backed
Securities/Investments (2,695) 7,903 (1,564) 3,644
-------- -------- -------- --------
Total net change in
income on interest-
earning assets ........ (7,564) 15,372 (2,467) 5,341
-------- -------- -------- --------
Interest-Bearing
Liabilities:
Deposits .............. (3,487) 2,333 (597) (1,751)
FHLB advances ......... (1,271) 3,184 (527) 1,386
Repurchase
Agreements .......... (4) 1,534 (13) 1,517
-------- -------- -------- --------
Total net change in
expense on interest-
bearing liabilities ... (4,762) 7,051 (1,137) 1,152
-------- -------- -------- --------
Net change in net
Interest income ....... $ (2,802) $ 8,321 $ (1,330) $ 4,189
======== ======== ======== ========
5
Average Balance Sheet
The following table sets forth certain information relating to the
Corporation's average balance sheet and reflects the average yield on assets and
average cost of liabilities for the periods indicated. Such yields and costs are
derived by dividing income or expense by the average balance of assets or
liabilities, respectively, for the periods presented. Average balances are
derived from month-end balances. Management does not believe that the use of
month-end balances instead of daily average balances has caused any material
difference in the information presented. Non-accrual loans are included in
average balance calculations.
Year Ended September 30,
------------------------------------------------------------------------------------------
2001 2002 2003
-------- -------- -------- -------- -------- -------- -------- -------- --------
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ---- ------- -------- ----
(Dollars in thousands)
ASSETS
Loans ........................ $521,575 $ 45,899 8.80% $531,257 $ 40,261 7.58% $629,817 $ 41,958 6.67%
Mortgage-backed
Securities/Investments(1) .. 206,367 14,356 6.95 226,295 13,612 6.02 357,680 17,256 4.81
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total interest-earning
assets ....................... $727,942 $ 60,255 8.26% $757,552 $ 53,873 7.11% $987,497 $ 59,214 6.00%
======== ======== ======== ======== ======== ======== ======== ======== ========
LIABILITIES
Transaction accounts ......... 250,784 7,404 2.95 309,624 4,524 1.46 369,871 3,925 1.06
Passbook accounts ............ 34,071 741 2.17 36,870 459 1.24 40,913 427 1.04
Certificate accounts ......... 194,575 11,235 5.77 222,723 8,767 3.94 258,355 7,647 2.96
FHLB advances ................ 188,666 11,133 5.90 150,239 7,682 5.11 212,501 9,068 4.27
Securities sold under
repurchase agreements ...... 49,891 2,810 5.63 20,676 414 2.00 97,288 1,931 1.98
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total interest-bearing
liabilities .................. $717,987 $ 33,323 4.64% $740,132 $ 21,846 2.95% $978,928 $ 22,998 2.35%
======== ======== ======== ======== ======== ======== ======== ======== ========
Net interest income/
interest rate spread ......... $ 26,932 3.62% $ 32,027 4.16% $ 36,216 3.65%
Net yield on interest earning
assets ....................... 3.70% 4.23% 3.67%
Ratio of interest earning assets
to interest-bearing
liabilities .................. 1.01x 1.02x 1.01x
- -----------------
(1) Includes short-term interest-bearing deposits and Federal funds sold.
6
Lending Activities
General. The principal lending activities of Coastal Federal are the
origination of consumer loans, commercial business loans, commercial real estate
loans and residential mortgage loans. The Bank originates construction and
permanent loans on single family and multi-unit dwellings, as well as on
commercial structures. The Bank emphasizes the origination of adjustable rate
residential and commercial real estate mortgages.
The Bank's loan portfolio totaled approximately $701.8 million at
September 30, 2003, representing approximately 59.4% of its total assets. On
that date, approximately 42.4% of Coastal Federal's total loan portfolio was
secured by mortgages on one-to-four family residential properties.
In an effort to ensure that the yields on its loan portfolio and
investments are interest-rate sensitive, the Bank has implemented a number of
measures, including: (i) emphasis on origination of adjustable rate mortgages on
residential and commercial properties; (ii) origination of construction loans
secured by residential properties, generally with terms for a one-year period or
less; and (iii) origination of commercial and consumer loans having either
adjustable rates or relatively short maturities. At September 30, 2003,
adjustable rate loans constituted approximately $506.7 million (or 72.2%) of the
Bank's total loan portfolio. Therefore, at such date, fixed rate loans comprised
only 27.8% of the total loan portfolio. These lending practices were adopted to
shorten the term of the Bank's assets and make the loan portfolio more
responsive to interest rate volatility.
7
Loan Portfolio Analysis
The following table set forth the composition of the Corporation's loan
portfolio by type of loan as of the dates indicated.
At September 30,
------------------------------------------------------------------------------------
1999 2000 2001 2002
------------------ ------------------ ------------------ ------------------
Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ -------
(Dollars in thousands)
Mortgage loans:
Construction ................ $ 46,766 9.48% $ 54,905 10.13% $ 60,765 11.56% $ 45,544 7.99%
Single family to 4 family
units .................... . 265,069 53.73 283,851 52.39 268,670 51.10 261,296 45.88
Income property (Commercial). 114,931 23.29 133,569 24.65 137,282 26.11 202,117 35.49
Commercial business loans ..... 22,818 4.62 23,357 4.31 18,886 3.59 18,377 3.23
Consumer loans:
Mobile home ................. 1,166 0.24 1,374 0.25 2,056 0.39 3,446 0.61
Automobiles ................. 6,809 1.38 7,789 1.44 6,599 1.26 7,117 1.25
Equity lines of credit ...... 21,081 4.27 23,009 4.25 22,379 4.26 24,273 4.26
Other ....................... 14,738 2.99 13,915 2.58 9,161 1.73 7,378 1.29
--------- ------ --------- ------ --------- ------ --------- ------
Total loans and loans
held for sale .............. $ 493,378 100.00% $ 541,769 100.00% $ 525,798 100.00% $ 569,548 100.00%
====== ====== ====== ======
Less:
Loans in process ............ (15,315) (13,329) (13,983) (6,365)
Deferred loan costs, net .... 354 519 372 245
Allowance for loan losses ... (6,430) (7,064) (7,159) (7,883)
--------- --------- --------- ---------
Total loans and loans held
for sale, net ............. $ 471,987 $ 521,895 $ 505,028 $ 555,545
========= ========= ========= =========
2003
---------------------
Amount Percent
------ -------
(Dollars in thousands)
Mortgage loans:
Construction ................ $ 81,227 11.16%
Single family to 4 family
units ..................... 308,293 42.37
Income property (Commercial) 263,688 36.24
Commercial business loans ..... 24,475 3.36
Consumer loans:
Mobile home ................. 4,607 .63
Automobiles ................. 8,516 1.17
Equity lines of credit ...... 26,639 3.66
Other ....................... 10,234 1.41
--------- ------
Total loans and loans
held for sale ............. $ 727,679 100.00%
======
Less:
Loans in process ............ (16,570)
Deferred loan costs, net .... 556
Allowance for loan losses ... (9,832)
---------
Total loans and loans held
for sale, net ............ $ 701,833
=========
8
Commercial Business Loans. The Bank is permitted under OTS regulations to
make secured or unsecured loans for commercial, corporate, business or
agricultural purposes, including the issuance of letters of credit secured by
real estate, business equipment, inventories, accounts receivable and cash
equivalents. The aggregate amount of such loans outstanding may not exceed 20%
of such institution's assets.
Coastal Federal has been making commercial business loans since 1983 on
both a secured and unsecured basis with terms that generally do not exceed one
year. The majority of these loans have interest rates that adjust with changes
in the prime rate as published in The Wall Street Journal. The Bank's non-real
-----------------------
estate commercial loans primarily consist of short-term loans for working
capital purposes, seasonal loans and lines of credit. The Bank customarily
requires a personal guaranty of payment by the principals of any borrowing
entity and reviews the financial statements and income tax returns of the
guarantors. At September 30, 2003, the Bank had $24.5 million outstanding in
commercial business loans, which represented approximately 3.4% of its loan
portfolio.
Commercial business lending is inherently riskier than secured mortgage
lending and involves risks that are different from those associated with
residential and commercial real estate lending. Real estate lending is generally
considered to be collateral based lending with loan amounts based on
predetermined loan to collateral values and liquidation of the underlying real
estate collateral is viewed as the primary source of repayment in the event of
borrower default. Although commercial business loans are often collateralized by
equipment, inventory, accounts receivable or other business assets, the
liquidation of such collateral in the event of a borrower default is often not a
sufficient source of repayment because accounts receivable may be uncollectible
and inventories and equipment may be obsolete, of limited use, or have limited
marketability, among other things. Accordingly, the repayment of a commercial
business loan depends primarily on the creditworthiness of the borrower (and any
guarantors), while liquidation of collateral is a secondary and potentially
insufficient source of repayment.
Commercial Real Estate Loans. The Bank may invest, by OTS regulation, in
non-residential real estate loans up to 400% of its capital as computed under
GAAP plus general loan loss reserves. At September 30, 2003, this limited
Coastal Federal's aggregate non-residential real estate loans to approximately
$361.2 million. At such date, the Bank had non-residential real estate loans
outstanding of $263.7 million compared to $202.1 million at September 30, 2002.
During fiscal 2000 through 2003, the Bank opened eight offices. The Bank hired
commercial lending officers to lead many of these offices and intends to have
commercial lending officers leading a majority of its banking offices. As a
result of this focus, the Bank has approximately doubled the number of its
commercial lending officers over the last two years. The Bank expects to
continue to focus significant origination efforts in commercial real estate and
commercial lending. It is expected that the Bank's commercial real estate loans
will continue to comprise the most significant portion of the Bank's loan growth
in future years.
9
The commercial real estate loans originated by the Bank are primarily
secured by shopping centers, office buildings, warehouse facilities, retail
outlets, hotels, motels and multi-family apartment buildings. The interest rate
of the commercial real estate loans presently offered by the Bank generally
adjusts every one, three or five years and is indexed to U.S. Treasury
securities or adjusts monthly indexed to the prime interest rate. Such loans
generally have a fifteen to twenty year term, with the payments based on a
similar amortization schedule. In many cases, the Bank may require the loan to
include a call option at the Bank's option in three to ten years. The Bank
generally requires that such loans have a minimum debt service coverage of 120%
of projected net operating income together with other generally accepted
underwriting criteria.
Commercial real estate lending entails significant additional risks
compared to residential lending. Commercial real estate loans typically involve
large loan balances to single borrowers or groups of related borrowers. The
payment experience of such loans is typically dependent upon the successful
operation of the real estate project. These risks can be significantly affected
by supply and demand conditions in the market for office and retail space and
for apartments and, as such, may be subject, to a greater extent, to adverse
conditions in the economy. In dealing with these risk factors, Coastal Federal
generally limits itself to a real estate market or to borrowers with which it
has experience. The Bank concentrates on originating commercial real estate
loans secured by properties located within its market areas of Horry and
Georgetown Counties, South Carolina and Brunswick and New Hanover Counties,
North Carolina. Additionally, the Bank has, on a limited basis, originated
commercial real estate loans secured by properties located in other parts of
North and South Carolina.
Consumer Loans. The Bank is permitted by OTS regulations to invest up to
35% of its assets in consumer loans. The Bank currently offers a wide variety of
consumer loans on a secured and unsecured basis including home improvement
loans, loans secured by savings accounts and automobile, truck and boat loans.
The Bank also offers a revolving line of credit secured by owner-occupied real
estate. Total consumer loans, including equity lines of credit generally secured
by one-to-four family residences, amounted to $50.0 million, or 6.9% of the
total loan portfolio, at September 30, 2003.
Coastal Federal offers consumer loans in order to provide a wider range of
financial services to its customers. These loans also have a shorter term and
normally higher interest rates than residential real estate loans.
10
Consumer loans entail greater risk than do residential mortgage loans,
particularly in the case of consumer loans which are unsecured or secured by
assets which may depreciate rapidly, such as automobiles, boats and other moving
vehicles. In such cases, repossessed collateral for a defaulted consumer loan
may not provide an adequate source of repayment of the outstanding loan and the
remaining deficiency often does not warrant further substantial collection
efforts against the borrower. In addition, consumer loan collections are
dependent on the borrower's continuing financial stability and, thus, are more
likely to be adversely affected by job loss, a change in family status such as
divorce, illness or personal bankruptcy. Furthermore, the application of various
federal and state laws, including federal and state bankruptcy and insolvency
laws, may limit the amount recoverable on such loans. Such loans may also give
rise to claims and defenses by the borrower against Coastal Federal as the
holder of the loan, and a borrower may be able to assert claims and defenses
which it has against the seller of the underlying collateral.
Residential Mortgage Loans. The Bank originates loans to enable borrowers
to purchase existing homes or residential lots, refinance existing mortgage
loans or construct new homes. Residential mortgage loans originated by the Bank
are generally long-term loans, amortized on a monthly basis, with principal and
interest due each month. The contractual loan payment period for residential
mortgage loans typically ranges from 10 to 30 years. The Bank's experience
indicates that real estate loans remain outstanding for significantly shorter
periods than their contractual terms. Borrowers may refinance or prepay loans at
their option, subject to any prepayment penalty provisions included in the note.
The Bank generally requires mortgage title insurance on all single family first
mortgage and residential mortgage loans.
The Bank offers adjustable rate residential mortgage loans ("ARMs"), the
interest rates of which generally adjust based upon either the prime rate or
treasury securities indices. Although Coastal Federal's ARMs are beneficial in
helping Coastal Federal improve the interest rate sensitivity of its assets,
such loans may pose potential additional risks to Coastal Federal. A precipitous
increase in interest rates could be expected to result in an increase in
delinquencies or defaults on such loans. Whereas a significant decrease in rates
could cause repayments to increase significantly.
Coastal Federal also offers residential mortgage loans with fixed rates of
interest. These loans generally can be sold in the secondary market or are
portfolio loans where the Bank offers such loans at rates somewhat above
conforming loan rates. Loans sold to correspondents amounted to $1.6 million and
$1.5 million, respectively, in fiscal 2002 and 2003. Coastal Federal sold
approximately $12.3 million and $43.9 million, respectively, of mortgages in
2002 and 2003 to FHLMC. In addition, Coastal Federal securitized loans into
FHLMC mortgage-backed securities of $84.0 million and $95.6 million in 2002 and
2003, respectively. The securitized mortgage-backed securities were generally
sold in the secondary market within a few days of securitization.
11
At September 30, 2003, approximately $308.3 million or 42.4% of the Bank's
loan portfolio consisted of one-to-four family residential loans.
Construction Loans. The Bank originates residential construction loans
that generally have a term of six to twelve months for individuals or one year
for builders. The individual's loans are generally tied to a commitment by the
Bank to provide permanent financing upon completion of construction. The
interest rate charged on construction loans is indexed to the prime rate as
published in The Wall Street Journal or the current permanent loan rate and
varies depending on the terms of the loan and the loan amount. The Bank
customarily requires personal guaranties of payment from the principals of the
borrowing entities.
The interest rate on commercial real estate construction loans presently
offered by the Bank is generally indexed to the prime rate as published in The
---
Wall Street Journal. Both residential and commercial real estate construction
- -------------------
financing generally expose the Bank to a greater risk of loss than long-term
financing on improved, occupied real estate, due in part to the fact that the
loans are underwritten on projected, rather than historical, income and rental
results. The Bank's risk of loss on such loans generally depends largely upon
the accuracy of the initial appraisal of the property's value at completion of
construction and the estimated cost (including interest) of completion. If
either estimate proves to have been inaccurate and the borrower is unable to
provide additional funds pursuant to his guaranty, the lender either may be
required to advance funds beyond the amount originally committed to permit
completion of the development and/or be confronted at the maturity of the loan
with a project whose value is insufficient to assure full repayment. Coastal
Federal generally provides a permanent financing commitment on residential and
commercial properties at the time the Bank provides the construction financing.
The Bank's underwriting criteria are designed to evaluate and to minimize
the risks of each residential and commercial real estate construction loan. The
Bank considers evidence of the financial stability and reputation of both the
borrower and the contractor, the amount of the borrower's cash equity in the
project, independent evaluation and review of the building costs, local market
conditions, pre-construction sale and leasing information based upon evaluation
of similar projects and the borrower's cash flow projections upon completion.
The Bank generally requires personal guaranties of payment by the principals of
any borrowing entity.
12
At September 30, 2003, approximately $81.2 million or 11.2% of the Bank's
gross loan portfolio consisted of construction loans on both residential ($27.5
million) and commercial properties ($53.7 million). Undisbursed proceeds on
these loans amounted to $16.6 million at September 30, 2003.
13
Loan Maturity
The following table sets forth certain information at September 30,
2003 regarding the dollar amount of loans maturing in the Company's loan
portfolio based on their contractual terms to maturity including scheduled
payments and potential prepayments. Prepayment estimates used are based on the
OTS NPV Model prepayment functions. Specific prepayment speeds applied to loans
are a function of their underlying coupons, lifetime rate caps and maturities.
Demand loans (without a stated maturity), loans having no stated schedule of
repayments and no stated maturity and overdrafts are reported as due in one year
or less.
More than
One Year
One Year Through More than
or Less Five Years Five Years Totals
------- ---------- ---------- ------
(In thousands)
First mortgage loans ....... $ 230,573 $ 165,875 $ 79,293 $ 475,741
Other residential and
non-residential ......... 48,054 91,878 22,957 162,889
Equity lines of credit ..... 24,123 1,987 633 26,743
Consumer loans ............. 9,012 13,968 107 23,087
Commercial loans ........... 6,629 16,020 -- 22,649
---------- ---------- ---------- ----------
Total loans ........... $ 318,391 $ 289,728 $ 102,990 $ 711,109
========== ========== ==========
Less:
Deferred loan costs, net .. 556
Allowance for loan losses . (9,832)
----------
Total loans, net ...... $ 701,833
==========
The following table sets forth the dollar amount of all loans expected to
be repaid after one year at September 30, 2003 which have fixed interest rates
and those which have floating or adjustable interest rates.
Fixed Floating or
Rates Adjustable Rates Totals
----- ---------------- ------
(In thousands)
First mortgage loans ........ $ 81,268 $163,900 $245,168
Other residential and
non-residential ........... 21,239 93,596 114,835
Equity lines of credit ...... 341 2,279 2,620
Consumer loans .............. 9,218 4,857 14,075
Commercial loans ............ 8,416 7,604 16,020
-------- -------- --------
Total loans ................ $120,482 $272,236 $392,718
======== ======== ========
14
Loan Solicitation and Processing. The Bank actively solicits mortgage loan
applications from the Communities it serves.
Detailed loan applications are obtained to determine the borrower's
ability to repay, and the more significant items on these applications are
verified through the use of credit reports, financial statements and
confirmations through verification forms. After analysis of the loan application
and property or collateral involved, including an appraisal of the property by
independent appraisers approved by the Bank's Board of Directors and reviewed by
the Bank's underwriter, or Credit Administration Group, a lending decision is
made by the Bank. With respect to commercial loans, the Bank also reviews the
capital adequacy of the business, the ability of the borrower to repay the loan
and honor its other obligations and general economic and industry conditions.
All loan applications over $1 million require the approval by a member or
members, depending on loan size, of the Bank's Internal Loan Committee, Director
Gerald and Executive Vice Presidents Rexroad and Stalvey. All loan applications
greater than $2.5 million require the approval of the Bank's Loan Committee that
consists of Directors Clemmons, Gerald, Thompson and Executive Vice Presidents
Rexroad and Stalvey. All residential mortgage loan applications in excess of 80%
of the lesser of appraised value or purchase price of the property, unless the
borrowers have private mortgage insurance, generally must be approved by a
member of the Bank's Internal Loan Committee.
The Bank's general policy is to obtain a title insurance policy insuring
that the Bank has a valid lien on the mortgaged real estate and that the
property is free of encumbrances. Borrowers must also obtain paid hazard
insurance policies prior to closing and, when the property is in a flood plain
as designated by the Federal Emergency Management Agency, obtain paid flood
insurance policies. It is the policy of Coastal Federal to require flood
insurance for the full insurable value of the improvements for any such loan
located in a designated flood hazard area. Borrowers on residential mortgage
loans which exceed 80% of the value of the security property are also required
to advance funds on a monthly basis, with each payment of principal and
interest, to a mortgage escrow account from which the Bank makes disbursements
for items such as real estate taxes, hazard insurance premiums and private
mortgage insurance premiums. In cases of flood insurance, it is the Bank's
policy to generally require escrow on these premiums regardless of the
loan-to-value ratio.
Residential Mortgage Loan Originations, Purchases and Sales. The Bank is
qualified to service loans for FHLMC and FNMA. Depending upon interest rates and
economic conditions, the Bank has sold loans in order to provide additional
funds for lending, to generate servicing fee income, and to decrease the amount
of its long-term, fixed rate loans in order to minimize the gap between the
maturities of its interest-earning assets and interest-bearing liabilities. The
Bank generally continues to collect payments on the loans, to supervise
foreclosure proceedings, if necessary, and to otherwise service the loans. The
Bank retains a portion of the interest paid by the borrower on the loans as
consideration for its servicing activities. At September 30, 2003, the Bank was
servicing loans sold to others with a principal balance of approximately $219.8
million. Sales of whole loans and participation interests by the Bank are made
without right of recourse to the Bank by the buyer of the loans in the event of
default by the borrower. At September 30, 2003, the Bank's consolidated loan
portfolio included purchased loans of approximately $5.8 million, which have
been primarily secured by single family residences and which have been written
as adjustable rate mortgage loan instruments. These loans are generally secured
by properties located in the Southeast and were purchased according to the
Bank's non-conforming mortgage loan underwriting standards.
15
Loans Originated, Purchased and Sold
The following table shows total loans originated, purchased, sold and
repaid during the periods indicated.
Year Ended September 30,
---------------------------------------------
2001 2002 2003
--------- --------- ---------
(In thousands)
Loans receivable, net, at the beginning
of the period ........................ $ 521,895 $ 505,028 $ 555,545
--------- --------- ---------
Loans originated:
Construction .......................... 66,769 100,717 134,036
Residential ........................... 106,043 192,095 483,352
Nonresidential & commercial business .. 83,463 67,951 74,472
Land .................................. 23,665 43,819 62,011
Consumer .............................. 16,134 13,626 15,705
--------- --------- ---------
Total loans originated .......... 296,074 418,208 769,576
--------- --------- ---------
Loans purchased, primarily single
family residential mortgages .............. 20 233 0
--------- --------- ---------
Loans sold ................................ (28,541) (13,907) (45,367)
--------- --------- ---------
Loan principal repayment and other ........ (233,653) (268,120) (477,676)
--------- --------- ---------
Securitization of mortgage loans .......... (47,157) (83,982) (95,635)
Other ..................................... (3,610) (1,915) (4,610)
--------- --------- ---------
Loans receivable, net, at end of period ... $ 505,028 $ 555,545 $ 701,833
========= ========= =========
17
Loan Commitments. The Bank, upon the submission of a loan application,
generally provides a 45-day written commitment as to the interest rate
applicable to such loan. If the loan has not been closed within 45 days, the
rate may be adjusted to reflect current market conditions at the Bank's option.
Loans which require closing time in excess of 45 days from the date of
application are issued a written commitment, with a term ranging from three to
six months. For fixed rate loans, the Bank either charges a higher interest rate
on the loan or may charge up to one point to lock in the rate for 180 days. At
September 30, 2003, the Company had residential loan origination commitments of
approximately $39.3 million, home equity loans and consumer lines of credit of
$42.0 million, commercial lines of credit of $11.0 million, standby letters of
credit of $2.9 million and unused business and personal credit card lines of
$12.9 million.
Loan Origination and Other Fees. Coastal Federal may receive loan
origination fees and discount "points." Loan fees and points are a percentage of
the principal amount of the loan which are charged to the borrower for funding
the loan. In certain circumstances, Coastal Federal allows the purchaser to
reduce the rate of interest by the payment of points at the Customers' options.
Fees on long-term commercial mortgage and residential construction loans vary
with loan type.
Delinquencies. Coastal Federal's collection procedures provide for a
series of contacts with delinquent borrowers. If the delinquency continues, more
formal efforts are made to contact the delinquent borrower. If a residential
mortgage loan continues in a delinquent status for 90 days or more, Coastal
Federal generally initiates foreclosure proceedings. Coastal Federal generally
initiates foreclosure proceedings on a commercial mortgage loan if the loan
continues in a delinquent status for 60 days or more. In certain limited
instances, however, Coastal Federal may modify the loan or grant a limited
moratorium on loan payments to enable the borrower to reorganize his financial
affairs.
Problem Assets and Asset Classification. Loans are reviewed on a regular
basis and a reserve for uncollectible interest is established on loans where
collection of interest is questionable, generally when such loans become 90 days
delinquent. Loan balances that relate to interest amounts reserved are
considered to be on a nonaccrual basis. Typically, payments received on a
nonaccrual loan are applied to the outstanding principal and interest as
determined at the time of collection of the loan.
18
The following table sets forth information with respect to the Bank's
non-performing assets at the dates indicated.
At September 30,
---------------------------------------------------------------------
1999 2000 2001 2002 2003
---- ---- ---- ---- ----
(Dollars in thousands)
Loans accounted for on a nonaccrual basis:
Real estate -
Residential ......................... $ 1,097 $2,080 $1,554 $ 785 $3,538
Commercial .......................... 267 2,478 1,185 18 2,816
Commercial business .................... -- -- 322 2,423 793
Consumer ............................... 67 224 193 288 302
--------- ------ ------ ------ ------
Total ....................... 1,431 4,782 3,254 3,514 7,449
--------- ------ ------ ------ ------
Accruing loans which are contractually
past due 90 days or more:
Real estate -
Residential ......................... -- -- -- -- --
Commercial .......................... -- -- -- -- --
Commercial business .................... -- -- -- -- --
Consumer ............................... -- -- -- -- --
--------- ------ ------ ------ ------
Total .................... -- -- -- -- --
--------- ------ ------ ------ ------
Restructured loans ....................... 418 419 1,693 970 369
Real estate owned, net ................... 96 867 2,363 1,046 1,627
Other nonperforming assets ............... -- -- -- -- --
--------- ------ ------ ------ ------
Total nonperforming assets ............... $ 1,945 $6,068 $7,310 $5,530 $9,445
========= ====== ====== ====== ======
Total nonaccrual loans to
net loans .............................. 0.30% 0.92% 0.64% 0.63% 1.06%
Total nonaccrual loans to
total assets ........................... 0.20% 0.62% 0.43% 0.37% 0.63%
Total nonperforming assets
to total assets ........................ 0.27% 0.79% 0.96% 0.58% 0.80%
Total nonperforming assets,excluding
restructured loans which are generally
performing under the restructured
terms, to total assets ................... 0.21% 0.73% 0.74% 0.48% .77%
In fiscal years 2001, 2002 and 2003, interest income which would have been
recorded was approximately $377,000, $301,000 and $623,000, respectively, had
nonaccruing loans been current in accordance with their original terms. At
September 30, 2002, impaired loans totaled $3.2 million. There were $4.9 million
in impaired loans at September 30, 2003. Included in the allowance for loan
losses at September 30, 2002 was $194,000 related to impaired loans compared to
$263,000 at September 30, 2003. The average recorded investment in impaired
loans for the year ended September 30, 2002 was $3.1 million compared to $4.0
million for the year ended September 30, 2003. Interest income recognized on
impaired loans in fiscal 2002 was $36,000. Interest income recognized on
impaired loans in fiscal 2003 was $134,000.
19
The allowance for uncollectible interest which is netted against accrued
interest receivable totaled $349,000 and $691,000 at September 30, 2002 and
2003, respectively.
The OTS has adopted various changes in its regulations regarding problem
assets. OTS regulations require that each insured institution review and
classify its assets on a regular basis. In addition, in connection with
examinations of insured institutions, OTS examiners have authority to identify
problem assets and, if appropriate, require them to be classified. There are
four classifications for problem assets: special mention, substandard, doubtful
and loss. Substandard assets must have one or more defined weaknesses and are
characterized by the distinct possibility that the insured institution will
sustain some loss if the deficiencies are not corrected. Doubtful assets have
the weaknesses of substandard assets with the additional characteristic that the
weaknesses make collection or liquidation in full on the basis of currently
existing facts, conditions and values questionable, and there is a high
possibility of loss. An asset classified loss is considered uncollectible and of
such little value that continuance as an asset of the institution is not
warranted. The regulations also have a special mention category, described as
assets which do not currently expose an insured institution to a sufficient
degree of risk to warrant classification but do possess credit deficiencies or
potential weaknesses deserving management's close attention. Assets classified
as substandard or doubtful require the institution to establish general
allowances for loan losses. If an asset or portion thereof is classified loss,
the insured institution must either establish specific allowances for loan
losses in the amount of 100% of the portion of the asset classified loss or
charge off such amount. A portion of general loss allowances established to
cover possible losses related to assets classified substandard or doubtful may
be included in determining an institution's regulatory capital, while specific
valuation allowances for loan losses generally do not qualify as regulatory
capital.
Coastal Federal had four individually classified assets in excess of $1.2
million as of September 30, 2003. At that date, classified assets amounted to
$27.3 million ($9.3 million substandard; $529,000 doubtful; and $17.4 million
special mention). Substandard assets consist primarily of twenty-nine loans with
aggregate balances of approximately $7.7 million at September 30, 2003. The
largest amount to any one borrower was $1.2 million. Special mention assets
consist primarily of twenty-six loans with aggregate balances of approximately
$16.0 million at September 30, 2003.
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 loan 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.
20
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 are believed 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
21
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 year ended
September 30, 2001, 2002 and 2003, of $955,000, $1.2 million and $2.7 million,
respectively. For the years ended September 30, 2001, 2002 and 2003, the Company
had net charge-offs of $860,000, $511,000 and $706,000, respectively. Net
charge-offs as a percentage of average outstanding loans were .17%, .10%, and
..11% for fiscal years ended 2001, 2002, and 2003. At September 30, 2003, the
Company had an allowance for loan losses of $9.8 million, which was 1.40% of net
loans.
See "Management's Discussion and Analysis - Non-Performing Assets" in the 2003
Annual Report to Stockholders attached hereto and incorporated by reference.
22
Loan Loss Allowance Analysis
The following table sets forth analysis of the Company's allowance for
loan losses for the periods indicated. Where specific loan loss reserves have
been established, any difference between the loss reserve and the amount of the
loss realized has been charged or credited to the loan loss allowance as a
charge-off or recovery.
Year Ended September 30,
--------------------------------------------------------------------
1999 2000 2001 2002 2003
---- ---- ---- ---- ----
(Dollars in thousands)
Allowance at beginning of
period $5,668 $ 6,430 $7,064 $7,159 $7,883
Allowance recorded on
acquired loans 112 50 -- -- --
Sale of Florence office loans -- (75) -- -- --
Provision for loan losses 750 978 955 1,235 2,655
------ ------- ------ ------ ------
Recoveries:
Residential loans 184 12 3 4 --
Commercial loans 13 -- -- -- 92
Construction loans -- -- -- -- --
Consumer loans 55 65 57 62 44
------ ------- ------ ------ ------
Total recoveries 252 77 60 66 136
------ ------- ------ ------ ------
Charge-offs:
Residential loans 15 28 167 -- 46
Construction loans 8 -- 226 90 388
Construction Loans -- -- -- -- --
Consumer loans 329 368 527 487 408
------ ------- ------ ------ ------
Total charge-offs 352 396 920 577 842
------ ------- ------ ------ ------
Net charge-offs 100 319 860 511 706
------ ------- ------ ------ ------
Allowance at end of period $6,430 $ 7,064 $7,159 $7,883 $9,832
====== ======= ====== ====== ======
Ratio of allowance to net
loans outstanding at the
end of the period 1.36% 1.35% 1.42% 1.42% 1.40%
Ratio of net charge-offs
to average loans outstanding
during the period .02% .06% .17% .10% .11%
23
Loan Loss Allowance by Category
The following table sets forth the breakdown of the allowance for loan
losses by loan category for the periods indicated.
September 30,
------------------------------------------------------------------------------------------------------
1999 2000 2001
-------------------------------- -------------------------------- --------------------------------
As a % Loan Type As a % Loan Type As a % Loan Type
of out- As a % of out- As a % of out- As a %
standing of out- standing of out- standing of out-
loans in standing loans in standing loans in standing
Amount category loans Amount category loans Amount category loans
------ -------- ----- ------ -------- ----- ------ -------- -----
(Dollars in thousands)
Residential $ 1,747 0.56% 66.01% $ 2,081 0.60% 66.53% $ 2,148 0.65% 65.55%
Commercial 4,191 3.04 29.18 4,719 3.01 30.07 4,893 3.13 30.92
Consumer 492 2.17 4.81 264 1.49 3.40 118 0.66 3.53
------- ------- ------- ------- ------- -------
Total Allowance for
loan losses $ 6,430 1.36% 100.00% $ 7,064 1.35% 100.00% $ 7,159 1.42% 100.00%
======= ======= ======= ======= ======= =======
September 30,
-------------------------------------------------------------------
2002 2003
-------------------------------- --------------------------------
As a % Loan Type As a % Loan Type
of out- As a % of out- As a %
standing of out- standing of out-
loans in standing loans in standing
Amount category loans Amount category loans
------ -------- ----- ------ -------- -----
(Dollars in thousands)
Residential $ 2,272 0.72% 57.08% $ 1,992 0.51% 55.61%
Commercial 5,273 2.39 39.69 7,229 2.51 41.06
Consumer 338 1.88 3.23 611 2.62 3.33
------- ------- ------- -------
Total Allowance for
loan losses $ 7,883 1.42% 100.00% $ 9,832 1.40% 100.00%
======= ======= ======= =======
24
Investment Activities
Under OTS regulations, the Bank has authority to invest in various types
of liquid assets, including U.S. Treasury obligations, securities of various
federal agencies and of state and municipal governments, deposits at the FHLB of
Atlanta, certificates of deposit of federally insured institutions, certain
bankers' acceptances and federal funds. Subject to various restrictions, such
savings institutions may also invest a portion of their assets in commercial
paper, corporate debt securities and mutual funds, the assets of which conform
to the investments that federally chartered savings institutions are otherwise
authorized to make directly. These institutions are also required to maintain
minimum levels of liquid assets which vary from time to time. See "Regulation
and Supervision - Federal Home Loan Bank System." The Bank may decide to
increase its liquidity above the required levels depending upon the availability
of funds and comparative yields on investments in relation to return on loans.
Coastal Federal is required under federal regulations to maintain a
minimum amount of liquid assets and is also permitted to make certain other
securities investments. See "Regulation and Supervision" herein and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources" in the Annual Report. The balance
of the Bank's investments in short-term securities in excess of regulatory
requirements reflects management's response to the significantly increasing
percentage of deposits with short maturities.
Investment decisions are made by the Investment Officer who reports
quarterly to the Asset/Liability Committee ("ALCO Committee"). The ALCO
Committee meets quarterly and consists of Directors Creel, Bishop, Thompson,
Clemmons and Gerald, and Executive Vice Presidents Graham, Rexroad, Douglas,
Sherry and Stalvey and Vice President Loehr. The ALCO Committee acts within
policies established by the Board of Directors. At September 30, 2003, the
Bank's investment portfolio had a market value of approximately $399.2 million.
The investment securities portfolio consisted primarily of mortgage-backed
securities. For further information concerning the Bank's securities portfolio,
see Notes 2 and 3 of the Notes to Consolidated Financial Statements attached
hereto and incorporated by reference.
At September 30, 2003, Coastal Federal did not own any securities, other
than those disclosed in the following table, that had an aggregate book value in
excess of 10% of its retained earnings at that date.
25
Securities Analysis
The following table sets forth Coastal Federal's investment securities
portfolio at amortized cost at the dates indicated.
September 30,
-------------
2001 2002 2003
---- ---- ----
Amortized Percent of Amortized Percent of Amortized Percent of
Cost(1) Portfolio Cost(1) Portfolio Cost(1) Portfolio
------- --------- ------- --------- ------- ---------
(Dollars in thousands)
U.S. Government agency Securities:
FHLMC ......................... $ 1,893 100.00% -- -- -- --
FHLB .......................... -- -- $ 1,998 100.00% $ 1,998 12.38%
State and municipal
Obligations ................... -- -- -- -- 14,141 87.62
---------- ---------- ---------- ---------- ---------- ----------
Total ................... $ 1,893 100.00% $ 1,998 100.00% $ 16,139 100.00%
========== ========== ========== ========== ========== ==========
(1) The market value of the Bank's investment securities portfolio amounted to
$2.0 million, $2.0 million and $15.9 million at September 30, 2001, 2002
and 2003, respectively.
The following table sets forth the final maturities and weighted average
yields of the securities at amortized cost at September 30, 2003.
One Year More than One More than Five More than
or Less to Five Years to Ten Years Ten Years
------- ------------- ------------ ---------
Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ -----
(Dollars in thousands)
U.S. Government agency securities:
FHLB .......................... $ -- --% $ -- --% $1,998 5.30% $ -- --%
State and municipal
Obligations ................... -- -- -- -- -- -- 14,141 4.16%
--------- ------ --------- ------ ------ ------ --------- ------
Total ................... $ -- --% $ -- --% $1,998 5.30% $ 14,141 4.16%
========= ====== ========= ====== ====== ====== ========= ======
The yield on state and municipal obligations is not computed on a tax equivalent
basis.
26
The following table sets forth Coastal Federal's mortgage-backed securities
portfolio, at amortized cost, at the dates indicated.
September 30,
--------------------------------------------------------------------------------
2001 2002 2003
------------------------ ------------------------ ------------------------
Amortized Percent of Amortized Percent of Amortized Percent of
Cost(1) Portfolio Cost(1) Portfolio Cost(1) Portfolio
-------- -------- -------- -------- -------- --------
(Dollars in thousands)
Mortgage-backed Securities:
FHLMC .............. $ 12,223 6.61% $ 57,628 17.87% $133,674 35.44%
FNMA ............... 123,271 66.64 206,448 64.01 205,200 54.41
GNMA ............... 20,630 11.15 22,139 6.86 26,659 7.07
CMO ................ 28,856 15.60 36,320 11.26 11,617 3.08
-------- -------- -------- -------- -------- --------
Total ........ $184,980 100.00% $322,535 100.00% $377,150 100.00%
======== ======== ======== ======== ======== ========
(1) The market value of the Bank's mortgage-backed securities portfolio
amounted to $190.6 million, $331.8 million and $383.3 million at September
30, 2001, 2002 and 2003, respectively.
The following table sets forth the maturities and weighted average
yields of the securities, at amortized cost, at September 30, 2003.
One Year More than One More than Five More than
or Less to Five Years to Ten Years Ten Years
------------------- ------------------- ------------------- -------------------
Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ -----
(Dollars in thousands)
Mortgage-backed
Securities:
FHLMC ......... $ -- --% $ -- --% $ -- --% $133,674 5.52%
FNMA .......... -- -- -- -- 3,302 3.62 201,898 5.85
GNMA .......... -- -- -- -- -- -- 26,659 6.39
CMO ........... -- -- -- -- -- -- 11,617 5.17
-------- -------- -------- -------- -------- -------- -------- --------
Total ... $ -- --% $ -- --% $ 3,302 3.62% $373,848 5.75%
======== ======== ======== ======== ======== ======== ======== ========
27
Service Corporation Activities
The Company has two wholly-owned subsidiaries, Coastal Federal and Coastal
Financial Capital Trust I. Coastal Federal has one wholly-owned service
corporation: Coastal Mortgage Bankers and Realty Co., Inc. "Coastal Mortgage
Bankers," which was incorporated in 1970 under the laws of South Carolina, and a
subsidiary Coastal Federal Holding Corporation, which was incorporated in 1998
under the laws of Delaware. Coastal Mortgage Bankers is not active in any real
estate operations.
-------------------
COASTAL FEDERAL
-------------------
| |
| | -------------------
| |
| | COASTAL FEDERAL(1)
| | HOLDING
| -------- CORPORATION
|
| -------------------
| |
| -------------------
-------------------
COASTAL REAL
COASTAL MORTGAGE ESTATE INVESTMENT
BANKERS* CORPORATION
------------------- -------------------
|
|
------------------------------------------------------------------------
| | | | |
- ------------------ ------------- ------------ ------------- ----------------
Shady Forest Sherwood Ridge
North Beach Development Development Development 501 Development
Investments, Inc.* Corporation* Corporation* Corporation* Corporation*
- ------------------ ------------- ------------ ------------- ----------------
* Inactive
(1) First tier operating subsidiary of Coastal Federal Bank consolidated with
Coastal Federal Bank for regulatory reporting.
28
On February 20, 1998, Coastal Real Estate Investment Corporation ("CREIC")
was incorporated in North Carolina. CREIC is a wholly owned operating subsidiary
of Coastal Federal Holding Corporation ("CFHC") and is a real estate investment
trust ("REIT"). CREIC engages in the investment and management of real estate
related assets, primarily mortgage loans. On September 1, 1998, CREIC was
capitalized with approximately $131.8 million of mortgage loans from Coastal
Federal. On December 10, 1998, CREIC became a wholly owned subsidiary of CFHC
through an exchange of stock transaction. On January 10, 2002, January 10, 2003
and January 24, 2003, CREIC received capital contributions from CFHC of $35.0
million, $50.0 million and $50.0 million, respectively, to purchase loans.
On June 25, 1998, Coastal Federal Holding Corporation was incorporated in
the state of Delaware. CFHC is a wholly owned subsidiary of Coastal Federal Bank
and is a passive investment company. All of CFHC's consolidated operating
activities are consolidated into Coastal Federal Bank. CFHC engages in the
management of its investment in CREIC and the management of the related
dividends received on that investment.
Deposit Activities and Other Sources of Funds
General. Deposits and loan repayments are the major source of Coastal
Federal's funds for lending and other investment purposes. Loan repayments are a
relatively stable source of funds, while deposit inflows and outflows and loan
prepayments are significantly influenced by general interest rates and money
market conditions. Borrowings may be used to compensate for reductions in the
availability of funds from other sources. They may also be used for general
business purposes.
Deposit Accounts. Deposits are attracted from within Coastal Federal's
primary market area through the offering of a broad selection of deposit
instruments, including checking accounts, money market accounts, savings
accounts, certificates of deposit and retirement accounts. Deposit account terms
vary, according to the minimum balance required, the time periods the funds must
remain on deposit and the interest rate, among other factors. In determining the
terms of its deposit accounts, Coastal Federal considers the rates offered by
its competition, profitability to Coastal Federal, matching deposit and loan
products and its customer preferences and concerns. Coastal Federal generally
reviews its deposit mix and pricing at least monthly.
29
Deposit Flow
The following table sets forth the balances of deposits in the various
types of deposit accounts offered by the Bank at the dates indicated.
At September 30,
-------------------------------------------------------------------------------------------------
2001 2002 2003
----------------------------- ------------------------------- --------------------------------
Percent Increase Percent Increase Percent Increase
Amount of Total (Decrease) Amount of Total (Decrease) Amount of Total (Decrease)
------ --------- ---------- ------ -------- ---------- ------ -------- ----------
(Dollars in thousands)
Transaction accounts:
NOW checking ........... $ 55,926 10.54% $ 6,981 $ 67,381 10.58% $ 11,455 $ 98,171 14.08% $30,790
Noninterest-bearing
checking ............... 49,098 9.26 13,884 63,003 9.89 13,905 86,258 12.38 23,255
--------- ------ --------- --------- ------ --------- --------- ------ ---------
Total transaction accounts . 105,024 19.80 20,865 130,384 20.47 25,360 184,429 26.46 54,045
--------- ------ --------- --------- ------ --------- --------- ------ ---------
Money market demand accounts 193,631 36.51 73,498 212,924 33.42 19,293 206,010 29.56 (6,914)
Savings accounts ........... 33,317 6.28 (2,888) 39,092 6.13 5,775 46,236 6.63 7,144
Fixed-rate certificates
(original maturity):
3 months ................ 3,689 0.70 (6) 4,968 0.78 1,279 3,477 .50 (1,491)
6 months ................ 47,126 8.89 (15,251) 90,177 14.15 43,051 82,349 11.81 (7,828)
9 months ................ 30,180 5.69 26,969 17,613 2.76 (12,567) 6,702 .96 (10,911)
12 months ............... 44,866 8.46 12,216 57,206 8.98 12,340 57,777 8.29 571
18 months ............... 31,638 5.97 7,118 30,994 4.87 (644) 46,044 6.61 15,050
24 months ............... 25,120 4.74 7,047 27,939 4.39 2,819 36,313 5.21 8,374
30 months ............... 2,751 0.52 (5,869) 3,041 0.48 290 2,923 .42 (118)
36 months ............... 2,294 0.43 (981) 11,580 1.82 9,286 11,649 1.67 69
48 months ............... 6,586 1.24 1,765 7,936 1.25 1,350 10,108 1.45 2,172
96 months ............... 18 0.00 (15) 19 0.00 1 20 0.00 1
--------- ------ --------- --------- ------ --------- --------- ------ ---------
194,268 36.64 32,993 251,473 39.48 57,205 257,362 36.92 5,889
--------- ------ --------- --------- ------ --------- --------- ------ ---------
Variable rate certificates:
(original maturity)
-- 0.00 -- 163 0.02 163 130 .02 (33)
18 months .............. 2,146 0.40 (141) 1,471 0.23 (675) 1,311 .19 (160)
30 months .............. 1,978 0.37 -- 1,574 0.25 (404) 1,534 .22 (40)
--------- ------ --------- --------- ------ --------- --------- ------ ---------
Total variable ............. 4,124 0.77 (321) 3,208 0.50 (916) 2,975 .43 (233)
--------- ------ --------- --------- ------ --------- --------- ------ ---------
Total certificates ......... 198,392 37.41 32,672 254,681 39.98 56,289 260,337 37.35 5,656
--------- ------ --------- --------- ------ --------- --------- ------ ---------
Total deposits ............. $ 530,364 100.00% $ 124,147 $ 637,081 100.00% $ 106,717 $ 697,012 100% $ 59,931
========= ====== ========= ========= ====== ========= ========= ====== =========
30
Time Deposits by Maturity and Rate
The following table sets forth the amount and maturities of time deposits
at September 30, 2003.
Amount Due
----------
Less Than One 1-2 2-3 3-4 After
Rate Year Years Years Years 4 Years Total
---- ---- ----- ----- ----- ------- -----
(In thousands)
0.00 - 1.99% ... $ 83,956 $ 3,151 $ 286 $ 3 $ -- $ 87,396
2.00 - 3.99% ... 109,864 34,396 2,414 2,904 100 149,678
4.00 - 5.99% ... 3,029 11,256 4,754 231 299 19,569
6.00 - 7.99% ... 1,387 1,747 7 -- 20 3,161
8.00 - 10.00% . 487 46 -- -- -- 533
-------- -------- -------- -------- -------- --------
Total ...... $198,723 $ 50,596 $ 7,461 $ 3,138 $ 419 $260,337
======== ======== ======== ======== ======== ========
The following table sets forth the amount and maturities of time deposits
with balances of $100,000 or more at September 30, 2003.
Amount Due
- --------------------------------------------------------------------------------
Within Over 3 Over 6 Over 12
3 Months through 6 months through 12 months Months Total
- --------------------------------------------------------------------------------
(In thousands)
$26,558 $ 31,506 $19,759 $19,102 $ 96,925
======= ======== ======= ======= ========
In the unlikely event Coastal Federal is liquidated, depositors will be
entitled to full payment of their deposit accounts prior to any payment being
made to the Corporation as the sole stockholder of Coastal Federal.
Borrowings. Demand and time deposits are the primary source of funds for
Coastal Federal's lending and investment activities and for its general business
purposes. The Bank has in the past, however, relied upon advances from the FHLB
of Atlanta to supplement its supply of lendable funds and to meet deposit
withdrawal requirements. The FHLB of Atlanta has served as one of the Bank's
primary borrowing sources. Advances from the FHLB of Atlanta are typically
secured by the Bank's first mortgage loans and certain of the Bank's
mortgage-backed securities portfolio. At September 30, 2003, Coastal Federal had
advances totaling $244.1 million from the FHLB of Atlanta due on various dates
through 2012 with a weighted average interest rate of 3.89%. Certain of these
advances are subject to call provisions. Call provisions are more likely to be
exercised by the FHLB when rates rise.
31
The FHLB of Atlanta functions as a central reserve bank providing credit
for financial institutions and certain other member financial institutions. As a
member, Coastal Federal is required to own capital stock in the FHLB of Atlanta
and is authorized to apply for advances on the security of such stock and
certain of its mortgage loans, certain commercial real estate loans, and other
assets (principally securities which are obligations of, or guaranteed by, the
United States) provided certain standards related to creditworthiness have been
met. Advances are made pursuant to several different programs. Each credit
program has its own interest rate and range of maturities. Depending on the
program, limitations on the amount of advances are based either on a fixed
percentage of an institution's net worth or on the FHLB's assessment of the
institution's creditworthiness. The FHLB of Atlanta determines specific lines of
credit for each member institution.
In addition to the borrowing described above, the Bank, from time to time,
has borrowed funds under reverse repurchase agreements pursuant to which it
sells securities (generally secured by government securities and mortgage-backed
securities) under an agreement to buy them back at a specified price at a later
date. These agreements to repurchase are deemed to be borrowings collateralized
by the securities sold. At September 30, 2003, the Bank had $125.9 million in
broker repurchase agreements. The Bank has also offered repurchase agreements to
its customers that are borrowings collateralized by underlying government
securities. At September 30, 2003, the Bank had $7.7 million outstanding in
customer repurchase agreements.
32
The following tables set forth certain information regarding short-term
borrowings by the Bank at the end of and during the periods indicated:
At September 30,
------------------------------
2001 2002 2003
-------- -------- --------
(Dollars in thousands)
Outstanding balance:
Securities sold under agreements
to repurchase:
Customer ........................... $ 3,703 $ 4,070 $ 7,703
Broker ............................. 15,000 30,000 125,899
Short-term FHLB advances (1) .......... 46,400 110,350 91,435
Weighted average rate paid on:
Securities sold under agreements
to repurchase:
Customer ........................... 3.36% 1.37% 0.81%
Broker ............................. 2.97 1.84 1.64
Short-term FHLB advances (1) .......... 5.13 4.52 3.81
Maximum amount of borrowings outstanding
At any month end:
Securities sold under agreements
to repurchase:
Customer ........................... $ 3,726 $ 5,625 $ 7,703
Broker ............................. 67,099 30,000 125,899
Short-term FHLB advances (1) .......... 138,946 110,350 121,582
Approximate average short-term borrowings
outstanding with respect to:
Securities sold under agreements
to repurchase:
Customer ........................... $ 2,361 $ 3,600 $ 4,812
Broker ............................. 45,461 15,007 92,476
Short-term FHLB advances (1) .......... 50,884 59,243 86,191
Weighted average rate paid on:
Securities sold under agreements
to repurchase:
Customer ........................... 3.73% 1.58% 1.02%
Broker ............................. 5.65 2.39 2.04
Short-term FHLB advances (1) .......... 5.90 4.52 3.81
(1) Short-term FHLB advances include various advances which are subject to
call by FHLB, within one year.
33
Competition
As of June 30, 2003, Coastal Federal held the largest share of deposits, a
16.4% share, in Horry County, S.C. according to the Federal Deposit Insurance
Corporation. Coastal Federal also held an 10.4% share in Brunswick County, N.C.
and a 0.4% share in Wilmington, N.C. The Bank faces strong competition in the
attraction of deposits (its primary source of lendable funds) and in the
origination of loans. Its most direct competition for deposits and loans has
historically come from other financial institutions located in its primary
market area. The Bank estimates that there are over 89 offices of other
financial institutions in Horry County, 29 offices in Brunswick County and 57
offices in Wilmington. Particularly in times of high interest rates, the Bank
has faced additional significant competition for investors' funds from
short-term money market securities and other corporate and government
securities. The Bank's competition for loans comes principally from other
financial institutions, mortgage banking companies and mortgage brokers.
Personnel
As of September 30, 2003, the Company had 303 full-time Associates and 24
part-time Associates. The Associates are not represented by a collective
bargaining unit. The Bank believes its relationship with its Associates is
excellent.
REGULATION AND SUPERVISION
General
As a savings and loan holding company, the Company is required by federal
law to file reports with, and otherwise comply with, the rules and regulations
of the Office of Thrift Supervision. The Bank is subject to extensive
regulation, examination and supervision by the Office of Thrift Supervision, as
its primary federal regulator, and the Federal Deposit Insurance Corporation, as
the deposit insurer. The Bank is a member of the Federal Home Loan Bank System
and, with respect to deposit insurance, of the Savings Association Insurance
Fund managed by the Federal Deposit Insurance Corporation. The Bank must file
reports with the Office of Thrift Supervision and the Federal Deposit Insurance
Corporation concerning its activities and financial condition in addition to
obtaining regulatory approvals prior to entering into certain transactions such
as mergers with, or acquisitions of, other savings institutions. The Office of
Thrift Supervision and/or the Federal Deposit Insurance Corporation conduct
periodic
34
examinations to test the Bank's safety and soundness and compliance with various
regulatory requirements. This regulation and supervision establishes a
comprehensive framework of activities in which an institution can engage and is
intended primarily for the protection of the insurance fund and depositors. The
regulatory structure also gives the regulatory authorities extensive discretion
in connection with their supervisory and enforcement activities and examination
policies, including policies with respect to the classification of assets and
the establishment of adequate loan loss reserves for regulatory purposes. Any
change in such regulatory requirements and policies, whether by the Office of
Thrift Supervision, the Federal Deposit Insurance Corporation or the Congress,
could have a material adverse impact on the Company, the Bank and their
operations. Certain of the regulatory requirements applicable to the Bank and to
the Company are referred to below or elsewhere herein. The description of
statutory provisions and regulations applicable to savings institutions and
their holding companies set forth in this Form 10-K does not purport to be a
complete description of such statutes and regulations and their effects on the
Bank and the Company.
Holding Company Regulation
The Company is a nondiversified unitary savings and loan holding company
within the meaning of federal law. Under prior law, a unitary savings and loan
holding company, such as the Company, was not generally restricted as to the
types of business activities in which it may engage, provided that the Bank
continued to be a qualified thrift lender. See "Federal Savings Institution
Regulation - QTL Test." The Gramm-Leach-Bliley Act of 1999 provides that no
company may acquire control of a savings association after May 4, 1999 unless it
engages only in the financial activities permitted for financial holding
companies under the law or for multiple savings and loan holding companies as
described below. Further, the Gramm-Leach-Bliley Act specifies that existing
savings and loan holding companies may only engage in such activities. The
Gramm-Leach-Bliley Act, however, grandfathered the unrestricted authority for
activities with respect to unitary savings and loan holding companies existing
prior to May 4, 1999, so long as the Bank continues to comply with the QTL Test.
The Company does qualify for the grandfathering. Upon any non-supervisory
acquisition by the Company of another savings institution or savings bank that
meets the qualified thrift lender test and is deemed to be a savings institution
by the Office of Thrift Supervision, the Company would become a multiple savings
and loan holding company (if the
35
acquired institution is held as a separate subsidiary) and would generally be
limited to activities permissible for bank holding companies under Section
4(c)(8) of the Bank Holding Company Act, subject to the prior approval of the
Office of Thrift Supervision, and certain activities authorized by Office of
Thrift Supervision regulation.
A savings and loan holding company is prohibited from, directly or
indirectly, acquiring more than 5% of the voting stock of another savings
institution or savings and loan holding company, without prior written approval
of the Office of Thrift Supervision and from acquiring or retaining control of a
depository institution that is not insured by the Federal Deposit Insurance
Corporation. In evaluating applications by holding companies to acquire savings
institutions, the Office of Thrift Supervision considers the financial and
managerial resources and future prospects of the Company and institution
involved, the effect of the acquisition on the risk to the deposit insurance
funds, the convenience and needs of the community and competitive factors.
The Office of Thrift Supervision may not approve any acquisition that
would result in a multiple savings and loan holding company controlling savings
institutions in more than one state, subject to two exceptions: (i) the approval
of interstate supervisory acquisitions by savings and loan holding companies and
(ii) the acquisition of a savings institution in another state if the laws of
the state of the target savings institution specifically permit such
acquisitions. The states vary in the extent to which they permit interstate
savings and loan holding company acquisitions.
Although savings and loan holding companies are not currently subject to
specific capital requirements or specific restrictions on the payment of
dividends or other capital distributions, federal regulations do prescribe such
restrictions on subsidiary savings institutions as described below. The Bank
must notify the Office of Thrift Supervision 30 days before declaring any
dividend to the Company. In addition, the financial impact of a holding company
on its subsidiary institution is a matter that is evaluated by the Office of
Thrift Supervision and the agency has authority to order cessation of activities
or divestiture of subsidiaries deemed to pose a threat to the safety and
soundness of the institution.
Acquisition of the Company. Under the Federal Change in Bank Control Act
("CIBCA"), a notice must be submitted to the Office
36
of Thrift Supervision if any person (including a company), or group acting in
concert, seeks to acquire 10% or more of the Company's outstanding voting stock,
unless the Office of Thrift Supervision has found that the acquisition will not
result in a change of control of the Company. Under the CIBCA, the Office of
Thrift Supervision has 60 days from the filing of a complete notice to act,
taking into consideration certain factors, including the financial and
managerial resources of the acquirer and the anti-trust effects of the
acquisition. Any company that so acquires control would then be subject to
regulation as a savings and loan holding company.
Federal Savings Institution Regulation
Business Activities. The activities of federal savings banks are governed
by federal law and regulations. These laws and regulations delineate the nature
and extent of the activities in which federal savings banks may engage. In
particular, certain lending authority for federal savings banks, e.g.,
commercial, non-residential real property loans and consumer loans, is limited
to a specified percentage of the institution's capital or assets.
Capital Requirements. The Office of Thrift Supervision capital regulations
require savings institutions to meet three minimum capital standards: a 1.5%
tangible capital ratio, a 4% leverage ratio (3% for institutions receiving the
highest rating on the CAMELS examination rating system) and an 8% risk-based
capital ratio. In addition, the prompt corrective action standards discussed
below also establish, in effect, a minimum 2% tangible capital standard, a 4%
leverage ratio (3% for institutions receiving the highest rating on the CAMELS
system), and, together with the risk-based capital standard itself, a 4% Tier 1
risk-based capital standard. The Office of Thrift Supervision regulations also
require that, in meeting the tangible, leverage and risk-based capital
standards, institutions must generally deduct investments in and loans to
subsidiaries engaged in activities as principal that are not permissible for a
national bank.
The risk-based capital standard for savings institutions requires the
maintenance of Tier 1 (core) and total capital (which is defined as core capital
and supplementary capital) to risk-weighted assets of at least 4% and 8%,
respectively. In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet assets, are multiplied by a
37
risk-weight factor of 0% to 100%, assigned by the Office of Thrift Supervision
capital regulation based on the risks believed inherent in the type of asset.
Core (Tier 1) capital is defined as common stockholders' equity (including
retained earnings), certain noncumulative perpetual preferred stock and related
surplus, and minority interests in equity accounts of consolidated subsidiaries
less intangibles other than certain mortgage servicing rights and credit card
relationships. The components of supplementary capital currently include
cumulative preferred stock, long-term perpetual preferred stock, mandatory
convertible securities, subordinated debt and intermediate preferred stock, the
allowance for loan and lease losses limited to a maximum of 1.25% of
risk-weighted assets and up to 45% of unrealized gains on available-for-sale
equity securities with readily determinable fair market values. Overall, the
amount of supplementary capital included as part of total capital cannot exceed
100% of core capital.
The OTS has authority to establish higher capital requirements where it
determines that the circumstances of a particular association require it. At
September 30, 2003, the Bank met each of its capital requirements. See Note 14
of the Notes to Consolidated Financial Statements for further information.
Prompt Corrective Regulatory Action. The Office of Thrift Supervision is
required to take certain supervisory actions against undercapitalized
institutions, the severity of which depends upon the institution's degree of
undercapitalization. Generally, a savings institution that has a ratio of total
capital to risk weighted assets of less than 8%, a ratio of Tier 1 (core)
capital to risk-weighted assets of less than 4% or a ratio of core capital to
total assets of less than 4% (3% or less for institutions with the highest
examination rating) is considered to be "undercapitalized." A savings
institution that has a total risk-based capital ratio less than 6%, a Tier 1
capital ratio of less than 3% or a leverage ratio that is less than 3% is
considered to be "significantly undercapitalized" and a savings institution that
has a tangible capital to assets ratio equal to or less than 2% is deemed to be
"critically undercapitalized." Subject to a narrow exception, the Office of
Thrift Supervision is required to appoint a receiver or conservator for an
institution that is "critically undercapitalized." The regulation also provides
that a capital restoration plan must be filed with the Office of Thrift
Supervision within 45 days of the date a savings institution receives notice
that it is "undercapitalized," "significantly undercapitalized" or "critically
undercapitalized." Compliance
38
with the plan must be guaranteed by any parent holding company. In addition,
numerous mandatory supervisory actions become immediately applicable to an
undercapitalized institution, including, but not limited to, increased
monitoring by regulators and restrictions on growth, capital distributions and
expansion. The Office of Thrift Supervision could also take any one of a number
of discretionary supervisory actions, including the issuance of a capital
directive and the replacement of senior executive officers and directors.
Insurance of Deposit Accounts. The Bank is a member of the Savings
Association Insurance Fund. The Federal Deposit Insurance Corporation maintains
a risk-based assessment system by which institutions are assigned to one of
three categories based on their capitalization and one of three subcategories
based on examination ratings and other supervisory information. An institution's
assessment rate depends upon the categories to which it is assigned. Assessment
rates for Savings Association Insurance Fund member institutions are determined
semi-annually by the Federal Deposit Insurance Corporation and currently range
from zero basis points for the healthiest institutions to 27 basis points of
assessable deposits for the riskiest.
The Federal Deposit Insurance Corporation has authority to increase
insurance assessments. A significant increase in Savings Association Insurance
Fund insurance premiums would likely have an adverse effect on the operating
expenses and results of operations of the Bank. Management cannot predict what
insurance assessment rates will be in the future.
Insurance of deposits may be terminated by the Federal Deposit Insurance
Corporation upon a finding that the institution has engaged in unsafe or unsound
practices, is in an unsafe or unsound condition to continue operations or has
violated any applicable law, regulation, rule, order or condition imposed by the
Federal Deposit Insurance Corporation or the Office of Thrift Supervision. The
management of the Bank does not know of any practice, condition or violation
that might lead to termination of deposit insurance.
Loans to One Borrower. Federal law provides that savings institutions are
generally subject to the limits on loans to one borrower applicable to national
banks. A savings institution may not make a loan or extend credit to a single or
related group of borrowers in excess of 15% of its unimpaired capital and
surplus. An additional amount may be lent, equal to 10% of unimpaired capital
and surplus, if secured by specified readily-marketable
39
collateral. At September 30, 2003, the Bank's limit on loans to one borrower was
$13.9 million, and the Bank's largest aggregate outstanding balance of loans to
one borrower was $12.5 million.
QTL Test. The HOLA requires savings institutions to meet a qualified
thrift lender test. Under the test, a savings association is required to either
qualify as a "domestic building and loan association" under the Internal Revenue
Code or maintain at least 65% of its "portfolio assets" (total assets less: (i)
specified liquid assets up to 20% of total assets; (ii) intangibles, including
goodwill; and (iii) the value of property used to conduct business) in certain
"qualified thrift investments" (primarily residential mortgages and related
investments, including certain mortgage-backed securities) in at least 9 months
out of each 12 month period.
A savings institution that fails the qualified thrift lender test is
subject to certain operating restrictions and may be required to convert to a
bank charter. As of September 30, 2003, the Bank met the qualified thrift lender
test. Recent legislation has expanded the extent to which education loans,
credit card loans and small business loans may be considered "qualified thrift
investments."
Limitation on Capital Distributions. Office of Thrift Supervision
regulations impose limitations upon all capital distributions by a savings
institution, including cash dividends, payments to repurchase its shares and
payments to shareholders of another institution in a cash-out merger. Under the
regulations, an application to and the prior approval of the Office of Thrift
Supervision is required prior to any capital distribution if the institution
does not meet the criteria for "expedited treatment" of applications under
Office of Thrift Supervision regulations (i.e., generally, examination ratings
in the two top categories), the total capital distributions for the calendar
year exceed net income for that year plus the amount of retained net income for
the preceding two years, the institution would be undercapitalized following the
distribution or the distribution would otherwise be contrary to a statute,
regulation or agreement with Office of Thrift Supervision. If an application is
not required, the institution must still provide prior notice to Office of
Thrift Supervision of the capital distribution if, like the Bank, it is a
subsidiary of a holding company. In the event the Bank's capital fell below its
regulatory requirements or the Office of Thrift Supervision notified it that it
was in need of more than normal supervision, the Bank's ability to make capital
distributions could be restricted. In addition, the Office of
40
Thrift Supervision could prohibit a proposed capital distribution by any
institution, which would otherwise be permitted by the regulation, if the Office
of Thrift Supervision determines that such distribution would constitute an
unsafe or unsound practice.
Assessments. Savings institutions are required to pay assessments to the
Office of Thrift Supervision to fund the agency's operations. The general
assessments, paid on a semi-annual basis, are computed upon the savings
institution's total assets, including consolidated subsidiaries, as reported in
the Bank's latest quarterly thrift financial report. The assessments paid by the
Bank for the fiscal year ended September 30, 2003 totaled $185,000.
Transactions with Related Parties. The Bank's authority to engage in
transactions with "affiliates" (e.g., any company that controls or is under
common control with an institution, including the Company and its non-savings
institution subsidiaries) is limited by federal law. The aggregate amount of
covered transactions with any individual affiliate is limited to 10% of the
capital and surplus of the savings institution. The aggregate amount of covered
transactions with all affiliates is limited to 20% of the savings institution's
capital and surplus. Certain transactions with affiliates are required to be
secured by collateral in an amount and of a type described in federal law. The
purchase of low quality assets from affiliates is generally prohibited. The
transactions with affiliates must be on terms and under circumstances that are
at least as favorable to the institution as those prevailing at the time for
comparable transactions with non-affiliated companies. In addition, savings
institutions are prohibited from lending to any affiliate that is engaged in
activities that are not permissible for bank holding companies and no savings
institution may purchase the securities of any affiliate other than a
subsidiary.
The Bank's authority to extend credit to executive officers, directors and
10% shareholders ("insiders"), as well as entities such persons control, is also
governed by federal law. Such loans are required to be made on terms
substantially the same as those offered to unaffiliated individuals and not
involve more than the normal risk of repayment. Recent legislation created an
exception for loans made pursuant to a benefit or compensation program that is
widely available to all employees of the institution and does not give
preference to insiders over other employees. The law limits both the individual
and aggregate amount of loans the Bank may make to insiders based, in part, on
the Bank's capital position and requires certain board approval
41
procedures to be followed.
Enforcement. The Office of Thrift Supervision has primary enforcement
responsibility over savings institutions and has the authority to bring actions
against the institution and all institution-affiliated parties, including
stockholders, and any attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful action likely to have an adverse effect on an
insured institution. Formal enforcement action may range from the issuance of a
capital directive or cease and desist order to removal of officers and/or
directors to institution of receivership, conservatorship or termination of
deposit insurance. Civil penalties cover a wide range of violations and can
amount to $25,000 per day, or even $1 million per day in especially egregious
cases. The Federal Deposit Insurance Corporation has the authority to recommend
to the Director of the Office of Thrift Supervision that enforcement action to
be taken with respect to a particular savings institution. If action is not
taken by the Director, the Federal Deposit Insurance Corporation has authority
to take such action under certain circumstances. Federal law also establishes
criminal penalties for certain violations.
Standards for Safety and Soundness. The federal banking agencies have
adopted Interagency Guidelines prescribing Standards for Safety and Soundness.
The guidelines set forth the safety and soundness standards that the federal
banking agencies use to identify and address problems at insured depository
institutions before capital becomes impaired. If the Office of Thrift
Supervision determines that a savings institution fails to meet any standard
prescribed by the guidelines, the Office of Thrift Supervision may require the
institution to submit an acceptable plan to achieve compliance with the
standard.
Federal Home Loan Bank System
The Bank is a member of the Federal Home Loan Bank System, which consists
of 12 regional Federal Home Loan Banks. The Federal Home Loan Bank provides a
central credit facility primarily for member institutions. The Bank, as a member
of the Federal Home Loan Bank, is required to acquire and hold shares of capital
stock in that Federal Home Loan Bank in an amount at least equal to $500,1.0% of
the aggregate principal amount of its unpaid residential mortgage loans and
similar obligations at the beginning of each year, or 1/20 of its advances
(borrowings) from the Federal Home Loan Bank, whichever is greater. The Bank was
42
in compliance with this requirement with an investment in Federal Home Loan Bank
stock at September 30, 2003 of $14.0 million.
The Federal Home Loan Banks are required to provide funds for the
resolution of insolvent thrifts in the late 1980s and to contribute funds for
affordable housing programs. These requirements could reduce the amount of
dividends that the Federal Home Loan Banks pay to their members and could also
result in the Federal Home Loan Banks imposing a higher rate of interest on
advances to their members. If dividends were reduced, or interest on future
Federal Home Loan Bank advances increased, the Bank's net interest income would
likely also be reduced. Recent legislation has changed the structure of the
Federal Home Loan Banks funding obligations for insolvent thrifts, revised the
capital structure of the Federal Home Loan Banks and implemented entirely
voluntary membership for Federal Home Loan Banks. Management cannot predict the
effect that these changes may have with respect to its Federal Home Loan Bank
membership.
Federal Reserve System
The Federal Reserve Board regulations require savings institutions to
maintain non-interest earning reserves against their transaction accounts
(primarily NOW and regular checking accounts). The regulations generally provide
that reserves be maintained against aggregate transaction accounts as follows: a
3% reserve ratio is assessed on net transaction accounts up to and including
$45.4 million; a 10% reserve ratio is applied above $45.4 million. The first
$6.6 million of otherwise reservable balances (subject to adjustments by the
Federal Reserve Board) are exempted from the reserve requirements. The amounts
are adjusted annually. The Bank complies with the foregoing requirements.
TAXATION
Federal Taxation
General. The Corporation and the Bank report their income via a
consolidated return on a fiscal year basis using the accrual method of
accounting and are subject to federal income taxation in the same manner as
other corporations with some exceptions, including particularly the Bank's
reserve for bad debts discussed below. The following discussion of tax matters
is intended only as a summary and does not purport to be a comprehensive
description of the tax rules applicable to the Bank or the Corporation.
43
Tax Bad Debt Reserves. For discussion related to the Bank's Tax Bad Debt
Reserves, please refer to Note 12 of the Company's Annual Report to Stockholders
for the fiscal year ended September 30, 2003.
Distributions. To the extent that the Bank makes "nondividend
distributions" to the Corporation that are considered as made: (i) from the
reserve for losses on qualifying real property loans, to the extent the reserve
for such losses exceeds the amount that would have been allowed under the
experience method; or (ii) from the supplemental reserve for losses on loans
("Excess Distributions"), then an amount based on the amount distributed will be
included in the Bank's taxable income. Nondividend distributions include
distributions in excess of the Bank's current and accumulated earnings and
profits, distributions in redemption of stock, and distributions in partial or
complete liquidation. However, dividends paid out of the Bank's current or
accumulated earnings and profits, as calculated for federal income tax purposes,
will not be considered to result in a distribution from the Bank's bad debt
reserve. Thus, any dividends to the Corporation that would reduce amounts
appropriated to the Bank's bad debt reserve and deducted for federal income tax
purposes would create a tax liability for the Bank. The amount of additional
taxable income attributable to an Excess Distribution is an amount that, when
reduced by the tax attributable to the income, is equal to the amount of the
distribution. Thus, if, the Bank makes a "nondividend distribution," then
approximately one and one-half times the amount so used would be includable in
gross income for federal income tax purposes, assuming a 35% corporate income
tax rate (exclusive of state and local taxes). See "Regulation" for limits on
the payment of dividends by the Bank. The Bank does not intend to pay dividends
that would result in a recapture of any portion of its tax bad debt reserve.
Corporate Alternative Minimum Tax. The Code imposes a tax on alternative
minimum taxable income ("AMTI") at a rate of 20%. Generally, only 90% of AMTI
can be offset by net operating loss carryovers. AMTI is increased by an amount
equal to 75% of the amount by which the Bank's adjusted current earnings exceeds
its AMTI (prior to reduction for net operating losses).
Dividends-Received Deduction and Other Matters. The Corporation may
exclude from its income 100% of dividends received from the Bank as a member of
the same affiliated group of corporations. The corporate dividends-received
deduction is generally 70% in the case of dividends received from unaffiliated
corporations with which the Corporation and the Bank will not file a
consolidated tax return, except that if the Corporation or the Bank owns more
than 20% of the stock of a corporation distributing a dividend, then 80% of any
dividends received may be deducted.
44
Audits. There have not been any audits of the Corporation's federal or
state income tax returns during the past five years.
State Income Taxation. South Carolina has adopted the Code as it relates
to savings and loan associations, effective for taxable years beginning after
December 31, 1985. Coastal Federal is subject to South Carolina income tax at
the rate of 6% and North Carolina income tax at a rate of 6.9%. This rate of tax
is imposed on savings associations in lieu of the general state business
corporation income tax.
For information regarding income taxes payable by Coastal Federal, see
Note 12 of the Notes to Consolidated Financial Statements.
45
Item 2. Properties
The following table sets forth the location of the offices of Coastal
Financial's subsidiaries, as well as certain additional information relating to
these offices, as of September 30, 2003.
Total Investment
Including Land, Net Book Approximate
Year Building, Furni- Value as Square Owned/
Location Opened ture and Fixtures Of 9/30/03 Footage Leased
- -------- ------ ----------------- ---------- ------- ------
(Dollars in thousands)
Main Office 1980 $ 11,611 $ 4,529 25,000 Owned
2619 Oak St
Myrtle Beach, SC (1)
Dunes Office 1971 836 239 2,000 Owned
7500 North Kings Hwy
Myrtle Beach, SC
North Myrtle Beach Office 1973 2,026 1,317 4,100 Owned
521 Main Street
North Myrtle Beach, SC
Surfside Office
112 Highway 17 South 1975 1,515 581 3,300 Owned
& Glenns Bay Road
Surfside Beach, SC
Conway Office 1976 1,177 451 2,882 Owned
310 Wright Boulevard
Conway, SC
Socastee Office 1981 1,046 271 2,275 Owned
4801 Socastee Boulevard
Myrtle Beach, SC
Murrells Inlet Office
3348 Highway 17 South & Inlet 1986 1,175 606 3,450 Owned
Crossing
Murrells Inlet, SC
Waccamaw Medical Pk Office 1986 693 301 1,450 Owned
112 Waccamaw Medical Pk Drive
Conway, SC
Sunset Beach Office 1998 1,134 817 3,000 Owned
1625 Seaside Road S.W
Sunset Beach, NC
Coastal Federal University
Center 1997 1,701 747 17,500 Owned
504 27th Avenue North
Myrtle Beach, SC
Conway Annex Property 1999 2,013 743 10,000 Owned
1515 4th Avenue
Conway, SC
46
Little River Office 1999 $1,203 $ 965 2,300 Owned
1602 Highway 17
Little River, SC
Bi-Lo 38th Avenue 2000 333 186 600 Leased
1245 38th Avenue North
Myrtle Beach, SC
Wilmington Office 1999 194 87 1,400 Lease
5710 Oleander Drive, Suite 209
Wilmington, NC
Carolina Forest Office 2000 1,253 1,016 3,500 Owned
3894 Renee Drive
Myrtle Beach, SC
Southport Office 2001 280 176 1,600 Leased
4956-1 Long Beach Road SE
Southport, NC
Central Business District Office 2001 196 122 1,800 Leased
109 Market Street
Wilmington, NC
Bi-Lo Socastee Office 2001 286 160 486 Leased
5020 Dick Pond Road
Myrtle Beach, SC
Loris Office 2002 378 282 1,040 Leased
4262 Main Street
Loris, SC
Pawleys Island Office
Coastal Federal Town Center 2002 1,058 994 3,150 Owned
11403 Ocean Highway
Pawleys Island, SC
Coastal Mortgage Bankers 1970 2 0 N/A N/A
and Realty Co., Inc.
2619 Oak Street
Myrtle Beach, SC
Coastal Investor Services, a
division of Coastal Federal Bank 1987 136 13 N/A N/A
2619 Oak Street
Myrtle Beach, SC
Shallotte Office 2003 614 609 2,000 Owned
200 Smith Avenue
Shallotte, NC
N/A
Land only
Wilmington-Main 2003 576 575 for Owned
4320 17th Street Extension
Wilmington, NC future
Banking
Center
47
Residential Lending Admin. 2003 $492 $301 4,100 Owned
604 27th Avenue North
Myrtle Beach, SC
(1) The original main office was located at 816 North Kings Highway and opened
in January 1954. The main office was moved to its new location in 1980.
The net book value of the Company's investment in office, properties and
equipment totaled $16.1 million at September 30, 2003. See Note 6 of the Notes
to the Consolidated Financial Statements. Coastal Federal uses the services of
an independent data processing service to process customer records and monetary
transactions, post deposit and general ledger entries and record activity in
installment lending, loan servicing and loan originations.
Item 3. Legal Proceedings
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.
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
The information contained under the section captioned "Market for the
Corporation's Common Stock and Related Stockholder Matters" in the Corporation's
Annual Report to Stockholders for the Fiscal Year Ended September 30, 2003
("Annual Report") is incorporated herein by reference.
Item 6. Selected Financial Data
The information contained in the section captioned "Financial Highlights"
in the Annual Report is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The information contained in the section captioned
48
"Management's Discussion and Analysis" in the Annual Report is incorporated
herein by reference.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
The information contained in the section captioned "Interest Rate Risk
Disclosure" in the Annual Report is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
The consolidated financial statements contained in the Annual Report which
are listed under Item 14 herein are incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
The registrant has not, within the 24 months before the date of the most
recent financial statements, changed its accountants, nor have there been any
disagreements on accounting and financial disclosure.
Item 9A. Evaluation of Disclosure Controls and Procedures and Changes in
Internal Controls
The Company's management, including the Company's principal executive
officer and principal financial officer, have evaluated the effectiveness of the
Company's "disclosure controls and procedures," as such term is defined in Rule
13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended,
(the "Exchange Act"). Based upon their evaluation, the principal executive
officer and principal financial officer concluded that, as of the end of the
period covered by this report, the Company's disclosure controls and procedures
were effective for the purpose of ensuring that the information required to be
disclosed in the reports that the Company files or submits under the Exchange
Act with the Securities and Exchange Commission (the "SEC") (1) is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms, and (2) is accumulated and communicated to the Company's
management, including its principal executive and principal financial officers,
as appropriate to allow timely decisions regarding required disclosure. In
addition, based on that evaluation, no change in the Company's internal control
over financial reporting occurred during the year ended September 30, 2003 that
has materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
49
PART III
Item 10. Directors and Executive Officers of the Registrant
The information contained under the sections captioned "Proposal I --
Election of Directors" and "Section 16(a) Beneficial Ownership Reporting
Compliance" in the Company's definitive proxy statement for the Bank's 2003
Annual Meeting of Stockholders (the "Proxy Statement") is incorporated herein by
reference.
Certain executive officers of the Bank also serve as executive officers of
the Corporation. The day-to-day management duties of the executive officers of
the Corporation and the Bank relate primarily to their duties as to the Bank.
The executive officers of the Company and the Bank are elected annually by the
respective Boards of Directors and hold office until their successors have been
elected and qualified or until they are removed from office.
50
Executive Officers of the Registrant
Name, Age and Position Business Experience
- ---------------------- -------------------
Michael C. Gerald, 54 Mr. Gerald has been associated with Coastal
President, Chief Executive Federal since 1974 and serves as Director,
Officer and a Director President and Chief Executive Officer of the
Corporation and Bank. Mr. Gerald also serves
as Director and President of Coastal Mortgage
Bankers & Realty Company, Inc., as Director
and President of Coastal Real Estate
Investment Corporation, and as a Director of
Coastal Retirement, Estate and Tax Planners,
Inc. He currently serves on the Board of
Visitors of Coastal Carolina University's
Wall School of Business, the Board of
Directors of the Waccamaw Community
Foundation, the Board of Directors of the
Coastal Education Foundation, the Board of
Directors of the South Carolina Bankers
Association, the Board of Directors of SC
BancPAC and the Board of Trustees of the USC
Business Partnership Foundation.
Jimmy R. Graham, 55, Mr. Graham serves as Executive Vice President
Executive Vice President and and Chief Information Officer of Coastal
Chief Information Officer Federal. Mr. Graham serves as Executive Vice
President of Coastal Financial Corporation.
He has been associated with the bank since
1977.
51
Jerry L. Rexroad, CPA, 43, Mr. Rexroad joined the Company in April 1995
Executive Vice President and and is Executive Vice President and Chief
Chief Financial Officer Financial Officer of Coastal Federal and
Coastal Financial Corporation. Mr. Rexroad
also serves as the Chief Financial Officer
and a Director for Coastal Mortgage Bankers &
Realty Company, Inc., Coastal Investor
Services, Inc., Coastal Planners Holding
Corporation, Coastal Retirement Estate and
Tax Planners, Coastal Federal Mortgage,
Coastal Real Estate Investment Corporation
and President of Coastal Federal Holdings
Corporation. He currently serves on the
Junior Achievement Board of Directors of
Horry County. He is a Past Chairman of the
Board of Directors for Junior Achievement of
Horry County as well as Past Chairman of the
Board of Directors for Junior Achievement of
Greenville. Mr. Rexroad is a Director of
PowerHouse Ministries, Inc. and Chairman of
the Board of Deacons at Grand Strand Baptist
Church. He is a certified public accountant,
and is a member of the AICPA and SCACPA.
Prior to joining the Company, Mr. Rexroad was
a partner with KPMG LLP where he was partner
in charge of the Financial Institutions
practice in South Carolina.
Phillip G. Stalvey, 47, Mr. Stalvey is Executive Vice President and
Executive Vice President Banking Group Leader for the Bank. He also
and Banking Group Leader serves as an Executive Vice President of the
Corporation and is a director of Coastal
Federal Mortgage and Coastal Investor
Services, Inc. He has been associated with
Coastal Federal for the past 22 years. In
addition, Mr. Stalvey is a member of the
Florence Stake Presidency with his Church and
a member of the Myrtle Beach Air Force Base
Redevelopment Authority.
Steven J. Sherry, 52 Mr. Sherry joined the Company in May 1998 and
Executive Vice President and is Executive Vice President and Director of
Director of Marketing Marketing for the Bank. He also serves as
Executive Vice President and Chief Marketing
Officer for Coastal Financial Corporation.
Mr. Sherry is a member of the Bank Marketing
Association and the ABA Marketing Network.
He is active with Horry County United Way and
serves on the Executive Board of the Franklin
G. Burroughs-Simeon B. Chapin Art Museum.
Mr. Sherry holds numerous achievement awards
for marketing and advertising.
52
Susan J. Cooke, 53 Ms. Cooke is Senior Vice President and
Senior Vice President and Corporate Secretary for Coastal Federal and
Corporate Secretary for Coastal Financial Corporation, Corporate
Secretary for Coastal Mortgage Bankers &
Realty Company, Inc., and Coastal Investor
Services, Inc. Ms. Cooke has been employed
with Coastal Federal for sixteen years. She
is a member of the American Society of
Corporate Secretaries, Inc. and the National
Association for Female Executives.
Robert D. Douglas, 44 Mr. Douglas joined the corporation in June
Executive Vice President 1994 and serves as Executive Vice President
Human Resources/Coastal of the Bank and Coastal Financial
Federal University Group Corporation. He previously served as
Chairman of the Human Resources Committee of
the South Carolina Community Bankers
Association. He has served on various
advisory committees for the Horry County Drug
and Alcohol Commission, and the South
Carolina Employment Security Commission,
Coastal Carolina and Horry Georgetown
Technical College, and Grand Strand Area
Chamber of Commerce.
The Company has adopted a Code of Ethics, a copy of which is filed as Exhibit 14
to the report. The Company intends to disclose any changes or waivers from the
Code of Ethics in a report on Form 8-K.
53
Item 11. Executive Compensation
The information contained under the section captioned "Proposal I --
Election of Directors -- Executive Compensation" in the Proxy Statement is
incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by
reference to the section captioned "Stock Ownership" of the Proxy
Statement.
(b) Security Ownership of Management
Information required by this item is incorporated herein by
reference to the section captioned "Stock Ownership" of the Proxy
Statement.
(c) Management of the Corporation knows of no arrangements, including
any pledge by any person of securities of the Corporation, the
operation of which may at a subsequent date result in a change in
control of the registrant.
(d) Equity Compensation Plan Information as of September 30, 2003:
- -----------------------------------------------------------------------------------------------
Number of securities
remaining available
for future issuance
Number of securities under equity
to be issued upon Weighted-average compensation plans
exercise of price of outstanding (excluding
outstanding options, options, warrants securities reflected
Plan Category warrants and rights and rights in column (a))
(a) (b) (c) (d)
- -----------------------------------------------------------------------------------------------
Equity compensation
plans approved by 1,580,011 $7.64 303,184
security holders
- -----------------------------------------------------------------------------------------------
Equity compensation
plans not approved N/A N/A N/A
by security holders
- -----------------------------------------------------------------------------------------------
Total 1,580,011 $7.64 303,184
- -----------------------------------------------------------------------------------------------
Item 13. Certain Relationships and Related Transactions
The information required by this item is incorporated herein by reference
to the section captioned "Proposal I - Election of Directors" and "Voting
Securities and Principal Holders Thereof" in the Proxy Statement.
54
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
1. Independent Auditors' Report(1)
2. All Financial Statements(1)
(a) Consolidated Statements of Financial Condition as of September
30, 2002 and 2003.
(b) Consolidated Statements of Operations for the Years Ended
September 30, 2001, 2002, 2003.
(c) Consolidated Statements of Stockholders' Equity and
Comprehensive Income for the Years Ended September 30, 2001,
2002, 2003.
(d) Consolidated Statements of Cash Flows for the Years Ended
September 30, 2001, 2002, 2003.
(e) Notes to Consolidated Financial Statements.
3. All Schedules have been omitted, as the required information is
either inapplicable or included in the Notes to consolidated
Financial Statements.
4. Exhibits
3 (a) Certificate of Incorporation of Coastal Financial
Corporation(2)
3 (b) Certificate of Amendment to Certificate of Incorporation
of Coastal Financial Corporation(7)
3 (c) Bylaws of Coastal Financial Corporation(1)
10 (a) Employment Agreement with Michael C. Gerald
(b) Employment Agreement with Jerry L. Rexroad
(c) Employment Agreement with Phillip G. Stalvey
(d) Employment Agreement with Steven J. Sherry
(e) Employment Agreement with Jimmy R. Graham
(f) 1990 Stock Option Plan (2)
55
(g) Directors Performance Plan(3)
(h) 2000 Stock Option Plan(6)
(i) Loan Agreement with Bankers Bank(8)
13 Annual Report to Stockholders for the Fiscal Year Ended
September 30, 2003
14 Code of Ethics
21 Subsidiaries of the Registrant
23 Consent of Independent Auditors
31 (a) Rule 13a-14(a)/15d-14(a) Certification of Chief Executive
Officer
31 (b) Rule 13a-14(a)/15d-14(a) Certification of Chief Financial
Officer
32 (a) Section 1350 Certification of Chief Executive Officer
32 (b) Section 1350 Certification of Chief Financial Officer
(1) Incorporated by reference to Registration Statement on Form S-4 filed with
the Securities and Exchange Commission on November 26, 1990.
(2) Incorporated by reference to 1995 Form 10-K filed with the Securities and
Exchange Commission on December 29, 1995.
(3) Incorporated by reference to the proxy statement for the 1996 Annual
Meeting of Stockholders.
(4) Incorporated by reference to 1997 Form 10-K filed with the Securities and
Exchange Commission on January 2, 1998.
(5) Incorporated by reference to 1998 Form 10-K filed with the Securities and
Exchange Commission on December 29, 1998.
(6) Incorporated by reference to the proxy statement for the 2000 Annual
Meeting of Stockholders.
(7) Incorporated by reference to the March 31, 1998 Form 10-Q filed with the
Securities and Exchange Commission on May 15, 1998.
56
(8) Incorporated by reference to the December 31, 1997 Form 10-Q filed with
the Securities and Exchange Commission on February 13, 1998.
57
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
COASTAL FINANCIAL CORPORATION
Date: December 19, 2003 By: /s/ Michael C. Gerald
-----------------------------------
Michael C. Gerald
President/Chief Executive
Officer
(Duly Authorized Representative)
Pursuant to the requirement of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By: /s/Michael C. Gerald By: /s/Jerry L. Rexroad
-------------------- -------------------
Michael C. Gerald Jerry L. Rexroad
President/Chief Executive Executive Vice President
Officer And a Director And Chief Financial Officer
(Principal Executive (Principal Financial and
Officer) Accounting Officer)
Date: December 19, 2003 December 19, 2003
By: /s/James T. Clemmons By: /s/Frank A. Thompson, II
-------------------- ------------------------
James T. Clemmons Frank A. Thompson, II
Chairman of the Board Director
Date: December 19, 2003 Date: December 19, 2003
By: /s/James C. Benton By: /s/James P. Creel
------------------ -----------------
James C. Benton James P. Creel
Director Director
Date: December 19, 2003 Date: December 19, 2003
By: /s/G. David Bishop By: /s/James H. Dusenbury
------------------ ---------------------
G. David Bishop James H. Dusenbury
Director Director
Date: December 19, 2003 Date: December 19, 2003
58