COASTAL FINANCIAL CORPORATION
2004
ANNUAL REPORT
A QUEST FOR EXCELLENCE
Dedication Exceptional Progress Toward
Transforming A Very Good Organization
Into An Exceptional Organization
All of us at Coastal Financial Corporation would probably agree that the best
word we could use to describe our 2004 performance is WOW! Thanks to the most
incredible group of Associates imaginable, we made significant progress this
year in beginning our quest for Transforming A Very Good Organization Into An
Exceptional Organization.
The journey began by refocusing on our QUEST FOR EXCELLENCE Business Model and
developed into a renewed understanding of and commitment to the Mission
Statement, Business Purpose, Principles and Values which are the essence of that
Guiding Vision. In fact, the progress we made during this past year has
dramatically reshaped our approach to the execution of our Business Model.
Going into this transformational year, we understood clearly that it would be
much more difficult to Transform A Very Good Organization Into An Exceptional
Organization than it had been to transform an Average Organization Into A Very
Good Organization. And, during the course of this year, we learned that progress
in such an ambitious endeavor could only be accomplished by creating a much more
in-depth understanding of our Business Purpose and Mission Statement throughout
our organization. The progress which resulted has lead us to significantly alter
our paradigms about our business and create totally new strategies which have
simplified our approach and enabled a much more aligned and consistent execution
of our Business Model.
These new strategies, which will define and differentiate our organization in
the future, are reflected in two tactical initiatives which were created during
2004. They are The Experience of FANtastic! Customer Service and Totally Free
Checking With A Gift!
Through the continued implementation of these strategies over the next several
months, we will begin to significantly change the rules which have generally
applied to banking throughout our market areas by making it an Experience which
is more convenient than ever before, fun, memorable and even exhilarating for
our Customers.
Over the fourteen years since becoming a publicly owned company, we have viewed
change and constant improvement, such as these powerful new strategies, as
essential to the accomplishment of Our Basic Corporate Objective Of Maximizing
The Value Of Our Shareholders' Investment and Our Long-Term Goal Of Being The
Best Financial Services Company In Our Marketplace.
And 2004 was certainly a testimony to that philosophy. Thanks to our exceptional
Associates and their ever-increasing understanding of and commitment to our
QUEST FOR EXCELLENCE Business Model and Vision 2005 Plan, we made very good
progress toward The Transformation Of Our Very Good Organization Into An
Exceptional Organization and produced outstanding results for our Shareholders.
Going forward, we remain absolutely convinced that this approach will help to
ensure that our best days are yet to come.
Share Price
Performance
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
$10.00 $10.00 $27.20 $68.31 $85.56 $85.92 $134.94 $217.16 $215.52 $177.72 $113.80 $217.36 $299.07 $374.19 $467.90
- ------------------------------------------------------------------------------------------------------------------------------------
Initial Sept. Sept. Sept. Sept. Sept. Sept. Sept. Sept. Sept. Sept. Sept. Sept. Sept. Sept.
Public 30, 30, 30, 30, 30, 30, 30, 30, 30, 30, 30, 30, 30, 30,
Offering 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
October 4,
1990
The market price of Coastal Financial Corporation's common stock increased 25.0%
from $11.56 at September 30, 2003 compared to $14.45 at September 30, 2004, and
has grown at a compound annual rate of over 31% since 1990 as indicated in the
above graph. These historical results may not be indicative of future stock
price performance. Share data has been restated to reflect all stock splits,
stock dividends, and reinvested cash dividends.
2
Financial Highlights
The following table sets forth certain information concerning the financial
position of the Company (including data from operations of its subsidiaries) as
of the dates and for the periods indicated. The consolidated data is derived
from, and should be read in conjunction with, the Consolidated Financial
Statements of the Company and its subsidiaries presented herein.
At or for Years Ended September 30,
-----------------------------------------------------------------
2000 2001 2002 2003 2004
--------- --------- --------- ----------- -----------
(Dollars in thousands, except per share data)
Financial Condition Data:
Total assets .................................................. $ 768,838 $ 763,214 $ 950,796 $ 1,181,209 $ 1,305,485
Loans receivable, net ......................................... 511,701 488,754 536,851 682,737 790,730
Mortgage-backed securities .................................... 189,239 190,553 331,808 383,324 374,283
Cash, interest-bearing deposits and investment securities ..... 25,715 36,320 27,816 37,484 60,941
Deposits ...................................................... 406,217 530,364 637,081 697,012 753,379
Borrowings .................................................... 303,151 160,808 228,622 392,797 451,144
Stockholders' equity .......................................... 46,945 57,248 66,386 73,707 85,348
Operating Data:
Interest income ............................................... $ 58,079 $ 60,255 $ 53,873 $ 59,214 $ 65,805
Interest expense .............................................. 33,636 33,323 21,846 22,998 23,524
--------- --------- --------- ----------- -----------
Net interest income ........................................... 24,443 26,932 32,027 36,216 42,281
Provision for loan losses ..................................... 978 955 1,235 2,655 1,750
--------- --------- --------- ----------- -----------
Net interest income after provision for loan losses ........... 23,465 25,977 30,792 33,561 40,531
--------- --------- --------- ----------- -----------
Other Income:
Fees and service charges on loan and deposit accounts ......... 2,126 2,634 3,148 3,489 3,771
Gain on sales of loans held for sale .......................... 631 1,295 1,462 2,985 1,523
Gain (loss) on sales of investment securities, net ............ (17) (56) 102 -- (100)
Gain (loss) on sales of mortgage-backed securities, net ....... (1,554) 727 238 469 (997)
Gain (loss) from real estate operations ....................... (64) (453) (137) (18) 3
Other income .................................................. 4,759 3,755 3,326 3,983 4,971
--------- --------- --------- ----------- -----------
Total other income ............................................ 5,881 7,902 8,139 10,908 9,171
Total general and administrative expense ...................... 16,191 19,292 22,824 27,156 27,269
--------- --------- --------- ----------- -----------
Income before income taxes .................................... 13,155 14,587 16,107 17,313 22,433
Income taxes .................................................. 4,698 5,287 5,901 6,141 7,627
--------- --------- --------- ----------- -----------
Net income .................................................... $ 8,457 $ 9,300 $ 10,206 $ 11,172 $ 14,806
========= ========= ========= =========== ===========
Net income per common diluted share ........................... $ .52 $ .58 $ .64 $ .69 $ .89
========= ========= ========= =========== ===========
Cash dividends per common share ............................... $ .12 $ .13 $ .14 $ .17 $ .18
========= ========= ========= =========== ===========
Weighted average shares outstanding diluted ................... 16,421 16,098 16,017 16,264 16,625
========= ========= ========= =========== ===========
All share and per share data have been restated as applicable to reflect a 5%
stock dividend declared on November 10, 1999, a 10% stock dividend declared on
March 14, 2000, a 3 for 2 stock dividend declared on July 31, 2001, and 10%
stock dividends declared on May 27, 2003, August 28, 2003, February 18, 2004 and
July 30, 2004.
Key Operating Ratios:
The table below sets forth certain performance ratios of the Company at the
dates or for the periods indicated.
At or for Years Ended September 30,
--------------------------------------------------
2000 2001 2002 2003 2004
------ ------- ------- ------- -------
Other Data:
Return on assets (net income divided by average assets) .................... 1.13% 1.20% 1.23% 1.04% 1.18%
Return on average equity (net income divided by average equity) ............ 19.52% 17.75% 16.92% 15.84% 18.77%
Average equity to average assets ........................................... 5.80% 6.59% 7.29% 6.59% 6.31%
Book value per share ....................................................... $ 2.93 $ 3.64 $ 4.28 $ 4.71 $ 5.37
Dividend payout ratio ...................................................... 22.61% 21.58% 21.77% 23.20% 19.91%
Interest rate spread (difference between average yield on interest-
earning assets and average cost of interest-bearing liabilities) ......... 3.50% 3.64% 4.14% 3.65% 3.64%
Net interest margin (net interest income as a percentage of average
interest-earning assets) ................................................. 3.57% 3.77% 4.24% 3.67% 3.64%
Allowance for loan losses to total net loans at end of period .............. 1.35% 1.42% 1.42% 1.40% 1.39%
Ratio of non-performing assets to total assets (1) ......................... 0.73% 0.74% 0.48% 0.77% 0.51%
Tangible capital ratio ..................................................... 6.56% 7.28% 6.57% 7.14% 7.44%
Core capital ratio ......................................................... 6.56% 7.28% 6.57% 7.14% 7.44%
Risk-based capital ratio ................................................... 12.45% 13.30% 12.74% 13.17% 13.55%
(1) Nonperforming assets consist of nonaccrual loans 90 days or more past due
and real estate acquired through foreclosure.
3
Dear Friends
2004 really was a very good year!
In addition to achieving record levels in Core Deposits, Core Earnings and Share
Price, we witnessed an encouraging demonstration of the tremendous personal
growth and development of many of our key Leaders in undertaking significant
roles of responsibility as we began the most important transformation we have
undertaken since our conversion to public ownership in 1990.
In the 2003 Annual Report, we reviewed and discussed our level of readiness to
undertake the ambitious challenge of Transforming Coastal Financial Corporation
From A Very Good Organization Into An Exceptional Organization and concluded
that, while it would indeed be challenging, it could only be accomplished by
working toward developing an even deeper understanding of and focus on our QUEST
FOR EXCELLENCE Business Model.
Accordingly, during this past year, in addition to celebrating our first fifty
years of operation, we spent considerable time examining our strengths,
weaknesses and opportunities, and in planning and organizing our efforts in
preparation for that journey.
Through that discovery-based process, we learned two very important things this
year. First, we further confirmed our belief that we are an organization
comprised of truly exceptional Associates who possess a strong sense of
appreciation for the Principles, Values and direction in which our organization
is moving. And, second, as Alexander Graham Bell learned long ago that "the
sun's rays do not burn until brought to a focus," we learned this year through
our discovery initiatives that we must simplify and bring into crystal clear
focus those very few critical things which each of us must do on a daily basis
in order to achieve Our Basic Corporate Objective Of Maximizing The Value Of Our
Shareholders' Investment and Our Long-Term Goal Of Being The Best Financial
Services Company In Our Marketplace.
In addition to undertaking the discovery, planning and organizational
initiatives in support of this transformational journey, our ever-increasing
focus on and commitment to our QUEST FOR EXCELLENCE Business Model and Vision
2005 Plan continued to guide our operations during 2004 and has produced another
year of exceptional financial results and some notable accomplishments:
o Coastal Financial Corporation's net income for 2004 totaled $14.8
million, compared to $11.2 million in 2003. On a fully diluted
basis, these results equated to a 29.0% increase, from $0.69 per
share in 2003 to $0.89 per share in 2004. Major contributors to this
growth in net income were continued strong Core Deposit and loan
growth and effective expense control.
o Deposits increased by approximately $56.4 million, or 8.1% to $753.4
million. Over the past three years, our average rate of deposit
growth has been 14% per year.
o Net loans receivable grew by 15.8%, primarily reflecting our
continued strong focus on our Business Banking operations.
o Coastal Investor Services, our Investment Services Division, had
another banner year with assets under management through Raymond
James Services, increasing by 23.0% to $261.4 million. Total
revenues from this area of our operations continued to increase,
resulting in Raymond James Financial Services ranking Coastal
Investor Services Branch #4, out of over 260 Financial Institution
Division offices.
o Our branch distribution system continued to expand to serve more of
the Communities of coastal North and South Carolina. Since October
of 1998, Coastal Federal has added 9 new branches to our rapidly
growing network - 50 percent of our existing branches. During 2004,
we completed construction of new branch facilities in Shallotte,
North Carolina and Loris, South Carolina and are currently nearing
completion of our newest branch office which is located on 17th
Street in the heart of the growing Wilmington, North Carolina
marketplace.
o In support of our primary focus on the significant growth of
Checking Account based relationships, during 2004, our Finance Group
developed and implemented a totally new financial management and
reporting system. This new system, based upon simple,
straightforward and enduring principles which are an outgrowth of
the well-grounded philosophies of our QUEST FOR EXCELLENCE Business
Model, will allow our organization to focus with much better clarity
on key result areas in a more aligned and consistent manner.
4
Dear Friends
o Coastal Federal University continued to enable Coastal Financial
Corporation's superior performance through its never-ending focus on
our philosophy of becoming a learning organization. In addition to
delivering an enhanced array and number of curriculum offerings
designed to enable each of our Associates to achieve their full
personal and professional potential, during 2004, the Dean of
Coastal Federal University, together with our exceptional faculty
and the members of the FANtastic! Customer Service Experience Team
and the Totally Free Checking Team helped to facilitate our progress
in a significant way. Through their work in developing, teaching and
reinforcing the principles which we use to maintain a laser-like
focus on what our Customers want and need, our new strategies have
gained immediate traction throughout our organization. Another key
achievement in support of our Transformation To An Exceptional
Organization was evidenced by the significant expansion of our
Leadership Development College. This initiative is crucial to our
philosophy of promoting our own Associates into the Leadership
positions which are created as a result of our growth.
In addition to the excellent operating results and Transformational progress
achieved this past year, the market price of Coastal Financial's common stock,
at September 30, 2004, was 25.0% higher than the market price at September 30,
2003.
Equally as impressive is the fact that, since 1990, our operating earnings have
increased at a compound annualized rate in excess of 17%.
Since becoming a publicly owned company in 1990, Coastal Financial Corporation's
stock has grown at a compound annual rate of over 31%, taking our market
capitalization from $4.6 million in October 1990, to $229.7 million at the close
of this fiscal year. Put another way, an initial investment of $10,000 in
October of 1990 would have grown to $467,900 at September 30, 2004.
One of the best indicators of performance is Return On Shareholders' Equity, and
this measure for 2004 was, again, outstanding. Our Return On Average
Shareholders' Equity of 18.8% ranks us among the top performing financial
services companies in America.
Our own sense of satisfaction with these financial results during 2004 was
augmented with continued public recognition of our progress toward the
attainment of Our Basic Corporate Objective Of Maximizing The Value Of Our
Shareholders' Investment and Our Long-Term Goal Of Being The Best Financial
Services Company In Our Marketplace. Several very good examples follow:
o Coastal Financial Corporation, for the 5th consecutive year, was
ranked the #1 Community Bank in the Carolinas by U.S. BANKER
------------
MAGAZINE, in its August 2004 publication. In this edition, U.S.
-------- ----
BANKER MAGAZINE featured its Ranking of the Top 100 Publicly Traded
---------------
Mid-Tier Banks. This ranking spotlighted banks with assets between
$1 and $5 billion, based upon a 3-year average measure of Return On
Average Equity. Coastal Financial Corporation was ranked 1st in the
Carolinas and 30th nationally in this listing.
o Coastal Federal Bank, for the seventh consecutive year, placed 1st
in voting by the readers of the (Myrtle Beach) SUN NEWS in the
--------
Financial Institutions category of the SUN NEWS Best Of The Beach
Competition for 2004. --------
o Coastal Federal Bank placed 1st in voting by the readers of the SUN
---
NEWS in the Mortgage Company category of the SUN NEWS Best Of The
---- --------
Beach Competition for 2004.
o Coastal Investor Services/Raymond James placed 1st in voting by the
readers of the SUN NEWS in the Financial Planning category of the
--------
SUN NEWS Best Of The Beach Competition for 2004.
--------
o The FDIC SUMMARY OF DEPOSITS REPORT ranked Coastal Federal Bank the
--------------------------------
leader in deposit market share for Horry County for the twelve
months ended June 30, 2004.
Examples like these offer strong evidence of the caliber of our organization and
the results which are possible through our ever-increasing focus on our QUEST
FOR EXCELLENCE Business Model and our Vision 2005 Plan.
5
2004 Our Best Year Yet
Considering the multitude of discovery-based, planning and organizational
initiatives undertaken during 2004, our very good operating results continue to
affirm what can be achieved through the aligned effort of an organization which
is anchored to our never-changing Business Purpose, Mission Statement,
Principles and Values. The consciously-held commitment our Associates have for
following our QUEST FOR EXCELLENCE Business Model in executing the strategies
established in our Vision 2005 Plan has enabled the financial performance during
fiscal 2004 which, again met our high expectations and which will serve to
further fuel our Transformation From A Very Good Organization To An Exceptional
Organization.
Noteworthy Financial Results for Fiscal 2004
DILUTED EARNINGS PER SHARE
o Net income for 2004 totaled $14.8 million, compared to $11.2 million
in 2003. On a fully diluted basis, these results equated to a 29.0%
increase, from $0.69 per share in 2003 to $0.89 per share in 2004.
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
$0.52 $0.58 $0.64 $0.69 $0.89
- --------------------------------------------------------------------------------
2000 2001 2002 2003 2004
BOOK VALUE PER SHARE
o Book value per share grew 14.0% to $5.37.
o Shareholders' equity advanced 15.8% to $85.3 million.
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
$2.93 $3.64 $4.28 $4.71 $5.37
- --------------------------------------------------------------------------------
2000 2001 2002 2003 2004
6
2004 Our Best Year Yet
ASSETS
o Total assets increased 10.5%, from $1.2 billion to $1.3 billion.
o Deposits derived from the residents and businesses of the
Communities we serve increased 8.1%, from $697.0 million to $753.4
million, the highest level in the Company's history.
o Loans receivable increased 15.8%, from $682.7 million to $790.7
million.
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
(IN MILLIONS)
$769 $763 $951 $1,181 $1,305
- --------------------------------------------------------------------------------
2000 2001 2002 2003 2004
NON-PERFORMING ASSETS TO TOTAL ASSETS
o Non-performing Assets to Total Assets decreased from 0.77% to 0.51%.
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
0.73% 0.74% 0.48% 0.77% 0.51%
- --------------------------------------------------------------------------------
2000 2001 2002 2003 2004
ALLOWANCE FOR LOAN LOSSES TO NET LOANS
o Allowance for Loan Losses to Net Loans was 1.39%.
o The Company had net loan charge-offs as a percentage of Average
Loans of 0.07% in 2004.
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
1.35% 1.42% 1.42% 1.40% 1.39%
- --------------------------------------------------------------------------------
2000 2001 2002 2003 2004
Our success in these key measures of performance is the result of the
commitment, dedication and aligned effort of a truly outstanding group of
Associates who share a passion for our QUEST FOR EXCELLENCE Business Model and
Vision 2005 Plan. This continuing trend of exceptional performance has been
rewarded in the financial markets by a 4,466% increase in the price of our
shares since becoming a public company in October of 1990, vs. 267% for the
Standard & Poors 500 Index over the same period.
7
2004 Our Best Year Yet
The momentum we have achieved and sustained since our conversion to public
ownership has resulted from the methodic focus of our individual and collective
efforts on accomplishing Our Basic Corporate Objective Of Maximizing The Value
Of Our Shareholders' Investment by working diligently toward the achievement of
Our Long-Term Goal Of Being The Best Financial Services Company In Our
Marketplace.
Over the past fourteen years, our compounded Shareholder return of 31% has,
indeed, been impressive. In evaluating our progress toward the attainment of Our
Basic Corporate Objective since becoming publicly owned, it is both informative
and illustrative to compare the share price performance of Coastal Financial
Corporation to the share price performance of other publicly traded financial
services companies operating within our marketplace, and to the financial
markets as a whole.
In the following graphs, we have compared the share price performance of (CFCP)
Coastal Financial Corporation to the Nasdaq, S&P 500 and Dow Indices, and to
(TSFG) The South Financial Group, the parent company of Carolina First Bank,
(WB) Wachovia Corporation, the parent company of Wachovia Bank, (SNV) Synovus
Financial Corporation, the parent company of NBSC, (BBT) BB&T Corporation, the
parent company of BB&T, (BAC) Bank of America Corporation, the parent company of
Bank of America, (FFCH) First Financial Holdings, Inc., the parent company of
First Federal Savings and Loan Association of Charleston and (COOP) Cooperative
Bankshares, Inc., the parent company of Cooperative Bank.
As shown by these graphic representations, which take a look back over our
history as a publicly owned company, the price of Coastal Financial
Corporation's shares has significantly outperformed the price of the shares of
the other publicly traded financial services companies in our marketplace, as
well as the Nasdaq, S&P 500 and Dow Indices. These historical results may not be
indicative of future stock price performance.
14 Year Peer Group Price Performance
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
Coastal Financial Corporation (CFCP) BB&T Corporation (BBT) South Financial Group, Inc. (TSFG)
Monthly prices Monthly prices Monthly prices
DATE DATE DATE
Oct-90 100 Oct-90 100.00 Oct-90 100.00
Oct-91 100 Oct-91 151.39 Oct-91 104.96
Oct-92 305.6051 Oct-92 191.67 Oct-92 149.62
Oct-93 792.2464 Oct-93 231.94 Oct-93 177.10
Oct-94 896.8847 Oct-94 229.17 Oct-94 180.15
Oct-95 874.4613 Oct-95 286.11 Oct-95 180.15
Oct-96 1471.45 Oct-96 384.72 Oct-96 213.74
Oct-97 2195.444 Oct-97 604.86 Oct-97 333.97
Oct-98 2366.66 Oct-98 794.44 Oct-98 352.10
Oct-99 1743.855 Oct-99 808.33 Oct-99 315.84
Oct-00 1510.613 Oct-00 708.33 Oct-00 155.53
Oct-01 2006.961 Oct-01 713.33 Oct-01 243.51
Oct-02 3088.126 Oct-02 805.56 Oct-02 330.53
Oct-03 4240.6 Oct-03 859.33 Oct-03 399.08
Oct-04 4565.561 Oct-04 882.00 Oct-04 430.53
Cooperative Bankshares, Inc. (COOP) First Financial Holdings, Inc. (FFCH) Bank of America Corporation (BAC)
Monthly prices Monthly prices Monthly prices
DATE DATE DATE
Oct-90 100.00 Oct-90 100.00 Oct-90 100.00
Oct-91 100 Oct-91 148.48 Oct-91 216.67
Oct-92 293.7499 Oct-92 234.85 Oct-92 268.12
Oct-93 421.875 Oct-93 363.64 Oct-93 270.29
Oct-94 513.2813 Oct-94 363.64 Oct-94 286.96
Oct-95 618.75 Oct-95 448.48 Oct-95 381.16
Oct-96 527.3438 Oct-96 484.85 Oct-96 546.38
Oct-97 942.1875 Oct-97 936.36 Oct-97 693.48
Oct-98 731.25 Oct-98 933.33 Oct-98 666.67
Oct-99 590.625 Oct-99 906.06 Oct-99 747.10
Oct-00 541.4063 Oct-00 818.18 Oct-00 557.25
Oct-01 646.875 Oct-01 1204.36 Oct-01 683.94
Oct-02 787.5 Oct-02 1239.27 Oct-02 809.28
Oct-03 1316.25 Oct-03 1461.33 Oct-03 878.03
Oct-04 1355.625 Oct-04 1515.64 Oct-04 1004.75
Synovus Financial Corp. (SNV) Wachovia Corporation (WB)
Monthly prices Monthly prices
DATE DATE
Oct-90 100.00 Oct-90 100.00
Oct-91 140.38 Oct-91 206.19
Oct-92 173.08 Oct-92 267.26
Oct-93 216.35 Oct-93 287.61
Oct-94 220.67 Oct-94 318.58
Oct-95 292.79 Oct-95 351.33
Oct-96 517.07 Oct-96 515.04
Oct-97 564.66 Oct-97 694.69
Oct-98 902.98 Oct-98 821.24
Oct-99 834.83 Oct-99 605.31
Oct-00 839.69 Oct-00 429.20
Oct-01 896.45 Oct-01 404.96
Oct-02 797.93 Oct-02 492.60
Oct-03 1074.81 Oct-03 649.49
Oct-04 1018.34 Oct-04 664.78
The financial results depicted above indicate that our business has continued to
grow and prosper over the years. And our 2004 operating and share price
performance clearly puts Coastal Financial among the top performing financial
services companies in the nation. But, as good as these results are, it's always
the future that we are most interested in, and it always leads to the question
we're often asked: "Can we keep it up?"
We continue to believe the answer is a resounding "Yes," as long as we remain
focused on our QUEST FOR EXCELLENCE Business Model and the goals established in
our Vision 2005 Plan.
CFCP Relative Price Performance
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
Monthly prices Indexes
S&P 500 DOW JONES DOW JONES
DATE INDEX (SPX) NASDAQ INDUSTRIAL DATE S&P 500 NASDAQ INDUSTRIAL CFCP
- ---- ----------- ------ ---------- ---- ------- ------ ---------- ----
Oct-90 304.0 329.8 2442.3 Oct-90 100 100 100 100
Oct-91 392.5 543.0 3069.1 Oct-91 129.0953947 164.6391753 125.6627892 100
Oct-92 418.7 605.2 3226.3 Oct-92 137.7236842 183.4960582 132.098447 305.7667387
Oct-93 467.8 779.3 3680.6 Oct-93 153.8914474 236.2825955 150.6999464 755.1197084
Oct-94 472.4 777.5 3908.1 Oct-94 155.3782895 235.7459066 160.0160502 854.8521944
Oct-95 581.5 1036.1 4755.5 Oct-95 191.2828947 314.1479685 194.7107885 875.1548445
Oct-96 705.3 1221.5 6029.4 Oct-96 231.9967105 370.3790176 246.8699971 1472.616518
Oct-97 914.6 1593.6 7442.1 Oct-97 300.8618421 483.2049727 304.7123034 2197.231944
Oct-98 1098.7 1771.4 8592.1 Oct-98 361.4046053 537.1103699 351.7993064 2368.641903
Oct-99 1362.9 2966.4 10729.9 Oct-99 448.3322368 899.4633111 439.3304754 1745.314976
Oct-00 1429.4 3369.6 10971.1 Oct-00 470.1973684 1021.719224 449.2062907 1511.879058
Oct-01 1059.8 1690.2 9075.1 Oct-01 348.6118421 512.4924196 371.5771415 2008.639201
Oct-02 885.76 1329.75 8397.03 Oct-02 291.3684211 403.1989084 343.8122612 3090.712408
Oct-03 1050.71 1932.21 9801.12 Oct-03 345.6283 585.8733 401.302 3656.133909
Oct-04 1114.58 1896.84 10080.27 Oct-04 366.6382 575.1486 412.7317 4565.561
8
A Look Back
Oliver Wendell Holmes once said, "The great thing in this world is not so much
where we are, but in what direction we are moving."
The Dedication Page of our 2003 Annual Report began the discussion about
Transforming Our Very Good Organization Into An Exceptional Organization. This
was not just a caption chosen for the purpose of that presentation, but, rather,
was intended as an outward expression of our Corporate Philosophy of viewing
change and constant improvement as essential to the achievement of our long-term
objectives.
And during 2004, we began our quest for Transforming Coastal Financial
Corporation From A Very Good Organization Into An Exceptional One in a powerful
way.
It started with internal survey results which confirmed that our Associates
truly understood, owned and were energized by our QUEST FOR EXCELLENCE Business
Model and which lead us to clarify our understanding of desired business results
by creating a laser-like focus on those very few goals which could best enable
the attainment of our most important objectives.
Upon having fine-tuned our focus through this process, we next identified
several organizations which we believed could aid us in developing the best
practices necessary in creating the world-class Customer Service Experiences
which would radically differentiate Coastal Financial from our competition. We
then developed relationships with those organizations as we endeavored to
benchmark and adopt certain of their best practices in restructuring our
approach to the execution of our Business Model.
Through the many projects which were undertaken in preparation for The
Transformation Of Coastal Financial Corporation From A Very Good Organization
Into An Exceptional Organization, two significant outcomes resulted.
The first was The Experience of FANtastic! Customer Service.
And the second was Totally Free Checking With A Gift.
Both of these initiatives, which were introduced in the latter part of the
fourth quarter of 2004, have been extremely well received by our Associates and
our Customers.
These approaches were intended from the outset to serve as the primary catalysts
in Transforming our organization into an exciting retail environment by offering
and promoting a truly exceptional Checking Account product with a gift and by
ensuring that our Customers would look forward to enjoyable and memorable
experiences on every visit.
The Experience of FANtastic! Customer Service
Totally Free
Checking With A Gift
9
Looking Ahead
The tremendous progress we made during 2004 toward The Transformation Of Coastal
Financial From A Very Good Organization Into An Exceptional Organization has
enabled us to begin our journey with a very good start. But, it is just that ...
a starting point. From here, as envisioned in the first drafts of our Vision
2010 Plan, there is much to be done and many waypoints to pass in this journey
which will never end, as we strive to fully develop our new Customer Service and
Convenience strategies and continuously create and systemically improve upon our
offerings of products and services.
What must we do next? We must work diligently to sustain and enhance our focus
on improving those attributes which will clearly set Coastal Federal Bank apart
from our crowded marketplace by "inculturating" our organization with two
primary goals. First, we must excel at marketing and selling Totally Free
Checking With A Gift by mastering and then improving upon our skills to execute
our sales processes exceptionally well. And, second, we must remain totally
focused on providing every Customer, on every visit, on every transaction, The
Experience of FANtastic! Customer Service by executing our Customer Service and
Convenience strategies with precision and alignment.
In so doing, we will continuously advance to the next waypoint in our
never-ending journey toward Transforming Our Organization From A Very Good One
Into An Exceptional Organization by building an exceptional retail model which
can be replicated with a high degree of certainty in both contiguous and
non-contiguous market areas.
The progress and success we have enjoyed over the past fourteen years as a
public company has well positioned us for this ambitious quest. And, while we
are very fortunate to be located in one of the best markets in America, and
enjoy many competitive advantages, all of the success that Coastal Financial has
achieved over these years is due to our exceptional team of Associates. And we
have the best team imaginable.
My sincere appreciation goes to our Board of Directors, Leadership Group and
Associates for all they do for all of us on a daily basis. Our 2004 results
speak volumes about their commitment to Our Basic Corporate Objective Of
Maximizing The Value Of Our Shareholders' Investment by working diligently
toward the achievement of Our Long-Term Goal Of Being The Best Financial
Services Company In Our Marketplace.
During 2003 and 2004, both revenue and earnings reached record levels. In fact,
in these two years alone, our net income has grown over 45%, and in the last
five years, our net income has increased by more than 92%. Since becoming a
publicly owned Company in 1990, we have roughly doubled our earnings every five
years.
While we are very pleased with our past achievements, in continuing the journey
we began during 2004, we look forward to even greater accomplishments in the
years ahead. With the advantages of our exceptional Associates, who believe in
our Principles, Values and the direction in which we are moving, our great
markets, our excellent new Checking Account products, our new Customer Service
and Convenience strategies and our ever-increasing ability to work together, as
a team, toward building even stronger relationships with our Customers and our
Communities, we have great confidence that our quest for Transforming Our Very
Good Organization Into An Exceptional Organization will continue to progress and
that, as a result, we will be better enabled to continue to achieve superior
returns for our Shareholders in the future.
All of us at Coastal Financial Corporation appreciate your continued
encouragement, loyalty and support, and look to the future with great enthusiasm
and excitement.
/s/ Michael C. Gerald
Michael C. Gerald
President and
Chief Executive Officer
COASTAL COASTAL [LOGO] [LOGO] CFU
FEDERAL INVESTOR COASTAL COASTAL FEDERAL
BANK SERVICES RETIREMENT o ESTATE o TAX UNIVERSITY
The right bank for you. PLANNERS
10
Report of Independent Registered Public Accounting Firm
The Board of Directors
Coastal Financial Corporation
Myrtle Beach, South Carolina
We have audited the consolidated statements of financial condition of Coastal
Financial Corporation and subsidiaries (the "Company") as of September 30, 2003
and 2004, and the related consolidated statements of operations, stockholders'
equity and comprehensive income, and cash flows for each of the years in the
three-year period ended September 30, 2004. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company at
September 30, 2003 and 2004, and the results of its operations and its cash
flows for each of the years in the three-year period ended September 30, 2004,
in conformity with U.S. generally accepted accounting principles.
Greenville, South Carolina
November 12, 2004
/s/ KPMG LLP
11
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Financial Condition
September 30, 2003 and 2004
2003 2004
----------- ----------
(Dollars in thousands)
ASSETS
Cash and amounts due from banks ........................................ $ 18,605 28,401
Short-term interest-bearing deposits ................................... 2,970 1,251
Investment securities available for sale ............................... 15,909 23,449
Mortgage-backed securities available for sale .......................... 383,324 374,283
Investment securities held to maturity ................................. -- 7,840
Loans receivable (net of allowance for loan losses of $9,832
at September 30, 2003 and $11,077 at September 30, 2004) ............ 682,737 790,730
Loans receivable held for sale ......................................... 19,096 8,246
Real estate acquired through foreclosure, net .......................... 1,627 785
Office property and equipment, net ..................................... 16,088 18,844
Federal Home Loan Bank (FHLB) stock, at cost ........................... 13,991 16,900
Accrued interest receivable on loans ................................... 2,258 2,877
Accrued interest receivable on securities .............................. 2,074 2,473
Bank-owned life insurance .............................................. 16,165 21,627
Other assets ........................................................... 6,365 7,779
----------- ----------
$ 1,181,209 1,305,485
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits ............................................................. 697,012 753,379
Securities sold under agreements to repurchase ....................... 133,602 107,173
Advances from FHLB ................................................... 244,114 328,507
Junior subordinated debt ............................................. -- 15,464
Debt associated with trust preferred securities ...................... 15,000 --
Other borrowings ..................................................... 81 --
Drafts outstanding ................................................... 2,644 2,792
Advances by borrowers for property taxes and insurance ............... 1,795 1,750
Accrued interest payable ............................................. 1,263 1,502
Other liabilities .................................................... 11,991 9,570
----------- ----------
Total liabilities ................................................ 1,107,502 1,220,137
----------- ----------
Stockholders' equity:
Serial preferred stock, 1,000,000 shares authorized and unissued ..... -- --
Common stock $.01 par value, 25,000,000 shares authorized;
15,634,771 shares at September 30, 2003 and 15,897,076
shares at September 30, 2004 issued and outstanding .......... 156 159
Additional paid-in capital ........................................... 10,208 10,640
Retained earnings, restricted ........................................ 63,030 73,533
Treasury stock, at cost (334,508 shares at September 30,
2003 and 108,557 shares at September 30, 2004) ................... (3,375) (1,182)
Accumulated other comprehensive income, net of tax ................... 3,688 2,198
----------- ----------
Total stockholders' equity ....................................... 73,707 85,348
----------- ----------
$ 1,181,209 1,305,485
=========== ==========
See accompanying notes to consolidated financial statements.
12
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended September 30, 2002, 2003 and 2004
2002 2003 2004
------------ ------------ ------------
(In thousands, except share data)
Interest:
Loans receivable ................................................ $ 40,261 41,958 46,765
Investment securities ........................................... 2,030 1,840 2,886
Mortgage-backed securities ...................................... 11,348 15,279 16,067
Other ........................................................... 234 137 87
------------ ------------ ------------
Total interest income ............................................. 53,873 59,214 65,805
------------ ------------ ------------
Interest expense:
Deposits ........................................................ 13,750 11,999 10,024
Securities sold under agreements to repurchase .................. 414 1,718 2,114
Advances from FHLB .............................................. 7,682 9,068 10,724
Other borrowings ................................................ -- 213 662
------------ ------------ ------------
Total interest expense ....................................... 21,846 22,998 23,524
------------ ------------ ------------
Net interest income .......................................... 32,027 36,216 42,281
Provision for loan losses ......................................... 1,235 2,655 1,750
------------ ------------ ------------
Net interest income after provision for loan losses .......... 30,792 33,561 40,531
------------ ------------ ------------
Other income:
Fees and service charges on loan and deposit accounts ........... 3,148 3,489 3,771
Gain on sales of loans held for sale ............................ 1,462 2,985 1,523
Gain (loss) on sales of investment securities, net .............. 102 -- (100)
Gain (loss) on sales of mortgage-backed securities, net ......... 238 469 (997)
Gain (loss) from real estate acquired through foreclosure ....... (137) (18) 3
Income from sales of non-depository products .................... 1,281 1,176 1,909
Federal Home Loan Bank stock dividends .......................... 463 453 499
Other income .................................................... 1,582 2,354 2,563
------------ ------------ ------------
Total other income ........................................... 8,139 10,908 9,171
------------ ------------ ------------
General and administrative expenses:
Salaries and employee benefits .................................. 12,514 13,452 16,099
Net occupancy, furniture and fixtures and
data processing expense ....................................... 5,044 5,917 6,176
FDIC insurance premium .......................................... 93 104 104
FHLB prepayment penalties ....................................... 1,083 2,824 77
Other expense ................................................... 4,090 4,859 4,813
------------ ------------ ------------
Total general and administrative expense ...................... 22,824 27,156 27,269
------------ ------------ ------------
Income before income taxes .................................... 16,107 17,313 22,433
Income taxes ...................................................... 5,901 6,141 7,627
------------ ------------ ------------
Net income ........................................................ $ 10,206 11,172 14,806
============ ============ ============
Net income per common share
Basic ........................................................... $ 0.66 0.72 0.94
============ ============ ============
Diluted ......................................................... $ 0.64 0.69 0.89
============ ============ ============
Average common shares outstanding
Basic ........................................................... 15,541,000 15,552,000 15,752,000
============ ============ ============
Diluted ......................................................... 16,017,000 16,264,000 16,625,000
============ ============ ============
See accompanying notes to consolidated financial statements.
13
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
and Comprehensive Income
Years ended September 30, 2002, 2003 and 2004
Accumulated
Additional Other Total
Common Paid-in Retained Treasury Comprehensive Stockholders'
Stock Capital Earnings Stock Income Equity
------- ---------- -------- -------- -------- --------
(In thousands)
Balance at September 30, 2001 .......................... $ 156 9,695 47,496 (3,620) 3,521 57,248
Exercise of stock options .............................. -- 200 (526) 1,529 -- 1,203
Cash dividends ......................................... -- -- (2,222) -- -- (2,222)
Net income ............................................. -- -- 10,206 -- -- 10,206
Other comprehensive income, net of tax:
Unrealized gains arising during period,
net of taxes of $1,500 ............................... -- -- -- -- 2,449 --
Less: reclassification adjustment for gains
included in net income, net of taxes of $128 ......... -- -- -- -- (212) --
------- -------- -------- -------- -------- --------
Other comprehensive income ............................. -- -- -- -- 2,237 2,237
------- -------- -------- -------- -------- --------
Comprehensive income ................................... -- -- -- -- -- 12,443
------- -------- -------- -------- -------- --------
Treasury stock repurchases ............................. (1) -- -- (2,285) -- (2,286)
------- -------- -------- -------- -------- --------
Balance at September 30, 2002 .......................... 155 9,895 54,954 (4,376) 5,758 66,386
Exercise of stock options .............................. 1 313 (504) 1,343 -- 1,153
Cash dividends ......................................... -- -- (2,592) -- -- (2,592)
Net income ............................................. -- -- 11,172 -- -- 11,172
Other comprehensive income, net of tax:
Unrealized losses arising during period,
net of taxes of $1,097 ............................... -- -- -- -- (1,779) --
Less: reclassification adjustment for gains
included in net income, net of taxes of $178 ......... -- -- -- -- (291) --
------- -------- -------- -------- -------- --------
Other comprehensive loss ............................... -- -- -- -- (2,070) (2,070)
------- -------- -------- -------- -------- --------
Comprehensive income ................................... -- -- -- -- -- 9,102
------- -------- -------- -------- -------- --------
Treasury stock repurchases ............................. -- -- -- (342) -- (342)
------- -------- -------- -------- -------- --------
Balance at September 30, 2003 .......................... 156 10,208 63,030 (3,375) 3,688 73,707
Exercise of stock options .............................. 3 432 (1,355) 2,193 -- 1,273
Cash dividends ......................................... -- -- (2,948) -- -- (2,948)
Net income ............................................. -- -- 14,806 -- -- 14,806
Other comprehensive income, net of tax:
Unrealized losses arising during period,
net of taxes of $1,330 ............................... -- -- -- -- (2,170) --
Less: reclassification adjustment for losses included
in net income, net of tax benefit of $417 ............ -- -- -- -- 680 --
------- -------- -------- -------- -------- --------
Other comprehensive loss ............................... -- -- -- -- (1,490) (1,490)
------- -------- -------- -------- -------- --------
Comprehensive income ................................... -- -- -- -- -- 13,316
------- -------- -------- -------- -------- --------
Balance at September 30, 2004 .......................... $ 159 10,640 73,533 (1,182) 2,198 85,348
======= ======== ======== ======== ======== ========
See accompanying notes to consolidated financial statements.
14
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended September 30, 2002, 2003 and 2004
2002 2003 2004
--------- --------- ---------
(In thousands)
Cash flows from operating activities:
Net income ........................................................................ $ 10,206 11,172 14,806
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation ................................................................... 2,074 2,374 2,175
Provision for loan losses ...................................................... 1,235 2,655 1,750
(Gain) loss on sale of mortgage-backed securities available for sale ........... (238) (469) 997
(Gain) loss on sale of investment securities available or sale ................. (102) -- 100
Origination of loans receivable held for sale .................................. (100,309) (141,404) (63,448)
Proceeds from sales of loans receivable held for sale .......................... 13,907 45,367 27,453
Loss on early extinguishment of debt ........................................... 1,083 2,824 77
Increase in:
Cash value of life insurance ................................................. -- (665) (962)
Other assets ................................................................. (2,006) (157) (2,290)
Accrued interest receivable .................................................. (127) (81) (1,018)
Increase (decrease) in:
Accrued interest payable ..................................................... 289 (210) 239
Other liabilities ............................................................ 2,176 (65) (168)
--------- --------- ---------
Net cash used in operating activities ........................................ (71,812) (78,659) (20,289)
--------- --------- ---------
Cash flows from investing activities:
Proceeds from sales of investment securities available for sale ................... -- -- 2,881
Proceeds from maturities of investment securities available for sale .............. 1,995 2,000 2,000
Purchases of investment securities available for sale ............................. (1,998) (16,141) (11,866)
Purchases of investment securities held to maturity ............................... -- -- (7,840)
Purchases of loans receivable ..................................................... (233) -- --
Proceeds from sales of mortgage-backed securities available for sale .............. 128,169 135,413 171,324
Purchases of mortgage-backed securities available for sale ........................ (254,494) (328,245) (234,672)
Principal collected on mortgage-backed securities available for sale .............. 72,990 234,321 115,179
Origination of loans receivable, net .............................................. (317,899) (628,172) (513,858)
Principal collected on loans receivable ........................................... 268,120 477,676 403,501
Purchase of bank-owned life insurance ............................................. -- (15,500) (4,500)
Proceeds from sales of real estate acquired through foreclosure ................... 1,997 1,374 1,456
Proceeds from sale of office properties and equipment ............................. -- -- 58
Purchases of office properties and equipment ...................................... (2,637) (4,749) (4,989)
Purchases of FHLB stock, net ...................................................... (2,935) (3,432) (2,909)
--------- --------- ---------
Net cash used in investing activities ........................................ (106,925) (145,455) (84,235)
--------- --------- ---------
Cash flows from financing activities:
Increase in deposits .............................................................. 106,717 59,931 56,367
Increase (decrease) in securities sold under agreements to repurchase ............. 18,181 96,718 (26,429)
Proceeds from FHLB advances ....................................................... 312,426 715,705 686,476
Repayment of FHLB advances ........................................................ (262,793) (661,260) (602,083)
Repayments from other borrowings, net ............................................. -- (1,988) (81)
Issuance of debt associated with trust preferred securities ....................... -- 15,000 --
Cash payments for debt issuance costs ............................................. -- (150) --
Prepayment penalties on early extinguishment of debt .............................. (1,083) (2,824) (77)
Increase (decrease) in advance payments by borrowers for property
taxes and insurance .......................................................... 136 409 (45)
Increase (decrease) in drafts outstanding, net .................................... (60) 127 148
Repurchase of treasury stock, at cost ............................................. (2,286) (342) --
Cash dividends to stockholders and cash for fractional shares ..................... (2,222) (2,592) (2,948)
Exercise of stock options ......................................................... 1,203 1,153 1,273
--------- --------- ---------
Net cash provided by financing activities .................................... 170,219 219,887 112,601
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents ............................... (8,518) (4,227) 8,077
--------- --------- ---------
Cash and cash equivalents at beginning of year ..................................... 34,320 25,802 21,575
--------- --------- ---------
Cash and cash equivalents at end of year ........................................... $ 25,802 21,575 29,652
========= ========= =========
Supplemental information:
Interest paid ..................................................................... $ 21,557 23,208 23,285
========= ========= =========
Income taxes paid ................................................................. $ 5,726 5,325 7,762
========= ========= =========
Supplemental schedule of non-cash investing and financing transactions:
Securitization of mortgage loans into mortgage-backed securities .................. $ 83,982 95,635 46,845
========= ========= =========
Transfer of mortgage loans to real estate acquired through foreclosure ............ $ 680 1,955 614
========= ========= =========
Increase in other assets and junior subordinated debt resulting from
deconsolidation under FIN 46R ............................................... $ -- -- 464
========= ========= =========
See accompanying notes to consolidated financial statements.
15
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of the more significant accounting policies
used in the preparation and presentation of the accompanying consolidated
financial statements. The preparation of financial statements in conformity with
U.S. generally accepted accounting principles requires management to make
estimates and assumptions. These estimates and assumptions affect the reported
amount of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements. In addition, they affect
the reported amounts of income and expenses during the reporting period. Actual
results could differ from these estimates and assumptions. Material estimates
that are particularly susceptible to signigicant change relate to the
determination of the allowance for loan losses and income tax assets or
liabilities. To a lesser extent, significant estimates are also associated with
the valuation of derivative instruments and valuation of mortgage servicing
rights.
(a) Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Coastal Financial Corporation (the "Company"), and its wholly-owned
subsidiaries, Coastal Financial Capital Trust I, a statutory trust (which was
deconsolidated at December 31, 2003 - See Note 11), Coastal Investor Services,
Inc., Coastal Planners Holding Corporation (and Coastal Planners Holding
Corporation's wholly-owned subsidiary, Coastal Retirement, Estate and Tax
Planners, Inc.), Coastal Federal Bank (the "Bank") (and the Bank's wholly-owned
subsidiaries, Coastal Federal Holding Company (and Coastal Federal Holding
Company's wholly-owned subsidiary, Coastal Real Estate Investment Corporation),
and Coastal Mortgage Bankers and Realty Co., Inc. (and Coastal Mortgage Bankers
and Realty Co. Inc.'s wholly-owned subsidiaries, Shady Forest Development
Corporation, Sherwood Development Corporation, Ridge Development Corporation,
501 Development Corporation and North Beach Investments, Inc.).
Shady Forest Development Corporation, Ridge Development Corporation, 501
Development Corporation and North Beach Investments, Inc. were dissolved
effective September 30, 2004. In consolidation, all significant intercompany
balances and transactions have been eliminated. Coastal Financial Corporation is
a unitary thrift holding company organized under the laws of the state of
Delaware.
(b) Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include
cash and amounts due from banks, short-term interest-bearing deposits and
federal funds sold. Cash and cash equivalents have maturities of three months or
less. Accordingly, the carrying amount of such instruments is considered to be a
reasonable estimate of fair value.
(c) Investment and Mortgage-backed Securities
Investment and mortgage-backed securities are accounted for in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting
for Certain Investments in Debt and Equity Securities". Investments are
classified into three categories as follows: (1) Held to Maturity - debt
securities that the Company has the positive intent and ability to hold to
maturity, which are reported at amortized cost; (2) Trading - debt and equity
securities that are bought and held principally for the purpose of selling them
in the near term, which are reported at fair value, with unrealized gains and
losses included in earnings and (3) Available for Sale - debt and equity
securities that may be sold under certain conditions, which are reported at fair
value, with unrealized gains and losses excluded from earnings and reported
accumulated other comprehensive income as a separate component of stockholders'
equity, net of income taxes.
The Company determines investment and mortgage-backed securities
classification at the time of purchase. Premiums and discounts on securities are
accreted or amortized as an adjustment to income over the estimated life of the
security using a method which approximates a level yield. Dividends and interest
income are recognized when earned. Unrealized losses on securities, reflecting a
decline in value judged by the Company to be other than temporary, are charged
to income in the consolidated statements of operations.
The cost basis of securities sold is determined by specific
identification. Purchases and sales of securities are recorded on a trade date
basis. The fair value of securities is based on quoted market prices or dealer
quotes.
16
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
(d) Loans Receivable Held for Sale
Mortgage loans originated and intended for sale in the secondary market
are carried at the lower of cost or estimated market value in the aggregate. Net
unrealized losses are provided for in a valuation allowance by charges to
operations. At September 30, 2003 and 2004, the Company had approximately $19.1
million and $8.2 million in mortgage loans held for sale, respectively. Gains or
losses on sales of loans are recognized when control over these assets has been
surrendered in accordance with SFAS No. 140, "Accounting for Transfer and
Servicing of Financial Assets and Extinguishment of Liabilities" ("SFAS No.
140").
(e) Loans Receivable
Loans receivable are stated at unpaid principal balances adjusted for
unamortized premiums and unearned discounts and deferred loan fees/costs. The
Company recognizes interest income on loans using the simple interest method.
The Company follows SFAS No. 114, "Accounting by Creditors for Impairment
of a Loan," for determining impairment on certain loans. SFAS No. 114 requires
that nonhomogenous impaired loans and certain restructured loans be measured at
the present value of expected future cash flows discounted at the loan's
effective interest rate, at the loan's observable market price or at the fair
value of the collateral if the loan is collateral dependent. A specific reserve
is set up for each impaired loan. Accrual of interest income on impaired loans
is suspended when, in management's judgment, doubt exists as to the
collectibility of principal and interest. If amounts are received on loans for
which the accrual of interest has been discontinued, a determination is made as
to whether payments received should be recorded as a reduction of the principal
balance or as interest income depending on management's judgment as to the
collectibility of principal. The loan is returned to accrual status when, in
management's judgment, the borrower has demonstrated the ability to make
periodic interest and principal payments on a timely basis.
Loans are charged-off when the amount of loss is reasonably quantifiable
and the loss is likely to occur. Commercial loans are generally placed in
nonaccrual status when they become 90-days delinquent or earlier if full
collection of principal and interest becomes doubtful. Consumer and mortgage
loans are placed in nonaccrual status when they become 90 days delinquent or
earlier if full collection of principal and interest becomes doubtful. Interest
payments received after a loan is placed in nonaccrual are applied as a
principal reduction until such time as the loan is returned to accrual status.
Generally, loans are returned to accrual status when the loan is brought current
and the ultimate collectibility of principal and interest is no longer in doubt.
The Company maintains an allowance for the loss of uncollected interest
primarily on loans which are ninety days or more past due. This allowance is
reviewed periodically and necessary adjustments, if any, are included in the
determination of current interest income.
(f) Loan Fees and Discounts
The net of origination fees received and direct costs incurred in the
origination of loans are deferred as part of the basis of loans and amortized to
interest income over the contractual life of the loans adjusted for actual
principal repayments using a method approximating a level yield.
(g) Allowance for Loan Losses
The allowance for loan loss is based on management's ongoing evaluation of
the loan portfolio and reflects an amount, that in management's opinion, is
adequate to absorb probable losses in the existing portfolio. All loan losses
are charged to the allowance and all recoveries are credited to the allowance.
Additions to the allowance for loan losses are provided by charges to operations
based on various factors which, in management's judgment, deserve current
recognition in estimating losses. Such factors considered by management include
the market value of the underlying collateral, growth and composition of credit
risk within the loan portfolio, loss experience, review of problem assets,
delinquency trends, and local and regional economic conditions. Management
evaluates the carrying value of loans periodically and the allowance is adjusted
accordingly. While management uses the best information available to make
evaluations, future adjustments to the allowance may be necessary if economic
conditions differ substantially from the assumptions used in making the
evaluation. The allowance for loan losses is subject to periodic evaluation by
various regulatory authorities and may be subject to adjustment upon their
examination.
17
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
(h) Concentration of Credit Risk
The Company's primary market area includes northeastern South Carolina and
southeastern North Carolina, predominately along the coastal regions. At
September 30, 2004, the majority of the total loan portfolio, as well as a
substantial portion of the commercial and real estate loan portfolios, were to
borrowers within this region.
The Company has identified two concentrations of credit risk that it is
monitoring. One of these areas involves loans for the acquisition of land and
loans for the development of land, which totaled $102.6 million at September 30,
2004 representing 120.2% of total equity and 13.0% of net loans receivable.
Economic growth and low interest rate environments have created opportunities
for land acquisition and development activities in the Company's market area.
Adverse changes in such factors can also slow absorption of developing projects
and moderate market values of land and developed lots. The other identified
concentration of credit risk is permanent mortgage loans secured by
condominiums, which totaled $65.6 million at September 30, 2004 representing
76.9% of total equity and 8.3% of net loans receivable. The market for
condominium properties in the Company's market area has been very active during
the year ended September 30, 2004, especially in new ocean front condominium
properties, fueling an overall rise in market values for such properties.
However, economic and social changes that affect tourism tend to influence
activity in resort properties and can cause fluctuations in the market values
for such condominium properties. Management continues to monitor these
concentrations of credit risk at this time and has considered these
concentrations in its evaluation of the allowance for loan losses. The Company
experienced no loan losses in either of these identified risks during the years
ending September 30, 2004 and 2003.
(i) Loan Securitizations
The Company packages and sells loans receivable as securities to
investors. These transactions are recorded as sales in accordance with SFAS No.
140 when control over these assets has been surrendered. The Company does not
retain any interest in the securities sold other than the servicing rights.
(j) Real Estate Owned
Real estate acquired in settlement of loans is initially recorded at the
lower of cost or net fair value (less estimated costs to sell). If cost exceeds
net fair value, the asset is written down to net fair value with the difference
being charged against the allowance for loan losses. Subsequent to foreclosure,
such assets are carried at the lower of cost or net fair value with any
additional write downs being charged as real estate losses.
(k) Office Properties and Equipment
Office properties and equipment are carried at cost less accumulated
depreciation. Depreciation is computed primarily on the straight-line method
over estimated useful lives. Estimated lives range up to thirty years for
buildings and improvements and up to ten years for furniture, fixtures and
equipment. Maintenance and repairs are charged to expense as incurred.
Improvements which extend the lives of the respective assets are capitalized.
When property or equipment is sold or otherwise disposed of, the cost and
related accumulated depreciation are removed from the respective accounts and
the resulting gain or loss is reflected in income.
(l) Mortgage Servicing Rights
SFAS No. 140 requires the recognition of originated mortgage servicing
rights ("mortgage servicing rights" or "MSRs") as assets by allocating total
costs incurred between the originated loan and the servicing rights retained
based on their relative fair values. SFAS No. 140 also requires the recognition
of purchased mortgage servicing rights at fair value, which is presumed to be
the price paid for the rights. MSRs are amortized in proportion to the servicing
income over the estimated life of the related mortgage loan. The amortization
method is designed to approximate a level-yield method, taking into
consideration the estimated prepayment of the underlying loans. For purposes of
measuring impairment, MSRs are reviewed for impairment by management on a
quarterly basis, primarily considering prepayments and interest rates.
Impairment is measured on a disaggregated basis. The Company establishes an
impairment valuation allowance to record any impairment for MSRs. Subsequent
increases in value are recognized only to the extent of the impairment valuation
allowance within the same tranche.
18
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
(m) Income Taxes
Deferred tax assets and liabilities are recognized for the estimated
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax basis. Deferred tax assets and liabilities are measured using the
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect
of a change in tax rates on deferred tax assets and liabilities is recognized in
the period that includes the statutory enactment date. A deferred tax asset
valuation allowance is recorded when it is more likely than not that deferred
tax assets will not be realized.
(n) Drafts Outstanding
The Company invests all excess funds on deposit at other banks (including
amounts on deposit for payment of outstanding disbursement checks) on a daily
basis in an overnight interest-bearing account. Accordingly, outstanding checks
are reported as a liability.
(o) Securities Sold Under Agreement to Repurchase
The Company maintains collateral for certain customers who wish to deposit
amounts greater than $100,000. These agreements function similarly to a
certificate of deposit in that the agreement is for a fixed length of time at a
fixed interest rate. However, these deposits are not insured by the Federal
Deposit Insurance Corporation (the "FDIC"), but are collateralized by an
interest in the pledged securities. The Company has classified these borrowings
separately from deposits.
The Company enters into sales of securities under agreements to
repurchase. Fixed-coupon, repurchase agreements are treated as financing, with
the obligation to repurchase securities sold being reflected as a liability and
the securities underlying the agreements remaining as assets.
(p) Stock Based Compensation
At September 30, 2004, the Company has one stock option plan which is
described more fully in note 17.
The Company applies the intrinsic value method of APB Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB Opinion No. 25) and related
interpretations in accounting for its plan. Accordingly, no compensation cost
has been recognized for its fixed stock option plans as all options granted
under those plans had an exercise price equal to or greater than the market
value of the underlying stock at the date of grant. Had compensation cost for
the Company's stock-based compensation plans been determined consistent with
SFAS Statement No. 123, "Accounting for Stock-Based Compensation", the Company's
net income and earnings per share would have been reduced to the proforma
amounts indicated below for the years ended September 30 (in thousands except
per share data):
2002 2003 2004
-------- -------- --------
Net income As reported $ 10,206 $ 11,172 $ 14,806
Proforma 9,728 10,668 14,207
Basic earnings per share As reported $ 0.66 $ 0.72 $ 0.94
Proforma 0.63 0.69 0.90
Diluted earnings per share As reported $ 0.64 $ 0.69 $ 0.89
Proforma 0.61 0.66 0.85
The weighted average fair value per share of options granted in 2002, 2003
and 2004 amounted to $3.15, $4.53 and $7.24, respectively. The fair value of
each option grant is estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted-average assumptions used for
grants in 2002, 2003 and 2004, respectively: dividend yield of approximately
1.62%, 1.86% and 1.25%, expected volatility of approximately 51%, 47% and 40%,
risk-free interest rate of 4.60%, 3.96% and 4.21%, expected lives of 7.5 years
and a vesting period of 5 years. For purposes of the proforma calculation,
compensation expense is recognized on a straight line basis over 5 years.
19
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
(q) Comprehensive Income
SFAS No. 130, "Reporting Comprehensive Income" establishes standards for
the reporting and presentation of comprehensive income and its components in a
full set of financial statements. Comprehensive income consists of net income
and net unrealized gains (losses) on securities and is presented in the
statements of stockholders' equity and comprehensive income.
(r) Disclosures Regarding Segments
The Company reports operating segments in accordance with SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS No.
131"). Operating segments are components of an enterprise about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and assess
performance. SFAS No. 131 requires that a public enterprise report a measure of
segment profit or loss, certain specific revenue and expense items, segment
assets, information about the way that the operating segments were determined
and other items. The Company has one reportable operating segment, Coastal
Federal Bank.
(s) Derivative Instruments and Hedging Activities
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133") as amended by SFAS
No. 137, 138, and 149 establishes accounting and reporting standards for
derivatives and hedging activities. It requires an entity to recognize all
derivatives as either assets or liabilities in the balance sheet, and measures
those instruments at fair value. Changes in the fair value of those derivatives
are reported in current earnings or other comprehensive income depending on the
purpose for which the derivative is held and whether the derivative qualifies
for hedge accounting. The Company does not currently engage in any activities
that qualify for hedge accounting under SFAS 133. Accordingly, changes in fair
value of these derivative instruments are included in gain on sale of loans held
for sale in the consolidated statements of operations. (See Note 23).
(t) Reclassification of Losses on Early Extinguishment of Debt
The Company adopted SFAS No. 145 "Recissions of FASB Statements No. 4, 44
and 64, Amendment of FASB Statement No. 13, and Technical Corrections" ("SFAS
No. 145") effective July 1, 2002. In connection with this adoption, the Company
reclassified $1.1 million of losses on the early extinguishment of debt to
general and administrative expense, which were incurred in fiscal 2002 and were
previously classified as extraordinary loss.
(u) Reclassifications
Certain amounts in the 2002 and 2003 consolidated financial statements
have been reclassified to conform with the 2004 presentation. Such
reclassifications did not change net income or equity as previously reported.
(2) INVESTMENT SECURITIES
The amortized cost and fair value of investment securities available for
sale at September 30, 2003 are summarized as follows:
2003
-----------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- --------
(In thousands)
U.S. Government and agency obligations:
Due after five years ..................... $ 1,998 9 -- 2,007
State and municipal obligations:
Due after five years ..................... 14,141 136 (375) 13,902
-------- -------- -------- --------
$ 16,139 145 (375) 15,909
======== ======== ======== ========
20
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
(2) INVESTMENT SECURITIES- CONTINUED
The amortized cost and fair value of investment securities available for
sale at September 30, 2004 are summarized as follows:
2004
-----------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- --------
(In thousands)
U.S. Government and agency obligations:
Due after five years
$ 2,901 12 -- 2,913
State and municipal obligations:
Due after five years ...................... 20,123 497 (84) 20,536
-------- -------- -------- --------
$ 23,024 509 (84) 23,449
======== ======== ======== ========
The amortized cost of investment securities held to maturity are
summarized as follows:
2004
-----------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Total
Cost Gains Losses
--------- ---------- ---------- --------
(In thousands)
U.S. Government and agency obligations:
Due after five years ..................... $ 7,840 -- -- 7,840
======== ======== ======== ========
The Company had gross realized gains of $102,000 and no gross realized
losses for the year ended September 30, 2002. For the year ended September 30,
2003, there were no gross realized gains or losses. For the year ended September
30, 2004, there were no gross realized gains and gross realized losses were
$100,000.
The unrealized losses on investment securities were attributable to
increases in interest rates, rather than credit quality. The unrealized losses
are comprised of four securities that have had continuous losses of less than 12
months and ten securities that have had continuous losses 12 months or longer.
None of the individual investment securities had an unrealized loss which
exceeded 5% of its amortized cost.
(3) MORTGAGE-BACKED SECURITIES
Mortgage-backed securities available for sale at September 30, 2003
consisted of the following:
2003
-----------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- --------
(In thousands)
Collateralized Mortgage Obligations ...... $ 11,617 12 (147) 11,482
FNMA ..................................... 205,200 5,483 (730) 209,953
GNMA ..................................... 26,659 827 (37) 27,449
FHLMC .................................... 133,674 1,793 (1,027) 134,440
-------- -------- -------- --------
$377,150 8,115 (1,941) 383,324
======== ======== ======== ========
Mortgage-backed securities available for sale at September 30, 2004
consisted of the following:
2004
-----------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- --------
(In thousands)
Collateralized Mortgage Obligations ...... $ 51,644 82 (319) 51,407
FNMA ..................................... 162,371 3,090 (661) 164,800
GNMA ..................................... 42,205 799 (5) 42,999
FHLMC .................................... 114,947 923 (793) 115,077
-------- -------- -------- --------
$371,167 4,894 (1,778) 374,283
======== ======== ======== ========
21
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
(3) MORTGAGE-BACKED SECURITIES - CONTINUED
The Company had gross realized gains of $462,000 and gross realized losses
of $224,000 for the year ended September 30, 2002. For the year ended September
30, 2003, the Company had gross realized gains of $695,000 and gross realized
losses of $226,000. For the year ended September 30, 2004, the Company had gross
realized gains of $772,000 and gross realized losses of $1.8 million.
Gross unrealized losses on mortgage-backed securities and the length of
time the securities have been in a continuous unrealized loss position, at
September 30, 2004, were as follows:
2004
---------------------------------------------------------------------
Less than 12 Months 12 Months or Longer Total
--------------------- --------------------- ---------------------
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
-------- ---------- -------- ---------- -------- ----------
Collateralized Mortgage Obligations ... $ 29,362 (221) 2,113 (98) 31,475 (319)
FNMA .................................. 21,027 (116) 22,117 (545) 43,144 (661)
GNMA .................................. 6,456 (5) -- -- 6,456 (5)
FHLMC ................................. 46,457 (226) 20,829 (567) 67,286 (793)
-------- -------- -------- -------- -------- --------
$103,302 (568) 45,059 (1,210) 148,361 (1,778)
======== ======== ======== ======== ======== ========
The unrealized losses on mortgage-backed securities summarized above were
attributable to increases in interest rates, rather than credit quality. The
unrealized losses are comprised of 25 securities that have had continuous losses
of less than 12 months and eight securities that have had continuous losses 12
months or longer. None of the individual mortgage-backed securities had an
unrealized loss which exceeded 5% of its amortized cost.
Certain investment and mortgage-backed securities are pledged to secure
other borrowed money and customer deposits in excess of FDIC insurance coverage.
The carrying value of the securities pledged at September 30, 2004 was $348.2
million with a fair value of $350.5 million.
(4) LOANS RECEIVABLE, NET
Loans receivable, net at September 30 consisted of the following:
2003 2004
--------- ---------
(In thousands)
First mortgage loans:
Single family to four family units ......... $ 290,395 329,287
Land and land development .................. 62,221 99,697
Residential lots ........................... 20,327 29,839
Other, primarily commercial real estate .... 179,283 182,924
Residential construction loans ............. 56,950 82,789
Commercial construction loans .............. 24,943 10,503
Consumer and commercial loans:
Installment consumer loans ................. 16,581 18,024
Mobile home loans .......................... 4,607 4,618
Savings account loans ...................... 2,179 2,058
Equity lines of credit ..................... 26,640 30,906
Commercial and other loans ................. 24,457 32,101
--------- ---------
708,583 822,746
Less:
Allowance for loan losses .................. 9,832 11,077
Deferred loan cost, net .................... (556) (674)
Undisbursed portion of loans in process .... 16,570 21,613
--------- ---------
$ 682,737 790,730
========= =========
The changes in the allowance for loan losses for the years ended September
30 consisted of the following:
22
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
(4) LOANS RECEIVABLE, NET - CONTINUED
2002 2003 2004
-------- -------- --------
(In thousands)
Beginning allowance ............. $ 7,159 7,883 9,832
Provision for loan losses ....... 1,235 2,655 1,750
Loan recoveries ................. 66 136 249
Loan charge-offs ................ (577) (842) (754)
-------- -------- --------
$ 7,883 9,832 11,077
======== ======== ========
Non-accrual loans which were over ninety days delinquent totaled
approximately $7.4 million and $5.9 million at September 30, 2003 and 2004,
respectively. In fiscal years 2002, 2003 and 2004, interest income which would
have been recorded would have been approximately $301,000, $623,000 and
$277,000, respectively, had non-accruing loans been current in accordance with
their original terms.
There were $4.9 million in impaired loans at September 30, 2003. At
September 30, 2004, impaired loans totaled $3.3 million. Included in the
allowance for loan losses at September 30, 2003 was $263,000 related to impaired
loans compared to $359,000 at September 30, 2004. The average recorded
investment in impaired loans for the year ended September 30, 2003 was $4.0
million compared to $3.9 million for the year ended September 30, 2004. Interest
income recognized on impaired loans in fiscal 2003 was $134,000. Interest income
recognized on impaired loans in fiscal 2004 was $607,000. This increase is
primarily due to a commercial loan that was placed in non-accrual status in a
prior fiscal year. The loan paid off in the fourth fiscal quarter of 2004. As a
result, the Company recognized approximately $330,000 of interest which had been
previously reserved.
In the normal course of business, to meet the financing needs of its
Customers, the Company is a party to financial instruments with
off-balance-sheet risk. These financial instruments include commitments to
extend credit and stand by letters of credit. These instruments involve, to
varying degrees, elements of credit and interest rate risk in excess of the
amount recognized in the balance sheet.
The Company's exposure to credit loss in the event of non-performance by
the other party to the financial instrument is represented by the contractual
amount of these instruments. The Company uses the same credit policies in making
commitments and conditional obligations as it does for on-balance-sheet
instruments.
Commitments to extend credit are agreements to lend as long as there is no
violation of any condition established in the contract. Commitments generally
have fixed expiration dates or other termination clauses and may require payment
of a fee. Since many of the commitments may expire without being drawn upon, the
total commitment amounts do not necessarily represent future cash requirements.
The Company evaluates each Customer's creditworthiness on a case-by-case basis.
The amount of collateral obtained, if deemed necessary by the Company upon
extension of credit, is based on management's credit evaluation.
Standby letters of credit obligate the Company to meet certain financial
obligations of its Customers, if, under the contractual terms of the agreement,
the Customers are unable to do so. Payment is only guaranteed under these
letters of credit upon the borrower's failure to perform its obligations to the
beneficiary. The Company can seek recovery of the amounts paid from the borrower
and the letters of credit are generally collateralized. Commitments under
standby letters of credit are usually one year or less. At September 30, 2004,
the Company has recorded no liability for the current carrying amount of the
obligation to perform as a guarantor, as such amounts are not considered
material. The maximum potential amount of undiscounted future payments related
to standby letters of credit at September 30, 2004 was $5.5 million.
Unfunded loan commitments and letters of credit at September 30, 2004 were
approximately $117.4 million and included the following (in thousands):
Loan Commitments:
Residential housing and land .............................. $ 40,033
Home equity loans and consumer lines of credit ............ 45,391
Commercial lines of credit ................................ 12,347
Standby letters of credit ................................. 5,502
Unused business and personal credit card lines ............ 14,171
23
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
(4) LOANS RECEIVABLE, NET - CONTINUED
Loans serviced for the benefit of others amounted to approximately $192.1
million, $219.8 million and $250.5 million at September 30, 2002, 2003 and 2004,
respectively.
During fiscal 2004, the Company securitized $46.8 million of mortgage
loans and concurrently sold these mortgage-backed securities to outside third
parties and recognized a net gain on sale of $1.4 million, which included the
recognition of a $637,000 mortgage servicing right asset. During fiscal 2003,
the Company securitized $95.6 million of mortgage loans and concurrently sold
these mortgage-backed securities to outside third parties and recognized a net
gain on sale of $1.7 million, which included the recognition of a $1.3 million
mortgage servicing right asset. The gain is included in gains on sales of loans
held for sale in the consolidated statement of operations. The proceeds from
sale are included in proceeds from sales of mortgage-backed securities available
for sale in the consolidated statement of cash flows.
As disclosed in note 9, certain mortgage loans are pledged to secure
advances from the Federal Home Loan Bank ("FHLB") of Atlanta.
The Bank offers mortgage and consumer loans to its directors, and
Associates for the financing of their personal residences and for other personal
purposes. The Bank also offers commercial loans to companies affiliated with
directors. These loans are made in the ordinary course of business and, in
management's opinion, are made on substantially the same terms, including
interest rates and collateral, prevailing at the time for comparable
transactions with other persons and companies.Management does not believe these
loans involve more than the normal risk of collectibility or present other
unfavorable features. At September 30, 2004, such loans were current with
respect to their payment terms.
The following is a summary of the activity of loans outstanding to certain
executive officers, directors and their affiliates for the year ended September
30, 2004 (in thousands):
Balance at September 30, 2003 ........................... $ 1,076
New loans ............................................... 435
Repayments .............................................. (523)
--------
Balance at September 30, 2004 ........................... $ 988
========
(5) MORTGAGE SERVICING RIGHTS
Mortgage servicing rights, net of the valuation allowance are included in
other assets and totaled $2.8 million and $3.0 million at September 30, 2003 and
2004, respectively. Amortization expense for MSRs totaled $505,000, $811,00 and
$1.0 million for the years ended September 30, 2002, 2003 and 2004,
respectively. The estimated amortization expense for MSRs held as of September
30, 2004, is $1.0 million, $888,000, $577,000, $492,000 and $333,000 for fiscal
2005, 2006, 2007, 2008 and 2009 respectively. The estimated amortization expense
is based on current information regarding loan payments and prepayments.
Amortization expense could change in future periods based on changes in the
volume of prepayments and various economic factors.
At September 30, 2003 and 2004, the valuation allowance for MSRs totaled
$461,000 and $299,000, respectively. In 2003, the Company recorded $461,000 for
impairment losses and in 2004 recorded $162,000 for impairment recoveries.
2003 2004
-------- --------
(In thousands)
Balance at beginning of year ............... $ 2,203 2,843
MSRs capitalized ........................... 1,912 1,020
MSRs amortized ............................. (811) (1,020)
(Impairment) recovery ...................... (461) 162
-------- --------
Balance at end of year ..................... $ 2,843 3,005
======== ========
24
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
(6) OFFICE PROPERTY AND EQUIPMENT, NET
Office property and equipment, net at September 30 consisted of the
following:
2003 2004
-------- --------
(In thousands)
Land ......................................... $ 5,532 5,848
Building and improvements .................... 10,532 13,058
Furniture, fixtures and equipment ............ 15,864 18,055
-------- --------
31,928 36,961
Less accumulated depreciation ................ (15,840) (18,117)
-------- --------
$ 16,088 18,844
======== ========
The Company leases office space and various equipment. Total rental
expense for the years ended September 30, 2002, 2003 and 2004 was approximately
$288,000, $259,000 and $285,000 respectively.
Future minimum rental payments for operating leases having remaining
noncancelable lease terms in excess of one year at September 30, 2004 are as
follows (in thousands):
2005 .............................. $ 119
2006 .............................. 111
2007 .............................. 57
2008 .............................. 31
2009 .............................. 25
Thereafter .............................. 237
------
$ 580
======
(7) INVESTMENT REQUIRED BY LAW
The Bank, as a member of the FHLB of Atlanta, is required to acquire and
hold shares of capital stock in the FHLB of Atlanta in an amount equal to the
greater of (i) $500 (ii) 1.0% of the aggregate outstanding principal amount of
home mortgage loans, home purchase contracts and similar obligations at the end
of each calendar year, or (iii) 5% of its advances (borrowings) from the FHLB of
Atlanta at the end of each calendar year. The Bank is in compliance with this
requirement with an investment in FHLB stock of $16.9 million, carried at cost,
at September 30, 2004. No ready market exists for this stock and it has no
quoted market value. However, redemption of this stock has historically been at
par value.
(8) DEPOSITS
Deposits at September 30 consisted of the following:
2003 2004
---------------------- ----------------------
Weighted Weighted
Amount Rate Amount Rate
--------- --------- --------- ---------
(Dollars in thousands)
Transaction accounts:
Noninterest bearing ................. $ 86,258 --% 122,357 --%
NOW ................................. 98,171 0.54 110,802 0.46
Money market checking ............... 206,010 1.34 224,437 1.37
--------- --------- --------- ---------
Total transaction accounts ...... 390,439 0.84 457,596 0.79
--------- --------- --------- ---------
Statement savings accounts:
Regular .............................. 44,919 0.79 54,147 0.79
Money market ......................... 1,317 1.00 1,058 1.00
--------- --------- --------- ---------
Total statement savings accounts 46,236 0.80 55,205 0.80
--------- --------- --------- ---------
Certificate accounts:
0.00-1.99% ........................... 87,396 69,014
2.00-3.99% ........................... 149,678 148,493
4.00-5.99% ........................... 19,569 22,470
6.00-7.99% ........................... 3,161 8
8.00-10.00% .......................... 533 593
--------- --------- --------- ---------
Total certificate accounts ...... 260,337 2.67 240,578 2.49
--------- --------- --------- ---------
$ 697,012 1.52% 753,379 1.33%
========= ========= ========= =========
25
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
(8) DEPOSITS - CONTINUED
The aggregate amount of all deposit accounts with a minimum denomination
of $100,000 or more was $287.9 million and $364.2 million at September 30, 2003
and 2004, respectively.
The amounts and scheduled maturities of certificate accounts at September
30, are as follows:
2003 2004
--------- ---------
(In thousands)
Within 1 year ................................ $ 198,723 208,130
After 1 but within 2 years ................... 50,596 23,512
After 2 but within 3 years ................... 7,461 4,960
Thereafter ................................... 3,557 3,976
--------- ---------
$ 260,337 240,578
========= =========
Interest expense on deposits for the years ended September 30 consisted of
the following:
2002 2003 2004
-------- -------- --------
(In thousands)
Transaction accounts ............... $ 4,524 3,925 3,331
Statement savings accounts ......... 459 427 405
Certificate accounts ............... 8,767 7,647 6,288
-------- -------- --------
$ 13,750 11,999 10,024
======== ======== ========
(9) ADVANCES FROM FHLB
Advances from the FHLB at September 30 consisted of the following:
2003 2004
-------------------- --------------------
Weighted Weighted
Amount Rate Amount Rate
-------- -------- -------- --------
Fiscal Year Maturity (Dollars in thousands)
2004 .................. $ 34,435 1.32% $ -- --%
2005 .................. 13,500 5.17 64,500 2.78
2006 .................. 5,686 2.81 4,177 2.79
2007 .................. 5,132 3.00 11,560 2.23
2008 .................. 4,633 3.28 3,977 3.18
2009 .................. 6,400 3.77 31,803 2.36
2010 or greater ....... 174,328 4.37 212,490 4.20
-------- -------- -------- --------
$244,114 3.89% $328,507 3.64%
======== ======== ======== ========
Stock in the FHLB of Atlanta and specific first mortgage loans and
mortgage-backed securities of approximately $275.8 million and $357.3 million at
September 30, 2003 and 2004, respectively, are pledged as collateral for these
advances. The Bank has adopted the policy of pledging excess collateral to
facilitate future advances. At September 30, 2004, the excess first mortgage
loan collateral pledged to the FHLB will support additional borrowings of
approximately $45.9 million. At September 30, 2004, included in the one, three,
five and after five year maturities were $217.0 million with a weighted average
rate of 3.91% of advances subject to call provisions. Callable advances at
September 30, 2004 are summarized as follows: $56.0 million callable in fiscal
2004, with a weighted average rate of 5.33%; $36.0 million callable in fiscal
2005, with a weighted average rate of 5.36%; $28.0 million callable in fiscal
2006, with a weighted average rate of 2.29%; $35.0 million callable in fiscal
2007, with a weighted average rate of 3.00%; and $25.0 million callable in
fiscal 2009, with a weighted average rate of 3.13%. Call provisions are more
likely to be excercised by the FHLB when interest rates rise. If exercised, the
Company may have to replace called advances with borrowings at a higher interest
rate.
During fiscal 2002, the Company prepaid approximately $59.3 million of
advances from FHLB and incurred gross penalties of approximately $1.1 million.
During fiscal 2003, the Company prepaid approximately $54.6 million of advances
from FHLB and incurred gross penalties of approximately $2.8 million. During
fiscal 2004, the Company prepaid approximately $4.6 million of advances and
incurred gross penalties of approximately $77,000. Prepayment penalties are
included in general and administrative expenses in the statement of operations.
Also see Note 1 (t).
26
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
(10) REPURCHASE AGREEMENTS
The following tables set forth certain information regarding repurchase
agreements by the Bank at the end of and during the periods indicated:
At September 30,
----------------------------------
2002 2003 2004
-------- -------- --------
(Dollars in thousands)
Outstanding balance:
Securities sold under agreements to repurchase:
Customer ............................................... $ 4,070 $ 7,703 $ 12,931
Broker ................................................. 30,000 125,899 94,242
Weighted average rate (at month end) paid on:
Securities sold under agreements to repurchase:
Customer .............................................. 1.37% 0.81% 1.42%
Broker ................................................ 1.84 1.64 1.74
Maximum amount of borrowings outstanding at any month end:
Securities sold under agreements to repurchase:
Customer .............................................. $ 5,625 $ 7,703 $ 12,931
Broker ................................................ 30,000 125,899 184,129
Approximate average outstanding with respect to:
Securities sold under agreements to repurchase:
Customer .............................................. $ 3,600 $ 4,812 $ 9,033
Broker ................................................ 15,007 92,476 134,809
Weighted average rate (year to date) paid on:
Securities sold under agreements to repurchase:
Customer .............................................. 1.58% 1.02% 1.01%
Broker ................................................ 2.39 2.04 1.50
Securities sold under agreements to repurchase represent borrowings by the
Company with maturities ranging from 1 to 12 months collateralized by securities
of the United States government or its agencies, which have been delivered to a
third party custodian for safekeeping. Assets pledged to collateralize
securities sold under agreements to repurchase had a fair value of $118.4
million at September 30, 2004 and are included in mortgage-backed securities
available for sale in the consolidated balance sheet.
(11) JUNIOR SUBORDINATED DEBT
The Company determines whether it has a controlling financial interest in
an entity by first evaluating whether the entity is a voting interest entity or
a variable interest entity under accounting principles generally accepted in the
United States of America. Voting interest entities are entities in which the
total equity investment at risk is sufficient to enable each entity to finance
itself independently and provides the equity holders with the obligation to
absorb losses, the right to receive residual returns and the right to make
decisions about the entity's activities. The Company consolidates voting
interest entities in which it has all, or at least a majority of, the voting
interest. As defined in applicable accounting standards, variable interest
entities ("VIEs") are entities that lack one or more of the characteristics of a
voting interest entity described above. A controlling financial interest in an
entity is present when an enterprise has a variable interest or a combination of
variable interests that will absorb a majority of the entity's expected losses,
receive a majority of the entity's expected residual returns, or both. The
enterprise with a controlling financial interest, known as the primary
beneficiary, consolidates the VIE.
Prior to January 1, 2004, the Company consolidated its wholly-owned
subsidiary, Coastal Financial Capital Trust I ("Trust"). In December 2003, the
Financial Accounting Standards Board issued a revised version of Interpretation
No. 46 ("FIN 46") "Consolidation of Variable Interest Entities." The revised FIN
46 clarifies some of the provisions of the original interpretation and adds new
scope exceptions. As a result of the changes, the Company deconsolidated the
Trust, increasing other assets by $464,000, increasing junior subordinated
debt-trust preferred securities by $15.5 million and reducing debt associated
with trust preferred securities ("Capital Securities") by $15.0 million.
The junior subordinated debentures are unsecured obligations of the
Company and are subordinate and junior in right of payment to all present and
future senior indebtedness of the Company. The Company has entered into a
guarantee, which together with its obligations under the junior subordinated
debentures and the declaration of trust governing the Trust, provides a full and
unconditional guarantee of the Capital Securities.
27
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
(11) JUNIOR SUBORDINATED DEBT - CONTINUED
The Capital Securities accrue and pay distributions semi-annually at a
rate per annum equal to 90-day LIBOR plus 305 basis points. At September 30,
2004, the distribution rate on the Capital Securities was 4.64%. The
distributions payable on the Capital Securities are cumulative and payable
quarterly in arrears. The Company has the right, subject to events of default,
to defer payments of interest on the Capital Securities for a period not to
exceed 20 consecutive quarters. The Company has no current intention to exercise
its right to defer payment of interest on the Capital Securities.
The Capital Securities are mandatorily redeemable upon maturity on July 3,
2033. The Company has the right to redeem the Capital Securities in whole or in
part, on or after July 3, 2008. If the Capital Securities are redeemed on or
after July 3, 2008, the redemption price will be 100% of the principal amount
plus accrued and unpaid interest. In addition, the Company may redeem the
Capital Securities in whole (but not in part) at any time within 90 days
following the occurrence of a tax event, an investment company event, or a
capital treatment event at a special redemption price (as defined in the
indenture).
(12) INCOME TAXES
Income tax expense (benefit) for the years ended September 30 consisted of
the following:
Current Deferred Total
-------- -------- --------
(In thousands)
2002:
Federal .................... $ 5,407 (13) 5,394
State ...................... 507 -- 507
-------- -------- --------
$ 5,914 (13) 5,901
======== ======== ========
2003:
Federal .................... $ 4,946 507 5,453
State ...................... 693 (5) 688
-------- -------- --------
$ 5,639 502 6,141
======== ======== ========
2004:
Federal .................... $ 7,070 126 7,196
State ...................... 433 (2) 431
-------- -------- --------
$ 7,503 124 7,627
======== ======== ========
The tax effect of the Company's temporary differences between the
financial statement carrying amounts and tax basis of assets and liabilities
that give rise to the net deferred tax asset (liability) at September 30, 2003
and 2004 relate to the following:
2003 2004
-------- --------
(In thousands)
Deferred tax assets:
Allowance for loan losses ................................................ $ 3,605 4,031
Accrued medical reserves ................................................. 91 91
Other real estate reserves and deferred gains on other real estate ....... 102 56
Net operating loss carryforwards ......................................... 21 38
Other .................................................................... 282 170
-------- --------
Total deferred tax assets .................................................... 4,101 4,386
Less valuation allowance ..................................................... (21) (38)
-------- --------
Net deferred tax assets ...................................................... 4,080 4,348
-------- --------
Deferred tax liabilities:
Tax bad debt reserve in excess of base year amount ....................... 97 --
Property and equipment principally due to differences in depreciation .... 527 688
FHLB stock, due to stock dividends not recognized for tax purposes ....... 67 15
Deferred loan fees ....................................................... 537 719
Book over tax basis in investment in unconsolidated subsidiary ........... 4,009 4,009
Unrealized gain on securities available for sale ......................... 2,225 1,312
Mortgage servicing rights ................................................ 1,075 1,120
Other .................................................................... 196 384
-------- --------
Total deferred tax liabilities ............................................... 8,733 8,247
-------- --------
Net deferred tax liability ................................................... $ (4,653) (3,899)
======== ========
28
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
(12) INCOME TAXES - CONTINUED
The valuation allowance for deferred tax assets was $21,000 and $38,000 at
September 30, 2003 and 2004, respectively. The net change in the total valuation
allowance for the years ended September 30, 2003 and 2004 was zero and an
increase of $17,000, respectively. In assessing the realizability of deferred
tax assets, management considers whether it is more likely than not that some
portion or all of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the generation of future
taxable income during the periods in which those temporary differences become
deductible. Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income, and tax planning strategies in
making this assessment. In order to fully realize the deferred tax asset, the
company will need to generate future taxable income prior to the expiration of
the deferred tax assets governed by the tax code. Based upon the level of
historical taxable income and projections for future taxable income over the
periods, which the deferred tax assets are deductible, management believes it
more likely than not the Company will realize the benefits of these deductible
differences, net of the existing valuation allowances at September 30, 2004. The
amount of the deferred tax asset considered realizable, however, could be
reduced in the near term if estimates of future taxable income during the
carryforward period are reduced.
The net deferred tax (asset) liability is included in other liabilities in
the consolidated financial statements. The valuation allowance relates to the
state loss carryforwards which may not be ultimately realized to reduce taxes of
the Company. A portion of the change in the net deferred tax liability relates
to unrealized gains and losses on securities available for sale. A current
period deferred tax benefit of $913,000 for the unrealized gains on securities
available for sale has been recorded directly to stockholders' equity. The
balance of the change in the deferred tax liability results from the current
period deferred tax expense of $124,000. Income taxes of the Company
attributable to income before income taxes differ from the amounts computed by
applying the Federal income tax rate of 34% for the years ended September 30 to
earnings before income taxes as follows:
2002 2003 2004
-------- -------- --------
(In thousands)
Computed federal income taxes ....... $ 5,476 5,886 7,627
State tax, net of federal benefit ... 335 454 284
Bank-owned life insurance ........... -- (226) (327)
Other, net .......................... 90 27 43
-------- -------- --------
Total income tax expense ............ $ 5,901 6,141 7,627
======== ======== ========
The Bank had been permitted under the Internal Revenue Code to deduct an
annual addition to the tax reserve for bad debts in determining taxable income,
subject to certain limitations. This addition may differ significantly from the
bad debt expense for financial reporting purposes and was based on either 8% of
taxable income (the "Percentage of Taxable Income Method") or actual loan loss
experience (the "Experience Method") for the years prior to 1997. As a result of
tax legislation, the Bank recaptured tax bad debt reserves in excess of pre-1988
based year amounts over a six-year period ending September 30, 2004. In
addition, for the period ending September 30, 1997, the Bank was required to
change its overall tax method of accounting for bad debts to the experience
method.
Retained earnings at September 30, 2004 includes approximately $5.2
million representing pre-1988 tax bad debt base year reserve amounts for which
no deferred income tax liability has been provided since these reserves are not
expected to reverse until indefinite future periods and may never reverse.
Circumstances that would require an accrual of a portion or all of this
unrecorded tax liability are a reduction in qualifying loan levels relative to
the end of 1987, failure to meet the tax definition of a savings bank, dividend
payments in excess of current year or accumulated tax earnings and profits, or
other distributions in dissolution, liquidation or redemption of the Bank's
stock.
(13) BENEFIT PLANS
The Company has a defined contribution plan covering substantially all
Associates. The Company matches Associate contributions based upon the Company
meeting certain return on equity operating results. Matching contribution
expense was approximately $384,000, $340,000 and $671,000 for fiscal years 2002,
2003 and 2004, respectively.
(14) REGULATORY MATTERS
The Company is subject to various capital requirements administered by
federal banking agencies. Failure to meet minimum capital requirements can
initiate mandatory and possibly additional discretionary actions by regulators
that, if undertaken, could have a direct material adverse effect on the
Company's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Company must meet
specific capital
29
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
(14) REGULATORY MATTERS - CONTINUED
guidelines that involve quantitative measures of the assets, liabilities and
certain off-balance sheet items as calculated under regulatory accounting
practices. The Company's capital amounts and classifications are also subject to
qualitative judgments by the regulators about components, risk-weighting and
other factors. Quantitative measures established by regulation to ensure capital
adequacy require the Company to maintain minimum amounts and ratios (set forth
in the following table) of total and tier 1 capital (as defined in the
regulation) to risk-weighted assets (as defined) and to average assets (as
defined). At September 30, 2004, the Company's loans-to-one borrower limit was
approximately $16.0 million. Management believes, as of September 30, 2004, that
the Company met all capital adequacy requirements and loans-to-one-borrower
limits.
As of September 30, 2004, the most recent notification from federal
banking agencies categorized the Bank as "well capitalized" under the regulatory
framework. To be categorized as "well capitalized," the Bank must maintain
minimum total risk-based capital, tier 1 capital, and tier 1 leverage ratios as
set forth in the table. Since September 30, 2004, there have been no events or
conditions that management believes have changed the Bank's categories. (Dollars
in thousands)
Amount to be
For Capital Categorized as
Actual Adequacy Purposes "Well Capitalized"
------------------- ------------------- -------------------
Amount Ratio Amount Ratio Amount Ratio
-------- ------- -------- ------- -------- -------
As of September 30, 2004:
Total Capital: .................. $106,851 13.55% $ 63,077 8.00% $ 78,847 10.00%
(To Risk Weighted Assets)
Tier 1 Capital: ................. $ 97,450 12.36% N/A N/A $ 47,308 6.00%
(To Risk Weighted Assets)
Tier 1 Capital: ................. $ 97,450 7.44% $ 39,278 3.00% $ 65,574 5.00%
(To Adjusted Total Assets)
Tangible Capital: ............... $ 97,450 7.44% $ 19,672 1.50% N/A N/A
(To Adjusted Total Assets)
As of September 30, 2003:
Total Capital: .................. $ 92,847 13.17% $ 56,388 8.00% $ 70,485 10.00%
(To Risk Weighted Assets)
Tier 1 Capital: ................. $ 84,153 11.94% N/A N/A $ 42,291 6.00%
(To Risk Weighted Assets)
Tier 1 Capital: ................. $ 84,153 7.14% $ 35,358 3.00% $ 58,929 5.00%
(To Adjusted Total Assets)
Tangible Capital: ............... $ 84,153 7.14% $ 17,679 1.50% N/A N/A
(To Adjusted Total Assets)
(15) LIQUIDATION ACCOUNT
In conjunction with the Bank's conversion to stock form on October 4,
1990, the Bank established, as required by Office of Thrift Supervision (the
"OTS") regulations, a liquidation account and maintains this account for the
benefit of the remaining eligible account holders as defined under the Bank's
plan of conversion. The initial balance of this liquidation account was equal to
the Bank's net worth defined by OTS regulations as of the date of the latest
statement of financial condition contained in the final offering circular. In
the event of a complete liquidation of the Bank (and only in such event) each
eligible holder shall be entitled to receive a liquidation distribution from
this account in the amount of the then current adjusted balance for deposits
then held, before any liquidation distribution may be made to the stockholders.
The Bank is prohibited from declaring cash dividends or repurchasing its capital
stock if it would cause a reduction in the Bank's net worth below either the
balance of the liquidation account or the statutory net worth requirements set
by the OTS.
The Company's ability to pay dividends depends primarily on the Bank's
ability to pay dividends to the Company. The Bank is prohibited from declaring
cash dividends on its common stock or repurchasing its common stock if the
effect thereof would cause its net worth to be reduced below either the amount
required for the liquidation account or the minimum regulatory capital
requirement. In addition, the Bank is also prohibited from declaring cash
dividends and repurchasing its own stock without prior regulatory approval if
the total amount of all dividends and stock repurchases (including any proposed
dividends and stock repurchases) for the applicable year exceeds its current
year's net income plus its retained net income for the preceding two years.
30
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
(16) EARNINGS PER SHARE
Basic earnings per share are computed by dividing net income by the
weighted-average number of common shares outstanding. Diluted earnings per share
are computed by dividing net income by the weighted average number of common
shares and potential common shares outstanding. Potential common shares consist
of dilutive stock options determined using the treasury stock method and the
average market price of common stock. All share and per share data have been
retroactively restated for all common stock dividends. The Company had
antidulutive securities of approximately 294,000 options to purchase shares by
Directors and Associates. The average exercise price for such shares was $13.93.
The following is a summary of the reconciliation of average shares outstanding
for the years ended September 30:
2002 2003 2004
----------------------- ----------------------- -----------------------
Basic Diluted Basic Diluted Basic Diluted
---------- ---------- ---------- ---------- ---------- ----------
Weighted average shares outstanding 15,541,000 15,541,000 15,552,000 15,552,000 15,752,000 15,752,000
Effective of dilutive securities:
Stock options -- 476,000 -- 712,000 -- 873,000
---------- ---------- ---------- ---------- ---------- ----------
Average shares outstanding 15,541,000 16,017,000 15,552,000 16,264,000 15,752,000 16,625,000
========== ========== ========== ========== ========== ==========
(17) STOCK OPTION PLAN
The Company's stock option plan provides for stock options to be granted
primarily to directors, officers and other key Associates. Options granted under
the stock option plan may be incentive stock options or non-incentive stock
options. Options vest ratably over a five year period and expire after ten years
from the date of grant. The remaining shares of stock reserved for the stock
option plan at September 30, 2004 amounted to approximately 710,000 shares. All
outstanding options have been retroactively restated to reflect the effects of
the common stock dividends. At September 30, 2004, the Company had the following
options outstanding:
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Fiscal Options Contractual Exercise Options Exercise
Year Range of exercise prices: Outstanding Life Price Exercisable Price
---- ------------------------- ----------- ----------- -------- ----------- --------
1995 $2.69 .................... 13,846 0.8 Years $ 2.69 13,846 $ 2.69
1997 $4.39 - $4.55 ............ 126,946 2.2 Years $ 4.45 126,946 $ 4.45
1998 $6.40 - $9.76 ............ 282,081 3.2 Years $ 7.25 282,081 $ 7.25
1999 $6.49 - $7.68 ............ 223,050 4.1 Years $ 7.16 223,050 $ 7.16
2000 $4.32 - $5.62 ............ 205,638 5.2 Years $ 5.13 164,510 $ 5.13
2001 $4.15 - $6.49 ............ 227,795 6.1 Years $ 4.24 136,677 $ 4.24
2002 $6.22 - $10.21 ........... 230,589 7.1 Years $ 6.32 92,236 $ 6.32
2003 $8.26 - $11.57 ........... 296,971 8.2 Years $ 9.91 59,394 $ 9.91
2004 $12.71 - $14.50 .......... 296,672 9.2 Years $ 13.93 -- N/A
--------- --------- ------- --------- -------
$2.69 - $14.50 ........... 1,903,588 6.0 Years $ 7.77 1,098,740 $ 6.22
========= ========= ======= ========= =======
The following is a summary of the activity of the stock option plans for
the years 2002, 2003, and 2004.
2002 2003 2004
---------------------- ---------------------- ----------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
---------- -------- ---------- -------- ---------- --------
Outstanding, October 1 ....... 1,778,156 $ 5.35 1,807,003 $ 5.59 1,911,813 $ 6.31
Granted ...................... 268,334 6.31 316,699 9.83 298,391 13.93
Cancelled .................... (15,912) 5.83 (14,423) 7.55 (5,045) 9.11
Exercised .................... (223,575) 4.52 (197,466) 5.26 (301,571) 4.53
---------- -------- ---------- -------- ---------- --------
Outstanding, September 30 .... 1,807,003 $ 5.59 1,911,813 $ 6.31 1,903,588 $ 7.77
========== ======== ========== ======== ========== ========
(18) COMMON STOCK DIVIDENDS
On May 27, 2003, August 28, 2003, February 18, 2004 and July 30, 2004, the
Company declared a 10% stock dividend aggregating approximately 1,065,000,
1,174,000, 1,308,000 and 1,442,000 shares respectively. All share and per share
data has been retroactively restated to give effect to the common stock
dividends.
31
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
(19) CASH DIVIDENDS
On each of December 29, 2000 and March 21, 2001 the Company declared
quarterly cash dividends of $0.03 per share. On each of June 27, 2001, September
26, 2001, December 19, 2001 and March 20, 2002 the Company declared quarterly
cash dividends of $0.033 per share. On each of June 19, 2002, September 18,
2002, December 18, 2002 and March 26, 2003, the Company declared quarterly cash
dividends of $0.037 per share. On each of June 24, 2003, September 24, 2003,
December 15, 2003, March 17, 2004 and June 16, 2004, the Company declared
quarterly cash dividends of $0.045 per share. On September 29, 2004 the Company
declared a quarterly cash dividend of $0.05 per share. Under Delaware law, the
Company is permitted to declare and pay dividends either out of its surplus or,
if there is no surplus, out of its net profits for the fiscal year in which the
dividend is declared and/or the preceding fiscal year.
(20) LEGAL MATTERS
The Company is not a defendant in any lawsuits. The subsidiaries are
defendants in lawsuits arising out of the normal course of business. Based upon
current information received from counsel representing the subsidiaries in these
matters, the Company believes none of the lawsuits would have a material impact
on the Company's financial status.
(21) QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly operating data for the years ended September 30 is summarized as
follows (in thousands, except share data):
First Second Third Fourth
Quarter Quarter Quarter Quarter
----------- ----------- ----------- -----------
2003:
Total interest income ......................... $ 14,740 14,743 14,790 14,941
Total interest expense ........................ 5,807 5,625 5,779 5,787
----------- ----------- ----------- -----------
Net interest income ........................... 8,933 9,118 9,011 9,154
Provision for loan losses ..................... 435 870 750 600
----------- ----------- ----------- -----------
Net interest income after provision for
loan losses ................................ 8,498 8,248 8,261 8,554
Other income .................................. 2,667 2,715 2,945 2,581
General and administrative expenses ........... 6,864 6,683 6,851 6,758
----------- ----------- ----------- -----------
Income before income taxes .................... 4,301 4,280 4,355 4,377
Income taxes .................................. 1,551 1,526 1,575 1,489
----------- ----------- ----------- -----------
Net income .................................... $ 2,750 2,754 2,780 2,888
=========== =========== =========== ===========
Net income per common share - diluted ......... $ .17 .17 .17 .18
=========== =========== =========== ===========
Weighted average shares outstanding-diluted ... 16,254,000 16,181,000 16,197,000 16,428,000
=========== =========== =========== ===========
First Second Third Fourth
Quarter Quarter Quarter Quarter
----------- ----------- ----------- -----------
2004:
Total interest income ......................... $ 15,535 16,155 16,661 17,453
Total interest expense ........................ 5,725 5,848 5,892 6,059
----------- ----------- ----------- -----------
Net interest income ........................... 9,810 10,307 10,769 11,394
Provision for loan losses ..................... 550 500 200 500
----------- ----------- ----------- -----------
Net interest income after provision for
loan losses ................................ 9,260 9,807 10,569 10,894
Other income .................................. 2,326 2,430 2,121 2,298
General and administrative expenses ........... 6,614 6,729 6,773 7,156
----------- ----------- ----------- -----------
Income before income taxes .................... 4,972 5,508 5,917 6,036
Income taxes .................................. 1,653 1,831 2,018 2,125
----------- ----------- ----------- -----------
Net income .................................... $ 3,319 3,677 3,899 3,911
=========== =========== =========== ===========
Net income per common share - diluted ......... $ .20 .22 .23 .23
=========== =========== =========== ===========
Weighted average shares outstanding-diluted ... 16,650,000 16,657,000 16,687,000 16,703,000
=========== =========== =========== ===========
32
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
(22) COASTAL FINANCIAL CORPORATION FINANCIAL STATEMENTS (PARENT COMPANY ONLY)
The following is condensed financial information of Coastal Financial
Corporation (parent company only), the primary asset of which is its investment
in its bank subsidiary, for the periods indicated. (In thousands):
Coastal Financial Corporation
Condensed Balance Sheets
September 30, 2003 and 2004
2003 2004
-------- --------
Assets
Cash ..................................................... $ 773 86
Investment in subsidiaries ............................... 88,088 99,754
Deferred tax asset ....................................... 441 441
Other assets ............................................. 246 1,334
-------- --------
Total assets ................................... $ 89,548 101,615
======== ========
Liabilities and Stockholders' Equity
Accounts payable (principally dividends) ................. 760 803
Note payable ............................................. 81 --
Junior subordinated debt ................................. -- 15,464
Debt associated with trust preferred securities .......... 15,000 --
Total stockholders' equity ............................... 73,707 85,348
-------- --------
Total liabilities and stockholders' equity .... $ 89,548 101,615
======== ========
Coastal Financial Corporation
Condensed Statements of Operations
Years ended September 30, 2002, 2003 and 2004
2002 2003 2004
-------- -------- --------
Income:
Interest income ..................................... $ 1 1 2
Management fees ..................................... 300 300 242
Dividends from subsidiary ........................... 3,470 1,221 2,230
Equity in undistributed earnings of subsidiaries .... 6,751 10,087 13,063
-------- -------- --------
Total income ................................ 10,522 11,609 15,537
-------- -------- --------
Expenses:
Professional fees ................................... 79 20 72
Supplies and printing ............................... 58 12 33
Interest expense .................................... 84 213 662
Other expenses ...................................... 96 277 213
Income tax benefit .................................. (1) (85) (249)
-------- -------- --------
Total expenses .............................. 316 437 731
-------- -------- --------
Net income ............................................ $ 10,206 11,172 14,806
======== ======== ========
33
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
(22) COASTAL FINANCIAL CORPORATION FINANCIAL STATEMENTS (PARENT COMPANY ONLY) -
CONTINUED
Coastal Financial Corporation
Condensed Statement of Cash Flows
Years ended September 30, 2002, 2003 and 2004
2002 2003 2004
-------- -------- --------
Operating activities:
Net income ...................................................... $ 10,206 11,172 14,806
Adjustments to reconcile net income to net cash provided by:
Equity in undistributed net income of subsidiary ............. (6,751) (10,087) (13,063)
(Increase) decrease in other assets .......................... 548 (290) (624)
Increase (decrease) in other liabilities ..................... (104) 134 43
-------- -------- --------
Total cash provided by operating activities ............... 3,899 929 1,162
-------- -------- --------
Financing activities:
Cash dividends to shareholders .................................. (2,222) (2,592) (2,948)
Treasury stock repurchases ...................................... (2,286) (342) --
Proceeds from stock options ..................................... 1,203 1,153 1,273
Proceeds from trust preferred ................................... -- 15,000 --
Repayment on line of credit ..................................... -- (1,988) (81)
Capital contribution to subsidiary .............................. -- (12,125) (100)
Other financing activities, net ................................. 3 -- 7
-------- -------- --------
Total cash used by financing activities ................. (3,302) (894) (1,849)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents ............ 597 35 (687)
Cash and cash equivalents at beginning of the year .............. 141 738 773
-------- -------- --------
Cash and cash equivalents at end of the years ................... $ 738 773 86
======== ======== ========
(23) Carrying Amounts and Fair Value of Financial Instruments
The carrying amounts and fair value of financial instruments as of
September 30, 2003 and 2004 are summarized below:
2003 2004
--------------------- ---------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------- ---------- -------- ----------
(In thousands)
Financial Assets
Cash and cash equivalents ........................... $ 21,575 21,575 $ 29,652 29,652
Investment securities available for sale ............ 15,909 15,909 23,449 23,449
Mortgage-backed securities available for sale ....... 383,324 383,324 374,283 374,283
Investment securities held to maturity .............. -- -- 7,840 7,840
Loans receivable held for sale ...................... 19,096 19,556 8,246 8,325
Loans receivable, net ............................... 682,737 704,171 790,730 818,274
FHLB stock .......................................... 13,991 13,991 16,900 16,900
Financial Liabilities
Deposits:
Demand accounts .................................. 436,675 436,675 512,801 512,801
Certificate accounts ............................. 260,337 263,743 240,578 241,133
Advances from Federal Home Loan Bank ............... 244,114 252,271 328,507 333,612
Securities sold under agreements to repurchase
and reverse repurchase agreements ................ 133,602 133,602 107,173 107,173
Junior subordinated debt ........................... -- -- 15,464 15,464
Debt associated with trust preferred securities .... 15,000 15,000 -- --
Other borrowings ................................... 81 81 -- --
34
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
(23) CARRYING AMOUNTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS - CONTINUED
SFAS 107, "Disclosures about Fair Value of Financial Instruments,"
requires disclosure of fair value information, whether or not recognized in the
statement of financial position, when it is practicable to estimate the fair
value. SFAS 107 defines a financial instrument as cash, evidence of an ownership
interest in an entity or contractual obligations, which require the exchange of
cash, or other financial instruments. Certain items are specifically excluded
from the disclosure requirements, including the Company's common stock, premises
and equipment, accrued interest receivable and payable, and other asset and
liabilities.
Fair value approximates book value for the following financial instruments
due to the short-term nature of the instrument: cash and due from banks,
interest-bearing bank balances, federal funds sold, federal funds purchased and
repurchase agreements (including reverse repurchase agreements) and other
short-term borrowings. Investments and mortgage-backed securities are valued
using quoted market prices.
Fair value for variable rate loans that reprice frequently is based on the
carrying value. Fair values for mortgage loans, consumer loans and all other
loans (primarily commercial) which have fixed rates of interest are based on the
discounted present value of the estimated future cash flows. Discount rates used
in these computations approximates the rates currently offered for similar loans
of comparable terms and credit quality.
Fair value for demand deposit accounts and interest-bearing accounts with
no fixed maturity date is equal to the carrying value. Certificate of deposit
accounts are estimated by discounting cash flows from expected maturities using
current interest rates on similar instruments.
Fair value for FHLB advances and fixed rate long-term debt is based on
discounted cash flows using the Company's current incremental borrowing rate.
The Company has used management's best estimate fair value based upon the
above assumptions. Therefore, the fair values presented may not be the amounts
which could be realized in an immediate sale or settlement of the instrument. In
addition, any income taxes or other expenses, which would be incurred in an
actual sale or settlement, are not taken into consideration in the fair values
presented.
The Company had $117.4 million of off-balance sheet financial commitments
as of September 30, 2004, which are commitments to originate loans, unused
consumer lines of credit and undisbursed portion of loans in process. Since
these obligations are based on current market rates, the carrying amount is
considered to be a reasonable estimate of fair value.
The Company originates certain fixed rate residential loans with the
intention of selling these loans. Between the time that the Company enters into
an interest rate lock or a commitment to originate a fixed rate residential loan
with a potential borrower and the time the closed loan is sold, the Company is
subject to variability in the market prices related to these commitments. The
Company believes that it is prudent to limit the variability of expected
proceeds from the sales through forward sales of "to be issued" mortgage backed
securities and loans ("forward sales commitments"). The commitment to originate
fixed rate residential loans and forward sales commitments are freestanding
derivative instruments. They do not generally qualify for hedge accounting
treatment so their fair value adjustments are recorded through the income
statement in net gains on sale of loans. The commitments to originate fixed rate
conforming loans totaled $6.7 million at September, 30 2004. The fair value of
these commitments was an asset of approximately $44,000 at September 30, 2004,
and is reflected in gain on sales of loans held for sale in the consolidated
statements of operations. The forward sales commitments totaled $14.0 million at
September 30, 2004. The fair value of these commitments was a liability of
approximately $12,000 at September 30, 2004, and is reflected in gain on sales
of loans held for sale in the consolidated statements of operations.
35
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
(23) CARRYING AMOUNTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS - CONTINUED
Fair value estimates are made at the dates indicated above, based on
relevant market information and information about the financial instrument.
These estimates do not reflect any premium or discount that could result from
offering for sale the Company's entire holdings of a particular financial
instrument. Because no active market exists for a significant portion of the
Company's financial instruments, fair value estimates are based on judgments
regarding future expected loss experience, current economic conditions, current
interest rates and prepayment trends, risk characteristics of various financial
instruments, and other factors. These estimates are subjective in nature and
involve uncertainties and matters of significant judgment and therefore cannot
be determined with precision. Changes in any of these assumptions used in
calculating fair value would also significantly affect the estimates. Changes in
market interest rates and prepayment assumptions could significantly change the
fair value.
Fair value estimates are based on existing on and off-balance sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and liabilities that are not considered
financial instruments. For example, the Company has significant assets and
liabilities that are not considered financial assets or liabilities including
deposit franchise value, loan servicing portfolio, real estate, deferred tax
liabilities, premises and equipment, and goodwill. In addition, the tax
ramifications related to the realization of the unrealized gains and losses can
have a significant effect on fair value estimates and have not been considered
in any of these estimates.
(24) COMMITMENTS AND CONTINGENCIES
The Company has entered into various contracts to purchase equipment and
software products to improve productivity, Customer service and convenience. The
total price of the equipment and software is approximately $1.8 million. The
annual maintenance fees are expected to be approximately $160,000. As of
September 30, 2004, the Company had paid approximately $550,000 toward the
commitments. The Company expects to complete the purchases in the first and
second quarters of fiscal 2005.
36
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis
Forward Looking Statements
This report may contain certain "forward-looking statements" within the
meaning of Section 27A of the Securities Exchange Act of 1934, as amended, that
represent Coastal Financial Corporation's (the Company) expectations or beliefs
concerning future events. All forward-looking statements are based on
assumptions and involve risks and uncertainties, many of which are beyond our
control and which may cause our actual results, performance or achievements to
differ materially from the results, performance or achievements contemplated by
the forward-looking statements. Forward-looking statements can be identified by
the fact that they do not relate strictly to historical or current facts. They
often include words such as "believe," "expect," "anticipate," "intend," "plan,"
"estimate" or words of similar meaning, or future or conditional verbs such as
"will," "would," "should," "could" or "may." Forward-looking statements speak
only as of the date they are made. Such risks and uncertainties include, among
other things:
o Competitive pressures among depository and other financial
institutions in our market areas may increase significantly.
o Adverse changes in the economy or business conditions, either
nationally or in our market areas, could increase credit-related
losses and expenses and/or limit growth.
o Increases in defaults by borrowers and other delinquencies could
result in increases in our provision for losses on loans and related
expenses.
o Our inability to manage growth effectively, including the successful
expansion of our Customer support, administrative infrastructure and
internal management systems, could adversely affect our results of
operations and prospects.
o Fluctuations in interest rates and market prices could reduce our
net interest margin and asset valuations and increase our expenses.
o The consequences of continued bank acquisitions and mergers in our
market areas, resulting in fewer but much larger and financially
stronger competitors, could increase competition for financial
services to our detriment.
o Our continued growth will depend in part on our ability to enter new
markets successfully and capitalize on other growth opportunities.
o Changes in legislative or regulatory requirements applicable to us
and our subsidiaries could increase costs, limit certain operations
and adversely affect results of operations.
o Changes in tax requirements, including tax rate changes, new tax
laws and revised tax law interpretations may increase our tax
expense or adversely affect our Customers' businesses.
o Company initiatives now in place or introduced in the future, not
producing results consistent with historic growth rates or results
which justify their costs.
In light of these risks, uncertainties and assumptions, you should not
place undue reliance on any forward-looking statements in this report. We
undertake no obligation to publicly update or otherwise revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
Overview
Coastal Financial Corporation is a unitary thrift holding company
incorporated in Delaware with one wholly-owned banking subsidiary, Coastal
Federal Bank (the "Bank" or "Coastal Federal"). The Company also owns Coastal
Planners Holding Corporation, whose subsidiary Coastal Retirement, Estate and
Tax Planners, Inc., offers fee-based financial planning and tax preparation
services. The Company's primary business activities are conducted by the Bank.
The Company and Bank's principal executive offices are located in Myrtle Beach,
South Carolina.
Coastal Federal Bank is a full service financial services company with 18
branches located in four counties throughout the coastal regions of South
Carolina and North Carolina. The Bank has twelve offices in Horry County, South
Carolina; one office in Georgetown County, South Carolina; three offices in
Brunswick County, North Carolina; and two offices in New Hanover County, North
Carolina.
The Bank's primary market areas are located along the coastal regions of
South Carolina and North Carolina and
37
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis - Continued
predominately center around the Metro regions of Myrtle Beach, South Carolina
and Wilmington, North Carolina, and their surrounding counties. Coastal
Federal's primary market is Horry County, South Carolina where the Bank has the
number one market share of deposits as of June 30, 2004 with 16.4% of deposits
as reported by the FDIC Summary of Deposits Report. The Bank also has the third
highest market share of deposits as of June 30, 2004 in Brunswick County, North
Carolina with 8.9% of deposits as reported by the FDIC Summary of Deposits
Report.
The primary business activities in Horry County are centered around the
tourism industry. To the extent that Horry County businesses rely heavily on
tourism business, decreased tourism would have a significant adverse effect on
Coastal Federal's primary deposit base and lending area. Moreover, the Bank
would likely experience a higher degree of loan delinquencies should the local
economy be materially and adversely affected.
Coastal Federal's principal business consists of attracting core deposits
from Customers in its primary market locations and using these funds to meet the
lending needs of its Customers as well as providing numerous financial products
and services to meet its Customer's needs.
Through its branch locations, the Bank provides a wide range of banking
products, including interest-bearing and non-interest bearing checking accounts;
business sweep accounts; business cash management services; statement savings
accounts; money market accounts; certificates of deposit accounts; individual
retirement accounts; merchant services; commercial, business, personal, real
estate, residential mortgage and home equity loans; safe deposit boxes; and
electronic banking services. The Bank has six ATMs at off-site locations and an
ATM at each branch. The Bank also makes available a wide range of financial
products through Raymond James Financial Services, including stocks, bonds,
mutual funds, annuities, insurance, and retirement products.
In the fourth fiscal quarter of 2004, the Company began two new
initiatives. The first was The Experience of FANtastic! Customer Service. This
initiative focuses on Customer service and convenience. The Company intends to
redesign its infrastructure and purchase software and products to improve
Customer convenience and Associate productivity (See Note 24). In addition, in
the second fiscal quarter of 2005, in order to improve Customer convenience the
Company will introduce an expanded hours Call Center that will employ 20 to 25
Associates and extend the Bank's operating hours. The Company anticipates hiring
another 15 to 20 Associates to service Customers during these additional banking
hours. As a result, the Company anticipates increased salary and benefit
expenses begining in the first fiscal quarter of 2005 and thereafter associated
with the hiring, training and placement of these new Associates.
The second initiative was Totally Free Checking With a Gift. The Company
has incurred, and will continue to incur, significant marketing costs associated
with this campaign. In the fourth fiscal quarter of 2004, marketing expenses
were $270,000 compared to $140,000 in the comparable 2003 period. The Bank
expects to realize significant benefits from this strategy consisting of more
Bank lobby traffic, increased number of personal checking accounts and higher
fee income as a result of those checking accounts. In the first week of the
campaign, which began on September 27, 2004, approximately 400 accounts had been
opened. This rate of growth could necessitate the hiring of additional
Associates to open and service these accounts. The Associates being hired for
these two initiatives are expected to have total compensation averaging between
$28,000 and $35,000 per Associate.
Critical Accounting Policies
The Company's significant accounting policies are set forth in Note 1 of
the Notes to Consolidated Financial Statements. Of these policies, the Company
considers the allowance for loan losses and the income taxes to be the most
critical accounting policies, because they require many of management's most
subjective and complex judgments. For additional discussion concerning the
Company's allowance for loan losses and related matters, see "Allowance for Loan
Losses" and see "Income Taxes" for additional discussion concerning income
taxes.
General
The Company reported $14.8 million in net income for the year ended
September 30, 2004, compared to $11.2 million for the year ended September 30,
2003. Net interest income increased $6.1 million as a result of increased
interest income of $6.6 million offset by an increase of $526,000 in interest
expense. Provision for loan losses decreased from $2.7 million for the year
ended September 30, 2003, to $1.8 million for the year ended September 30, 2004.
Other income decreased from $10.9 million in fiscal 2003, to $9.2 million in
2004. General and administrative expenses increased $113,000 for fiscal 2004 as
compared to fiscal 2003.
38
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis - Continued
Total assets increased from $1.2 billion at September 30, 2003 to $1.3
billion at September 30, 2004, or 10.5%. Liquid assets, consisting of cash,
interest-bearing deposits, and securities, increased from $420.8 million at
September 30, 2003, to $435.2 million at September 30, 2004. Loans receivable
increased 15.8% from $682.7 million at September 30, 2003, to $790.7 million at
September 30, 2004. Total loan originations for fiscal 2004 were $577.3 million
as compared to $769.6 million for fiscal 2003.
The growth in liquid assets was funded by increased deposits of $56.4
million and increased advances from the Federal Home Loan Bank ("FHLB") of
Atlanta of $84.4 million. As a result of increased Branches and a strong
emphasis on growing local deposits during fiscal 2004, deposits increased 8.1%
from $697.0 million at September 30, 2003, to $753.4 million at September 30,
2004. During this same period, noninterest bearing checking accounts and NOW
accounts increased $48.7 million, money market checking accounts increased $18.4
million, statement savings accounts increased $9.0 million and certificate
accounts decreased $19.8 million.
As a result of $14.8 million in net earnings, proceeds from the exercise
of stock options of approximately $1.3 million, less the cash dividends paid to
shareholders of approximately $2.9 million, and the net change in unrealized
gain (loss) on securities available for sale, net of income tax of $1.5 million,
stockholders' equity increased from $73.7 million at September 30, 2003 to $85.3
million at September 30, 2004.
Liquidity and Capital Resources
Historically, the Company has maintained its liquidity at levels believed
by management to be adequate to meet requirements of normal operations,
potential deposit outflows and strong loan demand and still allow for optimal
investment of funds and return on assets. The following table summarizes future
contractual obligations as of September 30, 2004.
Payment Due by Period
-------------------------------------------------------------
Less than 1-3 4-5 After 5
Total 1 Year Years Years Years
--------- --------- --------- --------- ---------
(Dollars in thousands)
Contractual Obligations
Time deposits ............................ $ 240,578 $ 208,130 $ 28,472 $ 3,281 $ 695
Short-term borrowings .................... 171,673 171,673 -- -- --
Long-term debt ........................... 279,471 -- 15,737 35,780 227,954
Operating leases ......................... 580 119 168 56 237
--------- --------- --------- --------- ---------
Total contractual cash obligations ..... $ 692,302 $ 379,922 $ 44,377 $ 39,117 $ 228,886
========= ========= ========= ========= =========
The Company has entered into various contracts to purchase equipment and
software products to improve productivity and Customer services. The total price
of the equipment and software is approximately $1.8 million. The annual
maintenance fees are expected to be approximately $160,000. As of September 30,
2004, the Company had paid approximately $550,000 toward the commitments. The
Company expects to complete the purchases in the first and second quarters of
fiscal 2005.
The principal sources of funds for the Company are cash flows from
operations, consisting mainly of mortgage, consumer and commercial loan
payments, retail customer deposits, repurchase agreements securitized by
mortgage-backed securities and advances from the FHLB of Atlanta.
The principal use of cash flows is the origination of loans receivable.
The Company originated loans receivable of $418.2 million, $769.6 million and
$577.3 million for the years ended September 30, 2002, 2003 and 2004,
respectively. A large portion of these loan originations were financed through
loan principal repayments which amounted to $268.1 million, $477.7 million and
$403.5 million for the years ended September 30, 2002, 2003 and 2004,
respectively. In addition, the Company has generally sold conforming fixed rate
mortgage loans to correspondent financial institutions in the secondary market
to finance future loan originations. For the years ended September 30, 2002,
2003 and 2004, the Company sold loans amounting to $13.9 million, $45.4 million
and $27.5 million, respectively.
During fiscal 2004, the Company securitized $46.8 million of mortgage
loans, concurrently sold these mortgage-backed securities to outside third
parties and recognized a net gain on sale of $1.4 million, which included
$637,000 related to mortgage servicing rights. The gain is included in gains on
sales of loans held for sale in the consolidated statement of operations. The
proceeds from sale are included in proceeds from sales of mortgage-backed
securities
39
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis - Continued
available for sale in the consolidated statement of cash flows. The Company has
no retained interest in the securities that were sold other than the servicing
rights.
In fiscal 2004 deposits increased from $697.0 million at September 30,
2003, to $753.4 million at September 30, 2004. During fiscal 2003 and 2004, the
Company has placed significant emphasis on growth in checking accounts. As a
result, Core Deposits (defined as transaction and statement savings accounts)
increased $76.1 million or 17.4%. This was accompanied by a $19.8 million
decrease in certificate accounts. During fiscal 2004, the Company prepaid
approximately $4.6 million of advances from FHLB and incurred gross penalties of
approximately $77,000 which were included in general and administrative expenses
in the statement of operations. As a result of the prepayment of FHLB advances
and the repayment of other short-term advances, the weighted average rate on
FHLB advances decreased to 3.64% at September 30, 2004, compared to 3.89% at
September 30, 2003.
At September 30, 2004, the Company had commitments to originate $40.0
million in loans and $77.4 million in unused lines of credit, which the Company
expects to fund from normal operations. Traditionally, a significant portion of
the unused lines of credit may never be used by the Customer.
At September 30, 2004, the Company had $208.1 million of certificates of
deposit which were due to mature within one year. Based upon previous
experience, the Company believes that a major portion of these certificates will
be redeposited. At September 30, 2004, the Company had excess collateral pledged
to the FHLB which would support additional FHLB advance borrowings of $45.9
million. Additionally, at September 30, 2004, the Company had repurchase
agreement lines of credit and available collateral consisting of investment
securities and mortgage-backed securities of $68.4 million as well as federal
funds lines available of $20.0 million.
As a condition of deposit insurance, current OTS regulations require that
the Bank calculate and maintain a minimum regulatory capital requirement on a
quarterly basis and satisfy such requirement at the calculation date and
throughout the ensuing quarter. The Bank's tangible and core capital
approximated $97.5 million at September 30, 2004, exceeding the Bank's tangible
and core requirements by $77.8 million and $58.2 million, respectively. At
September 30, 2004, the Bank's capital exceeded its current risk-based minimum
capital requirement by $43.8 million. The risk-based capital requirement may
increase in the future. Also see Note 14 of the Notes to Consolidated Financial
Statements.
Results of Operations
Comparison of the Years Ended September 30, 2003 and 2004
Interest Income
Despite a reduction in the average yield, the Company's growth in average
interest earning assets of 17.6% resulted in an increase in interest income for
the year ended September 30, 2004, of $6.6 million to $65.8 million, or 11.1% as
compared to $59.2 million for the year ended September 30, 2003. The earning
asset yield for the year ended September 30, 2004, was 5.67% compared to 6.00%
for the year ended September 30, 2003. As a result of significant declining
interest rates over much of the previous two years, the Bank's yield on assets
and cost of funds has declined. Interest rates have very recently begun to
increase. At September 30, 2002, 2003 and 2004, the one-year treasury rate of
interest was approximately 1.68%, 1.22% and 2.14%, respectively. At September
30, 2002, 2003 and 2004, the prime rate of interest was approximately 4.75%,
4.00% and 4.75%, respectively. On July 1, 2004, the prime rate was increased to
4.25% and on September 22, 2004, the prime rate was increased to 4.75%. The
average yield on loans receivable for the year ended September 30, 2004, was
6.17% compared to 6.66% for year ended September 30, 2003. The yield on
investments decreased to 4.73% for the year ended September 30, 2004, from 4.88%
for the year ended September 30, 2003. The yield on investments has declined due
to payoff of higher yielding mortgage-backed securities (MBS) resulting from
significant prepayments during fiscal 2003. These higher yielding MBS were
replaced with lower yielding MBS. Total average interest-earning assets were
$1.2 billion for the year ended September 30, 2004 as compared to $987.5 million
for the year ended September 30, 2003. The increase in average interest-earning
assets is primarily due to an increase in average loans receivable of
approximately $127.8 million and investment securities of approximately $50.1
million.
Interest Expense
Interest expense on interest-bearing liabilities was $23.5 million for the
year ended September 30, 2004, as compared to $23.0 million for the year ended
September 30, 2003. The average cost of deposits for the year ended September
30, 2004, was 1.39% compared to 1.79% for the year ended September 30, 2003. The
cost of interest-bearing
40
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis - Continued
liabilities was 2.03% for the year ended September 30, 2004, as compared to
2.34% for the year ended September 30, 2003. The cost of FHLB advances, other
borrowings and reverse repurchase agreements was 3.81%, 4.41% and 1.50%,
respectively, for the year ended September 30, 2004. For the year ended
September 30, 2003, the cost of FHLB advances, other borrowings and reverse
repurchase agreements was 4.27%, 5.62% and 1.81%, respectively. Total average
interest-bearing liabilities increased from $982.7 million at September 30, 2003
to $1.2 billion at September 30, 2004. The increase in average interest-bearing
liabilities is due to an increase in average deposits of approximately $50.0
million. This was accompanied by an increase in average reverse repurchase
agreements of $42.3 million, average FHLB advances of $68.9 million and average
outstanding debt associated with trust preferred securities of $11.2 million.
Net Interest Income
Net interest income was $42.3 million for the year ended September 30,
2004, as compared to $36.2 million for the year ended September 30, 2003. With
the reduction in interest rates over the last two years, the Bank continued to
experience a decrease in its net interest margin through December 31, 2003.
However, as rates stabilized over spring 2004, the Bank's net interest margin
declined at a much slower pace and actually increased slightly in the most
recent two quarters. The net interest margin for the quarters ended March 31,
2003, June 30, 2003, September 30, 2003, December 31, 2003, March 31, 2004, June
30, 2004 and September 30, 2004 was 3.87%, 3.61%, 3.65%, 3.48%, 3.58%, 3.63% and
3.81% respectively. For the year ended September 30, 2004, the net interest
margin was 3.64%.
Throughout the latter part of fiscal 2004, intermediate interest rates
have increased. From September 30, 2003 to September 30, 2004, the two year
treasury increased 116 basis points and the five year treasury increased 56
basis points. Management believes that over time this increase in intermediate
term interest rates should slow the refinancing of loans at lower rates. Based
upon the most recent information available, management believes that its net
interest margin should remain stable and could increase slightly if short-term
rates rise commensurately with long-term rates. Projection of the impact of
interest rates on the Bank's net interest margin is often imprecise due to the
fact that short-term and long-term interest rates often move very differently.
Provision for Loan Losses
The Company's provision for loan losses decreased from $2.7 million for
fiscal 2003 to $1.8 million for fiscal 2004 due to the nature and the risk
profile of the loans delinquent 90 days or more at September 30, 2004 as
compared to September 30, 2003. The allowance for loan losses as a percentage of
loans was 1.39% at September 30, 2004 compared to 1.40% at September 30, 2003.
Loans delinquent 90 days or more were $5.9 million or 0.73% of total loans at
September 30, 2004, compared to $7.4 million or 1.06% at September 30, 2003. The
allowance for loan losses was 189% of loans delinquent more than 90 days at
September 30, 2004, compared to 132% at September 30, 2003. Net charge-offs for
the year ended September 30, 2004 were $505,000 compared to $706,000 for the
year ended September 30, 2003. Net charge-offs were lower in 2004 due to
increased loss recoveries of $249,000 in 2004 versus $136,000 in 2003.
Management believes that the current level of the allowance for loan losses is
adequate considering the composition of the loan portfolio, the portfolio's loss
experience, delinquency trends, current regional and local economic conditions
and other factors. Also see "Nonperforming Assets" and "Allowance for Loan
Losses."
Other Income
In fiscal 2004, total other income decreased from $10.9 million for the
period ended September 30, 2003, to $9.2 million for the period ended September
30, 2004. As a result of increased transaction account balances of $390.4
million at September 30, 2003 compared to $457.6 million at September 30, 2004,
fees and service charges on loan and deposit accounts were $3.8 million for
fiscal 2004, compared to $3.5 million for fiscal 2003. As a result of rising
interest rates which decreased refinancing activity, gain on sale of loans was
$1.5 million for the year ended September 30, 2004, compared to $3.0 million for
the year ended September 30, 2003. Loss on sales of securities, net was $1.1
million for fiscal 2004, compared to gains of $469,000 for fiscal 2003. Other
income increased from $2.4 million for the year ended September 30, 2003, to
$2.6 million for the year ended September 30, 2004. This increase is primarily
due to increased income of $298,000 on bank-owned life insurance when comparing
the two periods.
Other Expense
General and administrative expenses were $27.3 million for fiscal 2004 as
compared to $27.2 million for fiscal 2003. Salaries and employee benefits
increased to $16.1 million for fiscal 2004 as compared to $13.5 million for
fiscal 2003, or 19.7%. This is primarily due to the addition of new branches,
additional business banking Associates
41
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis - Continued
and increased expense related to commission from the sale of non-depository
products. The Company employed 354 Associates at September 30, 2004 compared to
303 Associates at September 30, 2003. Also as a result of new branches, net
occupancy, furniture and fixtures and data processing expense increased $259,000
for fiscal 2004, as compared to fiscal 2003. Prepayment penalties on FHLB
advances were $77,000 for fiscal 2004, compared to $2.8 million for fiscal 2003.
Other expenses decreased slightly from $4.9 million in fiscal 2003 to $4.8
million in fiscal 2004. Other expenses included $162,000 of mortgage servicing
rights impairment recovery for fiscal 2004 compared to $461,000 of mortgage
servicing rights impairment for fiscal 2003.
Income Taxes
Income taxes increased from $6.1 million in fiscal 2003 to $7.6 million in
fiscal 2004 as a result of increased earnings before income taxes.
The effective income tax rate as a percentage of pretax income was 34.0%
in fiscal 2004 and 35.5% in fiscal 2003. The effective income tax rate declined
in connection with an increase in investment interest income generated by
bank-owned life insurance and municipal securities that are exempt from federal
and certain state taxes.
The Company's effective income tax rates take into consideration certain
assumptions and estimates made by management. No assurance can be given that
either the tax returns submitted by management or the income tax reported on the
consolidated financial statements will not be adjusted by either adverse rulings
by the U.S. Tax court, changes in the tax code, or assessments made by the
Internal Revenue Service. The Company is subject to potential adverse
adjustments, including but not limited to: an increase in the statutory federal
or state income tax rates, the permanent nondeductibility of amounts currently
considered deductible either now or in future periods, and the dependency on the
generation of future taxable income, in order to ultimately realize deferred
income tax assets. Income tax returns for 2001 and subsequent years are exposed
to examination by taxing authorities.
Results of Operations
Comparison of the Years Ended September 30, 2002 and 2003
Interest Income
Interest income for the year ended September 30, 2003, increased 9.9% to
$59.2 million as compared to $53.9 million for the year ended September 30,
2002. The yield on interest-earning assets for the year ended September 30, 2002
was 7.10% compared to 6.00% for the year ended September 30, 2003. The average
yield on loans receivable for fiscal year 2003 was 6.67% compared to 7.58% in
2002. The yield on investments which includes Investments, Mortgage-Backed
Securities, Overnight Funds and Federal Funds, decreased to 4.88% for the fiscal
year 2003 from 6.15% for fiscal year 2002. Total interest-earning assets for
fiscal year 2003 averaged $987.5 million compared to $765.8 million for the year
ended September 30, 2002. The increase in average interest-earning assets is
primarily due to an increase in average loans receivable of approximately $98.6
million and average mortgage-backed and investment securities of approximately
$133.4 million.
Interest Expense
Interest expense on interest-bearing liabilities was $23.0 million for the
year ended September 30, 2003, as compared to $21.8 million in fiscal 2002. The
cost of interest-bearing liabilities was 2.35% for the year ended September 30,
2003, compared to 2.96% in fiscal year 2002. The average cost of deposits for
the year ended September 30, 2003, was 1.79% compared to 2.42% for the year
ended September 30, 2002. The cost of FHLB advances and reverse repurchase
agreements for fiscal 2003 was 4.27% and 2.04%, respectively, compared to 5.11%
and 2.39%, respectively, for fiscal 2002. Total average interest-bearing
liabilities increased 32.6% from $738.1 million at September 30, 2002, to $978.9
million at September 30, 2003. The increase in average interest-bearing
liabilities is due to an increase in average deposits of approximately $99.9
million, average FHLB advances of $62.3 million and average reverse repurchase
agreements of $77.5 million.
Net Interest Income
Net interest income was $36.2 million for the year ended September 30,
2003, an increase of $4.2 million, compared to $32.0 million for the year ended
September 30, 2002. The net interest margin decreased to 3.65% for fiscal 2003
42
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis - Continued
compared to 4.14% for fiscal 2002. Average interest-earning assets increased
$221.7 million while average interest-bearing liabilities increased $240.8
million. During fiscal 2003, interest rates have decreased. At September 30,
2002 and September 30, 2003, the prime rate of interest was 4.75% and 4.00%,
respectively. With the reduction in interest rates, resulting from the Federal
Reserve Board's decision to reduce the prime rate by 75 basis points throughout
fiscal 2003, the Company's interest-earning assets repriced more quickly than
its interest-bearing liabilities. For fiscal 2003, the Company's average balance
of core deposits (checking, statement savings and money market) was $412.3
million with an average cost of 1.06%. This compares to average core deposits of
$346.7 million at 1.44% in fiscal 2002. As the Federal Reserve reduced the
discount rate, core deposits did not reprice at the same ratio as the Company's
interest-earning assets.
Provision for Loan Losses
As a result of growth in loans receivable and credit risk associated with
problem loans, the Company's provision for loan losses increased from $1.2
million for fiscal 2002 to $2.7 million for fiscal 2003. The allowance for loan
losses as a percentage of loans was 1.40% at September 30, 2003 compared to
1.42% at September 30, 2002. This is due to the nature and the risk of the
delinquent loans at September 30, 2003 as compared to September 30, 2002. Loans
delinquent 90 days or more were $7.4 million or 1.06% of total loans at
September 30, 2003, compared to $3.5 million or 0.63% at September 30, 2002. The
allowance for loan losses was 132% of loans delinquent more than 90 days at
September 30, 2003, compared to 224% at September 30, 2002. Although the Company
experienced an increase in loans delinquent 90 days or more, there was not a
corresponding increase in the required allowance for loan loss based on the
Company's model.
Other Income
In fiscal 2003, total other income increased from $8.1 million for the
period ended September 30, 2002, to $10.9 million for the period ended September
30, 2003. As a result of increased transaction deposit accounts, fees and
service charges on loans and deposit accounts was $3.5 million for fiscal 2003,
compared to $3.1 million for fiscal 2002. Due to a decreased long-term interest
rate environment which has resulted in increased fixed-rate mortgage
originations, gain on sale of loans was $3.0 million for the year ended
September 30, 2003, compared to $1.5 million for the year ended September 30,
2002. Gain on sale of mortgage-backed securities, net was $469,000 for fiscal
2003, compared to $238,000 for fiscal 2002. Other income increased from $1.6
million for the year ended September 30, 2002, to $2.4 million for the year
ended September 30, 2003. This is primarily due to $665,000 of income on
bank-owned life insurance purchased in December 2002.
Other Expense
General and administrative expenses were $27.2 million for fiscal 2003 as
compared to $22.8 million for fiscal 2002. Salaries and employee benefits
increased to $13.5 million for fiscal 2003 as compared to $12.5 million for
fiscal 2002, or 7.5%, primarily due to normal increases, increased incentives as
a result of increased loan production, and the costs of staffing for a new
office. During fiscal 2003, Coastal Federal Bank added an office in Shallotte,
North Carolina. Net occupancy, furniture and fixtures and data processing
expense increased $873,000 for fiscal 2003, as compared to fiscal 2002. Other
expenses increased from $4.1 million in fiscal 2002 to $4.9 million in fiscal
2003. Other expenses included $461,000 of mortgage servicing rights impairment
for fiscal 2003.
Income Taxes
Income taxes increased from $5.9 million in fiscal 2002 to $6.1 million in
fiscal 2003 as a result of increased earnings before income taxes.
The effective income tax rate as a percentage of pretax income was 35.5%
in fiscal 2003 and 36.6% in fiscal 2002. The effective income tax rate declined
in connection with an increase in investment interest income generated by
bank-owned life insurance and municipal securities that are exempt from federal
and certain state taxes.
The Company's effective income tax rates take into consideration certain
assumptions and estimates made by management. No assurance can be given that
either the tax returns submitted by management or the income tax reported on the
consolidated financial statements will not be adjusted by either adverse rulings
by the U.S. Tax court, changes in the tax code, or assessments made by the
Internal Revenue Service. The Company is subject to potential adverse
adjustments, including but not limited to: an increase in the statutory federal
or state income tax rates,
43
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis - Continued
the permanent nondeductibility of amounts currently considered deductible either
now or in future periods, and the dependency on the generation of future taxable
income, in order to ultimately realize deferred income tax assets. Income tax
returns for 2000 and subsequent years are exposed to examination by taxing
authorities.
Non-performing Assets
Non-performing assets were $6.6 million at September 30, 2004 compared to
$9.1 million at September 30, 2003. Loans past due 90 days or more decreased
from $7.4 million at September 30, 2003, to $5.9 million at September 30, 2004.
Real estate acquired through foreclosure decreased from $1.6 million at
September 30, 2003, to $785,000 at September 30, 2004.
At September 30, 2003, impaired loans totaled $4.9 million. There were
$3.3 million in impaired loans at September 30, 2004. Included in the allowance
for loan losses at September 30, 2003 was $263,000 related to impaired loans
compared to $359,000 at September 30, 2004. The average recorded investment in
impaired loans for the year ended September 30, 2003 was $4.0 million compared
to $3.9 million for the year ended September 30, 2004. Interest income
recognized on impaired loans in fiscal 2003 was $134,000. Interest income
recognized on impaired loans in fiscal 2004 was $607,000. This increase is
primarily due to a commercial loan that was placed in non-accrual status in a
prior fiscal year. The loan paid off in the fourth fiscal quarter of 2004. As a
result, the Company recognized approximately $330,000 of interest which had been
previously reserved.
Loans are reviewed on a regular basis and an allowance for uncollectible
interest is established on loans where collection is questionable, generally
when such loans become 90 days delinquent. Loan balances for which interest
amounts have been reserved and all loans more than 90 days delinquent are placed
on non-accrual status. Typically, payments received on a non-accrual loan are
applied to the outstanding principal or recognized as interest based upon the
collectability of the loan as determined by management.
Allowance for Loan Losses
The adequacy of the allowance is analyzed on a quarterly basis. For
purposes of this analysis, adequacy is defined as a level of reserves sufficient
to absorb probable losses inherent in the portfolio. The methodology employed
for this analysis considers historical loan loss experience, the results of loan
reviews, current economic conditions, and other qualitative and quantitative
factors that warrant current consideration in determining an adequate allowance.
The evaluation of the allowance is segregated into general allocations and
specific allocations. For general allocations, the portfolio is segregated into
risk-similar segments for which historical loss ratios are calculated and
adjusted for identified trends or changes in current portfolio characteristics.
Historical loss ratios are calculated by product type for consumer loans
(installment and revolving), mortgage loans, and commercial loans and may be
adjusted for other risk factors. 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
44
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis - Continued
methodology and judgments are based on the information currently available and
includes numerous assumptions about current events, which we believe to be
reasonable, but which may or may not be valid. Thus, there can be no assurance
that loan losses in future periods will not exceed the current allowance amount
or that future increases in the allowance will not be required. No assurance can
be given that management's ongoing evaluation of the loan portfolio in light of
changing economic conditions and other relevant circumstances will not require
significant future additions to the allowance, thus adversely affecting the
operating results of the Company. Management believes that the current level of
the allowance for loan losses is presently adequate considering the composition
of the loan portfolio, the portfolio's loss experience, delinquency trends,
current regional and local economic conditions and other factors.
The allowance is also subject to examination and adequacy testing by
regulatory agencies, which may consider such factors as the methodology used to
determine adequacy and the size of the allowance relative to that of peer
institutions, and other adequacy tests. In addition, such regulatory agencies
could require the Company to adjust the allowance based on information available
to them at the time of their examination.
The Company established provisions for loan losses for the years ended
September 30, 2002, 2003 and 2004, of $1.2 million, $2.7 million and $1.8
million, respectively. For the years ended September 30, 2002, 2003 and 2004,
the Company had net charge-offs of $511,000, $706,000 and $505,000,
respectively. Net charge-offs as a percentage of average outstanding loans were
..10%, .11%, and .07% for fiscal years ended 2002, 2003 and 2004, respectively.
At September 30, 2004, the Company had an allowance for loan losses of $11.1
million, which was 1.39% of net loans.
Off-Balance Sheet Arrangements
In the normal course of operations, the Company engages in a variety of
financial transactions that, in accordance with generally accepted accounting
principles, are not recorded in the financial statements, or are recorded in
amounts that differ from the notional amounts. These transactions involve, to
varying degrees, elements of credit, interest rate, and liquidity risk. Such
transactions are used by the Company for general corporate purposes or for
Customer needs. Corporate purpose transactions are used to help manage credit,
interest rate, and liquidity risk or to optimize capital. Customer transactions
are used to manage Customers' requests for funding.
The Company's off-balance sheet arrangements, which principally include
lending commitments and derivatives are described below.
Lending Commitments. Lending commitments include loan commitments, standby
letters of credit and unused business credit card lines. These instruments are
not recorded in the consolidated balance sheet until funds are advanced under
the commitments. The Company provides these lending commitments to Customers in
the normal course of business.
Loan commitments for residential housing and land totaled $40.0 million.
For retail Customers, loan commitments are generally lines of credit secured by
residential property. At September 30, 2004 retail loan commitments totaled
$45.4 million. Standby letters of credit are conditional commitments to
guarantee performance, typically contract or financial integrity, of a Customer
to a third party and totaled $5.5 million at September 30, 2004. Commercial
lines of credit and unused business and personal credit card lines, which
totaled $26.5 million at September 30, 2004, are generally for short-term
borrowings.
The Company applies essentially the same credit policies and standards as
it does in the lending process when making these commitments.
Derivatives. In accordance with SFAS No. 133, the Company records
derivatives at fair value, as either assets or liabilities, on the consolidated
balance sheet. Derivative transactions are measured in terms of the notional
amount, but this amount is not recorded on the balance sheet and is not, when
viewed in isolation, a meaningful measure of the risk profile of the instrument.
The notional amount is not exchanged, but is used only as the basis upon which
interest and other payments are calculated.
At September 30, 2004, the fair value of derivative assets and liabilities
totaled $44,000 and $12,000 respectively. The related notional amounts, which
are not recorded on the consolidated balance sheet, totaled $6.7 million for the
derivative assets and $14.0 million for the derivative liabilities. (See Note
23).
45
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis - Continued
Interest Rate Risk Disclosure
The Bank's Asset Liability Management Committee ("ALCO") monitors and
considers methods of managing exposure to interest rate risk. The ALCO consists
of members of the Board of Directors and Senior Leadership of the Company and
meets quarterly. The Bank's exposure to interest rate risk is reviewed on at
least a quarterly basis by the ALCO. Interest rate risk exposure is measured
using interest rate sensitivity analysis to determine the Bank's change in net
portfolio value in the event of hypothetical changes in interest rates. The ALCO
is charged with the responsibility to maintain the level of sensitivity of the
Bank's net portfolio value within Board approved limits.
Net portfolio value (NPV) represents the market value of portfolio equity
and is equal to the market value of assets minus the market value of
liabilities, with adjustments made for off-balance sheet items over a range of
assumed changes in market interest rates. The Bank's Board of Directors has
adopted an interest rate risk policy which establishes maximum allowable
decreases in NPV in the event of a sudden and sustained one hundred to four
hundred basis point increase or decrease in market interest rates. The following
table presents the Bank's projected change in NPV as computed by the OTS for the
various rate shock levels as of September 30, 2004.
Board Limit Board Limit Market Value Market Value
Minimum NPV Maximum Of Assets Portfolio Equity NPV
Change in Interest Rates Ratio Decline in NPV 9/30/04 9/30/04 Ratio
- ------------------------ ----------- -------------- ------------ ---------------- -------
300 basis point rise 5.00% 400 BPS $ 1,305,536 $ 124,568 9.54%
200 basis point rise 6.00% 300 BPS $ 1,329,250 $ 137,913 10.38%
100 basis point rise 6.00% 250 BPS $ 1,352,181 $ 148,722 11.00%
No Change 6.00% $ 1,371,829 $ 157,947 11.51%
100 basis point decline 6.00% 250 BPS $ 1,383,497 $ 159,851 11.55%
200 basis point decline 6.00% 300 BPS N/A N/A N/A
300 basis point decline 6.00% 350 BPS N/A N/A N/A
The preceding table indicates that at September 30, 2004, in the event of
a sudden and sustained increase in prevailing market interest rates, the Bank's
NPV would be expected to decrease, and that in the event of a sudden decrease in
prevailing market interest rates, the Bank's NPV would be expected to increase
minimally. Values for the 200 and 300 basis point decline are not indicated due
to the level of interest rates at September 30, 2004. At September 30, 2004, the
Bank's estimated changes in NPV were within the limits established by the Board
of Directors.
Computation of prospective effects of hypothetical interest rate changes
are based on numerous assumptions, including relative levels of market interest
rates, loan prepayments and deposit decay, and should not be relied upon as
indicative of actual results. Further, the computations do not contemplate any
actions the ALCO could undertake in response to sudden changes in interest
rates.
The Bank also uses interest rate sensitivity gap analysis to monitor the
relationship between the maturity and repricing of its interest-earning assets
and interest-bearing liabilities. Interest rate sensitivity gap is defined as
the difference between the amount of interest-earning assets maturing or
repricing within a specific time period and the amount of interest-bearing
liabilities maturing or repricing within the same time period. A gap is
considered positive when the amount of interest-rate-sensitive assets exceeds
the amount of interest-rate-sensitive liabilities. Generally, during a period of
rising rates, a positive gap would result in an increase in net interest income.
Conversely, during a period of falling interest rates, a positive gap would
result in a decrease in net interest income. It is ALCO's goal to maintain
reasonable balance between exposure to interest rate fluctuations and earnings.
Impact of New Accounting Pronouncements
Effective January 1, 2004, the Company adopted FASB Interpretation No. 46
("FIN 46"), "Consolidation of Variable Interest Entities," which addresses
consolidation by business enterprises of variable interest entities. Under FIN
46, an enterprise that holds significant variable interest in a variable
interest entity but is not the primary beneficiary is required to disclose the
nature, purpose, size and activities of the variable interest entity, its
exposure to loss as a result of the variable interest holder's involvement with
the entity, and the nature of its involvement with the entity and date when the
involvement began. The primary beneficiary of a variable interest entity is
required to disclose the nature, purpose, size and activities of the variable
interest entity, the carrying amount and classification of consolidated assets
that are collateral for the variable interest entity's obligations, and any lack
of recourse by creditors (or beneficial interest holders) of a consolidated
variable interest entity to the general credit of the primary beneficiary. In
accordance with these rules, the Company deconsolidated Coastal Financial
Capital Trust I at January 1, 2004, which had been
46
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis - Continued
formed to raise capital by issuing preferred securities to an institutional
investor. The deconsolidation of this wholly-owned subsidiary, increased other
assets by $464,000, increased junior subordinated debt-trust preferred
securities by $15.5 million, and reduced debt associated with trust preferred
securities by $15.0 million. The full and unconditional guarantee by the Company
for the preferred securities remains in effect.
FASB Statement No. 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity, was issued in May 2003. The
Statement establishes standards for the classification and measurement of
certain financial instruments with characteristics of both liabilities and
equity. The Statement also includes required disclosures for financial
instruments within its scope. For the Company, the Statement was effective for
instruments entered into or modified after May 31, 2003 and otherwise will be
effective as of January 1, 2004, except for mandatorily redeemable financial
instruments. For certain mandatorily redeemable financial instruments, the
Statement will be effective for the Company on January 1, 2005. The effective
date has been deferred indefinitely for certain other types of mandatorily
redeemable financial instruments. The Company currently does not have any
financial instruments that are within the scope of this Statement.
On March 9, 2004, the Securities and Exchange Commission staff issued
Staff Accounting Bulletin No. 105, "Application of Accounting Principles to Loan
Commitments" ("SAB 105"). SAB 105 provides recognition guidance for entities
that issue loan commitments that are required to be accounted for as derivative
instruments. SAB 105 indicates that the expected future cash flows related to
the associated servicing of the loan and any other internally-developed
intangible assets should not be considered when recognizing a loan commitment at
inception or through its life. SAB 105 also discusses disclosure requirements
for loan commitments and is effective for loan commitments accounted for as
derivatives and entered into subsequent to March 31, 2004. The Company currently
does not include the associated servicing of the loan when recognizing loan
commitments at inception and throughout its life. The Company adopted SAB 105 on
April 1, 2004 with no material impact.
In March 2004, the Financial Accounting Standards Board ("FASB") issued
EITF No. 03-1 ("EITF 03-1"), "The Meaning of Other-Than-Temporary Impairment and
Its Application of Certain Investments," which provided guidance for evaluating
whether an investment is other-than-temporarily impaired and its application to
investments classified as either available for sale or held to maturity under
FASB Statement No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," and investments accounted for under the cost or equity method of
accounting. In September 2004, the FASB issued FASB Staff Position ("FSP") EITF
No. 03-1-1, a delay of the effective date for the measurement and recognition
guidance contained in paragraphs 10-20 of EITF 03-1 until the FASB issues final
guidance, expected in the first quarter of 2005.
Paragraphs 10 through 20 of EITF 03-1 provide guidance on when impairment
of debt and equity securities is considered other-than-temporary. This guidance
generally states impairment is considered other-than-temporary unless the holder
of the security has both the intent and ability to hold the security until the
fair value recovers and evidence supporting the recovery outweighs evidence to
the contrary. We are currently evaluating the impact of the initial adoption of
this guidance on the financial condition or results of operations of the
Company.
The Company adopted the guidance of EITF 03-1, excluding paragraphs 10-20
effective as of September 30, 2004. As a result of this adoption, the Company
provides additional disclosures, which are found in Notes 2 and 3 of this
report. The initial adoption of this issue, which excludes paragraphs 10-20 did
not have a material impact on the financial condition or results of operations
of the Company.
Capital Standards and Regulatory Matters
The Bank's capital standards include: (1) a leverage limit requiring all
OTS chartered financial institutions to maintain core capital in an amount not
less than 4% of the financial institution's total assets; (2) a tangible capital
requirement of not less than 1.5% of total assets; and (3) a risk-based capital
requirement of not less than 8.0% of risk weighted assets. For further
information concerning the Bank's capital standards, refer to Note 14 of the
Notes to the Consolidated Financial Statements.
47
Board of Directors
Coastal Financial Corporation Coastal Federal Bank Coastal Planners Holding Corporation
E. Lawton Benton E. Lawton Benton James T. Clemmons
President President Chairman
C.L. Benton & Sons, Inc. C.L. Benton & Sons, Inc. Coastal Financial Corporation
James C. Benton James C. Benton Michael C. Gerald
Retired President Retired President President and Chief Executive Officer
C.L. Benton & Sons, Inc. C.L. Benton & Sons, Inc. Coastal Financial Corporation
G. David Bishop G. David Bishop Jerry L. Rexroad, CPA
Managing Director Managing Director Chief Financial Officer
White Harvest Trading Co., LLC White Harvest Trading Co., LLC Coastal Planners Holding Corporation
J. Robert Calliham J. Robert Calliham
President and Chief Executive Officer President and Chief Executive Officer
Smith, Sapp, Bookhout, Crumpler & Smith, Sapp, Bookhout, Crumpler &
Calliham, P.A. Calliham, P.A.
James T. Clemmons James T. Clemmons
Chairman Chairman
Coastal Financial Corporation Coastal Federal Bank
James P. Creel James P. Creel
President President
Creel Corporation Creel Corporation
James. H. Dusenbury James. H. Dusenbury
Retired - Attorney Retired - Attorney
Dusenbury and Clarkson Law Firm Dusenbury and Clarkson Law Firm
Michael C. Gerald Michael C. Gerald
President and Chief Executive Officer President and Chief Executive Officer
Coastal Financial Corporation Coastal Federal Bank
Frank A. Thompson, II Frank A. Thompson, II
President President
Peoples Underwriters, Inc. Peoples Underwriters, Inc.
48
COASTAL FINANCIAL CORPORATION
Leadership Group
Sherri J. Adams Anne R. Caldwell Joel P. Foster
Branch Manager Assistant Vice President Senior Vice President
N. Myrtle Beach Deposit Servicing Leader Area Banking Leader
Myrtle Beach Community
Ginger Allen Daniel R. Cameron, Jr.
Assistant Vice President Assistant Vice President Andrew D. Gable
Senior Underwriter Commercial Banking Officer Assistant Vice President
Wilmington Residential Brokerage
Anthony Ambuhl
Assistant Vice President Tamra T. Cannon William A. Gehman, III, CPA
Commercial Banking Assistant Vice President Senior Vice President
Officer Senior Branch Manager Corporate Controller
Conway
Phillip G. Ammons Mary L. Geist
Vice President Shonda C. Chestnut Vice President
Community Banking Assistant Vice President Data Services Leader
Leader Senior Banking Leader
Pawleys Island & Murrells Surfside Michael C. Gerald
Inlet President and Chief Executive
Susan J. Cooke Officer
Donna P. Bailey Senior Vice President
Assistant Vice President Corporate Secretary Jimmy R. Graham
Delivery Systems Resource Administrative Services Executive Vice President
Administrator Leader Chief Information Officer
James R. Baker, MCSE Patricia A. Coveno Don C. Hamilton
Assistant Vice President Vice President Vice President
Systems Engineer Retail Banking Resource Residential Banking Leader
Leader
Harry G. Bates, IV E. Haden Hamilton, Jr.
Assistant Vice President Jerry J. Cox, Jr. President
Commercial Banking Vice President Coastal Investor Services
Officer Community Banking Leader
Oak Street Loris Community Kathy D. Hane
Assistant Vice President
Jeffrey A. Benjamin John L. Creamer Senior Branch Manager
Senior Vice President Vice President Pawleys Island
Credit Administration Coastal Investor Services
Leader Lauren E. Henson
C. Renee Cummins Vice President
Rick R. Bowen Branch Manager Dean of Coastal Federal
Facilities Maintenance Socastee University
Leader
Deborah S. Dillard J. Michael Hill
Steven Brockmann Branch Manager Vice President
Assistant Vice President Sunset Beach Coastal Investor Services
Coastal Investor Services
Robert D. Douglas Debra Hinson
Cynthia L. Buffington Executive Vice President Assistant Vice President
Assistant Vice President Human Resources Leader Operations Leader
Item Processing Leader Coastal Investor Services
Trina S. Dusenbury
Nancy G. Bundy Vice President Glenn D. Humbert
Branch Manager Residential Loan Vice President
Surfside Administration Leader Community Banking Leader
Sunset Beach Community
Ronnie L. Burbank Michael L. Evans
Vice President Vice President Lisa B. James
Senior Banking Leader Loan Review Leader Senior Vice President
Wilmington CBD Operations Leader
Rita E. Fecteau
Glenn T. Butler, MCSE, Vice President Stephanie L. Karnap
CCNA Accounting Leader Branch Manager
Vice President Waccamaw
Network Services Leader J. Daniel Fogle
Vice President Ruth S. Kearns
Senior Banking Leader Senior Vice President
Carolina Forest / Community Relations Officer
Waccamaw / Conway
49
COASTAL FINANCIAL CORPORATION
Leadership Group - Continued
L. Eric Keys Abigail E. Mishoe Joseph Shumbo
Vice President Assistant Vice President Assistant Vice President
Community Banking Leader Residential Banking Officer Residential Banking Leader
South Horry Community
Lynn T. Murray J. Marcus Smith, Jr.
Linwood E. Koonce, Jr. Senior Vice President Senior Vice President
Banking Closing Leader Checking Account Product Internal Audit Leader
Development & Management
John L. Kosicki Officer Phillip G. Stalvey
Senior Vice President Executive Vice President
Residential Banking Leader Deborah J. Myers Banking Leader
Assistant Vice President
James Louis LaBruce Electronic Banking Leader H. Delan Stevens
Vice President Vice President
Senior Banking Leader Ronald A. Nolan Community Banking Leader
Assistant Vice President West Community
Scott W. Lander Security Officer
Senior Vice President S. Annette Stroud
Area Leader Deborah A. Orobello Branch Manager
North Carolina Region Branch Manager Carolina Forest
Little River
William H. Langfitt Sandra J. Szarek
Assistant Vice President Charles S. Page Assistant Vice President
Branch Manager Vice President Commercial Loan Servicing
Dunes Senior Banking Leader Leader
Carolina Forest
Justin M. Lee Andrea M. Taiani
Assistant Vice President Orit Perez Customer Contact Center
Senior Banking Leader Assistant Vice President Leader
Socastee Senior Branch Manager
Oak Street and 38th Avenue Sarah B. Thomas
Pauline M. Lewis Bi-Lo Assistant Vice President
Branch Manager Business Banking Loan
Shallotte Ellen S. Poisson Administrator
Branch Manager
Edward L. Loehr, Jr. Wilmington - Oleander Terry B. Thornton
Vice President Vice President
Budgeting and Treasury Derick R. Powers Senior Branch Manager
Senior Banking Leader Wilmington
Mary M. Lundy Southport
Branch Manager Matthew J. Towns
Southport Jerry L. Rexroad, CPA Vice President
Executive Vice President Credit Administration
Kathleen M. Lutes Chief Financial Officer
Assistant Vice President Douglas W. Walters
Senior Underwriter David L. Roe Vice President
Senior Vice President Residential Banking Leader
Richard M. Marsh Small Business Banking Leader North Myrtle Beach
Branch Manager
Loris Eulette W. Sauls Theresa M. Whitley
Assistant Vice President Closing and Construction
Michael C. Mauney Information Management Leader Leader
Assistant Vice President
Collections Leader Sherry G. Schoolfield Sandra R. Zanfini
Assistant Vice President Assistant Vice President
Amy E. McLaurin Compliance Officer Assistant Corporate Secretary
Assistant Vice President Corporate Support Leader
Senior Banking Leader Douglas E. Shaffer
Sunset Beach Senior Vice President
Area Leader
Janice B. Metz North and West Communities
Assistant Vice President
Advertising Officer Steven J. Sherry
Executive Vice President
Chief Marketing Officer
50
Branch Locations
Coastal Federal Bank
Oak Street Branch Pawleys Island Branch 38th Avenue Branch (BI-LO)
2619 Oak Street Coastal Federal Town Center 1245 38th Avenue North
Myrtle Beach, SC 29577-3129 11403 Ocean Highway Myrtle Beach, SC 29577
843.205.2000 Pawleys Island, SC 29585 843.205.2041
843.205.2020
Carolina Forest Branch Wilmington Branch
3894 Renee Drive Shallotte Branch 5710 Oleander Drive, Suite 209
Myrtle Beach, SC 29579 200 Smith Avenue Wilmington, NC 28403
843.205.2016 Shallotte, NC 28470 843.205.2031
843.205.2035 910.313.1161
Conway Branch 910.754.6186
310 Wright Boulevard Wilmington Branch
Conway, SC 29526 Socastee Branch 109 Market Street
843.205.2005 4801 Socastee Boulevard Wilmington, NC 28401
Myrtle Beach, SC 29575 843.205.2033
Dunes Branch 843.205.2007 910.763.2372
7500 North Kings Highway
Myrtle Beach, SC 29572 Southport Branch
843.205.2001 4956-1 Long Beach Road SE
Southport, NC 28461
Little River Branch 843.205.2032
1602 Highway 17 910.454.4173
Little River, SC 29566
843.205.2014 Sunset Beach Branch
1625 Seaside Road SW
Loris Branch Sunset Beach, NC 28468
3610 Broad Street 843.205.2012
Loris, SC 29569 910.579.8160
843.205.2018
Surfside Branch
Murrells Inlet Branch 112 Highway 17 South
3348 Highway 17 South & Glenns Bay Road
& Inlet Crossing Surfside Beach, SC 29575
Murrells Inlet, SC 29576 843.205.2003
843.205.2008
Waccamaw Medical Park Branch
North Myrtle Beach Branch 112 Waccamaw Medical Park Drive
521 Main Street Conway, SC 29526
North Myrtle Beach, SC 29582 843.205.2009
843.205.2002
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Corporate Information
Common Stock and Dividend Information
The common stock of Coastal Financial Corporation is quoted through the Nasdaq
Stock Market under the symbol CFCP. For information contact the Shareholder
Relations office.
As of November 30, 2004, the Corporation had 1,114 shareholders and 15,935,823
shares of Common Stock outstanding. This does not reflect the number of persons
or entities who hold stock in nominee or "street name."
The Company's ability to pay dividends depends primarily on the ability of
Coastal Federal Bank to pay dividends to the Company. See Notes 14, 15, and 19
of the Notes to Consolidated Financial Statements for further information.
Market Price of Common Stock
The table below reflects the high and low bid stock prices published by Nasdaq
for each quarter. Such prices may reflect inter-dealer prices, without retail
mark-up, mark-down or commissions, and may not necessarily represent actual
transactions. The prices have been adjusted retroactive to reflect stock
dividends.
HIGH LOW CASH
BID BID DIVIDEND
Fiscal Year 2004:
First Quarter $15.67 $11.49 $0.045
Second Quarter 15.00 11.32 0.045
Third Quarter 14.26 10.73 0.045
Fourth Quarter 15.18 12.76 0.050
Fiscal Year 2003:
First Quarter $12.70 $10.17 $0.037
Second Quarter 11.73 9.63 0.037
Third Quarter 11.15 9.67 0.045
Fourth Quarter 13.15 10.28 0.045
Form 10-K
A copy of Coastal Financial Corporation's Annual Report on Form 10-K, as filed
with the Securities Exchange Commission for the year ended September 30, 2004,
may be obtained without a charge by writing to the Shareholder Relations Officer
at the Corporate Address.
Annual Meeting of Shareholders
The Annual Meeting of Shareholders of Coastal Financial Corporation will be held
at the Ocean Reef Resort (formerly Myrtle Beach Martinique), 7100 North Ocean
Boulevard, Myrtle Beach, South Carolina, on Tuesday, January 25, 2005 at 2:00
p.m., Eastern Standard Time.
Additional Information
If you are receiving duplicate mailing of shareholder reports due to multiple
accounts, we can consolidate the mailings without affecting your account
registration. To do this, or for additional information, contact the Shareholder
Relations Office, at the Corporate address shown below.
Corporate Offices
Coastal Financial Corporation
2619 Oak Street
Myrtle Beach, South Carolina 29577
843.205.2000
Transfer Agent and Registrar
Registrar and Transfer Company
P.O. Box 1010
Cranford, NJ 07016
1.800.866.1340 Ext. 2514
Independent Registered Public Accounting Firm
KPMG LLP
55 Beattie Place, Suite 900
Greenville, South Carolina 29601
Special Counsel
Muldoon Murphy Faucette & Aguggia LLP
5101 Wisconsin Avenue
Washington, DC 20016
Shareholder Relations Officer
Susan J. Cooke
Coastal Financial Corporation
2619 Oak Street
Myrtle Beach, South Carolina 29577
843.205.2000
Coastal Financial Corporation is an equal opportunity employer and pledges equal
opportunities without regard to religion, citizenship, race, color, creed, sex,
age, national origin, disability or status as a disabled or Vietnam-Era veteran.
COASTAL [LOGO] [LOGO] * COASTAL Securities are
FEDERAL EQUAL HOUSING COASTAL INVESTOR RAYMOND JAMES offered exclusively
BANK LENDER RETIREMENT o ESTATE o TAX SERVICES FINANCIAL SERVICES through Raymond
The right bank for you. MEMBER PLANNERS MEMBER NASD/SIPC James Financial
FDIC Committed to your financial future. Services, Inc.,
member NASD/SIPC, an
independent
broker/dealer, and
are not insured by
the FDIC or any
other bank
insurance, are not
deposits or
obligations of the
bank, are not
guaranteed by the
bank, and are
subject to risk,
including the
possible loss of
principal.
52