EXHIBIT 13
ANNUAL REPORT TO STOCKHOLDERS FOR THE
FISCAL YEAR ENDED SEPTEMBER 30, 1997
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COASTAL FINANCIAL CORPORATION
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1997 ANNUAL REPORT
DEDICATION
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COASTAL FINANCIAL CORPORATION
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A QUEST FOR EXCELLENCE
GREAT PEOPLE
COASTAL FEDERAL UNIVERSITY
-----------------------------------
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Great people are the cornerstone of Coastal Financial Corporation and nothing
could better evidence our commitment to attract, develop and retain the very
best people than the creation of Coastal Federal University.
With this initiative, we are committing the resources necessary to better
prepare our Great People for the future. Coastal Federal University is dedicated
to providing a learning environment for all Associates by creating opportunities
to continuously develop skills and knowledge, both personally and
professionally.
As the financial services industry continues to change at an ever increasing
pace, we believe this approach will assure a continued focus on 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.
Thanks to our Great People, initiatives such as the founding of Coastal Federal
University to provide a pillar of quality professional development for them and
our overriding commitment to our QUEST FOR EXCELLENCE operating philosophy, we
have again produced outstanding results for our Shareholders. We are absolutely
convinced that this approach will help to insure that our best years are yet to
come.
[GRAPHIC OMITTED]
The value of one share of Coastal Financial Corporation's Capital Stock
purchased at $10.00 in the initial public offering, and affected by stock
dividends, stock splits, and reinvested cash dividends, was $217.16 based upon
NASDAQ Quotations at September 30, 1997. The foregoing reflects historical
results and may not be indicative of future stock prices.
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FINANCIAL HIGHLIGHTS
-----------------------
The following table sets forth certain information concerning the financial
position of the Company (including data from operations of its subsidiaries) as
of and for the dates indicated. The consolidated data is derived in part from,
and should be read in conjunction with, the Consolidated Financial Statements of
the Company and its subsidiaries presented herein.
At September 30,
-----------------------
1993 1994
------------ ----------
(dollars in thousands,
FINANCIAL CONDITION DATA:
Total assets ............................................................... $335,284 $374,980
Loans receivable, net ...................................................... 280,425 331,175
Mortgage-backed securities ................................................... 3,525 794
Cash, interest-bearing deposits and investment securities .................. 27,580 29,316
Deposits ..................................................................... 266,855 247,385
Borrowings .................................................................. 41,906 98,446
Stockholders' equity ......................................................... 21,829 23,104
OPERATING DATA:
Interest income ............................................................ $ 25,967 $ 24,562
Interest expense ............................................................ 12,876 11,548
-------- --------
Net interest income ......................................................... 13,091 13,014
Provision for loan losses ................................................... 1,389 510
-------- --------
Net interest income after provision for loan losses ........................ 11,702 12,504
-------- --------
OTHER INCOME:
Fees and service charges on loans and deposit accounts ..................... 811 1,001
Gain on sales of loans held for sale ....................................... 1,125 411
Gain (loss) on sales of investment securities .............................. (29) --
Gain on sales of mortgage-backed securities, net ........................... 238 54
Real estate operations ...................................................... (176) 341
Other income ............................................................... 1,209 1,022
-------- --------
Total other income ......................................................... 3,178 2,829
Total general and administrative expense .................................... 9,272 10,279
-------- --------
Earnings before income taxes ................................................ 5,608 5,054
Income taxes ............................................................... 2,270 1,906
-------- --------
Net earnings before cumulative effect of adopting FASB 109 .................. 3,338 3,148
-------- --------
Cumulative effect of adopting FASB 109 ....................................... -- 664
-------- --------
Net income .................................................................. $ 3,338 $ 3,812
======== ========
Net earnings per common share before cumulative effect of adopting FASB 109 $ .68 $ .65
Cumulative effect of adopting FASB 109 ....................................... -- .14
-------- --------
Net earnings per common share ................................................ $ .68 $ .79
======== ========
Cash dividends per common share ............................................. -- $ .14
======== ========
Weighted average shares outstanding .......................................... 4,904 4,881
======== ========
1995 1996 1997
---------- -------------- ---------
(dollars in thousands, except per
share data)
FINANCIAL CONDITION DATA:
Total assets ............................................................... $401,201 $459,712 $494,003
Loans receivable, net ...................................................... 356,819 370,368 403,570
Mortgage-backed securities ................................................... 12,776 27,029 23,023
Cash, interest-bearing deposits and investment securities .................. 13,530 38,332 39,582
Deposits ..................................................................... 273,099 313,430 347,116
Borrowings .................................................................. 95,997 109,886 106,337
Stockholders' equity ......................................................... 24,820 27,681 32,391
OPERATING DATA:
Interest income ............................................................ $ 30,328 $34,720 $ 38,065
Interest expense ............................................................ 17,272 19,091 20,146
-------- -------- --------
Net interest income ......................................................... 13,056 15,629 17,919
Provision for loan losses ................................................... 202 790 760
-------- -------- --------
Net interest income after provision for loan losses ........................ 12,854 14,839 17,159
-------- -------- --------
OTHER INCOME:
Fees and service charges on loans and deposit accounts ..................... 1,051 1,415 1,593
Gain on sales of loans held for sale ....................................... 39 990 931
Gain (loss) on sales of investment securities .............................. -- (6) 7
Gain on sales of mortgage-backed securities, net ........................... -- 189 235
Real estate operations ...................................................... 876 345 141
Other income ............................................................... 1,284 1,699 1,792
-------- --------- --------
Total other income ......................................................... 3,250 4,632 4,699
Total general and administrative expense .................................... 10,152 13,586 12,716
-------- --------- --------
Earnings before income taxes ................................................ 5,952 5,885 9,142
Income taxes ............................................................... 2,232 2,164 3,351
-------- --------- --------
Net earnings before cumulative effect of adopting FASB 109 .................. 3,720 3,721 5,791
-------- --------- --------
Cumulative effect of adopting FASB 109 ....................................... -- -- --
-------- --------- --------
Net income .................................................................. $ 3,720 $ 3,721 $ 5,791
======== ========= ========
Net earnings per common share before cumulative effect of adopting FASB 109 $ .78 $ .78 $ 1.19
Cumulative effect of adopting FASB 109 ....................................... -- -- --
-------- --------- --------
Net earnings per common share ................................................ $ .78 $ .78 $ 1.19
======== ========= ========
Cash dividends per common share ............................................. $ .28 $ .31 $ .35
======== ========= ========
Weighted average shares outstanding .......................................... 4,740 4,793 4,877
======== ========= ========
All share and per share data have been restated to reflect 10%, 15%, 5%,
and 35% common stock dividends declared on November 29, 1991, August 28, 1992
and May 30, 1995, respectively, three 3 for 2 common stock dividends declared on
January 27, 1993, August 18, 1993 and January 7, 1994, respectively, two 5 for 4
stock dividends declared on January 9, 1996 and June 20, 1996, respectively, and
one four for three stock dividend declared on April 30, 1997.
KEY OPERATING RATIOS:
The table below sets forth certain performance ratios of the Company for
the periods indicated.
At or for Years
Ended September 30,
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1993 1994
---------- ----------
Other Data:
Return on assets (net income divided by average assets) .............................. 1.00% 0.92%
Return on average equity (net income divided by average equity) ........................ 16.59% 13.88%
Average equity to average assets ...................................................... 6.08% 6.66%
Tangible book value per share ......................................................... $ 4.70 $ 5.12
Dividend payout ratio .................................................................. N/A 16.19%
Interest rate spread (difference between average yield on interest-earning assets and
average cost of interest-bearing liabilities) ......................................... 4.15% 4.09%
Net interest margin (net interest income as a percentage of average interest-earning 4.20% 4.12%
assets)
Allowance for loan losses to total loans at end of period .............................. 0.98% 1.01%
Ratio of non-performing assets to total assets (1) .................................... 0.75% 0.56%
Tangible capital ratio ............................................................... 6.27% 5.94%
Core capital ratio ..................................................................... 6.27% 5.94%
Risk-based capital ratio ............................................................... 10.57% 10.11%
Number of:
Real estate loans outstanding ......................................................... 5,647 6,614
Deposit accounts ..................................................................... 32,960 33,618
Number of full service offices ...................................................... 8 8
At or for Years Ended
September 30,
--------------------------------
1995 1996 1997
---------- ---------- ----------
Other Data:
Return on assets (net income divided by average assets) .............................. 0.94% 0.85% 1.21%
Return on average equity (net income divided by average equity) ........................ 15.54% 13.97% 19.36%
Average equity to average assets ...................................................... 6.08% 6.10% 6.24%
Tangible book value per share ......................................................... $ 5.55 $ 6.03 $ 6.97
Dividend payout ratio .................................................................. 34.46% 38.51% 27.63%
Interest rate spread (difference between average yield on interest-earning assets and
average cost of interest-bearing liabilities) ......................................... 3.52% 3.76% 3.89%
Net interest margin (net interest income as a percentage of average interest-earning 3.62% 3.86% 4.03%
assets)
Allowance for loan losses to total loans at end of period .............................. 1.00% 1.11% 1.19%
Ratio of non-performing assets to total assets (1) .................................... 0.53% 0.17% 0.10%
Tangible capital ratio ............................................................... 6.13% 5.93% 6.31%
Core capital ratio ..................................................................... 6.13% 5.93% 6.31%
Risk-based capital ratio ............................................................... 10.45% 10.41% 11.05%
Number of:
Real estate loans outstanding ......................................................... 6,688 5,741 6,752
Deposit accounts ..................................................................... 39,881 41,755 43,544
Number of full service offices ...................................................... 8 9 9
(1) Nonperforming assets consist of nonaccrual loans 90 days or more past due
and real estate acquired through foreclosure.
2
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DEAR FRIENDS
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This year's Annual Report spotlights Coastal Federal University. This
investment in the future of our Associates will help to assure 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 by focusing on the personal and professional development of
the real source of our success, our Great People.
What a remarkable year 1997 was. It was a truly successful year and
reflects well on our QUEST FOR EXCELLENCE operating philosophy and our Great
People.
Our Basic Corporate Objective is To Maximize The Value Of Our Shareholders'
Investment. And, in that regard, 1997 was a remarkably rewarding year, with our
stock price up 60%, following an increase of 56% for fiscal 1996. Since becoming
a publicly owned company in 1990, Coastal Financial Corporation's stock has
grown at a compound annual rate of over 54%, taking our market capitalization
from $4.6 million in October 1990, the date of our initial public offering, to
$106.3 million at the close of this fiscal year. Put another way, an initial
investment of $1,000 in October of 1990 would have grown to $21,700 at September
30, 1997.
The attainment of our Basic Corporate Objective is correlated closely with
our Long-Term Goal of Being The Best Financial Services Company In Our
Marketplace. Evidence of our success in this measure is reflected in our record
earnings and Coastal Federal's continued #1 ranking, by the 1997 SHESHUNOFF
MARKET SHARE REPORT, in deposit market share for Horry County, South Carolina,
the second fastest growing Metropolitan Statistical Area in the nation.
1997 marked the continuation of increased dividends for each consecutive
year since 1992, the year we began paying cash dividends. Net income for 1997
totaled $5.8 million, an increase of 23% over our record operating earnings
performance of 1996. Since 1990, our operating earnings have increased at a
compound annualized rate in excess of 16%.
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Noteworthy Financial Results for Fiscal 1997:
o The market price of Coastal Financial Corporation's
stock increased 60%. This compares with an 37.2% increase in the NASDAQ Bank
Index during the same period.
oThe value of Coastal Financial Corporation's common stock has grown at a
compound annual rate of over 51% during the past five years.
o An increase of 9.1% in cash dividends paid per common share.
o The payment of a 4 for 3 stock split in the form of a 33% stock dividend.
3
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oNet earnings of $5.8 million or $1.19 per share. Net operating earnings for
fiscal 1997 increased 23% over the prior year.
o Shareholders' equity advanced 17.0% to $32.4 million.
[GRAPHIC OMITTED]
o Book value per share grew 15.6% to $6.97
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o A 7.5% growth in total assets to $494.0 million.
o Loans receivable increased 9.0% to $403.6 million.
o Deposits were up 10.7% to the highest level in the Com-
pany's history.
o Transaction deposits grew by 18.8% in fiscal 1997.
[GRAPHIC OMITTED]
o Non-performing Assets to Total Assets decreased 41.2%
to 0.10%.
[GRAPHIC OMITTED]
o Allowance for Loan Losses to Net Loans increased to
1.19%.
o The Company had Loan Charge Offs of .04% in 1997.
4
One of the best indicators of performance is Return On Average Equity and
this ratio for 1997 was, again, outstanding. Our Return On Average Equity
measure of 19.4% ranks us among the top performing financial services companies
in the nation.
We are extremely proud of the performance evidenced by these results and
are especially proud of the Great People who worked so hard to achieve them.
1997. . . OUR BEST YEAR YET
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This year was remarkable in terms of the dramatic gains we achieved in both
Shareholder value and operating earnings. The restructuring of our operating
environment to create a stronger focus on the sales and marketing of financial
services in fiscal 1996 has continued to pay significant dividends, particularly
in the areas of loan, deposit and investment product sales.
Our financial performance during fiscal 1997 again met our high
expectations and well positions us to aggressively pursue future opportunities.
Since becoming a publicly owned company in 1990, we have achieved dramatic
gains in virtually all measures of our performance. But, despite these
historical results, it's the future that we are most interested in. As our
performance continues to accelerate, the question we continually ask ourselves
is, "Can we keep it up?"
The future looks good. That is not to say the future is without challenge.
But with Great People, excellent products, great markets, strong financial
resources and our philosophy of viewing change and constant improvement as
essential to the achievement of our long-term objectives, we are confident that
the answer is an unequivocal "Yes." Those attributes really set us apart from
the competition, and enabled another record performance during 1997.
A LOOK AT 1997
While 1997 really was quite a remarkable year
for Coastal Financial from a financial performance
perspective, the financial results are only
partially indicative of the real growth we
experienced this past year.
Some of the initiatives and achievements aimed
at increasing the value of the Company and
maximizing our ability to capitalize on
opportunities in the years ahead were:
oThe creation of Coastal Federal University to
assure that we remain on the cutting edge of
professional development education programs. In
support of that initiative and our overall
growth needs, we have recently acquired the
Mall Plaza property just across Oak Street from
our Corporate Offices. The addition of this
17,500 square foot facility, which currently
houses our Coastal Federal University Main
Campus, Human Resources, Marketing and Public
Relations Groups, will provide space for our
corporate facilities expansion needs well into
the future.
o The introduction of our "FLY FREE ON US...and more" line of Credit Cards.
Through this recent offering, we have rounded out our core banking product
offerings and have been extremely pleased with the degree of Customer
enthusiasm for this valuable travel and gift awards program.
5
o The introduction of our internet web site at:
http://www.coastalfederal.com. This addition allows us to offer information
about our full array of financial services to technology users across the
country and around the world, as well as providing a vehicle for the
solicitation of on-line applications for financial services, general
information about Coastal Federal and relocation packages.
Our On-Line PC Banking program is currently in the final phases of testing
and will be released in fiscal 1998.
These initiatives are designed to allow technology users to benefit from our
programs while encouraging all of our Customers to come into our lobbies and
experience our commitment to providing exceptional banking services through
the efforts of our warm, friendly and well trained professionals.
oThe construction of a full service banking office in Brunswick County, North
Carolina. This Sales Center, which is scheduled to open in early December,
will better position us to expand our financial services offerings to the
individuals and businesses of the rapidly growing and dynamic Brunswick
County area.
oThe expansion of our array of residential mortgage lending products coupled
with a well conceived and executed advertising and marketing campaign, has
increased our loan origination volume and further supported our commitment to
being the leading provider of residential mortgage loans in each of the
markets we serve.
oOur leadership role in serving as the Major Corporate Sponsor for the Horry
County March of Dimes WalkAmerica Campaign For Healthier Babies continued to
evidence our support for the communities we serve. In addition to this
initiative, we encourage our Associates to be involved in other civic and
charitable events to further support the needs of the communities
we serve.
Each year, Coastal Financial Corporation and its Great People, give
generously of their time, talents and financial resources in support of
hundreds of community organizations which contribute significantly to the
quality of life, health and welfare of our neighborhoods.
Our QUEST FOR EXCELLENCE operating philosophy, which is embodied in our
culture of viewing change and constant improvement as essential to the
achievement of our long-term objectives, is well reflected in these initiatives.
GREAT PEOPLE
Coastal Financial has more than 200 Great People, and they are the reason
for our success. Their dedication and ever increasing ability to work together
as a team toward Exceeding The Expectations Of Our Customers gives us the
confidence that, together, we can do anything.
Several years ago, we recognized the valuable
[GRAPHIC OMITTED] role that each of our Career Associates plays in
our organization by offering a 401-k profit
sharing plan to our Associates. Many have taken
advantage of this opportunity and today, thanks to
the results that we, as a team, have achieved,
this plan is one of the most appreciated parts of
our excellent benefits package.
The introduction of Coastal Federal University
further recognizes the significant capabilities of
each of our Great People and, through this
initiative, we will challenge them to achieve
their full potential. By teaching Coastal
Financial Corporation's core philosophies and
successful business strategies to our Associates,
we will, as an organization, be well prepared for
the 21st century. This initiative will reinforce
our commitment to the philosophies which
6
have made us unique and successful, allow our Associates the opportunity to
become much more valuable to the organization, position us to deliver even
greater service to our Customers and, ultimately, create enhanced value to our
Shareholders, many of whom are our Associates.
[GRAPHIC OMITTED]
COASTAL FEDERAL UNIVERSITY
Sir Francis Bacon once said, "A wise man will make more opportunities than
he finds."
For our Associates, taking advantage of the educational opportunities
afforded by Coastal Federal University is one very good way of assuring that.
Coastal Federal University, with its focus on our QUEST FOR EXCELLENCE operating
philosophy, will continue our journey toward building a culture which is
"Totally Committed To Exceeding The Expectations Of Our Customer" by offering
unique, innovative and powerful professional development opportunities. Here,
our Great People can experience a stimulating community of people and ideas,
offering a rich variety of professional development and enrichment experiences.
Through enrolling in the programs offered through Coastal Federal University,
they will learn about Service, Teamwork, Operations, Leadership, Management, our
Corporate Philosophy and innovative ways to make our business even more
successful.
Our curriculums will stress development of the skills required for their
success over a career in business and will, in addition to preparing our
Associates to be Career Associates, prepare them to continue to learn over those
careers.
We are extremely excited about this initiative and believe that it
demonstrates that we are not complacent about, nor satisfied with our current
success, but, rather, are dedicating ourselves to building an even stronger
foundation for the future.
COASTAL FINANCIAL'S FUTURE
Looking ahead, we see a future filled with even more opportunity than the
past and firmly believe that we can achieve our Corporate goals if we maintain
our values and continually renew ourselves and our business.
Our pledge to our Shareholders is to do exactly that...to do everything in
our power to remain youthful in our approach and spirit...and continue to view
change and constant improvement as the catalyst for reaching our fullest
potential.
I just can't thank our Great People enough. Our Board Of Directors,
Leadership Group and Associates are simply the best imaginable. They go above
and beyond the call of duty in serving our Customers every day and are totally
committed to Exceeding their Expectations on every occasion.
Our QUEST FOR EXCELLENCE operating philosophy, our Great People and our
commitment to helping each of them achieve their full potential through Coastal
Federal University...we believe it's the best formula possible to assure a great
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
7
MANAGEMENT'S DISCUSSION AND ANALYSIS
General
Coastal Financial Corporation (the "Company"), reported $5.8 million in net
income for the year ended September 30, 1997, compared to $3.7 million for the
year ended September 30, 1996. Net earnings for the year ended September 30,
1996 included a special assessment from the FDIC for the recapitalization of the
Savings Association Insurance Fund ("SAIF") of $1.6 million, and a related
reduction in income taxes of $615,000. Excluding the one-time SAIF assessment in
fiscal 1996, operating earnings in fiscal 1997 increased 23% over fiscal 1996.
Net interest income increased $2.3 million as a result of increased interest
income of $3.3 million offset by an increase of $1.1 million in interest
expense. Provision for loan losses decreased slightly from $790,000 for the year
ended September 30, 1996, to $760,000 for the year ended September 30, 1997.
Other income increased slightly from $4.6 million in fiscal 1996, to $4.7
million in 1997. General and administrative expenses decreased $870,000 for
fiscal 1997, as compared to fiscal 1996. Included in general and administrative
expenses in fiscal 1996, is a $1.6 million special assessment from the FDIC for
the recapitalization of the SAIF Insurance Fund.
Total assets increased from $459.7 million at September 30, 1996 to $494.0
million at September 30, 1997, or 7.5%. Liquid assets, consisting of cash,
interest-bearing deposits, and securities, decreased from $65.3 million at
September 30, 1996 to $62.6 million at September 30, 1997. Loans receivable
increased 9.0% from $370.4 million at September 30, 1996, to $403.6 million at
September 30, 1997. Total loan originations for fiscal 1997 were $178.5 million
as compared to $160.4 million for fiscal 1996. Mortgage-backed securities
decreased from $27.0 million at September 30, 1996, to $23.0 million at
September 30, 1997.
The growth in loans was funded by increased deposits of $33.7 million and
loan repayments. The Company's strategy is to increase its reliance on core
transaction deposits as opposed to certificates of deposit and advances from the
Federal Home Loan Bank ("FHLB"). During fiscal 1997, deposits increased from
$313.4 million at September 30, 1996, to $347.1 million at September 30, 1997.
During this same period, transaction deposits increased $26.4 million and
certificate accounts increased $10.6 million.
As a result of $5.8 million in net earnings, less the cash dividends paid
to shareholders of approximately $1.6 million, stockholders' equity increased
from $27.7 million at September 30, 1996 to $32.4 million at September 30, 1997.
Liquidity and Capital Resources
In accordance with OTS regulations, the Company is required to maintain
specific levels of cash and liquid investments in qualifying types of United
States treasury and Federal agency securities and other investments generally
having maturities of five years or less. The required level of such investments
is calculated on a liquidity base, consisting of net withdrawable accounts and
short-term borrowings, and is equal to 5.0% of such base amount. Short-term
liquid assets may not be less than 1.0% of the liquidity base.
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 liquidity ratio, as calculated for
regulatory purposes, was 7.3%, 8.0%, and 6.1% for the years ended September 30,
1995, 1996 and 1997, respectively. The Company expects to continue to maintain
liquidity at approximately the same level as 1997.
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 and advances from the Federal Home Loan Bank
("FHLB") of Atlanta.
The principal use of cash flows is the origination of loans receivable. The
Company originated loans receivable of $141.0 million, $160.4 million and $178.5
million for the years ended September 30, 1995, 1996 and 1997, respectively. A
large portion of these loan originations were financed through loan principal
repayments which amounted to $104.2 million, $93.6 million and $109.9 million
for the years ended September 30, 1995, 1996 and 1997, respectively. In
addition, the Company has sold certain loans in the secondary market to finance
future loan originations. The increase in originations and sales of mortgage
loans can be primarily attributed to the purchase of Coastal Federal Mortgage
("CFM"), in November 1995. CFM specializes in originating conforming mortgage
loans which are then sold to correspondent financial institutions. For the year
ended September 30, 1997, CFM originated $40.6 million of loans and sold $38.4
million of loans. For the years ended September 30, 1995, 1996 and 1997, the
Company sold loans amounting to $2.8 million, $40.7 million and $44.2 million,
respectively.
During 1997, the Company used deposit growth to fund the majority of its
loan growth. In fiscal 1997, deposits increased from $313.4 million at September
30, 1996, to $347.1 million at September 30, 1997. The increase was attributed
to transaction accounts which increased approximately $26.4 million, and
certificate accounts which increased $10.6 million. This was offset by a
decrease in passbook accounts of $3.4 million.
At September 30, 1997, the Company had commitments to originate $3.2
million in loans and $31.4 million in unused lines of credit, which the Company
expects to fund from normal operations.
At September 30, 1997, the Company had $111.9 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. Additionally, at September 30, 1997, the Company had excess
collateral pledged to the FHLB which would support additional FHLB advance
borrowings of $59.0 million.
8
As a condition of deposit insurance, current FDIC regulations require that
Coastal Federal Savings Bank (the "Bank") calculate and maintain a minimum
regulatory capital requirement on a quarterly basis and satisfy such requirement
at the calculation date and throughout the ensuing quarter. The Bank's tangible
and core capital approximated $31.2 million at September 30, 1997, exceeding the
Bank's tangible and core requirements by $23.8 million and $16.5 million,
respectively. At September 30, 1997, the Bank's capital exceeded its current
risk-based minimum capital requirement by $9.6 million. The risk-based capital
requirement may increase in the future.
Results of Operations
Comparison of the Years Ended September 30, 1996 and 1997
General
Net earnings were $5.8 million for the year ended September 30, 1997
compared to $3.7 million for the year ended September 30, 1996. Included in net
earnings for 1996, is a special assessment from the FDIC for the
recapitalization of the SAIF of $1.6 million, and a related reduction in income
taxes of $615,000. Excluding this special assessment, net income increased 23%
in 1997. Net interest income increased $2.3 million primarily as a result of an
increase in interest income of $3.3 million which was offset by an increase in
interest expense of $1.1 million.
Interest Income
Interest income for the year ended September 30, 1997, increased 9.6% to
$38.1 million as compared to $34.7 million for the year ended September 30, 1996
primarily due to the constant yield on assets and a 8.9% increase in average
interest-earning assets. The net yield on interest-earning assets for the year
ended September 30, 1996 and 1997 was 8.46%. The average yield on loans
receivable for fiscal year 1997 was 8.70% compared to 8.57% in 1996. The
increase in yield on loans receivables resulted from the repricing of teaser
rate ARMs originated in previous years and the continued growth of the
commercial real estate loan portfolio which has a higher yield than the mortgage
loan portfolio. The yield on investments which includes Investments, Overnight
Funds and Federal Funds, increased to 6.70% for the fiscal year 1997 from 6.55%
for fiscal year 1996. Total interest-earning assets for fiscal year 1997
averaged $452.5 million compared to $415.5 million for the year ended September
30, 1996.
Interest Expense
Interest expense on interest-bearing liabilities was $20.1 million for the
year ended September 30, 1997, as compared to $19.1 million in fiscal 1996. The
cost of interest-bearing liabilities was 4.57% for the year ended September 30,
1997, compared to 4.70% in fiscal year 1996. The increase in interest expense of
5.5% primarily resulted from a growth in deposits and a slight increase in
overall market rates paid on deposits. The average cost of deposits for the year
ended September 30, 1997, was 4.15% compared to 4.08% for the year ended
September 30, 1996. The cost of FHLB advances for fiscal 1997 was 5.95% compared
to 6.27% for fiscal 1996. Total average interest-bearing liabilities increased
8.0% from $406.2 million at September 30, 1996, to $438.6 million at September
30, 1997.
Net Interest Income
Net interest income was $17.9 million for the year ended September 30,
1997, compared to $15.6 million for the year ended September 30, 1996. The net
interest margin increased to 3.89% for fiscal 1997 compared to 3.76% for fiscal
1996. Average interest-earning assets increased $37.0 million while average
interest-bearing liabilities increased $32.4 million. At September 30, 1997, the
yield on the one year treasury security was approximately 5.5%, compared to
approximately 6.1% which was the yield on the 10 year treasury security. Should
the yield curve continue to remain relatively flat, the Company may continue to
experience a high amount of mortgage loan repayments and refinancings and may
experience a declining net interest margin in fiscal 1998.
Provision for Loan Losses
The Company's provision for loan losses decreased slightly from $790,000
for fiscal 1996 to $760,000 for fiscal 1997. The allowance for loan losses as a
percentage of loans was 1.19% at September 30, 1997, compared to 1.11% at
September 30, 1996. Loans delinquent 90 days or more were .06% of total loans at
September 30, 1997, compared to .12% at September 30, 1996. The allowance for
loan losses was 1,906% of loans delinquent more than 90 days at September 30,
1997, compared to 938% at September 30, 1996. 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 1997, total other income increased slightly from $4.6 million for
the period ended September 30, 1996, to $4.7 million for the period ended
September 30, 1997. Fees and service charges on loans and deposit accounts
increased $178,000, or 12.6%, for the year ended September 30, 1997, as a result
of growth in core deposits and loans. Income from real estate operations
decreased $204,000 from the prior fiscal year due to expenses related to a real
estate owned commercial property. This was partially offset by a gain on a land
sale that occurred
9
in the first quarter of fiscal 1997 by one of the Bank's subsidiaries. Other
income increased from $1.7 million for the year ended September 30, 1996, to
$1.8 million for the year ended September 30, 1997 primarily as a result of
increased fees related to ATM and debit card transactions.
Other Expense
General and administrative expenses were $12.7 million for fiscal 1997 as
compared to $13.6 million for fiscal 1996. Included in general and
administrative expense in 1996 is the $1.6 million assessment for capitalization
of the SAIF. Salaries and employee benefits were $6.8 million for fiscal 1997 as
compared to $6.2 million for fiscal 1996, or a 10.8% increase. Approximately a
third of this increase is attributable to increased group insurance costs, 401K
benefits, and increased bonuses and incentives due to increased return on equity
and increased loan production. Normal salary increases and increased lending
personnel accounted for a significant portion of the remaining increase. Net
occupancy, furniture and fixtures and data processing expense increased $60,000
for fiscal 1997, as compared to fiscal 1996. FDIC insurance premiums decreased
from $622,000 for the year ended September 30, 1996 to $283,000 for the year
ended September 30, 1997 as a result of the SAIF assessment paid in fiscal 1996.
Other expenses increased from $2.3 million in 1996 to $2.7 million in 1997. This
increase is primarily related to increased marketing expense, legal fees,
employment services, expenses related to debit cards and expenses related to
transaction accounts.
Income Taxes
Income taxes increased from $2.2 million in fiscal 1996 to $3.4 million in
fiscal 1997 as a result of increased earnings before income taxes.
Results of Operations
Comparison of the Years Ended September 30, 1995 and 1996
General
Net earnings were $3.7 million for the years ended September 30, 1995 and
1996. Included in net earnings for 1996, is a special assessment from the FDIC
for the recapitalization of the SAIF of $1,620,000, and a related reduction in
income taxes of $615,000. Excluding this special assessment, net income
increased 27.0% in 1996. Net interest income increased $2.6 million primarily as
a result of an increase in interest income of $4.4 million which was offset by
an increase in interest expense of $1.8 million. Provision for loan losses
increased $588,000. Other income increased from $3.3 million for the year ended
September 30, 1995, to $4.6 million for the year ended September 30, 1996.
General and administrative expenses increased $3.4 million when compared to
fiscal 1995. Included in general and administrative expenses in fiscal 1996, is
a $1.6 million special assessment from the FDIC for the recapitalization of the
SAIF Insurance Fund.
Interest Income
Interest income for the year ended September 30, 1996, increased 14.5% to
$34.7 million as compared to $30.3 million for the year ended September 30, 1995
primarily due to the increased yield on assets and a 11.7% increase in average
interest-earning assets. The net yield on interest-earning assets for the year
ended September 30, 1996, was 8.46% compared to a net yield of 8.27% in the
prior year. The increase in net yield primarily resulted from the repricing of
adjustable-rate mortgage loans and growth in commercial real estate loans which
have a higher yield. The average yield on loans receivable for fiscal year 1996
was 8.57% compared to 8.39% in 1995. The yield on investments which includes
Investments, Overnight Funds and Federal Funds, increased to 6.55% for the
fiscal year 1996 from 5.14% for fiscal year 1995. Total interest-earning assets
for fiscal year 1996 averaged $406.2 million compared to $371.9 million for the
year ended September 30, 1995.
Interest Expense
Interest expense on interest-bearing liabilities was $19.1 million for the
year ended September 30, 1996, as compared to $17.3 million in fiscal 1995. The
cost of interest-bearing liabilities was 4.70% for the year ended September 30,
1996, compared to 4.75% in fiscal year 1995. The increase in interest expense of
10.5% primarily resulted from a growth in deposits and a slight increase in
overall market rates paid on deposits. The average cost of deposits for the year
ended September 30, 1996, was 4.08% compared to 3.96% for the year ended
September 30, 1995. The cost of FHLB advances for fiscal 1996 was 6.27% compared
to 6.53% for fiscal 1995. Total average interest-bearing liabilities increased
11.7% from $363.7 million at September 30, 1995, to $406.2 million at September
30, 1996.
Net Interest Income
Net interest income was $15.6 million for the year ended September 30,
1996, compared to $13.1 million for the year ended September 30, 1995. The net
interest margin increased to 3.76% for fiscal 1996 compared to 3.52% for fiscal
1995. Average interest-earning assets increased $43.5 million while average
interest-bearing liabilities increased $42.4 million. At September 30, 1996, the
cost of one month advances was approximately 5.5%, compared to approximately
6.7% which was the yield on the 10 year treasury security. Should the yield
curve continue to remain relatively flat, the Company may continue to experience
a high amount of loan prepayments and refinancings and may experience a
declining net interest margin in fiscal 1997.
10
Provision for Loan Losses
The Company's provision for loan losses increased from $202,000 for fiscal
1995 to $790,000 for fiscal 1996. The allowance for loan losses as a percentage
of loans was 1.11% at September 30, 1996, compared to 1.00% at September 30,
1995. During fiscal 1996, commercial real estate and construction loans
increased 16.3%. As a result of the increase in loans which may possess a higher
degree of risk, the Company increased its allowance for loan losses as a
percentage of loans. Loans delinquent 90 days or more were .12% of total loans
at September 30, 1996, compared to .37% at September 30, 1995. The allowance for
loan losses was 937% of loans delinquent more than 90 days at September 30,
1996, compared to 270% at September 30, 1995. 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 1996, total other income increased to $4.6 million as compared to
$3.3 million for the period ended September 30, 1995. Fees and service charges
on loans and deposit accounts increased $364,000 for the year ended September
30, 1996, as a result of growth in core deposits and loans. Income from real
estate operations decreased $531,000 from the prior fiscal year due to reduced
sales of real estate at the Bank's subsidiaries. This was offset by increased
gains on sales of loans receivable and mortgage-backed securities of $951,000
and $189,000, respectively, primarily due to increased mortgage banking
activities of CFM which was acquired in November 1995. Other income increased
from $1.3 million for the year ended September 30, 1995, to $1.7 million for the
year ended September 30, 1996. The increase is attributed to an increase of fee
income from ATMs of $85,000, fee income from debit cards of $53,000, gains on
the sale of assets of $44,000, miscellaneous income of $44,000 and higher
revenues from sales of alternative investment products at the Company's
subsidiary, Coastal Investments Corporation, of $154,000.
Other Expense
General and administrative expenses were $13.6 million for fiscal 1996 as
compared to $10.2 million for fiscal 1995. Salaries and employee benefits were
$6.2 million for fiscal 1996 as compared to $5.3 million for fiscal 1995, or a
16.3% increase. Approximately a third of this increase is attributable to
increased group insurance costs, 401K benefits, and increased bonuses and
incentives. In addition, personnel at CFM accounted for approximately a third of
the increase. Normal salary increases and increased lending personnel accounted
for a significant portion of the remaining increase. Net occupancy, furniture
and fixtures and data processing expense increased $498,000 for fiscal 1996, as
compared to fiscal 1995 primarily as a result of enhancements to technology and
the addition of CFM. FDIC insurance premiums, excluding the special SAIF
assessment, increased from $566,000 for fiscal 1995, to $622,000 for fiscal 1996
as a result of the 14.8% growth in deposits. Other expenses increased from $1.9
million in 1995 to $2.3 million in 1996. In addition, in 1996 the Company
recorded a special assessment from the FDIC for the recapitalization of the SAIF
of $1,620,000.
Income Taxes
Although fiscal 1996 net income was slightly higher than fiscal 1995,
income taxes were slightly lower due to increased tax exempt interest.
Non-performing Assets
Non-performing assets were $507,000 at September 30, 1997 compared to
$768,000 at September 30, 1996. Loans past due 90 days or more decreased from
$445,000 at September 30, 1996, to $257,000 at September 30, 1997. Real estate
acquired through foreclosure decreased from $323,000 at September 30, 1996, to
$250,000 at September 30, 1997. At September 30, 1997, approximately 40% of the
loans 90 days past due are secured by residential mortgage loans. Loans are
reviewed on a regular basis and an allowance for uncollectable interest is
established on loans where collection is questionable, generally when such loans
become 90 days delinquent. Loan balances for which interest amounts have been
reserved and all loans more than 90 days delinquent are considered to be on a
non-accrual basis. Typically, payments received on a non-accrual loan are
applied to the outstanding principal or recognized as interest based upon the
collectability of the loan as determined by management.
Allowance for Loan Losses
The Company's management evaluates the need to establish additional
allowances against losses on loans quarterly. Such an evaluation includes a
review of all loans for which full collectability may not be reasonably assured
and considers, among other matters, the estimated market value of the underlying
collateral of problem loans, composition of the loan portfolio, prior loss
experience, economic conditions, etc. The Company established provisions for
loan losses for the years ended September 30, 1995, 1996 and 1997, of $202,000,
$790,000 and $760,000, respectively. For the years ended September 30, 1995,
1996 and 1997, the Company had net charge-offs (recoveries) of ($23,000),
$196,000 and $140,000, respectively. At September 30, 1997, the Company had an
allowance for loan losses of $4.9 million, which was 1.19% of net loans compared
to 1.11% at September 30, 1996. Management believes that the current level of
the allowance for loan losses is presently adequate considering the composition
of the loan portfolio, the portfolio's loss experience, delinquency trends,
current regional and local economic conditions and other factors. While
management uses the best information available to make evaluations, future
adjustments
11
to the allowance may be necessary if economic conditions differ substantially
from the assumptions used in making the evaluation. The allowance for possible
loan losses are subject to periodic evaluation by various regulatory authorities
and may be subject to adjustment upon their examination.
Impact of New Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 128, Earnings per Share
(EPS), which is effective for both interim and annual periods ending after
December 15, 1997. This statement supersedes Accounting Principles Board Opinion
No. 15, Earnings per Share. The purpose of this statement is to simplify current
reporting and make U.S. reporting comparable to international standards. The
statement requires dual presentation of basic and diluted EPS by entities with
complex capital structures (as defined by the statement). The Company
anticipates that adoption of this standard will not have a material effect on
EPS.
Also, in February 1997, the FASB issued SFAS No. 129, Disclosure of
information about Capital Structure, which is effective for financial statements
for periods ending after December 15, l997. This statement applies to both
public and nonpublic entities. The new statement requires no change for entities
subject to the existing requirements. The Company anticipates that adoption of
the standard will not have a material affect on the Company.
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income.
SFAS No. 130 establishes standards for reporting and display of comprehensive
income and its components in a full set of general purpose financial statements.
Enterprises are required to classify items of "other comprehensive income" by
their nature in the financial statement and display the balance of other
comprehensive income separately in the equity section of a statement of
financial position. SFAS No. 130 is effective for both interim and annual
periods beginning after December 15, 1997. Earlier application is permitted.
Comparative financial statements provided for earlier periods are required to be
reclassified to reflect the provisions of this statement.
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of
an Enterprise and Related Information. SFAS No. 131 establishes standards for
the way public business enterprises are to report information about operating
segments in annual financial statements and requires those enterprises to report
selected information about operating segments in interim financial reports
issued to shareholders. SFAS No. 131 is effective for financial statements for
periods beginning after December 15, 1997. Earlier application is encouraged. In
the initial year of application, comparative information for earlier years is to
be restated, unless it is impractical to do so. SFAS No. 131 need not be applied
to interim financial statements in the initial year of its application, but
comparative information for interim periods in the initial year of application
shall be reported in financial statements for interim periods in the second year
of application. It is not anticipated that this standard will materially effect
the Company.
Effects of Inflation and Changing Prices
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles which require the measurement of
financial position and results of operations in terms of historical dollars,
without consideration of change in the relative purchasing power over time due
to inflation. Unlike most industrial companies, virtually all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates have a more significant impact on a financial institution's
performance than the effect of inflation. Interest rates do not necessarily
change in the same magnitude as the price of goods and services.
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 the Company's expectations or beliefs concerning future events. Such
forward-looking statements are about matters that are inherently subject to
risks and uncertainties. Factors that could influence the matters discussed in
certain forward-looking statements include the timing and amount of revenues
that may be recognized by the Company, continuation of current revenue and
expense trends (including trends affecting charge-offs), absence of unforeseen
changes in the Company's markets, legal and regulatory changes, and general
changes in economy (particularly in the markets served by the Company).
12
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Coastal Financial Corporation
Myrtle Beach, South Carolina
We have audited the consolidated statements of financial condition of
Coastal Financial Corporation and subsidiaries (the "Company") as of September
30, 1996 and 1997, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the years in the three-year
period ended September 30, 1997. 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 generally accepted auditing
standards. 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, 1996 and 1997, and the results of their operations and their
cash flows for each of the years in the three-year period ended September 30,
1997, in conformity with generally accepted accounting principles.
/s/KPMG Peat Marwick LLP
------------------------
KPMG Peat Marwick LLP
Greenville, South Carolina
October 17, 1997
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30, 1996 and 1997
1996 1997
ASSETS ------------ ------------
(Dollars in thousands)
Cash and amounts due from banks ...................................................... $ 15,639 $ 12,852
Short-term interest-bearing deposits ................................................ 5,222 559
Investment securities held to maturity (market value of $332 at September 30, 1996) ... 330 --
Investment securities available for sale ............................................. 17,141 26,171
Mortgage-backed securities available for sale ....................................... 27,029 23,023
Loans receivable (net of allowance for loan losses of $4,172 at September 30, 1996 and
$4,902 at September 30, 1997) ........................................................ 370,368 403,570
Loans receivable held for sale ...................................................... 6,803 8,359
Real estate acquired through foreclosure, net ....................................... 323 250
Office property and equipment, net ................................................... 5,736 7,561
Federal Home Loan Bank (FHLB) stock, at cost .......................................... 5,228 5,618
Accrued interest receivable on loans ................................................ 2,444 2,814
Accrued interest receivable on investment securities ................................. 526 452
Other assets ........................................................................ 2,923 2,774
---------- --------
$ 459,712 $494,003
========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits ........................................................................... 313,430 347,116
Securities sold under agreements to repurchase ....................................... 3,365 2,666
Advances from FHLB .................................................................. 104,553 101,478
Other borrowings ..................................................................... 1,968 2,193
Drafts outstanding .................................................................. 1,922 1,018
Advances by borrowers for property taxes and insurance .............................. 1,435 1,409
Accrued interest payable ............................................................ 798 952
Other liabilities .................................................................. 4,560 4,780
---------- --------
Total liabilities .................................................................. 432,031 461,612
---------- --------
Stockholders' equity:
Serial preferred stock, 1,000,000 shares authorized and unissued ..................... -- --
Common stock $.01 par value, 5,000,000 shares authorized;
4,590,155 shares at September 30, 1996 and 4,646,534
shares at September 30, 1997 issued and outstanding ................................. 46 46
Additional paid-in capital ......................................................... 8,698 8,698
Retained earnings, restricted ...................................................... 20,015 23,402
Treasury stock, at cost (54,161 and 9,760 shares, respectively) ..................... (1,185) (182)
Unrealized gain on securities available for sale, net of
income taxes ........................................................................ 107 427
---------- --------
Total stockholders' equity ......................................................... 27,681 32,391
---------- --------
$ 459,712 $494,003
========== ========
See accompanying notes to consolidated financial statements.
14
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended September 30, 1995, 1996 and 1997
1995 1996 1997
------------ ------------ ----------
(In thousands, except share data)
Interest income:
Loans receivable ................................................... $ 28,671 31,698 33,769
Investment securities ............................................. 381 721 1,574
Mortgage-backed securities ....................................... 732 1,805 2,446
Other ............................................................ 544 496 276
----------- ------- -------
Total interest income .......................................... 30,328 34,720 38,065
----------- ------- -------
Interest expense:
Deposits ......................................................... 9,890 11,689 13,650
Securities sold under agreements to repurchase ..................... 63 323 1,130
Advances from FHLB ................................................ 7,319 7,079 5,366
----------- ------- -------
Total interest expense .......................................... 17,272 19,091 20,146
----------- ------- -------
Net interest income ............................................. 13,056 15,629 17,919
Provision for loan losses .......................................... 202 790 760
----------- ------- -------
Net interest income after provision for loan losses ............ 12,854 14,839 17,159
----------- ------- -------
Other income:
Fees and service charges on loans and deposit accounts ............ 1,051 1,415 1,593
Gain on sales of loans held for sale .............................. 39 990 931
Gain (loss) on sales of investment securities, net ............... -- (6) 7
Gain on sales of mortgage-backed securities, net .................. -- 189 235
Income (loss) from real estate acquired through foreclosure ...... 224 202 (137)
Income from real estate operations ................................. 652 143 278
Other income ...................................................... 1,284 1,699 1,792
----------- -------- -------
Total other income ............................................. 3,250 4,632 4,699
----------- -------- -------
General and administrative expenses:
Salaries and employee benefits .................................... 5,307 6,174 6,841
Net occupancy, furniture and fixtures and data processing expense 2,333 2,831 2,891
FDIC insurance premium ............................................. 566 622 283
FDIC insurance premium to recapaitalize the SAIF .................. -- 1,620 --
Other expense ...................................................... 1,946 2,339 2,701
----------- -------- -------
Total general and administrative expense ........................ 10,152 13,586 12,716
----------- -------- -------
Earnings before income taxes .................................... 5,952 5,885 9,142
Income taxes ...................................................... 2,232 2,164 3,351
----------- -------- -------
Net income ......................................................... $ 3,720 3,721 5,791
=========== ======== =======
Earnings per common share .......................................... $ 0.78 0.78 1.19
=========== ======== =======
Weighted average common shares outstanding ........................ 4,740,000 4,793,000 4,877,000
=========== ========== =========
See accompanying notes to consolidated financial statements.
15
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended September 30, 1995, 1996 and 1997
Additional
Common Paid-In Retained
Stock Capital Earnings
-------- ------------ -------------
(In thousands)
Balance at September 30, 1994 ........................... $ 45 $6,614 $18,446
Exercise of stock options .............................. -- 96 (215)
Treasury stock repurchases .............................. -- -- --
Cash paid for fractional shares ........................ -- -- (6)
Cash dividends .......................................... -- -- (1,282)
Common stock dividend ................................. 1 1,988 (1,989)
Net income ............................................. -- -- 3,720
---- ------ -------
Balance at September 30, 1995 ........................... 46 8,698 18,674
Exercise of stock options .............................. -- -- (863)
Issuance of shares in acquisition ..................... -- -- (67)
Cash paid for fractional shares ........................ -- -- (17)
Cash dividends .......................................... -- -- (1,433)
Unrealized gain on securities available for sale, net of
income taxes .......................................... -- -- --
Net income ............................................. -- -- 3,721
---- ------ -------
Balance at September 30, 1996 ........................... 46 8,698 20,015
Exercise of stock options .............................. -- -- (786)
Cash paid for fractional shares ........................ -- -- (18)
Cash dividends .......................................... -- -- (1,600)
Unrealized gain on securities available for sale, net of
income taxes .......................................... -- -- --
Net income ............................................. -- -- 5,791
---- ------ -------
Balance at September 30, 1997 ........................... $ 46 $8,698 $23,402
==== ====== =======
Total
Treasury Stockholders'
Stock Other Equity
------------- ------- --------------
Balance at September 30, 1994 ........................... $ (2,001) $ -- $23,104
Exercise of stock options .............................. 241 -- 122
Treasury stock repurchases .............................. (838) -- (838)
Cash paid for fractional shares ........................ -- -- (6)
Cash dividends .......................................... -- -- (1,282)
Common stock dividend ................................. -- -- --
Net income ............................................. -- -- 3,720
--------- --- ---------
Balance at September 30, 1995 ........................... (2,598) -- 24,820
Exercise of stock options .............................. 970 -- 107
Issuance of shares in acquisition ..................... 443 -- 376
Cash paid for fractional shares ........................ -- -- (17)
Cash dividends .......................................... -- -- (1,433)
Unrealized gain on securities available for sale, net of
income taxes .......................................... -- 107 107
Net income ............................................. -- -- 3,721
--------- ----- ---------
Balance at September 30, 1996 ........................... (1,185) 107 27,681
Exercise of stock options .............................. 1,003 -- 217
Cash paid for fractional shares ........................ -- -- (18)
Cash dividends .......................................... -- -- (1,600)
Unrealized gain on securities available for sale, net of
income taxes .......................................... -- 320 320
Net income ............................................. -- -- 5,791
--------- ----- ---------
Balance at September 30, 1997 ........................... $ (182) $427 $32,391
========= ===== =========
See accompanying notes to consolidated financial statements.
16
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended September 30, 1995, 1996 and 1997
1995 1996 1997
------------- ------------ ------------
(In thousands)
Cash flows from operating activities:
Net earnings ........................................................................... $ 3,720 3,721 5,791
Adjustments to reconcile net earnings to net cash provided (used) by operating
activities:
Income from real estate partnerships ................................................ (652) (143) (278)
Depreciation ........................................................................ 552 740 865
Provision for loan losses ............................................................ 202 790 760
Origination of loans receivable held for sale ....................................... (5,199) (45,082) (45,717)
Proceeds from sales of loans receivable held for sale .............................. 2,806 40,672 44,160
(Increase) decrease in:
Other assets ........................................................................ (1,266) (587) 149
Accrued interest receivable ......................................................... (434) (553) (296)
Increase (decrease) in:
Accrued interest payable ............................................................ 284 31 154
Other liabilities .................................................................. 531 1,960 220
----------- ------- -------
Net cash provided (used) by operating activities ................................. 544 1,549 5,808
----------- ------- -------
Cash flows from investing activities:
Proceeds from maturities of investment securities held to maturity ..................... 5,675 -- --
Purchases of investment securities held to maturity .................................... (324) -- --
Proceeds from sale of investment securities available for sale ........................ -- 7,000 5,693
Proceeds from maturities of investment securities available for sale .................. -- 1,999 17,839
Purchases of investment securities available for sale ................................. -- (24,331) (32,022)
Purchases of loans receivable ......................................................... (6,337) (12,448) (9,948)
Proceeds from sale of mortgage-backed securities available for sale .................. -- 13,220 25,678
Purchases of mortgage-backed securities available for sale ........................... (1,000) (11,867) (26,636)
Principal collected on mortgage-backed securities .................................... 811 4,129 4,850
Origination of loans receivable, net ................................................... (135,830) (115,288) (132,786)
Principal collected on loans receivable ................................................ 104,215 93,560 109,946
Proceeds from sales of real estate acquired through foreclosure ........................ 305 937 456
Proceeds from sales of office properties and equipment ................................. -- 192 --
Purchases of office properties and equipment .......................................... (1,166) (1,253) (2,690)
Redemptions (purchases) of FHLB stock ................................................ 101 (502) (390)
Other investing activities, net ...................................................... 884 447 914
----------- -------- --------
Net cash used by investing activities ............................................. (32,666) (44,205) (39,096)
----------- -------- --------
Cash flows from financing activities:
Increase in deposits .................................................................. 25,714 40,331 33,686
Increase (decrease) in securities sold under agreements to repurchase .................. 771 688 (2,666)
Proceeds from FHLB advances ............................................................ 365,120 75,850 198,170
Repayment of FHLB advances ............................................................ (368,340) (64,617) (201,245)
Proceeds from other borrowings, net ................................................... -- 1,968 224
Increase (decrease) in advance payments by borrowers for property taxes and insurance 79 (194) (26)
Increase (decrease) in drafts outstanding, net ....................................... 411 (367) (904)
Repurchase of treasury stock, at cost ................................................ (838) -- --
Cash dividends to stockholders and cash for fractional shares ........................ (1,288) (1,450) (1,618)
Exercise of stock options ............................................................ 57 107 217
----------- -------- --------
Net cash provided by financing activities .......................................... 21,686 52,316 25,838
----------- -------- --------
Net increase (decrease) in cash and cash equivalents .................................... (10,436) 9,660 (7,450)
----------- -------- --------
Cash and cash equivalents at beginning of year .......................................... 21,637 11,201 20,861
----------- -------- --------
Cash and cash equivalents at end of year ................................................ $ 11,201 20,861 13,411
=========== ======== ========
Supplemental information:
Interest paid ........................................................................ $ 16,988 19,060 19,992
=========== ======== ========
Income taxes paid ..................................................................... $ 2,377 3,030 2,687
=========== ======== ========
Supplemental schedule of non-cash investing and financing transactions:
Securitization of mortgage loans into mortgage-backed securities ..................... $ 11,793 19,366 --
=========== ======== ========
Transfer of mortgage loans to real estate acquired through foreclosure ............... $ 313 471 383
=========== ======== ========
Common stock dividend declared ......................................................... $ 1,989 -- --
=========== ======== ========
Transfer of investment securities held to maturity to available for sale ............... $ -- 14,775 --
=========== ======== ========
See accompanying notes to consolidated financial statements
17
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of the more significant accounting policies used
in the preparation and presentation of the accompanying consolidated financial
statements. The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions. These estimates and assumptions affect the reported amount of
assets and liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements. In addition, they affect the reported
amounts of income and expenses during the reporting period. Actual results could
differ from these estimates and assumptions.
(a) Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Coastal Financial Corporation (the "Company"), and its wholly-owned
subsidiaries, Coastal Federal Mortgage, Inc., Coastal Investments Corporation
and Coastal Federal Savings Bank (the "Bank") and its wholly-owned subsidiary,
Coastal Mortgage Bankers and Realty Co., Inc. (and its wholly-owned
subsidiaries, Shady Forest Development Corporation, Sherwood Development
Corporation, Ridge Development Corporation, 501 Development Corporation, North
Beach Investments, Inc. and North Strand Property Management, Inc.). In
consolidation, all significant intercompany balances and transactions have been
eliminated. Coastal Financial Corporation is a unitary thrift holding company
organized under the laws of the state of Delaware. The Company's subsidiaries
operations consist primarily of the sales of financial products.
(b) Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include
cash and amounts due from banks, short-term interest-bearing deposits and
federal funds sold. Cash and cash equivalents have maturities of three months or
less. Accordingly, the carrying amount of such instruments is considered to be a
reasonable estimate of fair value.
(c) Investment and Mortgage-backed Securities
Investment and mortgage-backed securities are accounted for in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting
for Certain Investments in Debt and Equity Securities". Investments are
classified into three categories as follows: (1) Held to Maturity -- debt
securities that the Company has the positive intent and ability to hold to
maturity, which are reported at amortized cost; (2) Trading -- debt and equity
securities that are bought and held principally for the purpose of selling them
in the near term, which are reported at fair value, with unrealized gains and
losses included in earnings and (3) Available for Sale -- debt and equity
securities that may be sold under certain conditions, which are reported at fair
value, with unrealized gains and losses excluded from earnings and reported as a
separate component of stockholders' equity, net of income taxes.
The Company determines investment and mortgage-backed securities
classification at the time of purchase. Premiums and discounts on securities are
accreted or amortized as an adjustment to income over the estimated life of the
security using a method which approximates a level yield. Unrealized losses on
securities, reflecting a decline in value judged by the Company to be other than
temporary, are charged to income in the consolidated statements of operations.
In November 1995, the FASB issued a guide to implementation of SFAS No. 115
on accounting for certain investments in debt and equity securities which allows
for the one time transfer of certain investments classified as held to maturity
to available for sale. The Company reclassified its investments classified as
held to maturity to the available for sale classification in the first quarter
of fiscal 1996.
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.
The Bank maintained liquid assets in excess of the amount required by
regulations during all periods included in these consolidated financial
statements. The required amount is 5% of the average daily balances of deposits
and short-term borrowings. Liquid assets consist principally of cash, including
time deposits and investment securities.
(d) Allowance for Loan Losses
The Company provides for loan losses on the allowance method. Accordingly,
all loan losses are charged to the allowance and all recoveries are credited to
the allowance. Additions to the allowance for loan losses are provided by
charges to operations based on various factors which, in management's judgment,
deserve current recognition in estimating losses. Such factors considered by
management include the market value of the underlying collateral, growth and
composition of the loan portfolios, the relationship of the allowance for loan
losses to outstanding loans, loss experience, delinquency trends, and local and
regional economic conditions. Management evaluates the carrying
18
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
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 possible loan losses is subject to periodic evaluation by various regulatory
authorities and may be subject to adjustment upon their examination.
The Company follows SFAS No. 114, "Accounting by Creditors for Impairment
of a Loan," for determining impairment on loans. SFAS No. 114 requires that
nonhomogenous impaired loans and certain restructured loans be measured at the
present value of expected future cash flows discounted at the loan's effective
interest rate, at the loan's observable market price or at the fair value of the
collateral if the loan is collateral dependent. A specific reserve is set up for
each impaired loan.
Also on October 1, 1995, the Company adopted SFAS No. 118, "Accounting by
Creditors for Impairment of a Loan -- Income Recognition and Disclosures." SFAS
No. 118 amends SFAS No. 114 in the areas of disclosure requirements and methods
for recognizing interest income on an impaired loan.
Under SFAS No. 114, as amended by SFAS No. 118, when the ultimate
collectibility of an impaired loan's principal is in doubt, wholly or partially,
all cash receipts are applied to principal. When this doubt does not exist, cash
receipts are applied under the contractual terms of the loan agreement first to
principal then to interest income. Once the recorded principal balance has been
reduced to zero, future cash receipts are applied to interest income, to the
extent that any interest has been foregone. Further cash receipts are recorded
as recoveries of any amounts previously charged off.
(e) Loans Receivable Held for Sale
Mortgage loans originated and intended for sale in the secondary market are
carried at the lower of cost or estimated market value in the aggregate. Net
unrealized losses are provided for in a valuation allowance by charges to
operations. At September 30, 1996 and 1997, the Company had approximately $6.8
million and $8.4 million, respectively, in mortgage loans held for sale. The
aggregate market value of loans receivable held for sale exceeded the aggregate
carrying value at September 30, 1996 and 1997.
(f) Real Estate Owned and Investments in Real Estate Partnerships
Real estate acquired through foreclosure is initially recorded at the lower
of cost or estimated fair value. Subsequent to the date of acquisition, it is
carried at the lower of cost or fair value, less selling costs. Market values of
real estate owned are reviewed regularly and allowances for losses are
established when it is determined that the carrying value of real estate exceeds
the fair value less selling costs. Costs relating to the development and
improvement of such property are capitalized, whereas those costs relating to
holding the property are charged to expense.
Real estate purchased for development and sale and investments in real
estate partnerships are stated at the lower of cost or estimated net realizable
value. Costs directly related to such real estate are capitalized until
construction required to bring these properties to a salable condition is
completed. Capitalized costs include real estate taxes, interest, and other
direct costs incurred during the improvement period.
Gains on the sale of real estate purchased for development and sale are
recorded at the time of sale provided certain criteria relating to property
type, cash down payment, loan terms, and other factors are met. If these
criteria are not met at the date of sale, the gain is deferred and recognized
using the installment or cost recovery method until they are satisfied, at which
time the remaining deferred gain is recorded as income.
Market values of real estate purchased for development and sale are
reviewed regularly and allowances for losses are established when the carrying
value exceeds the estimated net realizable value. In determining the estimated
net realizable value, the Company deducts from the estimated selling price the
projected cost to complete and dispose of the property and the estimated cost
(i.e. interest, property taxes, etc.) to hold the property to an expected date
of sale.
(g) Office Properties and Equipment
Office properties and equipment are carried at cost less accumulated
depreciation. Depreciation is computed primarily on the straight-line method
over estimated useful lives. Estimated lives range up to thirty years for
buildings and improvements and up to ten years for furniture, fixtures and
equipment. Maintenance and repairs are charged to expense as incurred.
Improvements which extend the lives of the respective assets are capitalized.
When property or equipment is sold or otherwise disposed of, the cost and
related accumulated depreciation are removed from the respective accounts and
the resulting gain or loss is reflected in income.
19
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(h) Uncollected Interest
The Company maintains an allowance for the loss of uncollected interest
primarily on loans which are ninety days or more past due. This allowance is
reviewed periodically and necessary adjustments, if any, are included in the
determination of current interest income.
(i) Loan Fees and Discounts
The net of origination fees received and direct costs incurred in the
origination of loans are deferred and amortized to interest income over the
contractual life of the loans adjusted for actual principal repayments using a
method approximating a level yield.
(j) Income Taxes
Deferred taxes are provided for differences in the financial reporting
bases for assets and liabilities as compared to their tax bases. A current tax
liability or asset is established for taxes presently payable or refundable and
a deferred tax liability or asset is established for future taxable items. A
valuation allowance, if applicable, is established for deferred tax assets that
may not be realized.
(k) Loan Sales
Gains or losses on sales of loans are recognized when control has been
surrendered over these assets in accordance with SFAS No. 125 "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities."
The resulting servicing rights are amortized in proportion to, and over the
period of, estimated net servicing revenues. Impairment of mortgage servicing
rights is assessed based on the fair value of those rights. Fair values are
estimated using discounted cash flows based on a current market interest rate.
The amount of impairment recognized is the amount by which the capitalized
mortgage servicing rights exceed their fair value.
(l) Drafts Outstanding
The Company invests all excess funds on deposit at other banks (including
amounts on deposit for payment of outstanding disbursement checks) on a daily
basis in an overnight interest-bearing account. Accordingly, outstanding checks
are reported as a liability.
(m) Securities Sold Under Agreement to Repurchase
The Company maintains collateral to 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 FDIC but are
insured by a security interest in the security. The Company has classified these
amounts separately from deposits.
(n) Stock Based Compensation
In 1996, the Company adopted the disclosure provisions of SFAS No. 123
"Accounting for Stock Based Compensation". The statement permits the Company to
continue accounting for stock based compensation as set forth in APB Opinion 25,
"Accounting for Stock Issued to Employees", provided the Company discloses the
proforma effect on net income and earnings per share of adopting the full
provisions of SFAS No. 123. Accordingly, the Company continues to account for
stock based compensation under APB Opinion 25 and has provided the required
proforma disclosures.
(o) Reclassifications
Certain amounts in the 1995 and 1996 consolidated financial statements have
been reclassified to conform with the 1997 presentation. Such reclassifications
had no impact on net income or retained earnings as previously reported.
20
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(2) INVESTMENT SECURITIES
The amortized cost and market value of investment securities available for
sale at September 30, 1996 is summarized as follows:
1996
---------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Gross Gains Losses Value
----------- ------------ ------------ -------
(In thousands)
U.S. Government and agency obligations:
Due within one year .................. $ -- -- -- --
Due after one but within five years 13,037 -- (150) 12,887
Due after five years ............... 4,297 -- (43) 4,254
---------- ------------ ---- ------
$ 17,334 -- (193) 17,141
========== ============ ==== ======
The amortized cost and market value of investment securities available for
sale at September 30, 1997 is summarized as follows:
1997
---------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ------------ ------------ -------
(In thousands)
U.S. Government and agency obligations:
Due within one year .................. $ -- -- -- --
Due after one but within five years 9,996 17 -- 10,013
Due after five years ............... 16,128 30 -- 16,158
--------- -- ------------ ------
$26,124 47 -- 26,171
========= == ============ ======
There were no realized gains or losses during the year ended September 30,
1995. The Company had gross realized losses of $18,000 and gross realized gains
of $12,000 for the year ended September 30, 1996. For the year ended September
30, 1997, gross realized losses were $58,000 and gross realized gains were
$65,000.
Certain investment and mortgage-backed securities are pledged to secure
other borrowed money and customer deposits in excess of FDIC insurance coverage.
The carrying value of the securities pledged at September 30, 1997 was
$5,269,000 with a market value of $5,302,000.
(3) MORTGAGE-BACKED SECURITIES
Mortgage-backed securities available for sale at September 30, 1996
consisted of the following:
1996
---------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ------------ ------------ -------
(In thousands)
FNMA ............... $ 2,469 12 -- 2,481
GNMA ............... 5,330 -- (98) 5,232
FHLMC ............... 18,861 455 -- 19,316
--------- --- --- ------
$26,660 467 (98) 27,029
========= === === ======
21
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(3) MORTGAGE-BACKED SECURITIES -- Continued
Mortgage-backed securities available for sale at September 30, 1997
consisted of the following:
1997
---------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ------------ ------------ -------
(In thousands)
FNMA ............... $ 1,861 2 -- 1,863
GNMA ............... 6,471 26 -- 6,497
FHLMC ............... 14,048 615 -- 14,663
---------- --- ------------ ------
$ 22,380 643 -- 23,023
========== === ============ ======
The Company had no realized gains or losses on sales of mortgage-backed
securities 1995. For the year ended September 30, 1996, there were gross
realized gains of $189,000 and no realized losses. The Company had gross
realized gains of $258,000 and realized losses of $23,000 for the year ended
September 30, 1997.
(4) LOANS RECEIVABLE, NET
Loans receivable, net at September 30 consisted of the following:
1996 1997
------------ -----------
(In thousands)
First mortgage loans:
Single family to 4 family units ............ $ 224,570 237,964
Other, primarily commercial real estate ... 73,295 97,680
Construction loans ........................ 34,566 34,216
Consumer and commercial loans:
Installment consumer loans ............... 31,601 24,378
Mobile home loans ........................ 1,103 1,291
Savings account loans ..................... 436 1,336
Equity lines of credit ..................... 12,441 15,294
Commercial and other loans ............... 14,831 10,939
---------- -------
392,843 423,098
Less:
Allowance for loan losses .................. 4,172 4,902
Deferred loan fees (costs) ............... (286) (458)
Undisbursed portion of loans in process ... 18,589 15,084
---------- -------
$ 370,368 403,570
========== =======
The changes in the allowance for loan losses for the years ended September
30 consisted of the following:
1995 1996 1997
---------- --------- ---------
(In thousands)
Beginning allowance ..................... $3,353 3,578 4,172
Provision for loan losses ............... 202 790 760
Allowance recorded on acquired loans ...... -- -- 110
Loan recoveries ........................... 255 82 72
Loan charge-offs ........................ (232) (278) (212)
------- ----- -----
$3,578 4,172 4,902
======= ===== =====
Non-accrual loans which were over ninety days delinquent totaled
approximately $445,000 and $257,000 at September 30, 1996 and 1997,
respectively. There were no impaired loans at September 30, 1996 or 1997.
22
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(4) LOANS RECEIVABLE, NET -- Continued
The carrying amounts and fair values of loans receivable at September 30,
1996 and 1997 are as follows (In thousands):
1996 1997
------------------------- ----------------------
Carrying Calculated Carrying Calculated
Amount Fair Value Amount Fair Value
------------ ------------ ---------- -----------
Mortgage loans ............... $321,951 330,025 369,662 378,964
Consumer loans ............... 24,098 23,520 12,622 12,310
Equity lines of credit ...... 12,441 12,715 17,902 18,260
Commercial loans ............ 16,050 16,082 8,286 8,208
Allowance for loan losses ... (4,172) (4,172) (4,902) (4,902)
-------- ------- ------- -------
$370,368 378,170 403,570 412,840
======== ======= ======= =======
Management has made estimates of fair value discount rates and estimated
prepayment rates that it believes to be reasonable based upon present market
conditions. However, because there is no active market for many of the above
financial instruments, management believes such information is of limited value
and has no basis to determine whether the fair value presented above would be
indicative of the value which could be negotiated during an actual sale.
Furthermore, this information is as of September 30, 1996 and 1997. Changes in
market interest and prepayment rates since September 30, 1996 and 1997 would
have significant impact on the fair value presented and should be considered
when analyzing this financial data.
A portion of the credit lines and commercial loans have interest rate
floors which may increase the value of these loans. No increase in fair market
value was assigned for these interest rate floors.
At September 30, 1997, excluding single family home loans and the fact that
the majority of the loan portfolio is located in the Company's immediate market
area, there were no concentrations of loans in any type of industry, type of
property, or to one borrower that exceeded 10% of the Company's total loan
portfolio. The Company does have 190 loans aggregating approximately $9.7
million which were originated on individual income producing condominium units
in two projects in which the Bank's subsidiaries were a partner. At September
30, 1997, one loan in the amount of $56,000 was over sixty days delinquent. The
majority of these loans have been outstanding greater than four years and
management does not believe that they represent a significant risk in the loan
portfolio. Approximately $1.7 million of these loans have been sold to other
financial institutions.
At September 30, 1996 and 1997, the Company had commitments outstanding to
originate loans totaling approximately $9.0 million and $3.2 million,
respectively, (excluding undisbursed portion of loans in process). Commitments
on loan originations are made at prevailing market interest rates, and are
generally limited to 60 days from date of application. Additionally, at
September 30, 1996 and 1997, the Company had undisbursed lines of credit of
approximately $32.0 million and $31.4 million, respectively.
Loans serviced for the benefit of others amounted to approximately $110.7
million, $115.1 million and $104.5 million at September 30, 1995, 1996 and 1997,
respectively.
As disclosed in note 9, certain mortgage loans are pledged to secure
advances from the Federal Home Loan Bank of Atlanta ("FHLB").
(5) INVESTMENT IN REAL ESTATE PARTNERSHIPS
The Bank's subsidiaries are general partners in real estate partnerships,
with ownership interests ranging up to 50%, organized for the purposes of
constructing and marketing residential real estate. Condensed combined financial
information for the partnerships at or for the year ended at September 30 is
summarized as follows:
1996 1997
------ -----
(In
thousands)
Assets, net .............................. $113 25
===== ==
Liabilities .............................. 5 1
----- --
Partners' equity:
Bank's subsidiaries ..................... 46 8
Others ................................. 62 16
----- --
108 24
----- --
Liabilities and partners' equity ...... $113 25
===== ==
23
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(5) INVESTMENT IN REAL ESTATE PARTNERSHIPS -- Continued
1995 1996 1997
-------- --------- --------
(In thousands)
Sales ....................................... $2,016 523 --
Cost of sales .............................. 885 140 --
------- --- --
Gross profit on sales ..................... 1,131 383 --
Other (expense) income, net ............... 78 (223) (36)
------- ---- ---
Net income ................................. $1,209 160 (36)
======= ==== ===
Bank's equity in partnership's income ...... $ 611 115 (12)
======= ==== ===
(6) OFFICE PROPERTY AND EQUIPMENT, NET
Office property and equipment, net at September 30 consisted of the
following:
1996 1997
--------- -------
(In thousands)
Land .................................... $ 1,132 1,981
Building and improvements ............... 4,990 5,647
Furniture, fixtures and equipment ...... 5,964 7,105
-------- -----
12,086 14,733
Less accumulated depreciation ......... 6,350 7,172
-------- ------
$ 5,736 7,561
======== ======
The Company leases office space and various equipment. Total rental expense
for the years ended September 30, 1995, 1996 and 1997 was approximately
$121,000, $138,000, and $112,000 respectively.
Future minimum rental payments for operating leases having remaining
noncancelable lease terms in excess of one year at September 30, 1997 are as
follows (In thousands):
1998 ............... $112
1999 ............... 111
2000 ............... 92
2001 ............... 91
2002 ............... 56
----
$462
====
(7) INVESTMENT REQUIRED BY LAW
Investment in stock of the FHLB is required by law of every
Federally-insured savings institution. No ready market exists for this stock and
it has no quoted market value. However, redemption of this stock has been at par
value.
The Bank, as a member of the FHLB of Atlanta, is required to acquire and
hold shares of capital stock in the FHLB of Atlanta in an amount equal to the
greater of (i) 1.0% of the aggregate outstanding principal amount of residential
mortgage loans, home purchase contracts and similar obligations at the beginning
of each year, or (ii) 1/20 of its advances (borrowings) from the FHLB of
Atlanta. The Bank is in compliance with this requirement with an investment in
FHLB of Atlanta stock of $5.6 million at September 30, 1997.
24
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(8) DEPOSITS
Deposits at September 30, consisted of the following:
1996 1997
--------------------- --------------------
Weighted Weighted
Amount Rate Amount Rate
---------- ---------- ---------- ---------
(Dollars in thousands)
Transaction accounts:
Noninterest bearing ............... $ 19,926 --% $ 23,765 --%
NOW .............................. 35,654 1.23 38,773 1.27
Money market checking ............ 84,997 4.85 104,476 4.48
--------- ---- -------- ----
Total transaction accounts ...... 140,577 3.24 167,014 3.10
--------- ---- -------- ----
Passbook accounts:
Regular passbooks ............... 39,287 2.67 36,652 2.63
Money market ..................... 3,553 2.44 2,793 2.38
--------- ---- -------- ----
Total passbook accounts ......... 42,840 2.66 39,445 2.62
--------- ---- -------- ----
Certificate accounts:
0.00 - 5.99% .................. 113,871 110,606
6.00 - 8.00% .................. 15,623 29,683
8.01 - 10.00% .................. 130 368
10.01 - 12.00% .................. 389 --
--------- --------
Total certificate accounts ...... 130,013 5.64 140,657 5.58
--------- ---- -------- ----
$313,430 4.12% $347,116 4.02%
========= ==== ======== ====
The aggregate amount of deposit accounts with a minimum denomination of
$100,000 or more was $60,406,000 and $80,691,000 at September 30, 1996 and 1997,
respectively.
The amounts and scheduled maturities of certificate accounts at September
30, are as follows:
1996 1997
---------- --------
(In thousands)
Within 1 year .................. $ 94,651 111,942
After 1 but within 2 years ...... 28,241 23,704
After 2 but within 3 years ...... 5,484 3,630
Thereafter ..................... 1,637 1,381
--------- -------
$130,013 140,657
========= =======
Interest expense on deposits for the years ended September 30 consisted of
the following:
1995 1996 1997
-------- -------- -------
(In thousands)
Transaction accounts ...... $1,925 3,162 4,894
Passbook accounts ......... 1,581 1,599 1,015
Certificate accounts ...... 6,384 6,928 7,741
------- ----- -----
$9,890 11,689 13,650
======= ====== ======
The fair value of transaction and passbook accounts is $183.4 million and
$206.5 million which was the amount currently payable at September 30, 1996 and
1997, respectively. The fair value of certificate accounts was $130.3 million
and $142.6 million compared to a book value of $130.0 million and $140.7 million
and was estimated by discounting the amounts payable at the certificate rates
currently offered for deposits of similar remaining maturities.The fair value
estimates above did not include the substantial benefit that results from the
low cost funding provided by the deposit liabilities compared to the cost of
borrowing funds in the market.
25
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(9) ADVANCES FROM FHLB
Advances from the FHLB at September 30 consisted of the following:
1996 1997
--------------------- --------------------
Weighted Weighted
Amount Rate Amount Rate
---------- ---------- ---------- ---------
(In thousands)
Fiscal Year Maturity
1997 .................. $ 54,404 5.68% $ -- --%
1998 .................. 20,120 5.90 68,620 5.60
1999 .................. 13,105 6.35 13,435 6.06
2000 .................. 6,861 6.46 6,761 6.45
2001 .................. 2,846 6.46 2,646 6.49
2002 or greater ...... 7,217 7.07 10,016 6.79
--------- ---- -------- ----
$104,553 5.97% $101,478 5.86%
========= ==== ======== ====
Stock in the FHLB of Atlanta and specific first mortgage loans of
approximately $223.4 million and $213.9 million at September 30, 1996 and 1997,
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, 1997, the excess first mortgage loan collateral pledged to the
FHLB will support additional borrowings of approximately $59.0 million.
The estimated fair value of the FHLB advances at September 30, 1996 and
1997 is $104.2 million and $101.0 million. This estimate is based on discounting
amounts payable at contractual rates using current market rates for advances
with similar maturities.
(10) INCOME TAXES
Income tax expense for the years ended September 30 consisted of the
following:
Current Deferred Total
--------- ---------- ------
(In thousands)
1995:
Federal ............... $1,697 229 1,926
State ............... 268 38 306
-------- --- -----
1,965 267 2,232
======== === =====
1996:
Federal ............... $2,528 (646) 1,882
State ............... 403 (121) 282
-------- ---- -----
2,931 (767) 2,164
======== ==== =====
1997:
Federal ............... $2,646 331 2,977
State ............... 311 63 374
-------- ---- -----
2,957 394 3,351
======== ==== =====
26
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(10) INCOME TAXES -- Continued
The tax effect of the Company's temporary differences between the financial
statement carrying amounts and tax basis of assets and liabilities that give
rise to the net deferred tax asset at September 30, 1996 and 1997 related to the
following:
1996 1997
---------- ---------
(In thousands)
Deferred tax assets:
Allowance for loan losses .......................................... $1,600 1,858
Accrued medical reserves ............................................. 79 123
Other real estate reserves and deferred gains on other real estate ... 75 81
Accrued FDIC premiums ................................................ 615 --
Net operating loss carryforwards .................................... 138 135
Other ............................................................... 99 122
------- -----
Total deferred tax assets ............................................. 2,606 2,319
Less valuation allowance ............................................. (138) (135)
------- -----
Net deferred tax assets ............................................. 2,468 2,184
======= =====
Deferred tax liabilities:
Tax bad debt reserve in excess of base year amount .................. 552 484
Property and equipment principally due to differences in depreciation 190 237
FHLB stock, due to stock dividends not recognized for tax purposes ... 356 356
Unrealized gain on securities available for sale ..................... 69 263
Deferred loan fees ................................................... 204 318
Other ............................................................... 220 237
------- -----
Total deferred tax liabilities ....................................... 1,591 1,895
------- -----
Net deferred tax asset ................................................ $ 877 289
======= =====
The net deferred tax asset is included in other assets in the consolidated
financial statements. The valuation allowance relates to the state loss
carryforwards which may not be ultimately realized to reduce taxes of the
Company. A portion of the change in the net deferred tax asset relates to
unrealized gains and losses on securities available for sale. A current period
deferred tax expense of $194,000 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 asset results from the current period
deferred tax expense of $394,000.
Income taxes of the Company differ from the amounts computed by applying
the Federal income tax rate of 34% for the years ended September 30 to earnings
before income taxes as follows:
1995 1996 1997
------ ----- -------
(In thousands)
Computed federal income taxes ......... $2,024 2,001 3,108
State tax, net of federal benefit ...... 201 173 247
Other, net .............................. 7 (10) (4)
------ ----- -----
Total income tax expense ............... $2,232 2,164 3,351
====== ===== =====
The Bank has been permitted under the Internal Revenue Code to deduct an
annual addition to the tax reserve for bad debts in determining taxable income,
subject to certain limitations. This addition may differ significantly from the
bad debt expense for financial reporting purposes and was based on either 8% of
taxable income (the "Percentage of Taxable Income Method") or actual loan loss
experience (the "Experience Method") for the years ended September 30, 1995,
1996 and 1997. As a result of recent tax legislation, the Bank will be required
to recapture tax bad debt reserves in excess of pre-1988 based year amounts over
a period of approximately six to eight years. In addition, for the period ending
September 30, 1997, the Bank was required to change its overall tax method of
accounting for bad debts to the experience method.
Retained earnings at September 30, 1996 and 1997 includes approximately
$5,200,000 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
27
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(10) INCOME TAXES -- Continued
a reduction in qualifying loan levels relative to the end of 1987, failure to
meet the tax definition of a 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.
(11) BENEFIT PLANS
The Company participates in a multiple-employer defined benefit pension
plan covering substantially all employees. Separate actuarial valuations are not
available for each participating employer, nor are plan assets segregated.
Pension expense for the years ended September 30, 1995, 1996 and 1997 was minor.
Plan assets exceeded the present value of accumulated plan benefits at June 30,
1997, the latest actuarial valuation date.
The Company has a defined contribution plan covering substantially all
employees. The Company matches employee contributions based upon the Company
meeting certain return on equity operating results. Matching contributions made
by the Company were approximately $28,000, $149,000 and $245,000 for fiscal
years 1995, 1996 and 1997, respectively.
(12) REGULATORY MATTERS
At September 30, 1997, the Bank's loans-to-one borrower limit was
approximately $5.2 million. At September 30, 1997, the Bank is in compliance
with the core, tangible and risk-based capital requirements and loans-to-one
borrower limits.
On September 30, 1996, the Bank recorded a $1,620,000 special assessment to
the FDIC for the recapitalization of the SAIF. Beginning January 1, 1997, the
Bank began paying 6.4 cents per $100 of deposits insured. Previously the Bank
had been paying approximately 23 cents per $100 of deposits insured. It is
expected that the Bank Insurance Fund ("BIF") members and SAIF members will
begin paying the same amount to the insurance fund in fiscal year 2000.
The ability of the Company to pay dividends depends primarily on the
ability of the Bank to pay dividends to the Company. The Bank is subject to
various regulatory capital requirements administered by the federal banking
agencies. Failure to meet minimum capital requirements can initiate certain
mandatory -- and possibly additional discretionary -- actions by regulators
that, if undertaken, could have a direct material effect on the Bank's financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Bank must meet specific capital guidelines that
involve quantitative measures of the Bank's assets, liabilities and certain
off-balance-sheet items as calculated under regulatory accounting practices.
The regulatory requirements for the Bank and the Bank's compliance with
such requirements at September 30, 1996 and 1997 is as follows.
Percent
Amount of Assets
--------- ----------
(In thousands)
1996:
Tangible capital (1) ........................ $27,271 5.93%
Tangible capital requirement ............... 6,859 1.50
-------- -----
Excess ....................................... $20,412 4.43%
======== =====
Core capital ................................. 27,271 5.93%
Core capital requirement ..................... 13,719 3.00
-------- -----
Excess ....................................... $13,552 2.93%
======== =====
Risk-based capital ........................... 30,777 10.41%
Minimum risk-based capital requirements ...... 23,641 8.00
-------- -----
Excess ....................................... $ 7,136 2.41%
======== =====
28
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(12) REGULATORY MATTERS -- Continued
Percent
Amount of Assets
--------- ----------
1996:
Tier I leverage ratio ..................... $27,271 5.93%
Tier I leverage ratio requirement ......... 18,388 4.00
------ ----
Excess .................................... $ 8,883 1.93%
======= ====
Tier I risk-based capital .................. 27,271 9.23%
Tier I risk-based capital requirement ...... 11,821 4.00
------- ----
Excess .................................... $15,450 5.23%
======= ====
Percent
Amount of Assets
--------- ----------
(In thousands)
1997:
Tangible capital (1) ........................ $31,193 6.31%
Tangible capital requirement ............... 7,365 1.50
-------- -----
Excess ....................................... $23,828 4.81%
======== =====
Core capital ................................. 31,193 6.31%
Core capital requirement ..................... 14,730 3.00
-------- -----
Excess ....................................... $16,463 3.31%
======== =====
Risk-based capital ........................... 34,749 11.05%
Minimum risk-based capital requirements ...... 25,147 8.00
-------- -----
Excess ....................................... $ 9,602 3.05%
======== =====
Tier I leverage ratio ........................ 31,193 6.31%
Tier I leverage ratio requirement ............ 19,760 4.00
-------- -----
Excess ....................................... $11,433 2.31%
======== =====
Tier I risk-based capital .................. 31,193 9.92%
Tier I risk-based capital requirement ...... 12,574 4.00
-------- -----
Excess ....................................... $18,619 5.92%
======== =====
(1) Equals the Bank's stockholder's equity
(13) LIQUIDATION ACCOUNT
In conjunction with the Bank's conversion and sale of common stock, as
required by Office of Thrift Supervision regulations, on October 6, 1990 the
Bank established a liquidation account and will maintain this account for the
benefit of the remaining eligible account holders.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 liquidation account or the statutory net worth
requirements set by the OTS.
(14) EARNINGS PER SHARE
Earnings per share for the years ended September 30, 1995, 1996 and 1997
are computed by dividing net earnings by the weighted average number of common
share equivalents outstanding during the year. Common share equivalents include,
if applicable, dilutive stock option share equivalents determined by using the
treasury stock method. All share and per share data have been retroactively
restated for all common stock dividends.
29
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(15) STOCK OPTION PLAN
The Company's stock option plan provides for stock options to be granted
primarily to directors, officers and other key Associates. Options granted under
the stock option plan may be incentive stock options or non-incentive stock
options. The remaining shares of stock reserved for the stock option plan at
September 30, 1997 amounted to approximately 253,000 shares. All outstanding
options have been retroactively restated to reflect the effects of the common
stock dividends. The stock option plan is administered by three non-management
directors of the Company. At September 30, 1997, the Company had the following
options outstanding:
Options Average
Options Available for Option
Grant Date (Calendar Year) Granted Exercise Price Expiration Date
- ---------------------------- --------- --------------- -------- ----------------
1990 ............... 159,921 100% $ 1.07 2000
1991 ............... 6,651 100 1.47 2001
1992 ............... 23,872 100 2.83 2002
1994 ............... 23,985 60 9.17 2004
1995 ............... 162,493 40 9.07 2005
1996 ............... 66,642 20 15.19 2006
1997 ............... 41,245 -- 15.09 2007
During the years ended September 30, 1995, 1996 and 1997, options for
45,369, 76,863, and 60,473 shares, at an average of $1.07, $1.46, and $3.61 per
share, respectively, were exercised.
The Company applies APB Opinion No. 25 and related Interpretations in
accounting for its plan. Accordingly, no compensation cost has been recognized
for its fixed stock option plans. Had compensation cost for the Company's
stock-based compensation plans been determined consistent with FASB Statement
No. 123, the Company's net income and earnings per share would have been reduced
to the proforma amounts indicated below (in thousands except per share date):
1996 1997
-------- -------
Net income As reported $3,721 $5,791
Proforma 3,704 5,693
Earnings per share As reported $ 0.78 1.19
Proforma 0.77 1.17
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 1996, and 1997, dividend yield of approximately
1.6%, expected volatility of approximately 27% in 1996 and 35% in 1997,
risk-free interest rate of 6.08%, expected lives of 10 years and a vesting
period of 5 years.
(16) COMMON STOCK DIVIDENDS
On May 30, 1995, the Company declared a 5% common stock dividend
aggregating 102,003 shares. On January 9, 1996 and June 20, 1996, the Company
declared a five for four stock split in the form of a 25% stock dividend,
aggregating approximately 542,000 and 687,000 shares, respectively. On April 30,
1997, the Company declared a four for three stock split in the form of a 33%
stock dividend, aggregating approximately 1,160,000 shares. All share data has
been retroactively restated to give effect to the common stock dividends.
(17) CASH DIVIDENDS
On June 21, 1995, September 27, 1995, December 27, 1995 and March 27, 1996,
the Company declared a quarterly cash dividend of $.075 per share. On June 27,
1996, September 25, 1996, December 18, 1996, and March 26, 1997 the Company
declared quarterly cash dividends of $.0825, respectively. On June 25, 1997 and
September 24, 1997, the Company declared quarterly cash dividends of $.09,
respectively.
(18) LEGAL MATTERS
The legal proceedings against the Company are generally incidental to its
business. At September 30, 1997, there were no material legal proceedings
pending against the Company.
30
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(19) QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly operating data for the years ended September 30 is summarized as
follows (In thousands, except share data):
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------ ----------- ----------- ----------
1996:
Total interest income .............................. $ 8,408 8,577 8,748 8,987
Total interest expense .............................. 4,757 4,685 4,661 4,988
---------- ----- ----- -----
Net interest income ................................. 3,651 3,892 4,087 3,999
Provision for loan losses ........................... 115 225 300 150
---------- ----- ----- -----
Net interest income after provision for loan losses 3,536 3,667 3,787 3,849
Other income ....................................... 935 1,132 1,291 1,273
General and administrative expenses* ............... 2,792 2,955 3,115 4,723
---------- ----- ----- -----
Earnings before income taxes ........................ 1,679 1,844 1,963 399
Income taxes* ....................................... 621 676 729 137
---------- ----- ----- -----
Net earnings ....................................... $ 1,058 1,168 1,234 262
========== ===== ===== =====
Earnings per common share ........................... $ .22 .24 .26 .05
========== ===== ===== =====
Weighted average shares outstanding .................. 4,744,000 4,793,000 4,797,000 4,837,000
========== ========= ========= =========
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------ ----------- ----------- ----------
1997:
Total interest income .............................. $ 8,997 9,229 9,806 10,033
Total interest expense .............................. 4,810 4,852 5,213 5,271
---------- ----- ----- ------
Net interest income ................................. 4,187 4,377 4,593 4,762
Provision for loan losses ........................... 230 120 190 220
---------- ----- ----- ------
Net interest income after provision for loan losses 3,957 4,257 4,403 4,542
Other income ....................................... 1,363 971 994 1,370
General and administrative expenses .................. 3,308 3,062 2,999 3,346
---------- ----- ----- ------
Earnings before income taxes ........................ 2,012 2,166 2,398 2,566
Income taxes ....................................... 734 790 882 945
---------- ----- ----- ------
Net earnings ....................................... $ 1,278 1,376 1,516 1,621
========== ===== ===== ======
Earnings per common share ........................... $ .26 .28 .31 .33
========== ===== ===== ======
Weighted average shares outstanding .................. 4,841,000 4,855,000 4,898,000 4,915,000
========== ========= ========= =========
- ---------
* The three month period ended September 30, 1996 includes a special assessment
from the FDIC for the recapitalization of the SAIF of $1,620,000, and a
related reduction in income taxes of $615,000. Excluding this special
assessment, net income for the three months ended would have been $1,267,000,
or $0.26 per share.
31
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(20) COASTAL FINANCIAL CORPORATION FINANCIAL STATEMENTS (PARENT COMPANY ONLY)
The following is condensed financial information of Coastal Financial
Corporation (parent company only), the primary asset of which is its investment
in its bank subsidiary, for the periods indicated (In thousands):
Coastal Financial Corporation
Condensed Balance Sheets
September 30, 1996 and 1997
1996 1997
Assets ------- -------
Cash ......................................... $ 145 1,208
Investment in subsidiaries ................... 27,855 32,644
Deferred tax asset ........................... 36 49
Other assets ................................. 34 18
------- -------
Total assets ............................. $28,070 33,919
======= =======
Liabilities and Stockholders' Equity
Accounts payable ............................. 389 1,528
Total stockholders' equity ................... 27,681 32,391
------- -------
Total liabilities and stockholders'equity. $28,070 33,919
======= =======
Coastal Financial Corporation
Condensed Statement of Operations
For the years ended September 30, 1995, 1996 and 1997
1995 1996 1997
------- ------- -------
Income:
Interest income $ -- -- 1
Management fees 230 108 108
Dividends from subsidiary ...................... 1,725 1,090 1,850
Equity in undistributed earnings of subsidiaries 2,013 2,616 3,969
------- ------- -------
Total income ............................... 3,968 3,814 5,928
------- ------- -------
Expenses:
Amortization of organization cost 8 14 16
Professional fees .............................. 177 38 40
Supplies and printing 40 7 29
Other expenses ................................. 25 32 66
Income tax (benefit) expense ................... (2) 2 (14)
------- ------- -------
Total expenses 248 93 137
------- ------- -------
Net income $ 3,720 3,721 5,791
======= ======= =======
32
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(20) COASTAL FINANCIAL CORPORATION FINANCIAL STATEMENTS (PARENT COMPANY ONLY)
-- Continued
Coastal Financial Corporation
Condensed Statement of Cash Flows
For the years ended September 30, 1995, 1996 and 1997
1995 1996 1997
----------- ----------- -----------
Operating activities:
Net income ....................................... $ 3,720 3,721 5,791
Adjustments to reconcile net income
to net cash (used) provided by:
Equity in undistributed net income of subsidiary (2,013) (2,616) (3,969)
Increase (decrease) in other assets ............... (46) 27 3
Increase (decrease) in other liabilities ......... 82 (79) 639
-------- ------ ------
Total cash provided by operating activities ...... 1,743 1,053 2,464
-------- ------ ------
Financing activities:
Purchase of Treasury Stock ........................ (838) -- --
Capital contributions to subsidiary ............... (150) -- (500)
Cash dividend to shareholders ..................... (1,282) (1,433) (1,600)
Proceeds from stock options ........................ 56 107 217
Proceeds from line of credit advance ............... -- -- 500
Other financing activities, net .................. 59 (24) (18)
-------- ------ ------
Total cash used by financing activities ......... (2,155) (1,350) (1,401)
-------- ------ ------
Net increase (decrease) in cash and cash equivalents (412) (297) 1,063
Cash and cash equivalents at beginning of the year 854 442 145
-------- ------ ------
Cash and cash equivalents at end of the year ...... $ 442 145 1,208
======== ====== ======
33
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(21) CARRYING AMOUNTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts and fair value of financial instruments as of
September 30, 1996 and 1997 are summarized below:
1996 1997
----------------------- ----------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
---------- ------------ ---------- -----------
(In thousands) (In thousands)
Financial Assets
Cash and cash equivalents ..................... $ 20,861 20,861 13,411 13,411
Investment securities ........................... 17,471 17,473 26,171 26,171
Mortgage-backed securities ..................... 27,029 27,029 23,023 23,023
Loans receivable held for sale .................. 6,803 6,905 8,359 8,359
Loans receivable, net ........................... 370,368 378,170 403,570 412,840
FHLB stock .................................... 5,228 5,228 5,618 5,618
--------- ------- --------- -------
$447,760 455,666 $480,152 489,422
========= ======= ========= =======
Financial Liabilities
Deposits:
Demand accounts .............................. 183,417 183,417 206,459 206,459
Certificate accounts ........................... 130,013 130,303 140,657 142,615
Advances from Federal Home Loan Bank ............ 104,553 104,241 101,478 100,971
Securities sold under agreements to repurchase.. 3,365 3,365 2,666 2,666
Other borrowings .............................. 1,922 1,922 2,193 2,193
--------- ------- --------- -------
$423,270 423,248 $453,453 454,904
========= ======= ========= =======
The Company had $53.4 million of off-balance sheet financial commitments as
of September 30, 1997, 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.
Fair value estimates are made at a specific point in time, 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. Further,
the fair value estimates were calculated as of September 30, 1997. Changes in
market interest rates and prepayment assumptions could significantly change the
fair value.
Fair value estimates are based on existing on and off-balance sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and liabilities that are not considered
financial instruments. For example, the Company has significant assets and
liabilities that are not considered financial assets or liabilities including
deposit franchise value, loan servicing portfolio, real estate, deferred tax
liabilities, premises and equipment, and goodwill. In addition, the tax
ramifications related to the realization of the unrealized gains and losses can
have a significant effect on fair value estimates and have not been considered
in any of these estimates.
(22) COMMITMENTS AND CONTINGENCIES
The Company has a $8 million outstanding line of credit with a commercial
bank. The line of credit is secured by 51% of the stock of the Bank. At
September 30, 1997, the outstanding balance was $500,000.
34
- --------------------------------------------------------------------------------
BOARD OF DIRECTORS
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
COASTAL FINANCIAL
CORPORATION
DIRECTORS
James C. Benton
President, C.L. Benton &
Sons, Inc.
G. David Bishop
Chairman, WCI
Management Group Inc.
Harold D. Clardy
President, Chapin Company
James T. Clemmons
Chairman
Coastal Financial
Corporation
James P. Creel
President, Creel Corporation
James H. Dusenbury
Dusenbury, Hendrix &
Little, Attorneys at Law
Michael C. Gerald
President and Chief
Executive Officer
Coastal Financial
Corporation
Samuel A. Smart
Retired, United States
Department of Defense
Wilson B. Springs
Owner, H.B. Springs
Company
ADVISORY DIRECTOR
William J. Sigmon, Sr.
Former President and Chief
Executive Officer
Burroughs & Chapin
Company
COASTAL FEDERAL
SAVINGS BANK
DIRECTORS
James C. Benton
President, C.L. Benton &
Sons, Inc.
G. David Bishop
Chairman, WCI
Management Group Inc.
Harold D. Clardy
President, Chapin Company
James T. Clemmons
Chairman
Coastal Federal Savings
Bank
James P. Creel
President, Creel Corporation
James H. Dusenbury
Dusenbury, Hendrix &
Little, Attorneys at Law
Michael C. Gerald
President and Chief
Executive Officer
Coastal Federal Savings
Bank
Samuel A. Smart
Retired, United States
Department of Defense
Wilson B. Springs
Owner, H.B. Springs
Company
DIRECTOR EMERITUS
William J. Sigmon, Sr.
Former President and Chief
Executive Officer
Burroughs & Chapin
Company
COASTAL INVESTMENTS
CORPORATION
DIRECTORS
G. David Bishop
Chairman, WCI
Management Group Inc.
James P. Creel
President, Creel Corporation
James H. Dusenbury
Attorney
Dusenbury, Hendrix &
Little, Attorneys at Law
Michael C. Gerald
President and Chief
Executive Officer
Coastal Investments
Corporation
Jerry L. Rexroad, CPA
Chief Financial Officer
Coastal Investments
Corporation
Phillip G. Stalvey
Executive Vice President
Coastal Financial
Corporation
COASTAL FEDERAL
MORTGAGE
DIRECTORS
James T. Clemmons
Chairman
Coastal Financial
Corporation
Michael C. Gerald
President and Chief
Executive Officer
Coastal Federal Mortgage
Jerry L. Rexroad, CPA
Chief Financial Officer
Coastal Federal Mortgage
Wilson B. Springs
Owner, H.B. Springs
Company
Phillip G. Stalvey
Executive Vice President
Coastal Financial
Corporation
35
- --------------------------------------------------------------------------------
LEADERSHIP GROUP
COASTAL FEDERAL SAVINGS BANK
- --------------------------------------------------------------------------------
Denise F. Brown
Deposit Sales Group Leader
Surfside
Cynthia L. Buffington
Item Processing Group Leader
Glenn T. Butler
Vice President
Management Information Systems
Group Leader
Edward F. Cagle
Senior Vice President
Marketing Group Leader
Susan R. Cammons
Loan Sales Group Leader
Surfside
Pamela D. Collins
Office Sales Group Leader
Dunes
Susan J. Cooke
Vice President
Corporate Support Group Leader
Corporate Secretary
Patricia A. Coveno
Deposit Sales Group Leader
Oak Street
Robert D. Douglas
Senior Vice President
Human Resources Group Leader
James T. Faulk
Assistant Vice President
Collections Group Leader
Rita E. Fecteau
Vice President
Controller
Trina S. Ferguson
Assistant Vice President
Residential Loan Administration
Group Leader
J. Daniel Fogle
Vice President
Regional Sales Group Leader
Conway Region
Mary L. Geist
Vice President
Computer Services Group Leader
Michael C. Gerald
President and Chief Executive Officer
Belinda B. Gillespie
Assistant Vice President
Office Sales Group Leader
Florence
Jimmy R. Graham
Executive Vice President
Information Systems Group Leader
Richard L. Granger
Vice President
Loan Sales Group Leader
Florence
Allen W. Griffin
Executive Vice President
Banking Administration Group Leader
Don C . Hamilton
Assistant Vice President
Mortgage Sales Group Leader
Myrtle Beach
Lisa B. James
Assistant Vice President
Deposit Servicing Group Leader
Ruth S. Kearns
Senior Vice President
Director of Public Relations
Assistant Corporate Secretary
Cecil H. Kennedy
Corporate Services Group Leader
Scott W. Lander
Vice President
Regional Sales Group Leader
North Carolina
Edward L. Loehr
Vice President
Budgeting and Treasury
Sandy L. Louden
Office Sales Group Leader
Socastee
Sherry A. Maloni
Assistant Vice President
Office Sales Group Leader
Waccamaw Medical Park
Janice B. Metz
Marketing Programs Coordinator
Cindy L. Milardo
Assistant Vice President
Loan Servicing Group Leader
Lauren E. Miller
Staff Development Coordinator
Erin P. Mitchell
Assistant Vice President
Commercial Sales Officer
Jerry L. Rexroad, CPA
Executive Vice President
Chief Financial Officer
Steve C. Sellers
Loan Sales Group Leader
Socastee
Douglas E. Shaffer
Vice President
Regional Sales Group Leader
North Strand Region
Cathe P. Singleton
Office Sales Group Leader
Murrells Inlet
Ashley M. Smith
Deposit Sales Group Leader
South Brunswick
J. Marcus Smith, Jr.
Vice President
Account Servicing Group Leader
Phillip G. Stalvey
Executive Vice President
Sales Group Leader
H. Delan Stevens
Office Sales Group Leader
Conway
Donna P. Todd
Assistant Vice President
Sales Support Group Leader
John L. Truelove
Vice President
Regional Sales Group Leader
South Strand Region
Jerry A. Vereen
Vice President
Regional Sales Group Leader
Central Region
Douglas W. Walters
Assistant Vice President
Loan Sales Group Leader
North Myrtle Beach
David E. Williams
Merchant Account Group Leader
36
------------------------
COASTAL FEDERAL
SAVINGS BANK OFFICES
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Oak Street Office
2619 Oak Street
Myrtle Beach, SC
29577-3129
(803) 448-5151
Conway Office
310 Highway 378
Conway, SC 29526
(803) 444-0225
Dunes Office
7500 North Kings Highway
Myrtle Beach, SC 29572
(803) 444-0241
Florence Office
1385 Alice Drive
Florence, SC 29505
(803) 444-1299
Murrells Inlet Office
3348 Highway 17 South
& Inlet Crossing
Murrells Inlet, SC 29576
(803) 444-0200
North Myrtle Beach Office
521 Main Street
North Myrtle Beach, SC 29582
(803) 444-0265
Socastee Office
4801 Socastee Boulevard
Myrtle Beach, SC 29575
(803) 444-0281
Surfside Office
112 Highway 17 South
& Glenns Bay Road
Surfside Beach, SC 29575
(803) 444-0250
Waccamaw Medical Park Office
112 Waccamaw Medical Park Drive
Conway, SC 29526
(803) 444-0216
South Brunswick Office
1625 Seaside Road, SW
Sunset Beach, NC 28468
(803) 444-1258
(910) 579-8160
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COASTAL INVESTMENTS CORPORATION
(803) 626-0491
----------------------------------------
Susan J. Cooke
Corporate Secretary
Myrtle Beach Investment Center
(803) 448-5151
Victoria J. Damore
Investment Services Representative
Conway Investment Center
(803) 626-0491
Michael C. Gerald
President and Chief Executive Officer
Myrtle Beach Investment Center
(803) 448-5151
John Michael Hill
Investment Services Representative
Myrtle Beach Investment Center
(803) 626-0491
Jerry L. Rexroad, CPA
Chief Financial Officer
Myrtle Beach Investment Center
(803) 448-5151
Julie M. Tellier
Sales Assistant
Myrtle Beach Investment Center
(803) 626-0491
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COASTAL FEDERAL MORTGAGE
(803) 662-2273
-------------------------------
Susan J. Cooke
Corporate Secretary
Michael C. Gerald
President and Chief Executive Officer
Edward F. Hurley
Vice President
Jerry L. Rexroad, CPA
Chief Financial Officer
Nancy L. Watts
Assistant Vice President
37
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CORPORATE INFORMATION
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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 J.C. Bradford
at 1-800-829-4522, Trident Financial Corporation at 1-800-222- 2618,
Robinson-Humphrey at 1-800-241-0077, Herzog, Heine, Geduld, Inc. at
1-800-523-4936, Raymond James & Associates, Inc. at 1-800-441-4103 or Wheat
First Butcher & Singer Securities at 1-800-678-3232. As of November 30, 1997 the
Corporation had 793 shareholders and 4,655,982 shares of common stock
outstanding. This does not reflect the number of persons or entities who hold
stock in nominee or "street name."
Market Price of Common Stock
The table below reflects the high and low bid stock prices published by
NASDAQ for each quarter.
High Low
Bid Bid
--------- --------
Fiscal Year 1997:
First Quarter ...... $16.50 $13.88
Second Quarter ...... 19.13 16.50
Third Quarter ...... 23.13 21.13
Fourth Quarter ...... 25.25 22.88
Fiscal Year 1996:
First Quarter ...... 10.08 9.12
Second Quarter ...... 12.45 9.36
Third Quarter ...... 13.35 11.40
Fourth Quarter ...... 15.75 13.20
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,
1997, may be obtained without a charge by writing to the Shareholder Relations
Officer at the Corporate Address.
Annual Meeting of Shareholders
The Annual Meeting of Shareholders of Coastal Financial Corporation will
be held at the Myrtle Beach Martinique, 7100 North Ocean Boulevard, Myrtle
Beach, South Carolina, on Monday, January 26, 1998 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 Officer at the address shown below.
Corporate Offices
Coastal Financial Corporation
2619 Oak Street
Myrtle Beach, South Carolina 29577
803-448-5151
Transfer Agent and Registrar
Registrar and Transfer Company
P.O. Box 1010
Cranford, NJ 07016
(800) 866-1340
Independent Certified Public Accountants
KPMG Peat Marwick LLP
P.O. Box 10529
Greenville, South Carolina 29603
General Counsel
James H. Dusenbury
Dusenbury, Hendrix & Little
602 27th Avenue
Myrtle Beach, South Carolina 29577
Special Counsel
Breyer & Aggugia
1300 I Street, N.W.
Suite 470 East
Washington, DC 20005
Shareholder Relations Officer
Susan J. Cooke
Coastal Financial Corporation
2619 Oak Street
Myrtle Beach, South Carolina 29577
803-448-5151
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.
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COASTAL FINANCIAL CORPORATION
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Corporate Office
2619 Oak Street
Myrtle Beach, SC 29577-3129
(803) 448-5151