EXHIBIT 13
ANNUAL REPORT TO STOCKHOLDERS FOR THE
FISCAL YEAR ENDED SEPTEMBER 30, 1998
Coastal
Financial Corporation
1998
Annual
Report
The Coastal Federal Customer
Continued growth depends upon Coastal Federal's ability to uncover customer
needs and meet those needs with the right products and services, delivered by
well-trained Associates.
Personal Banking
Coastal Banker Checking, Savings and Investments
Our Customers enjoy the benefits of one of our four COASTAL BANKER Checking
options. They can add long term growth to their financial plans with a Coastal
Federal savings account or tap the broad resources available from Coastal
Investor Services, Inc., the securities brokerage subsidiary of Coastal
Financial Corporation.*
Easy Access
In addition to the knowledgeable personnel at Coastal Federal locations,
Customers can access their Checking accounts, Savings and credit accounts 24
hours a day using their touch-tone telephones. Or with their computers and
Coastal Federal PC Banking, they can take advantage of the convenience of the
Internet to manage their finances. When they're in a hurry, our Customers can
stop by any of our conveniently located ATMs, or use our ATM/VISA(R) Check Card
to eliminate the check-writing hassles of presenting multiple IDs and waiting
for approval.
Ruetilla Ford
Mrs. Ford has been a Coastal Federal Customer since the days when she climbed
the stairs to the Bank's original second-floor location at the Colonial Building
in downtown Myrtle Beach - that's more than 45 years. She still lives in the
home that she and her late husband Charles built themselves, with the help of a
Coastal Federal mortgage. Now that Mrs. Ford is retired from the AVX
Corporation, Coastal Federal is there for savings, financial planning and
investment advice. A tireless gardener and enthusiastic traveler, Mrs. Ford
enjoys the people she encounters at her part-time job at The Breakers and the
organizations of which she is an active member. And Coastal Federal runs in the
family. "Both my sons are Coastal Federal Customers," she says.
- ---------------------
*Securities offered through Robert Thomas Securities, Inc., Member NASD/SIPC
- -- NOT FDIC Insured
- -- NOT GUARANTEED by Coastal Federal Savings Bank
- -- Subject to risk and may lose value
The Coastal Federal Customer
Coastal Federal offers a wide array of time-saving, added-value financial
advantages that are right for our Customers.
Personal Banking
Loans and Other Credit Products
When our Customers are ready to buy or build a home, or purchase a lot to build
on later, Coastal Federal has a mortgage specialist at every location to deliver
personal attention. Our specialists have a keen understanding of the community
real estate market, and have local decision-making authority to speed the
approval process.
For big expenses, our Customers can lower the cost of credit with a Coastal
Federal Home Equity Line or Loan. (Home Equity products may be tax de-ductible;
Customers should check with their tax advisors.) Our Consumer Loans can make the
money available for buying a vehicle or taking advantage of a great deal. And
our Customers enjoy the purchasing power and worldwide convenience of our
popular Fly Free on Us(R) VISA(R) Credit Card.
We make it simple.
Our All-in-One Application makes it easy for our Customers to sign up for a
broad range of services, all at one time. No lengthy forms, no hassle. Then as
they add future services, we simply up-date the data. It's part of the added
convenience our Customers can count on from Coastal Federal.
Tom & Bonnie Black
As an ERA Winner's Circle Realtor, Bonnie Black knows the real estate market in
the coastal Carolina area. When she and husband Tom bought their home in
Calabash, North Carolina, Coastal Federal was their choice as a Mortgage Lender.
"We like Coastal Federal's personal attention," Tom said. So when they recently
decided to refinance and renovate their home, Coastal Federal was their choice
once again. When they renovated their home, Tom built a wide, comfortable deck
so they could make the most of the coastal climate. Both Tom and Bonnie grew up
in military families, with frequent moves and traveling, so they appreciate the
friendliness and quiet of Calabash. Now that Tom and Bonnie are planning their
own real estate ventures, Coastal Federal is helping them with personal
attention to define the right options for their business as well.
Quest for
Excellence
Our Mission:
Exceeding the
Expectations of
Our Customer
Coastal
Financial
Corporation
1998
Annual
Report
Coastal
Financial
Corporation
Our Values
Values we follow in carrying forth the Bank's Mission Statement.
Commitment
We pledge to Exceed the Expectations of our Customer and adhere to the Guiding
Principles of the Bank.
Leadership
Continuously developing and communicating the correct visions and ensuring their
reality.
Integrity
Retaining Trust and Respect.
Quality
Doing the Right things Right.
Dedication
Quest for Excellence
Shortly after becoming a public company in 1990, we set out to develop a
foundation which would support the significant changes we would, and should,
experience.
Our vision then, and today, is that change is necessary for growth and progress.
However, no matter how, or in what magnitude, the change should occur, we
believed that our foundation principles had to be unchanging.
The result of this initiative produced a clearly defined set of values which we
refer to as our Quest for Excellence operating philosophy.
This Guiding Vision, in the big picture, links our Basic Corporate Objective of
Maximizing The Value Of Our Shareholders' Investment with our Long Term Goal of
Being The Best Financial Services Company In Our Marketplace by constantly
focusing our attention on the fact that this result may only be achieved by
providing exceptional Customer service. We firmly believe that this level of
commitment to Exceeding the Expectations of our Customer can only be delivered
by motivated Career Associates, working as part of a group which is well focused
on established goals. And further, that the degree of our success will be
significantly influenced by our ability to contribute to the improvement of the
Communities we serve.
Our overriding commitment to our QUEST FOR EXCELLENCE operating philosophy has
again produced outstanding results for our Shareholders and we are absolutely
convinced that this approach will help to insure that our best years are yet to
come.
Share Price Performance
[GRAPHIC -- SHARE PRICE PERFORMANCE GRAPH PLOTTED TO POINTS IN CHART BELOW]
Initial Public Offering
October 4, 1990 .................................................$10.00
Sept. 30, 1991 ..................................................$10.00
Sept. 30, 1992 ..................................................$27.20
Sept. 30, 1993 ..................................................$68.31
Sept. 30, 1994 ..................................................$85.56
Sept. 30, 1995 ..................................................$85.92
Sept. 30, 1996 ..................................................$134.94
Sept. 30, 1997 ..................................................$217.16
Sept. 30, 1998 ..................................................$215.52
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 $215.52 based upon
NASDAQ Quotations at September 30, 1998. The foregoing reflects historical
results and may not be indicative of future stock prices.
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,
---------------------------
1994 1995
------------- -------------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
FINANCIAL CONDITION DATA:
Total assets ....................................................... $ 374,980 $ 401,201
Loans receivable, net .............................................. 331,175 356,819
Mortgage-backed securities ......................................... 794 12,776
Cash, interest-bearing deposits and investment securities .......... 29,316 13,530
Deposits ........................................................... 247,385 273,099
Borrowings ......................................................... 98,446 95,997
Stockholders' equity ............................................... 23,104 24,820
OPERATING DATA:
Interest income .................................................... $ 24,562 $ 30,328
Interest expense ................................................... 11,548 17,272
--------- ---------
Net interest income ................................................ 13,014 13,056
Provision for loan losses .......................................... 510 202
--------- ---------
Net interest income after provision for loan losses ................ 12,504 12,854
--------- ---------
OTHER INCOME:
Fees and service charges on loans and deposit accounts ............. 1,001 1,051
Gain on sales of loans held for sale ............................... 411 39
Gain (loss) on sales of investment securities ...................... -- --
Gain on sales of mortgage-backed securities, net ................... 54 --
Real estate operations ............................................. 341 876
Other income ....................................................... 1,022 1,284
--------- ---------
Total other income ................................................. 2,829 3,250
Total general and administrative expense ........................... 10,279 10,152
--------- ---------
Earnings before income taxes ....................................... 5,054 5,952
Income taxes ....................................................... 1,906 2,232
--------- ---------
Net earnings before cumulative effect of adopting FASB 109 ......... 3,148 3,720
--------- ---------
Cumulative effect of adopting FASB 109 ............................. 664 --
--------- ---------
Net income ......................................................... $ 3,812 $ 3,720
========= =========
Net earnings per common diluted share before cumulative effect of
adopting FASB 109 ................................................. $ .48 $ .59
Cumulative effect of adopting FASB 109 ............................. .10 --
--------- ---------
Net earnings per common diluted share .............................. $ .58 $ .59
========= =========
Cash dividends per common share .................................... $ .11 $ .21
========= =========
Weighted average shares outstanding ................................ 6,508 6,320
========= =========
AT SEPTEMBER 30,
------------------------------------------
1996 1997 1998
-------------- ------------- -------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE
DATA)
FINANCIAL CONDITION DATA:
Total assets ....................................................... $459,712 $ 494,003 $ 643,560
Loans receivable, net .............................................. 370,368 403,570 414,264
Mortgage-backed securities ......................................... 27,029 23,023 170,181
Cash, interest-bearing deposits and investment securities .......... 38,332 39,582 25,507
Deposits ........................................................... 313,430 347,116 386,321
Borrowings ......................................................... 109,886 106,337 210,560
Stockholders' equity ............................................... 27,681 32,391 37,851
OPERATING DATA:
Interest income .................................................... $34,720 $ 38,065 $ 43,894
Interest expense ................................................... 19,091 20,146 24,451
-------- --------- ---------
Net interest income ................................................ 15,629 17,919 19,443
Provision for loan losses .......................................... 790 760 865
-------- --------- ---------
Net interest income after provision for loan losses ................ 14,839 17,159 18,578
-------- --------- ---------
OTHER INCOME:
Fees and service charges on loans and deposit accounts ............. 1,415 1,593 1,639
Gain on sales of loans held for sale ............................... 990 931 1,579
Gain (loss) on sales of investment securities ...................... (6) 7 96
Gain on sales of mortgage-backed securities, net ................... 189 235 521
Real estate operations ............................................. 345 141 149
Other income ....................................................... 1,699 1,792 1,895
--------- --------- ---------
Total other income ................................................. 4,632 4,699 5,879
Total general and administrative expense ........................... 13,586 12,716 13,618
--------- --------- ---------
Earnings before income taxes ....................................... 5,885 9,142 10,839
Income taxes ....................................................... 2,164 3,351 3,987
--------- --------- ---------
Net earnings before cumulative effect of adopting FASB 109 ......... 3,721 5,791 6,852
--------- --------- ---------
Cumulative effect of adopting FASB 109 ............................. -- -- --
--------- --------- ---------
Net income ......................................................... $ 3,721 $ 5,791 $ 6,852
========= ========= =========
Net earnings per common diluted share before cumulative effect of
adopting FASB 109 ................................................. $ .58 $ .89 $ 1.04
Cumulative effect of adopting FASB 109 ............................. -- -- --
--------- --------- ---------
Net earnings per common diluted share .............................. $ .58 $ .89 $ 1.04
========= ========= =========
Cash dividends per common share .................................... $ .23 $ .26 $ .28
========= ========= =========
Weighted average shares outstanding ................................ 6,391 6,503 6,563
========= ========= =========
All share and per share data have been restated to reflect two 5 for 4
stock dividends declared on January 9, 1996 and June 20, 1996, respectively, and
two 4 for 3 stock dividends declared on April 30, 1997 and May 6, 1998.
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,
-------------------------
1994 1995
------------ ------------
Other Data:
Return on assets (net income divided by average assets) ............................ 0.92% 0.94%
Return on average equity (net income divided by average equity) .................... 13.88% 15.54%
Average equity to average assets ................................................... 6.66% 6.08%
Tangible book value per share ...................................................... $ 3.84 $ 4.16
Dividend payout ratio .............................................................. 16.19% 34.46%
Interest rate spread (difference between average yield on interest-earning assets
and average cost of interest-bearing liabilities) ................................. 4.09% 3.52%
Net interest margin (net interest income as a percentage of average interest-
earning assets) ................................................................... 4.12% 3.62%
Allowance for loan losses to total loans at end of period .......................... 1.01% 1.00%
Ratio of non-performing assets to total assets (1) ................................. 0.56% 0.53%
Tangible capital ratio ............................................................. 5.94% 6.13%
Core capital ratio ................................................................. 5.94% 6.13%
Risk-based capital ratio ........................................................... 10.11% 10.45%
Number of:
Real estate loans outstanding ..................................................... 6,614 6,688
Deposit accounts .................................................................. 33,618 39,881
Number of full service offices .................................................... 8 8
AT OR FOR YEARS ENDED SEPTEMBER 30,
-------------------------------------
1996 1997 1998
------------ ------------ -----------
Other Data:
Return on assets (net income divided by average assets) ............................ 0.85% 1.21% 1.13%
Return on average equity (net income divided by average equity) .................... 13.97% 19.36% 19.52%
Average equity to average assets ................................................... 6.10% 6.24% 6.05%
Tangible book value per share ...................................................... $ 4.52 $ 5.23 $ 6.04
Dividend payout ratio .............................................................. 38.51% 27.63% 25.14%
Interest rate spread (difference between average yield on interest-earning assets
and average cost of interest-bearing liabilities) ................................. 3.76% 3.89% 3.51%
Net interest margin (net interest income as a percentage of average interest-
earning assets) ................................................................... 3.86% 4.03% 3.64%
Allowance for loan losses to total loans at end of period .......................... 1.11% 1.19% 1.33%
Ratio of non-performing assets to total assets (1) ................................. 0.17% 0.10% 0.36%
Tangible capital ratio ............................................................. 5.93% 6.31% 6.10%
Core capital ratio ................................................................. 5.93% 6.31% 6.10%
Risk-based capital ratio ........................................................... 10.41% 11.05% 12.67%
Number of:
Real estate loans outstanding ..................................................... 5,741 6,752 6,666
Deposit accounts .................................................................. 41,755 43,544 43,720
Number of full service offices .................................................... 9 9 10
(1) Nonperforming assets consist of nonaccrual loans 90 days or more past due
and real estate acquired through foreclosure.
Dear Friends
Record financial results
The year 1998 was the best in Coastal Financial Corpora-tion's history. We
achieved record financial results and accomplished many strategic objectives
aimed at maximizing our ability to capitalize on opportunities in the future.
Net income for the year totaled $6.9 million, or $1.04 per diluted share, an
increase of 18% compared to $5.8 million, or $0.89 per diluted share in 1997.
These results produced a return on average Shareholders' equity of 19.52% and a
return on average assets of 1.13%.
Our balance sheet continues to be very strong. Total assets increased over 30%,
or $149.6 million, for the year. This growth enabled us to achieve a better risk
balance in terms of asset/liability mix and geographic dispersion. Asset quality
remained excellent compared to both industry standards and historical norms.
While our operating results for 1998 met our high expectations, the market price
of Coastal Financial Corporation's shares remained steady. Despite the very
challenging global economy, the market price of Coastal Financial Corporation's
common stock remained at 99.24% of the market price at September 30, 1997. This
level of share price performance, while quite a contrast compared to the 60%
increase in 1997 and the 56% increase in 1996, compares favorably to the Dow
Jones Industrial Average which, at September 30, 1998, was at 98.7% of its value
at September 30, 1997.
Since becoming a public company in October, 1990, Coastal Financial
Corporation's stock has grown at a compound annual rate of over 46%, taking our
market capitalization from $4.6 million in October 1990, to $106.5 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 $21,552. We believe this level of
performance to be a record for the banking industry.
Equally as impressive is the fact that, since 1990, our operating earnings have
increased at a compound annualized rate in excess of 17%.
During 1998, the quarterly cash dividend was increased 3.7% to $0.07 per share,
marking the continuation of increased dividends each year since 1992, the year
we began paying cash dividends.
One of the best indicators of performance is Return On Shareholders' Equity, and
this measure for 1998 was, again, outstanding. Our Return On Average
Shareholders' Equity measure of 19.52% ranks us among the top performing
financial services companies in the nation.
Progress toward 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 was further evidenced by the
following public recognition:
Coastal Financial Corporation was recently listed as #1 in Return on Equity for
all publicly-held financial institutions in North and South Carolina in the
1998/1999 edition of Corporate Carolina, published by the editors of Business
North Carolina.
Coastal Federal placed 1st in voting by the readers of the (Myrtle Beach) Sun
News in the Financial Institutions category of the Sun News Best Of The Beach
Competition for 1998.
Coastal Federal was ranked #1 by the 1998 Sheshunoff Market Share Report, in
deposit market share for Horry County, South Carolina, the second fastest
growing Metropolitan Statistical Area in the nation.
We are extremely proud of the performance evidenced by these results and are
especially proud of our Associates who worked so hard to achieve them.
1998
Our best year yet
This was indeed a year of significant achievement for Coastal Financial
Corporation. The ongoing restructuring of our operations to create a stronger
focus on the sales and marketing of financial services, an initiative for which
we began the allocation of substantial resources in 1996, has continued to pay
significant dividends, particularly in the areas of loan, deposit and investment
product sales.
Our financial performance during fiscal 1998 again met our high expectations and
well positions us to aggressively pursue future opportunities.
Noteworthy Financial Results for Fiscal 1998:
PERFORMANCE GRAPH 1998
- -- The value of Coastal Financial Corporation's common stock has grown at a
compound annual rate of over 25% during the past five years.
- -- A 3.7% increase in cash dividends paid per common share.
- -- The payment of a 4 for 3 stock split in the form of a 33% stock dividend.
[GRAPHIC -- Performance Graph]
EARNINGS PER SHARE
- -- Net earnings of $6.9 million or $1.04 per diluted share. Net earnings for
fiscal 1998 increased 18% over the prior year.
- -- Shareholders' equity advanced 16.9% to $37.9 million.
[GRAPHIC -- Bar Graph plotted to numbers in chart below]
1994 ........................ $0.48
1995 ........................ $0.59
1996 ........................ $0.58
1997 ........................ $0.89
1998 ........................ $1.04
BOOK VALUE PER SHARE
- -- Book value per share grew 15.5% to $6.04.
[GRAPHIC -- Bar Graph plotted to numbers in chart below]
1994 ........................ $3.84
1995 ........................ $4.16
1996 ........................ $4.52
1997 ........................ $5.23
1998 ........................ $6.04
ASSETS
- -- A 30.3% growth in total assets to $643.6 million.
- -- Loans receivable increased 3.11% to $424.8 million.
- -- Deposits were up 11.3% to the highest level in the Company's history.
- -- Transaction deposits grew by 16.1% in fiscal 1998.
[GRAPHIC -- Bar Graph plotted to numbers in chart below]
(in millions)
1994 ........................ $375.00
1995 ........................ $401.20
1996 ........................ $459.70
1997 ........................ $494.00
1998 ........................ $643.60
ALLOWANCE FOR LOAN LOSSES TO NET LOANS
- -- Allowance for Loan Losses to Net Loans increased to 1.33%.
- -- The Company had Net Loan Charge Offs of .05% in 1998.
[GRAPHIC -- Bar Graph plotted to numbers in chart below]
1994 ........................ 1.01%
1995 ........................ 1.00%
1996 ........................ 1.11%
1997 ........................ 1.19%
1998 ........................ 1.33%
Coastal Financial Corporation's outstanding operating results have been
recognized by the financial markets and have been a major factor in the
achievement of a compound annual growth rate of more than 46% in our stock price
since becoming a public company in October of 1990.
As good as these results are, it's the future that we are really interested in.
The question we're most often asked at Coastal Financial is the same question we
continually ask ourselves: "Can we keep it up?"
We believe the answer is a resounding "Yes," as long as we maintain our
philosophy of viewing change and constant improvement as essential to the
achievement of our Corporate objectives. That's what really sets us apart from
the competition.
A Look Back at 1998
Winston Churchill once said, "The further backward you look, the further forward
you can see." Churchill was describing the process of analyzing and interpreting
the elements of change and continuous improvement ... two elements which are
essential to the future success of both organizations and individuals.
At Coastal Financial Corporation, we embrace change as the essential ingredient
of continuous improvement, and, when interwoven with the changeless core values
imbedded in our Quest for Excellence Operating Philosophy, we are con-fident in
our belief that our formula will continue to produce exceptional results.
As we rapidly approach the change of the century and millennium, we are stronger
than ever and truly believe the future looks great. While we expect 1999 to be a
challenging and difficult year, with a likely continued slowing of the economy,
we are very excited about the opportunities which lie ahead.
In continuing to prepare our organization for the future, we undertook many
significant initiatives during 1998. Some of the initiatives and accomplishments
aimed at increasing the long term value of the Company by maximizing our ability
to capitalize on opportunities in the years ahead were:
- -- The expansion of Coastal Federal University to assure that we remain focused
on leadership development offerings such as our Pledge To Excellence Program.
We believe that the ultimate test for a leader is not whether they can make
smart decisions and take decisive action, which are two very valuable
attributes, but, rather, whether they can teach others to be leaders and
build an organization that remains successful even when they are not present.
The key to our ability to remain a high performance organization, with
exceptional leadership, is our ever-increasing capacity to create new
leaders.
- -- The continued development of our franchise in Horry, Florence and Brunswick
counties. Our newest Sales Center in Sunset Beach, North Carolina, and plans
for the development of other Sales Centers throughout our existing and
contiguous market areas is consistent with our efforts to build a significant
presence in coastal North Carolina as well as to expand our presence and
market awareness along the South Carolina coast and throughout the robust and
growing Pee Dee region.
We view de novo Sales Center development as a strategic line of business.
And, while there is some dilution to earnings per share, as there is with any
major capital investment, such as a new computer system, we believe these
additions, in the long term, will contribute significantly to growth in
earnings per share and enhance the franchise value of Coastal Financial
Corporation.
- -- Preparation for the Year 2000. A significant amount of time has been
allocated, over the past two years, toward preparing Coastal Financial
Corporation for dealing with the challenge posed by the Year 2000 (Y2K)
computer problem which affects all businesses, nationwide and worldwide. Our
Leadership Group and Board of Directors are acutely aware of the seriousness
of this issue for our Customers and our organization, and have engaged the
services of a highly qualified consultant to work with our project team. It
is our goal to have all affected areas in compliance by calendar year-end
1998, thus providing the entire year of 1999 for testing and validating our
efforts.
- -- The further development of our internet web site at:
http://www.coastalfederal.com to include PC Banking. This web site employs
the most secure encryption technology permitted by the Federal government.
Through this web site, our Customers may, for their accounts, verify current
deposit or loan balances, print up-to-date statements, determine interest
information, transfer funds between accounts or make a loan payment. In the
near future, we will offer our PC Bill Pay product which is unique to our
market in that it does not require any optional software.
[GRAPHIC -- Photo]
Michael C. Gerald
President and Chief Executive Officer
OUR CONTINUED GROWTH DEPENDS UPON BUILDING LONG TERM RELATIONSHIPS
WITH OUR CUSTOMERS
- -- The reorganization of Coastal Investor Services to ensure greater alignment
with Corporate objectives. This initiative resulted in a higher level of
leadership being devoted to this very important segment of our business and
created greater geographic coverage to the markets we serve through the
addition of Investment Advisors to our Florence and Brunswick County banking
offices.
- -- A re-alignment of our product offerings into four categories: Personal Lines,
Business Lines, Investment Services and Residential Mortgages. Our capacity
to compete effectively and continue to experience substantial growth rests in
our ability to uncover Customer needs and meet those needs with the right
products and services, delivered by a well-trained and highly motivated group
of Associates. To better enable us to achieve that result, we have developed
a relationship selling approach which allows for competitive
relationship-based pricing as well as added new products and sales tools to
assist in the selling effort.
- -- The further decentralization of decision-making. Our future success is firmly
rooted in the Communities we serve, and the ability to be flexible and
responsive to those needs is a cornerstone of our competitive advantage.
Community support, pricing, lending decisions and mix of product offerings
are largely determined by our Regional Leaders. This focus provides both
increased speed of decisions as well as the ability to better match our
services and actions to specific Customer and Community needs.
- -- The development of a Customer For Life Relationship Building program. Like
any sales organization, we commit significant resources, in both time and
dollars, in prospecting for Customers. During 1998, we began developing
approaches, processes and procedures designed to better define our long term
Customers, and provide added-value services which will enhance and sustain
the relationship. Continued growth is dependent upon retaining good Customers
while adding new ones and, through the successful implementation of this very
valuable program, we will be well positioned to retain valued Customers for
life.
These initiatives well reflect our culture of viewing change and constant
improvement as essential to the achievement of our long term objectives.
Prepared for the Future
Our two primary strengths at Coastal Financial Corporation are our Associates
and our QUEST FOR EXCELLENCE Operating Philosophy. These powerful attributes
have allowed us to achieve record levels of performance and provide the solid
foundation for helping to assure that our best years are yet to come.
While the financial services industry is, and will continue to be, rapidly
changing and highly competitive, our plan going forward is, quite simply, to
build on this solid foundation and our powerful record of achievement and
success.
All of us at Coastal Financial Corporation appreciate your continued
encouragement, loyalty and support, and look to the future with great enthusiasm
and excitement.
/s/Michael C. Gerald
Michael C. Gerald
President and Chief Executive Officer
OUR COMMITMENT TO SERVICE FOR OUR CUSTOMERS IS EXTENDED BY NEW TECHNOLOGIES THAT
ALLOW 24 HOUR ACCESS TO ACCOUNTS.
MANAGEMENT'S DISCUSSION AND ANALYSIS
FORWARD LOOKING STATEMENTS
This report may contain certain "forward-looking statements" within the
meaning of Section 27A of the Securities Exchange Act of 1934, as amended, that
represent 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).
GENERAL
Coastal Financial Corporation (the "Company") reported $6.9 million in net
income for the year ended September 30, 1998, compared to $5.8 million for the
year ended September 30, 1997. Net interest income increased $1.5 million as a
result of increased interest income of $5.8 million offset by an increase of
$4.3 million in interest expense. Provision for loan losses increased from
$760,000 for the year ended September 30, 1997, to $865,000 for the year ended
September 30, 1998. Other income increased from $4.7 million in fiscal 1997, to
$5.9 million in 1998. General and administrative expenses increased $902,000 for
fiscal 1998, as compared to fiscal 1997.
Total assets increased from $494.0 million at September 30, 1997 to $643.6
million at September 30, 1998, or 30.3%. Liquid assets, consisting of cash,
interest-bearing deposits, and securities, increased from $62.6 million at
September 30, 1997 to $195.7 million at September 30, 1998. This increase
primarily resulted from the Company's decision to significantly increase it's
investment in mortgage-backed securities. Mortgage-backed securities increased
from $23.0 million at September 30, 1997, to $170.2 million at September 30,
1998. Loans receivable increased 2.6% from $403.6 million at September 30, 1997,
to $414.3 million at September 30, 1998. Total loan originations for fiscal 1998
were $205.3 million as compared to $178.5 million for fiscal 1997.
The growth in mortgage-backed securities was funded by increased deposits
of $39.2 million, increased advances from the FHLB of $43.4 million and
increased repurchase agreements of $56.5 million. The increase in advances and
repurchase agreements were used primarily to fund growth in the investment
portfolio. During fiscal 1998, deposits increased from $347.1 million at
September 30, 1997, to $386.3 million at September 30, 1998. During this same
period, transaction deposits increased $26.9 million and certificate accounts
increased $14.5 million. The Company's strategy is to increase its reliance on
core transaction deposits as opposed to certificates of deposits.
As a result of $6.9 million in net earnings, less the cash dividends paid
to shareholders of approximately $1.7 million, stockholders' equity increased
from $32.4 million at September 30, 1997 to $37.9 million at September 30, 1998.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has maintained its liquidity at levels believed
by management to be adequate to meet requirements of normal operations,
potential deposit outflows and strong loan demand and still allow for optimal
investment of funds and return on assets.
The principal sources of funds for the Company are cash flows from
operations, consisting mainly of mortgage, consumer and commercial loan
payments, retail customer deposits, repurchase agreements securitized by
mortgage-backed securities and advances from the 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 $160.4 million, $178.5 million and $205.3
million for the years ended September 30, 1996, 1997 and 1998, respectively. A
large portion of these loan originations were financed through loan principal
repayments which amounted to $93.6 million, $109.9 million and $130.3 million
for the years ended September 30, 1996, 1997 and 1998, respectively. In
addition, the Company has generally sold conforming fixed rate mortgage loans
which are sold to correspondent financial institutions in the secondary market
to finance future loan originations. For the year ended September 30, 1998, the
Company's mortgage subsidiary originated $68.6 million of loans and sold $64.8
million of loans. For the years ended September 30, 1996, 1997 and 1998, the
Company sold loans amounting to $40.7 million, $44.2 million and $71.7 million,
respectively.
During 1998, the Company used deposit growth to fund its loan growth. In
fiscal 1998, deposits increased from $347.1 million at September 30, 1997, to
$386.3 million at September 30, 1998. The increase was attributed to transaction
accounts which increased approximately $26.9 million, and certificate accounts
which increased $14.5 million. This was offset by a decrease in passbook
accounts of $2.2 million.
1
At September 30, 1998, the Company had commitments to originate $11.5
million in loans and $35.1 million in unused lines of credit, which the Company
expects to fund from normal operations.
At September 30, 1998, the Company had $127.2 million of certificates of
deposit which were due to mature within one year. Based upon previous
experience, the Company believes that a major portion of these certificates will
be redeposited. At September 30, 1998, the Company had excess collateral pledged
to the FHLB which would support additional FHLB advance borrowings of $28.5
million. Additionally, at September 30, 1998, the Company had repurchase
agreement lines of credit and available collateral consisting of investment
securities and mortgage-backed securities of $104.2 million as well as federal
funds available of $15.0 million.
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 $39.0 million at September 30, 1998, exceeding the
Bank's tangible and core requirements by $26.2 million and $13.4 million,
respectively. At September 30, 1998, the Bank's capital exceeded its current
risk-based minimum capital requirement by $15.9 million. The risk-based capital
requirement may increase in the future.
RESULTS OF OPERATIONS
COMPARISON OF THE YEARS ENDED SEPTEMBER 30, 1997 AND 1998
GENERAL
Net earnings were $6.9 million ($1.04 per diluted share) for the year ended
September 30, 1998 compared to $5.8 million ($0.89 per diluted share) for the
year ended September 30, 1997. Net interest income increased $1.5 million
primarily as a result of an increase in interest income of $5.8 million which
was offset by an increase in interest expense of $4.3 million.
INTEREST INCOME
Interest income for the year ended September 30, 1998, increased 15.3% to
$43.9 million as compared to $38.1 million for the year ended September 30, 1997
primarily due to a 20.8% increase in average interest-earning assets. The net
yield on interest-earning assets for the year ended September 30, 1997 was 8.46%
compared to 8.11% for the year ended September 30, 1998. The average yield on
loans receivable for fiscal year 1998 was 8.75% compared to 8.70% in 1997. The
yield on investments which includes Investments, Overnight Funds and Federal
Funds, decreased slightly to 6.69% for the fiscal year 1998 from 6.70% for
fiscal year 1997. Total interest-earning assets for fiscal year 1998 averaged
$546.6 million compared to $452.5 million for the year ended September 30, 1997.
The increase in average interest-earning assets is due to an increase in average
loans receivable of approximately $27.9 million and mortgage-backed securities
of approximately $68.9 million.
INTEREST EXPENSE
Interest expense on interest-bearing liabilities was $24.5 million for the
year ended September 30, 1998, as compared to $20.1 million in fiscal 1997. The
cost of interest-bearing liabilities was 4.60% for the year ended September 30,
1998, compared to 4.57% in fiscal year 1997. The average cost of deposits for
the year ended September 30, 1998, was 4.10% compared to 4.15% for the year
ended September 30, 1997. The cost of FHLB advances and reverse repurchase
agreements for fiscal 1998 was 5.62% and 5.68%, respectively, compared to 5.95%
and 5.60%, respectively, for fiscal 1997. Total average interest-bearing
liabilities increased 21.2% from $438.6 million at September 30, 1997, to $531.7
million at September 30, 1998. The increase in average interest-bearing
liabilities is due to an increase in average deposits of approximately $26.2
million, FHLB advances of $25.2 million and reverse repurchase agreements of
$40.9 million.
NET INTEREST INCOME
Net interest income was $19.4 million for the year ended September 30,
1998, compared to $17.9 million for the year ended September 30, 1997. The net
interest margin decreased to 3.51% for fiscal 1998 compared to 3.89% for fiscal
1997. During the second quarter of fiscal 1998, the Bank entered into a leverage
strategy by purchasing ARM mortgage-backed securities which were funded by
repurchase agreements and short-term advances. This strategy has had an expected
spread of approximately fifty to seventy-five basis points during the first
year. Should the yield curve continue to flatten and mortgage prepayment speeds
continue to increase, the net spread on this strategy could decline.
Average interest-earning assets increased $94.1 million while average
interest-bearing liabilities increased $93.1 million. At September 30, 1998, the
yield on the one year treasury security was approximately 4.6%, compared to
approximately 4.7% 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 mortgage loan repayments and refinancings and may
experience a declining net interest margin in fiscal 1999.
2
PROVISION FOR LOAN LOSSES
The Company's provision for loan losses increased from $760,000 for fiscal
1997 to $865,000 for fiscal 1998. The allowance for loan losses as a percentage
of loans was 1.33% at September 30, 1998, compared to 1.19% at September 30,
1997. Loans delinquent 90 days or more were .54% of total loans at September 30,
1998, compared to .06% at September 30, 1997. The allowance for loan losses was
251% of loans delinquent more than 90 days at September 30, 1998, compared to
1,906% at September 30, 1997. 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 1998, total other income increased from $4.7 million for the
period ended September 30, 1997, to $5.9 million for the period ended September
30, 1998. Due to a decreasing long-term interest rate environment which has
resulted in increased mortgage originations, gain on sale of loans was $1.6
million for the year ended September 30, 1998, compared to $931,000 for the year
ended September 30, 1997. Gain on sale of securities was $617,000 for fiscal
1998, compared to $242,000 for fiscal 1997. Other income increased slightly from
$1.8 million for the year ended September 30, 1997, to $1.9 million for the year
ended September 30, 1998.
OTHER EXPENSE
General and administrative expenses were $13.6 million for fiscal 1998 as
compared to $12.7 million for fiscal 1997. Salaries and employee benefits were
$7.4 million for fiscal 1998 as compared to $6.8 million for fiscal 1997, or a
7.5% increase. Normal salary increases and increased lending personnel accounted
for a significant portion of this increase. Net occupancy, furniture and
fixtures and data processing expense increased $369,000 for fiscal 1998, as
compared to fiscal 1997. This is primarily attributed to increased depreciation
expense on Coastal Federal University and the North Carolina office. FDIC
insurance premiums decreased from $283,000 for the year ended September 30, 1997
to $213,000 for the year ended September 30, 1998. Other expenses increased
slightly from $2.7 million in 1997 to $2.8 million in 1998.
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.
3
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 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.
NON-PERFORMING ASSETS
Non-performing assets were $2.3 million at September 30, 1998 compared to
$507,000 at September 30, 1997. Loans past due 90 days or more increased from
$257,000 at September 30, 1997, to $2.3 at September 30, 1998. This increase is
primarily attributable to the initiation of foreclosure proceedings on one
commercial real estate loan totaling approximately $2.0 million. The loan is
secured by commercial property as well as a large tract of undeveloped land.
Management does not expect a material loss from this loan. Real estate acquired
through foreclosure decreased from $250,000 at September 30, 1997, to $35,000 at
September 30, 1998.
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.
4
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, 1996, 1997 and 1998, of $790,000, $760,000 and $865,000,
respectively. For the years ended September 30, 1996, 1997 and 1998, the Company
had net charge-offs of $196,000, $140,000 and $208,000, respectively. At
September 30, 1998, the Company had an allowance for loan losses of $5.7
million, which was 1.33% of net loans compared to 1.19% at September 30, 1997.
Management believes that the current level of the allowance for loan losses
is presently adequate considering the composition of the loan portfolio, the
portfolio's loss experience, delinquency trends, current regional and local
economic conditions and other factors. While management uses the best
information available to make evaluations, future adjustments to the allowance
may be necessary if economic conditions differ substantially from the
assumptions used in making the evaluation. The allowance for possible loan
losses is subject to periodic evaluation by various regulatory authorities and
may be subject to adjustment upon their examination.
INTEREST RATE RISK DISCLOSURE
The words: anticipate, estimate, expect, project, target, goal, and similar
expressions, when used in disclosure documents, are intended to identify
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933. Such forward-looking statements are subject to certain risks,
uncertainties, and assumptions including those set forth below. Should one or
more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from those
expected or projected. These forward-looking statements speak only as of the
date of the document. The Bank expressly disclaims any obligation or undertaking
to publicly release any updates or revisions to any forward-looking statement
contained herein to reflect any change in the Bank's expectations with regard to
any change in events, conditions or circumstances on which any such statement is
based.
The Bank's Asset Liability Management Committee ("ALCO") monitors and
considers methods of managing exposure to interest rate risk. The Bank's
exposure to interest rate risk is reviewed on at least a quarterly basis by the
Board of Directors and the ALCO. Interest rate risk exposure is measured using
interest rate sensitivity analysis to determine the Bank's change in net
portfolio value in the event of hypothetical changes in interest rates. The ALCO
is charged with the responsibility to maintain the level of sensitivity of the
Bank's net portfolio value within Board approved limits.
Net portfolio value represents the market value of portfolio equity and is
equal to the market value of assets minus the market value of liabilities, with
adjustments made for off-balance sheet items over a range of assumed changes in
market interest rates. The Bank's Board of Directors has adopted an interest
rate risk policy which establishes maximum allowable decreases in NPV in the
event of a sudden and sustained one hundred to four hundred basis point increase
or decrease in market interest rates. The following table presents the Bank's
projected change in NPV for the various rate shock levels as of September 30,
1998.
MARKET VALUE OF
CHANGE IN INTEREST RATES BOARD LIMIT PORTFOLIO EQUITY PERCENT CHANGE
- ---------------------------- ------------- ------------------ ---------------
(In Thousands)
400 basis point rise -44.00% $46,526 -21%
300 basis point rise -32.00% $52,456 -11%
200 basis point rise -20.00% $56,798 -4%
100 basis point rise -11.00% $58,827 0%
No Change 00% $58,981
100 basis point decline -18.00% $59,143 0%
200 basis point decline -22.00% $60,141 2%
300 basis point decline -37.00% $62,565 6%
400 basis point decline -55.00% $65,804 12%
The preceding table indicates that at September 30, 1998, in the event of a
sudden and sustained increase in prevailing market interest rates, the Bank's
NPV would be expected to decrease, and that in the event of a sudden decrease in
prevailing market interest rates, the Bank's NPV would be expected to change
minimally. At September 30, 1998, the Bank's estimated changes in NPV were
within the limits established by the Board of Directors.
Computation of prospective effects of hypothetical interest rate changes
are based on numerous assumptions, including relative levels of market interest
rates, loan prepayments and deposit decay, and should not be relied upon as
indicative of actual results. Further, the computations do not contemplate any
actions the ALCO could undertake in response to sudden changes in interest
rates.
The Bank also uses interest rate sensitivity gap analysis to monitor the
relationship between the maturity and repricing of its interest-earning assets
and interest-bearing liabilities. Interest rate sensitivity gap is defined
5
as the difference between the amount of interest-earning assets maturing or
repricing within a specific time period and the amount of interest-bearing
liabilities maturing or repricing within the same time period. A gap is
considered positive when the amount of interest-rate-sensitive assets exceeds
the amount of interest-rate-sensitive liabilities. Generally, during a period of
rising rates, a positive gap would result in an increase in net interest income.
Conversely, during a period of falling interest rates, a positive gap would
result in a decrease in net interest income. Management's goal is to maintain
reasonable balance between exposure to interest rate fluctuations and earnings.
The Company's one-year cumulative gap is a positive $30.1 million, or 4.7% of
the Company's total assets of $643.6 million at September 30, 1998.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 130, Reporting
Comprehensive Income (Statement 130). 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
fiscal 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
fiscal 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.
SFAS 133, Accounting for Derivative Instruments and Hedging Activities
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts and hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position, and measure those
instruments at fair value. If certain conditions are met, a derivative may be
specifically designated as (a) a hedge of the exposure to changes in the fair
value of a recognized asset and liability or a firm commitment, (b) a hedge of
the exposure to variable cash flows of a forecasted transaction, or (c) a hedge
of the foreign currency exposure of a net investment in a foreign corporation.
This statement is effective for fiscal quarters beginning after June 15, 1999.
The Company has not determined the impact of adopting this statement.
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.
6
CAPITAL STANDARDS AND REGULATORY MATTERS
The Bank's capital standards include (1) a leverage limit requiring all OTS
chartered financial institutions to maintain core capital in an amount not less
than 4% of the financial institution's total assets; (2) a tangible capital
requirement of not less than 1.5% of total assets; and (3) a risk-based capital
requirement of not less than 8.0% of risk weighted assets.
The following table summarizes the capital requirements and the Bank's
capital position at September 30, 1998 (dollars in thousands):
PERCENT
AMOUNT OF ASSETS
---------- ----------
Tangible capital (1) ............................ $38,989 6.10%
Tangible capital requirement .................... 12,774 1.50
------- -----
Excess .......................................... 26,215 4.60%
======= =====
Core capital .................................... $38,989 6.10%
Core capital requirement ........................ 25,547 4.00
------- -----
Excess .......................................... $13,442 2.10%
======= =====
Risk-based capital .............................. $43,116 12.67%
Minimum risk-based capital requirements ......... 27,215 8.00
------- -----
Excess .......................................... $15,901 4.67%
======= =====
PERCENT
AMOUNT OF ASSETS
---------- ----------
Tier I leverage ratio ......................... $38,989 6.10%
Tier I leverage ratio requirement ............. 25,742 5.00
------- -----
Excess ........................................ 13,247 1.10%
======= =====
Tier I risk-based capital ..................... $38,989 11.46%
Tier I risk-based capital requirement ......... 13,607 6.00
------- -----
Excess ........................................ $25,382 5.46%
======= =====
Total risk-based capital ...................... $43,116 12.67%
Total risk-based capital requirements ......... 27,215 10.00
------- -----
Excess ........................................ $15,901 2.67%
======= =====
(1) Equals the Bank's stockholders' equity
YEAR 2000 COMPLIANCE
The Company is a user of computers, computer software and equipment
utilizing embedded microprocessors that will be effected by the year 2000 issue.
The year 2000 issue exists because many computer systems and applications use
two-digit date fields to designate a year. As the century date change occurs,
date-sensitive systems may recognize the year 2000 as 1900, or not at all. This
inability to recognize or properly treat the year 2000 may cause erroneous
results, ranging from system malfunctions to incorrect or incomplete processing.
The Company's year 2000 committee consists of the Chief Executive Officer,
three Executive Vice Presidents, two Vice Presidents, and one associate from the
Internal Audit Group. The committee makes a monthly progress report to the Board
of Directors. The committee has developed and is implementing a comprehensive
plan to make all information and non-information technology assets year 2000
compliant. The plan is comprised of the following phases:
1. Awareness -- Educational initiatives on year 2000 issues and concerns.
This phase is ongoing, especially as it relates to informing Customers of the
Company's year 2000 preparedness.
2. Assessment -- Inventory of all technology assets and identification of
third-party vendors and service providers. This phase was completed as August
31, 1998.
3. Renovation -- Review of vendor and service providers responses to the
Company's year 2000 inquires and development of a follow-up plan and timeline.
This phase was completed as of October 15, 1998.
4. Validation -- Testing all systems and third-party vendors for year 2000
compliance. The Company is currently in this phase of its plan. A third-party
service bureau processes all Customer transactions and has completed upgrades to
its systems to be year 2000 compliant. The Company will test the third-party
systems by reviewing the results of transactions at six different test dates
before and after the year 2000 date change covering all of the applications used
by the Company. Testing was completed as of November 16, 1998. In the event that
testing reveals that the third-party systems are not year 2000 compliant, the
Company's service bureau intends to either transfer the Company to other systems
that are year 2000 compliant and provide additional resources to resolve the
year 2000 issues. Other parties whose year 2000 compliance may affect the
Company
7
include the FHLB of Atlanta, brokerage firms, the operator of the Company's ATM
network and the Company's 401K administrator. These third-parties have indicated
their compliance or intended compliance. Where it is possible to do so, the
Company has scheduled testing with these third-parties. Where testing is not
possible, the Company will rely on certifications from vendors and service
providers.
5. Implementation -- Replacement or repair of non-compliant technology. As
the Company progresses through the validation phase, the Company expects to
determine necessary remedial actions and provide for their implementation. The
Company has already implemented a new year 2000 compliant computerized teller
system and has verified the year 2000 compliance of its computer hardware and
other equipment containing embedded microprocessors. The Company's plan provides
for year 2000 readiness to be completed by December 31, 1998.
The Company estimates its total cost to replace computer equipment,
software programs or other equipment containing embedded microprocessors that
were not year 2000 compliant to be $118,000, of which $41,156 has been incurred
as of September 30, 1998. System maintenance or modification costs are charged
to expense as incurred, while the cost of new hardware, software or other
equipment is capitalized and amortized over their estimated useful lives. The
Company does not separately track the internal costs and time that its own
Associates spend on year 2000 issues, which are principally payroll costs.
Because the Company depends substantially on its computer systems and those
of third-parties, the failure of these systems to be year 2000 compliant could
cause substantial disruption of the Company's business and could have a material
adverse financial impact on the Company. Failure to resolve year 2000 issues
presents the following risks to the Company; (1) the Company could lose
Customers to other financial institutions, resulting in a loss of revenue, if
the Company's third-party service bureau is unable to properly process Customer
transactions; (2) governmental agencies, such as the Federal Home Loan Company,
and correspondent institutions could fail to provide funds to the Company, which
could materially impair the Company's liquidity and affect the Company's ability
to fund loans and deposit withdrawals; (3) concern on the part of depositors
that year 2000 issues could impair access to their deposit account balances
could result in the Company experiencing deposit outflows prior to December 31,
1999; and (4) the Company could incur increased personnel costs if additional
staff is required to perform functions that inoperative systems would have
otherwise performed. Management believes that it is not possible to estimate the
potential lost revenue due to the year 2000 issue, as the extent and longevity
of any potential problem cannot be predicted. Because substantially all of the
Company's loan portfolio consists of loans to individuals rather than commercial
enterprises, management believes that year 2000 issues will not impair the
ability of the Company's borrowers to repay their debt.
There can be no assurances that the Company's year 2000 plan will
effectively address the year 2000 issues, that the Company's estimates of the
timing and costs of completing the plan will ultimately be accurate or that the
impact of any failure of the Company or its third-party vendors and service
providers to be year 2000 compliant will not have a material adverse effect on
the Company's business, financial condition or results of operations.
8
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, 1997 and 1998, 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, 1998. 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, 1997 and 1998, and the results of its operations and its cash
flows for each of the years in the three-year period ended September 30, 1998,
in conformity with generally accepted accounting principles.
/s/KPMG Peat Marwick LLP
Greenville, South Carolina
October 30, 1998
9
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
SEPTEMBER 30, 1997 AND 1998
1997 1998
------------ -----------
(Dollars in thousands)
ASSETS
Cash and amounts due from banks ...................................................... $ 12,852 11,978
Short-term interest-bearing deposits ................................................. 559 3,688
Investment securities available for sale ............................................. 26,171 9,841
Mortgage-backed securities available for sale ........................................ 23,023 170,181
Loans receivable (net of allowance for loan losses of $4,902 at September 30, 1997
and $5,668 at September 30, 1998).................................................... 403,570 414,264
Loans receivable held for sale ....................................................... 8,359 10,486
Real estate acquired through foreclosure, net ........................................ 250 35
Office property and equipment, net ................................................... 7,561 9,001
Federal Home Loan Bank (FHLB) stock, at cost ......................................... 5,618 7,266
Accrued interest receivable on loans ................................................. 2,814 2,546
Accrued interest receivable on investment securities ................................. 452 1,324
Other assets ......................................................................... 2,774 2,950
-------- -------
$494,003 $643,560
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits ............................................................................ 347,116 386,321
Securities sold under agreements to repurchase ...................................... 2,666 59,214
Advances from FHLB .................................................................. 101,478 144,909
Other borrowings .................................................................... 2,193 6,437
Drafts outstanding .................................................................. 1,018 1,615
Advances by borrowers for property taxes and insurance .............................. 1,409 1,329
Accrued interest payable ............................................................ 952 1,352
Other liabilities ................................................................... 4,780 4,532
-------- --------
Total liabilities ................................................................. 461,612 605,709
-------- --------
Stockholders' equity:
Serial preferred stock, 1,000,000 shares authorized and unissued .................... -- --
Common stock $.01 par value, 15,000,000 shares authorized; 6,195,379 shares at
September 30, 1997 and 6,263,777 shares at September 30, 1998 issued and
outstanding, ...................................................................... 62 63
Additional paid-in capital .......................................................... 8,682 8,983
Retained earnings, restricted ....................................................... 23,402 28,369
Treasury stock, at cost (9,760 shares) .............................................. (182) --
Unrealized gain on securities available for sale, net of income tax ................. 427 436
-------- --------
Total stockholders' equity ........................................................ 32,391 37,851
-------- --------
$494,003 $643,560
======== ========
See accompanying notes to consolidated financial statements.
10
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED SEPTEMBER 30, 1996, 1997 AND 1998
1996 1997 1998
----------- ----------- -----------
(In thousands, except share data)
Interest income:
Loans receivable ................................................ $ 31,698 33,769 36,314
Investment securities ........................................... 721 1,574 1,309
Mortgage-backed securities ...................................... 1,805 2,446 5,972
Other ........................................................... 496 276 299
----------- ----------- -----------
Total interest income ......................................... 34,720 38,065 43,894
----------- ----------- -----------
Interest expense:
Deposits ........................................................ 11,689 13,650 14,559
Securities sold under agreements to repurchase .................. 323 1,130 3,404
Advances from FHLB .............................................. 7,079 5,366 6,488
----------- ----------- -----------
Total interest expense ........................................ 19,091 20,146 24,451
----------- ----------- -----------
Net interest income ........................................... 15,629 17,919 19,443
Provision for loan losses ........................................ 790 760 865
----------- ----------- -----------
Net interest income after provision for loan losses ........... 14,839 17,159 18,578
----------- ----------- -----------
Other income:
Fees and service charges on loans and deposit accounts .......... 1,415 1,593 1,639
Gain on sales of loans held for sale ............................ 990 931 1,579
Gain (loss) on sales of investment securities, net .............. (6) 7 96
Gain on sales of mortgage-backed securities, net ................ 189 235 521
Income (loss) from real estate acquired through foreclosure ..... 202 (137) (72)
Income from real estate partnerships ............................ 143 278 221
Other income .................................................... 1,699 1,792 1,895
----------- ----------- -----------
Total other income ............................................ 4,632 4,699 5,879
----------- ----------- -----------
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED SEPTEMBER 30, 1996, 1997 AND 1998
1996 1997 1998
----------- ----------- -----------
(In thousands, except share data)
General and administrative expenses:
Salaries and employee benefits .................................. 6,174 6,841 7,355
Net occupancy, furniture and fixtures and data processing expense 2,831 2,891 3,260
FDIC insurance premium .......................................... 622 283 213
FDIC insurance premium to recapitalize the SAIF ................. 1,620 -- --
Other expense ................................................... 2,339 2,701 2,790
----------- ----------- -----------
Total general and administrative expense ...................... 13,586 12,716 13,618
----------- ----------- -----------
Earnings before income taxes .................................. 5,885 9,142 10,839
Income taxes ..................................................... 2,164 3,351 3,987
----------- ----------- -----------
Net income ....................................................... $ 3,721 5,791 6,852
=========== =========== ===========
Earnings per common share
Basic ........................................................... $ 0.61 0.93 1.09
=========== =========== ===========
Diluted ......................................................... $ 0.58 0.89 1.04
=========== =========== ===========
Average common shares outstanding
Basic ........................................................... 6,100,000 6,227,000 6,264,000
=========== =========== ===========
Diluted ......................................................... 6,391,000 6,503,000 6,563,000
=========== =========== ===========
See accompanying notes to consolidated financial statements.
11
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 1996, 1997 AND 1998
ADDITIONAL TOTAL
COMMON PAID-IN RETAINED TREASURY STOCKHOLDERS'
STOCK CAPITAL EARNINGS STOCK OTHER EQUITY
-------- ------------ ------------- ------------ ------- --------------
(In thousands)
Balance at September 30, 1995 ............. $62 $8,682 $18,674 $ (2,598) -- $24,820
Exercise of stock options ................. -- -- (863) 970 -- 107
Issuance of shares in acquisition ......... -- -- (67) 443 -- 376
Cash paid for fractional shares ........... -- -- (17) -- -- (17)
Cash dividend ............................. -- -- (1,433) -- -- (1,433)
Unrealized gain on securities available for
sale, net of income taxes ............... -- -- -- -- 107 107
Net income ................................ -- -- 3,721 -- -- 3,721
--- ------ -------- -------- --- -------
Balance at September 30, 1996 ............. 62 8,682 20,015 (1,185) 107 27,681
Exercise of stock option .................. -- -- (786) 1,003 -- 217
Cash paid for fractional shares ........... -- -- (18) -- -- (18)
Cash dividend ............................. -- -- (1,600) -- -- (1,600)
Unrealized gain on securities available for
sale, net of income taxes ............... -- -- -- -- 320 320
Net income ................................ -- -- 5,791 -- 5,791
--- ------ -------- -------- -------
Balance at September 30, 1997 ............. 62 8,682 23,402 (182) 427 32,391
Exercise of stock options ................. 1 301 (161) 182 -- 323
Cash paid for fractional shares............ -- (9) -- -- (9)
Cash dividends ............................ -- (1,715) -- -- (1,715)
Unrealized gain on securities available for
sale, net of income taxes ............... -- -- -- -- 9 9
Net income ................................ -- -- 6,852 -- -- 6,852
--- ------ --------- -------- --- ---------
Balance at September 30, 1998 ............. $63 $8,983 $28,369 $ -- $436 $37,851
=== ====== ========= ======== ==== =========
See accompanying notes to consolidated financial statements.
12
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1996, 1997 AND 1998
1996 1997 1998
--------- --------- ---------
(In thousands)
Cash flows from operating activities:
Net earnings ........................................................... $ 3,721 5,791 6,852
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Income from real estate partnerships .................................. (143) (278) (221)
Depreciation .......................................................... 740 865 1,030
Provision for loan losses ............................................. 790 760 865
Origination of loans receivable held for sale ......................... (45,082) (45,717) (69,546)
Proceeds from sales of loans receivable held for sale ................. 40,672 44,160 71,674
(Increase) decrease in:
Other assets ......................................................... (587) 149 (176)
Accrued interest receivable .......................................... (553) (296) (604)
Increase (decrease) in:
Accrued interest payable ............................................. 31 154 400
Other liabilities .................................................... 1,960 220 (248)
--------- --------- ---------
Net cash provided by operating activities .......................... 1,549 5,808 10,026
--------- --------- ---------
Cash flows from investing activities:
Proceeds from sale of investment securities available for sale ......... 7,000 5,693 4,500
Proceeds from maturities of investment securities available for sale ... 1,999 17,839 25,596
Purchases of investment securities available for sale .................. (24,331) (32,022) (13,798)
Purchases of loans receivable .......................................... (12,448) (9,948) (10,442)
Proceeds from sale of mortgage-backed securities available for sale .... 13,220 25,678 86,547
Purchases of mortgage-backed securities available for sale ............. (11,867) (26,636) (279,141)
Principal collected on mortgage-backed securities ...................... 4,129 4,850 45,505
Origination of loans receivable, net ................................... (115,288) (132,786) (135,706)
Principal collected on loans receivable ................................ 93,560 109,946 130,286
Proceeds from sales of real estate acquired through foreclosure ........ 937 456 263
Proceeds from sales of office properties and equipment ................. 192 -- --
Purchases of office properties and equipment ........................... (1,253) (2,690) (2,470)
Purchases of FHLB stock ................................................ (502) (390) (1,648)
Other investing activities, net ........................................ 447 914 193
--------- --------- ---------
Net cash used by investing activities .............................. (44,205) (39,096) (150,315)
--------- --------- ---------
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1996, 1997 AND 1998
1996 1997 1998
--------- --------- ---------
(In thousands)
Cash flows from financing activities:
Increase in deposits ................................................... 40,331 33,686 39,205
Increase (decrease) in securities sold under agreements to repurchase .. 688 (2,666) 56,548
Proceeds from FHLB advances ............................................ 75,850 198,170 242,625
Repayment of FHLB advances ............................................. (64,617) (201,245) (199,194)
Proceeds from other borrowings, net .................................... 1,968 224 4,244
Decrease in advance payments by borrowers for property taxes and
insurance ............................................................. (194) (26) (80)
Increase (decrease) in drafts outstanding, net ......................... (367) (904) 597
Cash dividends to stockholders and cash for fractional shares .......... (1,450) (1,618) (1,724)
Exercise of stock options .............................................. 107 217 323
--------- --------- ---------
Net cash provided by financing activities .......................... 52,316 25,838 142,544
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents ..................... 9,660 (7,450) 2,255
--------- --------- ---------
Cash and cash equivalents at beginning of year ........................... 11,201 20,861 13,411
--------- --------- ---------
Cash and cash equivalents at end of year ................................. $ 20,861 13,411 15,666
========= ========= =========
Supplemental information:
Interest paid .......................................................... $ 19,060 19,992 24,051
========= ========= =========
Income taxes paid ...................................................... $ 3,030 2,687 4,112
========= ========= =========
Supplemental schedule of non-cash investing and financing transactions:
Securitization of mortgage loans into mortgage-backed securities ....... $ 19,366 -- 4,997
========= ========= =========
Transfer of mortgage loans to real estate acquired through foreclosure . $ 471 383 48
========= ========= =========
Transfer of investment securities held to maturity to available for sale $ 14,775 -- --
========= ========= =========
See accompanying notes to consolidated financial statements.
13
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 Investment Services, Inc.
and Coastal Federal Savings Bank (the "Bank"), and the Bank's wholly-owned
subsidiaries, Coastal Real Estate Investment Corporation and Coastal Mortgage
Bankers and Realty Co., Inc. (and Coastal Mortgage Bankers and Realty Co. Inc.'s
wholly-owned subsidiaries, Shady Forest Development Corporation, Sherwood
Development Corporation, Ridge Development Corporation, 501 Development
Corporation, 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.
(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.
14
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
(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 value of loans
periodically and the allowance is adjusted accordingly. While management uses
the best information available to make evaluations, future adjustments to the
allowance may be necessary if economic conditions differ substantially from the
assumptions used in making the evaluation. The allowance for loan losses is
subject to periodic evaluation by various regulatory authorities and may be
subject to adjustment upon their examination.
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.
(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, 1997 and 1998, the Company had approximately $8.4
million and $10.5 million in mortgage loans held for sale. The aggregate market
value of loans receivable held for sale exceeded the aggregate carrying value at
September 30, 1997 and 1998.
(F) REAL ESTATE OWNED
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.
(G) OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment are carried at cost less accumulated
depreciation. Depreciation is computed primarily on the straight-line method
over estimated useful lives. Estimated lives range up to thirty years for
buildings and improvements and up to ten years for furniture, fixtures and
equipment. Maintenance and repairs are charged to expense as incurred.
Improvements which extend the lives of the respective assets are capitalized.
When property or equipment is sold or otherwise disposed of, the cost and
related accumulated depreciation are removed from the respective accounts and
the resulting gain or loss is reflected in income.
(H) UNCOLLECTED INTEREST
The Company maintains an allowance for the loss of uncollected interest
primarily on loans which are ninety days or more past due. This allowance is
reviewed periodically and necessary adjustments, if any, are included in the
determination of current interest income.
(I) LOAN FEES AND DISCOUNTS
The net of origination fees received and direct costs incurred in the
origination of loans are deferred and amortized to interest income over the
contractual life of the loans adjusted for actual principal repayments using a
method approximating a level yield.
15
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
(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 to
reflect an amount that will more likely than 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 Federal
Deposit Insurance Corporation (the "FDIC"), but are collateralized by an
interest in the pledged securities. The Company has classified these amounts
separately from deposits.
(N) RECLASSIFICATIONS
Certain amounts in the 1996 and 1997 consolidated financial statements have
been reclassified to conform with the 1998 presentation.
(O) 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.
16
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, 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
======= == == ======
The amortized cost and market value of investment securities available for
sale at September 30, 1998 is summarized as follows:
1998
---------------------------------------------------
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 ......... 3,053 44 -- 3,097
Due after five years ........................ 6,699 45 -- 6,744
------ -- -- -----
$9,752 89 -- 9,841
====== == == =====
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. For the year ended September 30, 1998, gross realized gains were
$96,000 and there were no realized losses.
Certain investment and mortgage-backed securities are pledged to secure
other borrowed money and customer deposits in excess of FDIC insurance coverage.
The carrying value of the securities pledged at September 30, 1998 was $83.1
million with a market value of $83.4 million.
(3) MORTGAGE-BACKED SECURITIES
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
======= === == ======
17
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, 1998
consisted of the following:
1998
-----------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
----------- ------------ ------------ ---------
(In thousands)
FNMA .............. $ 95,024 413 (156) 95,281
GNMA .............. 49,586 68 (95) 49,559
FHLMC ............. 24,901 479 (39) 25,341
-------- --- ---- ------
$169,511 960 (290) 170,181
======== === ==== =======
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.
For the year ended September 30, 1998, the Company had gross realized gains of
$533,000 and realized losses of $12,000.
(4) LOANS RECEIVABLE, NET
Loans receivable, net at September 30 consisted of the following:
1997 1998
----------- ----------
(In thousands)
First mortgage loans:
Single family to 4 family units ................. $237,964 248,781
Other, primarily commercial real estate ......... 97,680 95,420
Construction loans .............................. 34,216 31,261
Consumer and commercial loans:
Installment consumer loans ...................... 24,378 19,489
Mobile home loans ............................... 1,291 990
Savings account loans ........................... 1,336 1,078
Equity lines of credit .......................... 15,294 18,655
Commercial and other loans ...................... 10,939 14,848
-------- -------
423,098 430,522
Less:
Allowance for loan losses ....................... 4,902 5,668
Deferred loan fees (costs) ...................... (458) (702)
Undisbursed portion of loans in process ......... 15,084 11,292
-------- -------
$403,570 414,264
======== =======
The changes in the allowance for loan losses for the years ended September
30 consisted of the following:
1996 1997 1998
--------- --------- ---------
(In thousands)
Beginning allowance .......................... $3,578 4,172 4,902
Provision for loan losses .................... 790 760 865
Allowance recorded on acquired loans ......... -- 110 109
Loan recoveries .............................. 82 72 64
Loan charge-offs ............................. (278) (212) (272)
------ ----- -----
$4,172 4,902 5,668
====== ===== =====
18
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(4) LOANS RECEIVABLE, NET -- Continued
Non-accrual loans which were over ninety days delinquent totaled
approximately $257,000 and $2.3 million at September 30, 1997 and 1998,
respectively. For the year ended September 30, 1998, interest income which would
have been recorded would have been approximately $181,000, had non-accruing
loans been current in accordance with their original terms.
The carrying amounts and fair values of loans receivable at September 30,
1997 and 1998 are as follows (In thousands):
1997 1998
--------------------------- ------------------------
CARRYING CALCULATED CARRYING CALCULATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------------ ------------ ---------- -----------
Mortgage loans .................... $369,662 378,964 382,572 393,667
Consumer loans .................... 12,622 12,310 10,513 10,587
Equity lines of credit ............ 17,902 18,260 18,655 18,468
Commercial loans .................. 8,286 8,208 8,192 8,280
Allowance for loan losses ......... (4,902) (4,902) (5,668) (5,668)
-------- ------- ------- -------
$403,570 412,840 414,264 425,334
======== ======= ======= =======
Management has made estimates of fair value discount rates and estimated
prepayment rates that it believes to be reasonable based upon market conditions
at the dates indicated. 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, 1997 and 1998.
Changes in market interest and prepayment rates since September 30, 1997 and
1998 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, 1998, 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 178 loans aggregating approximately $8.7
million which were originated on individual income producing condominium units
in two projects in which the Bank's subsidiaries were a partner. 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 $1.5 million of these loans have been sold to other financial
institutions.
At September 30, 1997 and 1998, the Company had commitments outstanding to
originate loans totaling approximately $5.4 million and $11.5 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, 1997 and 1998, the Company had undisbursed lines of credit of
approximately $31.4 million and $35.1 million, respectively.
Loans serviced for the benefit of others amounted to approximately $115.1
million, $104.5 million and $88.0 million at September 30, 1996, 1997 and 1998,
respectively.
As disclosed in note 8, certain mortgage loans are pledged to secure
advances from the Federal Home Loan Bank ("FHLB") of Atlanta.
19
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED.....................-
(5) OFFICE PROPERTY AND EQUIPMENT, NET
Office property and equipment, net at September 30 consisted of the
following:
1997 1998
--------- --------
(In thousands)
Land ...................................... $ 1,981 2,311
Building and improvements ................. 5,647 7,395
Furniture, fixtures and equipment ......... 7,105 7,398
------- -----
14,733 17,104
Less accumulated depreciation ............. 7,172 8,103
------- ------
$ 7,561 9,001
======= ======
The Company leases office space and various equipment. Total rental expense
for the years ended September 30, 1996, 1997 and 1998 was approximately
$138,000, $112,000, and $153,000 respectively.
Future minimum rental payments for operating leases having remaining
noncancelable lease terms in excess of one year at September 30, 1998 are as
follows (In thousands):
1999 ......... $156
2000 ......... 155
2001 ......... 131
2002 ......... 85
2003 ......... 62
----
$589
====
(6) INVESTMENT REQUIRED BY LAW
Investment in stock of the FHLB of Atlanta 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 $7.3 million at September 30, 1998.
20
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED.....................-
(7) DEPOSITS
Deposits at September 30, consisted of the following:
1997 1998
----------------------- ----------------------
WEIGHTED WEIGHTED
AMOUNT RATE AMOUNT RATE
---------- ---------- ---------- ---------
(Dollars in thousands)
Transaction accounts:
Noninterest bearing .................. $ 23,765 --% $ 27,285 --%
NOW .................................. 38,773 1.27 42,434 1.19
Money market checking ................ 104,476 4.47 124,207 4.47
-------- ---- -------- ----
Total transaction accounts ......... 167,014 3.10 193,926 3.12
-------- ---- -------- ----
Passbook accounts:
Regular passbooks .................... 36,652 2.63 34,652 2.53
Money market ......................... 2,793 2.38 2,590 2.35
-------- ---- -------- ----
Total passbook accounts ............ 39,445 2.62 37,242 2.52
-------- ---- -------- ----
Certificate accounts:
0.00 - 5.99% ........................ 110,606 128,727
6.00 - 8.00% ........................ 29,683 26,017
8.00 - 10.00% ........................ 368 409
-------- --------
Total certificate accounts ......... 140,657 5.58 155,153 5.38
-------- ---- -------- ----
$347,116 4.02% $386,321 3.96%
======== ==== ======== ====
The aggregate amount of deposit accounts with a minimum denomination of
$100,000 or more was $80,691,000 and $95,493,000 at September 30, 1997 and 1998,
respectively.
The amounts and scheduled maturities of certificate accounts at September
30, are as follows:
1997 1998
----------- ----------
(In thousands)
Within 1 year ................................ $111,942 127,206
After 1 but within 2 years ................... 23,704 20,943
After 2 but within 3 years ................... 3,630 5,001
Thereafter ................................... 1,381 2,003
-------- -------
$140,657 155,153
======== =======
Interest expense on deposits for the years ended September 30 consisted of
the following:
1996 1997 1998
--------- -------- --------
(Dollars In thousands)
Transaction accounts ......... $ 3,162 4,894 5,756
Passbook accounts ............ 1,599 1,015 924
Certificate accounts ......... 6,928 7,741 7,879
------- ----- -----
$11,689 13,650 14,559
======= ====== ======
The fair value of transaction and passbook accounts is $206.5 million and
$231.2 million which was the amount currently payable at September 30, 1997 and
1998, respectively. The fair value of certificate accounts was $142.6 million
and $156.0 million compared to a book value of $140.7 million and $155.2 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.
21
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED.....................-
(8) ADVANCES FROM FHLB
Advances from the FHLB at September 30 consisted of the following:
1997 1998
----------------------- -----------------------
WEIGHTED WEIGHTED
AMOUNT RATE AMOUNT RATE
---------- ---------- ----------- ---------
(Dollars in thousands)
FISCAL YEAR MATURITY
1998 .................... $ 24,820 6.13 $ -- --%
1999 .................... 27,235 5.77 28,235 5.74
2000 .................... 6,761 6.45 6,961 6.19
2001 .................... 7,646 5.91 32,146 4.83
2002 .................... 30,061 5.36 4,261 6.62
2003 or greater ......... 4,955 7.03 73,306 5.21
-------- ---- -------- ----
$101,478 5.86% $144,909 5.13%
======== ==== ======== ====
Stock in the FHLB of Atlanta and specific first mortgage loans of
approximately $213.9 million and $231.2 million at September 30, 1997 and 1998,
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, 1998, the excess first mortgage loan collateral pledged to the
FHLB will support additional borrowings of approximately $28.5 million.
The estimated fair value of the FHLB advances at September 30, 1997 and
1998 is $101.0 million and $145.3 million. This estimate is based on discounting
amounts payable at contractual rates using current market rates for advances
with similar maturities.
(9) INCOME TAXES
Income tax expense for the years ended September 30 consisted of the
following:
CURRENT DEFERRED TOTAL
--------- ---------- --------
(In thousands)
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
====== ==== =====
1998:
Federal ......... $3,397 138 3,535
State ........... 430 22 452
------ ---- -----
3,827 160 3,987
====== ==== =====
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, 1997 and 1998 related to the
following:
22
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED.....................-
(9) INCOME TAXES -- Continued
1997 1998
--------- --------
(In thousands)
Deferred tax assets:
Allowance for loan losses ................................................. $1,858 2,140
Accrued medical reserves .................................................. 123 121
Other real estate reserves and deferred gains on other real estate ........ 81 87
Net operating loss carryforwards ........................................ 135 135
Other ..................................................................... 122 121
------ -----
Total deferred tax assets .................................................. 2,319 2,604
Less valuation allowance ................................................... (135) (135)
------ -----
Net deferred tax assets .................................................... 2,184 2,469
====== =====
Deferred tax liabilities:
Tax bad debt reserve in excess of base year amount ........................ 484 581
Property and equipment principally due to differences in depreciation ..... 237 237
FHLB stock, due to stock dividends not recognized for tax purposes ........ 356 356
Unrealized gain on securities available for sale .......................... 263 292
Deferred loan fees ........................................................ 318 335
Book over tax basis in investment in unconsolidated subsidiary ............ -- 309
Other ..................................................................... 237 260
------ -----
Total deferred tax liabilities ............................................. 1,895 2,370
------ -----
Net deferred tax asset ..................................................... $ 289 99
====== =====
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 $29,000 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 $161,000.
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:
1996 1997 1998
--------- ---------- --------
(In thousands)
Computed federal income taxes ............. $2,001 3,108 3,685
State tax, net of federal benefit ......... 173 247 298
Other, net ................................ (10) (4) 4
------ ----- -----
Total income tax expense .................. $2,164 3,351 3,987
====== ===== =====
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 and
1996. 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, 1998 includes approximately $5,200,000
million representing pre-1988 tax bad debt base year reserve amounts for which
no deferred income tax liability has been provided since these reserves are not
expected to reverse until indefinite future periods and may never reverse.
Circumstances that
23
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED.....................-
(9) INCOME TAXES -- Continued
would require an accrual of a portion or all of this unrecorded tax liability
are a reduction in qualifying loan levels relative to the end of 1987, failure
to meet the tax definition of a 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.
(10) 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, 1996, 1997 and 1998 was minor.
Plan assets exceeded the present value of accumulated plan benefits at June 30,
1998, 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 $149,000, $245,000 and $221,000 for fiscal
years 1996, 1997 and 1998, respectively.
(11) REGULATORY MATTERS
At September 30, 1998, the Bank's loans-to-one borrower limit was
approximately $6.5 million. The Bank may apply to have this amount increased to
$13.0 million for borrowers who have loans secured by residential lending. At
September 30, 1998, the Bank had applied for this limit increase for four
borrowers. At September 30, 1998, 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 $1.6 million special assessment
to the FDIC for the recapitalization of the Savings Association Insurance Fund
(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.
24
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED.....................-
(11) REGULATORY MATTERS -- Continued
The regulatory requirements for the Bank and the Bank's compliance with
such requirements at September 30, 1997 and 1998 are as follows.
PERCENT
AMOUNT OF ASSETS
------------ ------------
(DOLLARS 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 5.00
-------- -----
Excess .......................................... $ 11,433 1.31%
======== =====
Tier I risk-based capital ....................... 31,193 9.92%
Tier I risk-based capital requirement ........... 12,574 6.00
-------- -----
Excess .......................................... $ 18,619 3.92%
======== =====
PERCENT
AMOUNT OF ASSETS
-------- ------------
(DOLLARS IN THOUSANDS)
1998:
Tangible capital (1) ............................ $ 38,989 6.10%
Tangible capital requirement .................... 12,774 1.50
---------- -----
Excess .......................................... $ 26,215 4.60%
========== =====
Core capital .................................... $ 38,989 6.10%
Core capital requirement ........................ 25,547 4.00
---------- -----
Excess .......................................... $ 13,442 2.10%
========== =====
Risk-based capital .............................. $ 43,116 12.67%
Minimum risk-based capital requirements ......... 27,215 8.00
---------- -----
Excess .......................................... $ 15,901 4.67%
========== =====
Tier I leverage ratio ........................... 38,989 6.10%
Tier I leverage ratio requirement ............... 25,742 5.00
---------- -----
Excess .......................................... $ 13,247 1.10%
========== =====
Tier I risk-based capital ....................... 38,989 11.46%
Tier I risk-based capital requirement ........... 13,607 6.00
---------- -----
Excess .......................................... $ 25,382 5.46%
========== =====
Total risk-based capital ........................ 43,116 12.67%
Total risk-based capital requirements ........... 27,215 10.00
---------- -----
Excess .......................................... $ 15,901 2.67%
========== =====
(1) Equals the Bank's stockholders' equity
25
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED.....................-
(12) LIQUIDATION ACCOUNT
In conjunction with the Bank's conversion to stock form on October 4, 1990,
as required by Office of Thrift Supervision (the "OTS") regulations, the Bank
established, on that date, 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.
(13) EARNINGS PER SHARE
The Company has adopted the provisions of SFAS 128, "Earnings per Share"
("EPS"), for the year ended September 30, 1998. The presentation of primary and
fully-diluted EPS has been replaced with basic and diluted EPS. All prior-period
EPS data have been restated to reflect the adoption of SFAS 128. Basic earnings
per share are computed by dividing net income applicable to common shareholders
by the weighted-average number of common shares outstanding. Diluted earnings
per share are computed by dividing net income by the weighted average number of
shares of common stock and common stock equivalents outstanding during the
period, with common stock equivalents calculated based on the average market
price. Common share equivalents include, if applicable, dilute 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.
The following is a summary of the earnings per share calculation for the
years ended September 30:
(IN THOUSANDS, EXCEPT SHARE DATA) 1996 1997 1998
- -------------------------------------------------------------- -------------- -------------- --------------
BASIC:
Net income (numerator) ................................... $ 3,721 5,791 6,852
=========== ===== =====
Average common shares outstanding (denominator) .......... 6,100,000 6,227,000 6,264,000
=========== ========= =========
Per share amount ......................................... $ 0.61 $ 0.93 $ 1.09
=========== =========== ===========
DILUTED:
Net income (numerator) ................................... $ 3,721 5,791 6,852
=========== =========== ===========
Average common shares outstanding ........................ 6,100,000 6,227,000 6,264,000
Dilutive common stock options ............................ 291,000 276,000 299,000
----------- ----------- -----------
Average diluted shares outstanding (denominator) ......... 6,391,000 6,503,000 6,563,000
=========== =========== ===========
Per share amount ......................................... $ 0.58 $ 0.89 $ 1.04
=========== =========== ===========
(14) 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, 1998 amounted to approximately 604,000 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, 1998, the Company had the following
options outstanding:
26
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED.....................-
(14) STOCK OPTION PLAN -- Continued
OPTIONS
OPTIONS AVAILABLE FOR OPTION
GRANT DATE (CALENDAR YEAR) GRANTED EXERCISE PRICE EXPIRATION DATE
- ---------------------------- --------- --------------- ---------- ----------------
1990 .................. 152,215 100 % $ .80 2000
1992 .................. 14,919 100 2.12 2002
1994 .................. 9,358 80 6.69 2004
1995 .................. 161,333 60 7.29 2005
1996 .................. 69,351 40 11.54 2006
1997 .................. 185,642 20 16.29 2007
1998 .................. 66,398 -- 16.84 2008
During the years ended September 30, 1996, 1997 and 1998, options for
102,484, 80,631, and 62,067 shares, at an average of $1.09, $2.71, and $4.20 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 1998
----------- ----------- -----------
Net income As reported $ 3,721 $ 5,791 $ 6,852
Proforma 3,704 5,693 6,516
Diluted earnings
per share As reported $ 0.58 $ 0.89 1.04
Proforma 0.58 0.88 .99
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, 1997 and 1998, respectively: dividend yield
of approximately 1.60%, 1.57% and 1.65%, expected volatility of approximately
27%, 35% and 30%, risk-free interest rate of 6.08%, 6.08% and 4.70%, expected
lives of 10 years and a vesting period of 5 years.
(15) COMMON STOCK DIVIDENDS
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
723,000 and 916,000 shares respectively. On April 30, 1997 and May 6, 1998, the
Company declared a four for three stock split in the form of a 33% stock
dividend, aggregating approximately 1,547,000 and 1,562,000 shares respectively.
All share data has been retroactively restated to give effect to the common
stock dividends.
(16) CASH DIVIDENDS
On December 18, 1996, and March 26,1997 the Company declared quarterly cash
dividends of $.0619, respectively. On June 25, 1997, September 24, 1997,
December 16, 1997, and March 25, 1998, the Company declared quarterly cash
dividends of $.0675, respectively. On June 24, 1998 and September 23, 1998 the
Company declared quarterly cash dividends of $.07, respectively.
(17) LEGAL MATTERS
The Company is not a defendant in any lawsuits. The Bank is a defendant in
one significant lawsuit. The action commenced on December 1, 1997, and the
Plaintiffs are seeking approximately $1.5 million in actual damages as well as
punitive damages. The cause of action is breach of fiduciary duties, negligence,
fraud, civil conspiracy and breach of contract arising out of a lending
relationship. At this date, the Bank does not know if or when the action will go
to trial. The Bank will vigorously defend this suit and does not anticipate any
settlement discussion. The Bank does not expect the results of this action to be
material to its financial results.
27
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED.....................-
(18) 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
------------ ------------ ------------ ------------
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 -- diluted ........................ $ .20 .21 .23 .25
========= ===== ===== ======
Weighted average shares outstanding -- diluted .............. 6,455,000 6,473,000 6,531,000 6,553,000
========= ========= ========= =========
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------------ ------------ ------------ ------------
1998:
Total interest income ....................................... $ 10,177 10,773 11,294 11,648
Total interest expense ...................................... 5,447 5,955 6,329 6,719
--------- ------ ------ ------
Net interest income ......................................... 4,730 4,818 4,965 4,929
Provision for loan losses ................................... 190 250 240 185
--------- ------ ------ ------
Net interest income after provision for loan losses ......... 4,540 4,568 4,725 4,744
Other income ................................................ 1,515 1,576 1,521 1,438
General and administrative expenses ......................... 3,478 3,504 3,444 3,361
--------- ------ ------ ------
Earnings before income taxes ................................ 2,577 2,640 2,802 2,821
Income taxes ................................................ 950 961 1,040 1,038
--------- ------ ------ ------
Net earnings ................................................ $ 1,627 1,679 1,762 1,783
========= ====== ====== ======
Earnings per common share -- diluted ........................ $ .25 .26 .27 .27
========= ====== ====== ======
Weighted average shares outstanding -- diluted .............. 6,548,000 6,552,000 6,581,000 6,583,000
========= ========= ========= =========
28
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED.....................-
(19) 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, 1997 AND 1998
1997 1998
--------- ---------
ASSETS
Cash ................................................... $ 1,208 220
Investment in subsidiaries ............................. 32,644 40,785
Deferred tax asset ..................................... 49 68
Other assets ........................................... 18 86
------- ------
Total assets ....................................... $33,919 41,159
======= ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable (principally dividends) ............... 1,028 739
Note payable ........................................... 500 2,569
Total stockholders' equity ............................. 32,391 37,851
------- ------
Total liabilities and stockholders' equity ......... $33,919 41,159
======= ======
COASTAL FINANCIAL CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
YEARS ENDED SEPTEMBER 30, 1996, 1997 AND 1998
1996 1997 1998
-------- -------- --------
Income:
Interest income .......................................... $ -- 1 --
Management fees .......................................... 108 108 244
Dividends from subsidiary ................................ 1,090 1,850 850
Equity in undistributed earnings of subsidiaries ......... 2,616 3,969 6,033
------ ----- -----
Total income .......................................... 3,814 5,928 7,127
------ ----- -----
Expenses:
Amortization of organization cost ........................ 14 16 16
Professional fees ........................................ 38 40 75
Supplies and printing .................................... 7 29 11
Other expenses ........................................... 32 66 191
Income tax (benefit) expense ............................. 2 (14) (18)
------ ----- -----
Total expenses ........................................ 93 137 275
------ ----- -----
Net income ................................................. $3,721 5,791 6,852
====== ===== =====
29
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED.....................-
(19) COASTAL FINANCIAL CORPORATION FINANCIAL STATEMENTS (PARENT
COMPANY ONLY) -- Continued
COASTAL FINANCIAL CORPORATION
CONDENSED STATEMENT OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1996, 1997 AND 1998
1996 1997 1998
----------- ----------- -----------
Operating activities:
Net income ................................................. $ 3,721 5,791 6,852
Adjustments to reconcile net income to net cash provided by:
Equity in undistributed net income of subsidiary .......... (2,616) (3,969) (6,033)
Increase (decrease) in other assets ....................... 27 3 (87)
Increase (decrease) in other liabilities .................. (79) 639 (289)
-------- ------ ------
Total cash provided by operating activities ............. 1,053 2,464 443
-------- ------ ------
Financing activities:
Capital contributions to subsidiary ........................ -- (500) (2,000)
Cash dividend to shareholders .............................. (1,433) (1,600) (1,715)
Proceeds from stock options ................................ 107 217 323
Proceeds from line of credit advance ....................... -- 500 2,069
Other financing activities, net ............................ (24) (18) (108)
-------- ------ ------
Total cash used by financing activities ................. (1,350) (1,401) (1,431)
-------- ------ ------
Net increase (decrease) in cash and cash equivalents ......... (297) 1,063 (988)
Cash and cash equivalents at beginning of the year ........... 442 145 1,208
-------- ------ ------
Cash and cash equivalents at end of the year ................. $ 145 1,208 220
======== ====== ======
(20) CARRYING AMOUNTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts and fair value of financial instruments as of
September 30, 1997 and 1998 are summarized below:
1997 1998
--------------------------- ------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------------ ------------ ---------- -----------
(IN THOUSANDS) (IN THOUSANDS)
Financial Assets
Cash and cash equivalents .............................. $ 13,411 13,411 15,666 15,666
Investment securities .................................. 26,171 26,171 9,841 9,841
Mortgage-backed securities ............................. 23,023 23,023 170,181 170,181
Loans receivable held for sale ......................... 8,359 8,359 10,486 10,486
Loans receivable, net .................................. 403,570 412,840 414,264 425,334
FHLB stock ............................................. 5,618 5,618 7,266 7,266
--------- ------- ------- -------
$ 480,152 489,422 627,704 638,774
========= ======= ======= =======
Financial Liabilities
Deposits:
Demand accounts ...................................... 206,459 206,459 231,168 231,168
Certificate accounts ................................. 140,657 142,615 155,153 156,037
Advances from Federal Home Loan Bank ................... 101,478 100,971 144,909 145,298
Securities sold under agreements to repurchase ......... 2,666 2,666 59,214 59,214
Other borrowings ....................................... 2,193 2,193 6,437 6,437
--------- ------- ------- -------
$ 453,453 454,904 596,881 598,154
========= ======= ======= =======
30
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED.....................-
(20) CARRYING AMOUNTS AND FAIR VALUE OF FINANCIAL
INSTRUMENTS -- Continued
The Company had $51.8 million of off-balance sheet financial commitments as
of September 30, 1998, 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 the dates indicated above, based on
relevant market information and information about the financial instrument.
These estimates do not reflect any premium or discount that could result from
offering for sale the Company's entire holdings of a particular financial
instrument. Because no active market exists for a significant portion of the
Company's financial instruments, fair value estimates are based on judgments
regarding future expected loss experience, current economic conditions, current
interest rates and prepayment trends, risk characteristics of various financial
instruments, and other factors. These estimates are subjective in nature and
involve uncertainties and matters of significant judgment and therefore cannot
be determined with precision. Changes in any of these assumptions used in
calculating fair value would also significantly affect the estimates. Changes in
market interest rates and prepayment assumptions could significantly change the
fair value.
Fair value estimates are based on existing on and off-balance sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and liabilities that are not considered
financial instruments. For example, the Company has significant assets and
liabilities that are not considered financial assets or liabilities including
deposit franchise value, loan servicing portfolio, real estate, deferred tax
liabilities, premises and equipment, and goodwill. In addition, the tax
ramifications related to the realization of the unrealized gains and losses can
have a significant effect on fair value estimates and have not been considered
in any of these estimates.
(21) COMMITMENTS AND CONTINGENCIES
The Company has a $16.0 million outstanding line of credit with a
commercial bank. The line of credit is secured by 100% of the stock of the Bank.
At September 30, 1998, the outstanding balance was approximately $2.5 million.
31
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 Investor Services, Inc.
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 Financial Corporation
E. Haden Hamilton, Jr.
President and
Chief Executive Officer
Coastal Investor Services, Inc.
Jerry L. Rexroad, CPA
Chief Financial Officer
Coastal Investor Services, Inc.
Phillip G. Stalvey
Executive Vice President
Coastal Financial Corporation
Leadership Group
Coastal Federal Savings Bank
Sherri J. Adams
Personal Banking Leader
North Myrtle Beach
Ginger Allen
Senior Loan Underwriter
James R. Baker
Assistant Vice President
Systems Engineer
Jeffrey A. Benjamin
Senior Vice President
Credit Administration Leader
Denise F. Brown
Assistant Vice President
Personal Banking Leader
Surfside
Stephen L. Brunson, Jr.
Assistant Vice President
Residential Banking Leader
Cynthia L. Buffington
Item Processing Leader
Glenn T. Butler
Vice President
Management Information Systems
Leader
Susan R. Cammons
Residential Banking Leader
Surfside
Pamela D. Collins
Personal Banking Leader
Dunes
Susan J. Cooke
Vice President
Corporate Support Leader
Corporate Secretary
Patricia A. Coveno
Personal Banking Leader
Conway
Robert D. Douglas
Senior Vice President
Human Resources Leader
Miriam E. Evans
Corporate Services Leader
Barbara R. Faber, CPA
Assistant Vice President
Banking Administration Leader
James T. Faulk
Assistant Vice President
Collections Leader
Rita E. Fecteau
Vice President
Controller
Trina S. Ferguson
Vice President
Residential Loan Administration
Leader
J. Daniel Fogle
Vice President
Regional Banking Leader
West Region
Joel P. Foster
Assistant Vice President
Business Banking Officer
Mary L. Geist
Vice President
Data Services Leader
Michael C. Gerald
President and Chief Executive Officer
Belinda B. Gillespie
Assistant Vice President
Personal Banking Leader
Florence
Jimmy R. Graham
Executive Vice President
Information Systems Leader
Richard L. Granger
Vice President
Residential Banking Leader
Florence
Allen W. Griffin
Senior Vice President
Regional Banking Leader
Florence Region
Lisa B. James
Assistant Vice President
Deposit Servicing Leader
Ruth S. Kearns
Senior Vice President
Director of Public Relations
Assistant Corporate Secretary
Cecil H. Kennedy
Facilities/Maintenance Leader
Scott W. Lander
Vice President
Regional Banking Leader
North Carolina Region
Edward L. Loehr
Vice President
Budgeting and Treasury
Sandy L. Louden
Personal Banking Leader
Socastee
Sherry A. Maloni
Assistant Vice President
Personal Banking Leader
Waccamaw Medical Park
Janice B. Metz
Marketing Programs Coordinator
Cindy L. Milardo
Assistant Vice President
Loan Servicing Leader
Lauren E. Miller
Assistant Vice President
Dean of Associate Development
Coastal Federal University
Erin P. Mitchell
Assistant Vice President
Business Banking Officer
Jerry L. Rexroad, CPA
Executive Vice President
Chief Financial Officer
Douglas E. Shaffer
Senior Vice President
Regional Banking Leader
North Strand Region
Steven J. Sherry
Executive Vice President
Chief Marketing Officer
Cathe P. Singleton
Assistant Vice President
Personal Banking Leader
Murrells Inlet
Ashley M. Smith
Assistant Vice President
Personal Banking Leader
South Brunswick
J. Marcus Smith, Jr.
Vice President
Account Servicing Leader
Phillip G. Stalvey
Executive Vice President
Sales Leader
H. Delan Stevens
Assistant Vice President
Business Banking Leader
West Region
Donna P. Todd
Assistant Vice President
Personal Banking Support Leader
John L. Truelove
Vice President
Regional Banking Leader
South Strand Region
Jerry A. Vereen
Vice President
Regional Banking Leader
Central Region
Douglas W. Walters
Assistant Vice President
Residential Banking Leader
North Myrtle Beach
David E. Williams
Personal Banking Leader
Oak Street
Locations
Coastal Federal
Savings Bank Offices
Oak Street Office
2619 Oak Street
Myrtle Beach, SC 29577-3129
843.448.5151
Conway Office
310 Highway 378
Conway, SC 29526
843.444.0225
Dunes Office
7500 North Kings Highway
Myrtle Beach, SC 29572
843.444.0241
Florence Office
1385 Alice Drive
Florence, SC 29505
843.444.1299
Murrells Inlet Office
3348 Highway 17 South
& Inlet Crossing
Murrells Inlet, SC 29576
843.444.0200
North Myrtle Beach Office
521 Main Street
North Myrtle Beach, SC 29582
843.444.0265
Socastee Office
4801 Socastee Boulevard
Myrtle Beach, SC 29575
843.444.0281
Surfside Office
112 Highway 17 South
& Glenns Bay Road
Surfside Beach, SC 29575
843.444.0250
Waccamaw Medical Park Office
112 Waccamaw Medical Park Drive
Conway, SC 29526
843.444.0216
South Brunswick Office
1625 Seaside Road, SW
Sunset Beach, NC 28468
843.444.1258
910.579.8160
Coastal Investor Services, Inc.
843.918.7600
Susan J. Cooke
Corporate Secretary
Myrtle Beach Investment Center
843.448.5151
Victoria J. Damore
Financial Advisor
Conway Investment Center
843.918.7604
Fred Elmore
Financial Advisor
Florence Investment Center
843.679.9041
E. Haden Hamilton, Jr.
President, Chief Executive Officer and Financial Advisor
Myrtle Beach Investment Center
843.918.7603
John Michael Hill
Vice President and Financial Advisor
Myrtle Beach Investment Center
843.918.7602
Deborah Hinson
Sales Assistant
Myrtle Beach Investment Center
843.918.7600
Jennifer Ivey
Sales Assistant
Myrtle Beach Investment Center
843.918.7600
Jerry L. Rexroad, CPA
Chief Financial Officer
Myrtle Beach Investment Center
843.448.5151
Scott Sensenig
Financial Advisor
South Brunswick Investment Center
843.918.7607
Corporate Information
Common Stock and Dividend Information
The common stock of Coastal Financial Corporation is quoted through the NASDAQ
Stock Market under the symbol CFCP. For information contact:
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,
Edgar M. Norris and Co., Inc. at 1.800.476.3662
or Wheat First Union at 1.800.678.3232.
As of November 30, 1998, the Corporation had 916 shareholders and 6,264,467
shares of common stock outstanding. This does not reflect the number of persons
or entities who hold stock in nominee or "street name." The prices have been
adjusted to reflect the stock dividends discussed below.
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 1998:
First Quarter $18.38 $15.38
Second Quarter 18.00 14.53
Third Quarter 20.69 16.50
Fourth Quarter 20.69 16.63
Fiscal Year 1997:
First Quarter 12.38 10.41
Second Quarter 14.35 12.38
Third Quarter 17.35 15.85
Fourth Quarter 18.94 17.16
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, 1998,
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 25, 1999 at 2:00 p.m., Eastern Standard Time.
Additional Information
If you are receiving duplicate mailing of shareholder reports due to multiple
accounts, we can consolidate the mailings without affecting your account
registration. To do this, or for additional information, contact the Shareholder
Relations Office, at the Corporate address shown below.
Corporate Offices
Coastal Financial Corporation
2619 Oak Street
Myrtle Beach, South Carolina 29577
843.448.5151
Transfer Agent and Registrar
Registrar and Transfer Company
P.O. Box 1010
Cranford, NJ 07016
800.866.1340 Ext. 2511
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
Muldoon, Murphy & Faucette
5101 Wisconsin Avenue
Washington, DC 20016
Shareholder Relations Officer
Susan J. Cooke
Coastal Financial Corporation
2619 Oak Street
Myrtle Beach, South Carolina 29577
843.448.5151
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.
The Coastal Federal Customer
The sign of a good community bank is helping local businesses grow with a wide
range of innovative products and services that best meet their needs.
Business Banking
Business Checking
If the owners are the brains of a company, then the checking account is its
heart. Our Customers can choose the benefits of the Business Checking option
that best suits their needs: Min-imum Balance, Business Plus, Commercial or
Non-Profit.
Money Management
Coastal Federal has the right assort-ment of financial options to help our
Customers' businesses thrive. Business Customers can enjoy the flexibility of
accessing their funds daily with our Money Market Gold Business Cash Management
account or lock in on an attractive rate of return with one of our fixed-rate
Certificates of Deposit. And with desktop Coastal Federal PC Banking, they can
control and access funds directly from their computers.
Arnold Johnson
"I don't feel like a number at Coastal Federal," says Arnold Johnson, owner of
Arnold's Pools in Myrtle Beach. "And they are efficient; I've never had to wait
to get things in order."
Since the early 1980s, Mr. Johnson has had both business and personal accounts
with Coastal Federal; most of his employees bank here, too.
As Arnold's Pools has grown, Mr. Johnson has taken advantage of the business
financing and other commercial services Coastal Federal offers.
He likes the range of services, and the way we keep up with technological and
security advances. As a Shareholder, Mr. Johnson has found Coastal Federal to be
a good investment.
He has confidence in the knowledge and integrity of Coastal Federal leaders.
"The Board members all have good reputations. They are businessmen who
understand business."
The Coastal Federal Customer
Regardless of the size of the company, Coastal Federal offers the right
assortment of financial options to make it easy to help businesses succeed.
Business Banking
Business Financing
Customers can keep their businesses growing using Coastal Federal's wide
selection of loans and lines of credit. Or conveniently extend their operating
capital with our Preferred Prime Business Credit Card, which offers credit
limits up to $50,000. Most importantly, our Business Customers can be confident
that our attention to service doesn't stop when the loan closes. Alternative
Investments Business and personal investment services are available through
Coastal Investor Services, Inc., the securities brokerage subsidiary of Coastal
Financial Corporation.* Customers have access to financial planners that provide
corporate retirement programs, wealth management plans for owners, and personal
investment planning.
Wayne Cole
When you ask Wayne Cole what he thinks about Coastal Federal, you will get an
immediate answer: "Coastal Federal changed my life!"
Mr. Cole says that Coastal Federal is responsive when opportunities arise for
local business people. When Mr. Cole decided to open his jewelry store in North
Myrtle Beach, things moved fast. On Monday, he applied for a business loan at
Coastal Federal. Tuesday, the loan was approved. Wednesday, he resigned from his
job. Thursday, he purchased inventory, display cases, insurance, a safe and
security system. Friday, he started renovating the building.
Within two weeks, everything was finished, polished and in place. The door of
Cole's Jewelers opened May 1, 1990. "Since then, there's never been a day when I
didn't make a sale. Our business is based on service," Mr. Cole said. "And
that's just what Coastal Federal provides."
Mr. Cole puts his trust in Coastal Federal's expertise and community commitment.
"I'm a shareholder - of course!"
*Securities offered through Robert Thomas Securities, Inc., Member NASD/SIPC
- -- NOT FDIC Insured
- -- NOT GUARANTEED by Coastal Federal Savings Bank
- -- Subject to risk and may lose value
Coastal
Financial
Corporation
Corporate Office: 2619 Oak Street
Myrtle Beach, South Carolina 29577-3129
(843) 448-5151