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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------
FORM 10-K
| X | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended September 30, 2001
OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-19684
COASTAL FINANCIAL CORPORATION
-----------------------------
(Exact name of registrant as specified in its charter)
Delaware 57-0925911
- -------------------------------------------- ----------------------
(State or other jurisdiction of incorporation (I.R.S. Employer I.D.)
or organization)
2619 Oak Street, Myrtle Beach, South Carolina 29577-3129
- --------------------------------------------- ------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (843) 205-2000
--------------
Securities registered pursuant to Section 12(b) of the Act: None
----
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
--------------------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [ X ] NO [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
As of December 19, 2001, there were issued and outstanding 10,614,373
shares of the registrant's Common Stock.
The aggregate market value of the voting stock held by nonaffiliates
of the registrant, based on the closing sales price of the registrant's
common stock as quoted on the NASDAQ System under the symbol "CFCP" on
December 19, 2001, was $97,227,657(10,614,373) shares at $9.16 per share,
which is the average of the closing ask and closing bid price on December
19, 2001. It is assumed for purposes of this calculation that none of the
registrant's officers, directors and 5% stockholders are affiliates.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Annual Report to Stockholders for the Fiscal Year Ended
September 30, 2001 (Parts I and II)
2. Portions of the Proxy Statement for the 2002 Annual Meeting of Stockholders.
(Part III)
PART I
Item 1. Business
General
Coastal Financial Corporation ("Coastal Financial" or the
"Corporation") was incorporated in the State of Delaware in June 1990, for the
purpose of becoming a savings and loan holding company for Coastal Federal
Savings Bank ("Coastal Federal" or the "Bank"). On January 28, 1991, the
stockholders of the Bank approved a plan to reorganize the Bank into the holding
company form of ownership. The reorganization was completed on November 6, 1991,
on which date the Bank became the wholly owned subsidiary of the Corporation,
and the stockholders of the Bank became stockholders of the Corporation. Prior
to completion of the reorganization, the Corporation had no material assets or
liabilities and engaged in no business activities. On April 1, 1993 Coastal
Federal's investment in Coastal Investor Services, Inc., formerly named Coastal
Investment Services, Inc., was transferred to Coastal Financial and became a
first tier subsidiary of the Corporation. The financial results contained herein
relate primarily to the Corporation's principal subsidiary, Coastal Federal.
Coastal Federal was organized in 1953 as a mutual savings and
loan association and, since that time, its deposits have been federally insured.
In March 1989, Coastal Federal converted from a federally chartered mutual
savings and loan association to a federally chartered mutual savings bank. On
October 4, 1990, Coastal Federal converted to the stock form of ownership
("Conversion") through the sale and issuance of 492,541 shares of common stock
at a price of $10.00 per share, which resulted in gross proceeds to Coastal
Federal of $4,925,410.
Coastal Federal conducts its business from its main office in
Myrtle Beach, South Carolina, eleven branch offices located in South Carolina,
one branch office located in Sunset Beach, North Carolina, one branch office in
Southport, North Carolina, and two branch offices located in Wilmington, North
Carolina. At September 30, 2001 Coastal Financial had total assets of $763.2
million, total deposits of $530.4 million and stockholders' equity of $57.2
million. The deposits of the Bank are insured by the Federal Deposit Insurance
Corporation ("FDIC") under the Savings Association Insurance Fund ("SAIF"). The
corporate offices of the Bank are located at 2619 Oak Street, Myrtle Beach,
South Carolina and the telephone number is (843) 205-2000.
Twelve of Coastal Federal's sixteen offices are in Horry County,
South Carolina. The economy of the Horry County area depends primarily on
tourism. To the extent Horry County area businesses rely heavily on tourism
2
for business, decreased tourism would have a significant adverse effect on
Coastal Federal's primary deposit base and lending area. Moreover, Coastal
Federal would likely experience a higher degree of loan delinquencies should the
local economy be materially and adversely affected.
Coastal Federal's principal business currently consists of
attracting deposits from the general public and using these funds to originate
conventional one-to-four family first mortgage loans, consumer, commercial
business loans and commercial real estate loans. Commercial real estate loans
were 26.1% of total loans at September 30, 2001.
As part of its lending strategy, subject to market conditions,
management intends to continue emphasizing the origination of consumer and
commercial business loans in addition to first mortgage loans. At September 30,
2001, 3.6% and 7.6% respectively, of the Bank's total loan portfolio consisted
of commercial business and consumer loans.
Coastal Federal Savings Bank has received permission from the
Office of Thrift Supervision to change its name. Effective September 20, 2001,
its new name changed to Coastal Federal Bank.
3
Rate/Volume Analysis
The following table sets forth certain information regarding changes to interest
income and interest expense of the Corporation for the periods indicated. For
each category of interest-earning asset and interest-bearing liability,
information is provided on changes attributed to (i) changes in rate (changes in
rate multiplied by old volume); (ii) changes in volume (changes in volume
multiplied by old rate), (iii) changes in rate-volume (change in rate multiplied
by change in volume), and (iv) the net change (the sum of the prior columns).
Non-accrual loans are included in the average volume calculations.
Year Ended September 30,
---------------------------------------------------------------------------------------
1999 Compared to 1998 2000 Compared to 1999
Increase (Decrease) Increase (Decrease)
Due to Due to
--------------------------------------- -----------------------------------------
Rate Volume Rate/ Net Rate Volume Rate/ Net
---- ------ ----- --- ---- ------ ----- ---
Volume Volume
--------------------------------------- -----------------------------------------
(Dollars in thousands)
- ------------------------
Interest-Earning Assets:
Loans $ (830) $ 3,150 $ (93) $ 2,227 $ 857 $ 4,477 $ 130 $ 5,464
Mortgage-backed
Securities/Investments 201 3,156 81 3,438 1,991 906 159 3,056
------- ------- ------- ------- ------- ------- ------- -------
Total net change in
income on interest-
earning assets (629) 6,306 (12) 5,665 2,848 5,383 289 8,520
------- ------- ------- ------- ------- ------- ------- -------
Interest-Bearing
Liabilities:
Deposits (1,188) 1,148 108 68 427 680 35 1,142
FHLB advances (392) 2,564 (165) 2,007 1,336 889 154 2,379
Repurchase
Agreements (49) 519 (5) 465 576 2,215 333 3,124
------- ------- ------- ------- ------- ------- ------- -------
Total net change in
expense on interest-
bearing liabilities (1,629) 4,231 (62) 2,540 2,339 3,784 522 6,645
------- ------- ------- ------- ------- ------- ------- -------
Net change in net
Interest income $ 1,000 $ 2,075 $ 50 $ 3,125 $ 509 $ 1,599 $ (233) $ 1,875
======= ======= ======= ======= ======= ======= ======= =======
Year Ended September 30,
--------------------------------------------
2001 Compared to 2000
Increase (Decrease)
Due to
------------------------------------------
Rate Volume Rate/ Net
---- ------ ----- ---
Volume
------------------------------------------
(Dollars in thousands)
- ------------------------
Interest-Earning Assets:
Loans $ 286 $ 1,597 $ 10 $ 1,893
Mortgage-backed
Securities/Investments (691) 1,024 (50) 283
------- ------- ------- -------
Total net change in
income on interest-
earning assets (405) 2,621 (40) 2,176
------- ------- ------- -------
Interest-Bearing
Liabilities:
Deposits 135 3,435 40 3,610
FHLB advances (380) 662 (23) 259
Repurchase
Agreements (766) (3,837) 420 (4,183)
------- ------- ------- -------
Total net change in
expense on interest-
bearing liabilities (1,011) 260 437 (314)
------- ------- ------- -------
Net change in net
Interest income $ 606 $ 2,361 $ (477) $ 2,490
======= ======= ======= =======
4
Average Balance Sheet
The following table sets forth certain information relating to
the Corporation's average balance sheet and reflects the average yield on assets
and average cost of liabilities for the periods indicated. Such yields and costs
are derived by dividing income or expense by the average balance of assets or
liabilities, respectively, for the periods presented. Average balances are
derived from month-end balances. Management does not believe that the use of
month-end balances instead of daily average balances has caused any material
difference in the information presented. Non-accrual loans are included in
average balance calculations.
Year Ended September 30,
------------------------------- -----------------------------------------------------------------
1999 2000 2001
------------------------------- ----------------------------- ---------------------------------
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
------- -------- ----- ------- -------- ------ ------- -------- ------
(Dollars in thousands)
ASSETS
Loans $450,940 $ 38,541 8.55% $503,306 $ 44,005 8.74% $521,575 $ 45,899 8.80%
Mortgage-backed 177,758 11,018 6.20 192,375 14,074 7.32 206,367 14,356 6.95
-------- -------- ---- -------- -------- ---- -------- -------- ----
Securities/Investments(1)
Total interest-earning
assets $628,698 $ 49,559 7.88% $695,681 $ 58,079 8.34% $727,942 $ 60,255 8.26%
======== ======== ==== ======== ======== ==== ======== ======== ====
LIABILITIES
Transaction accounts 210,072 6,368 3.03 215,255 6,283 2.92 250,784 7,404 2.95
Passbook accounts 33,310 962 2.89 40,891 909 2.22 34,071 741 2.17
Certificate accounts 144,698 7,297 5.04 149,982 8,577 5.72 194,575 11,235 5.77
FHLB advances 161,005 8,495 5.28 177,834 10,874 6.11 188,666 11,133 5.90
Securities sold under
repurchase agreements 70,299 3,869 5.50 110,563 6,993 6.32 49,891 2,810 5.63
-------- -------- ---- -------- -------- ---- -------- -------- ----
Total interest-bearing $619,384 $ 26,991 4.33% $694,525 $ 33,636 4.84% $717,987 $ 33,323 4.62%
======== ======== ==== ======== ======== ==== ======== ======== ====
liabilities
Net interest income/
interest rate spread $ 22,568 3.55% $ 24,443 3.50% $ 26,932 3.64%
Net yield on interest earning
assets 3.67% 3.57% 3.77%
Ratio of interest earning assets
to interest-bearing
liabilities 1.03x 1.02x 1.01x
- ------------------------------
(1) Includes short-term interest-bearing deposits and Federal funds sold.
5
Lending Activities
General. The principal lending activities of Coastal Federal are
the origination of residential one-to-four family mortgage loans, consumer
loans, commercial business loans and commercial real estate loans. The Bank
originates construction and permanent loans on single family and multi-unit
dwellings, as well as on commercial structures. The Bank emphasizes the
origination of adjustable rate residential and commercial real estate mortgages.
The Bank's loan portfolio totaled approximately $505.0 million at
September 30, 2001, representing approximately 66.2% of its total assets. On
that date, approximately 51.1% of Coastal Federal's total loan portfolio was
secured by mortgages on one-to-four family residential properties.
In an effort to ensure that the yields on its loan portfolio and
investments are interest-rate sensitive, the Bank has implemented a number of
measures, including: (i) emphasis on origination of adjustable rate mortgages on
residential and commercial properties; (ii) origination of construction loans
secured by residential properties, generally with terms for a one-year period;
and (iii) origination of commercial and consumer loans having either adjustable
rates or relatively short maturities. At September 30, 2001, adjustable rate
loans constituted approximately $374.6 million (or 74.2%) of the Bank's total
loan portfolio. Therefore, at such date, fixed rate loans comprised only 25.8%
of the total loan portfolio. Of these fixed rate loans, 79.2% are projected to
be repaid in five years or less. These lending practices were adopted to shorten
the term of the Bank's assets and make the loan portfolio more responsive to
interest rate volatility.
6
Loan Portfolio Analysis
The following table set forth the composition of the Corporation's loan
portfolio by type of loan as of the dates indicated.
At September 30,
-------------------------------------------------------------------------------------------------
1997 1998 1999 2000 2001
---------------- ---------------- ----------------- ----------------- -----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in thousands)
Mortgage loans:
Construction $ 34,216 7.93% $ 31,261 7.09% $ 46,766 9.48% $ 54,905 10.13% $ 60,765 11.56%
Single family to 4 family units 240,268 55.69 254,161 57.63 265,069 53.73 283,851 52.39 268,670 51.10
Income property (Commercial) 97,680 22.64 95,420 21.63 114,931 23.29 133,569 24.65 137,282 26.11
Commercial business loans 10,939 2.54 14,848 3.37 22,818 4.62 23,357 4.31 18,886 3.59
Consumer loans:
Mobile home 1,291 0.30 990 0.22 1,166 0.24 1,374 0.25 2,056 0.39
Automobiles 6,055 1.40 5,106 1.16 6,809 1.38 7,789 1.44 6,599 1.26
Equity lines of credit 15,294 3.54 18,655 4.23 21,081 4.27 23,009 4.25 22,379 4.26
Other 25,714 5.96 20,567 4.67 14,738 2.99 13,915 2.58 9,161 1.73
--------- ----- --------- ----- --------- ----- --------- ----- --------- -----
Total loans and loans
held for sale $ 431,457 100.00% $ 441,008 100.00% $ 493,378 100.00% $541,769 100.00% $ 525,798 100.00%
====== ====== ====== ====== ======
Less:
Loans in process (15,084) (11,292) (15,315) (13,329) (13,983)
Deferred loan (fees) costs 458 702 354 519 372
Allowance for loan losses (4,902) (5,668) (6,430) (7,064) (7,159)
--------- --------- --------- ------- -------
Total loans and loans held
for sale, net $ 411,929 $ 424,750 471,987 521,895 505,028
========= ========= ======= ======= =======
7
Single Family Residential Loans. The Bank actively originates
conventional loans to enable borrowers to purchase existing homes or residential
lots, refinance existing mortgage loans or construct new homes. Mortgage loans
originated by the Bank are generally long-term loans, amortized on a monthly
basis, with principal and interest due each month. The contractual loan payment
period for single family residential loans typically range from 10 to 30 years.
The Bank's experience indicates that real estate loans remain outstanding for
significantly shorter periods than their contractual terms. Borrowers may
refinance or prepay loans at their option, subject to any prepayment penalty
provisions included in the note. The Bank generally requires mortgage title
insurance on all single family first mortgage and residential mortgage loans.
The Bank offers adjustable rate mortgage loans ("ARMs"), the
interest rates of which generally adjust based upon either the prime rate or
treasury securities indices. The interest rates on ARMs generally may not adjust
more than 2% per year and 6% over the life of the loan. Based upon market
conditions, the Bank may originate ARMs at below the fully phased-in interest
rate but generally qualifies borrowers for one-year and three-year ARMS at 2%
above the initial rate when the loan to value ratio exceeds 70%. Monthly
payments could increase significantly at the first repricing period. Although
Coastal Federal's ARMs are beneficial in helping Coastal Federal improve the
interest rate sensitivity of its assets, such loans may pose potential
additional risks to Coastal Federal. A precipitous increase in interest rates
could be expected to result in an increase in delinquencies or defaults on such
loans. Whereas a significant decrease in rates could cause repayments to
increase significantly.
Coastal Federal also offers one-to-four family residential loans
with fixed rates of interest. These loans generally can be sold in the secondary
market or are portfolio loans where the Bank offers such loans at rates
approximately 1% above conforming loan rates. Loans sold to correspondents
amounted to $13.4 million and $14.8 million, respectively, in fiscal 2000 and
2001. Coastal Federal sold approximately $20.3 million and $60.9 million,
respectively, of mortgages in 2000 and 2001 to FHLMC. In addition, Coastal
Federal securitized and sold mortgages to FHLMC of $14.9 million and $47.2
million in 2000 and 2001, respectively.
At September 30, 2001, approximately $268.7 million or 51.1% of
the Bank's loan portfolio consisted of one-to-four family residential loans.
Construction Loans. The Bank originates construction loans on
single-family residences that generally have a term of six to twelve months for
individuals or one year for builders. The individual's loans are generally tied
to a commitment by the Bank to provide permanent financing upon completion of
construction. The interest rate charged on construction loans is indexed to the
8
prime rate as published in The Wall Street Journal or current permanent loan
rate and varies depending on the terms of the loan and the loan amount. The Bank
customarily requires personal guaranties of payment from the principals of the
borrowing entities.
The interest rate on commercial real estate construction loans
presently offered by the Bank is indexed to either the U.S. Treasury securities
or the prime rate as published in The Wall Street Journal. Commercial real
estate construction financing generally exposes the lender to a greater risk of
loss than long-term financing on improved, occupied real estate, due in part to
the fact that the loans are underwritten on projected rather than historical,
income and rental results. The Bank's risk of loss on such loans generally
depends largely upon the accuracy of the initial appraisal of the property's
value at completion of construction and the estimated cost (including interest)
of completion. If either estimate proves to have been inaccurate and the
borrower is unable to provide additional funds pursuant to his guaranty, the
lender either may be required to advance funds beyond the amount originally
committed to permit completion of the development and/or be confronted at the
maturity of the loan with a project whose value is insufficient to assure full
repayment. Coastal Federal generally provides a permanent financing commitment
on commercial properties at the time the Bank provides the construction
financing.
The Bank's underwriting criteria are designed to evaluate and to
minimize the risks of each commercial real estate construction loan. The Bank
considers evidence of the financial stability and reputation of both the
borrower and the contractor, the amount of the borrower's cash equity in the
project, independent evaluation and review of the building costs, local market
conditions, pre-construction sale and leasing information based upon evaluation
of similar projects and the borrower's cash flow projections upon completion.
The Bank generally requires personal guaranties of payment by the principals of
any borrowing entity.
At September 30, 2001, approximately $60.8 million or 11.6% of
the Bank's gross loan portfolio consisted of construction loans on both
residential ($16.8 million) and commercial properties ($44.0 million).
Undisbursed proceeds on these loans amounted to $14.0 million at September 30,
2001.
Commercial Real Estate Loans. The Bank may invest, by OTS
regulation, in non-residential real estate loans up to 400% of its capital as
computed under GAAP plus general loan loss reserves. At September 30, 2001, this
limited Coastal Federal's aggregate non-residential real estate loans to
approximately $236.1 million. At such date, the Bank had non-residential real
estate loans outstanding of $137.3 million. The commercial real estate loans
9
originated by the Bank are primarily secured by shopping centers, office
buildings, warehouse facilities, retail outlets, hotels, motels and multi-family
apartment buildings. The interest rate of the commercial real estate loans
presently offered by the Bank generally adjusts every one, three or five years
and is indexed to U.S. Treasury securities. Such loans generally have a fifteen
to twenty year term, with the payments based up to a similar amortization
schedule. The Bank may require the loan to include a call option at the Bank's
option in five to ten years. The Bank generally requires that such loans have a
minimum debt service coverage of 120% of projected net operating income together
with other generally accepted underwriting criteria.
Commercial real estate lending entails significant additional
risks compared to residential lending. Commercial real estate loans typically
involve large loan balances to single borrowers or groups of related borrowers.
The payment experience of such loans is typically dependent upon the successful
operation of the real estate project. These risks can be significantly affected
by supply and demand conditions in the market for office and retail space and
for apartments and, as such, may be subject, to a greater extent, to adverse
conditions in the economy. In dealing with these risk factors, Coastal Federal
generally limits itself to a real estate market or to borrowers with which it
has experience. The Bank concentrates on originating commercial real estate
loans secured by properties located within its market areas of Horry County,
Georgetown County, all within South Carolina and Brunswick and New Hanover
Counties, North Carolina. Additionally, the Bank has, on a limited basis,
originated commercial real estate loans secured by properties located in other
parts of North and South Carolina.
Consumer Loans. The Bank is permitted by OTS regulations to
invest up to 35% of its assets in consumer loans. The Bank currently offers a
wide variety of consumer loans on a secured and unsecured basis including home
improvement loans, loans secured by savings accounts and automobile, truck and
boat loans. The Bank also offers a revolving line of credit secured by
owner-occupied real estate. Total consumer loans, including equity lines of
credit generally secured by one-to-four family residences, amounted to $40.2
million, or 7.6% of the total loan portfolio, at September 30, 2001.
Coastal Federal has marketed consumer loans in order to provide a
wider range of financial services to its customers. These loans also have a
shorter term and normally higher interest rates than residential real estate
loans.
Consumer loans entail greater risk than do residential mortgage
loans, particularly in the case of consumer loans which are unsecured or secured
by assets which may depreciate rapidly, such as automobiles. In the latter case,
repossessed collateral for a defaulted consumer loan may not provide an adequate
source of repayment of the outstanding loan and the remaining deficiency often
10
does not warrant further substantial collection efforts against the borrower. In
addition, consumer loan collections are dependent on the borrower's continuing
financial stability and, thus, are more likely to be adversely affected by job
loss, divorce, illness or personal bankruptcy. Furthermore, the application of
various federal and state laws, including federal and state bankruptcy and
insolvency laws, may limit the amount recoverable on such loans. Such loans may
also give rise to claims and defenses by the borrower against Coastal Federal as
the holder of the loan, and a borrower may be able to assert claims and defenses
which it has against the seller of the underlying collateral.
Commercial Business Loans. The Bank is permitted under OTS
regulations to make secured or unsecured loans for commercial, corporate,
business or agricultural purposes, including the issuance of letters of credit
secured by real estate, business equipment, inventories, accounts receivable and
cash equivalents. The aggregate amount of such loans outstanding may not exceed
20% of such institution's assets.
Coastal Federal has been making commercial business loans since
1983 on both a secured and unsecured basis with terms which generally do not
exceed one year. The majority of these loans have interest rates which adjust
with changes in the prime rate as published in The Wall Street Journal. The
Bank's non-real estate commercial loans primarily consist of short-term loans
for working capital purposes, seasonal loans and lines of credit. The Bank
customarily requires a personal guaranty of payment by the principals of any
borrowing entity and reviews the financial statements and income tax returns of
the guarantors. At September 30, 2001, the Bank had $18.9 million outstanding in
commercial business loans, which represented approximately 3.6% of its loan
portfolio.
Commercial business lending is inherently riskier than
residential mortgage lending and involves risks that are different from those
associated with residential and commercial real estate lending. Real estate
lending is generally considered to be collateral based lending with loan amounts
based on predetermined loan to collateral values and liquidation of the
underlying real estate collateral is viewed as the primary source of repayment
in the event of borrower default. Although commercial business loans are often
collateralized by equipment, inventory, accounts receivable or other business
assets, the liquidation of collateral in the event of a borrower default is
often not a sufficient source of repayment because accounts receivable may be
uncollectible and inventories and equipment may be obsolete or of limited use,
among other things. Accordingly, the repayment of a commercial business loan
depends primarily on the creditworthiness of the borrower (and any guarantors),
while liquidation of collateral is a secondary and potentially insufficient
source of repayment.
11
Loan Maturity
The following table sets forth certain information at September
30, 2001 regarding the dollar amount of loans maturing in the Company's loan
portfolio based on their contractual terms to maturity including scheduled
payments and potential prepayments. Prepayment estimates used are based on the
OTS NPV Model prepayment functions. Specific prepayment speeds applied to loans
are a function of their underlying coupons, life-time rate caps and maturities.
Demand loans (without a stated maturity), loans having no stated schedule of
repayments and no stated maturity and overdrafts are reported as due in one year
or less.
More than
One Year
One Year Through More than
or Less Five Years Five Years Totals
-------- ---------- ---------- -------
(In thousands)
First mortgage loans ........... $ 23,852 $170,622 $114,191 $308,665
Other residential and
non-residential ............. 8,452 90,425 38,405 137,282
Equity lines of credit ......... 22,379 -- -- 22,379
Consumer loans ................. 1,069 10,028 6,719 17,816
Commercial loans ............... 1,133 10,630 7,123 18,886
-------- -------- -------- --------
Total loans ............. $ 56,885 $281,705 $166,438 $505,028
======== ======== ======== ========
The following table sets forth the dollar amount of all loans
expected to be repaid after one year at September 30, 2001 which have fixed
interest rates and those which have floating or adjustable interest rates.
Fixed Floating or
Rates Adjustable Rates Totals
----- ---------------- ------
(In thousands)
First mortgage loans ............. $ 31,284 $253,529 $284,813
Other residential and
Non-residential .............. 54,219 74,611 128,830
Consumer loans ................... 13,310 3,437 16,747
Commercial loans ................. 6,814 10,939 17,753
-------- -------- --------
Total loans ............... $105,627 $342,516 $448,143
======== ======== ========
12
Loan Solicitation and Processing. The Bank actively solicits
mortgage loan applications from existing customers, walk-ins, referrals and from
real estate brokers. Commercial real estate loan applications also are obtained
by direct solicitation by loan officers.
Detailed loan applications are obtained to determine the
borrower's ability to repay, and the more significant items on these
applications are verified through the use of credit reports, financial
statements and confirmations through verification forms. After analysis of the
loan application and property or collateral involved, including an appraisal of
the property by independent appraisers approved by the Bank's Board of Directors
and reviewed by the Bank's underwriter, a lending decision is made by the Bank.
With respect to commercial loans, the Bank also reviews the capital adequacy of
the business, the ability of the borrower to repay the loan and honor its other
obligations and general economic and industry conditions. All loan applications
over $500,000 require the approval by a member or members, depending on loan
size, of the Bank's Internal Loan Committee, Director Gerald and Executive Vice
Presidents Rexroad and Stalvey. All loan applications greater than $2.0 million
require the approval of the Bank's Loan Committee which consists of Directors
Clemmons, Gerald, Thompson and Executive Vice Presidents Rexroad and Stalvey.
All first mortgage loan applications in excess of 80% of the lesser of appraised
value or purchase price of the property, unless the borrowers have private
mortgage insurance, must be approved by a member of the Bank's Loan Committee.
Loan applicants are promptly notified of the decision of the Bank
by a letter setting forth the terms and conditions of the decision. If approved,
such terms and conditions include the amount of the loan, interest rate,
amortization term, a brief description of real estate to be mortgaged to the
Bank and notice of requirement of insurance coverage necessary to protect the
Bank's interest in the collateral.
The Bank's general policy is to obtain a title insurance policy
insuring that the Bank has a valid lien on the mortgaged real estate and that
the property is free of encumbrances. Borrowers must also obtain paid hazard
insurance policies prior to closing and, when the property is in a flood plain
as designated by the Federal Emergency Management Agency, obtain paid flood
insurance policies. It is the policy of Coastal Federal to require flood
insurance for the full insurable value of the improvements for any such loan
located in a designated flood hazard area. Borrowers on loans which exceed 80%
of the value of the security property are also required to advance funds on a
monthly basis, with each payment of principal and interest, to a mortgage escrow
account from which the Bank makes disbursements for items such as real estate
taxes, hazard insurance premiums and private mortgage insurance premiums. In
cases of flood insurance, it is the Bank's policy to require escrow on these
premiums regardless of the loan-to-value ratio.
13
Loan Originations, Purchases and Sales. The Bank is qualified to
service loans for FHLMC and FNMA. Depending upon interest rates and economic
conditions, the Bank has sold loans in order to provide additional funds for
lending, to generate servicing fee income, and to decrease the amount of its
long-term, fixed rate loans in order to minimize the gap between the maturities
of its interest-earning assets and interest-bearing liabilities. The Bank
generally continues to collect payments on the loans, to supervise foreclosure
proceedings, if necessary, and to otherwise service the loans. The Bank retains
a portion of the interest paid by the borrower on the loans as consideration for
its servicing activities. At September 30, 2001, the Bank was servicing loans
sold to others with a principal balance of approximately $143.3 million. Sales
of whole loans and participation interests by the Bank are made without right of
recourse to the Bank by the buyer of the loans in the event of default by the
borrower. At September 30, 2001, the Bank's consolidated loan portfolio included
purchased loans of approximately $19.3 million, which have been primarily
secured by single family residences and which have been written as adjustable
rate mortgage loan instruments. These loans are generally secured by properties
located in the Southeast and were purchased according to the Bank's
non-conforming mortgage loan underwriting standards.
14
Loans Originated, Purchased and Sold
The following table shows total loans originated, purchased, sold
and repaid during the periods indicated.
Year Ended September 30,
-----------------------------------
1999 2000 2001
--------- --------- ---------
(In thousands)
Loans receivable, net, at the beginning
of the period .............................................................. $ 424,750 $ 471,987 $ 521,895
--------- --------- ---------
Loans originated:
Construction ............................................................... 72,456 68,799 66,769
Residential ................................................................ 96,510 120,961 106,043
Nonresidential & commercial business ....................................... 51,465 39,899 83,463
Land ....................................................................... 19,060 6,103 23,665
Consumer ................................................................... 16,866 11,434 16,134
--------- --------- ---------
Total loans originated ............................................. 256,357 247,196 296,074
--------- --------- ---------
Loans purchased, primarily single
family residential mortgages ................................................... 9,078 4,027 20
--------- --------- ---------
Loans sold ..................................................................... (60,781) (33,695) (75,698)
--------- --------- ---------
Loan principal repayment and other ............................................. (128,805) (139,900) (186,496)
--------- --------- ---------
Sale of loans, related to the sale of the Florence office ...................... -- (10,897) --
Securitization of mortgage loans ............................................... (27,713) (14,894) (47,157)
Other .......................................................................... (899) (1,929) (3,610)
--------- --------- ---------
Loans receivable, net, at end of period ........................................ $ 471,987 $ 521,895 $ 505,028
========= ========= =========
15
Loan Commitments. The Bank, upon the submission of a loan
application, generally provides a 45-day written commitment as to the interest
rate applicable to such loan. If the loan has not been closed within 45 days,
the rate may be adjusted to reflect current market conditions at the Bank's
option. Loans which require closing time in excess of 45 days from the date of
application are issued a written commitment, with a term ranging from three to
six months. For fixed rate loans, the Bank either charges a higher interest rate
on the loan or may charge up to one point to lock in the rate for 180 days. At
September 30, 2001, the Company had residential loan origination commitments of
approximately $14.8 million.
Loan Origination and Other Fees. Coastal Federal may receive loan
origination fees and discount "points." Loan fees and points are a percentage of
the principal amount of the mortgage loan which are charged to the borrower for
funding the loan. Coastal Federal allows the purchaser to reduce the rate of
interest by the payment of points at the customers' options. Fees on long-term
commercial real estate and residential construction loans vary with loan type.
Delinquencies. Coastal Federal's collection procedures provide
for a series of contacts with delinquent borrowers. If the delinquency
continues, more formal efforts are made to contact the delinquent borrower. If a
residential real estate loan continues in a delinquent status for 90 days or
more, Coastal Federal generally initiates foreclosure proceedings. Coastal
Federal generally initiates foreclosure proceedings on a commercial real estate
loan if the loan continues in a delinquent status for 60 days or more. In
certain limited instances, however, Coastal Federal may modify the loan or grant
a limited moratorium on loan payments to enable the borrower to reorganize his
financial affairs.
Problem Assets and Asset Classification. Loans are reviewed on a
regular basis and a reserve for uncollectible interest is established on loans
where collection of interest is questionable, generally when such loans become
90 days delinquent. Loan balances that relate to interest amounts reserved are
considered to be on a nonaccrual basis. Typically, payments received on a
nonaccrual loan are applied to the outstanding principal and interest as
determined at the time of collection of the loan.
16
The following table sets forth information with respect to the
Bank's non-performing assets at the dates indicated.
At September 30,
-------------------------------------------------
1997 1998 1999 2000 2001
---- ---- ---- ---- ----
(Dollars in thousands)
Loans accounted for on a nonaccrual basis:
Real estate -
Residential .................................................... $ 71 $ 222 $1,097 $2,080 $1,554
Commercial ..................................................... -- -- 267 2,478 1,185
Commercial business ............................................ 99 1,962 -- -- 322
Consumer ....................................................... 87 73 67 224 193
------ ------ ------ ------ ------
Total .......................................... 257 2,257 1,431 4,782 3,254
------ ------ ------ ------ ------
Accruing loans which are contractually past due 90 days or more:
Real estate -
Residential .................................................... -- -- -- -- --
Commercial ..................................................... -- -- -- -- --
Commercial business ............................................ -- -- -- -- --
Consumer ....................................................... -- -- -- -- --
------ ------ ------ ------ ------
Total ....................................... -- -- -- -- --
------ ------ ------ ------ ------
Restructured loans ............................................. -- -- 418 419 1,693
Real estate owned .............................................. 250 35 96 867 2,363
Other nonperforming assets ..................................... -- -- -- -- --
------ ------ ------ ------ ------
Total nonperforming assets ..................................... $ 507 $2,292 $1,945 $6,068 $7,310
====== ====== ====== ====== ======
Total nonaccrual loans to
net loans .................................................... 0.06% 0.54% 0.30% 0.92% 0.64%
Total nonaccrual loans to
total assets ................................................. 0.05% 0.35% 0.20% 0.62% 0.43%
Total nonperforming assets
to total assets .............................................. 0.10% 0.36% 0.27% 0.79% 0.96%
In fiscal years 1999, 2000 and 2001, interest income which would
have been recorded was approximately $46,000, $220,000 and $377,000,
respectively, had nonaccruing loans been current in accordance with their
original terms. At September 30, 2001, impaired loans totaled $3.4 million.
There were $1.4 million in impaired loans at September 30, 2000. Included in the
allowance for loan losses at September 30, 2001 was $281,000 related to impaired
loans compared to $345,000 at September 30, 2000. The average recorded
investment in impaired loans for the year ended September 30, 2001 was $3.6
million compared to $1.5 million for the year ended September 30, 2000. Interest
income recognized on impaired loans in fiscal 2001 was $120,000. No interest
income was recognized on impaired loans in fiscal 2000.
17
The allowance for uncollectible interest which is netted against
accrued interest receivable totaled $242,000 and $323,000 at September 30, 2000
and 2001, respectively.
The OTS has adopted various changes in its regulations regarding
problem assets of savings institutions. OTS regulations require that each
insured institution review and classify its assets on a regular basis. In
addition, in connection with examinations of insured institutions, OTS examiners
have authority to identify problem assets and, if appropriate, require them to
be classified. There are four classifications for problem assets: special
mention, substandard, doubtful and loss. Substandard assets must have one or
more defined weaknesses and are characterized by the distinct possibility that
the insured institution will sustain some loss if the deficiencies are not
corrected. Doubtful assets have the weaknesses of substandard assets with the
additional characteristic that the weaknesses make collection or liquidation in
full on the basis of currently existing facts, conditions and values
questionable, and there is a high possibility of loss. An asset classified loss
is considered uncollectible and of such little value that continuance as an
asset of the institution is not warranted. The regulations also have a special
mention category, described as assets which do not currently expose an insured
institution to a sufficient degree of risk to warrant classification but do
possess credit deficiencies or potential weaknesses deserving management's close
attention. Assets classified as substandard or doubtful require the institution
to establish general allowances for loan losses. If an asset or portion thereof
is classified loss, the insured institution must either establish specific
allowances for loan losses in the amount of 100% of the portion of the asset
classified loss or charge off such amount. A portion of general loss allowances
established to cover possible losses related to assets classified substandard or
doubtful may be included in determining an institution's regulatory capital,
while specific valuation allowances for loan losses generally do not qualify as
regulatory capital.
Coastal Federal had six individual classified assets in excess of
$750,000 as of September 30, 2001. At that date, classified assets amounted to
$22.3 million ($12.8 million substandard; $327,000 doubtful; and $9.2 million
special mention). Substandard assets consist primarily of eighteen loans with
aggregate balances of approximately $9.7 million at September 30, 2001. The
largest amount to any one borrower was $2.3 million. Special mention assets
consist primarily of twelve loans with aggregate balances of approximately $7.9
million at September 30, 2001.
Allowance for Loan Losses. In making loans, the Bank recognizes
the fact that credit losses will be experienced and that the risk of loss will
vary with, among other things, the type of loan being made, the creditworthiness
of the borrower over the term of the loan and, in the case of a secured loan,
the quality of the security for the loan.
The Bank's management evaluates the need to establish allowances
for losses on loans and other assets each year based on estimated losses on
18
specific loans and on any real estate held for sale or investment when a finding
is made that a significant decline in value has occurred. Such evaluation
includes a review of all loans for which full collectibility may not be
reasonably assured and considers, among other matters, the estimated market
value of the underlying collateral of problem loans, prior loss experience,
economic conditions and overall portfolio quality. Additions to the allowance
for losses are charged against earnings in the year they are established. The
Bank established provisions for losses on loans for the years ended September
30, 1999, 2000 and 2001 of $750,000, $978,000 and $955,000, respectively. As a
result, the Bank has a $7.2 million allowance for loan losses as of September
30, 2001. The allowance as a percentage of loans receivable was 1.42% at
September 30, 2001 compared to 1.35% at September 30, 2000. See "Management's
Discussion and Analysis - Non-Performing Assets and - Allowance for Loan Losses"
in the 2001 Annual Report to Stockholders attached hereto and incorporated by
reference.
While the Bank believes it has established its existing allowance
for loan losses in accordance with GAAP at September 30, 2001, there can be no
assurance that regulators, when reviewing the Bank's loan portfolio in the
future, will not request the Bank to significantly increase its allowance for
loan losses, thereby adversely affecting the Bank's financial condition and
earnings.
19
Loan Loss Allowance Analysis
The following table sets forth analysis of the Company's
allowance for loan losses for the periods indicated. Where specific loan loss
reserves have been established, any difference between the loss reserve and the
amount of the loss realized has been charged or credited to the loan loss
allowance as a charge-off or recovery.
Year Ended September 30,
------------------------------------------------
1997 1998 1999 2000 2001
---- ---- ---- ---- ----
(Dollars in thousands)
Allowance at beginning of
period $ 4,172 $ 4,902 $ 5,668 $ 6,430 $ 7,064
Allowance recorded on
acquired loans 110 109 112 50 --
Sale of Florence office loans -- -- -- (75) --
Provision for loan losses 760 865 750 978 955
------- ------- ------- ------- -------
Recoveries:
Residential real estate 20 7 184 12 3
Commercial real estate 14 1 13 -- --
Real estate construction -- -- -- -- --
Consumer 38 56 55 65 57
------- ------- ------- ------- -------
Total recoveries 72 64 252 77 60
------- ------- ------- ------- -------
Charge-offs:
Residential real estate .. 46 28 15 28 167
Commercial real estate -- 17 8 -- 226
Real estate construction . -- -- -- -- --
Consumer 166 227 329 368 527
------- ------- ------- ------- -------
Total charge-offs 212 272 352 396 920
------- ------- ------- ------- -------
Net charge-offs 140 208 100 319 860
------- ------- ------- ------- -------
Allowance at end of period $ 4,902 $ 5,668 $ 6,430 $ 7,064 $ 7,159
======= ======= ======= ======= =======
Ratio of allowance to net
loans outstanding at the
end of the period 1.19% 1.33% 1.36% 1.35% 1.42%
Ratio of net charge-offs
to average loans outstanding
during the period 0.04% 0.05% 0.02% 0.06% 0.17%
20
Loan Loss Allowance by Category
The following table sets forth the breakdown of the allowance for
loan losses by loan category for the periods indicated.
September 30,
-----------------------------------------------------------------------------------------------
1997 1998 1999
---------------------------- ----------------------------- -------------------------------
As a % Loan Type As a % Loan Type As a % Loan Type
of out- As a % of out- As a % of out- As a %
standing of out- standing of out- standing of out-
loans in standing loans in standing loans in standing
Amount category loans Amount category loans Amount category loans
------ -------- ----- ------ -------- ----- ------ -------- -----
(Dollars in thousands)
Real Estate - mortgage
Residential $1,064 0.41% 63.56% $1,375 0.47% 67.60% $1,747 0.56% 66.01%
Commercial 3,261 2.78 28.52 3,685 3.30 28.52% 4,191 3.04 29.18
Consumer 577 1.77 7.92 608 2.82 6.08 492 2.17 4.81
------ ---- ------ ------ ------ ------ ------ ------ ------
Total Allowance for
loan losses $4,902 1.19% 100.00% $5,668 1.33% 100.00% $6,430 1.36% 100.00%
====== ==== ====== ====== ====== ====== ====== ====== ======
September 30,
------------------------------------------------------------
2000 2001
---------------------------- -----------------------------
As a % Loan Type As a % Loan Type
of out- As a % of out- As a %
standing of out- standing of out-
loans in standing loans in standing
Amount category loans Amount category loans
------ -------- ----- ------ -------- -----
(Dollars in thousands)
Real Estate - mortgage
Residential $2,081 0.60% 66.53% $2,148 0.65% 65.55%
Commercial 4,719 3.01 30.07 4,893 3.13 30.92
Consumer 264 1.49 3.40 118 0.66 3.53
------ ---- ----- ------ ---- ------
Total Allowance for $7,064 1.35% 100.00% $7,159 1.42% 100.00%
====== ==== ====== ====== ==== ======
loan losses
21
Investment Activities
Under OTS regulations, the Bank has authority to invest in
various types of liquid assets, including U.S. Treasury obligations, securities
of various federal agencies and of state and municipal governments, deposits at
the FHLB of Atlanta, certificates of deposit of federally insured institutions,
certain bankers' acceptances and federal funds. Subject to various restrictions,
such savings institutions may also invest a portion of their assets in
commercial paper, corporate debt securities and mutual funds, the assets of
which conform to the investments that federally chartered savings institutions
are otherwise authorized to make directly. These institutions are also required
to maintain minimum levels of liquid assets which vary from time to time. See
"Regulation of Coastal Federal - Federal Home Loan Bank System." The Bank may
decide to increase its liquidity above the required levels depending upon the
availability of funds and comparative yields on investments in relation to
return on loans.
Coastal Federal is required under federal regulations to maintain
a minimum amount of liquid assets and is also permitted to make certain other
securities investments. See "Regulation" herein and "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources" in the Annual Report. The balance of the Bank's investments
in short-term securities in excess of regulatory requirements reflects
management's response to the significantly increasing percentage of deposits
with short maturities.
Investment decisions are made by the Investment Officer who
reports quarterly to the Asset/Liability Committee ("ALCO committee"). The ALCO
Committee meets quarterly and consists of Directors Creel, Bishop, Thompson,
Clemmons and Gerald, and Executive Vice Presidents Graham, Rexroad, Sherry and
Stalvey and Vice President Loehr. The ALCO Committee acts within policies
established by the Board of Directors. At September 30, 2001, the Bank's
investment portfolio had a market value of approximately $192.6 million. The
investment securities portfolio consisted primarily of mortgage-backed
securities. For further information concerning the Bank's securities portfolio,
see Notes 2 and 3 of the Notes to Consolidated Financial Statements attached
hereto and incorporated by reference.
22
Securities Analysis
The following table sets forth Coastal Federal's investment
securities portfolio at amortized cost at the dates indicated.
September 30,
-----------------------------------------------------------------------
1999 2000 2001
----------------------- ----------------------- ---------------------
Amortized Percent of Amortized Percent of Amortized Percent of
Cost(1) Portfolio Cost(1) Portfolio Cost(1) Portfolio
------- --------- ------- --------- ------- ---------
(Dollars in thousands)
U.S. Government agency
Securities:
FHLMC................ $ -- --% $2,858 32.99% 1,893 100.00%
FHLB................. 4,723 75.99% 3,077 35.52% -- --
FNMA................. -- -- 1,235 14.26% -- --
Federal Farm Credit
Bond................. 1,492 24.01% -- -- -- --
Federal Agric Mtg
Association -- -- 1,499 17.23% -- --
------ ------ ------ ------ ------- ------
Total $6,215 100.00% $8,669 100.00% $ 1,893 100.00%
====== ====== ====== ====== ======= ======
(1) The market value of the Bank's investment securities portfolio amounted to
$6.1 million, $8.5 million and $2.0 million at September 30, 1999, 2000 and
2001, respectively.
The following table sets forth the final maturities and weighted average
yields of the securities at amortized cost at September 30, 2001.
Less Than One to Five to
One Year Five Years Ten Years
---------------- ---------------- ----------------
Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ -----
(Dollars in thousands)
U.S. Government agency
securities:
FHLMC ................ -- -- $ -- -- $1,893 6.25%
FHLB ................. -- -- -- -- -- --
FNMA ................. -- -- -- -- -- --
Federal Farm
Credit Bond .......... -- -- -- -- -- --
Federal Agric Mtg .... --
------ ----
Association .......... -- -- -- -- --
------- -------- ------- ------- ------ ----
Total ........ $ -- -- -- -- $1,893 6.25%
======= ======== ======= ======= ====== ====
23
The following table sets forth Coastal Federal's mortgage-backed securities
portfolio, at amortized cost, at the dates indicated.
September 30,
-----------------------------------------------------------------------------------------
1999 2000 2001
-------------------------- -------------------------- --------------------------
Amortized Percent of Amortized Percent of Amortized Percent of
Cost(1) Portfolio Cost(1) Portfolio Cost(1) Portfolio
--------- ----------- --------- ----------- --------- -----------
(Dollars in thousands)
Mortgage-backed Securities:
FHLMC ............. $ 35,175 18.98% $ 19,191 10.02% $ 12,223 6.61%
FNMA .............. 103,117 55.64% 122,665 64.03% 123,271 66.64%
GNMA .............. 23,349 12.60% 18,698 9.76% 20,630 11.15%
CMO ............... 23,680 12.78% 31,023 16.19% 28,856 15.60%
-------- ------ -------- ------ -------- ------
Total ..... $185,321 100.00% $191,577 100.00% $184,980 100.00%
======== ====== ======== ====== ======== ======
(1) The market value of the Bank's mortgage-backed securities portfolio
amounted to $182.1 million, $189.2 million and $190.6 million at September
30, 1999, 2000 and 2001, respectively.
The following table sets forth the maturities and weighted average yields
of the securities, at amortized cost, at September 30, 2001.
Less Than One to Five to Ten Years
One Year Five Years Ten Years and Thereafter
----------------- ---------------- ---------------- ----------------
Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ -----
(Dollars in thousands)
Mortgage-backed
Securities
FHLMC ....... $ -- --% $ -- --% $ -- --% $ 12,223 7.70%
FNMA ........ -- --% -- --% -- --% 123,271 7.46%
GNMA ........ -- --% -- --% -- --% 20,630 8.00%
CMO ......... -- --% -- --% 2,023 7.00% 26,833 6.25%
---- --- ---- --- -------- ---- -------- ----
Total -- --% -- --% $ 2,023 7.00% $182,957 7.36%
==== === ==== === ======== ==== ======== ====
24
Service Corporation Activities
Coastal Federal has one wholly-owned service corporation: Coastal Mortgage
Bankers and Realty Co., Inc. "Coastal Mortgage Bankers," which was incorporated
in 1970 under the laws of South Carolina. Coastal Mortgage Bankers is not active
in any real estate operations.
------------------
COASTAL FEDERAL
------------------
------------------------
COASTAL FEDERAL(1)
HOLDING
CORPORATION
------------------------
------------------------
COASTAL REAL
ESTATE INVESTMENT
CORPORATION
------------------------
-------------------
COASTAL MORTGAGE
BANKERS*
-------------------
- ----------------- ------------ ----------- ----------- ----------------
Shady Forest Sherwood Ridge
North Beach Development Development Development 501 Development
Investments, Inc. Corporation Corporation Corporation Corporation
- ----------------- ------------ ----------- ----------- ----------------
* Inactive
(1) First tier operating subsidiary of Coastal Federal Savings Bank consolidated
with Coastal Federal Savings Bank for regulatory reporting.
25
On February 20, 1998, Coastal Real Estate Investment Corporation
("CREIC") was incorporated in North Carolina. CREIC is a wholly owned operating
subsidiary of Coastal Federal Holding Corporation ("CFHC") and is a real estate
investment trust ("REIT"). CREIC engages in the investment and management of
real estate related assets, primarily mortgage loans. On September 1, 1998,
CREIC was capitalized with approximately $131.8 million of mortgage loans from
Coastal Federal. On December 10, 1998, CREIC became a wholly owned subsidiary of
CFHC through an exchange of stock transaction.
On June 25, 1998, Coastal Federal Holding Corporation was
incorporated in the state of Delaware. CFHC is a wholly owned subsidiary of
Coastal Federal Savings Bank ("CFSB") and is a passive investment company
("PIC"). All of CFHC's consolidated operating activities are consolidated into
Coastal Federal Savings Bank. CFHC engages in the management of its investment
in CREIC and the management of the related dividends received on that
investment.
Deposit Activities and Other Sources of Funds
General. Deposits and loan repayments are the major source of
Coastal Federal's funds for lending and other investment purposes. Loan
repayments are a relatively stable source of funds, while deposit inflows and
outflows and loan prepayments are significantly influenced by general interest
rates and money market conditions. Borrowings may be used to compensate for
reductions in the availability of funds from other sources. They may also be
used for general business purposes.
Deposit Accounts. Deposits are attracted from within Coastal
Federal's primary market area through the offering of a broad selection of
deposit instruments, including NOW checking accounts, money market accounts,
regular statement savings and passbook accounts, certificates of deposit and
retirement savings plans. Deposit account terms vary, according to the minimum
balance required, the time periods the funds must remain on deposit and the
interest rate, among other factors. In determining the terms of its deposit
accounts, Coastal Federal considers the rates offered by its competition,
profitability to Coastal Federal, matching deposit and loan products and its
customer preferences and concerns. Coastal Federal generally reviews its deposit
mix and pricing at least monthly.
26
Deposit Flow
The following table sets forth the balances of savings deposits in the
various types of savings accounts offered by the Bank at the dates indicated.
At September 30,
--------------------------------------------------------------------------
1999 2000
----------------------------------- ----------------------------------
Percent Increase Percent Increase
Amount of Total (Decrease) Amount of Total (Decrease)
--------- -------- ---------- --------- -------- ----------
(Dollars in thousands)
Transaction accounts:
NOW checking ........................... $ 50,774 12.70% $ 8,340 $ 48,945 12.05% $ (1,829)
Commercial checking .................... 37,256 9.32 9,971 35,214 8.67 (2,042)
--------- ----- -------- --------- ------ ---------
Total transaction accounts ................... 88,030 22.03 18,311 84,159 20.72 (3,871)
--------- ----- -------- --------- ------ ---------
Money market demand accounts ................. 138,188 34.58 13,981 120,133 29.57 (18,055)
Savings accounts ............................. 39,212 9.81 1,970 36,205 8.91 (3,007)
Fixed-rate certificates (original maturity):
3 months ............................... 4,440 1.11 2,395 3,695 0.91 (745)
6 months ............................... 23,367 5.85 (2,196) 62,377 15.36 39,010
9 months ............................... 5,220 1.31 (176) 3,211 0.79 (2,009)
12 months .............................. 37,953 9.50 (8,166) 32,650 8.04 (5,303)
18 months .............................. 16,016 4.01 (19,124) 24,520 6.04 8,504
24 months .............................. 19,104 4.78 1,756 18,073 4.45 (1,031)
30 months .............................. 13,677 3.42 7,119 8,620 2.12 (5,057)
36 months .............................. 4,622 1.16 (118) 3,275 0.81 (1,347)
48 months .............................. 4,870 1.22 (1,982) 4,821 1.19 (49)
96 months .............................. 31 0.01 2 33 0.01 2
--------- ----- -------- --------- ------ ---------
129,300 32.35 (20,490) 161,275 39.70 31,975
--------- ----- -------- --------- ------ ---------
Variable rate certificates:
(original maturity)
18 months .............................. 2,716 0.68 (421) 2,287 0.56 (429)
30 months .............................. 2,227 0.56 3 2,158 0.53 (69)
--------- ----- -------- --------- ------ ---------
Total variable ............................... 4,943 1.24 (418) 4,445 1.09 (498)
--------- ----- -------- --------- ------ ---------
Total certificates ........................... 134,243 33.59 (20,910) 165,720 40.80 31,477
--------- ----- -------- --------- ------ ---------
Total deposits ............................... $ 399,673 100.00% $ 13,352 $ 406,217 100.00% $ 6,544
========= ====== ========= ========= ====== =========
At September 30,
-------------------------------
2001
-------------------------------
Percent Increase
Amount of Total (Decrease)
--------- -------- ----------
(Dollars in thousands)
Transaction accounts:
NOW checking ........................... $ 55,926 10.54% $ 6,981
Commercial checking .................... 49,098 9.26 13,884
--------- ------ --------
Total transaction accounts ................... 105,024 19.80 20,865
--------- ------ --------
Money market demand accounts ................. 193,631 36.51 73,498
Savings accounts ............................. 33,317 6.28 (2,888)
Fixed-rate certificates (original maturity):
3 months ............................... 3,689 0.70 (6)
6 months ............................... 47,126 8.89 (15,251)
9 months ............................... 30,180 5.69 26,969
12 months .............................. 44,866 8.46 12,216
18 months .............................. 31,638 5.97 7,118
24 months .............................. 25,120 4.74 7,047
30 months .............................. 2,751 0.52 (5,869)
36 months .............................. 2,294 0.43 (981)
48 months .............................. 6,586 1.24 1,765
96 months .............................. 18 0.00 (15)
--------- ------ --------
194,268 36.64 32,993
--------- ------ --------
Variable rate certificates:
(original maturity)
18 months .............................. 2,146 0.40 (141)
30 months .............................. 1,978 0.37 (180)
--------- ------ --------
Total variable ............................... 4,124 0.77 (321)
--------- ------ ---------
Total certificates ........................... 198,392 37.41 32,672
--------- ------ --------
Total deposits ............................... $ 530,364 100.00% $124,147
========= ====== ========
27
Time Deposits by Maturity and Rate
The following table sets forth the amount and maturities of time
deposits at September 30, 2001.
Amount Due
Less Than 1-2 2-3 3-4 After
Rate One Year Years Years Years 4 Years Total
-------- ----- ----- ----- ------- -----
(In thousands)
0.00 - 5.99%.. $143,735 $13,792 $2,728 $3,594 $457 $164,306
6.00 - 8.00%.. 18,132 12,459 1,339 1,718 -- 33,648
8.01 - 10.00%. 438 -- -- -- -- 438
-------- -------- ------ ------ ---- ---------
Total...... $162,305 $26,251 $4,067 $5,312 $457 $198,392
========= ======== ====== ====== ==== ========
The following table sets forth the amount and maturities of time
deposits with balances of $100,000 or more at September 30, 2001.
Amount Due
- -----------------------------------------------------------------------------
Within Over 3 Over 6 Over 12 Total
3 Months through 6 months through 12 months Months
- -----------------------------------------------------------------------------
(In thousands)
$15,892 $ 19,102 $16,371 $12,387 $ 63,752
======== ========= ======== ======== ========
In the unlikely event Coastal Federal is liquidated, depositors
will be entitled to full payment of their deposit accounts prior to any payment
being made to the Corporation as the sole stockholder of Coastal Federal.
Borrowings. Demand and time deposits are the primary source of
funds for Coastal Federal's lending and investment activities and for its
general business purposes. The Bank has in the past, however, relied upon
advances from the FHLB of Atlanta to supplement its supply of lendable funds and
to meet deposit withdrawal requirements. The FHLB of Atlanta has served as one
of the Bank's primary borrowing sources. Advances from the FHLB of Atlanta are
typically secured by the Bank's first mortgage loans. At September 30, 2001,
Coastal Federal had advances totaling $140.0 million from the FHLB of Atlanta
due on various dates through 2011 with a weighted average interest rate of
5.46%. Certain of these advances are subject to call provisions. Call provisions
are more likely to be exercised by the FHLB when rates rise.
28
The FHLB of Atlanta functions as a central reserve bank providing
credit for financial institutions and certain other member financial
institutions. As a member, Coastal Federal is required to own capital stock in
the FHLB of Atlanta and is authorized to apply for advances on the security of
such stock and certain of its mortgage loans and other assets (principally
securities which are obligations of, or guaranteed by, the United States)
provided certain standards related to creditworthiness have been met. Advances
are made pursuant to several different programs. Each credit program has its own
interest rate and range of maturities. Depending on the program, limitations on
the amount of advances are based either on a fixed percentage of an
institution's net worth or on the FHLB's assessment of the institution's
creditworthiness. The FHLB of Atlanta determines specific lines of credit for
each member institution.
In addition to the borrowing described above, the Bank, from time
to time, has borrowed funds under reverse repurchase agreements pursuant to
which it sells securities (generally secured by government securities and
mortgage-backed securities) under an agreement to buy them back at a specified
price at a later date. These agreements to repurchase are deemed to be
borrowings collateralized by the securities sold. At September 30, 2001, the
Bank had $15.0 million in broker repurchase agreements. The Bank has also
offered repurchase agreements to its customers which are borrowings that are
collateralized by underlying government securities. At September 30, 2001, the
Bank had $3.7 million outstanding in customer repurchase agreements.
The following tables set forth certain information regarding
short-term borrowings by the Bank at the end of and during the periods
indicated:
At September 30,
---------- ----------- ----------
1999 2000 2001
---------- ----------- ----------
(Dollars in thousands)
Outstanding balance:
Securities sold under agreements
to repurchase:
Customer ................... $ 4,848 $ 3,825 $ 3,703
Broker ..................... 92,100 72,033 15,000
Short-term FHLB advances (1) ... 118,000 116,476 46,400
Weighted average rate paid on:
Securities sold under agreements
to repurchase:
Customer ................... 3.37% 5.75% 3.36%
Broker ..................... 5.53 6.59 2.97
Short-term FHLB advances (1) ... 5.14 6.68 5.13
29
At September 30,
---------- ----------- ----------
1999 2000 2001
---------- ----------- ----------
(Dollars in thousands)
Maximum amount of borrowings outstanding
At any month end:
Securities sold under agreements
to repurchase:
Customer ........................ $ 4,848 $ 4,196 $ 3,726
Broker .......................... 92,100 122,700 67,099
Short-term FHLB advances (1) ........ 147,135 154,546 138,946
Approximate average short-term borrowings
outstanding with respect to:
Securities sold under agreements
to repurchase:
Customer ........................ $ 3,199 $ 2,826 $ 2,361
Broker .......................... 67,100 107,737 45,461
Short-term FHLB advances (1) ........ 118,276 127,458 50,884
Weighted average rate paid on:
Securities sold under agreements
to repurchase:
Customer ........................ 3.09% 4.10% 3.73%
Broker .......................... 5.30 6.38 5.65
Short-term FHLB advances (1) ........ 5.14 6.68 5.90
(1) Short-term FHLB advances include various advances which are subject to call
by FHLB.
Competition
As of June 30, 2001, Coastal Federal held a 15.4% share of the
deposits in Horry County, S.C. according to the Federal Deposit Insurance
Corporation. The Bank faces strong competition in the attraction of deposits
(its primary source of lendable funds) and in the origination of loans. Its most
direct competition for deposits and loans has historically come from other
financial institutions located in its primary market area. The Bank estimates
that there are over 70 offices of other financial institutions in its primary
market area. Particularly in times of high interest rates, the Bank has faced
additional significant competition for investors' funds from short-term money
market securities and other corporate and government securities. The Bank's
competition for loans comes principally from other financial institutions,
mortgage banking companies and mortgage brokers.
Personnel
As of September 30, 2001, the Company had 254 full-time
Associates and 22 part-time Associates. The Associates are not represented by a
collective bargaining unit. The Bank believes its relationship with its
Associates is excellent.
30
REGULATION AND SUPERVISION
General
As a savings and loan holding company, the Corporation is
required by federal law to file reports with, and otherwise comply with, the
rules and regulations of the OTS. The Bank is regulated, examined and supervised
extensively by the OTS, as its primary federal regulator, and the FDIC, as the
deposit insurer. The Bank is a member of the Federal Home Loan Bank System and
its deposit accounts are insured up to applicable limits by the Savings
Association Insurance Fund managed by the FDIC. The Bank must file reports with
the OTS and the FDIC concerning its activities and financial condition in
addition to obtaining certain approvals before entering into certain
transactions such as mergers with, or acquisitions of, other savings
institutions. The OTS and the FDIC examine the Bank periodically to test the
Bank's safety and soundness and compliance with various regulatory requirements.
This regulation and supervision establishes a comprehensive framework for the
Bank's activities and is intended primarily to protect the insurance fund and
the Bank's depositors.
The regulatory structure also gives regulatory authorities
extensive discretion in their supervisory and enforcement activities and
examination policies, including policies regarding asset classification and the
establishment of adequate loan loss reserves for regulatory purposes. Any change
in regulatory requirements and policies, whether by the OTS, the FDIC or the
Congress, could have a material adverse impact on the Corporation, the Bank and
their operations. The description of statutory provisions and regulations that
apply to the Corporation and the Bank discussed below and elsewhere in this
prospectus is not a complete description of them and their effects on the Bank
and the Corporation.
Holding Company Regulation
The Corporation is a nondiversified unitary savings and loan
holding company under federal law. Formerly, a unitary savings and loan holding
company was not restricted as to the types of business activities in which it
could engage, provided that its subsidiary savings association continued to be a
qualified thrift lender. See "-Federal Savings Institution Regulation -
Qualified Thrift Lender Test." The Gramm-Leach Bliley Act of 1999 restricts
unitary savings and loan holding companies not existing or applied for before
May 4, 1999 to activities permissible for a financial holding company as defined
under the legislation, including insurance and securities activities, and those
permitted for a multiple savings and loan holding company, as described below.
31
The Gramm-Leach-Bliley Act, however, grandfathered the unreastricted authority
for activities with respect to unitary savings and loan holding companies
existing, or subject to an application filed, prior to May 4, 1999, such as the
Corporation, so long as the Bank continues to comply with the qualified thrift
lender test. Upon any non-supervisory acquisition by the Corporation of another
savings institution or savings bank that meets the qualified thrift lender test
and is held as a separate subsidiary, the Corporation would become a multiple
savings and loan holding company and would generally be limited to activities
permissible for bank holding companies under Section 4(c)(8) of the Bank Holding
Company Act, subject to the prior approval of the OTS, and certain activities
authorized by OTS regulation.
A savings and loan holding company is prohibited from, directly
or indirectly, acquiring more than 5% of the voting stock of another savings
institution or savings and loan holding company and from acquiring or retaining
control of a depository institution that is not insured by the FDIC, unless it
first receives the approval of the OTS. In evaluating applications by holding
companies to acquire savings institutions, the OTS considers the financial and
managerial resources and future prospects of the holding company and the
institution involved, the effect of the acquisition on the risk to the deposit
insurance funds, the convenience and needs of the community and competitive
factors.
The OTS may not approve any acquisition that results in a
multiple savings and loan holding company controlling savings institutions in
more than one state. However, there are two exceptions to this general rule.
First, the approval of interstate supervisory acquisitions by savings and loan
holding companies. Second, the acquisition of a savings institution in another
state if the laws of the state of the target savings institution specifically
permit the acquisition. The states vary in the extent to which they permit
interstate savings and loan holding company acquisitions.
Although savings and loan holding companies do not have specific
capital requirements or specific restrictions on the payment of dividends or
other capital distributions, federal regulations place these restrictions on
subsidiary savings institutions as described below. In addition, the financial
impact of a holding company on its subsidiary institution is a matter that is
evaluated by the OTS, which has authority to order the stoppage of activities or
divestiture of subsidiaries deemed to pose a threat to the safety and soundness
of the institution.
Federal Savings Institution Regulation
Business Activities. The activities of federal savings
institutions are governed by federal law and regulations. These laws and
regulations delineate the nature and extent of the activities in which federal
associations may engage. In particular, many types of lending authority for
federal association are limited to a specified percentage of the institution's
capital or assets.
Capital Requirements. The OTS capital regulations require savings
institutions to meet three minimum capital standards: a 1.5% tangible capital
ratio, a 3% leverage ratio and an 8% risk-based capital ratio. However, the
minimum leverage ratio increased to 4% for all institutions except those with
the highest rating on the CAMELS financial institution rating system. In
addition, the prompt corrective action standards discussed below also establish,
32
in effect, a minimum 2% tangible capital standard, a 4% leverage ratio (3% for
institutions receiving the highest rating on the CAMELS financial institution
rating system) and, together with the risk-based capital standard itself, a 4%
Tier 1 risk-based capital standard. The OTS regulations also require that, in
meeting the tangible, leverage and risk-based capital standards, institutions
must generally deduct investments in and loans to subsidiaries engaged in
activities as principal that are not permissible for a national bank.
The risk-based capital standard requires an institution to
maintain Tier 1 or core capital to risk-weighted assets of at least 4% and total
capital to risk-weighted assets of at least 8%. Total capital is defined as core
capital and supplementary capital. In determining the amount of risk-weighted
assets, all assets, including certain off-balance sheet assets, are multiplied
by a risk-weight factor of 0% to 100%, assigned by the OTS capital regulation
based on the risks believed inherent in the type of asset. Core or Tier 1
capital is defined as common stockholders' equity and retained earnings, certain
noncumulative perpetual preferred stock and related surplus, and minority
interests in equity accounts of consolidated subsidiaries, less intangibles
other than certain mortgage servicing rights and credit card relationships. The
components of supplementary capital include cumulative preferred stock,
long-term perpetual preferred stock, mandatory convertible securities,
subordinated debt and intermediate preferred stock, and the allowance for loan
and lease losses limited to a maximum of 1.25% of risk-weighted assets. Overall,
the amount of supplementary capital included as part of total capital cannot
exceed 100% of core capital.
At September 30, 2001, the Bank met each of its capital
requirements. See Note 12 of the Notes to Consolidated Financial Statements for
further information.
Prompt Corrective Regulatory Action. The OTS is required to take
certain supervisory actions against undercapitalized institutions, the severity
of which depends upon the institution's degree of undercapitalization.
Generally, a savings institution that has a ratio of total capital to risk
weighted assets of less than 8%, a ratio of Tier 1 or core capital to
risk-weighted assets of less than 4%, or a ratio of core capital to total assets
of less than 4%, or 3% or less for institutions with the highest examination
rating, is considered to be "undercapitalized." A savings institution that has
33
a total risk-based capital ratio less than 6%, a Tier 1 capital ratio of less
than 3% or a leverage ratio that is less than 3% is considered to be
"significantly undercapitalized" and a savings institution that has a tangible
capital to assets ratio equal to or less than 2% is deemed to be "critically
undercapitalized." Although there is a narrow exception, the OTS is required to
appoint a receiver or conservator for an institution that is "critically
undercapitalized" if the institution is critically undercapitalized on average
during the calendar quarter 270 days after becoming critically undercapitalized.
The regulation also provides that an institution must file a capital restoration
plan with the OTS within 45 days of the date that the OTS notifies it that it is
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized." Compliance with the plan must be guaranteed by any parent
holding company. In addition, numerous mandatory supervisory actions immediately
apply to an undercapitalized institution, including, but not limited to,
increased monitoring by regulators and restrictions on growth, capital
distributions and expansion. The OTS could also take any one of a number of
discretionary supervisory actions, including issuing a capital directive and
replacing senior executive officers and directors.
Insurance of Deposit Accounts. Deposits of the Bank are presently
insured by the Savings Association Insurance Fund. The FDIC maintains a
risk-based assessment system by which institutions are assigned to one of three
categories based on their capitalization and one of three subcategories based on
examination ratings and other supervisory information. An institution's
assessment rate depends upon the categories to which it is assigned. Assessment
rates for Savings Association Insurance Fund member institutions are determined
semiannually by the FDIC and currently range from zero basis points for the
healthiest institutions to 27 basis points for the riskiest.
The FDIC may terminate an institution's deposit insurance if it
finds that the institution has engaged in unsafe or unsound practices, is in an
unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC or the
OTS. The management of the Bank does not know of any practice, condition or
violation that might lead to termination of its deposit insurance.
34
Loans to One Borrower. Federal law provides that savings
institutions must generally follow the limits on loans to one borrower
applicable to national banks. A savings institution may not make a loan or
extend credit to single or related group of borrowers in excess of 15% of its
unimpaired capital and surplus. An additional amount may be lent, equal to 10%
of unimpaired capital and surplus, if secured by specified readily-marketable
collateral. At September 30, 2001, the Bank's limit on loans to one borrower was
approximately $9.1 million. At September 30, 2001, the Bank's largest aggregate
amount of loans to one borrower was $8.5 million, all of which was performing
according to their terms.
Qualified Thrift Lender Test. Federal law requires savings
institutions to meet a qualified thrift lender test. Under the test, a savings
association is required to either qualify as a "domestic building and loan
association" under the Internal Revenue Code or maintain at least 65% of its
"portfolio assets" in certain "qualified thrift investments" in at least 9
months out of each 12-month period. "Portfolio Assets" equals total assets less
specified liquid assets up to 20% of total assets, intangibles, including
goodwill, and the value of property used to conduct business. "Qualified thrift
investments" are primarily residential mortgages and related investments,
including certain mortgage-backed securities.
A savings institution that fails the qualified thrift lender test
faces certain operating restrictions and may be required to convert to a
commercial bank charter. As of September 30, 2001, the Bank complied with the
qualified thrift lender test. Recent legislation has expanded the extent to
which education loans, credit card loans and small business loans may be
considered "qualified thrift investments."
Limitation on Capital Distributions. OTS regulations impose
limitations upon all capital distributions by a savings institution, including
cash dividends, payments to repurchase its shares and payments to stockholders
of another institution in a cash-out merger.
35
Under the OTS regulations, an application to and the prior
approval of the OTS is required before any capital distribution if the
institution does not meet the criteria for "expedited treatment" of applications
under OTS regulations (generally, compliance with all capital requirements and
examination ratings in one of two top categories), the total capital
distributions for the calendar year exceed net income for that year plus the
amount of retained net income for the preceding two years, the institution would
be undercapitalized following the distribution or the distribution would
otherwise be contrary to a statute, regulation or agreement with OTS. If an
application is not required, the institution must still give advance notice to
OTS of the capital distribution. If the Bank's capital fell below its regulatory
requirements or if the OTS notified it that it was in need of more than normal
supervision, the Bank's ability to make capital distributions could be
restricted. In addition, the OTS could prohibit a proposed capital distribution,
which would otherwise be permitted by the regulation if the OTS determines that
the distribution would be an unsafe or unsound practice.
Assessments. Savings institutions are required to pay assessments
to the OTS to fund the agency's operations. The general assessments, paid on a
semi-annual basis, are computed upon the savings institution's total assets,
including consolidated subsidiaries, as reported in the Bank's latest quarterly
thrift financial report. The Bank's assessments for the fiscal year ended
September 30, 2001 totaled $149,000.
36
Branching. OTS regulations permit federally chartered savings
associations to branch nationwide under certain conditions. Generally, federal
savings associations may establish interstate networks and geographically
diversify their loan portfolios and lines of business. The OTS authority
preempts any state law purporting to regulate branching by federal savings
associations.
Transactions with Related Parties. The Bank's authority to engage
in transactions with "affiliates" is limited by federal law. Generally, an
affiliate is any company that controls or is under common control with an
institution, including the Corporation. The aggregate amount of covered
transactions with any individual affiliate is limited to 10% of the capital and
surplus of the savings institution. The aggregate amount of covered transactions
with all affiliates is limited to 20% of the savings institution's capital and
surplus. Certain transactions with affiliates are required to be secured by
collateral in an amount and of a type described in federal law. The purchase of
low quality assets from affiliates is generally prohibited. The transactions
with affiliates must be on terms and under circumstances, that are at least as
favorable to the institution as those prevailing at the time for comparable
transactions with non-affiliated companies. In addition, savings institutions
are prohibited from lending to any affiliate that is engaged in activities that
are not permissible for bank holding companies and no savings institution may
purchase the securities of any affiliate other than a subsidiary.
The Bank's authority to extend credit to executive officers,
directors and 10% stockholders, as well as entities within the control of these
persons, is governed by federal law. These persons are often referred to as
"insiders" of a company. Loans to insiders are required to be made on terms
substantially the same as those offered to unaffiliated individuals and may not
involve more than the normal risk of repayment. Recent legislation created an
exception for loans made pursuant to a benefit or compensation program that is
widely available to all employees of the institution and does not give
preference to insiders over other employees. The law limits both the individual
and aggregate amount of loans the Bank may make to insiders based, in part, on
the Bank's capital position and requires certain board approval procedures to be
followed.
Enforcement. The OTS has primary enforcement responsibility over
savings institutions and has the authority to bring actions against the
institution and all institution-affiliated parties, including stockholders, and
any attorneys, appraisers and accountants who knowingly or recklessly
participate in wrongful action likely to have an adverse effect on an insured
institution. Formal enforcement action may range from the issuance of a capital
37
directive or cease and desist order, to removal of officers and/or directors, to
institution of a receivership or conservatorship, or to termination of deposit
insurance. Civil penalties cover a wide range of violations and can amount to
$27,500 per day, or even $1.2 million per day in especially serious cases. The
FDIC has the authority to recommend to the Director of the OTS that enforcement
action to be taken with respect to a particular savings institution. If action
is not taken by the Director, the FDIC has authority to take action under
certain circumstances. Federal law also established criminal penalties for
certain violations.
Standards for Safety and Soundness. The federal banking agencies
have adopted Interagency Guidelines prescribing Standards for Safety and
Soundness. The guidelines set forth the safety and soundness standards that the
federal banking agencies use to identify and address problems at insured
depository institutions before capital becomes impaired. If the OTS determines
that a savings institution fails to meet any standard prescribed by the
guidelines, the OTS may require the institution to submit an acceptable plan to
achieve compliance with the standard.
Federal Home Loan Bank System
The Bank is a member of the Federal Home Loan Bank System, which
consists of 12 regional Federal Home Loan Banks. The Federal Home Loan Bank of
Atlanta provides a central credit facility primarily for member institutions.
The Bank, as a member of the Federal Home Loan Bank of Atlanta, is required to
acquire and hold shares of capital stock in that Federal Home Loan Bank of
Atlanta in an amount at least equal to 1.0% of the aggregate principal amount of
its unpaid residential mortgage loans and similar obligations at the beginning
of each year, or 1/20 of its advances (borrowings) from the Federal Home Loan
Bank of Atlanta, whichever is greater. The Bank complied with this requirement
with an investment in Federal Home Loan Bank of Atlanta stock at September 30,
2001, of $7.6 million. Federal Home Loan Bank of Atlanta advances must be
secured by specified types of collateral.
The Federal Home Loan Banks are required to provide funds for the
resolution of insolvent thrifts in the late 1980s and to contribute funds for
affordable housing programs. These requirements could reduce the amount of
dividends that the Federal Home Loan Banks pay to their members and could also
result in the Federal Home Loan Banks imposing a higher rate of interest on
advances to their members. If dividends were reduced, or interest on future
Federal Home Loan Bank advances increased, the Bank's net interest income would
likely also be reduced. Recent legislation has changed the structure of the
Federal Home Loan Banks funding obligations for insolvent thrifts, revised the
capital structure of the Federal Home Loans Banks and implemented entirely
voluntary membership for Federal Home Loan Banks. Management cannot predict
38
the effect that these changes may have with respect to its Federal Home Loan
Bank membership.
Federal Reserve System
The Federal Reserve Board regulations require savings
institutions to maintain non-interest earning reserves against their transaction
accounts, primarily NOW and regular checking accounts. The regulations generally
require that reserves be maintained against aggregate transaction accounts as
follows: for accounts aggregating $41.3 million or less, subject to adjustment
by the Federal Reserve Board, the reserve requirement is 3%; and for accounts
aggregating greater than $41.3 million, the reserve requirement is $1.284
million plus 10%, subject to adjustment by the Federal Reserve Board between 8%
and 14%, against that portion of total transaction accounts in excess of $41.3
million. The first $5.7 million of otherwise reservable balances, as adjusted by
the Federal Reserve Board, are exempted from the reserve requirements. The Bank
complies with the foregoing requirements.
Community Reinvestment Act
Under the Community Reinvestment Act, as implemented by OTS
regulations, a savings association has a continuing and affirmative obligation
consistent with its safe and sound operation to help meet the credit needs of
its entire community, including low and moderate-income neighborhoods. The
Community Reinvestment Act does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the Community
Reinvestment Act. The Community Reinvestment Act requires the OTS, in connection
with its examination of an institution; to assess the institution's record of
meeting the credit needs of its community and to take such record into account
in its evaluation of applications by such institution. The Community
Reinvestment Act requires public disclosure of an institution's Community
Reinvestment Act rating. The Bank's latest Community Reinvestment Act rating
received from the OTS was "satisfactory."
TAXATION
Federal Taxation
General. The Corporation and the Bank report their income via a
consolidated return on a fiscal year basis using the accrual method of
accounting and are subject to federal income taxation in the same manner as
other corporations with some exceptions, including particularly the Bank's
reserve for bad debts discussed below. The following discussion of tax matters
39
is intended only as a summary and does not purport to be a comprehensive
description of the tax rules applicable to the Bank or the Corporation.
Tax Bad Debt Reserves. For discussion related to the Bank's Tax
Bad Debt Reserves, please refer to Note 10 of the Company's Annual Report to
Stockholders for the fiscal year ended September 30, 2001.
Distributions. To the extent that the Bank makes "nondividend
distributions" to the Corporation that are considered as made: (i) from the
reserve for losses on qualifying real property loans, to the extent the reserve
for such losses exceeds the amount that would have been allowed under the
experience method; or (ii) from the supplemental reserve for losses on loans
("Excess Distributions"), then an amount based on the amount distributed will be
included in the Bank's taxable income. Nondividend distributions include
distributions in excess of the Bank's current and accumulated earnings and
profits, distributions in redemption of stock, and distributions in partial or
complete liquidation. However, dividends paid out of the Bank's current or
accumulated earnings and profits, as calculated for federal income tax purposes,
will not be considered to result in a distribution from the Bank's bad debt
reserve. Thus, any dividends to the Corporation that would reduce amounts
appropriated to the Bank's bad debt reserve and deducted for federal income tax
purposes would create a tax liability for the Bank. The amount of additional
taxable income attributable to an Excess Distribution is an amount that, when
reduced by the tax attributable to the income, is equal to the amount of the
distribution. Thus, if, the Bank makes a "nondividend distribution," then
approximately one and one-half times the amount so used would be includable in
gross income for federal income tax purposes, assuming a 35% corporate income
tax rate (exclusive of state and local taxes). See "Regulation" for limits on
the payment of dividends by the Bank. The Bank does not intend to pay dividends
that would result in a recapture of any portion of its tax bad debt reserve.
Corporate Alternative Minimum Tax. The Code imposes a tax on
alternative minimum taxable income ("AMTI") at a rate of 20%. Only 90% of AMTI
can be offset by net operating loss carryovers. AMTI is increased by an amount
equal to 75% of the amount by which the Bank's adjusted current earnings exceeds
its AMTI (prior to reduction for net operating losses).
Dividends-Received Deduction and Other Matters. The Corporation
may exclude from its income 100% of dividends received from the Bank as a member
of the same affiliated group of corporations. The corporate dividends-received
deduction is generally 70% in the case of dividends received from unaffiliated
40
corporations with which the Corporation and the Bank will not file a
consolidated tax return, except that if the Corporation or the Bank owns more
than 20% of the stock of a corporation distributing a dividend, then 80% of any
dividends received may be deducted.
Audits. There have not been any audits of the Corporation's
federal or state income tax returns during the past five years.
State Income Taxation. South Carolina has adopted the Code as it
relates to savings and loan associations, effective for taxable years beginning
after December 31, 1985. Coastal Federal is subject to South Carolina income tax
at the rate of 6%. This rate of tax is imposed on savings associations in lieu
of the general state business corporation income tax.
For information regarding income taxes payable by Coastal
Federal, see Note 10 of the Notes to Consolidated Financial Statements.
41
Item 2. Properties
The following table sets forth the location of the offices of
Coastal Financial's subsidiaries, as well as certain additional information
relating to these offices, as of September 30, 2001.
Total Investment
Including Land, Net Book Approximate
Year Building, Furni- Value as Square Owned/
Location Opened ture and Fixtures Of 9/30/01 Footage Leased
- -------- ------ ------------------ ---------- ----------- ------
(Dollars in thousands)
Main Office
2619 Oak St
Myrtle Beach, SC (1) 1980 $11,391 $ 3,914 25,000 Owned
Dunes Office
7500 North Kings Hwy
Myrtle Beach, SC 1971 742 277 2,000 Owned
North Myrtle Beach Office
521 Main Street
North Myrtle Beach, SC 1973 1,218 678 4,100 Owned
Surfside Office
112 Highway 17 South
& Glenns Bay Road
Surfside Beach, SC 1975 1,532 835 3,300 Owned
Conway Office
310 Highway 378
Conway, SC 1976 1,002 396 2,882 Owned
Socastee Office
1 Cimerron Drive 1981 1,010 370 2,275 Owned
Myrtle Beach, SC
Murrells Inlet Office
Highway 17 South
Murrells Inlet, SC 1986 1,102 652 3,450 Owned
Waccamaw Medical Pk Office
7000 Waccamaw Medical Pk Rd 1986 596 264 1,450 Owned
Conway, SC
Sunset Beach Office
1625 Seaside Road S.W
Sunset Beach, NC 1998 1,083 900 3,000 Owned
Coastal Federal University Center
504 27th Avenue North
Myrtle Beach, SC 1997 1,217 1,102 17,500 Owned
42
Total Investment
Including Land, Net Book Approximate
Year Building, Furni- Value as Square Owned/
Location Opened ture and Fixtures Of 9/30/01 Footage Leased
- -------- ------ ------------------ ---------- ----------- ------
(Dollars in thousands)
Conway Annex Property
1515 4th Avenue
Conway, SC 1999 446 430 10,000 Owned
Little River Office
1602 Highway 17
Little River, SC 1999 1,248 1,122 2,300 Owned
Bi-Lo 38th Avenue
1245 38th Avenue North
Myrtle Beach, SC 2000 326 271 600 Leased
Wilmington Office
5710 Oleander Drive, Suite 209
Wilmington, NC 1999 214 179 1,400 Leased
Carolina Forest Office
3894 Renee Drive
Myrtle Beach, SC 2000 1,287 1,175 3,500 Owned
Southport Office
4956-1 Long Beach Road SE 2001 221 199 1,600 Leased
Southport, NC
Central Business District Office
5710 Oleander Drive, Suite 209 . 2001 71 68 1,800 Leased
Wilmington, NC
Bi-Lo Socastee Office
5020 Dick Pond Road 2001 281 263 486 Leased
Myrtle Beach, SC
Coastal Mortgage Bankers
and Realty Co., Inc. 1970 2 0 N/A N/A
2619 Oak Street
Myrtle Beach, SC
Coastal Investor Services, Inc.
2619 Oak Street 1987 123 19 N/A N/A
Myrtle Beach, SC
- -------------
(1) The original main office was located at 816 North Kings Highway and opened
in January 1954. The main office was moved to its new location in 1980.
43
The Company began to invest in equipment for a full service
office in Pawleys Island, SC. The office is scheduled to open in February 2002.
The net book value of the Company's investment in office,
properties and equipment (including the future Pawleys Island Office) totaled
$13.2 million at September 30, 2001. See Note 5 of the Notes to the consolidated
Financial Statements. Coastal Federal uses the services of an independent data
processing service to process customer records and monetary transactions, post
deposit and general ledger entries and record activity in installment lending,
loan servicing and loan originations.
44
Item 3. Legal Proceedings
The Company is not a defendant in any lawsuits. The subsidiaries
are defendants in lawsuits arising out of the normal course of business. Based
upon current information received from counsel representing the subsidiaries in
these matters, the Company believes none of the lawsuits would have a material
impact on the Company's financial status.
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
The information contained under the section captioned "Market for
the Corporation's Common Stock and Related Stockholder Matters" in the
Corporation's Annual Report to Stockholders for the Fiscal Year Ended September
30, 2001 ("Annual Report") is incorporated herein by reference.
Item 6. Selected Financial Data
The information contained in the section captioned "Financial
Highlights" in the Annual Report is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The information contained in the section captioned "Management's
Discussion and Analysis" in the Annual Report is incorporated herein by
reference.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
The information contained in the section captioned "Interest Rate
Risk Disclosure" in the Annual Report is incorporated herein by reference.
45
Item 8. Financial Statements and Supplementary Data
The consolidated financial statements contained in the Annual
Report which are listed under Item 14 herein are incorporated herein by
reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
The registrant has not, within the 24 months before the date of
the most recent financial statements, changed its accountants, nor have there
been any disagreements on accounting and financial disclosure.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information contained under the section captioned "Proposal I
- -- Election of Directors" in the Bank's definitive proxy statement for the
Bank's 2002 Annual Meeting of Stockholders (the "Proxy Statement") is
incorporated herein by reference.
Certain executive officers of the Bank also serve as executive
officers of the Corporation. The day-to-day management duties of the executive
officers of the Corporation and the Bank relate primarily to their duties as to
the Bank.
46
Executive Officers of the Registrant
- ------------------------------------
Name, Age and Position Business Experience
- ---------------------- -------------------
Michael C. Gerald, 52 Mr. Gerald has been associated with
President, Chief Executive Coastal Federal since 1974 and
Officer and a Director serves as Director, President and
Chief Executive Officer of the
Corporation and Bank. Mr. Gerald
also serves as Director and
President of Coastal Mortgage
Bankers & Realty Company, Inc., and
as Director and President of Coastal
Real Estate Investment Corporation.
He currently serves on the Board of
Visitors of Coastal Carolina
University's Wall School of
Business, the Board of Directors of
the Waccamaw Community Foundation,
the Board of Directors of the
Coastal Education Foundation, the
Session of the First Presbyterian
Church of Myrtle Beach, Chairman of
the Planning Commission for the Town
of Briarcliffe Acres and the Board
of Advisors of the USC Business
Partnership Foundation.
Jimmy R. Graham, 53, Mr. Graham serves as Executive Vice
Executive Vice President and President and Chief Information
Chief Information Officer Officer of Coastal Federal. Mr.
Graham serves as Executive Vice
President of Coastal Financial
Corporation. He has been associated
with the bank since 1977.
Jerry L. Rexroad, CPA, 41, Mr. Rexroad joined the Company in
Executive Vice President and April 1995 and is Executive Vice
Chief Financial Officer President and Chief Financial
Officer of Coastal Federal and
Coastal Financial Corporation. Mr.
Rexroad also serves as the Chief
Financial Officer and a Director for
Coastal Mortgage Bankers & Realty
Company, Inc., Coastal Investments
Corporation, and Coastal Federal
Mortgage, Coastal Real Estate
Investment Corporation and President
of Coastal Federal Holdings
Corporation. He currently serves on
the Junior Achievement Board of
Directors of Horry County. He is a
Past Chairman of the Board of
Directors for Junior Achievement of
Horry County as well as Past
Chairman of the Board of Directors
for Junior Achievement of
Greenville. Mr. Rexroad is a
Director of PowerHouse Ministries,
Inc. and Chairman of the Board of
Deacons at Grand Strand Baptist
Church. He is a certified public
accountant, and is a member of the
AICPA and SCACPA. Prior to joining
the Company, Mr. Rexroad was a
partner with KPMG LLP where he was
partner in charge of the Financial
Institutions practice in South
Carolina.
47
Phillip G. Stalvey, 45, Mr. Stalvey is Executive Vice
Executive Vice President President and Sales Group Leader for
And Sales Group Leader the Bank. He also serves as an
Executive Vice President of the
Corporation and is a director of
Coastal Federal Mortgage and Coastal
Investor Services, Inc. He has been
associated with Coastal Federal for
the past 20 years. In addition, Mr.
Stalvey is a member of the Florence
Stake Presidency with his Church and
a member of the Myrtle Beach Air
Force Base Redevelopment Authority.
Steven J. Sherry, 50 Mr. Sherry is Executive Vice
Executive Vice President and President and Director of Marketing
Director of Marketing for the Bank. He also serves as
Executive Vice President/Chief
Marketing Officer for Coastal
Financial Corporation. He has been
associated with Coastal Federal, in
a consultative fashion for over five
years, and formally with the
organization for 3 1/2years. Mr.
Sherry is a member of the Bank
Marketing Association, and holds
various achievement awards for
marketing and advertising.
Susan J. Cooke, 51 Ms. Cooke is Vice President and
Vice President and Corporate Secretary for Coastal
Corporate Secretary Federal and for Coastal Financial
Corporation, Corporate Secretary for
Coastal Mortgage Bankers & Realty
Company, Inc., and Coastal Investor
Services, Inc. Ms. Cooke has been
employed with Coastal Federal for
fourteen years. She is a member of
the American Society of Corporate
Secretaries, Inc. and the National
Association for Female Executives.
Robert D. Douglas, 42 Mr. Douglas joined the corporation
Executive Vice President in June 1994 and serves as Executive
Human Resources/Coastal Vice President of the Bank and
Federal University Group Coastal Financial Corporation. He
currently serves on the Myrtle Beach
Area Chamber of Commerce
Governmental Affairs Committee. He
previously served as Chairman of the
Human Resources Committee, and as a
member of the Young Management
Division of the Community Financial
Institutions of South Carolina
Association. He has served on
various advisory committees for the
Horry County Drug and Alcohol
Commission, and the South Carolina
Employment Security Commission.
48
Item 11. Executive Compensation
The information contained under the section captioned "Proposal I
- -- Election of Directors -- Executive Compensation" in the Proxy Statement is
incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and
Management
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated
herein by reference to the section captioned
"Voting Securities and Principal Holders Thereof"
of the Proxy Statement.
(b) Security Ownership of Management
Information required by this item is incorporated
herein by reference to the sections captioned
"Proposal I -- Election of Directors" and "Voting
Securities and Principal Holders Thereof" of the
Proxy Statement.
(c) Management of the Corporation knows of no arrangements,
including any pledge by any person of securities of the
Corporation, the operation of which may at a subsequent
date result in a change in control of the registrant.
Item 13. Certain Relationships and Related Transactions
The information required by this item is incorporated herein by
reference to the section captioned "Proposal I - Election of Directors" and
"Voting Securities and Principal Holders Thereof" in the Proxy Statement.
49
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K
1. Independent Auditors' Report(1)
2. All Financial Statements(1)
(a) Consolidated Statements of Financial Condition as of
September 30, 2000 and 2001.
(b) Consolidated Statements of Operations for the Years Ended
September 30, 1999, 2000, 2001.
(c) Consolidated Statements of Stockholders' Equity and
Comprehensive Income for the Years Ended September 30, 1999,
2000, 2001.
(d) Consolidated Statements of Cash Flows for the Years Ended
September 30, 1999, 2000, 2001.
(e) Notes to Consolidated Financial Statements.
3. All Schedules have been omitted, as the required information is either
inapplicable or included in the Notes to consolidated Financial Statements.
4. Exhibits
3 (a) Certificate of Incorporation of Coastal Financial
Corporation(2)
3 (b) Certificate of Amendment to Certificate of Incorporation
of Coastal Financial Corporation(7)
3 (c) Bylaws of Coastal Financial Corporation(1)
10 (a) Employment Agreement with Michael C. Gerald(2)
(b) Employment Agreement with Jerry L. Rexroad(2)
(c) Employment Agreement with Phillip G. Stalvey(4)
(d) Employment Agreement with Jimmy R. Graham(2)
(e) Employment Agreement with Steven J. Sherry(5)
(f) 1990 Stock Option Plan(2)
50
(g) Directors Performance Plan(3)
(h) 2000 Stock Option Plan(6)
(i) Loan Agreement with Bankers Bank(8)
13 Annual Report to Stockholders for the Fiscal Year Ended
September 30, 2001
21 Subsidiaries of the Registrant
23 Consent of Independent Auditors
5. The Corporation filed a Form 8-K on August 2, 2001 to report that the
Corporation declared a 3-for-2 stock split on the Corporation's outstanding
shares of common stock, payable in the form of a 50% stock dividend. A copy
of the press release announcing the stock split is filed as an exhibit to the
Form 8-K.
- --------------------
(1) Incorporated by reference to Registration Statement on Form S-4 filed with
the Securities and Exchange Commission on November 26, 1990.
(2) Incorporated by reference to 1995 Form 10-K filed with the Securities and
Exchange Commission on December 29, 1995.
(3) Incorporated by reference to the proxy statement for the 1996 Annual
Meeting of Stockholders.
(4) Incorporated by reference to 1997 Form 10-K filed with the Securities and
Exchange Commission on January 2, 1998.
(5) Incorporated by reference to 1998 Form 10-K filed with the Securities and
Exchange Commission on December 29, 1998.
(6) Incorporated by reference to the proxy statement for the 2000 Annual
Meeting of Stockholders.
(7) Incorporated by reference to the March 31, 1998 Form 10-Q filed with the
Securities and Exchange Commission on May 15, 1998.
(8) Incorporated by reference to the December 31, 1997 Form 10-Q filed with the
Securities and Exchange Commission on February 13, 1998.
51
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
COASTAL FINANCIAL CORPORATION
Date: December 21, 2001 By: /s/ Michael C. Gerald
---------------------
Michael C. Gerald
President/Chief Executive
Officer
(Duly Authorized Representative)
Pursuant to the requirement of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
By: /s/ Michael C. Gerald By: /s/ Jerry L. Rexroad
-------------------- -------------------
Michael C. Gerald Jerry L. Rexroad
President/Chief Executive Executive Vice President
Officer And a Director And Chief Financial Officer
(Principal Executive (Principal Financial and
Officer) Accounting Officer)
Date: December 21, 2001 December 21, 2001
By: /s/ James T. Clemmons By: /s/ Frank A. Thompson, II
-------------------- ------------------------
James T. Clemmons Frank A. Thompson, II
Chairman of the Board Director
Date: December 21, 2001 Date: December 21, 2001
By: /s/ James C. Benton By: /s/ James P. Creel
------------------ -----------------
James C. Benton James P. Creel
Director Director
Date: December 21, 2001 Date: December 21, 2001
By: /s/ G. David Bishop By: /s/ James H. Dusenbury
------------------ ---------------------
G. David Bishop James H. Dusenbury
Director Director
Date: December 21, 2001 Date: December 21, 2001
52