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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, 1997
OR
[ X ] 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 North Oak Street, Myrtle Beach, South Carolina 29577-3129
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (803) 448-5151
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 November 30, 1997, there were issued and outstanding 4,655,982
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 National Association of Securities Dealers, Inc.
Automated Quotation System under the symbol "CFCP" on November 30, 1997, was
$104,759,595(4,655,982 shares at $22.50 per share, which is the ending bid on
November 30, 1997.). 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, 1997. (Parts I and II)
2. Portions of the Proxy Statement for the 1998 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 Investments Corporation, 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.
On November 2, 1995, Coastal Financial purchased Granger-O'Harra
Mortgage, Inc.("Granger-O'Harra") and merged Granger-O'Harra into a new
subsidiary, Coastal Federal Mortgage, Inc. Coastal Federal Mortgage, Inc.
engages in the origination of conforming mortgage loans which are sold in the
secondary market generally servicing released.
On May 7, 1996, the Corporation formed Coastal Technology Services,
Inc. ("CTS"). CTS primarily develops specialized banking software for sale to
financial services companies. Activity for fiscal 1997 was limited for CTS.
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, nine branch offices located in South Carolina and a
lending office in Sunset Beach, North Carolina. The lending office will be
converted to a full service branch office in fiscal 1998. At September 30, 1997,
Coastal Financial had total assets of $494.0 million, total deposits of $347.1
million and stockholders' equity of $32.4 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 (803) 448-5151.
Eight of Coastal Federal's nine offices are in Horry County, South
Carolina. The economy of the Horry County area is dependent primarily on
tourism. To the extent Horry County area businesses rely heavily on tourism for
business, decreased tourism would have a significant adverse effect on Coastal
Federal's primary deposit base and lending area. Moreover, Coastal Federal would
likely experience a higher degree of loan delinquencies should the local economy
be significantly 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 as a percentage of
total loans have increased from 13.9% of total loans at September 30, 1995 to
22.6% of total loans at September 30, 1997.
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,
1997, 2.5% and 9.8%, respectively, of the Bank's total loan portfolio consisted
of commercial business and consumer loans.
Selected Consolidated Financial Data and Other Items
The information contained in the table captioned "Selected Consolidated
Financial and Other Data" on page 2 of the Corporation's Annual Report to
Stockholders for the Fiscal Year Ended September 30, 1997 is incorporated herein
by reference.
Yields Earned and Rates Paid
The following table sets forth, for the periods and at the date
indicated, the weighted average yields earned on Coastal Financial's assets, the
weighted average interest rates paid on its liabilities, together with the net
yield on interest-earning assets.
Year Ended At
September 30, September 30,
----------------------------------
1995 1996 1997 1997
---- ---- ---- ----
Weighted average yield
on loan portfolio .................... 8.39% 8.57% 8.70% 8.88%
Weighted average yield
on mortgage-backed
securities ............................ 7.81 7.78 7.25 7.40
Weighted average yield
on Federal Funds and
overnight deposits .................... 5.77 5.89 5.27 5.33
Weighted average yield
on investment securities .............. 5.14 6.55 6.70 6.80
Weighted average yield
on all interest-
earning assets ....................... 8.27 8.46 8.46 8.63
Weighted average rate
paid on savings deposits .............. 3.96 4.08 4.15 4.08
Weighted average rate
paid on Federal Home
Loan Bank advances .................... 6.53 6.27 5.95 5.82
Weighted average rate
paid on repurchase
agreements ............................ 3.70 4.63 5.82 4.52
Weighted average rate
paid on all interest
bearing liabilities .................. 4.75 4.70 4.57 4.50
Interest rate spread (spread
between weighted average
rate on all interest-earning
assets and all interest-
bearing liabilities) ................. 3.52 3.76 3.89 4.13
Net interest margin (net
interest income as a percentage
of average interest-earning
assets) ............................... 3.62 3.86 4.03 4.29
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,
------------------------------------------------------------------------------------------
1995 Compared to 1994 1996 Compared to 1995
Increase (Decrease) Increase (Decrease)
Due to Due to
Rate/ Rate/
Rate Volume Volume Net Rate Volume Volume Net
---- ------ ------ ----- ---- ------ ------ -----
(Dollars in thousands)
Interest-Earning Assets:
Loans ........................ $1,377 $ 3,346 $ 222 $4,945 $ 615 $ 2,361 $ 51 $3,027
Mortgage-backed
securities................... 4 567 17 588 (4) 1,083 (6) 1,073
Investments and
other........................ 11 188 34 233 177 96 19 292
-- ---- -- --- --- -- -- ---
Total net change in
income on interest-
earning assets................ 1,392 4,101 273 5,766 788 3,540 64 4,392
----- ----- --- ----- --- ----- -- -----
Interest-Bearing
Liabilities:
Deposits...................... 1,735 (297) (64) 1,374 300 1,455 44 1,799
FHLB advances................. 526 3,215 564 4,305 (289) 51 (2) (240)
Repurchase
agreements................... 35 3 7 45 16 194 50 260
--- - -- -- -- --- -- ---
Total net change in
expense on interest-
bearing liabilities........... 2,296 2,921 507 5,724 27 1,700 92 1,819
------ ----- --- ----- -- ----- -- -----
Net change in net
interest income............... $ (904) $ 1,180 $ (234) $ 42 $ 761 $1,840 $ (28) $2,573
========= ======= ======= ===== ===== ====== ====== ======
Year Ended September 30,
------------------------------------------
1997 Compared to 1996
Increase (Decrease)
Due to
Rate/
Rate Volume Volume Net
---- ------ ------ ----
Interest-Earning Assets:
Loans ........................ $ 502 $ 1,545 $ 24 $ 2,071
Mortgage-backed
securities................... (123) 820 (56) 641
Investments and
other........................ (70) 747 (44) 633
---- --- ---- ---
Total net change in
income on interest-
earning assets................ 309 3,112 (76) 3,345
--- ----- ---- -----
Interest-Bearing
Liabilities:
Deposits...................... 200 1,742 19 1,961
FHLB advances................. (361) (1,425) 73 (1,713)
Repurchase
agreements................... 50 576 181 807
-- --- --- ---
Total net change in
expense on interest-
bearing liabilities........... (111) 893 273 1,055
----- --- --- -----
Net change in net
interest income............... $ 420 $2,219 $ (349) $2,290
======= ====== ======= ======
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.
Year Ended September 30,
-------------------------------------------------------------------------------
1995 1996
------------------------------------ ------------------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
------- -------- ------ ------- -------- ------
(Dollars in thousands)
ASSETS
Loans................................ $341,557 $28,671 8.39% $369,733 $31,698 8.57%
Investments(1)....................... 15,153 925 6.10 16,730 1,217 7.27
Mortgage-backed
securities.......................... 9,365 732 7.82 23,214 1,805 7.78
-------- ------- ----- -------- ------- -----
Total interest-earning
assets............................... $366,075 $30,328 8.28% $409,677 $34,720 8.46%
======== ======= ===== ======== ======= =====
LIABILITIES
Transaction accounts................. 80,586 1,678 2.08 114,220 2,862 2.51
Passbook accounts.................... 55,370 1,314 2.37 44,631 1,160 2.60
Certificate accounts................. 124,287 6,898 5.55 134,415 7,667 5.70
FHLB advances........................ 112,097 7,319 6.53 112,878 7,079 6.27
Securities sold
under repurchase
agreements.......................... 1,705 63 3.70 6,955 323 4.63
------- -------- ----- -------- ------ -----
Total interest-bearing
liabilities.......................... $374,045 $17,272 4.75% $413,099 $19,091 4.70%
======== ======= ===== ======== ======= =====
Net interest income/
interest rate spread................. $13,056 3.52% $15,629 3.76%
Net yield on earning
assets............................... 3.62% 3.86%
Ratio of earning assets
to interest-bearing
liabilities.......................... 1.02x 1.02x
Year Ended September 30,
--------------------------------------
1997
--------------------------------------
Average Yield/
Balance Interest Rate
------- -------- -----
ASSETS
Loans................................ $ 389,196 $33,769 8.70%
Investments(1)....................... 27,007 1,850 6.85
Mortgage-backed
securities.......................... 33,738 2,446 7.25
---------- ------- ----
Total interest-earning
assets............................... $ 449,941 $38,065 8.46%
========== ======= ====
LIABILITIES
Transaction accounts................. 153,796 4,894 3.18
Passbook accounts.................... 41,143 1,015 2.47
Certificate accounts................. 135,335 7,741 5.72
FHLB advances........................ 90,154 5,366 5.95
Securities sold
under repurchase
agreements.......................... 19,387 1,130 5.82
--------- ------- ----
Total interest-bearing
liabilities.......................... $ 439,815 $20,146 4.57%
========== ======= ====
Net interest income/
interest rate spread................. $17,919 3.89%
Net yield on earning
assets............................... 4.03%
Ratio of earning assets
to interest-bearing
liabilities.......................... 1.03x
- -------------------------
(1) Includes short-term interest-bearing deposits and Federal funds sold.
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 commerical 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 $411.9 million at
September 30, 1997, representing approximately 83.4% of its total assets. On
that date, approximately 63.5% 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, 1997, adjustable rate
loans constituted approximatley $318 million (or 77.0%) of the Bank's total loan
portfolio. Therefore, at such date, fixed rate loans comprised only 23.0% of the
total loan portfolio. These lending practices were adopted to shorten the term
of the Bank's assets and make the loan portfolio more responsive to interest
rate volatility.
Loan Portfolio Analysis
The following tables set forth the composition of the Corporation's loan
portfolio by type of loan and type of security as of the dates indicated.
At September 30,
-----------------------------------------------------------------------------------------
1993 1994 1995 1996
------------------ ------------------ ------------------- ------------------
Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ -------
(Dollars in thousands)
Type of Loan:
Mortgage loans:
Construction........................... $ 12,266 4.08% $ 23,222 6.67% $ 27,905 7.34% $ 34,566 8.65%
On existing property................... 206,632 68.86 225,544 64.82 228,881 60.23 231,373 57.89
Income property (commercial)........... 35,328 11.77 42,207 12.13 54,401 14.31 73,295 18.34
Commercial business loans............... 13,913 4.64 14,052 4.04 19,610 5.16 14,831 3.71
Consumer loans:
Mobile home........................... 1,807 .60 1,497 .43 1,204 .32 1,103 .28
Automobiles........................... 5,126 1.71 6,300 1.81 5,941 1.56 7,261 1.82
Equity lines of credit................ 11,362 3.79 12,763 3.67 13,210 3.48 12,441 3.11
Other................................. 13,626 4.55 22,373 6.43 28,887 7.60 24,776 6.20
-------- ------ -------- ----- -------- ------ -------- ------
Total loans and loans held for sale.... $300,060 100.00% $347,958 100.0% $380,039 100.00% $399,646 100.00%
====== ===== ====== ======
Less:
Loans in process...................... (5,607) (13,087) (17,178) (18,589)
Deferred loan(fees)costs.............. (546) (343) (71) 286
Allowance for loan losses............. (2,753) (3,353) (3,578) (4,172)
-------- -------- -------- --------
Total loans net........................ $291,154 $331,175 $359,212 $377,171
======== ======== ======== ========
At September 30,
---------------------
1997
---------------------
Amount Percent
Type of Loan:
Mortgage loans:
Construction........................... $ 34,216 7.93%
On existing property................... 246,323 57.09
Income property (commercial)........... 97,680 22.64
Commercial business loans............... 10,939 2.54
Consumer loans:
Mobile home........................... 1,291 .30
Automobiles........................... 6,055 1.40
Equity lines of credit................ 15,294 3.54
Other................................. 19,659 4.56
-------- ------
Total loans and loans held for sale.... $431,457 100.00%
======
Less:
Loans in process...................... (15,084)
Deferred loan(fees)costs.............. 458
Allowance for loan losses............. (4,902)
Total loans net........................ $411,929
========
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 initial contractual loan
payment period for single family residential loans typically range from 15 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 residential mortgage loans.
The Bank offers adjustable rate mortgage loans ("ARMs"), the interest
rates of which adjust based upon either the cost of funds, prime rate or
treasury securities indices. The interest rates on ARMs generally may not adjust
more than 1-2% per year and 4-6% over the life of the loan. The Bank originates
ARMs at below the fully phased-in interest rate but generally qualifies
borrowers at 2% above the initial rate when the loan to value ratio exceeds 80%.
Monthly payments could increase significantly at the first repricing period.
Although Coastal Federal's ARMs have been 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 or a flat yield
curve 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. A large majority of the conforming
fixed rate loans offered by Coastal Federal are originated through Coastal
Federal Mortgage, Inc. (CFM). These loans are generally sold to correspondent
banks servicing released. Loans sold by CFM amounted to $34.5 and $38.4 million,
respectively, in fiscal 1996 and 1997. Coastal Federal sold approximately $6.2
and $5.8 million, respectively, of mortgages in 1996 and 1997 generally to
FHLMC.
At September 30, 1997, approximately $274.2 million or 63.5% 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 usually tied to
a commitment by the Bank to provide permanent financing upon completion of
construction. The interest rate charged on construction loans is indexed to the
prime rate as published in The Wall Street Journal or 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 is dependent
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.
The general practice of Coastal Federal is to provide 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, 1997, approximately $34.2 million or 7.9% of the
Bank's gross loan portfolio consisted of construction loans on both residential
($19.7 million) and commercial properties ($14.5 million). Undisbursed proceeds
on these loans amounted to $15.1 million at September 30, 1997.
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, 1997, this limited
Coastal Federal's aggregate non-residential real estate loans to approximately
$146.1 million. At such time, the Bank had non-residential real estate loans
outstanding of $120.7 million. The Bank will maintain a level of these loan
types within the guidelines set forth. The commercial real estate loans
originated by the Bank are primarily secured by shopping centers, office
buildings, warehouse facilities, retail outlets, hotels, motels and multi-family
apartment buildings. The interest rate of the commercial real estate loans
presently offered by the Bank generally adjusts every one, three years 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. At
September 30, 1997, the Bank had approximately $97.7 million of loans secured by
commercial real estate, representing approximately 22.6% of Coastal Federal's
total loan portfolio.
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,
Florence County, the Pee Dee Region, northeastern Georgetown County, all within
South Carolina and Brunswick County, North Carolina. Additionally, the Bank has,
on a limited basis, originated or purchased commercial real estate loans secured
by properties located in other parts of the Southeast.
Consumer Loans. The Bank 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 amounted to $42.3 million, or 9.8% of the total
loan portfolio, at September 30, 1997.
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 on such loans than on 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
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, 1997, the Bank had $10.9 million outstanding in
commercial business loans, which represented approximately 2.5% 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 often insufficient source of
repayment.
Loan Maturity
The following table sets forth certain information at September 30,
1997 regarding the dollar amount of loans maturing in the Company's loan
portfolio based on their contractual terms to maturity but does not include
scheduled payments or potential prepayments. 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 More than More than More than
One Year Three Years Five Years Ten Years
One Year Through Through Through Through Over
or Less Three Years Five Years Ten Years Twenty Years Twenty Years Totals
------- ----------- ---------- --------- ------------ ------------ ------
(In thousands)
First mortgage loans . $ 3,586 $ 7,982 $ 3,999 $ 10,665 $ 62,545 $221,492 $310,269
Other residential and
non-residential ..... 10,834 4,884 4,282 4,890 32,318 8,249 65,457
Equity lines of credit 15,294 -- -- -- -- -- 15,294
Consumer loans ....... 2,743 4,906 3,643 795 536 -- 12,623
Commercial loans ..... 2,386 2,947 1,529 399 1,025 -- 8,286
-------- -------- -------- -------- -------- -------- --------
Total loans ..... $ 34,843 $ 20,719 $ 13,453 $ 16,749 $ 96,424 $229,741 $411,929
======== ======== ======== ======== ======== ======== ========
The following table sets forth the dollar amount of all loans due after
one year at September 30, 1997 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......................... $54,317 $252,366 $306,683
Other residential and
non-residential............................. 6,484 48,139 54,623
Consumer loans............................... 9,485 395 9,880
Commercial loans............................. 2,432 3,468 5,900
------- -------- --------
Total loans............................. $72,718 $304,368 $377,086
======= ======== ========
Interest Rate Sensitivity Analysis
The following table illustrates the repricing analysis of the Company's
interest-earning assets and interest-bearing liabilities as of September 30,
1997. For purposes of the table, repricing characteristics of loans include
estimated annual prepayment rates.
Zero to Four Months One Year to Greater than
Three Months to One Year Five Years Five Years Total
------------ ----------- ---------- ---------- -----
(In thousands)
Rate Sensitive Assets(1):
Mortgage loans and
mortgage-backed securities............... $57,040 $223,641 $91,460 $23,324 $395,465
Mortgage-backed securities................ $1,147 $2,943 $14,089 $4,200 $ 22,379
Non-mortgage loans........................ 9,059 3,699 8,150 -- 20,908
Interest-bearing deposits and
investment securities.................... 1,159 1,913 20,220 3,391 26,683
------- -------- -------- ------- --------
Total................................. $68,405 $232,196 $133,919 $30,915 $465,435
======= ======== ======== ======= ========
Rate Sensitive Liabilities:
Core deposits(2).......................... $42,058 $69,741 $62,219 $32,441 $206,459
Time deposits............................. 67,494 48,433 24,730 -- 140,657
Borrowings................................ 52,858 23,720 27,802 1,957 106,337
------- -------- -------- ------- --------
Total................................. $162,410 $141,894 $114,751 $34,398 $453,453
======== ======== ======== ======= ========
Off-Balance Sheet Positions:
Commitments to originate
mortgage loans........................... $1,772 $2,468 $(4,756) $516 --
Interest rate sensitivity gap.............. $(92,233) $92,770 $14,412 $(2,967) $11,982
Cumulative interest
sensitivity gap........................... $(92,233) $537 $14,949 $11,982 --
Cumulative interest sensitivity
gap as a percent of total assets (18.77%) 0.11% 3.04% 2.44% --
(1) Prepayments have been applied to all loans. Prepayment speeds vary
according to the instrument's original maturity, coupon rate and age.
(2) Decay rates have been applied to all core deposits as follows:
NOW MMDA Passbook Non-interest
Accounts Accounts Accounts Demand
-------- -------- -------- ------
Percent Repricing:
1 - 12 months............................ 37.00% 79.00% 17.00% 37.00%
13 - 36 months........................... 33.87 11.00 25.82 33.87
37 - 60 months........................... 9.06 5.24 16.83 9.06
Over 60 months........................... 20.07 4.76 40.35 20.07
------ ------ ------ ------
Total.................................... 100.00% 100.00% 100.00% 100.00%
======= ======= ======= =======
Interest Rate Sensitivity of Net Portfolio Value
The table below measures interest rate risk by estimating the change in
market value of the Bank's assets, liabilities, and off-balance sheet contracts
in response to an instantaneous change in the general level of interest rates.
The procedure for measuring interest rate risk was developed by the Office of
Thrift Supervision ("OTS") to replace the "gap" analysis (the difference between
interest-earning assets and interest-bearing liabilities that mature or reprice
within a specific time period) used previously by the OTS. The model first
estimates the level of the Bank's market value of portfolio equity ("MVPE")
(market value of assets, less market value of liabilities, plus or minus the
market value of any off-balance sheet items) under the current rate environment.
In general, market values are estimated by discounting the estimated cash flows
of each instrument by appropriate discount rates. The model then recalculates
the Bank's MVPE under different interest rate scenarios. The change in MVPE
under the different interest rate scenarios provides a measure of the Bank's
exposure to interest rate risk. Due to OTS reporting requirements,
classifications may vary from GAAP reporting. Further, this report does not
include assets owned by the Company not included in the Bank. The data presented
below is as of September 30, 1997. This information is an estimate and may not
be indicative of actual changes in market values should rates change
significantly at a future date.
-400 -300 -200 -100 +100 +200 +300 +400
Basis Basis Basis Basis No Basis Basis Basis Basis
Points Points Points Points Change Points Points Points Points
------ ------ ------ ------ ------ ------ ------ ------ ------
(In thousands)
ASSETS
Mortgage loans and
securities ......... $ 440,467 $ 436,263 $ 432,780 $ 429,505 $ 425,152 $ 418,999 $ 411,243 $ 402,373 $ 392,891
Non-mortgage loans .. 22,352 22,177 22,006 21,842 21,680 21,523 21,369 21,218 21,073
Cash, deposits and
securities ......... 44,022 43,074 42,161 41,282 40,436 39,621 38,836 38,080 37,351
Repossessed assets .. 253 253 253 253 253 253 253 253 253
Premises and equipmen 7,383 7,383 7,383 7,383 7,383 7,383 7,383 7,383 7,383
Other assets ........ 9,584 10,928 12,846 15,563 19,326 23,372 27,170 30,774 34,197
--------- --------- --------- --------- --------- --------- --------- --------- ---------
TOTAL ............... 524,061 520,078 517,429 515,828 514,230 511,151 506,254 500,081 493,148
========= ========= ========= ========= ========= ========= ========= ========= =========
LIABILITIES
Deposits ............ $ 348,602 $ 347,730 $ 346,876 $ 346,030 $ 345,198 $ 344,380 $ 343,576 $ 342,785 $ 342,004
Borrowings .......... 114,383 112,743 111,158 109,625 108,142 106,707 105,317 103,971 102,666
Other liabilities ... 6,495 6,495 6,495 6,495 6,495 6,495 6,496 6,495 6,496
--------- --------- --------- --------- --------- --------- --------- --------- ---------
TOTAL ............... 469,480 466,968 464,529 462,150 459,835 457,582 455,389 453,251 451,165
========= ========= ========= ========= ========= ========= ========= ========= =========
OFF BALANCE SHEET
POSITIONS .......... $ 992 $ 814 $ 661 $ 516 $ 320 $ 49 $ (230) $ (498) $ (774)
MARKET VALUE OF
PORTFOLIO EQUITY ... $ 58,573 $ 53,924 $ 53,561 $ 54,194 $ 54,715 $ 53,617 $ 50,635 $ 46,331 $ 41,209
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 residential mortgage loan
applications over $400,000 require the approval of the Bank's Loan Committee,
which consists of Directors Clemmons, Gerald, Smart, Springs and Executive Vice
Presidents Rexroad and Stalvey. All first mortgage loan applications in excess
of 95% of the appraised value of the property must be approved by the Board of
Directors.
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 Department of Housing and Urban Development, 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.
Loan Originations, Purchases and Sales. The Bank is a qualified
servicer 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, 1997, the Bank was servicing loans
sold to others with a principal balance of approximately $104.5 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. The majority of the loans sold during the year ended September 30,
1997 were conforming conventional loans originated and sold by Coastal Federal
Mortgage. These loans were sold on a servicing released basis. At September 30,
1997, the Bank's loan portfolio included purchased loans of approximately $22.1
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.
Loans Originated, Purchased and Sold
The following table shows total loans originated, purchased, sold and
repaid during the periods indicated.
Year Ended September 30,
---------------------------------------
1995 1996 1997
--------- --------- ---------
(In thousands)
Loans receivable net, at the beginning of the
period ..................................... $ 331,175 $ 359,212 $ 377,171
--------- --------- ---------
Loans originated:
Construction ............................... 31,849 38,172 45,986
Residential ................................ 46,935 60,683 59,289
Nonresidential ............................. 8,307 11,897 13,794
Land ....................................... 7,263 8,355 10,308
Commercial business ........................ 20,145 23,062 33,730
Consumer ................................... 26,530 18,201 15,396
--------- --------- ---------
Total loans originated ................. 141,029 160,370 178,503
--------- --------- ---------
Loans purchased, primarily single
family residental mortgages ................. 6,337 12,448 9,948
--------- --------- ---------
Loans sold .................................. (2,806) (40,672) (44,160)
--------- --------- ---------
Loan principal repayments and other ......... (116,008) (112,926) (109,946)
--------- --------- ---------
Other ....................................... (515) (1,261) 413
--------- --------- ---------
Loans receivable net, at end of period ...... $ 359,212 $ 377,171 $ 411,929
========= ========= =========
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, 1997, Coastal Federal had loan commitments of approximately $3.2
million. At September 30, 1997, CFM had loan commitments of approximately $2.3
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.
The following table sets forth information with respect to the Bank's
non-performing assets at the dates indicated. At each of the dates indicated,
Coastal Federal has no debt that has been restructured.
At September 30,
-------------------------------------------------------
1993 1994 1995 1996 1997
------ ------ ------ ------ ------
(Dollars in thousands)
Loans accounted for on a nonaccrual basis:
Real estate -
Residential ........................... $ 205 $ 79 $ 999 $ 307 $ 71
Commercial ............................ 64 1,056 134 -- --
Commercial business ................... -- -- 154 60 99
Consumer .............................. 44 16 36 78 87
------ ------ ------ ------ ------
Total ................................ 313 1,151 1,323 445 257
------ ------ ------ ------ ------
Accruing loans which are
contractually past due
90 days or more:
Real estate -
Residential ........................... -- -- -- -- --
Commercial ............................ -- -- -- -- --
Commercial business .................... -- -- -- -- --
Consumer ............................... -- -- -- -- --
------ ------ ------ ------ ------
Total ................................ -- -- -- __ -- --
------ ------ ------ ------ ------
Restructured loans ....................... -- -- -- -- --
Real estate owned ........................ 2,197 781 789 323 250
Other nonperforming
assets .................................. -- -- -- -- --
------ ------ ------ ------ ------
Total nonperforming
assets .................................. $2,510 $1,932 $2,112 $ 768 $ 507
====== ====== ====== ====== ======
Total nonaccrual loans to net
loans ................................... .10% .03% .36% .12% .06%
Total nonaccrual loans to total
assets .................................. .09% .03% .33% .10% .05%
Total nonperforming assets
to total assets ......................... .74% .56% .53% .17% .10%
For the year ended September 30, 1997, gross interest income which
would have been recorded had non-accruing loans been current in
accordance with their original terms would have amounted to
approximately $13,000, of which approximately $5,000 was included in
interest income. There were no impaired loans at September 30, 1996 or
1997.
The allowance for uncollectible interest which is netted against
accrued interest receivable totaled $50,000 and $36,000 at September 30, 1996
and 1997, 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 three classifications for problem assets: 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 one individual classified asset in excess of
$500,000 as of September 30, 1997. At that date, classified assets amounted to
$6.8 million ($1.6 million substandard; $15,000 doubtful; and $5.2 million
special mention). In the first quarter of fiscal 1998, the classified asset in
excess of $500,000 was paid in full.
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 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, 1995, 1996 and
1997 of $202,000, $790,000 and $760,000, respectively. As a result, the Bank has
a $4.9 million allowance for loan losses as of September 30, 1997. The allowance
as a percentage of loans receivable was 1.19% at September 30, 1997 compared to
1.11% at September 30, 1996. See "Management's Discussion and Analysis
- --Non-Performing Assets and --Allowance for Loan Losses" in the 1997 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, 1997, 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.
Loan Loss Allowance Analysis
The following table sets forth an 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 loss
realized has been charged or credited to the loan loss allowance as a charge-off
or recovery.
Year Ended September 30,
-------------------------------------------------------------
1993 1994 1995 1996 1997
------- ------- ------- ------- -------
(Dollars in thousands)
Allowance at beginning of
period ............................. $ 1,851 $ 2,753 $ 3,353 $ 3,578 $ 4,172
Allowance recorded on
acquired loans ...................... -- -- -- -- 110
Provision for loan losses ........... 1,389 510 202 790 760
------- ------- ------- ------- -------
Recoveries:
Residential real estate ............ -- 3 232 -- 20
Commercial real estate ............. 11 148 11 75 14
Real estate construction ........... -- -- -- -- --
Consumer ........................... 106 79 12 7 38
------- ------- ------- ------- -------
Total recoveries ................. 117 230 255 82 72
------- ------- ------- ------- -------
Charge-offs:
Residential real estate ............ 71 38 206 24 46
Commercial real estate ............. 392 13 18 216 --
Real estate construction ........... -- -- -- -- --
Consumer ........................... 141 89 8 38 166
------- ------- ------- ------- -------
Total charge-offs ................ 604 140 232 278 212
------- ------- ------- ------- -------
Net charge-offs (recoveries) ..... 487 (90) (23) 196 140
------- ------- ------- ------- -------
Allowance at end of period ......... $ 2,753 $ 3,353 $ 3,578 $ 4,172 $ 4,902
======= ======= ======= ======= =======
Ratio of allowance to net
loans outstanding at the
end of the period .................. 0.98% 1.01% 1.00% 1.11% 1.19%
Ratio of net charge-offs (recoveries)
to average loans outstanding
during the period .................. 0.17% (.03%) (.01%) .05% .04%
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,
-------------------------------------------------------------------------------------------------
1993 1994 1995
--------------------------------- --------------------------------- ----------------------------
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................... $ 542 0.25% 75.48% $ 742 .30% 75.05% $ 803 .31% 72.03%
Commercial.................... 1,901 5.54 12.22 2,296 5.58 11.94 2,371 4.36 14.17
Consumer...................... 310 .89 12.30 315 .71 13.01 404 .80 13.80
------ ------ ------ ------ ------ ------
Total allowance for
loan losses.................. $2,753 0.98% 100.00% $3,353 1.01% 100.00% $3,578 1.00% 100.00%
====== ====== ====== ====== ====== =======
September 30,
-------------------------------------------------------------------
1996 1997
--------------------------------- --------------------------------
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
------ -------- ----- ------ -------- -----
Real Estate -- mortgage
Residential................... $ 837 .37% 65.35% $1,064 .41% 63.56%
Commercial.................... 2,875 3.80 22.34 3,261 2.78 28.52
Consumer...................... 460 1.01 12.31 577 1.77 7.92
------ ---- ------ ------
Total allowance for
loan losses.................. $4,172 1.11% 100.00% $4,902 1.19% 100.00%
====== ====== ====== ======
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. At September 30, 1997, Coastal Federal's regulatory
liquidity was 6.1%, which was in excess of the required 4.0%.
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 Benton, Creel, Bishop,
Springs, Clemmons and Gerald, Chief Financial Officer Rexroad and Executive Vice
Presidents Graham, Griffin and Stalvey. The ALCO Committee acts within policies
established by the Board of Directors. At September 30, 1997, the Bank's
investment portfolio had a market value of approximately $49.2 million. The
investment securities portfolio consisted primarily of U.S. Government agency
securities and 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.
Securities Analysis
The following table sets forth Coastal Federal's investment securities
portfolio at amortized cost at the dates indicated.
September 30,
------------------------------------------------------------------------------------------------
1995 1996 1997
--------------------------- -------------------------- -------------------------
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........................ $ -- -- % $ -- -- % $ 995 3.82%
FHLB......................... 1,000 42.94 17,334 98.13 17,738 67.89
FNMA......................... -- -- -- -- -- --
FFCB......................... 999 42.89 -- -- 7,391 28.29
Municipal.................... 330 14.17 330 1.87 -- --
--- ------- ------ ----- ----- -----
Total....................... $2,329 100.00% $17,664 100.00% $26,124 100.00%
====== ====== ======= ====== ======= ======
(1) The market value of the Bank's investment securities portfolio amounted to
$2.3 million, $17.5 million and $26.2 million at September 30, 1995, 1996
and 1997, respectively.
The following table sets forth the final maturities and weighted
average yields of the securities at amortized cost at September 30, 1997.
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................................... -- -- -- -- 995 6.89
FHLB................................... -- -- 6,506 6.72 11,231 6.93
FNMA................................... -- -- -- -- -- --
FFCB................................... -- -- 3,490 6.84 3,902 7.04
Municipal............................... -- -- -- -- -- --
---- --- ------ ---- ------- ----
Total................................ $ -- --% $9,996(1) 6.78% $16,128(2) 6.95%
==== === ====== ===== ======= ====
(1) Includes $8.7 million subject to call provisions. Should these bonds be
called prior to maturity the Bank may not be able to obtain the same yield
with similar term securities.
(2) Includes $13.8 million subject to call provisions. Should these bonds be
called prior to maturity the Bank may not be able to obtain the same yield
with similar term securities.
The following table sets forth Coastal Federal's mortgage-backed
securities portfolio at amortized cost at the dates indicated.
September 30,
---------------------------------------------------------------------------------
1995 1996 1997
------------------------- ------------------------ ------------------------
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 ................... $11,246 88.02% $18,861 70.75% $14,048 62.79%
FNMA .................... 538 4.22 2,469 9.26 1,861 8.31
GNMA .................... 992 7.76 5,330 19.99 6,471 28.90
------- ------ ------- ------ ------- ------
Total .................. $12,776 100.00% $26,660 100.00% $22,380 100.00%
======= ====== ======= ====== ======= ======
(1) The market value of the Bank's mortgage-backed securities portfolio
amounted to $12.9 million, $27.0 million and $23.0 million at September 30,
1995, 1996 and 1997, respectively.
The following table sets forth the maturities and weighted average
yields of the securities at September 30, 1997.
Less Than One to Five to
One Year Five Years Ten Years
----------------- -------------------- -------------------
Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ -----
(Dollars in thousands)
Mortgage-Backed Securities: ..............
FHLMC................................... $ -- --% $-- --% $14,048 7.90%
FNMA.................................... 216 8.67 -- -- 1,645 6.57
GNMA.................................... -- -- -- -- 6,471 7.46
---- ---- --- -- ------- ----
Total..................................... $216 8.67% $-- --% $22,164 7.67%
==== ==== === == ======= ====
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 FEDERAL |
| |
| |
+------------------------+
|
|
+------------------------+
| |
| COASTAL MORTGAGE |
| BANKERS* |
| |
+------------------------+
|
|
|
|
+------------------------------------------------+----------------------------------------+
| | | | |
+------------------+ +-----------------+ +---------------+ +----------------+ +-------------------+
| North Beach | | Shady Forest | | Sherwood | | Ridge | | 501 Development |
| Investments, Inc.| | Development | | Development | | Development | | Corporation |
| | | Corporation | | Corporation | | Corporation | | |
| | | | | | | | | |
+------------------+ +-----------------+ +---------------+ +----------------+ +-------------------+
- ---------------
* For a description of these subsidiaries, see "Real Estate Development
Activities."
Real Estate Development Activity
With the exception of one project, for which a joint venture was
created to dispose of real estate acquired through foreclosure, the Corporation
has not entered into any new real estate activity since 1984 and has, in fact,
almost eliminated its investment in these real estate activities. These efforts
are reflected in the reduction of Corporation's investment and loans to
subsidiaries from $8.5 million at September 30, 1987 to zero at September 30,
1997.
In prior years, the Bank made loans to purchasers of units in which the
Bank's subsidiaries were involved in a joint venture.
The following table summarizes the balances of permanent loans to
individual unit purchasers, by project, at September 30, 1997 (net of
participations sold to other financial institutions).
Number of Total Slow Loans(1)
Project Borrowers Amount Number Amount
- ------- --------- ------ ------ ------
Beach Cove 87 $5,440,601 -- $ --
Condominium
North Myrtle Beach,
South Carolina
Bluewater 103 $4,207,632 1 $55,529
Condominium
Myrtle Beach,
South Carolina
Cobblestone Villas 58 $2,101,438 -- $ --
Condominium
Myrtle Beach,
South Carolina
Carolina Pines 16 $ 449,483 -- $ --
Condominium
Conway, South Carolina
- ----------
(1) Loans over 60 days delinquent
In most cases, development was undertaken through joint ventures in
which a subsidiary of Coastal Mortgage Bankers made an equity investment and, as
a partner, participated in the profits or losses of the joint ventures. Coastal
Federal generally made loans to the joint ventures, subject to Coastal Federal's
underwriting standards and policies and generally with the personal guarantees
of the partners. Generally, Coastal Federal sold participations in the
construction loans, which had interest and fees at market rates, to other
financial institutions.
The business of real estate development involves substantial risks. In
addition, the development and sale of condominium projects is subject to a
number of federal and state statutes, including, but not limited to, the
Interstate Land Sales Full Disclosure Act, Federal Securities Act of 1933, state
"Blue Sky" laws, state real estate laws, Federal Unfair Trade Practices Act,
South Carolina Unfair Trade Practices Act and the Racketeer Influenced and
Corrupt Organizations Act, the violation of which could result in liability to
the participant. Furthermore, changes in the federal income tax laws have
reduced the attractiveness of rental property as an investment, which may
adversely affect the ability to sell these properties.
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 on a short-term basis to compensate
for reductions in the availability of funds from other sources. They may also be
used on a longer term basis 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.
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,
------------------------------------------------------------------------------------
1995 1996 1997
----------------- ------------------------------ ------------------------------
Percent Percent Percent
of of Increase of Increase
Amount Total Amount Total (Decrease) Amount Total (Decrease)
------ ----- ------ ----- ---------- ------ ----- ----------
(Dollars in thousands)
Transaction accounts:
NOW checking ............................. $ 29,852 10.93% $ 35,654 11.38% $ 5,802 $ 38,773 11.17 $ 3,119
Commercial checking ...................... 16,494 6.04 19,926 6.36 3,432 23,765 6.85 3,839
-------- ----- -------- ----- -------- --------- ----- --------
Total transaction accounts ................. 46,346 16.97 55,580 17.74 9,234 62,538 18.02 6,958
-------- ----- -------- ----- -------- --------- ----- --------
Money market demand accounts ............... 41,516 15.20 84,997 27.12 43,481 104,476 30.10 19,479
Savings accounts ........................... 46,421 17.00 42,840 13.66 (3,581) 39,445 11.36 (3,395)
Fixed-rate certificates (original maturity):
3 months .................................. 3,431 1.26 2,122 .68 (1,309) 1,826 .53 (296)
6 months .................................. 9,522 3.49 23,479 7.49 13,957 22,185 6.39 (1,294)
9 months .................................. 26,751 9.80 9,293 2.96 (17,458) 7,342 2.12 (1,951)
12 months ................................. 57,315 21.00 47,059 15.01 (10,256) 43,901 12.64 (3,158)
18 months ................................. 12,426 4.55 20,981 6.69 8,555 32,250 9.29 11,269
24 months ................................. 3,845 1.41 4,049 1.29 204 7,390 2.13 3,341
30 months ................................. 1,786 .65 2,189 .70 403 4,809 1.39 2,620
36 months ................................. 9,504 3.48 8,944 2.85 (560) 9,215 2.65 271
48 months ................................. 4,613 1.69 4,728 1.51 115 5,664 1.63 936
96 months ................................. 24 -- 26 .01 2 27 .01 1
Mini-jumbo ................................ -- -- -- -- -- -- -- --
Jumbo ..................................... -- -- -- -- -- -- -- --
-------- ----- -------- ----- -------- --------- ----- --------
129,217 47.33 122,870 39.20 (6,347) 134,609 38.78 11,739
-------- ----- -------- ----- -------- --------- ----- --------
Variable rate certificates:
(original maturity)
18 months ................................. 7,100 2.60 4,593 1.47 (2,507) 3,678 1.06 (915)
30 months ................................. 2,499 .90 2,550 .81 51 2,370 .68 (180)
-------- ----- -------- ----- -------- --------- ----- --------
Total variable ............................. 9,599 3.50 7,143 2.28 (2,456) 6,048 1.74 (1,095)
-------- ----- -------- ----- -------- --------- ----- --------
Total certificates ......................... 138,816 50.83 130,013 41.48 (8,803) 140,657 40.52 10,644
-------- ----- -------- ----- -------- --------- ----- --------
Total deposits ............................. $273,099 100.00% $313,430 100.00% $ 40,331 $ 347,116 100.00% $ 33,686
======== ====== ======== ====== ======== ========= ====== ========
Time Deposits by Maturity and Rate
The following table sets forth the amount and maturities of time deposits at
September 30, 1997.
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%........... $ 93,712 $13,956 $2,364 $ 547 $27 $110,606
6.00 - 8.00%........... 18,230 9,482 1,164 807 -- 29,683
8.01 - 10.00%.......... -- 266 102 -- -- 368
-------- ------- ------ ------ --- --------
Total................ $111,942 $23,704 $3,630 $1,354 $27 $140,657
======== ======= ====== ====== === ========
The following table sets forth the amount and maturities of time deposits
with balances of $100,000 or more at September 30, 1997.
Amount Due
----------------------------------------------------------------------------
Within Over 3 Over 6 Over 12
3 months through 6 months through 12 months Months
-------- ---------------- ----------------- ------
(In thousands)
$3,639 $11,141 $7,616 $8,240
====== ======= ====== ======
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.
Substantially all of Coastal Federal's depositors are residents of the State of
South Carolina.
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, 1997,
Coastal Federal had advances totaling $101.5 million from the FHLB of Atlanta
due on various dates through 2005 with a weighted average interest rate of
5.86%.
The FHLB of Atlanta functions as a central reserve bank providing
credit for savings 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 borrowings 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, 1997, the
Bank did not have any 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, 1997, the
Bank had $2.7 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,
---------------------------------
1995 1996 1997
---- ---- ----
(Dollars in thousands)
Outstanding balance:
Securities sold under agreements
to repurchase:
Customer ............................ $ 2,677 $ 3,365 $ 2,666
Broker .............................. -- --
Short-term FHLB advances .............. 36,989 54,404 68,620
Weighted average rate paid on:
Securities sold under agreements
to repurchase:
Customer ............................ 3.77% 3.57% 3.16%
Broker .............................. -- -- --
Short-term FHLB advances .............. 6.40 5.68 5.60
Maximum amount of borrowings outstanding
at any month end:
Securities sold under agreements
to repurchase:
Customer ............................ $ 3,448 $ 3,950 $ 3,257
Broker .............................. -- 12,840 37,516
Short-term FHLB advances .............. 85,078 68,213 75,020
Approximate average short-term borrowings
outstanding with respect to:
Securities sold under agreements
to repurchase:
Customer ............................ $ 1,700 $ 2,900 $ 2,100
Broker .............................. -- 4,100 17,200
Short-term FHLB advances .............. 61,400 56,600 74,023
Weighted average rate paid on:
Securities sold under agreements
to repurchase:
Customer ............................ 3.70% 3.55% 3.36%
Broker .............................. -- 5.40 5.60
Short-term FHLB advances .............. 6.17 5.68 5.60
Competition
As of September 30, 1997, Coastal Federal had the largest market share
(14.0%) of any financial institution located in Horry County, South Carolina
according to Sheshunoff Information Services, Inc. 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, 1997, the Company had 202 full-time Associates and
15 part-time Associates. The Associates are not represented by a collective
bargaining unit. The Bank believes its relationship with its Associates is
excellent.
REGULATION OF COASTAL FINANCIAL
General
The Corporation is a savings and loan holding company within the
meaning of the Home Owners' Loan Act of 1933 ("HOLA"), as amended by FIRREA. As
such, the Corporation is registered with the OTS and is subject to OTS
regulations, examinations, supervision and reporting requirements. As explained
more fully below under "Regulation of Coastal Federal - Federal Regulation of
Savings Associations," the key provisions of FIRREA replaced the Federal Home
Loan Bank Board ("FHLBB") with the OTS, abolished the Federal Savings and Loan
Insurance Corporation ("FSLIC") and vested the prior insurance responsibilities
of the FSLIC with the FDIC. As a subsidiary of a savings and loan holding
company, the Bank is subject to certain restrictions in its dealings with the
Corporation and with other companies affiliated with the Corporation and also is
subject to regulatory requirements and provisions as a federal savings and loan
association.
Holding Company Acquisitions
The HOLA and OTS regulations generally prohibit a savings and loan
holding company, without prior OTS approval, from acquiring any other savings
association or savings and loan holding company or controlling the assets
thereof. They also prohibit, among other things, any director or officer of a
savings and loan holding company, or any individual who owns or controls more
than 25 percent of the voting shares of such holding company, from acquiring
control of any savings association not a subsidiary of such savings and loan
holding company, unless the acquisition is approved by the OTS.
Holding Company Activities
As a unitary savings and loan holding company, the Corporation
generally is not subject to activity restrictions. If the Corporation acquires
control of another savings bank as a separate subsidiary, it would become a
multiple savings and loan holding company, and the activities of the Corporation
and any of its subsidiaries (other than the Bank or any other SAIF-insured
savings association) would become subject to such restrictions unless such other
associations each qualify as a QTL and were acquired in a supervisory
acquisition.
If the Bank fails the QTL test, the Corporation must obtain the
approval of the OTS prior to continuing after such failure, directly or through
its other subsidiaries, any business activity other than those approved for
multiple savings and loan holding companies or their subsidiaries. In addition,
within one year of such failure the Corporation must register as, and will
become subject to, the restrictions applicable to bank holding companies. The
activities authorized for a bank holding company are more limited than are the
activities authorized for a unitary or multiple savings and loan holding
company. See "-- Qualified Thrift Lender Test."
Coastal Financial must obtain approval from the OTS before acquiring
control of more than 5% of the voting shares of any other SAIF-insured
association. Such acquisitions generally are prohibited if they result in a
multiple savings and loan holding company controlling savings associations in
more than one state. However, such interstate acquisitions are permitted based
on specific state authorization or in a supervisory acquisition of a failing
savings association.
Affiliate Restrictions
The affiliate restrictions contained in Sections 23A and 23B of the
Federal Reserve Act apply to all federally insured savings associations and any
such "affiliate." A savings and loan holding company, its subsidiaries and any
other company under common control are considered affiliates of the subsidiary
savings association under the HOLA. Generally, Sections 23A and 23B: (i) limit
the extent to which the insured association or its subsidiaries may engage in
certain covered transactions with an affiliate to an amount equal to ten percent
of such institution's capital and surplus, and contain an aggregate limit on all
such transactions with all affiliates to an amount equal to twenty percent of
such capital and surplus, and (ii) require that all such transactions be on
terms substantially the same, or at least as favorable to the institution or
subsidiary, as those provided to a non-affiliate. The term "Covered transaction"
includes the making of loans, purchase of assets, issuance of a guarantee and
similar other types of transactions. Also, a savings association may not make
any loan to an affiliate unless the affiliate is engaged only in activities
permissible for bank holding companies. Only the Federal Reserve Board may grant
exemptions from the restrictions of Sections 23A and 23B. The OTS, however, may
impose more stringent restrictions on savings associations for reasons of safety
and soundness.
Qualified Thrift Lender Test
Any savings and loan holding company that controls a savings
association that fails the qualified thrift lender test, as explained under
"Regulation of Coastal Federal -- Qualified Thrift Lender Test", must, within
one year after the date on which the association ceases to be a qualified thrift
lender, register as and be deemed a bank holding company subject to all
applicable laws and regulations.
REGULATION OF COASTAL FEDERAL
General
The Bank is subject to extensive regulation, examination and
supervision by the OTS as its chartering agency, and the FDIC, as the insurer of
its deposits. The activities of federal savings institutions are governed by the
"HOLA" and, in certain respects, the Federal Deposit Insurance Act ("FDIA") and
the regulations issued by the OTS and the FDIC to implement these statutes.
These laws and regulations delineate the nature and extent of the activities in
which federal savings associations may engage. Lending activities and other
investments must comply with various statutory and regulatory capital
requirements. In addition, the Bank's relationship with its depositors and
borrowers is also regulated to a great extent, especially in such matters as the
ownership of savings accounts and the form and content of the Bank's mortgage
documents. The Bank must file reports with the OTS and the FDIC concerning its
activities and financial condition in addition to obtaining regulatory approvals
prior to entering into certain transactions such as mergers with, or
acquisitions of, other financial institutions. There are periodic examinations
by the OTS and the FDIC to review the Bank's compliance with various regulatory
requirements. The regulatory structure also gives the regulatory authorities
extensive discretion in connection with their supervisory and enforcement
activities and examination policies, including policies with respect to the
classification of assets and the establishment of adequate loan loss reserves
for regulatory purposes. Any change in such policies, whether by the OTS, the
FDIC or Congress, could have a material adverse impact on the Corporation, the
Bank and their operations. The Corporation, as a savings and loan holding
company, is also required to file certain reports with, and otherwise comply
with the rules and regulations of the OTS.
Proposed Federal Legislation
Legislation is proposed periodically providing for a comprehensive
reform of the banking and thrift industries, and has included provisions that
would (i) require federal savings associations to convert to a national bank or
a state-chartered bank or thrift, (ii) require all savings and loan holding
companies to become bank holding companies and (iii) abolish the OTS. It is
uncertain when or if any of this type of legislation will be passed, and if
passed, in what form the legislation would be passed.
As a result, management cannot accurately predict the possible impact of such
legislation on the Bank.
Federal Regulation of Savings Associations
Office of Thrift Supervision. The OTS is an office in the Department of
the Treasury subject to the general oversight of the Secretary of the Treasury.
Except as modified by FIRREA, the OTS possesses the supervisory and regulatory
duties and responsibilities formerly vested in the Federal Home Loan Bank Board.
Among other functions, the OTS issues and enforces regulations affecting
federally insured savings associations and regularly examines these
institutions.
Federal Deposit Insurance Corporation. The FDIC is an independent
federal agency established originally to insure the deposits, up to prescribed
statutory limits, of federally insured banks and to preserve the safety and
soundness of the banking industry. In 1989 the FDIC also became the insurer, up
to the prescribed limits, of the deposit accounts held at federally insured
savings associations and established two separate insurance funds: the Bank
Insurance Fund ("BIF") and the SAIF. As insurer of deposits, the FDIC has
examination, supervisory and enforcement authority over all savings
associations.
The Bank's accounts are insured by the SAIF. The FDIC insures deposits
at the Bank to the maximum extent permitted by law. The Bank currently pays
deposit insurance premiums to the FDIC based on a risk-based assessment system
established by the FDIC for all SAIF-member institutions. Under applicable
regulations, institutions are assigned to one of three capital groups which are
based solely on the level of an institution's capital -- "well capitalized,"
"adequately capitalized," and "undercapitalized" -- which are defined in the
same manner as the regulations establishing the prompt corrective action system
under Section 38 of the FDIA, as discussed below. These three groups are then
divided into three subgroups which reflect varying levels of supervisory
concern, from those which are considered to be healthy to those which are
considered to be of substantial supervisory concern. The matrix so created
results in nine assessment risk classifications, with rates currently ranging
from .23% of insured deposits for well capitalized, financially sound
institutions with only a few minor weaknesses to .31% of insured deposits for
undercapitalized institutions that pose a substantial risk of loss to the SAIF
unless effective corrective action is taken. Until the first half of 1996, the
same amounts applied to BIF member institutions. The FDIC is authorized to raise
assessment rates in certain circumstances. The Bank's assessments expensed for
the year ended September 30,1997, equaled $283,000.
Until the second half of 1995, the same matrix applied to BIF-member
institutions. As a result of the BIF having reached its designated reserve
ratio, effective January 1, 1996, the FDIC substantially reduced deposit
insurance premiums for well-capitalized, well-managed, financial institutions
that are members of the BIF. Under the new assessment schedule, rates were
reduced to a range of 0 to 27 basis points, with approximately 92% of BIF
members paying the statutory minimum annual assessment rate of $2,000. Pursuant
to the Deposit Insurance Fund ("DIF"), which was enacted on September 30, 1996,
the FDIC imposed a special one-time assessment on each depository institution
with SAIF-assessable deposits so that the SAIF may achieve its designated
reserve ratio. The Bank's assessment amounted to $1.6 million and was accrued
during the quarter ended September 30, 1996. Beginning January 1, 1997, the
assessment schedule for SAIF members will be the same as that for BIF members.
In addition, beginning January 1, 1997, SAIF members will be charged an
assessment of approximately 0.065% of SAIF-assessable deposits for the purpose
of paying interest on the obligations issued by the Financing Corporation
("FICO") in the 1980s to help fund the thrift industry cleanup. BIF-assessable
deposits will be charged an assessment to help pay interest on the FICO bonds at
a rate of approximately 0.013% until the earlier of December 31, 1999 or the
date upon which the last savings association ceases to exist, after which time
the assessment will be the same for all insured deposits.
The FDIC may terminate the deposit insurance of any insured depository
institution if it determines after a hearing that the institution has engaged or
is engaging in unsafe or unsound practices, is in an unsafe or unsound condition
to continue operations, or has violated any applicable law, regulation, order or
any condition imposed by an agreement with the FDIC. It also may suspend deposit
insurance temporarily during the hearing process for the permanent termination
of insurance, if the institution has no tangible capital. If insurance of
accounts is terminated, the accounts at the institution at that time, less
subsequent withdrawals, shall continue to be insured for a period of six months
to two years, as determined by the FDIC. Management is unaware of any existing
circumstance which could result in termination of the deposit insurance of the
Bank.
Federal Home Loan Bank System. The FHLB System, consisting of 12 FHLBs,
now is under the jurisdiction of the Federal Housing Finance Board ("FHFB"). The
designated duties of the FHFB are to: supervise the FHLBs; ensure that the FHLBs
carry out their housing finance mission; ensure that the FHLBs remain adequately
capitalized and able to raise funds in the capital market; and ensure that the
FHLBs operate in a safe and sound manner.
The Bank, as a member of the FHLB-Atlanta, is required to acquire and
hold shares of capital stock in the FHLB-Atlanta in an amount equal to the
greater of (i) 1.0% of the aggregate outstanding principal amount of residential
mortgage loans, home purchase contracts and similar obligations at the beginning
of each year, or (ii) 1/20 of its advances (borrowings) from the FHLB-Atlanta.
The Bank is in compliance with this requirement with an investment in
FHLB-Atlanta stock of $5.6 million at September 30, 1997.
Among other benefits, the FHLB provides a central credit facility
primarily for member institutions. It is funded primarily from proceeds derived
from the sale of consolidated obligations of the FHLB System. It makes advances
to members in accordance with policies and procedures established by the FHFB
and the Board of Directors of the FHLB-Atlanta.
Liquidity Requirements. Under OTS regulations, each savings institution
is required to maintain an average daily balance of liquid assets (cash, certain
time deposits and savings accounts, bankers' acceptances, and specified U.S.
Government, state or federal agency obligations and certain other investments)
equal to a monthly average of not less than a specified percentage (currently
4.0%) of its net withdrawable accounts plus short-term borrowings. Monetary
penalties may be imposed for failure to meet liquidity requirements. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" contained in the Annual Report
Prompt Corrective Action. Under the FDIA, as added by the Federal
Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), each federal
banking agency is required to implement a system of prompt corrective action for
institutions which it regulates. The federal banking agencies have promulgated
substantially similar regulations to implement this system of prompt corrective
action. Under the regulations, an institution shall be deemed to be (i) "well
capitalized" if it has a total risk-based capital ratio of 10.0% or more, has a
Tier I risk-based capital ratio of 6.0% or more, has a Tier I leverage capital
ratio of 5.0% or more and is not subject to specified requirements to meet and
maintain as specific capital level for any capital measure; (ii) "adequately
capitalized" if it has a total risk-based capital ratio of 8.0% or more, a Tier
I risk-based capital ratio of 4.0% or more and a Tier I leverage capital ratio
of 4.0% or more (3.0% under certain circumstances) and does not meet the
definition of "well capitalized;" (iii) "undercapitalized" if it has a total
risk-based capital ratio that is less than 8.0%, a Tier I risk-based capital
ratio that is less than 4.0% or a Tier I leverage capital ratio that is less
than 4.0% (3.0% under certain circumstances); (iv) "significantly
undercapitalized" if it has a total risk-based capital ratio that is less than
6.0%, a Tier I risk-based capital ratio that is less than 3.0% or a Tier I
leverage capital ratio that is less than 3.0%; and (v) "critically
undercapitalized" if it has a ratio of tangible equity to total assets that is
equal to or less than 2.0%.
The FDIA and the implementing regulations also provide that a federal
banking agency may, after notice and an opportunity for a hearing, reclassify a
well capitalized institution as adequately capitalized and may require an
adequately capitalized institution or an undercapitalized institution to comply
with supervisory actions as if it were in the next lower category if the
institution is in an unsafe or unsound condition or engaging in an unsafe or
unsound practice. (The OTS may not, however, reclassify a significantly
undercapitalized institution as critically undercapitalized.)
An institution generally must file a written capital restoration plan
which meets specified requirements, as well as a performance guaranty by each
company that controls the institution, with the appropriate federal banking
agency within 45 days of the date that the institution receives notice or is
deemed to have notice that it is undercapitalized, significantly
undercapitalized or critically undercapitalized. Immediately upon becoming
undercapitalized, an institution shall become subject to the provisions of
Section 38 of the FDIA, which sets forth various mandatory and discretionary
restrictions on its operations.
At September 30, 1997, the Bank was categorized as "well capitalized"
under the prompt corrective action regulations of the OTS.
Standards for Safety and Soundness. The FDIA requires the federal
banking regulatory agencies to prescribe, by regulation, standards for all
insured depository institutions relating to: (i) internal controls, information
systems and internal audit systems; (ii) loan documentation; (iii) credit
underwriting; (iv) interest rate risk exposure; (v) asset growth; and (vi)
compensation, fees and benefits. The federal banking agencies recently adopted
final regulations and Interagency Guidelines Prescribing Standards for Safety
and Soundness ("Guidelines") to implement safety and soundness standards
required by the FDIA. 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. The agencies
also proposed asset quality and earnings standards which, if adopted in final,
would be added to the Guidelines. Under the final regulations, if the OTS
determines that the Bank fails to meet any standard prescribed by the
Guidelines, the agency may require the Bank to submit to the agency an
acceptable plan to achieve compliance with the standard, as required by the
FDIA. The final regulations establish deadlines for the submission and review of
such safety and soundness compliance plans.
Qualified Thrift Lender Test
All savings associations are required to meet a qualified thrift lender
("QTL") test set forth in the HOLA and regulations of the OTS thereunder to
avoid operating certain restrictions. A savings institution that fails to become
or remain a QTL shall either become a national bank or be subject to the
following restrictions on its operations: (i) the association may not make any
new investment or engage in activities that would not be permissible for
national banks; (ii) the association may not establish any new branch office
where a national bank located in the savings institution's home state would not
be able to establish a branch office; (iii) the association shall be ineligible
to obtain new advances from any FHLB; and (iv) the payment of dividends by the
association shall be subject to the rules regarding the statutory and regulatory
dividend restrictions applicable to national banks. Also, beginning three years
after the date on which the savings institution ceases to be a QTL, the savings
institution would be prohibited from retaining any investment or engaging in any
activity not permissible for a national bank and would be required to repay any
outstanding advances to any FHLB. In addition, within one year of the date on
which savings association controlled by a company ceases to be a QTL, the
company must register as a bank holding company and become subject to the rules
applicable to such companies. A savings institution may requalify as a QTL if it
thereafter complies with the QTL test.
Currently, the QTL test requires that either an institution qualify as
a domestic building and loan association under the Code or that 65% of an
institution's "portfolio assets" (as defined) consist of certain housing and
consumer-related assets on a monthly average basis in nine out of every 12
months. Assets that qualify without limit for inclusion as part of the 65%
requirement are loans made to purchase, refinance, construct, improve or repair
loans; mortgage-backed securities (where the mortgages are secured by domestic
residential housing or manufactured housing); FHLB stock; direct or indirect
obligations of the FDIC; and loans for educational purposes, loans to small
businesses and loans made through credit cards. In addition, the following
assets, among others, may be included in meeting the test subject to an overall
limit of 20% of the savings institution's portfolio assets: 50% of residential
mortgage loans originated and sold within 90 days of origination; 100% of
consumer loans; and stock issued by the FHLMC or the FNMA. Portfolio assets
consist of total assets minus the sum of (i) goodwill and other intangible
assets, (ii) property used by the savings institution to conduct its business,
and (iii) liquid assets up to 20% of the institution's total assets. At
September 30, 1997, the Bank's qualified thrift investments exceeded 65% of its
portfolio assets as required by regulation.
Capital Requirements. Under OTS regulations a savings association must
satisfy three minimum capital requirements: core capital, tangible capital and
risk-based capital. Savings associations must meet all of the standards in order
to comply with the capital requirements. The Corporation is not subject to any
minimum capital requirements.
OTS capital regulations establish a 3% core capital ratio (defined as
the ratio of core capital to adjusted total assets). Core capital is defined to
include common stockholders' equity, noncumulative perpetual preferred stock and
any related surplus, and minority interests in equity accounts of consolidated
subsidiaries, less (i) any intangible assets; and (ii) equity and debt
investments in subsidiaries that are not "includable subsidiaries," which is
defined as subsidiaries engaged solely in activities not impermissible for a
national bank, engaged in activities impermissible for a national bank but only
as an agent for its customers, or engaged solely in mortgage-banking activities.
In calculating adjusted total assets, adjustments are made to total assets to
give effect to the exclusion of certain assets from capital and to appropriately
account for the investments in and assets of both includable and nonincludable
subsidiaries. Institutions that fail to meet the core capital requirement would
be required to file with the OTS a capital plan that details the steps they will
take to reach compliance. In addition, the OTS' prompt corrective action
regulation provides that a savings institution that has a core capital leverage
ratio of less than 4% (3% for institutions receiving the highest CAMEL
examination rating) will be deemed to be "undercapitalized" and may be subject
to certain restrictions. See "-- Prompt Corrective Action."
As required by federal law, the OTS has proposed a rule revising its
minimum core capital requirement to be no less stringent than that imposed on
national banks. The OTS has proposed that only those savings associations rated
a composite one (the highest rating) under the CAMEL rating system for savings
associations will be permitted to operate at or near the regulatory minimum
leverage ratio of 3%. All other savings associations will be required to
maintain a minimum leverage ratio of 4% to 5%. The OTS will assess each
individual savings association through the supervisory process on a case-by-case
basis to determine the applicable requirement. No assurance can be given as to
the final form of any such regulation, the date of its effectiveness or the
requirement applicable to the Bank.
Savings associations also must maintain "tangible capital" not less
than 1.5% of the Bank's adjusted total assets. "Tangible capital" is defined,
generally, as core capital minus any "intangible assets."
Each savings institution must maintain total capital equal to at least
8% of risk-weighted assets. Total capital consists of the sum of core and
supplementary capital, provided that supplementary capital cannot exceed core
capital, as previously defined. Supplementary capital includes (i) permanent
capital instruments such as cumulative perpetual preferred stock, perpetual
subordinated debt, and mandatory convertible subordinated debt, (ii) maturing
capital instruments such as subordinated debt, intermediate-term preferred stock
and mandatory redeemable preferred stock, subject to an amortization schedule,
and (iii) general valuation loan and lease loss allowances up to 1.25% of
risk-weighted assets.
The risk-based capital regulation assigns each balance sheet asset held
by a savings institution to one of four risk categories based on the amount of
credit risk associated with that particular class of assets. Assets not included
for purposes of calculating capital are not included in calculating
risk-weighted assets. The categories range from 0% for cash and securities that
are backed by the full faith and credit of the U.S. Government to 100% for
repossessed assets or assets more than 90 days past due. Qualifying residential
mortgage loans (including multi-family mortgage loans) are assigned a 50% risk
weight. Consumer, commercial, home equity and residential construction loans are
assigned a 100% risk weight, as are nonqualifying residential mortgage loans and
that portion of land loans and nonresidential construction loans which do not
exceed an 80% loan-to-value ratio. The book value of assets in each category is
multiplied by the weighing factor (from 0% to 100%) assigned of that category.
These products are then totaled to arrive at total risk-weighted assets.
Off-balance sheet items are included in risk-weighted assets by converting them
to an approximate balance sheet "credit equivalent amount" based on a conversion
schedule. These credit equivalent amounts are then assigned to risk categories
in the same manner as balance sheet assets and included risk-weighted assets.
The OTS has incorporated an interest rate risk component into its
regulatory capital rule. Under the rule, savings associations with "above
normal" interest rate risk exposure would be subject to a deduction from total
capital for purposes of calculating their risk-based capital requirements. A
savings association's interest rate risk is measured by the decline in the net
portfolio value of its assets (i.e., the difference between incoming and
outgoing discounted cash flows from assets, liabilities and off-balance sheet
contracts) that would result from a hypothetical 200 basis point increase or
decrease in market interest rates divided by the estimated economic value of the
association's assets, as calculated in accordance with guidelines set forth by
the OTS. A savings association whose measured interest rate risk exposure
exceeds 2% must deduct an interest rate risk component in calculating its total
capital under the risk-based capital rule. The interest rate risk component is
an amount equal to one-half of the difference between the institution's measured
interest rate risk and 2%, multiplied by the estimated economic value of the
association's assets. That dollar amount is deducted from an association's total
capital in calculating compliance with its risk-based capital requirement. Under
the rule, there is a two quarter lag between the reporting date of an
institution's financial data and the effective date for the new capital
requirement based on that data. A savings association with assets of less than
$300 million and risk-based capital ratios in excess of 12% is not subject to
the interest rate risk component, unless the OTS determines otherwise. The rule
also provides that the Director of the OTS may waive or defer an association's
interest rate risk component on a case-by-case basis. Under certain
circumstances, a savings association may request an adjustment to its interest
rate risk component if it believes that the OTS-calculated interest rate risk
component overstates its interest rate risk exposure. In addition, certain
"well-capitalized" institutions may obtain authorization to use their own
interest rate risk model to calculate their interest rate risk component in lieu
of the OTS-calculated amount. The OTS has postponed the date that the component
will first be deducted from an institution's total capital until savings
associations become familiar with the process for requesting an adjustment to
its interest rate risk component.
At September 30, 1997, Coastal Federal's core capital of approximately
$31.2 million, or 6.31% of adjusted total assets, was $16.5 million in excess of
the OTS requirement of $14.7 million, or 3% of adjusted total assets. As of such
date, the Bank's tangible capital of approximately $31.2 million, or 6.31% of
adjusted total assets, was $23.8 million in excess of the OTS requirement of
$7.4 million, or 1.5% of adjusted total assets. Finally, at September 30, 1997,
the Bank had risk-based capital of approximately $34.7 million or 11.05% of
total risk-weighted assets, which was $9.6 million in excess of the OTS
risk-based capital requirement of $25.1 million or 8% of risk-weighted assets.
See note 12 on page 28 of the Company's Annual Report to Stockholders for the
fiscal year ended September 30, 1997.
Limitations On Capital Distributions. OTS regulations impose uniform
limitations on the ability of all savings associations to engage in various
distributions of capital such as dividends, stock repurchases and cash-out
mergers. In addition, OTS regulations require the Bank to give the OTS 30 days'
advance notice of any proposed declaration of dividends, and the OTS has the
authority under its supervisory powers to prohibit the payment of dividends. The
regulation utilizes a three-tiered approach which permits various levels of
distributions based primarily upon a savings association's capital level.
A Tier 1 savings association generally has capital in excess of its
fully phased-in capital requirement (both before and after the proposed capital
distribution) and has not been notified by the OTS that it is in need of more
than normal supervision. A Tier 1 savings association may make (without
application but upon prior notice to, and no objection made by, the OTS) capital
distributions during a calendar year up to 100% of its net income to date during
the calendar year plus one-half its surplus capital ratio (i.e., the amount of
capital in excess of its fully phased-in requirement) at the beginning of the
calendar year. Capital distributions in excess of such amount require advance
approval from the OTS.
A savings association with either (i) capital equal to or in excess of
its minimum capital requirement but below its fully phased-in capital
requirement (both before and after the proposed capital distribution), or (ii)
capital in excess of its fully phased-in capital requirement (both before and
after the proposed capital distribution) but which has been notified by the OTS
that it is in need of more than normal supervision may be designated by the OTS
as a Tier 2 association. Such an association may make (without application)
capital distributions up to an amount equal to 75% of its net income during the
previous four quarters depending on how close the association is to meeting its
fully phased-in capital requirement. Capital distributions exceeding this amount
require prior OTS approval.
Tier 3 associations include savings associations with either (i)
capital below the minimum capital requirement (either before or after the
proposed capital distribution), or (ii) capital in excess of the fully phased-in
capital requirement but which has been notified by the OTS that it shall be
treated as a Tier 3 association because it is in need of more than normal
supervision. Tier 3 associations may not make any capital distributions without
prior approval from the OTS.
The Bank is currently meeting the criteria to be designated a Tier 1
association and, consequently, could at its option (after prior notice to, and
no objection made by, the OTS) distribute up to 100% of its net income during
the calendar year plus 50% of its surplus capital ratio at the beginning of the
calendar year less any distributions previously paid during the year.
Loans to One Borrower. Under the HOLA, savings institutions are
generally subject to the national bank limit on loans to one borrower.
Generally, this limit is 15% of the Bank's unimpaired capital and surplus, plus
an additional 10% of unimpaired capital and surplus, if such loan is secured by
readily-marketable collateral, which is defined to include certain financial
instruments and bullion. The OTS by regulation has amended the loans to one
borrower rule to permit savings associations meeting certain requirements,
including capital requirements, to extend loans to one borrower in additional
amounts under circumstances limited essentially to loans to develop or complete
residential housing units. At September 30, 1997, the Bank's limit on loans to
one borrower was $5.2 million. However, the Bank may request to increase its
loan to one borrower for borrowers who develop one to four family residential
projects. At September 30, 1997, the Bank's largest aggregate amount of loans to
one borrower was $5.6 million, all of which was performing according to its
terms. The Bank received permission to increase the loan to one borrower limit
on this borrower.
Activities of Savings Associations and Their Subsidiaries. FIRREA
provides that, when a savings association establishes or acquires a subsidiary
or elects to conduct any new activity through a subsidiary that the association
controls, the savings association shall notify the FDIC and the OTS 30 days in
advance and provide the information each agency may, by regulation, require.
Savings associations also must conduct the activities of subsidiaries in
accordance with existing regulations and orders.
The OTS may determine that the continuation by a savings association of
its ownership control of, or its relationship to, the subsidiary constitutes a
serious risk to the safety, soundness or stability of the association or is
inconsistent with sound banking practices or with the purposes of the FDIA.
Based upon that determination, the FDIC or the OTS has the authority to order
the savings association to divest itself of control of the subsidiary. The FDIC
also may determine by regulation or order that any specific activity poses a
serious threat to the SAIF. If so, it may require that no SAIF member engage in
that activity directly.
Transactions with Affiliates. Pursuant to FIRREA, savings associations
must comply with Sections 23A and 23B of the Federal Reserve Act ("Sections 23A
and 23B") relative to transactions with affiliates in the same manner and to the
same extent as if the savings association were a Federal Reserve member bank. A
savings and loan holding company, its subsidiaries and any other company under
common control are considered affiliates of the subsidiary savings association
under the HOLA. Generally, Sections 23A and 23B: (i) limit the extent to which
the insured association or its subsidiaries may engage in certain covered
transactions with an affiliate to an amount equal to 10% of such institution's
capital and surplus and place an aggregate limit on all such transactions with
affiliates to an amount equal to 20% of such capital and surplus, and (ii)
require that all such transactions be on terms substantially the same, or at
least as favorable to the institution or subsidiary, as those provided to a
non-affiliate. The term "covered transaction" includes the making of loans,
purchase of assets, issuance of a guaranty and similar other types of
transactions.
Three additional rules apply to savings associations under FIRREA: (i)
a savings association may not make any loan or other extension of credit to an
affiliate unless that affiliate is engaged only in activities permissible for
bank holding companies; (ii) a savings association may not purchase or invest in
securities issued by an affiliate (other than securities of a subsidiary); and
(iii) the OTS may, for reasons of safety and soundness, impose more stringent
restrictions on savings associations but may not exempt transactions from or
otherwise abridge Section 23A or 23B. Exemptions from Section 23A or 23B may be
granted only by the Federal Reserve Board, as is currently the case with respect
to all FDIC-insured banks. The Bank has not been significantly affected by the
rules regarding transactions with affiliates.
The Bank's authority to extend credit to executive officers, directors
and 10% shareholders, as well as entities controlled by such persons, is
currently governed by Sections 22(g) and 22(h) of the Federal Reserve Act, and
Regulation O thereunder. Among other things, these regulations require that such
loans be made on terms and conditions substantially the same as those offered to
unaffiliated individuals and not involve more than the normal risk of repayment.
Regulation O also places individual and aggregate limits on the amount of loans
the Bank may make to such persons based, in part, on the Bank's capital
position, and requires certain board approval procedures to be followed. The OTS
regulations, with certain minor variances, apply Regulation O to savings
institutions.
Regulatory and Criminal Enforcement Provisions. Under the FDIA, the OTS
has primary enforcement responsibility over savings institutions and has the
authority to bring action against all "institution-affiliated parties,"
including stockholders, and any attorneys, appraisers and accountants who
knowingly or recklessly participate in wrongful action likely to have an adverse
effect on an insured institution. Formal enforcement action may range from the
issuance of a capital directive or cease and desist order to removal of officers
or directors, receivership, conservatorship or termination of deposit insurance.
Civil penalties cover a wide range of violations and can amount to $25,000 per
day, or $1 million per day in especially egregious cases. Under the FDIA, the
FDIC has the authority to recommend to the Director of the OTS that enforcement
action be taken with respect to a particular savings institution. If action is
not taken by the Director, the FDIC has authority to take such action under
certain circumstances. Federal law also establishes criminal penalties for
certain violations.
TAXATION
Federal Taxation
General. The Corporation and the Bank report their income via a
consolidated return on a fiscal year basis using the accrual method of
accounting and are subject to federal income taxation in the same manner as
other corporations with some exceptions, including particularly the Bank's
reserve for bad debts discussed below. The following discussion of tax matters
is intended only as a summary and does not purport to be a comprehensive
description of the tax rules applicable to the Bank or the Corporation.
Tax Bad Debt Reserves. For taxable years beginning prior to January 1,
1996, savings institutions such as the Bank which met certain definitional tests
primarily relating to their assets and the nature of their business ("qualifying
thrifts") were permitted to establish a reserve for bad debts and to make annual
additions thereto, which additions may, within specified formula limits, have
been deducted in arriving at their taxable income. The Bank's deduction with
respect to "qualifying loans," which are generally loans secured by certain
interests in real property, may have been computed using an amount based on the
Bank's actual loss experience, or a percentage equal to 8% of the Bank's taxable
income, computed with certain modifications and reduced by the amount of any
permitted additions to the nonqualifying reserve. Each year the Bank selected
the most favorable way to calculate the deduction attributable to an addition to
the tax bad debt reserve. The Bank used the percentage-of-taxable-income method
for the taxable years ended September 30, 1995 and 1996. For the period ending
September 30, 1997, the Bank was required to change its tax method of accounting
for bad debts to the experience method.
Recently enacted legislation repealed the reserve method of accounting
for bad debt reserves for tax years beginning after December 31, 1995. As a
result, savings associations will no longer be able to calculate their deduction
for bad debts using the percentage-of-taxable-income method. Instead, they will
be required to compute their deduction based on specific charge-offs during the
taxable year or, if the savings association or its controlled group had assets
of less than $500 million, based on actual loss experience over a period of
years. For the taxable year ended September 30, 1997, the controlled group has
assets less than $500 million. The legislation also requires savings
associations to recapture into taxable income over a six-year period their
post-1987 additions to their bad debt tax reserves, thereby generating
additional current tax liability. At September 30, 1997, the Bank's post-1987
reserves totaled approximately $1.53 million. The recapture may be suspended for
up to two years if, during those years, the institution satisfies a residential
loan requirement. The Bank anticipates meeting the residential loan requirement
for the taxable year ending September 30, 1997.
Under prior law, if the Bank failed to satisfy the qualifying thrift
definition tests in any taxable year, it would be unable to make additions to
its bad debt reserve. Instead, the Bank would be required to deduct bad debts as
they occur and would additionally be required to recapture its bad debt reserve
deductions ratably over a multi-year period. At September 30, 1997, the Bank's
total bad debt reserve for tax purposes was approximately $ 6.71 million. Among
other things, the qualifying thrift definitional tests required the Bank to hold
at least 60% of its assets as "qualifying assets". Qualifying assets generally
include cash, obligations of the United States or any agency or instrumentality
thereof, certain obligations of a state or political subdivision thereof, loans
secured by interests in improved residential real property or by savings
accounts, student loans and property used by the Bank in the conduct of its
banking business. Under current law, a savings association will not be required
to recapture its pre-1988 bad debt reserves if it ceases to meet the qualifying
thrift definitional tests. However, if the Bank fails to meet the definition of
a "bank" under Internal Revenue Code Section 581 it will be required to
recapture its pre-1988 tax bad debt reserves. The Bank anticipates meeting the
definition of a "bank" in the future.
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%. For years
beginning before December 31, 1995, the excess of the tax bad debt reserve
deduction using the percentage of taxable income method over the deduction that
would have been allowable under the experience method was treated as a
preference item for purposes of computing the AMTI. In addition, 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 (determined without regard to this preference and prior to
reduction for net operating losses). For taxable years beginning after December
31, 1986, and before January 1, 1996, an environmental tax of .12% of the excess
of AMTI (with certain modification) over $2.0 million is imposed on
corporations, including the Bank, whether or not an Alternative Minimum Tax
("AMT") is paid.
Dividends-Received Deduction and Other Matters. The Corporation may
exclude from its income 100% of dividends received from the Bank as a member of
the same affiliated group of corporations. The corporate dividends-received
deduction is generally 70% in the case of dividends received from unaffiliated
corporations with which the Corporation and the Bank will not file a
consolidated tax return, except that if the Corporation or the Bank owns more
than 20% of the stock of a corporation distributing a dividend, then 80% of any
dividends received may be deducted.
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.
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, 1997.
Total Investment
Including Land, Net Book Approximate
Year Building, Furni- Value as of Square Owned/
Location Opened ture and Fixtures 9/30/97 Footage Leased
- -------- ------ ----------------- ------- ------- ------
(Dollars in thousands)
Main Office
2619 Oak St. 1980 $6,864 $2,929 25,000 Owned
Myrtle Beach, SC (1)
Dunes Office
7500 North Kings Hwy 1971 543 157 2,000 Owned
Myrtle Beach, SC
Ocean Drive Office
521 Main Street 1973 989 535 4,100 Owned
North Myrtle Beach, SC
Surfside Office
112 Highway 17 South 1975 642 220 2,300 Owned
& Glenns Bay Road
Surfside Beach, SC
Conway Office
310 Highway 378 1976 909 315 2,882 Owned
Conway, SC
Socastee Office
1 Cimerron Drive 1981 807 254 2,275 Owned
Myrtle Beach, SC
Murrells Inlet Office
Highway 17 South 1986 1,075 636 3,450 Owned
Murrells Inlet, SC
Waccamaw Medical Pk Office
7000 Waccamaw Medical Pk Rd 1986 632 361 1,450 Owned
Conway, SC
Florence Office
1385 Alice Drive 1996 365 317 2,500 Leased
Florence, SC
Coastal Mortgage Bankers and
Realty Co., Inc.
2619 Oak Street 1970 2 0 N/A N/A
Myrtle Beach, SC
Total Investment
Including Land, Net Book Approximate
Year Building, Furni- Value as of Square Owned/
Location Opened ture and Fixtures 9/30/97 Footage Leased
- -------- ------ ----------------- ------- ------- ------
(Dollars in thousands)
Coastal Investments
Corporation
2619 Oak Street 1987 72 40 N/A N/A
Myrtle Beach, SC
Coastal Federal Mortgage, Inc.
1385 Alice Drive 1995 170 138 1,038 Leased
Florence, SC
Total Investment
Including Land, Net Book
Year Building, Furni- Value as of Square Owned/
Location Opened ture and Fixtures 9/30/97 Footage Leased
- -------- ------ ----------------- ------- ------- ------
(Dollars in thousands)
Sunset Beach Office
7290 Beach Drive, SW 1994 26 19 900 Leased
Sunset Beach, NC
South Brunswick Office Under
1625 Seaside Road S.W. Construction 496 496 3,000 Owned
Sunset Beach, NC
Mall Plaza 1997 1,143 1,143 17,500 Owned
504 27th Avenue North
Myrtle Beach, SC
- ------------
(1) The original main office was located at 816 North Kings Highway and opened
in January 1954. The main office was moved to its new location in 1980.
The net book value of the Company's investment in office, properties
and equipment totaled $7.6 million at September 30, 1997. See Note 6 of 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.
The Company began working on year 2000 compliance issues in early 1997.
Its data processor is currently 65% complete with their programming. Testing
will begin in July 1998 and the Company expects to be in full compliance by
December 31, 1998. Internal software applications and hardware compliance issues
will be resolved by December 31, 1998, to allow testing in early 1999. The
Company believes it has adequate resources and funds to address the year 2000
issues. The Company is also in the process of addressing any loan relationships
it believes could be materially effected by year 2000 issues.
Item 3. Legal Proceedings
The Bank is a defendant in one significant lawsuit as summarized below.
The action commenced on December 1, 1997, and the Plaintiffs are
seeking approximately $1.5 million in actual damages as well as punitive
damages. The cause of action is breach of fiduciary duties, negligence, fraud,
civil conspiracy and breach of contract arising out of a lending relationship.
At this date, the Bank does not know if or when the action will go to trial. The
Bank will vigorously defend this suit and does not anticipate any settlement
discussions.
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, 1997
("Annual Report") is incorporated herein by reference.
Item 6. Selected Financial Data
The information contained in the section captioned "Selected 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 words: anticipate, estimate, expect, project, target, goal, and
similar expressions, when used in disclosure documents, are intended to identify
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933. Such forward-looking statements are subject to certain risks,
uncertainties, and assumptions including those set forth below. Should one or
more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from those
expected or projected. These forward-looking statements speak only as of the
date of the document. The Bank expressly disclaims any obligation or undertaking
to publicly release any updates or revisions to any forward-looking statement
contained herein to reflect any change in the Bank's expectations with regard to
any change in events, conditions or circumstances on which any such statement is
based.
The Bank's Asset Liability Management Committee ("ALCO") monitors and
considers methods of managing exposure to interest rate risk. The Bank's
exposure to interest rate risk is reviewed on at least a quarterly basis by the
Board of Directors and the ALCO. Interest rate risk exposure is measured using
interest rate sensitivity analysis to determine the Bank's change in net
portfolio value in the event of hypothetical changes in interest rates. The ALCO
is charged with the responsibility to maintain the level of sensitivity of the
Bank's net portfolio value within Board approved limits.
Net portfolio value represents the market value of portfolio equity and
is equal to the market value of assets minus the market value of liabilities,
with adjustments made for off-balance sheet items over a range of assumed
changes in market interest rates. The Bank's Board of Directors has adopted an
interest rate risk policy which establishes maximum allowable decreases in NPV
in the event of a sudden and sustained one hundred to four hundred basis point
increase or decrease in market interest rates. The following table presents the
Bank's projected change in NPV for the various rate shock levels as of September
30, 1997.
Market Value of
Change in Interest Rates Board Limit Portfolio Equity Percent Change
- ------------------------ ----------- ---------------- --------------
(In Thousands)
400 basis point rise -44.00 % $ 41,209 -24.68 %
300 basis point rise -32.00 % $ 46,331 -15.32 %
200 basis point rise -20.00 % $ 50,635 - 7.46 %
100 basis point rise -11.00 % $ 53,617 - 2.01 %
No Change 00 % $ 54,715
100 basis point decline -18.00 % $ 54,194 - 0.95 %
200 basis point decline -22.00 % $ 53,561 - 2.11 %
300 basis point decline -37.00 % $ 53,924 - 1.45 %
400 basis point decline -55.00 % $ 55,573 1.57 %
The preceding table indicates that at September 30, 1997, in the event of a
sudden and sustained increase in prevailing market interest rates, the Bank's
NPV would be expected to decrease, and that in the event of a sudden decrease in
prevailing market interest rates, the Bank's NPV would be expected to change
minimally. At September 30, 1997, the Bank's estimated changes in NPV were
within the limits established by the Board of Directors.
Computation of prospective effects of hypothetical interest rate changes are
based on numerous assumptions, including relative levels of market interest
rates, loan prepayments and deposit decay, and should not be relied upon as
indicative of actual results. Further, the computations do not contemplate any
actions the ALCO could undertake in response to changes in interest rates.
The Bank also uses interest rate sensitivity gap analysis to monitor the
relationship between the maturity and repricing of its interest-earning assets
and interest-bearing liabilities. Interest rate sensitivity gap is defined as
the difference between the amount of interest-earning assets maturing or
repricing within a specific time period and the amount of interest-bearing
liabilities maturing or repricing within the same time period. A gap is
considered positive when the amount of interest-rate-sensitive assets exceeds
the amount of interest-rate-sensitive liabilities. Generally, during a period of
rising rates, a positive gap would result in an increase in net interest income.
Conversely, during a period of falling interest rates, a positive gap would
result in a decrease in net interest income. Management's goal is to maintain
reasonable balance between exposure to interest rate fluctuations and earnings.
The Company's one-year cumulative gap is a positive $.5 million, or .11% of the
Company's total assets of $494.0 million at September 30, 1997. For futher
information concerning the Bank's market risk, see the table on page 14 of this
document.
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 disclosures.
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
1998 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.
Executive Officers of the Registrant
Name, Age and Position Business Experience
- ---------------------- -------------------
Michael C. Gerald, 48, Mr. Gerald has been associated with
President, Chief Executive Coastal Federal since 1974 and serves as
Officer and a Director 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 Federal
Mortgage and Coastal Investments
Corporation. He currently serves on the
Board of Visitors of Coastal Carolina
University's Wall School of Business
Administration and Computer Science, the
Governmental Affairs Committee of
America's Community Bankers, the Board
of Directors of the Institute of
Financial Education, the Board of
Trustees of the Franklin G. Burroughs
and Simeon B. Chapin Art Museum and is a
member of the Board of Directors of the
Coastal Education Foundation.
Jimmy R. Graham, 49, Mr. Graham serves as Executive Vice
Executive Vice President and President and Information Systems Group
Information Systems Group Leader of Coastal Federal. Mr. Graham
Leader serves as Executive Vice President of
Coastal Financial Corporation. He has
been associated with the Bank since
1977.
Jerry L. Rexroad, CPA, 37, Mr. Rexroad joined the Company in April
Executive Vice President and 1995 and is Executive Vice President and
Chief Financial Officer Chief Financial Officer of Coastal
Federal and Coastal Financial
Corporation. Mr. Rexroad also serves as
the Chief Financial Officer and a
Director for Coastal Federal Mortgage
Bankers & Realty Company, Inc., Coastal
Investments Corporation, and Coastal
Federal Mortgage. He currently serves as
Chairman of the Junior Achievement Board
of Directors and Advisory Council of
Horry County. He is a Past Chairman of
the Board and Treasurer of Junior
Achievement of Greenville. Mr. Rexroad
is the President of the Financial
Manager's Society of South Carolina.
Name, Age and Position Business Experience
- ---------------------- -------------------
Jerry L. Rexroad, CPA, 37, He is a certified public accountant, and
Executive Vice President and is a member of the AICPA and SCACPA.
Chief Financial Officer Prior to joining the Company, Mr.
(continued) Rexroad was a partner with KPMG Peat
Marwick LLP where he was partner in
charge of the Financial Institutions
practice in South Carolina.
Allen W. Griffin, 37, Mr. Griffin is currently Executive Vice
Executive Vice President President and Banking Administration
and Banking Administration Group Leader for Coastal Federal. He
Group Leader also serves as an Executive Vice
President of the Corporation. He has
been associated with the Bank for the
past eleven years. Mr. Griffin is a
School Director for Christian Academy
and is past Director of the Eastern
Group of Robert Morris Associates
Chapter, Myrtle Beach Rotary Club of the
YMCA, and Junior Achievement.
Phillip G. Stalvey, 41, Mr. Stalvey is Executive Vice President
Executive Vice President and Sales Group Leader for the Bank. He
and Sales Group Leader also serves as an Executive Vice
President of the Corporation and is a
director of Coastal Federal Mortgage and
Coastal Investment Corporation. He has
been associated with Coastal Federal for
the past 15 years. In addition, Mr.
Stalvey is a member of the Florence
Stake Presidency with his Church, a
committee member of a local Scout Troop,
Landscape Committee Chairman for the
City of Myrtle Beach and a Board of
Director for the Myrtle Beach Airforce
Base Redevelopment Authority.
Susan J. Cooke, 47, Ms. Cooke is Vice President and
Vice President and Corporate Secretary for Coastal Federal,
Corporate Secretary Corporate Secretary for Coastal
Financial Corporation, Coastal Mortgage
Bankers & Realty Company, Inc., and
Coastal Investments Corporation. Ms.
Cooke has been employed with Coastal
Federal for ten years. She is a member
of the American Society of Corporate
Secretaries, Inc. and the National
Association for Female Executives.
Item 11. Executive Compensation
The information contained under the section captioned "Proposal I --
Election of Directors -- Remuneration of Executive Officers" 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.
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 26, 1997 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/ James T. Clemmons By: /s/ Michael C. Gerald
--------------------- ---------------------
James T. Clemmons Michael C. Gerald
Chairman of the Board President/Chief Executive Officer
and a Director
(Principal Executive Officer)
Date: December 26, 1997 Date: December 26, 1997
By: /s/ Jerry L. Rexroad By: /s/ Wilson B. Springs
-------------------- ---------------------
Jerry L. Rexroad Wilson B. Springs
Executive Vice President Director
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
Date: December 26, 1997 Date: December 26, 1997
By: /s/ James C. Benton By: /s/ Samuel A. Smart
------------------- -------------------
James C. Benton Samuel A. Smart
Director Director
Date: December 26, 1997 Date: December 26, 1997
By: /s/ Harold D. Clardy By: /s/ James P. Creel
-------------------- ------------------
Harold D. Clardy James P. Creel
Director Director
Date: December 26, 1997 Date: December 26, 1997
By: /s/ G. David Bishop By: /s/ James H. Dusenbury
-------------------- ----------------------
G. David Bishop James H. Dusenbury
Director Director
Date: December 26, 1997 Date: December 26, 1997
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K
1. Independent Auditors' Report*
2. All Financial Statements*
(a) Consolidated Statements of Financial Condition as of
September 30, 1996 and 1997.
(b) Consolidated Statements of Operations for the Years
Ended September 30, 1995, 1996 and 1997.
(c) Consolidated Statements of Stockholders' Equity for
the Years Ended September 30, 1995, 1996 and 1997.
(d) Consolidated Statements of Cash Flows for the Years
Ended September 30, 1995, 1996 and 1997.
(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**
3 (b) Bylaws of Coastal Financial Corporation**
10 (a) Employment Agreement with Michael C. Gerald***
(b) Employment Agreement with Jerry L. Rexroad***
(c) Employment Agreement with Phillip G. Stalvey
(d) Employment Agreement with Allen W. Griffin***
(e) Employment Agreement with Jimmy R. Graham***
(f) Employment Agreement with Richard L. Granger***
(g) Employment Agreement with Robert S. O'Harra***
(h) 1990 Stock Option Plan***
(i) Directors Performance Plan****
13 Annual Report to Stockholders for the Fiscal Year
Ended September 30, 1997*
21 Subsidiaries of the Registrant
23 Consent of Independent Auditors
27 Financial Data Schedule
5. No reports on Form 8-K have been filed during the last quarter
of the fiscal year covered by this report.
* Incorporated by reference from the Annual Report to Stockholders for the
fiscal year ended September 30, 1997, attached as an exhibit hereto.
** Incorporated by reference to Registration Statement on Form S-4 filed with
the Securities and Exchange Commission on November 26, 1990.
*** Incorporated by reference to 1995 Form 10K filed with the Securities and
Exchange Commission on December 29, 1995.
**** Incorporated by reference to the proxy statement for the 1996 Annual
Meeting of Stockholders.