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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, 1999
OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-19684
COASTAL FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 57-0925911
(State or other jurisdiction (I.R.S. Employer I.D.)
- ---------------------------- ----------------------
of incorporation or organization)
2619 Oak Street, Myrtle Beach, South Carolina 29577-3129
- --------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (843) 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 [ ] NO [ X ] .
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
As of December 21, 1999, there were issued and outstanding 6,754,421
shares of the registrant's Common Stock.
The aggregate market value of the voting stock held by nonaffiliates of
the registrant, based on the closing sales price of the registrant's common
stock as quoted on the NASDAQ System under the symbol "CFCP" on December 21,
1999, was $84,430,263 (6,754,421 shares at $12.50 per share, which is the ending
bid price on December 21, 1999.). 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, 1999 (Parts I and II)
2. Portions of the Proxy Statement for the 2000 Annual Meeting of
Stockholders. (Part III)
PART I
Item 1. Business
General
Coastal Financial Corporation ("Coastal Financial" or the
"Corporation") was incorporated in the State of Delaware in June 1990, for the
purpose of becoming a savings and loan holding company for Coastal Federal
Savings Bank ("Coastal Federal" or the "Bank"). On January 28, 1991, the
stockholders of the Bank approved a plan to reorganize the Bank into the holding
company form of ownership. The reorganization was completed on November 6, 1991,
on which date the Bank became the wholly-owned subsidiary of the Corporation,
and the stockholders of the Bank became stockholders of the Corporation. Prior
to completion of the reorganization, the Corporation had no material assets or
liabilities and engaged in no business activities. On April 1, 1993 Coastal
Federal's investment in Coastal Investor Services, Inc., formerly named Coastal
Investment Services, Inc., was transferred to Coastal Financial and became a
first tier subsidiary of the Corporation. The financial results contained herein
relate primarily to the Corporation's principal subsidiary, Coastal Federal.
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.
engaged in the origination of conforming mortgage loans which are sold in the
secondary market, generally on a servicing released basis. During fiscal 1999,
Coastal Federal Mortgage's operations were discontinued. Consequently, the
Bank's mortgage banking function was expanded.
On May 7, 1996, the Corporation formed Coastal Technology Services,
Inc. ("CTS"). CTS primarily develops specialized banking software for sale to
financial services companies. CTS's activities for fiscal 1999 was immaterial to
the consolidated financial condition and results of operations of Coastal
Financial.
On February 20, 1998, Coastal Real Estate Investment Corporation
("CREIC") was incorporated in North Carolina. CREIC is a wholly owned operating
subsidiary of Coastal Federal Holding Corporation ("CFHC") and is a real estate
investment trust ("REIT"). All of CREIC's operating activities are consolidated
into Coastal Federal Savings Bank. CREIC engages in the investment and
management of real estate related assets, primarily mortgage loans. On September
1, 1998, CREIC was capitalized with approximately $131.8 million of mortgage
loans from Coastal Federal. On December 10, 1998, CREIC became a wholly owned
subsidiary of CFHC through an exchange of stock transaction.
On June 25, 1998, Coastal Federal Holding Corporation ("CFHC") was
incorporated in the state of Delaware. CFHC is a wholly owned subsidiary of
Coastal Federal Savings Bank ("CFSB") and is a passive investment company
("PIC"). All of CFHC's operating activities are consolidated into Coastal
Federal Savings Bank. CFHC engages in the management of its investment in CREIC
and the management of the related dividends received on that investment.
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, one branch
office located in Sunset Beach, North Carolina, and a lending office located in
Wilmington, North Carolina. At September 30, 1999, Coastal Financial had total
assets of $713.0 million, total deposits of $399.7 million and stockholders'
equity of $41.2 million. The deposits of the Bank are insured by the Federal
Deposit Insurance Corporation ("FDIC") under the Savings Association Insurance
Fund ("SAIF"). The corporate offices of the Bank are located at 2619 Oak Street,
Myrtle Beach, South Carolina and the telephone number is (843) 448-5151.
Nine of Coastal Federal's eleven offices are in Horry County, South
Carolina. The economy of the Horry County area depends primarily on tourism. To
the extent Horry County area businesses rely heavily on tourism for business,
decreased tourism would have a significant adverse effect on Coastal Federal's
primary deposit base and lending area. Moreover, Coastal Federal would likely
experience a higher degree of loan delinquencies should the local economy be
materially and adversely affected.
Coastal Federal's principal business currently consists of attracting
deposits from the general public and using these funds to originate conventional
one-to-four family first mortgage loans, consumer, commercial business loans and
commercial real estate loans. Commercial real estate loans as a percentage of
total loans have increased from 14.3% of total loans at September 30, 1995 to
23.3% of total loans at September 30, 1999.
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,
1999, 4.6% and 8.9%, respectively, of the Bank's total loan portfolio consisted
of commercial business and consumer loans.
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,
-------------------------------------------------------------------------------------------------
1997 Compared to 1996 1998 Compared to 1997
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 ................. $ 502 $ 1,545 $ 24 $ 2,071 $ 195 $ 2,240 $ 13 $ 2,448
Mortgage-backed
Securities/Investments (193) 1,567 (100) 1,274 (436) 4,711 (992) 3,283
------- ------- ------- ------- ------- ------- ------- -------
Total net change in
income on interest-
earning assets ........ 309 3,112 (76) 3,345 (241) 6,951 (979) 5,731
------- ------- ------- ------- ------- ------- ------- -------
Interest-Bearing
Liabilities:
Deposits .............. 200 1,742 19 1,961 (165) 1,089 (13) 911
FHLB advances ......... (361) (1,425) 73 (1,713) (298) 1,501 (83) 1,120
Repurchase
agreements ........... 50 576 181 807 (47) 2,422 (100) 2,275
------- ------- ------- ------- ------- ------- ------- -------
Total net change in
expense on interest-
bearing liabilities ... (111) 893 273 1,055 (510) 5,012 (196) 4,306
------- ------- ------- ------- ------- ------- ------- -------
Net change in net
interest income ....... $ 420 $ 2,219 $ (349) $ 2,290 $ 269 $ 1,939 $ (783) $ 1,425
======= ======= ======= ======= ======= ======= ======= =======
1999 Compared to 1998
Increase (Decrease)
Due to
---------------------------------------------
Rate/
Rate Volume Volume Net
------- ------- ------- -------
Interest-Earning Assets:
Loans ................. $ (830) $ 3,150 $ (93) $ 2,227
Mortgage-backed
Securities/Investments 201 3,156 81 3,438
------- ------- ------- -------
Total net change in
income on interest-
earning assets ........ (629) 6,306 (12) 5,665
------- ------- ------- -------
Interest-Bearing
Liabilities:
Deposits .............. (1,188) 1,148 108 68
FHLB advances ......... (392) 2,564 (165) 2,007
Repurchase
agreements ........... (49) 519 (5) 465
------- ------- ------- -------
Total net change in
expense on interest-
bearing liabilities ... (1,629) 4,231 (62) 2,540
------- ------- ------- -------
Net change in net
interest income ....... $ 1,000 $ 2,075 $ 50 $ 3,125
======= ======= ======= =======
4
Average Balance Sheet
The following table sets forth certain information relating to the
Corporation's average balance sheet and reflects the average yield on assets and
average cost of liabilities for the periods indicated. Such yields and costs are
derived by dividing income or expense by the average balance of assets or
liabilities, respectively, for the periods presented. Average balances are
derived from month-end balances. Management does not believe that the use of
month-end balances instead of daily average balances has caused any material
difference in the information presented. Non-accrual loans are included in
average balance calculations.
Year Ended September 30,
----------------------------------------------------------------------------------------------------
1997 1998 1999
------------------------------ ------------------------------ --------------------------------
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
ASSETS
Loans ..................... $389,196 $ 33,769 8.70% $414,938 $ 36,314 8.75% $450,940 $ 38,541 8.55%
Mortgage-backed
Securities/Investments (1) 60,745 4,296 7.07 125,509 7,580 6.04 177,758 11,018 6.20
Total interest-earning
assets .................... $449,941 $ 38,065 8.46% $540,447 $ 43,894 8.11% $628,698 $ 49,559 7.88%
======== ======== ==== ======== ======== ==== ======== ======== ====
LIABILITIES
Transaction accounts ...... 153,796 4,894 3.18 179,398 5,756 3.21 210,072 6,368 3.03
Passbook accounts ......... 41,143 1,015 2.47 36,102 924 2.56 33,310 962 2.89
Certificate accounts ...... 135,335 7,741 5.72 144,569 7,879 5.45 144,698 7,297 5.04
FHLB advances ............. 90,154 5,366 5.95 115,389 6,488 5.62 161,005 8,495 5.28
Securities sold
under repurchase
agreements ............... 19,387 1,130 5.82 60,998 3,404 5.58 70,299 3,869 5.50
-------- -------- ---- -------- -------- ---- -------- -------- ----
Total interest-bearing
liabilities ............... $439,815 $ 20,146 4.57% $536,456 $ 24,451 4.60% $619,384 $ 26,991 4.33%
======== ======== ==== ======== ======== ==== ======== ======== ====
Net interest income/
interest rate spread................. $17,919 3.89% $19,443 3.51% $22,568 3.55%
Net yield on interest earning
assets............................... 4.03% 3.64% 3.67%
Ratio of interest earning assets
to interest-bearing
liabilities.......................... 1.03x 1.03x 1.03x
- -------------------------
(1) Includes short-term interest-bearing deposits and Federal funds sold.
5
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 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, 1999. This
information is an estimate and may not be indicative of actual market values or
the actual changes in market values should rates change significantly at a
future date.
-300 -200 -100 +100 +200 +300
Basis Basis Basis No Basis Basis Basis
Points Points Points Change Points Points Points
------ ------ ------ ------ ------ ------ ------
(In thousands)
ASSETS
Mortgage loans and
securities........... $632,916 $625,103 $616,782 $606,078 $592,608 $577,232 $560,958
Non-mortgage loans.... 36,529 36,198 35,873 35,556 35,246 34,942 34,645
Cash, deposits and
securities........... 56,384 55,193 54,006 52,827 51,651 50,480 49,314
Repossessed assets.... 97 97 97 97 97 97 97
Premises and equipment 11,114 11,114 11,114 11,114 11,114 11,114 11,114
Other assets.......... 17,128 20,124 23,963 29,067 34,006 38,653 43,063
------ ------ ------ ------ ------ ------ ------
TOTAL................. 754,168 747,829 741,835 734,739 724,722 712,518 699,191
======= ======= ======= ======= ======= ======= =======
LIABILITIES
Deposits.............. $401,004 $400,223 $399,451 $398,691 $397,944 $397,208 $396,483
Borrowings............ 269,786 265,764 261,905 258,201 254,645 251,230 247,947
Other liabilities..... 8,023 8,023 8,023 8,023 8,023 8,023 8,023
-------- -------- -------- -------- -------- -------- --------
TOTAL................. 678,813 674,010 669,379 664,915 660,612 656,461 652,453
======= ======= ======= ======= ======= ======= =======
OFF BALANCE SHEET
POSITIONS............ $ 1,058 $492 $219 $304 $501 $823 $1,186
MARKET VALUE OF
PORTFOLIO EQUITY..... $76,413 $74,311 $72,675 $70,128 $64,611 $56,880 $47,924
Lending Activities
General. The principal lending activities of Coastal Federal are the
origination of residential one-to-four family mortgage loans, consumer loans,
commercial business loans and commercial real estate loans. The Bank originates
construction and permanent loans on single family and multi-unit dwellings, as
well as on commercial structures. The Bank emphasizes the origination of
adjustable rate residential and commercial real estate mortgages.
The Bank's loan portfolio totaled approximately $472.0 million at
September 30, 1999, representing approximately 66.0% of its total assets. On
that date, approximately 62.9% 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, 1999, adjustable rate
loans constituted approximately $329.5 million (or 69.8%) of the Bank's total
loan portfolio. Therefore, at such date, fixed rate loans comprised only 30.2%
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.
6
Loan Portfolio Analysis
The following table set forth the composition of the Corporation's loan
portfolio by type of loan as of the dates indicated.
At September 30,
--------------------------------------------------------------------------------------------------
1995 1996 1997 1998 1999
----------------- ------------------ ----------------- ----------------- -----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in thousands)
Mortgage loans:
Construction ............... $ 27,905 7.34% $ 34,566 8.65% $ 34,216 7.93% $ 31,261 7.09% $ 46,766 9.48%
On existing property ....... 228,881 60.23 231,373 57.89 240,268 55.69 254,161 57.63 265,069 53.73
Income property (commercial) 54,401 14.31 73,295 18.34 97,680 22.64 95,420 21.63 114,931 23.29
Commercial business loans ... 19,610 5.16 14,831 3.71 10,939 2.54 14,848 3.37 22,818 4.62
Consumer loans:
Mobile home ............... 1,204 .32 1,103 .28 1,291 .30 990 .22 1,166 .24
Automobiles ............... 5,941 1.56 7,261 1.82 6,055 1.40 5,106 1.16 6,809 1.38
Equity lines of credit .... 13,210 3.48 12,441 3.11 15,294 3.54 18,655 4.23 21,081 4.27
Other ..................... 28,887 7.60 24,776 6.20 25,714 5.96 20,567 4.67 14,738 2.99
-------- ---- -------- ---- -------- ---- -------- ---- -------- ----
Total loans and loans
held for sale......... $380,039 100.00% $399,646 100.00% $431,457 100.00% $441,008 100.00% $493,378 100.00%
====== ====== ====== ====== ======
Less:
Loans in process............ (17,178) (18,589) (15,084) (11,292) (15,315)
Deferred loan(fees)costs.... (71) 286 458 702 354
Allowance for loan losses.. (3,578) (4,172) (4,902) (5,668) (6,430)
------- ------- ------- ------- -------
Total loans and loans held
for sale, net.......... $359,212 $377,171 $411,929 $424,750 $471,987
======== ======== ======== ======== ========
7
Single Family Residential Loans. The Bank actively originates
conventional loans to enable borrowers to purchase existing homes or residential
lots, refinance existing mortgage loans or construct new homes. Mortgage loans
originated by the Bank are generally long-term loans, amortized on a monthly
basis, with principal and interest due each month. The contractual loan payment
period for single family residential loans typically range from 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 generally adjust based upon either the prime rate or treasury
securities indices. The interest rates on ARMs generally may not adjust more
than 2% per year and 6% over the life of the loan. Based upon market conditions,
the Bank may originate ARMs at below the fully phased-in interest rate but
generally qualifies borrowers at 2% above the initial rate when the loan to
value ratio exceeds 70%. Monthly payments could increase significantly at the
first repricing period. Although Coastal Federal's ARMs are beneficial in
helping Coastal Federal improve the interest rate sensitivity of its assets,
such loans may pose potential additional risks to Coastal Federal. A precipitous
increase in interest rates could be expected to result in an increase in
delinquencies or defaults on such loans. Whereas a significant decrease in rates
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. Loans sold to correspondents
amounted to $64.8 million and $24.8 million, respectively, in fiscal 1998 and
1999. Coastal Federal sold approximately $6.9 million and $36.0 million,
respectively, of mortgages in 1998 and 1999 to FHLMC.
At September 30, 1999, approximately $296.9 million or 62.9% 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, 1999, approximately $46.7 million or 9.5% of the
Bank's gross loan portfolio consisted of construction loans on both residential
($31.8 million) and commercial properties ($14.9 million). Undisbursed proceeds
on these loans amounted to $15.3 million at September 30, 1999.
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, 1999, this limited
Coastal Federal's aggregate non-residential real estate loans to approximately
$196.8 million. At such time, the Bank had non-residential real estate loans
outstanding of $114.9 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 or five years
and is indexed to U.S. Treasury securities. Such loans generally have a fifteen
to twenty year term, with the payments based up to a similar amortization
schedule. The Bank may require the loan to include a call option at the Bank's
option in five to ten years. The Bank generally requires that such loans have a
minimum debt service coverage of 120% of projected net operating income together
with other generally accepted underwriting criteria.
Commercial real estate lending entails significant additional risks
compared to residential lending. Commercial real estate loans typically involve
large loan balances to single borrowers or groups of related borrowers. The
payment experience of such loans is typically dependent upon the successful
operation of the real estate project. These risks can be significantly affected
by supply and demand conditions in the market for office and retail space and
for apartments and, as such, may be subject, to a greater extent, to adverse
conditions in the economy. In dealing with these risk factors, Coastal Federal
generally limits itself to a real estate market or to borrowers with which it
has experience. The Bank concentrates on originating commercial real estate
loans secured by properties located within its market areas of Horry County,
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 is permitted by OTS regulations to invest up
to 35% of its assets in consumer loans. The Bank currently offers a wide variety
of consumer loans on a secured and unsecured basis including home improvement
loans, loans secured by savings accounts and automobile, truck and boat loans.
The Bank also offers a revolving line of credit secured by owner-occupied real
estate. Total consumer loans amounted to $43.8 million, or 8.9% of the total
loan portfolio, at September 30, 1999.
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, 1999, the Bank had $22.8 million outstanding in
commercial business loans, which represented approximately 4.6% of its loan
portfolio.
Commercial business lending is inherently riskier than residential
mortgage lending and involves risks that are different from those associated
with residential and commercial real estate lending. Real estate lending is
generally considered to be collateral based lending with loan amounts based on
predetermined loan to collateral values and liquidation of the underlying real
estate collateral is viewed as the primary source of repayment in the event of
borrower default. Although commercial business loans are often collateralized by
equipment, inventory, accounts receivable or other business assets, the
liquidation of collateral in the event of a borrower default is often not a
sufficient source of repayment because accounts receivable may be uncollectible
and inventories and equipment may be obsolete or of limited use, among other
things. Accordingly, the repayment of a commercial business loan depends
primarily on the creditworthiness of the borrower (and any guarantors), while
liquidation of collateral is a secondary and potentially insufficient source of
repayment.
Loan Maturity
The following table sets forth certain information at September 30,
1999 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 Totals Twenty Years Twenty
------- ----------- ---------- --------- ------ ------------ ------
(In thousands)
First mortgage loans . $ 32,110 $ 3,517 $ 2,634 $ 14,300 $ 60,357 $177,526 $290,444
Other residential and
non-residential ..... 26,415 15,069 5,692 10,835 47,523 9,397 114,931
Equity lines of credit 21,081 -- -- -- -- -- 21,081
Consumer loans ....... 10,320 4,050 6,029 941 1,373 -- 22,713
Commercial loans ..... 15,674 2,139 1,970 1,135 1,727 173 22,818
Total loans .... $105,600 $ 24,775 $ 16,325 $ 27,211 $110,980 $187,096 $471,987
======== ======== ======== ======== ======== ======== ========
The following table sets forth the dollar amount of all loans due after
one year at September 30, 1999 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 .............. $ 59,864 $198,470 $258,334
Other residential and
non-residential .................. 18,461 70,055 88,516
Consumer loans .................... 11,950 443 12,393
Commercial loans .................. 5,954 1,190 7,144
Total loans .................. $ 96,229 $270,158 $366,387
======== ======== ========
Loan Solicitation and Processing. The Bank actively solicits mortgage
loan applications from existing customers, walk-ins, referrals and from real
estate brokers. Commercial real estate loan applications also are obtained by
direct solicitation by loan officers.
Detailed loan applications are obtained to determine the borrower's
ability to repay, and the more significant items on these applications are
verified through the use of credit reports, financial statements and
confirmations through verification forms. After analysis of the loan application
and property or collateral involved, including an appraisal of the property by
independent appraisers approved by the Bank's Board of Directors and reviewed by
the Bank's underwriter, a lending decision is made by the Bank. With respect to
commercial loans, the Bank also reviews the capital adequacy of the business,
the ability of the borrower to repay the loan and honor its other obligations
and general economic and industry conditions. All loan applications over
$500,000 require the approval by members of the Bank's Internal Loan Committee,
Director Gerald and Executive Vice Presidents Rexroad and Stalvey. All loan
applications greater than $2,000,000 require the approval of the Bank's Loan
Committee which consists of Directors Clemmons, Gerald, Springs and Executive
Vice Presidents Rexroad and Stalvey. All first mortgage loan applications in
excess of 80% of the lesser of appraised value or purchase price of the
property, unless the borrowers have private mortgage insurance, must be approved
by a member of the Banks' Loan Committee.
Loan applicants are promptly notified of the decision of the Bank by a
letter setting forth the terms and conditions of the decision. If approved, such
terms and conditions include the amount of the loan, interest rate, amortization
term, a brief description of real estate to be mortgaged to the Bank and notice
of requirement of insurance coverage necessary to protect the Bank's interest in
the collateral.
The Bank's general policy is to obtain a title insurance policy
insuring that the Bank has a valid lien on the mortgaged real estate and that
the property is free of encumbrances. Borrowers must also obtain paid hazard
insurance policies prior to closing and, when the property is in a flood plain
as designated by the Federal Emergency Management Agency, obtain paid flood
insurance policies. It is the policy of Coastal Federal to require flood
insurance for the full insurable value of the improvements for any such loan
located in a designated flood hazard area. Borrowers on loans which exceed 80%
of the value of the security property are also required to advance funds on a
monthly basis, with each payment of principal and interest, to a mortgage escrow
account from which the Bank makes disbursements for items such as real estate
taxes, hazard insurance premiums and private mortgage insurance premiums. In
cases of flood insurance, it is the Bank's policy to require escrow on these
premiums regardless of the loan-to-value ratio.
Loan Originations, Purchases and Sales. The Bank is qualified to
service loans for FHLMC and FNMA. Depending upon interest rates and economic
conditions, the Bank has sold loans in order to provide additional funds for
lending, to generate servicing fee income, and to decrease the amount of its
long-term, fixed rate loans in order to minimize the gap between the maturities
of its interest-earning assets and interest-bearing liabilities. The Bank
generally continues to collect payments on the loans, to supervise foreclosure
proceedings, if necessary, and to otherwise service the loans. The Bank retains
a portion of the interest paid by the borrower on the loans as consideration for
its servicing activities. At September 30, 1999, the Bank was servicing loans
sold to others with a principal balance of approximately $99.4 million. Sales of
whole loans and participation interests by the Bank are made without right of
recourse to the Bank by the buyer of the loans in the event of default by the
borrower. At September 30, 1999, the Bank's consolidated loan portfolio included
purchased loans of approximately $23.6 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,
-------------------------------------
1997 1998 1999
--------- --------- ---------
(In thousands)
Loans receivable net, at the beginning of the
period ..................................... $ 377,171 $ 411,929 424,750
--------- --------- ---------
Loans originated:
Construction ............................... 45,986 62,805 72,456
Residential ................................ 59,289 70,588 96,510
Nonresidential ............................. 13,794 23,622 22,233
Land ....................................... 10,308 20,025 19,060
Commercial business ........................ 33,730 16,076 29,232
Consumer ................................... 15,396 12,136 16,866
--------- --------- ---------
Total loans originated ................. 178,503 205,252 256,357
--------- --------- ---------
Loans purchased, primarily single
family residential mortgages ................ 9,948 10,442 9,078
--------- --------- ---------
Loans sold .................................. (44,160) (71,674) (60,781)
--------- --------- ---------
Loan principal repayments and other ......... (109,946) (130,286) (156,518)
--------- --------- ---------
Other ....................................... 413 (913) (899)
--------- --------- ---------
Loans receivable net, at end of period ...... $ 411,929 $ 424,750 $ 471,987
========= ========= =========
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, 1999, the Company had residential loan origination commitments of
approximately $5.6 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 September 30,
-------------------------------------------------
1995 1996 1997 1998 1999
------ ------ ------ ------ ------
(Dollars in thousands)
Loans accounted for on a nonaccrual basis:
Real estate -
Residential ........................... $ 999 $ 307 $ 71 $ 222 $1,097
Commercial ............................ 134 -- -- -- 267
Commercial business ................... 154 60 99 1,962 --
Consumer .............................. 36 78 87 73 67
------ ------ ------ ------ ------
Total ................................ 1,323 445 257 2,257 1,431
------ ------ ------ ------ ------
Accruing loans which are
contractually past due
90 days or more:
Real estate -
Residential ........................... -- -- -- -- --
Commercial ............................ -- -- -- -- --
Commercial business .................... -- -- -- -- --
Consumer ............................... -- -- -- -- --
------ ------ ------ ------ ------
Total ................................ -- -- -- -- --
------ ------ ------ ------ ------
Restructured loans ....................... -- -- -- -- 418
Real estate owned ........................ 789 323 250 35 96
Other nonperforming
assets .................................. -- -- -- -- --
------ ------ ------ ------ ------
Total nonperforming
assets .................................. $2,112 $ 768 $ 507 $2,292 $1,945
====== ====== ====== ====== ======
Total nonaccrual loans to net
loans ................................... .36% .12% .06% .54% .30%
Total nonaccrual loans to total
assets .................................. .33% .10% .05% .35% .20%
Total nonperforming assets
to total assets ......................... .53% .17% .10% .36% .27%
- ----------
In fiscal years 1997, 1998 and 1999, interest income which would have
been recorded approximated $9,000, $181,000 and $46,000, respectively,
had nonaccruing loans been current in accordance with their original
terms. At September 30, 1998 and 1999 and during the years then ended
there are no loans considered to be impaired.
The allowance for uncollectible interest which is netted against
accrued interest receivable totaled $202,000 and $70,000 at September 30, 1998
and 1999, respectively.
The OTS has adopted various changes in its regulations regarding
problem assets of savings institutions. OTS regulations require that each
insured institution review and classify its assets on a regular basis. In
addition, in connection with examinations of insured institutions, OTS examiners
have authority to identify problem assets and, if appropriate, require them to
be classified. There are four classifications for problem assets: special
mention, substandard, doubtful and loss. Substandard assets must have one or
more defined weaknesses and are characterized by the distinct possibility that
the insured institution will sustain some loss if the deficiencies are not
corrected. Doubtful assets have the weaknesses of substandard assets with the
additional characteristic that the weaknesses make collection or liquidation in
full on the basis of currently existing facts, conditions and values
questionable, and there is a high possibility of loss. An asset classified loss
is considered uncollectible and of such little value that continuance as an
asset of the institution is not warranted. The regulations also have a special
mention category, described as assets which do not currently expose an insured
institution to a sufficient degree of risk to warrant classification but do
possess credit deficiencies or potential weaknesses deserving management's close
attention. Assets classified as substandard or doubtful require the institution
to establish general allowances for loan losses. If an asset or portion thereof
is classified loss, the insured institution must either establish specific
allowances for loan losses in the amount of 100% of the portion of the asset
classified loss or charge off such amount. A portion of general loss allowances
established to cover possible losses related to assets classified substandard or
doubtful may be included in determining an institution's regulatory capital,
while specific valuation allowances for loan losses generally do not qualify as
regulatory capital.
Coastal Federal had three individual classified assets in excess of
$700,000 as of September 30, 1999. At that date, classified assets amounted to
$11.6 million ($5.7 million substandard; $288,000 doubtful; $61,000 loss; and
$5.5 million special mention). Substandard assets consist primarily of seven
commercial real estate loans with balances of approximately $2.8 million and
four residential real estate loans with balances of approximately $2.0 million
at September 30, 1999. Special mention assets consist primarily of five
commercial real estate loans with balances of approximately $4.1 million at
September 30, 1999.
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, 1997, 1998 and
1999 of $760,000, $865,000 and $750,000, respectively. As a result, the Bank has
a $6.4 million allowance for loan losses as of September 30, 1999. The allowance
as a percentage of loans receivable was 1.36% at September 30, 1999 compared to
1.33% at September 30, 1998. See "Management's Discussion and Analysis
- --Non-Performing Assets and --Allowance for Loan Losses" in the 1999 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, 1999, there can be no
assurance that regulators, when reviewing the Bank's loan portfolio in the
future, will not request the Bank to significantly change its allowance for loan
losses, thereby 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,
--------------------------------------------------------
1995 1996 1997 1998 1999
------ ------ ------ ------ ------
(Dollars in thousands)
Allowance at beginning of
period........................................... $3,353 $3,578 $4,172 $4,902 $5,668
Allowance recorded on
acquired loans................................... - - 110 109 112
Provision for loan losses......................... 202 790 760 865 750
------ ------ ------ ------ ------
Recoveries:
Residential real estate.......................... 232 -- 20 7 184
Commercial real estate........................... 11 75 14 1 13
Real estate construction......................... -- -- -- -- --
Consumer......................................... 12 7 38 56 55
------ ------ ------ ------ ------
Total recoveries............................... 255 82 72 64 252
------ ------ ------ ------ ------
Charge-offs:
Residential real estate.......................... 206 24 46 28 15
Commercial real estate........................... 18 216 -- 17 8
Real estate construction......................... -- -- -- -- --
Consumer......................................... 8 38 166 227 329
------ ------ ------ ------ ------
Total charge-offs.............................. 232 278 212 272 352
------ ------ ------ ------ ------
Net charge-offs (recoveries) .................. (23) 196 140 208 100
------ ------ ------ ------ ------
Allowance at end of period....................... $3,578 $4,172 $4,902 $5,668 $6,430
====== ====== ====== ====== ======
Ratio of allowance to net
loans outstanding at the
end of the period................................ 1.00% 1.11% 1.19% 1.33% 1.36%
Ratio of net charge-offs (recoveries)
to average loans outstanding
during the period................................ (.01%) .05% .04% .05% .02%
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,
-----------------------------------------------------------------------------------------------------
1995 1996 1997
----------------------------- ---------------------------------------- -----------------------
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 ......... $ 803 .31% 72.03% $ 837 .37% 65.35% 1,064 .41% 63.56%
Commercial .......... 2,371 4.36 24.17 2,875 3.80 22.34 3,261 2.78 28.52
Consumer ............ 404 .80 3.80 460 1.01 12.31 577 1.77 7.92
------ ------ --------- ------ ------- ------
Total allowance for
loan losses ........ $3,578 1.00% 100.00% $ 4,172 1.11% 100.00% $ 4,902 1.19% 100.00%
====== ====== ========= ====== ======= ======
1998 1999
------------------------------- -------------------------------
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 ......... $1,375 .47% 67.60% $ 1,747 .56 66.01%
Commercial .......... 3,685 3.30 26.32 4,191 3.04 29.18
Consumer ............ 608 2.82 6.08 492 2.17 4.81
------ ------ -------- ------
Total allowance for
loan losses ........ $5,668 1.33% 100.00% $ 6,430 1.36% 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.
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, Sherry and Stalvey and Vice President Loehr. The ALCO
Committee acts within policies established by the Board of Directors. At
September 30, 1999, the Bank's investment portfolio had a market value of
approximately $188.2 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,
------------------------------------------------------------------------------------------
1997 1998 1999
-------------------------- -------------------------- ------------------------
Amortized Percent of Amortized Percent of Percent of
Cost(1) Portfolio Cost(1) Portfolio Amortized Portfolio
------- --------- ------- --------- --------- ---------
(Dollars in thousands)
U.S. Government agency
securities:
FHLMC....................... $ 995 3.82% $ -- -- $ -- --%
FHLB........................ 17,738 67.89% 8,840 90.64% 4,723 75.99%
FFCB........................ 7,391 28.29% 912 9.36 -- --
FAMA........................ -- -- -- -- 1,492 24.01%
Total...................... $26,124 100.00% $ 9,752 100.00% $6,215 100.00%
======= ======= ======= ======= ====== =======
(1) The market value of the Bank's investment securities portfolio amounted to
$26.2 million, $9.8 million and $6.1 million at September 30, 1997, 1998
and 1999, respectively.
The following table sets forth the final maturities and weighted
average yields of the securities at amortized cost at September 30, 1999.
Less Than One to Five to
One Year Five Years Ten Years
---------------- ----------------- ------------------
Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ -----
(Dollars in thousands)
U.S. Government and agency
Securities:
FHLB ..................... -- -- 2,770 6.86% 1,953 6.86
FAMA ..................... -- -- -- -- 1,492 5.93%
Total ................. $-- --% $2,770 6.86% $3,445 6.46%
=== === ====== ==== ====== =====
The following table sets forth Coastal Federal's mortgage-backed
securities portfolio at amortized cost at the dates indicated.
September 30,
-----------------------------------------------------------------------------------------
1997 1998 1999
---------------------------- ----------------------- ---------------------------
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 ................... $ 14,048 62.79% $ 24,901 14.69% $ 35,175 18.98%
FNMA .................... 1,861 8.31 95,024 56.05 103,117 55.64
GNMA .................... 6,471 28.90 49,586 29.26 23,349 12.60
CMO ..................... -- -- -- -- 23,680 12.78
-------- ------ -------- ------ -------- ------
Total .................. $ 22,380 100.00% $169,511 100.00% $185,321 100.00%
======== ====== ======== ====== ======== ======
- ---------
(1) The market value of the Bank's mortgage-backed securities portfolio
amounted to $23.0 million, $170.2 million and $182.1 million at September
30, 1997, 1998 and 1999, respectively.
The following table sets forth the maturities and weighted average
yields of the securities at September 30, 1999.
Less Than One to Five to Ten Years
One Year Five Years Ten Years and Thereafter
---------------- ------------- -------------- -----------------------
Amount Yield Amount Yield Amount Yield Amount Yield
(Dollars in thousands)
Mortgage-Backed Securities:
FHLMC ................... $-- --% $ -- --% -- --% $ 35,175 7.30%
FNMA .................... -- -- -- -- -- 103,117 7.12
GNMA .................... -- -- -- -- 23,349 7.48
CMO ..................... -- -- -- -- 23,680 6.62
---- --- ---- ---- --- -- ----------- ----
Total ..................... $-- --% $ -- --% $-- --% $ 185,321 7.14%
==== === ==== ==== === === =========== ====
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 FEDERAL |
| | | HOLDING |
| |-----------| CORPORATION |
| +-------------------+
| +-------------------+
| | COASTAL REAL |
| | ESTATE INVESTMENT |
+------------------------+ | CORPORATION |
| | +-------------------+
| COASTAL MORTGAGE |
BANKERS* |
| |
+------------------------+
+------------------+ +-----------------+ +---------------+
| North Beach | | Shady Forest | | Sherwood |
| Investments, Inc.| | Development | | Development |
| | | Corporation | | Corporation |
| | | | | |
+------------------+ +-----------------+ +---------------+
+----------------+ +-------------------+
| Ridge | | 501 Development |
| Development | | Corporation |
| Corporation | | |
| | | |
+----------------+ +-------------------+
- --------------
* Inactive
(1) First tier operating subsidiary of Coastal Federal Savings Bank
consolidated with Coastal Federal Savings Bank for regulatory
reporting. On December 10, 1998 Coastal Federal exchanged its stock of
Coastal Real Estate Investment Corporation for 100% of the outstanding
stock of Coastal Federal Holding Corporation.
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,
-------------------------------------------------------------------------------------------------
1997 1998 1999
---------------------------- ---------------------------- ------------------------------
Percent Percent Percent
of Increase of Increase of Increase
Amount Total (Decrease) Amount Total (Decrease) Amount Total (Decrease)
------ ----- ---------- ------ ----- ---------- ------ ----- ----------
(Dollars in thousands)
Transaction accounts:
NOW checking ..................$ 38,773 11.17% $ 3,119 $ 42,434 10.99% $ 3,661 $ 50,774 12.70% $ 8,340
Commercial checking ........... 23,765 6.85 3,839 27,285 7.06 3,520 37,256 9.32 9,971
--------- ----- --------- --------- ----- --------- --------- ----- ---------
Total transaction accounts ...... 62,538 18.02 6,958 69,719 18.05 7,181 88,030 22.03 18,311
--------- ----- --------- --------- ----- --------- --------- ----- ---------
Money market demand accounts .... 104,476 30.10 19,479 124,207 32.15 19,731 138,188 34.58 13,981
Savings accounts ................ 39,445 11.36 (3,395) 37,242 9.64 (2,203) 39,212 9.81 1,970
Fixed-rate certificates
(original maturity):
3 months ....................... 1,826 .53 (296) 2,045 .53 219 4,440 1.11 2,395
6 months ....................... 22,185 6.39 (1,294) 25,563 6.62 3,378 23,367 5.85 (2,196)
9 months ....................... 7,342 2.12 (1,951) 5,396 1.40 (1,946) 5,220 1.31 (176)
12 months ...................... 43,901 12.64 (3,158) 46,121 11.94 2,220 37,955 9.50 (8,166)
18 months ...................... 32,250 9.29 11,269 35,140 9.10 2,890 16,016 4.01 (19,124)
24 months ...................... 7,390 2.13 3,341 17,348 4.49 9,958 19,104 4.78 1,756
30 months ...................... 4,809 1.39 2,620 6,558 1.70 1,749 13,677 3.42 7,119
36 months ...................... 9,215 2.65 271 4,740 1.23 (4,475) 4,622 1.16 (118)
48 months ...................... 5,664 1.63 936 6,852 1.77 1,188 4,870 1.22 (1,982)
96 months ...................... 27 .01 1 29 .01 2 31 .01 2
--------- ----- --------- --------- ----- --------- --------- ----- ---------
134,609 38.78 11,739 149,792 38.77 15,183 129,302 32.35 (20,490)
--------- ----- --------- --------- ----- --------- --------- ----- ---------
Variable rate certificates:
(original maturity)
18 months ...................... 3,678 1.06 (915) 3,137 .81 (541) 2,716 .68 (421)
30 months ...................... 2,370 .68 (180) 2,224 .58 (146) 2,227 .56 3
--------- ----- --------- --------- ----- --------- --------- ----- ---------
Total variable .................. 6,048 1.74 (1,095) 5,361 1.39 (687) 4,943 1.24 (418)
--------- ----- --------- --------- ----- --------- --------- ----- ---------
Total certificates .............. 140,657 40.52 11,644 155,153 40.16 14,496 134,243 33.59 (20,910)
--------- ----- --------- --------- ----- --------- --------- ----- ---------
Total deposits ..................$ 347,116 100.00% $ 33,686 $ 386,321 100.00% $ 39,205 $ 399,673 100.00% $13,352
========= ====== ========= ========= ====== ========= ========= ====== =======
Time Deposits by Maturity and Rate
The following table sets forth the amount and maturities of time deposits at
September 30, 1999.
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%........... $107,873 $19,785 $4,870 $ 1,123 -- $133,651
6.00 - 8.00%........... 217 -- -- -- -- 217
8.01 - 10.00%.......... 45 -- 330 -- -- 375
-------- ------- ------ ------ ----- --------
Total................ $108,135 $19,785 $5,200 $1,123 -- $134,243
======== ======= ====== ====== ===== =======
The following table sets forth the amount and maturities of time deposits
with balances of $100,000 or more at September 30, 1999. Included in certificate
accounts were $5.3 million at September 30, 1999, originated by brokers for a
fee.
Amount Due
Within Over 3 Over 6 Over 12
3 months through 6 months through 12 months Months Total
- -------- ---------------- ----------------- ------ -----
(In thousands)
$4,692 $21,514 $8,935 $6,772 $41,913
====== ======= ====== ====== =======
In the unlikely event Coastal Federal is liquidated, depositors will be
entitled to full payment of their deposit accounts prior to any payment being
made to the Corporation as the sole stockholder of Coastal Federal.
Borrowings. Demand and time deposits are the primary source of funds
for Coastal Federal's lending and investment activities and for its general
business purposes. The Bank has in the past, however, relied upon advances from
the FHLB of Atlanta to supplement its supply of lendable funds and to meet
deposit withdrawal requirements. The FHLB of Atlanta has served as one of the
Bank's primary borrowing sources. Advances from the FHLB of Atlanta are
typically secured by the Bank's first mortgage loans. At September 30, 1999,
Coastal Federal had advances totaling $164.0 million from the FHLB of Atlanta
due on various dates through 2008 with a weighted average interest rate of
5.33%.
The FHLB of Atlanta functions as a central reserve bank providing
credit for financial institutions and certain other member financial
institutions. As a member, Coastal Federal is required to own capital stock in
the FHLB of Atlanta and is authorized to apply for advances on the security of
such stock and certain of its mortgage loans and other assets (principally
securities which are obligations of, or guaranteed by, the United States)
provided certain standards related to creditworthiness have been met. Advances
are made pursuant to several different programs. Each credit program has its own
interest rate and range of maturities. Depending on the program, limitations on
the amount of advances are based either on a fixed percentage of an
institution's net worth or on the FHLB's assessment of the institution's
creditworthiness. The FHLB of Atlanta determines specific lines of credit for
each member institution.
In addition to the 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, 1999, the
Bank had $92.1 million in broker repurchase agreements. The Bank has also
offered repurchase agreements to its customers which are borrowings that are
collateralized by underlying government securities. At September 30, 1999, the
Bank had $4.8 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,
-------------------------------
1997 1998 1999
---- ---- ----
(Dollars in thousands)
Outstanding balance:
Securities sold under agreements
to repurchase:
Customer ............................ $ 2,666 $ 4,214 $ 4,848
Broker .............................. -- 55,000 2,100
Short-term FHLB advances (1) .......... 68,620 120,235 118,000
Weighted average rate paid on:
Securities sold under agreements
to repurchase:
Customer ............................ 3.16% 3.43% 3.37%
Broker .............................. -- 5.69 5.53
Short-term FHLB advances (1) .......... 5.60 5.10 5.14
Maximum amount of borrowings outstanding
at any month end:
Securities sold under agreements
to repurchase:
Customer ............................ $ 3,257 $ 4,214 $ 4,848
Broker .............................. 37,516 86,250 92,100
Short-term FHLB advances (1) .......... 75,020 120,235 147,135
Approximate average short-term borrowings
outstanding with respect to:
Securities sold under agreements
to repurchase:
Customer ............................ $ 2,100 $ 2,989 $ 3,199
Broker .............................. 17,200 56,262 67,100
Short-term FHLB advances (1) .......... 74,023 92,369 118,276
Weighted average rate paid on:
Securities sold under agreements
to repurchase:
Customer ............................ 3.36% 3.61% 3.09%
Broker .............................. 5.60 5.58 5.30
Short-term FHLB advances (1) .......... 5.60 5.10 5.14
- ------
(1) Short-term FHLB advances include various advances which are subject to call
by FHLB.
Competition
As of September 30, 1999, Coastal Federal held a 13.4% share of the
deposits in Horry County S.C. 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, 1999, the Company had 220 full-time Associates and
20 part-time Associates. The Associates are not represented by a collective
bargaining unit. The Bank believes its relationship with its Associates is
excellent.
REGULATION AND SUPERVISION
General
As a savings and loan holding company, the Corporation is required by
federal law to file reports with, and otherwise comply with, the rules and
regulations of the OTS. The Bank is regulated, examined and supervised
extensively by the OTS, as its primary federal regulator, and the FDIC, as the
deposit insurer. The Bank is a member of the Federal Home Loan Bank System and
its deposit accounts are insured up to applicable limits by the Savings
Association Insurance Fund managed by the FDIC. The Bank must file reports with
the OTS and the FDIC concerning its activities and financial condition in
addition to obtaining certain approvals before entering into certain
transactions such as mergers with, or acquisitions of, other savings
institutions. The OTS and the FDIC examine the Bank periodically to test the
Bank's safety and soundness and compliance with various regulatory requirements.
This regulation and supervision establishes a comprehensive framework for the
Bank's activities and is intended primarily to protect the insurance fund and
the Bank's depositors.
The regulatory structure also gives regulatory authorities extensive
discretion in their supervisory and enforcement activities and examination
policies, including policies regarding asset classification and the
establishment of adequate loan loss reserves for regulatory purposes. Any change
in regulatory requirements and policies, whether by the OTS, the FDIC or the
Congress, could have a material adverse impact on the Corporation, the Bank and
their operations. The description of statutory provisions and regulations that
apply to the Corporation and the Bank discussed below and elsewhere in this
prospectus is not a complete description of them and their effects on the Bank
and the Corporation.
Holding Company Regulation
The Corporation is a nondiversified unitary savings and loan holding
company under federal law. Formerly, a unitary savings and loan holding company
was not restricted as to the types of business activities in which it could
engage, provided that its subsidiary savings association continued to be a
qualified thrift lender. See "--Federal Savings Institution Regulation
- --Qualified Thrift Lender Test." Recent legislation, however, restricts unitary
savings and loan holding companies not existing or applied for before May 4,
1999 to activities permissible for a financial holding company as defined under
the legislation, including insurance and securities activities, and those
permitted for a multiple savings and loan holding company, as described below.
The Corporation qualifies for the grandfather.
A savings and loan holding company is prohibited from, directly or
indirectly, acquiring more than 5% of the voting stock of another savings
institution or savings and loan holding company and from acquiring or retaining
control of a depository institution that is not insured by the FDIC, unless it
first receives the approval of the OTS. In evaluating applications by holding
companies to acquire savings institutions, the OTS considers the financial and
managerial resources and future prospects of the holding company and the
institution involved, the effect of the acquisition on the risk to the deposit
insurance funds, the convenience and needs of the community and competitive
factors.
The OTS may not approve any acquisition that results in a multiple
savings and loan holding company controlling savings institutions in more than
one state. However, there are two exceptions to this general rule. First, the
approval of interstate supervisory acquisitions by savings and loan holding
companies. Second, the acquisition of a savings institution in another state if
the laws of the state of the target savings institution specifically permit the
acquisition. The states vary in the extent to which they permit interstate
savings and loan holding company acquisitions.
Although savings and loan holding companies do not have specific
capital requirements or specific restrictions on the payment of dividends or
other capital distributions, federal regulations place these restrictions on
subsidiary savings institutions as described below. The Bank must notify the OTS
30 days before declaring any dividend to the Corporation. In addition, the
financial impact of a holding company on its subsidiary institution is a matter
that is evaluated by the OTS, which has authority to order the stoppage of
activities or divestiture of subsidiaries deemed to pose a threat to the safety
and soundness of the institution.
Federal Savings Institution Regulation
Business Activities. The activities of federal savings institutions are
governed by federal law and regulations. These laws and regulations delineate
the nature and extent of the activities in which federal associations may
engage. In particular, many types of lending authority for federal association
are limited to a specified percentage of the institution's capital or assets.
Capital Requirements. The OTS capital regulations require savings
institutions to meet three minimum capital standards: a 1.5% tangible capital
ratio, a 3% leverage ratio and an 8% risk-based capital ratio. Effective April
1, 1999, however, the minimum leverage ratio increased to 4% for all
institutions except those with the highest rating on the CAMELS financial
institution rating system. In addition, the prompt corrective action standards
discussed below also establish, in effect, a minimum 2% tangible capital
standard, a 4% leverage ratio (3% for institutions receiving the highest rating
on the CAMELS financial institution rating system) and, together with the
risk-based capital standard itself, a 4% Tier 1 risk-based capital standard. The
OTS regulations also require that, in meeting the tangible, leverage and
risk-based capital standards, institutions must generally deduct investments in
and loans to subsidiaries engaged in activities as principal that are not
permissible for a national bank.
The risk-based capital standard requires an institution to maintain
Tier 1 or core capital to risk-weighted assets of at least 4% and total capital
to risk-weighted assets of at least 8%. Total capital is defined as core capital
and supplementary capital. In determining the amount of risk-weighted assets,
all assets, including certain off-balance sheet assets, are multiplied by a
risk-weight factor of 0% to 100%, assigned by the OTS capital regulation based
on the risks believed inherent in the type of asset. Core or Tier 1 capital is
defined as common stockholders' equity and retained earnings, certain
noncumulative perpetual preferred stock and related surplus, and minority
interests in equity accounts of consolidated subsidiaries, less intangibles
other than certain mortgage servicing rights and credit card relationships. The
components of supplementary capital include cumulative preferred stock,
long-term perpetual preferred stock, mandatory convertible securities,
subordinated debt and intermediate preferred stock, and the allowance for loan
and lease losses limited to a maximum of 1.25% of risk-weighted assets. Overall,
the amount of supplementary capital included as part of total capital cannot
exceed 100% of core capital.
The capital regulations also incorporate an interest rate risk
component. Savings institutions with "above normal" interest rate risk exposure
are subject to a deduction from total capital for purposes of calculating their
risk-based capital requirements. Presently, the OTS has deferred implementation
of the interest rate risk component. At September 30, 1999, the Bank met each of
its capital requirements. See Note 12 to Notes to Consolidated Financial
Statements for further information.
Prompt Corrective Regulatory Action. The OTS is required to take
certain supervisory actions against undercapitalized institutions, the severity
of which depends upon the institution's degree of undercapitalization.
Generally, a savings institution that has a ratio of total capital to risk
weighted assets of less than 8%, a ratio of Tier 1 or core capital to
risk-weighted assets of less than 4%, or a ratio of core capital to total assets
of less than 4%, or 3% or less for institutions with the highest examination
rating, is considered to be "undercapitalized." A savings institution that has a
total risk-based capital ratio less than 6%, a Tier 1 capital ratio of less than
3% or a leverage ratio that is less than 3% is considered to be "significantly
undercapitalized" and a savings institution that has a tangible capital to
assets ratio equal to or less than 2% is deemed to be "critically
undercapitalized." Although there is a narrow exception, the OTS is required to
appoint a receiver or conservator for an institution that is "critically
undercapitalized" if the institution is critically undercapitalized on average
during the calendar quarter 270 days after becoming critically undercapitalized.
The regulation also provides that an institution must file a capital restoration
plan with the OTS within 45 days of the date that the OTS notifies it that it is
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized." Compliance with the plan must be guaranteed by any parent
holding company. In addition, numerous mandatory supervisory actions immediately
apply to an undercapitalized institution, including, but not limited to,
increased monitoring by regulators and restrictions on growth, capital
distributions and expansion. The OTS could also take any one of a number of
discretionary supervisory actions, including issuing a capital directive and
replacing senior executive officers and directors.
Insurance of Deposit Accounts. Deposits of the Bank are presently
insured by the Savings Association Insurance Fund. The FDIC maintains a
risk-based assessment system by which institutions are assigned to one of three
categories based on their capitalization and one of three subcategories based on
examination ratings and other supervisory information. An institution's
assessment rate depends upon the categories to which it is assigned. Assessment
rates for Savings Association Insurance Fund member institutions are determined
semiannually by the FDIC and currently range from zero basis points for the
healthiest institutions to 27 basis points for the riskiest.
In addition to the assessment for deposit insurance, institutions are
required to pay on bonds issued in the late 1980s by the Financing Corporation
to recapitalize the predecessor to the Savings Association Insurance Fund.
During 1998, Financing Corporation payments for Savings Association Insurance
Fund members approximated 6.10 basis points, while Bank Insurance Fund members
paid 1.22 basis points. By law, there will be equal sharing of Financing
Corporation payments between the members of both insurance funds on the earlier
of January 1, 2000 or the date the two insurance funds are merged.
The FDIC may terminate an institution's deposit insurance if it finds
that the institution has engaged in unsafe or unsound practices, is in an unsafe
or unsound condition to continue operations or has violated any applicable law,
regulation, rule, order or condition imposed by the FDIC or the OTS. The
management of the Bank does not know of any practice, condition or violation
that might lead to termination of its deposit insurance.
Financial Institution Modernization Legislation. Recently enacted
federal legislation designed to modernize the regulation of the financial
services industry expands the ability of bank holding companies to affiliate
with other types of financial services companies such as insurance companies and
investment banking companies. However, the legislation provides that companies
that acquire control of a single savings association after May 4, 1999 (or that
filed an application for that purpose after that date) are not entitled to the
unrestricted activities formerly allowed for a unitary savings and loan holding
company. Rather, these companies will have authority to engage in the activities
permitted "a financial holding company" under the new legislation, including
insurance and securities-related activities, and the activities currently
permitted for multiple savings and loan holding companies, but generally not in
commercial activities. The authority for unrestricted activities is
grandfathered for unitary savings and loan holding companies, such as the
Corporation, that existed before May 4, 1999. However, the authority for
unrestricted activities would not apply to any company that acquired the
Corporation.
Loans to One Borrower. Federal law provides that savings institutions
must generally follow the limits on loans to one borrower applicable to national
banks. A savings institution may not make a loan or extend credit to a single or
related group of borrowers in excess of 15% of its unimpaired capital and
surplus. An additional amount may be lent, equal to 10% of unimpaired capital
and surplus, if secured by specified readily-marketable collateral. At September
30, 1999, the Bank's limit on loans to one borrower was $7.4 million. The Bank
may apply to have this amount increased to $14.8 million for borrowers who have
loans secured by residential lending. At September 30, 1999, the Bank had
applied for this limit increase for three borrowers with a maximum aggregate
exposure to the three borrowers of $24.6 million. At September 30, 1999, the
Bank's largest aggregate amount of loans to one borrower was $11.8 million, all
of which was performing according to their terms. The Bank had received
permission to increase the loan to one borrower limit on this borrower.
Qualified Thrift Lender Test. Federal law requires savings institutions
to meet a qualified thrift lender test. Under the test, a savings association is
required to either qualify as a "domestic building and loan association" under
the Internal Revenue Code or maintain at least 65% of its "portfolio assets" in
certain "qualified thrift investments" in at least 9 months out of each 12 month
period. "Portfolio assets" equals total assets less specified liquid assets up
to 20% of total assets, intangibles, including goodwill, and the value of
property used to conduct business. "Qualified thrift investments" are primarily
residential mortgages and related investments, including certain mortgage-backed
securities.
A savings institution that fails the qualified thrift lender test faces
certain operating restrictions and may be required to convert to a commercial
bank charter. As of September 30, 1999, the Bank complied with the qualified
thrift lender test. Recent legislation has expanded the extent to which
education loans, credit card loans and small business loans may be considered
"qualified thrift investments."
Limitation on Capital Distributions. OTS regulations impose limitations
upon all capital distributions by a savings institution, including cash
dividends, payments to repurchase its shares and payments to stockholders of
another institution in a cash-out merger. The rule effective through the first
quarter of 1999 established three tiers of institutions based primarily on an
institution's capital level. A Tier I institution exceeded all capital
requirements before and after a proposed capital distribution and has not been
advised by the OTS that it needs more than normal supervision. A Tier I
institution could, after first giving notice to but without obtaining approval
of the OTS, make capital distributions during the calendar year equal to the
greater of 100% of its net earnings to date during the calendar year plus the
amount that would have reduced by one-half the excess capital over its capital
requirements at the beginning of the calendar year, or 75% of its net income for
the previous four quarters. Any additional capital distributions required prior
regulatory approval.
Effective April 1, 1999, the OTS's capital distribution regulation
changed. Under the new regulation, an application to and the prior approval of
the OTS is required before any capital distribution if the institution does not
meet the criteria for "expedited treatment" of applications under OTS
regulations (generally, compliance with all capital requirements and examination
ratings in one of two top categories), the total capital distributions for the
calendar year exceed net income for that year plus the amount of retained net
income for the preceding two years, the institution would be undercapitalized
following the distribution or the distribution would otherwise be contrary to a
statute, regulation or agreement with OTS. If an application is not required,
the institution must still give advance notice to OTS of the capital
distribution. If the Bank's capital fell below its regulatory requirements or if
the OTS notified it that it was in need of more than normal supervision, the
Bank's ability to make capital distributions could be restricted. In addition,
the OTS could prohibit a proposed capital distribution, which would otherwise be
permitted by the regulation if the OTS determines that the distribution would be
an unsafe or unsound practice.
Liquidity. The Bank is required to maintain an average daily balance of
specified liquid assets equal to a monthly average of not less than a specified
percentage of its net withdrawable deposit accounts plus short-term borrowings.
This liquidity requirement is currently 4%, but may be changed from time to time
by the OTS to any amount within the range of 4% to 10%. Monetary penalties may
be imposed for failure to meet these liquidity requirements. The Bank met these
requirements at September 30, 1999.
Assessments. Savings institutions are required to pay assessments to
the OTS to fund the agency's operations. The general assessments, paid on a
semi-annual basis, are computed upon the savings institution's total assets,
including consolidated subsidiaries, as reported in the Bank's latest quarterly
thrift financial report. The Bank's assessments for the fiscal year ended
September 30, 1999 totaled $126,000.
Branching. OTS regulations permit federally chartered savings
associations to branch nationwide under certain conditions. Generally, federal
savings associations may establish interstate networks and geographically
diversify their loan portfolios and lines of business. The OTS authority
preempts any state law purporting to regulate branching by federal savings
associations.
Transactions with Related Parties. The Bank's authority to engage in
transactions with "affiliates" is limited by federal law. Generally, an
affiliate is any company that controls or is under common control with an
institution, including the Corporation. The aggregate amount of covered
transactions with any individual affiliate is limited to 10% of the capital and
surplus of the savings institution. The aggregate amount of covered transactions
with all affiliates is limited to 20% of the savings institution's capital and
surplus. Certain transactions with affiliates are required to be secured by
collateral in an amount and of a type described in federal law. The purchase of
low quality assets from affiliates is generally prohibited. The transactions
with affiliates must be on terms and under circumstances, that are at least as
favorable to the institution as those prevailing at the time for comparable
transactions with non-affiliated companies. In addition, savings institutions
are prohibited from lending to any affiliate that is engaged in activities that
are not permissible for bank holding companies and no savings institution may
purchase the securities of any affiliate other than a subsidiary.
The Bank's authority to extend credit to executive officers, directors
and 10% stockholders, as well as entities within the control of these persons,
is also governed by federal law. These persons are often referred to as
"insiders" of a company. Loans to insiders are required to be made on terms
substantially the same as those offered to unaffiliated individuals and may not
involve more than the normal risk of repayment. Recent legislation created an
exception for loans made pursuant to a benefit or compensation program that is
widely available to all employees of the institution and does not give
preference to insiders over other employees. The law limits both the individual
and aggregate amount of loans the Bank may make to insiders based, in part, on
the Bank's capital position and requires certain board approval procedures to be
followed.
Enforcement. The OTS has primary enforcement responsibility over
savings institutions and has the authority to bring actions against the
institution and all institution-affiliated parties, including stockholders, and
any attorneys, appraisers and accountants who knowingly or recklessly
participate in wrongful action likely to have an adverse effect on an insured
institution. Formal enforcement action may range from the issuance of a capital
directive or cease and desist order, to removal of officers and/or directors, to
institution of a receivership or conservatorship, or to termination of deposit
insurance. Civil penalties cover a wide range of violations and can amount to
$25,000 per day, or even $1 million per day in especially serious cases. The
FDIC has the authority to recommend to the Director of the OTS that enforcement
action to be taken with respect to a particular savings institution. If action
is not taken by the Director, the FDIC has authority to take action under
certain circumstances. Federal law also establishes criminal penalties for
certain violations.
Standards for Safety and Soundness. The federal banking agencies have
adopted Interagency Guidelines prescribing Standards for Safety and Soundness.
The guidelines set forth the safety and soundness standards that the federal
banking agencies use to identify and address problems at insured depository
institutions before capital becomes impaired. If the OTS determines that a
savings institution fails to meet any standard prescribed by the guidelines, the
OTS may require the institution to submit an acceptable plan to achieve
compliance with the standard.
Federal Home Loan Bank System
The Bank is a member of the Federal Home Loan Bank System, which
consists of 12 regional Federal Home Loan Banks. The Federal Home Loan Bank of
Atlanta provides a central credit facility primarily for member institutions.
The Bank, as a member of the Federal Home Loan Bank of Atlanta, is required to
acquire and hold shares of capital stock in that Federal Home Loan Bank of
Atlanta in an amount at least equal to 1.0% of the aggregate principal amount of
its unpaid residential mortgage loans and similar obligations at the beginning
of each year, or 1/20 of its advances (borrowings) from the Federal Home Loan
Bank of Atlanta, whichever is greater. The Bank was in compliance with this
requirement with an investment in Federal Home Loan Bank of Atlanta stock at
September 30, 1999, of $8.2 million. Federal Home Loan Bank of Atlanta advances
must be secured by specified types of collateral.
The Federal Home Loan Banks are required to provide funds for the
resolution of insolvent thrifts in the late 1980s and to contribute funds for
affordable housing programs. These requirements could reduce the amount of
dividends that the Federal Home Loan Banks pay to their members and could also
result in the Federal Home Loan Banks imposing a higher rate of interest on
advances to their members. If dividends were reduced, or interest on future
Federal Home Loan Bank advances increased, the Bank's net interest income would
likely also be reduced. Recent legislation has changed the structure of the
Federal Home Loan Banks funding obligations for insolvent thrifts, revised the
capital structure of the Federal Home Loan Banks and implemented entirely
voluntary membership for Federal Home Loan Banks. Management cannot predict the
effect that these changes may have with respect to its Federal Home Loan Bank
membership.
Federal Reserve System
The Federal Reserve Board regulations require savings institutions to
maintain non-interest earning reserves against their transaction accounts,
primarily NOW and regular checking accounts. The regulations generally require
that reserves be maintained against aggregate transaction accounts as follows:
for accounts aggregating $46.5 million or less, subject to adjustment by the
Federal Reserve Board the reserve requirement is 3%; and for accounts
aggregating greater than $46.5 million, the reserve requirement is $1.395
million plus 10%, subject to adjustment by the Federal Reserve Board between 8%
and 14%, against that portion of total transaction accounts in excess of $46.5
million. The first $4.9 million of otherwise reservable balances, as adjusted by
the Federal Reserve Board, are exempted from the reserve requirements. The Bank
complies with the foregoing requirements.
Community Reinvestment Act
Under the Community Reinvestment Act, as implemented by OTS
regulations, a savings association has a continuing and affirmative obligation
consistent with its safe and sound operation to help meet the credit needs of
its entire community, including low and moderate income neighborhoods. The
Community Reinvestment Act does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the Community
Reinvestment Act. The Community Reinvestment Act requires the OTS, in connection
with its examination of an institution, to assess the institution's record of
meeting the credit needs of its community and to take such record into account
in its evaluation of applications by such institution. The Community
Reinvestment Act requires public disclosure of an institution's Community
Reinvestment Act rating. The Bank's latest Community Reinvestment Act rating,
received from the OTS was
"satisfactory."
TAXATION
Federal Taxation
General. The Corporation and the Bank report their income via a
consolidated return on a fiscal year basis using the accrual method of
accounting and are subject to federal income taxation in the same manner as
other corporations with some exceptions, including particularly the Bank's
reserve for bad debts discussed below. The following discussion of tax matters
is intended only as a summary and does not purport to be a comprehensive
description of the tax rules applicable to the Bank or the Corporation.
Tax Bad Debt Reserves. For discussion related to the Bank's Tax Bad
Debt Reserves, please refer to page 25 note 10 of the Company's Annual Report to
Stockholders for the fiscal year ended September 30, 1999.
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.
Audits. There have not been any audits of the Corporation's federal or
state income tax returns during the past five years.
State Income Taxation. South Carolina has adopted the Code as it
relates to savings and loan associations, effective for taxable years beginning
after December 31, 1985. Coastal Federal is subject to South Carolina income tax
at the rate of 6%. This rate of tax is imposed on savings associations in lieu
of the general state business corporation income tax.
For information regarding income taxes payable by Coastal Federal, see
Note 10 of the Notes to Consolidated Financial Statements.
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, 1999.
Total Investment
Including Land, Net Book Approximate
Year Building, Furni- Value as of Square Owned/
Location Opened ture and Fixtures 9/30/99 Footage Leased
- -------- ------ ----------------- ------- ------- ------
(Dollars in thousands)
Main Office
2619 Oak St. 1980 $9,534 $3,527 25,000 Owned
Myrtle Beach, SC (1)
Dunes Office
7500 North Kings Hwy 1971 647 270 2,000 Owned
Myrtle Beach, SC
Ocean Drive Office
521 Main Street 1973 960 532 4,100 Owned
North Myrtle Beach, SC
Surfside Office
112 Highway 17 South 1975 1,435 1,007 3,300 Owned
& Glenns Bay Road
Surfside Beach, SC
Conway Office
310 Highway 378 1976 799 243 2,882 Owned
Conway, SC
Socastee Office
1 Cimerron Drive 1981 892 376 2,275 Owned
Myrtle Beach, SC
Murrells Inlet Office
Highway 17 South 1986 954 569 3,450 Owned
Murrells Inlet, SC
Waccamaw Medical Pk Office
7000 Waccamaw Medical Pk Rd 1986 566 289 1,450 Owned
Conway, SC
Florence Office
1385 Alice Drive 1996 366 230 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 9/30/99 Footage Leased
- -------- ------ ----------------- ------- ------- ------
(Dollars in thousands)
Coastal Investor Services, Inc.
2619 Oak Street 1987 129 25 N/A N/A
Myrtle Beach, SC
Coastal Federal Mortgage, Inc.
2619 Oak Street 1995 173 73 1,038 Leased
Myrtle Beach, SC 29577
South Brunswick Office
1625 Seaside Road S.W. 1998 1,010 933 3,000 Owned
Sunset Beach, NC
Mall Plaza 1997 1,156 1,102 17,500 Owned
504 27th Avenue North
Myrtle Beach, SC
Conway Rental Property 1999 540 539 10,000 Owned
1515 4th Avenue
Conway, SC 29526
Little River Office 1999 1,074 1,074 2,300 Owned
1602 Highway 17
Little River, SC 29566
Carolina Forest Office (under construction) 416 416 3,500 Owned
3894 Renee Drive
Myrtle Beach, SC 29579
Wilmington Loan Office 1999 6 6 1,400 Leased
5710 Oleander Drive, Suite 209
Wilmington, NC 28403
- ------------
(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 $11.2 million at September 30, 1999. See Note 5 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.
Year 2000 Compliance
The Company is a user of computers, computer software and equipment utilizing
embedded microprocessors that will be effected by the year 2000 issue. The year
2000 issue exists because many computer systems and applications use two-digit
date fields to designate a year. As the century date change occurs,
date-sensitive systems may recognize the year 2000 as 1900, or not at all. This
inability to recognize or properly treat the year 2000 may cause erroneous
results, ranging from system malfunctions to incorrect or incomplete processing.
The Company's Year 2000 Committee consists of Senior management members of the
Company. The Committee makes a monthly progress report to the Board of
Directors. The Committee has developed and is implementing a comprehensive plan
to make all information and non-information technology assets year 2000
compliant. The plan is comprised of the following phases:
1. Awareness - Educational initiatives on year 2000 issues and concerns.
This phase is ongoing, especially as it relates to informing customers
of the Company's year 2000 preparedness.
2. Assessment - Inventory of all technology assets and identification of
third-party vendors and service providers. This phase was completed as
of August 31, 1998.
3. Renovation - Review of vendor and service providers responses to the
Company's year 2000 inquires and development of a follow-up plan and
timeline. This phase was completed as of October 15, 1998.
4. Validation - Testing all systems and third-party vendors for year 2000
compliance. The Company has currently completed this phase of its plan.
A third-party service bureau processes all customer transactions and
has completed upgrades to its systems to be year 2000 compliant. The
Company tested the third-party systems by reviewing the results of
transactions of different test dates before and after the year 2000
date change covering all of the applications used by the Company.
Testing was completed as of November 16, 1998. The results of the test
were all positive. Other parties whose year 2000 compliance may effect
the Company include the FHLB of Atlanta, brokerage firms, the operator
of the Company's ATM network and the Company's 401K administrator.
These third-parties have indicated their compliance or intended
compliance. Where it is possible to do so, the Company has tested with
these third-parties. All the test results were positive. Where testing
is not possible, the Company will rely on certifications from vendors
and service providers.
5. Implementation - Replacement or repair of non-compliant technology has
been completed.
The Company estimates its total cost to replace computer equipment, software
programs or other equipment containing embedded microprocessors that were not
year 2000 compliant to be $200,000, of which $172,000 has been incurred as of
September 30, 1999. System maintenance or modification costs are charged to
expense as incurred, while the cost of new hardware, software or other equipment
is capitalized and amortized over their estimated useful lives. The Company does
not separately track the internal costs and time that its own employees spend on
year 2000 issues, which are principally payroll costs.
Because the Company depends substantially on its computer systems and those of
third-parties, the failure of these systems to be year 2000 compliant could
cause substantial disruption of the Company's business and could have a material
adverse financial impact on the Company. Failure to resolve year 2000 issues
presents the following risks to the Company; (1) the Company could lose
customers to other financial institutions, resulting in a loss of revenue, if
the Company's third-party service bureau is unable to properly process customer
transactions; (2) governmental agencies, such as the Federal Home Loan Bank, and
correspondent institutions could fail to provide funds to the Company, which
could materially impair the Company's liquidity and affect the Company's ability
to fund loans and deposit withdrawals; (3) concern on the part of depositors
that year 2000 issues could impair access to their deposit account balances
could result in the Company experiencing deposit outflows prior to December 31,
1999; and (4) the Company could incur increased personnel costs if additional
staff is required to perform functions that inoperative systems would have
otherwise performed. Management believes that it is not possible to estimate the
potential lost revenue due to the year 2000 issue, as the extent and longevity
of any potential problem cannot be predicted. Because substantially all of the
Company's loan portfolio consists of loans primarily secured by real estate,
management believes that year 2000 issues will not impair the ability of the
Company's borrowers to repay their debt.
There can be no assurances that the Company's year 2000 plan will effectively
address the year 2000 issues, that the Company's estimates of the timing and
costs of completing the plan will ultimately be accurate or that the impact of
any failure of the Company or its third-party vendors and service providers to
be year 2000 compliant will not have a material adverse effect on the Company's
business, financial condition or results of operations. The Company has
developed a contingency plan for year 2000 in the event there is a malfunction
in any of the critical application software. The plan provides for alternative
methods to conduct business until application problems can be rectified. The
Company has recognized that its commercial borrowers may also face risks from
year 2000 issues. The Company has identified its material loan relationships and
completed year 2000 surveys of those customers to assess their vulnerability to
year 2000 problems and their readiness for year 2000 compliance. The Company is
continuing to monitor its commercial borrowers for year 2000 risk and feels that
its commercial relationships do not pose an inordinate risk at this time.
Item 3. Legal Proceedings
- --------------------------
The Company is not a defendant in any lawsuits. The Bank is a defendant
in one significant lawsuit. The action commenced on December 1, 1997, and
the Plaintiffs are seeking approximately $1.5 million in actual damages
as well as punitive damages. The cause of action is breach of fiduciary
duties, negligence, fraud, civil conspiracy and breach of contract
arising out of a lending relationship. At this date, the Bank does not
know if or when the action will go to trial. The Bank will vigorously
defend this suit. Based upon discussions with its counsel, the Bank does
not expect the results of this action to be material to its financial
results.
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, 1999
("Annual Report") is incorporated herein by reference.
Item 6. Selected Financial Data
- --------------------------------
The information contained in the section captioned "Financial
Highlights" in the Annual Report is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial
- ----------------------------------------------------------
Condition and Results of Operations
-----------------------------------
The information contained in the section captioned "Management's
Discussion and Analysis" in the Annual Report is incorporated herein by
reference.
Item 7A. Quantitative and Qualitative Disclosures about
- --------------------------------------------------------
Market Risk
-----------
The information contained in the section captioned "Interest Rate Risk
Disclosure" in the Annual Report is incorporated herein by reference.
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
2000 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, 50, 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 Real Estate
Investment Corporation. He currently
serves on the Board of Visitors of
Coastal Carolina University's Wall
School of Business, the Board of
Directors of the Waccamaw Community
Foundation, the Board of Directors of
the Coastal Education Foundation, the
Board of Directors of the North Carolina
Bankers Association and the Board of
Directors of the Financial Institutions
Retirement Fund.
Jimmy R. Graham, 51, 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, 39, 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 Mortgage Bankers &
Realty Company, Inc., Coastal
Investments Corporation, and Coastal
Federal Mortgage, Coastal Real Estate
Investment Corporation and President of
Coastal Federal Holdings Corporation.
He currently serves on the Junior
Achievement Board of Directors of Horry
County. He is a Past Chairman of the
Board of Directors for Junior
Achievement of Horry County as well as
Past Chairman of the Board of Directors
for Junior Achievement of Greenville.
Mr. Rexroad is the President of the
Financial Manager's Society of South
Carolina.
Name, Age and Position Business Experience
- --------------------- -------------------
He is a certified public accountant, and
is a member of the AICPA and SCACPA.
Prior to joining the Company, Mr.
Rexroad was a partner with KPMG LLP
where he was partner in charge of the
Financial Institutions practice in South
Carolina.
Phillip G. Stalvey, 43, 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 Investor Services, Inc. He has
been associated with Coastal Federal for
the past 18 years. In addition, Mr.
Stalvey is a member of the Florence
Stake Presidency with his Church, a
committee member of a local Scout Troop
and a Board of Director for the Myrtle
Beach Airforce Base Redevelopment
Authority.
Steven J. Sherry, 48 Mr. Sherry is Executive Vice President
Executive Vice President and and Director of Marketing for the Bank.
Director of Marketing. He also serves as Executive Vice
President/Chief Marketing Officer for
Coastal Financial Corporation. He has
been associated with Coastal Federal, in
a consultative fashion for over five
years, and formally with the
organization for 18 months. Mr. Sherry
is a member of the Bank Marketing
Association, and holds various
achievement awards for marketing and
advertising.
Susan J. Cooke, 49, Ms. Cooke is Vice President and
Vice President and Corporate Secretary for Coastal Federal
Corporate Secretary and for Coastal Financial Corporation,
Corporate Secretary for Coastal Mortgage
Bankers & Realty Company, Inc., and
Coastal Investor Services, Inc. Ms.
Cooke has been employed with Coastal
Federal for twelve 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 -- Executive Compensation" in the Proxy Statement is
incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and
- -------------------------------------------------------------
Management
----------
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by
reference to the section captioned "Voting Securities and
Principal Holders Thereof" of the Proxy Statement.
(b) Security Ownership of Management
Information required by this item is incorporated herein by
reference to the sections captioned "Proposal I -- Election of
Directors" and "Voting Securities and Principal Holders
Thereof" of the Proxy Statement.
(c) Management of the Corporation knows of no arrangements,
including any pledge by any person of securities of the
Corporation, the operation of which may at a subsequent date
result in a change in control of the registrant.
Item 13. Certain Relationships and Related Transactions
- --------------------------------------------------------
The information required by this item is incorporated herein by
reference to the section captioned "Proposal I -- Election of Directors" and
"Voting Securities and Principal Holders Thereof" in the Proxy Statement.
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, 1998 and 1999.
(b) Consolidated Statements of Operations for the Years
Ended September 30, 1997, 1998 and 1999.
(c) Consolidated Statements of Stockholders' Equity and
Comprehensive Income for the Years Ended September
30, 1997, 1998 and 1999.
(d) Consolidated Statements of Cash Flows for the Years
Ended September 30, 1997, 1998 and 1999.
(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) Employment Agreement with Steven J. Sherry******
(i) 1990 Stock Option Plan***
(j) Directors Performance Plan****
13 Annual Report to Stockholders for the Fiscal
Year Ended September 30, 1999*
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, 1999, 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 10-K 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.
***** Incorporated by reference to 1997 Form 10-K filed with the
Securities and Exchange Commission on January 2, 1998.
****** Incorporated by reference to 1998 Form 10-K filed with the
Securities and Exchange Commission on December 29, 1998.
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 29, 1999 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 29, 1999 Date: December 29, 1999
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 29, 1999 Date: December 29, 1999
By: /s/James C. Benton By: /s/James P. Creel
------------------ -----------------
James C. Benton James P. Creel
Director Director
Date: December 29, 1999 Date: December 29, 1999
By: /s/Harold D. Clardy By: /s/James H. Dusenbury
-------------------- ---------------------
Harold D. Clardy James H. Dusenbury
Director Director
Date: December 29, 1999 Date: December 29, 1999
By: /s/G. David Bishop
------------------
G. David Bishop
Director
Date: December 29, 1999