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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, 1996
OR
[ X ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-19684
COASTAL FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 57-0925911
- --------------------------------------------------------------------------------
(State or other jurisdiction of incorporation (I.R.S. Employer I.D.)
or organization)
2619 North Oak Street, Myrtle Beach, South Carolina 29577-3129
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (803) 448-5151
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [ X ] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
As of November 30, 1996, there were issued and outstanding 3,447,187
shares of the registrant's Common
Stock.
The aggregate market value of the voting stock held by nonaffiliates of
the registrant, based on the closing sales price of the registrant's common
stock as quoted on the National Association of Securities Dealers, Inc.
Automated Quotation System under the symbol "CFCP" on November 30, 1996, was
$74,114,521(3,447,187 shares at $21.50 per share, which is the ending bid on
November 30, 1996.). 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, 1996. (Parts I and II)
2. Portions of the Proxy Statement for the 1997 Annual Meeting of
Stockholders. (Part III)
PART I
Item 1. Business
General
Coastal Financial Corporation ("Coastal Financial" or the
"Corporation") was incorporated in the State of Delaware in June 1990, for the
purpose of becoming a savings and loan holding company for Coastal Federal
Savings Bank ("Coastal Federal" or the "Bank"). On January 28, 1991, the
stockholders of the Bank approved a plan to reorganize the Bank into the holding
company form of ownership. The reorganization was completed on November 6, 1991,
on which date the Bank became the wholly-owned subsidiary of the Corporation,
and the stockholders of the Bank became stockholders of the Corporation. Prior
to completion of the reorganization, the Corporation had no material assets or
liabilities and engaged in no business activities. On April 1, 1993 Coastal
Federal's investment in Coastal Investments Corporation, formerly named Coastal
Investment Services, Inc., was transferred to Coastal Financial and became a
first tier subsidiary of the Corporation. The majority of the financial results
relates to the Corporation's largest 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 recently
formed subsidiary, Coastal Federal Mortgage, Inc. Coastal Federal Mortgage, Inc.
engages in the origination of conforming mortgage loans which are sold in the
secondary market generally servicing released.
On May 7, 1996, the Corporation formed Coastal Technology Services,
Inc. ("CTS"). CTS primarily develops specialized banking software for sale to
financial services companies. Activity for fiscal 1996 was limited for CTS.
Coastal Federal was organized in 1953 as a mutual savings and loan
association and, since that time, its deposits have been federally insured. In
March 1989, Coastal Federal converted from a federally chartered mutual savings
and loan association to a federally chartered mutual savings bank. On October 4,
1990, Coastal Federal converted to the stock form of ownership ("Conversion")
through the sale and issuance of 492,541 shares of common stock at a price of
$10.00 per share, which resulted in gross proceeds to Coastal Federal of
$4,925,410.
Coastal Federal conducts its business from its main office in Myrtle
Beach, South Carolina, nine branch offices located in South Carolina and a
lending office in Sunset Beach, North Carolina. At September 30, 1996, Coastal
Financial had total assets of $459.7 million, total deposits of $313.4 million
and stockholders' equity of $27.7 million. The deposits of the Bank are insured
by the Federal Deposit Insurance Corporation ("FDIC") under the Savings
Association Insurance Fund ("SAIF"). The corporate offices of the Bank are
located at 2619 Oak Street, Myrtle Beach, South Carolina and the telephone
number is (803) 448-5151.
Eight of Coastal Federal's nine offices are in Horry County, South
Carolina. The economy of the Horry County area is dependent primarily on
tourism. To the extent Horry County area businesses rely heavily on tourism for
business, decreased tourism would have a significant adverse effect on Coastal
Federal's primary deposit base and lending area. Moreover, Coastal Federal would
likely experience a higher degree of loan delinquencies should the local economy
be significantly adversely affected.
Coastal Federal's principal business currently consists of attracting
deposits from the general public and using these funds to originate conventional
one-to-four family first mortgage loans, consumer and commercial business loans
and commercial real estate loans.
From 1982 until 1986, Coastal Mortgage Bankers and Realty Co., Inc.
("Coastal Mortgage"), Coastal Federal's wholly-owned service corporation,
invested in corporations which were actively engaged in real estate development
activities, primarily in the Myrtle Beach area. In 1986, Congress enacted
significant changes to the tax laws that reduced the tax benefits available on
second homes and rental property. The change in tax laws had a negative effect
on certain projects in which Coastal Mortgage was involved, and Coastal Mortgage
incurred significant losses from these real estate projects. Consequently, in
1986 Coastal Mortgage decreased its emphasis on real estate projects, decreasing
its loans to joint ventures as a percentage of total loans from 1.48% at
September 30, 1988 to 0% at September 30, 1995 and 1996, respectively.
Accordingly, losses from real estate partnerships were $394,000 in fiscal 1988
compared to income of $143,000 in fiscal 1996.
In 1988, the Bank decreased its emphasis on the origination of
commercial real estate loans. Commercial real estate loans as a percentage of
total loans have decreased from 20.1% of total loans at September 30, 1988 to
14.3% of total loans at September 30, 1996.
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,
1996, 6.3% and 10.7%, respectively, of the Bank's total loan portfolio consisted
of commercial business and consumer loans.
Selected Consolidated Financial Data and Other Items
The information contained in the table captioned "Selected Consolidated
Financial and Other Data" on page 2 of the Corporation's Annual Report to
Stockholders for the Fiscal Year Ended September 30, 1996 is incorporated herein
by reference.
Yields Earned and Rates Paid
The following table sets forth, for the periods and at the date
indicated, the weighted average yields earned on Coastal Financial's assets, the
weighted average interest rates paid on its liabilities, together with the net
yield on interest-earning assets.
Year Ended At
September 30, September 30,
----------------------------------
1994 1995 1996 1996
---- ---- ---- ----
Weighted average yield
on loan portfolio .................... 7.93% 8.39% 8.57% 8.59%
Weighted average yield
on mortgage-backed
securities ............................ 7.59 7.81 7.78 7.23
Weighted average yield
on Federal Funds and
overnight deposits .................... 3.40 5.77 5.89 5.35
Weighted average yield
on investment portfolio ............... 4.46 5.14 6.55 6.70
Weighted average yield
on all interest-
earning assets ....................... 7.77 8.27 8.46 8.38
Weighted average rate
paid on savings deposits .............. 3.29 3.96 4.08 4.12
Weighted average rate
paid on Federal Home
Loan Bank advances .................... 5.56 6.53 6.27 5.97
Weighted average rate
paid on repurchase
agreements ............................ 3.11 3.70 4.63 3.57
Weighted average rate
paid on all interest
bearing liabilities .................. 3.68 4.75 4.70 4.44
Interest rate spread (spread
between weighted average
rate on all interest-earning
assets and all interest-
bearing liabilities) ................. 4.09 3.52 3.76 3.94
Net interest margin (net
interest income as a percentage
of average interest-earning
assets) ............................... 4.12 3.62 3.86 4.07
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); and (iii) changes in rate-volume (change in rate
multiplied by change in volume). Non-accrual loans are included in the average
volume calculations.
Year Ended September 30,
-------------------------------------------------------------------------------------------
1994 Compared to 1993 1995 Compared to 1994
Increase (Decrease) Increase (Decrease)
Due to Due to
-------------------------------------------- ------------------------------------------
Rate/ Rate/
Rate Volume Volume Net Rate Volume Volume Net
(Dollars in thousands)
Interest-Earning Assets:
Loans ........................ $(1,810) $ 1,179 $ (88) $ (719) $ 1,377 $ 3,346 $ 222 $ 4,945
Mortgage-backed
securities................... (52) (576) 41 (587) 4 567 17 588
Investments and
other........................ 113 (89) (123) (99) 11 188 34 233
--- -- --- -- -- --- -- ---
Total net change in
income on interest-
earning assets................ (1,749) 514 (170) (1,405) 1,392 4,101 273 5,766
----- --- --- ----- ----- ----- --- -----
Interest-Bearing
Liabilities:
Deposits...................... (1,433) 22 (3) (1,414) 1,735 (297) (64) 1,374
FHLB advances................. (186) 291 (18) 87 526 3,215 564 4,305
Repurchase
agreements................... (10) 20 (11) (1) 35 3 7 45
-- -- -- - -- - - --
Total net change in
expense on interest-
bearing liabilities........... (1,629) 333 (32) (1,328) 2,296 2,921 507 5,724
----- --- -- ----- ----- ----- --- -----
Net change in net
interest income............... $ (120) $ 181 $ (138) $ (77) $ (904) $1,180 $ (234) $ 42
========= ======= ======= ======= ======= ====== ======= =====
Year Ended September 30,
-------------------------------------------
1996 Compared to 1995
Increase (Decrease)
Due to
-------------------------------------------
Rate/
Rate Volume Volume Net
---- ------ ------ ---
Interest-Earning Assets:
Loans ........................ $ 615 $ 2,361 $ 51 $ 3,027
Mortgage-backed
securities................... (4) 1,083 (6) 1,073
Investments and
other........................ 177 96 19 292
--- -- -- ---
Total net change in
income on interest-
earning assets................ 644 3,540 49 4,392
--- ----- -- -----
Interest-Bearing
Liabilities:
Deposits...................... 300 1,455 44 1,799
FHLB advances................. (289) 51 (2) (240)
Repurchase
agreements................... 16 194 49 260
-- --- -- ---
Total net change in
expense on interest-
bearing liabilities........... 27 1,700 91 1,819
-- ----- -- -----
Net change in net
interest income............... $ 617 $ 1,840 $ (42) $2,573
======= ======= ====== ======
Average Balance Sheet
The following table sets forth certain information relating to the
Corporation's average balance sheet and reflects the average yield on assets and
average cost of liabilities for the periods indicated. Such yields and costs are
derived by dividing income or expense by the average balance of assets or
liabilities, respectively, for the periods presented. Average balances are
derived from month-end balances. Management does not believe that the use of
month-end balances instead of daily average balances has caused any material
difference in the information presented.
Year Ended September 30,
----------------------------------------------------------------------------------------
1994 1995
------------------------------------------- ------------------------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
(Dollars in thousands)
ASSETS
Loans ........................... $299,356 $ 23,726 7.93% $341,557 $ 28,671 8.39%
Investments(1) .................. 14,882 692 4.20 15,153 925 6.10
Mortgage-backed
securities ..................... 1,897 144 7.59 9,365 732 7.82
-------- -------- ---- -------- -------- ----
Total interest-earning
assets .......................... $316,135 $ 24,562 7.77% $366,075 $ 30,328 8.28%
======== ======== ==== ======== ======== ====
LIABILITIES
Transaction accounts ............ 72,359 1,210 1.67 80,586 1,678 2.08
Passbook accounts ............... 63,620 1,523 2.39 55,370 1,314 2.37
Certificate accounts ............ 121,142 5,783 4.77 124,287 6,898 5.55
FHLB advances ................... 54,226 3,014 5.56 112,097 7,319 6.53
Securities sold
under repurchase
agreements ..................... 570 18 3.11 1,705 63 3.70
-------- -------- ---- -------- -------- ----
Total interest-bearing
liabilities ..................... $313,779 $ 11,548 3.68% $363,733 $ 17,272 4.75%
======== ======== ==== ======== ======== ====
Net interest income/
interest rate spread ............ $ 13,014 4.09% $ 13,056 3.52%
Net yield on earning
assets .......................... 4.12% 3.62%
Ratio of earning assets
to interest-bearing
liabilities ..................... 1.01x 1.02x
Year Ended September 30,
-----------------------------------
1996
-----------------------------------
Average Yield/
Balance Interest Rate
------- -------- -----
ASSETS
Loans ...................... $369,733 $ 31,698 8.57%
Investments(1) ............. 16,730 1,217 7.27
Mortgage-backed
securities ................ 23,214 1,805 7.78
-------- -------- ----
Total interest-earning
assets ..................... $409,677 $ 34,720 8.46%
======== ======== ====
LIABILITIES
Transaction accounts ....... 114,220 2,862 2.51
Passbook accounts .......... 44,631 1,160 2.60
Certificate accounts ....... 134,415 7,667 5.70
FHLB advances .............. 112,878 7,079 6.27
Securities sold
under repurchase
agreements ................ 6,955 323 4.63
-------- -------- ----
Total interest-bearing
liabilities ................ $406,162 $ 19,091 4.70%
======== ======== ====
Net interest income/
interest rate spread ....... $ 15,629 3.76%
Net yield on earning
assets ..................... 3.86%
Ratio of earning assets
to interest-bearing
liabilities................. 1.02x
- -----------------
(1) Includes short-term interest-bearing deposits and Federal funds sold.
Lending Activities
General. The principal lending activities of Coastal Federal are the
origination of residential one-to-four family mortgage loans, consumer loans and
commercial business loans. The Bank originates construction and permanent loans
on single family and multi-unit dwellings, as well as on commercial structures.
The Bank has emphasized the origination of adjustable rate residential and
commercial real estate mortgages since 1982.
The Bank's loan portfolio, including mortgage-backed securities,
totaled approximately $404.2 million at September 30, 1996, representing
approximately 87.9% of its total assets. On that date, approximately 58.0% of
Coastal Federal's total loan portfolio, including mortgage-backed securities,
were secured by mortgages on one-to-four family residential properties. The
balance of the Bank's outstanding loans at that date consisted of construction
loans, consumer loans and commercial real estate and commercial business loans.
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) increased 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, 1996,
adjustable rate loans constituted $271.4 million (or 72.0%) of the Bank's total
loan portfolio. Therefore, at such date, fixed rate loans comprised only 18.0%
of the total loan portfolio. These lending practices were adopted to shorten the
term of the Bank's assets and make the loan portfolio more responsive to
interest rate volatility.
Loan Portfolio Analysis
The following tables set forth the composition of Coastal Federal's loan
and mortgage-backed securities portfolio by type of loan and type of security as
of the dates indicated.
At September 30,
-----------------------------------------------------------------
1992 1993 1994
------------------ ------------------- -------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in thousands)
Type of Loan:
Mortgage loans:
Construction.................................. $ 8,867 3.05% $ 12,266 4.04% $ 23,222 6.66%
On existing property.......................... 197,234 67.80 206,632 68.06 225,544 64.67
Mortgage-backed securities.................... 14,640 5.03 3,525 1.16 794 .23
Income property (commercial).................. 34,835 11.98 35,328 11.64 42,207 12.10
Commercial business loans...................... 10,665 3.67 13,913 4.58 14,052 4.03
Consumer loans:
Mobile home.................................. 2,299 .79 1,807 .60 1,497 .43
Automobiles.................................. 2,661 .91 5,126 1.69 6,300 1.81
Equity lines of credit....................... 10,180 3.50 11,362 3.74 12,763 3.66
Other........................................ 9,499 3.27 13,626 4.49 22,373 6.41
-------- ---- ------ ---- -------- ------
Total loans, loans held for sale, and
mortgage-backed securities................... $290,880 100.00% $303,585 100.0% $348,752 100.00%
====== ===== ======
Less:
Loans in process............................. (3,535) (5,607) (13,087)
Deferred loan fees (costs)................... (576) (546) (343)
Allowance for loan losses.................... (1,851) (2,753) (3,353)
-------- ------ -------
Total loans and
mortgage-backed securities, net.............. $284,918 $294,679 $331,969
======== ======== ========
At September 30,
-------------------------------------------
1995 1996
------------------- -------------------
Amount Percent Amount Percent
------ ------- ------ -------
Type of Loan:
Mortgage loans:
Construction.................................. $ 27,905 7.10% $ 34,566 8.10%
On existing property.......................... 228,881 58.27 231,373 54.23
Mortgage-backed securities.................... 12,776 3.25 27,029 6.33
Income property (commercial).................. 54,401 13.85 61,180 14.34
Commercial business loans...................... 19,610 4.99 26,946 6.32
Consumer loans:
Mobile home.................................. 1,204 .31 1,103 .26
Automobiles.................................. 5,941 1.51 7,261 1.70
Equity lines of credit....................... 13,210 3.36 12,441 2.91
Other........................................ 28,887 7.36 24,776 5.81
-------- ------ -------- -----
Total loans, loans held for sale, and
mortgage-backed securities................... $392,815 100.00% $426,675 100.00%
====== ======
Less:
Loans in process............................. (17,178) (18,589)
Deferred loan fees (costs)................... (71) 286
Allowance for loan losses.................... (3,578) (4,172)
-------- --------
Total loans and
mortgage-backed securities, net.............. $371,988 $404,200
======== ========
(table continued on following page)
At September 30,
------------------- -------------------- ---------------------
1992 1993 1994
------------------- -------------------- ---------------------
Amount Percent Amount Percent Amount Percent
(Dollars in thousands)
Type of Security:
Residential real estate:
Single family, one-to-four.......................$201,859 69.41% $218,095 71.85% $246,246 70.61%
Multi-family..................................... 2,306 .79 1,773 .58 1,510 .43
Mortgage-backed securities......................... 14,640 5.03 3,525 1.16 794 .23
Commercial or industrial real estate............... 35,828 12.32 35,829 11.80 42,207 12.10
Developed building lots, acquisi-
tion and development of land...................... 11,123 3.82 11,881 3.91 12,718 3.65
Automobiles........................................ 2,661 .91 5,126 1.69 6,300 1.81
Savings accounts................................... 1,077 .37 910 .30 966 .28
Other.............................................. 21,386 7.35 26,446 8.71 38,011 10.89
------ ------ -------- ------ -------- ------
Total loans, loans held for sale and
mortgage-backed securities........................$290,880 100.00% $303,585 100.00% $348,752 100.00%
====== ====== ======
Less:
Loans in process.................................. (3,535) (5,607) (13,087)
Deferred loan fees (costs)........................ (576) (546) (343)
Allowance for loan losses ........................ (1,851) (2,753) (3,353)
------ ------ ------
Total loans and mortgage-
backed securities, net............................$284,918 $294,679 $331,969
======== ======== ========
At September 30,
----------------------------------------------
1995 1996
-------------------- --------------------
Amount Percent Amount Percent
------ ------- ------ -------
Type of Security:
Residential real estate:
Single family, one-to-four.............. $257,408 65.53% $247,013 57.89%
Multi-family............................ 2,018 .51 1,833 .43
Mortgage-backed securities................ 12,776 3.25 27,029 6.33
Commercial or industrial real estate...... 54,401 13.85 61,180 14.34
Developed building lots, acquisi-
tion and development of land............. 15,806 4.02 17,093 4.01
Automobiles............................... 5,941 1.51 7,261 1.70
Savings accounts.......................... 705 .18 436 .10
Other..................................... 43,760 11.15 64,830 15.20
-------- ------ -------- ------
Total loans, loans held for sale and
mortgage-backed securities............... $392,815 100.00% $426,675 100.00%
====== ======
Less:
Loans in process......................... (17,178) (18,589)
Deferred loan fees (costs)............... (71) 286
Allowance for loan losses ............... (3,578) (4,172)
-------- --------
Total loans and mortgage-
backed securities, net................... $371,988 $404,200
======== ========
Single Family Residential Loans. The Bank has been active in the
origination of conventional loans to enable borrowers to purchase existing homes
or residential lots, refinance existing mortgage loans or construct new homes.
Mortgage loans originated by the Bank are generally long-term loans, amortized
on a monthly basis, with principal and interest due each month. The initial
contractual loan payment period for single family residential loans typically
range from 15 to 30 years. The Bank's experience indicates that real estate
loans remain outstanding for significantly shorter periods than their
contractual terms. Borrowers may refinance or prepay loans at their option,
subject to any prepayment penalty provisions included in the note. The Bank
generally requires mortgage title insurance on all mortgage loans.
Since 1982, the Bank has offered adjustable mortgage loans ("ARMs"),
the interest rates of which adjust based upon either the cost of funds, prime
rate or treasury securities indices. The interest rates on ARMs generally may
not adjust more than 1-2% per year and 4-6% over the life of the loan. The Bank
originates ARMs at below the fully phased-in interest rate but generally
qualifies borrowers at the fully phased-in rate when the loan to value ratio
exceeds 80%. Monthly payments could increase significantly at the first
repricing period. Although Coastal Federal's ARMs have been beneficial in
helping Coastal Federal improve the interest rate sensitivity of its assets,
such loans may pose potential additional risks to Coastal Federal. A precipitous
increase in interest rates could be expected to result in an increase in
delinquencies or defaults on such loans.
Coastal Federal continues to offer 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.
At September 30, 1996, approximately $274.0 million or 57.9% of the
Bank's loan portfolio, including mortgage-backed securities, 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 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 during the six month period. 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.
In the past, the Bank had originated a significant amount of commercial
real estate construction loans. The interest rate on such 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, 1996, approximately $34.6 million or 8.1% of the
Bank's gross loan portfolio consisted of construction loans on both residential
($22.2 million) and commercial properties ($12.4 million).
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, 1996, this limited
Coastal Federal's aggregate non-residential real estate loans to approximately
$127 million. At such time, the Bank had non-residential real estate loans
outstanding of $78.3 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 or three years and is indexed to U.S. Treasury
securities. Such loans generally have a ten-year term, with the payments based
up to a 20 year amortization schedule. The Bank generally requires that such
loans have a minimum debt service coverage of 120% of projected net operating
income together with other generally accepted underwriting criteria. At
September 30, 1996, the Bank had approximately $61.2 million of loans secured by
commercial real estate, representing approximately 14.3% of Coastal Federal's
total loan portfolio.
Commercial real estate lending entails significant additional risks
compared to residential lending. Commercial real estate loans typically involve
large loan balances to single borrowers or groups of related borrowers. The
payment experience of such loans is typically dependent upon the successful
operation of the real estate project. These risks can be significantly affected
by supply and demand conditions in the market for office and retail space and
for apartments and, as such, may be subject, to a greater extent, to adverse
conditions in the economy. In dealing with these risk factors, Coastal Federal
generally limits itself to a real estate market or to borrowers with which it
has experience. The Bank concentrates on originating commercial real estate
loans secured by properties located within its market areas of Horry County,
Florence County, the Pee Dee Region, northeastern Georgetown County, all within
South Carolina and Brunswick County, North Carolina, although the Bank has, on a
limited basis, originated or purchased commercial real estate loans secured by
properties located in other parts of the Southeast.
Consumer Loans. The Bank permitted by OTS regulations to invest up to
35% of their 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 $45.6 million, or 10.7% of the total
loan portfolio, at September 30, 1996.
Coastal Federal has marketed consumer loans in order to provide a wider
range of financial services to its customers and because of the 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 that 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, 1996, the Bank had $26.9 million outstanding in
commercial business loans, which represented approximately 6.3% of its loan
portfolio, including mortgage-backed securities.
Loan Maturity
The following table sets forth certain information at September 30,
1996 regarding the dollar amount of loans and mortgage-backed securities
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, loans having no stated schedule of repayments and no stated
maturity and overdrafts are reported as due in one year or less.
More than More than More than More than
One Year Three Years Five Years Ten Years
One Year Through Through Through Through Over
or Less Three Years Five Years Ten Years Twenty Years Twenty Years Totals
------- ----------- ---------- --------- ------------ ------------ ------
(In thousands)
First mortgage loans ............. $ 10,674 $ 9,979 $ 13,787 $ 11,784 $ 62,282 $199,981 $308,487
Other residential and
non-residential ................. 13,233 3,602 3,362 3,108 14,123 6,156 43,584
Equity lines of credit ........... 12,441 -- -- -- -- -- 12,441
Consumer loans ................... 5,267 7,812 6,184 2,780 1,779 -- 23,822
Commercial loans ................. 4,607 3,102 2,413 3,542 2,202 -- 15,866
-------- -------- -------- -------- -------- -------- --------
Total loans ................. $ 46,222 $ 24,495 $ 25,746 $ 21,214 $ 80,386 $206,137 $404,200
======== ======== ======== ======== ======== ======== ========
The following table sets forth the dollar amount of all loans due after
one year at September 30, 1996 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 .............. $ 76,046 $221,767 $297,813
Other residential and
non-residential .................. 2,627 27,724 30,351
Consumer loans .................... 16,690 1,865 18,555
Commercial loans .................. 4,040 7,219 11,259
-------- -------- --------
Total loans .................. $ 99,403 $258,575 $357,978
======== ======== ========
Interest Rate Sensitivity Analysis
The following table illustrates the repricing analysis of the Bank's
interest-earning assets and interest-bearing liabilities as of September 30,
1996. For purposes of the table, repricing characteristics of loans include
estimated annual prepayment rates.
Zero to Four Months One Year to Greater than
Three Months to One Year Five Years Five Years Total
------------ ----------- ---------- ---------- -----
(In thousands)
Rate Sensitive Assets(1):
Mortgage loans and
mortgage-backed securities .... $ 27,306 $ 215,894 $ 89,818 $ 31,494 $ 364,512
Non-mortgage loans ............. 14,684 5,603 19,401 -- 39,688
Interest-bearing deposits and
investment securities ......... 5,222 330 17,512 -- 23,064
--------- --------- --------- --------- ---------
Total ...................... $ 47,212 $ 221,827 $ 126,731 $ 31,494 $ 427,264
========= ========= ========= ========= =========
Rate Sensitive Liabilities:
Core deposits(2) ............... $ 36,449 $ 60,668 $ 54,425 $ 30,962 $ 182,504
Time deposits .................. 56,806 42,777 31,343 -- 130,926
Borrowings ..................... 49,741 5,201 38,854 17,479 111,275
--------- --------- --------- --------- ---------
Total ...................... $ 142,996 $ 108,646 $ 124,622 $ 48,441 $ 424,705
========= ========= ========= ========= =========
Off-Balance Sheet Positions:
Commitments to originate
mortgage loans ................ $ (794) $ 3,874 $ (3,544) $ 464 --
Interest rate sensitivity gap ... $ (96,578) $ 117,055 $ (1,435) $ (16,483) $ 2,559
Cumulative interest
sensitivity gap ................ $ (96,578) $ 20,477 $ 19,042 $ 2,559 --
Cumulative interest sensitivity
gap as a percent of total assets (21.11%) 4.48% 4.16% .56% --
(1) Prepayments have been applied to all loans. Prepayment speeds vary according
to the instrument's original maturity, coupon rate and age.
(2) Decay rates have been applied to all core deposits as follows:
NOW MMDA Passbook Non-interest
Accounts Accounts Accounts Demand
-------- -------- -------- ------
Percent Repricing:
1 - 12 months .............. 37.00% 79.00% 17.00% 37.00%
13 - 60 months ............. 42.93 16.24 42.65 42.93
Over 60 months ............. 20.07 4.76 40.35 20.07
------ ------ ------ ------
Total ...................... 100.00% 100.00% 100.00% 100.00%
====== ====== ====== ======
Interest Rate Sensitivity of Net Portfolio Value
The table below measures interest rate risk by estimating the change in
market value of the Bank's assets, liabilities, and off-balance sheet contracts
in response to an instantaneous change in the general level of interest rates.
The procedure for measuring interest rate risk was developed by the Office of
Thrift Supervision ("OTS") to replace the "gap" analysis (the difference between
interest-earning assets and interest-bearing liabilities that mature or reprice
within a specific time period) used previously by the OTS. The model first
estimates the level of the Bank's market value of portfolio equity ("MVPE")
(market value of assets, less market value of liabilities, plus or minus the
market value of any off-balance sheet items) under the current rate environment.
In general, market values are estimated by discounting the estimated cash flows
of each instrument by appropriate discount rates. The model then recalculates
the Bank's MVPE under different interest rate scenarios. The change in MVPE
under the different interest rate scenarios provides a measure of the Bank's
exposure to interest rate risk. Due to OTS reporting requirements,
classifications may vary from GAAP reporting. The data presented below is as of
September 30, 1996.
-400 -300 -200 -100 +100 +200
Basis Basis Basis Basis No Basis Basis
Points Points Points Points Change Points Points
------ ------ ------ ------ ------ ------
(In thousands)
ASSETS
Mortgage loans and
securities........... $388,401 $384,624 $381,316 $377,325 $371,609 $364,304 $355,832
Non-mortgage loans.... 41,142 40,663 40,196 39,746 39,308 38,883 38,473
Cash, deposits and
securities........... 41,522 40,768 40,046 39,355 38,693 38,060 37,453
Repossessed assets.... 336 336 336 336 336 336 336
Premises and equipment 5,567 5,567 5,567 5,567 5,567 5,567 5,567
Other assets.......... 9,974 11,490 13,440 16,583 19,992 23,600 26,983
-------- -------- -------- -------- -------- -------- --------
TOTAL................. 486,942 483,448 480,901 478,912 475,505 470,750 464,644
======== ======== ======== ======== ======== ======== ========
LIABILITIES
Deposits.............. $317,340 $316,484 $315,641 $314,812 $314,002 $313,204 $312,419
Borrowings............ 115,567 113,957 112,411 110,924 109,494 108,118 106,793
Other liabilities..... 6,275 6,275 6,275 6,275 6,275 6,275 6,276
-------- -------- -------- -------- -------- -------- --------
TOTAL................. 439,182 436,716 434,327 432,011 429,771 427,597 425,488
======== ======== ======== ======== ======== ======== ========
OFF BALANCE SHEET
POSITIONS............ $ 300 $177 $69 $(76) $(256) $(467) $(674)
MARKET VALUE OF
PORTFOLIO EQUITY..... $48,060 $46,909 $46,643 $46,825 $45,478 $42,686 $38,482
+300 +400
Basis Basis
Points Points
------ ------
ASSETS
Mortgage loans and
securities........... $346,714 $337,292
Non-mortgage loans.... 38,072 37,684
Cash, deposits and
securities........... 36,871 36,313
Repossessed assets.... 336 336
Premises and equipment 5,567 5,567
Other assets.......... 30,200 33,253
-------- --------
TOTAL................. $457,760 $450,445
======== ========
LIABILITIES
Deposits.............. $311,650 $310,892
Borrowings............ 105,517 104,286
Other liabilities..... 6,275 6,275
TOTAL................. 423,442 421,453
======== ========
OFF BALANCE SHEET
POSITIONS............ $(881) $(1,094)
MARKET VALUE OF
PORTFOLIO EQUITY..... $33,437 $27,898
Loan Solicitation and Processing. The Bank actively solicits mortgage
loan applications from existing customers, walk-ins, referrals and from real
estate brokers. Commercial real estate loan applications also are obtained by
direct solicitation by loan officers.
Detailed loan applications are obtained to determine the borrower's
ability to repay, and the more significant items on these applications are
verified through the use of credit reports, financial statements and
confirmations through verification forms. After analysis of the loan application
and property or collateral involved, including an appraisal of the property by
independent appraisers approved by the Bank's Board of Directors and reviewed by
the Bank's underwriter, a lending decision is made by the Bank. With respect to
commercial loans, the Bank also reviews the capital adequacy of the business,
the ability of the borrower to repay the loan and honor its other obligations
and general economic and industry conditions. All residential mortgage loan
applications over $500,000 require the approval of the Bank's Loan Committee,
which consists of Directors Clemmons, Gerald, Smart, Springs and Executive Vice
Presidents Griffin, Rexroad and Stalvey. All first mortgage loan applications in
excess of 95% of the appraised value of the property must be approved by the
Board of Directors.
Loan applicants are promptly notified of the decision of the Bank by a
letter setting forth the terms and conditions of the decision. If approved, such
terms and conditions include the amount of the loan, interest rate, amortization
term, a brief description of real estate to be mortgaged to the Bank and notice
of requirement of insurance coverage necessary to protect the Bank's interest in
the collateral.
The Bank's general policy is to obtain a title insurance policy
insuring that the Bank has a valid lien on the mortgaged real estate and that
the property is free of encumbrances. Borrowers must also obtain paid hazard
insurance policies prior to closing and, when the property is in a flood plain
as designated by the Department of Housing and Urban Development, obtain paid
flood insurance policies. It is the policy of Coastal Federal to require flood
insurance for the full insurable value of the improvements for any such loan
located in a designated flood hazard area. Borrowers on loans which exceed 80%
of the value of the security property are also required to advance funds on a
monthly basis, with each payment of principal and interest, to a mortgage escrow
account from which the Bank makes disbursements for items such as real estate
taxes, hazard insurance premiums and private mortgage insurance premiums. In
cases of flood insurance, it is the Bank's policy to require escrow on these
premiums regardless of the loan-to-value ratio.
Loan Originations, Purchases and Sales. The Bank is a qualified
servicer for FHLMC and FNMA. Depending upon interest rates and economic
conditions, the Bank has sold loans in order to provide additional funds for
lending, to generate servicing fee income, and to decrease the amount of its
long-term, fixed rate loans in order to minimize the gap between the maturities
of its interest-earning assets and interest-bearing liabilities. The Bank
generally continues to collect payments on the loans, to supervise foreclosure
proceedings, if necessary, and to otherwise service the loans. The Bank retains
a portion of the interest paid by the borrower on the loans as consideration for
its servicing activities. At September 30, 1996, the Bank was servicing loans
sold to others with a principal balance of approximately $115.1 million. Sales
of whole loans and participation interests by the Bank are made without right of
recourse to the Bank by the buyer of the loans in the event of default by the
borrower. The majority of the loans sold during the year ended September 30,
1996 were conforming conventional loans originated and sold by Coastal Federal
Mortgage. These loans were sold on a servicing released basis. At September 30,
1996, the Bank's loan portfolio included purchased loans of approximately $15.3
million, which have been primarily secured by single family residences and which
have been written on adjustable rate mortgage loan instruments.
Loans Originated, Purchased and Sold
The following table shows total loans originated, purchased, sold and
repaid during the periods indicated.
Year Ended September 30,
-----------------------------------
1994 1995 1996
--------- --------- ---------
(In thousands)
Loans receivable and mortgage-backed
securities, net at the beginning of the
period ................................. $ 294,679 $ 331,969 $ 371,988
--------- --------- ---------
Loans originated:
Construction ........................... 22,338 31,849 38,172
Residential ............................ 82,507 46,935 60,683
Nonresidential ......................... 17,156 8,307 11,897
Land ................................... 6,831 7,263 8,355
Commercial business .................... 21,840 20,145 23,062
Consumer ............................... 24,089 26,530 18,201
--------- --------- ---------
Total loans originated ............. 174,761 141,029 160,370
--------- --------- ---------
Loans purchased:
Multi-family residential and
commercial real estate ............... 63 6,337 12,448
Mortgage-backed securities ............ -- 1,000 11,867
--------- --------- ---------
Total loans purchased .............. 63 7,337 24,315
--------- --------- ---------
Loans sold:
Whole loans sold ...................... (29,299) (2,806) (40,672)
Mortgage-backed securities ............ (1,613) -- (13,220)
--------- --------- ---------
Total loans sold ................... (30,912) (2,806) (53,892)
--------- --------- ---------
Loan and mortgage-backed securities
principal repayments and other ......... (105,707) (105,026) (97,689)
--------- --------- ---------
Other ................................... (915) (515) (892)
--------- --------- ---------
Loans receivable and mortgage-backed
securities, net, at end of period ..... $ 331,969 $ 371,988 $ 404,200
========= ========= =========
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, 1996, Coastal Federal had loan commitments of approximately $9.0
million.
Loan Origination and Other Fees. Coastal Federal may receive loan
origination fees and discount "points." Loan fees and points are a percentage of
the principal amount of the mortgage loan which are charged to the borrower for
funding the loan. Coastal Federal allows the purchaser to reduce the rate of
interest by the payment of points at the customers options. Fees on long-term
commercial real estate and residential construction loans vary with loan type.
Delinquencies. Coastal Federal's collection procedures provide for a
series of contacts with delinquent borrowers. If the delinquency continues, more
formal efforts are made to contact the delinquent borrower. If a residential
real estate loan continues in a delinquent status for 90 days or more, Coastal
Federal generally initiates foreclosure proceedings. Coastal Federal generally
initiates foreclosure proceedings on a commercial real estate loan if the loan
continues in a delinquent status for 60 days or more. In certain limited
instances, however, Coastal Federal may modify the loan or grant a limited
moratorium on loan payments to enable the borrower to reorganize his financial
affairs.
Problem Assets and Asset Classification. Loans are reviewed on a
regular basis and a reserve for uncollectible interest is established on loans
where collection of interest is questionable, generally when such loans become
90 days delinquent. Loan balances that relate to interest amounts reserved are
considered to be on a nonaccrual basis. Typically, payments received on a
nonaccrual loan are applied to the outstanding principal and interest as
determined at the time of collection of the loan.
The following table sets forth information with respect to the Bank's
non-performing assets at the dates indicated. At each of the dates indicated,
Coastal Federal has no debt that has been restructured.
At September 30,
-------------------------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
(Dollars in thousands)
Loans accounted for on a nonaccrual basis:
Real estate -
Residential.............................. 312 205 79 999 307
Commercial............................... 2,630 64 1,056 134 --
Commercial business....................... -- -- -- 154 60
Consumer.................................. 43 44 16 36 78
----- ----- ------ ------ ------
Total................................... 2,985 31 1,151 1,323 445
----- ----- ------ ------ ------
Accruing loans which are
contractually past due
90 days or more:
Real estate -
Residential.............................. -- -- -- -- --
Commercial............................... -- -- -- -- --
Commercial business....................... -- -- -- -- --
Consumer.................................. -- -- -- -- --
----- ----- ------ ------ ------
-- ----- ------ ----- -----
Total................................... -- -- -- __ -- --
----- ----- ------ ------ ------
Restructured loans......................... 480 -- -- -- --
Real estate owned........................... 2,555 2,197 781 789 323
Other nonperforming
assets..................................... -- -- -- -- --
----- ----- ------ ------ ------
Total nonperforming
assets..................................... $6,020 $2,510 $1,932 $2,112 $768
======= ====== ====== ====== ====
Total loans delinquent 90
days or more to net
loans...................................... 1.11% .10% .03% .36% .12%
Total loans delinquent 90
days or more to total
assets..................................... .91% .09% .03% .33% .10%
Total nonperforming assets
to total assets............................ 1.83% .74% .56% .53% .17%
For the year ended September 30,1996, gross interest income which would
have been recorded had non-accruing loans been current in accordance with their
original terms would have amounted to $46,000, of which $13,000 was included in
interest income.
The allowance for uncollectible interest which is netted against
accrued interest receivable totaled $83,000 and $50,000 at September 30, 1995
and 1996, respectively.
The OTS has adopted various changes in its regulations regarding
problem assets of savings institutions. These regulations, which became
effective on December 31, 1987, are intended to comply with directives to the
Federal Home Loan Bank Board ("FHLBB") (as predecessor to the OTS) in the
Competitive Equality Banking Act ("CEBA"). The regulations conform the OTS asset
classification system to commercial banking practices, eliminate the FHLBB's
previous regulation that had classified certain problem assets as "scheduled
items" and put the establishment of loan loss allowances on a basis consistent
with the requirements of GAAP.
OTS regulations require that each insured institution review and
classify its assets on a regular basis. In addition, in connection with
examinations of insured institutions, OTS examiners have authority to identify
problem assets and, if appropriate, require them to be classified. There are
three classifications for problem assets: substandard, doubtful and loss.
Substandard assets must have one or more defined weaknesses and are
characterized by the distinct possibility that the insured institution will
sustain some loss if the deficiencies are not corrected. Doubtful assets have
the weaknesses of substandard assets with the additional characteristic that the
weaknesses make collection or liquidation in full on the basis of currently
existing facts, conditions and values questionable, and there is a high
possibility of loss. An asset classified loss is considered uncollectible and of
such little value that continuance as an asset of the institution is not
warranted. The regulations also have a special mention category, described as
assets which do not currently expose an insured institution to a sufficient
degree of risk to warrant classification but do possess credit deficiencies or
potential weaknesses deserving management's close attention. Assets classified
as substandard or doubtful require the institution to establish general
allowances for loan losses. If an asset or portion thereof is classified loss,
the insured institution must either establish specific allowances for loan
losses in the amount of 100% of the portion of the asset classified loss or
charge off such amount. A portion of general loss allowances established to
cover possible losses related to assets classified substandard or doubtful may
be included in determining an institution's regulatory capital, while specific
valuation allowances for loan losses generally do not qualify as regulatory
capital.
Coastal Federal had no individual classified asset in excess of
$450,000 as of September 30, 1996. At that date, classified assets amounted to
$5.1 million ($18,000.00 loss; $1.0 million substandard; $50,000.00 doubtful;
and $4.0 million special mention).
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, 1994, 1995 and
1996 of $510,000, $202,000 and $790,000, respectively. As a result, the Bank has
a $4.2 million allowance for loan losses as of September 30, 1996. The allowance
as a percentage of loans receivable was 1.11% at September 30, 1996 compared to
1.0% at September 30, 1995. See "Management's Discussion and Analysis" in the
1996 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, 1996, there can be no
assurance that regulators, when reviewing the Bank's loan portfolio in the
future, will not request the Bank to significantly increase its allowance for
loan losses, thereby adversely affecting the Bank's financial condition and
earnings.
Loan Loss Allowance Analysis
The following table sets forth an analysis of Coastal Federal'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,
--------------------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
(Dollars in thousands)
Allowance at beginning of
period........................................... $1,532 $1,851 $2,753 $3,353 $3,578
Provision for loan losses......................... 645 1,389 510 202 790
--- ------ ------ ------ ------
Recoveries:
Residential real estate.......................... 29 -- 3 232 --
Commercial real estate........................... 116 11 148 11 75
Real estate construction......................... -- -- -- -- --
Consumer......................................... 3 106 79 12 7
------ ------ ------ ------ -----
Total recoveries............................... 148 117 230 255 82
------ ------ ------ ------ -----
Charge-offs:
Residential real estate.......................... 153 71 38 206 24
Commercial real estate........................... 119 392 13 18 216
Real estate construction......................... -- -- -- -- --
Consumer......................................... 202 141 89 8 38
------ ------ ------ ------ -----
Total charge-offs.............................. 474 604 140 232 278
------ ------ ------ ------ -----
Net charge-offs (recoveries) .................. 326 487 (90) (23) 196
------ ------ ------ ------ -----
Allowance at end of period....................... $1,851 $2,753 $3,353 $3,578 $4,172
====== ====== ====== ====== ======
Ratio of allowance to net
loans outstanding at the
end of the period................................ 0.69% 0.98% 1.01% 1.00% 1.11%
Ratio of net charge-offs (recoveries)
to average loans outstanding
during the period................................ 0.12% 0.17% (.03%) (.01%) .05%
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,
1992 1993 1994
--------------------------------- --------------------------------- ----------------------------
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................... $ 257 0.11% 78.09% $ 542 .25% 75.48% $ 742 .30% 75.05%
Commercial.................... 1,282 3.79 12.68 1,901 5.54 12.22 2,296 5.58 11.94
Consumer........................ 312 1.26 9.23 310 .89 12.30 315 .71 13.01
------ ---- ------ ------ ---- ------ ------ ---- ------
Total allowance for
loan losses.................. $1,851 0.69% 100.00% $2,753 .98% 100.00% $3,353 1.01% 100.00%
====== ====== ====== ====== ====== ======
1995 1996
--------------------------------- --------------------------------
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................... $ 803 .31% 72.03% $ 837 .37% 65.35%
Commercial.................... 2,371 4.36 14.17 2,875 3.80 22.34
Consumer........................ 404 .80 13.80 460 1.01 12.31
------ ---- ------ ------ ---- ------
Total allowance for
loan losses.................. $3,578 1.00% 100.00% $4,172 1.11% 100.00%
====== ====== ====== ======
Investment Activities
Under OTS regulations, the Bank has authority to invest in various
types of liquid assets, including U.S. Treasury obligations, securities of
various federal agencies and of state and municipal governments, deposits at the
FHLB of Atlanta, certificates of deposit of federally insured institutions,
certain bankers' acceptances and federal funds. Subject to various restrictions,
such savings institutions may also invest a portion of their assets in
commercial paper, corporate debt securities and mutual funds, the assets of
which conform to the investments that federally chartered savings institutions
are otherwise authorized to make directly. These institutions are also required
to maintain minimum levels of liquid assets which vary from time to time. See
"Regulation of Coastal Federal - Federal Home Loan Bank System." The Bank may
decide to increase its liquidity above the required levels depending upon the
availability of funds and comparative yields on investments in relation to
return on loans.
Coastal Federal is required under federal regulations to maintain a
minimum amount of liquid assets and is also permitted to make certain other
securities investments. See "Regulation" herein and "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources" in the Annual Report. The balance of the Bank's investments
in short-term securities in excess of regulatory requirements reflects
management's response to the significantly increasing percentage of deposits
with short maturities. At September 30, 1996, Coastal Federal's regulatory
liquidity was 8.0%, which was in excess of the required 5.0%.
Investment decisions are made by the Investment Officer who reports
quarterly to the Asset/Liability Committee ("ALCO Committee"). The ALCO
Committee meets quarterly and consists of Directors Benton, Creel, Bishop,
Springs, Clemmons and Gerald, Chief Financial Officer Rexroad and Executive Vice
Presidents Graham, Griffin and Stalvey. The ALCO Committee acts within policies
established by the Board of Directors. At September 30, 1996, the Bank's
investment security portfolio had a market value of approximately $17.5 million.
The investment securities portfolio consisted primarily of U.S. Government
agency securities. For further information concerning the Bank's securities
portfolio, see Notes 2 and 3 of the Notes to Consolidated Financial Statements.
Investment Securities Analysis
The following table sets forth Coastal Federal's investment securities
portfolio at carrying value at the dates indicated.
September 30,
----------------------------------------------------------------------------------
1994 1995 1996
-------------------------- ------------------------ ----------------------
Amortized Percent of Amortized Percent of Amortized Percent of
Cost(1) Portfolio Cost(1) Portfolio Cost(1) Portfolio
-------------------------- ------------------------ ----------------------
(Dollars in thousands)
U.S. Government securities ............ $ -- --% $ -- --% -- --
FHLMC ................................. 1,000 13.02 -- -- -- --
FHLB .................................. 5,000 65.10 1,000 42.94 17,334 98.13
FNMA .................................. -- -- -- -- --
FFCB .................................. 999 13.01 999 42.89 --
Municipal ............................. 681 8.87 330 14.17 330 1.87
------- ------ ------- ------- ------ --
Total .............................. $ 7,680 100.00% $ 2,329 100.00% $17,664 100.00%
======= ====== ======= ====== ======= ======
(1) The market value of the Bank's investment securities portfolio amounted to
$7.5 million, $2.3 million and $17.5 million at September 30, 1994, 1995 and
1996, respectively.
The following table sets forth the maturities and weighted average
yields of the debt securities at September 30, 1996.
Less Than One to Five to
One Year Five Years Ten Years
Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ -----
(Dollars in thousands)
U.S. Government
securities.............................. $ -- --% $ -- --% $ -- --%
Agency securities......................... 330 5.10 4,300 (1) 7.13 13,034 (2) 6.66
---- ---- ------ ---- ------- ----
Total................................. $330 5.10% $4,300 7.13% $13,034 6.66%
=== ===== ===== ===== ====== =====
(1) Includes $4.3 million subject to call provisions. Should these bonds be
called prior to maturity the Bank may not be able to obtain the same yield with
similar term securities.
(2) Includes $13.1 million subject to call provisions. Should these bonds be
called prior to maturity the Bank may not be able to obtain the same yield with
similar term securities.
Service Corporation Activities
Coastal Federal has one wholly-owned service corporation: Coastal
Mortgage Bankers and Realty Co., Inc. "Coastal Mortgage Bankers", which was
incorporated in 1970 under the laws of South Carolina.
COASTAL FEDERAL
COASTAL MORTGAGE
BANKERS*
North Beach Shady Forest Sherwood Ridge 501 Development
Investments, Inc. Development Development Development Corporation
Corporation Corporation Corporation
- ---------------
* For a description of these subsidiaries, see "Real Estate Development
Activities."
Real Estate Development Activity
Since 1982, Coastal Mortgage and its subsidiaries have been involved in
real estate operations, either as the sole owner/developer or as a joint venture
partner.
o Through its investment in 501 Development Corporation, Coastal
Mortgage has a 50% ownership interest in a project that consists of
approximately 50 acres in Horry County, which has received zoning approval as a
planned unit development. At September 30, 1996, the total remaining investment
in this project was approximately $47,000.
With the exception of one project, for which a joint venture was
created to dispose of real estate acquired through foreclosure, the Corporation
has not entered into any real estate activity since 1984 and has, in fact,
almost eliminated its investment in these real estate activities. These efforts
are reflected in the reduction of Corporation's investment and loans to
subsidiaries from $8.5 million at September 30, 1987 to approximately $187,000
at September 30, 1996.
In prior years, the Bank made loans to purchasers of units in which the
Bank's Subsidiaries were involved in a joint venture.
The following table summarizes the balances of permanent loans to
individual unit purchasers, by project, at September 30, 1996 (net of
participations sold to other financial institutions).
Number of Total Slow Loans(1)
Project Borrowers Amount Number Amount
- ------- --------- ------ ------ ------
Beach Cove 89 $5,978,804 -- $ --
Condominium
North Myrtle Beach,
South Carolina
Bluewater 111 $5,579,894 -- $ --
Condominium
Myrtle Beach,
South Carolina
Cobblestone Villas 61 $2,300,008 -- $ --
Condominium
Myrtle Beach,
South Carolina
Carolina Pines 27 $ 939,761 -- $ --
Condominium
Conway, South Carolina
- -----------------
(1) Loans over 60 days delinquent
In most cases, development was undertaken through joint ventures in
which a subsidiary of Coastal Mortgage Bankers made an equity investment and, as
a partner, participated in the profits or losses of the joint ventures. Coastal
Federal generally made loans to the joint ventures, subject to Coastal Federal's
underwriting standards and policies and generally with the personal guarantees
of the partners. Generally, Coastal Federal sold participations in the
construction loans, which had interest and fees at market rates, to other
financial institutions.
The business of real estate development involves substantial risks.
Development activities typically involve substantial capital outlays both before
and during construction. Post-construction operations also may result in a
negative cash flow and losses due to an inability to recoup costs until project
sales occur, substantial cost overruns or other factors over which the developer
has little or no control. Seasonality, location and general economic and market
conditions, particularly in resort locations such as the Myrtle Beach area, as
well as the size of the project and the experience, reputation and performance
of the developer and the project operator are other facts which may adversely
affect real estate development projects. Adverse changes in these factors could
cause additional losses. In addition, the development and sale of condominium
projects is subject to a number of federal and state statutes, including, but
not limited to, the Interstate Land Sales Full Disclosure Act, Federal
Securities Act of 1933, state "Blue Sky" laws, state real estate laws, Federal
Unfair Trade Practices Act, South Carolina Unfair Trade Practices Act and the
Racketeer Influenced and Corrupt Organizations Act, the violation of which could
result in liability to the participant. Furthermore, changes in the federal
income tax have reduced the attractiveness of rental property as an investment,
which may adversely affect the ability to sell these properties.
As discussed under "Regulation Of Coastal Federal", Coastal Mortgage is
a "nonincludable subsidiary" as defined in the OTS capital regulations and the
Bank must exclude its investment in and loans to it when calculating its
regulatory capital. As of September 30, 1996, the Bank's investment in and loans
to Coastal Mortgage totalled approximately $187,000.00.
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 accounts, money market accounts, regular savings
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 weekly.
Deposit Balances
The following table sets forth information concerning the Bank's time
deposits and other deposits at September 30, 1996.
Average Percentage
Interest Minimum of Total
Rate Term Category Amount Balance Deposits
---- ---- -------- ------ ------- --------
(In thousands)
Checking and Savings
1.50% None NOW $ 100 $ 35,654 11.38%
-- None Commercial checking 100 19,926 6.36
4.93 Money market Demand 1,000-2,500 84,997 27.12
2.50 None Passbook savings 100-500 39,287 12.53
2.25 Money market Passbook 2,500 3,553 1.13
----- -------
Total checking and savings $183,417 58.52%
-------- -----
Certificates of Deposit
4.78 3 months Fixed term, fixed rate $ 1,000 $ 2,122 .68%
5.54 6 months Fixed term, fixed rate 1,000 23,479 7.49
5.12 9 months Fixed term, fixed rate 1,000 9,293 2.96
5.64 12 months Fixed term, fixed rate 1,000 47,059 15.01
and variable rate
5.83 18 months Fixed term, fixed rate
and variable rate 1,000 20,981 6.69
5.92 24 months Fixed term, fixed rate 1,000 4,049 1.29
5.65 30 months Fixed term, fixed rate 1,000 2,189 .70
5.97 36 months Fixed term, fixed rate 1,000 8,944 2.85
6.06 48 months Fixed term, fixed rate 1,000 4,728 1.51
6.18 96 months Fixed term, fixed rate 1,000 26 .01
-- 30-365 days Mini-jumbo certificates 50,000 -- --
-- 30-365 days Jumbo certificates 100,000 -- --
------ -----
Total fixed $122,870 39.20%
======== =====
5.00 18 months Variable rate $ 100 $ 4,593 1.47%
5.63 30 months Variable rate 100 2,550 .81
-------- -----
Total variable $ 7,143 2.28%
======== =====
Total certificates $130,013 41.48%
======== =====
Total deposits $313,430 100.00%
======== ======
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,
---------------------------------------------------------------------
1994 1995
---------------- ---------------------------------------
Percent Percent
of of Increase
Amount Total Amount Total (Decrease)
------------------- -------------------- -----------
(Dollars in thousands)
Transaction accounts:
NOW......................................... $ 30,244 12.23% $ 29,852 10.93% $(392)
Commercial checking......................... 12,605 5.10 16,494 6.04 3,889
-------- ----- ------ ----- -----
Total transaction accounts.................... 42,849 17.33 46,346 16.97 3,497
-------- ----- ------ ----- -----
Money market demand accounts.................. 30,461 12.31 41,516 15.20 11,055
Passbook savings accounts..................... 64,318 25.99 46,421 17.00 (17,897)
Fixed-rate certificates (original maturity):
3 months..................................... 1,549 .63 3,431 1.26 1,882
6 months..................................... 13,830 5.59 9,522 3.49 (4,308)
9 months..................................... 1,126 .46 26,751 9.80 25,625
12 months.................................... 9,931 4.01 57,315 21.00 47,384
18 months.................................... 64,158 25.94 12,426 4.55 (51,732)
24 months.................................... 2,714 1.10 3,845 1.41 1,131
30 months.................................... 975 .39 1,786 .65 811
36 months.................................... 3,063 1.24 9,504 3.48 6,441
48 months.................................... 2,399 .97 4,613 1.69 2,214
96 months.................................... 34 .01 24 -- (10)
Mini-jumbo................................... -- -- -- -- --
Jumbo........................................ -- -- -- -- --
-------- ----- -------- ------ ------
99,779 40.34 129,217 47.33 29,438
--------- ----- -------- ------ ------
Variable rate certificates:
(original maturity)
18 months.................................... 7,308 2.95 7,100 2.60 (208)
30 months.................................... 2,670 1.08 2,499 .90 (171)
-------- ------- ----- ----- ----
Total variable................................ 9,978 4.03 9,599 3.50 (379)
------- ------ ----- ---- ----
Total certificates............................ 109,757 44.37 138,816 50.83 29,059
-------- ----- ------- ----- ------
Total deposits................................ $247,385 100.00% $273,099 100.00% $25,714
======== ======= ======== ======= =======
At September 30,
-------------------------------------
1996
-------------------------------------
Percent
of Increase
Amount Total (Decrease)
-------------------------------------
Transaction accounts:
NOW......................................... $ 35,654 11.38% $ 5,802
Commercial checking......................... 19,926 6.36 3,432
------ ---- -----
Total transaction accounts.................... 55,580 17.74 9,234
------ ----- -----
Money market demand accounts.................. 84,997 27.12 43,481
Passbook savings accounts..................... 42,840 13.66 (3,581)
Fixed-rate certificates (original maturity):
3 months..................................... 2,122 .68 (1,309)
6 months..................................... 23,479 7.49 13,957
9 months..................................... 9,293 2.96 (17,458)
12 months.................................... 47,059 15.01 (10,256)
18 months.................................... 20,981 6.69 8,555
24 months.................................... 4,049 1.29 204
30 months.................................... 2,189 .70 403
36 months.................................... 8,944 2.85 (560)
48 months.................................... 4,728 1.51 115
96 months.................................... 26 .01 2
Mini-jumbo................................... -- -- --
Jumbo........................................ -- -- --
------- ---- ------
122,870 39.20 (6,347)
------ ------ ------
Variable rate certificates:
(original maturity)
18 months.................................... 4,593 1.47 (2,507)
30 months.................................... 2,550 .81 51
----- --- --
Total variable................................ 7,143 2.28 (2,456)
----- ---- ------
Total certificates............................ 130,013 41.48 (8,803)
------- ----- -------