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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended September 30, 1997
OR
[ X ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-19684
COASTAL FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 57-0925911
- --------------------------------------------------------------------------------
(State or other jurisdiction of incorporation (I.R.S. Employer I.D.)
or organization)
2619 North Oak Street, Myrtle Beach, South Carolina 29577-3129
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (803) 448-5151
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [ X ] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
As of November 30, 1997, there were issued and outstanding 4,655,982
shares of the registrant's Common Stock.
The aggregate market value of the voting stock held by nonaffiliates of
the registrant, based on the closing sales price of the registrant's common
stock as quoted on the National Association of Securities Dealers, Inc.
Automated Quotation System under the symbol "CFCP" on November 30, 1997, was
$104,759,595(4,655,982 shares at $22.50 per share, which is the ending bid on
November 30, 1997.). It is assumed for purposes of this calculation that none of
the registrant's officers, directors and 5% stockholders are affiliates.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Annual Report to Stockholders for the Fiscal Year
Ended September 30, 1997. (Parts I and II)
2. Portions of the Proxy Statement for the 1998 Annual Meeting of
Stockholders. (Part III)
PART I
Item 1. Business
General
Coastal Financial Corporation ("Coastal Financial" or the
"Corporation") was incorporated in the State of Delaware in June 1990, for the
purpose of becoming a savings and loan holding company for Coastal Federal
Savings Bank ("Coastal Federal" or the "Bank"). On January 28, 1991, the
stockholders of the Bank approved a plan to reorganize the Bank into the holding
company form of ownership. The reorganization was completed on November 6, 1991,
on which date the Bank became the wholly-owned subsidiary of the Corporation,
and the stockholders of the Bank became stockholders of the Corporation. Prior
to completion of the reorganization, the Corporation had no material assets or
liabilities and engaged in no business activities. On April 1, 1993 Coastal
Federal's investment in Coastal Investments Corporation, formerly named Coastal
Investment Services, Inc., was transferred to Coastal Financial and became a
first tier subsidiary of the Corporation. The financial results contained herein
relate primarily to the Corporation's principal subsidiary, Coastal Federal.
On November 2, 1995, Coastal Financial purchased Granger-O'Harra
Mortgage, Inc.("Granger-O'Harra") and merged Granger-O'Harra into a new
subsidiary, Coastal Federal Mortgage, Inc. Coastal Federal Mortgage, Inc.
engages in the origination of conforming mortgage loans which are sold in the
secondary market generally servicing released.
On May 7, 1996, the Corporation formed Coastal Technology Services,
Inc. ("CTS"). CTS primarily develops specialized banking software for sale to
financial services companies. Activity for fiscal 1997 was limited for CTS.
Coastal Federal was organized in 1953 as a mutual savings and loan
association and, since that time, its deposits have been federally insured. In
March 1989, Coastal Federal converted from a federally chartered mutual savings
and loan association to a federally chartered mutual savings bank. On October 4,
1990, Coastal Federal converted to the stock form of ownership ("Conversion")
through the sale and issuance of 492,541 shares of common stock at a price of
$10.00 per share, which resulted in gross proceeds to Coastal Federal of
$4,925,410.
Coastal Federal conducts its business from its main office in Myrtle
Beach, South Carolina, nine branch offices located in South Carolina and a
lending office in Sunset Beach, North Carolina. The lending office will be
converted to a full service branch office in fiscal 1998. At September 30, 1997,
Coastal Financial had total assets of $494.0 million, total deposits of $347.1
million and stockholders' equity of $32.4 million. The deposits of the Bank are
insured by the Federal Deposit Insurance Corporation ("FDIC") under the Savings
Association Insurance Fund ("SAIF"). The corporate offices of the Bank are
located at 2619 Oak Street, Myrtle Beach, South Carolina and the telephone
number is (803) 448-5151.
Eight of Coastal Federal's nine offices are in Horry County, South
Carolina. The economy of the Horry County area is dependent primarily on
tourism. To the extent Horry County area businesses rely heavily on tourism for
business, decreased tourism would have a significant adverse effect on Coastal
Federal's primary deposit base and lending area. Moreover, Coastal Federal would
likely experience a higher degree of loan delinquencies should the local economy
be significantly adversely affected.
Coastal Federal's principal business currently consists of attracting
deposits from the general public and using these funds to originate conventional
one-to-four family first mortgage loans, consumer, commercial business loans and
commercial real estate loans. Commercial real estate loans as a percentage of
total loans have increased from 13.9% of total loans at September 30, 1995 to
22.6% of total loans at September 30, 1997.
As part of its lending strategy, subject to market conditions,
management intends to continue emphasizing the origination of consumer and
commercial business loans in addition to first mortgage loans. At September 30,
1997, 2.5% and 9.8%, respectively, of the Bank's total loan portfolio consisted
of commercial business and consumer loans.
Selected Consolidated Financial Data and Other Items
The information contained in the table captioned "Selected Consolidated
Financial and Other Data" on page 2 of the Corporation's Annual Report to
Stockholders for the Fiscal Year Ended September 30, 1997 is incorporated herein
by reference.
Yields Earned and Rates Paid
The following table sets forth, for the periods and at the date
indicated, the weighted average yields earned on Coastal Financial's assets, the
weighted average interest rates paid on its liabilities, together with the net
yield on interest-earning assets.
Year Ended At
September 30, September 30,
----------------------------------
1995 1996 1997 1997
---- ---- ---- ----
Weighted average yield
on loan portfolio .................... 8.39% 8.57% 8.70% 8.88%
Weighted average yield
on mortgage-backed
securities ............................ 7.81 7.78 7.25 7.40
Weighted average yield
on Federal Funds and
overnight deposits .................... 5.77 5.89 5.27 5.33
Weighted average yield
on investment securities .............. 5.14 6.55 6.70 6.80
Weighted average yield
on all interest-
earning assets ....................... 8.27 8.46 8.46 8.63
Weighted average rate
paid on savings deposits .............. 3.96 4.08 4.15 4.08
Weighted average rate
paid on Federal Home
Loan Bank advances .................... 6.53 6.27 5.95 5.82
Weighted average rate
paid on repurchase
agreements ............................ 3.70 4.63 5.82 4.52
Weighted average rate
paid on all interest
bearing liabilities .................. 4.75 4.70 4.57 4.50
Interest rate spread (spread
between weighted average
rate on all interest-earning
assets and all interest-
bearing liabilities) ................. 3.52 3.76 3.89 4.13
Net interest margin (net
interest income as a percentage
of average interest-earning
assets) ............................... 3.62 3.86 4.03 4.29
Rate/Volume Analysis
The following table sets forth certain information regarding changes to
interest income and interest expense of the Corporation for the periods
indicated. For each category of interest-earning asset and interest-bearing
liability, information is provided on changes attributed to (i) changes in rate
(changes in rate multiplied by old volume); (ii) changes in volume (changes in
volume multiplied by old rate); (iii) changes in rate-volume (change in rate
multiplied by change in volume); and (IV) the net change (the sum of the prior
columns). Non-accrual loans are included in the average volume calculations.
Year Ended September 30,
------------------------------------------------------------------------------------------
1995 Compared to 1994 1996 Compared to 1995
Increase (Decrease) Increase (Decrease)
Due to Due to
Rate/ Rate/
Rate Volume Volume Net Rate Volume Volume Net
---- ------ ------ ----- ---- ------ ------ -----
(Dollars in thousands)
Interest-Earning Assets:
Loans ........................ $1,377 $ 3,346 $ 222 $4,945 $ 615 $ 2,361 $ 51 $3,027
Mortgage-backed
securities................... 4 567 17 588 (4) 1,083 (6) 1,073
Investments and
other........................ 11 188 34 233 177 96 19 292
-- ---- -- --- --- -- -- ---
Total net change in
income on interest-
earning assets................ 1,392 4,101 273 5,766 788 3,540 64 4,392
----- ----- --- ----- --- ----- -- -----
Interest-Bearing
Liabilities:
Deposits...................... 1,735 (297) (64) 1,374 300 1,455 44 1,799
FHLB advances................. 526 3,215 564 4,305 (289) 51 (2) (240)
Repurchase
agreements................... 35 3 7 45 16 194 50 260
--- - -- -- -- --- -- ---
Total net change in
expense on interest-
bearing liabilities........... 2,296 2,921 507 5,724 27 1,700 92 1,819
------ ----- --- ----- -- ----- -- -----
Net change in net
interest income............... $ (904) $ 1,180 $ (234) $ 42 $ 761 $1,840 $ (28) $2,573
========= ======= ======= ===== ===== ====== ====== ======
Year Ended September 30,
------------------------------------------
1997 Compared to 1996
Increase (Decrease)
Due to
Rate/
Rate Volume Volume Net
---- ------ ------ ----
Interest-Earning Assets:
Loans ........................ $ 502 $ 1,545 $ 24 $ 2,071
Mortgage-backed
securities................... (123) 820 (56) 641
Investments and
other........................ (70) 747 (44) 633
---- --- ---- ---
Total net change in
income on interest-
earning assets................ 309 3,112 (76) 3,345
--- ----- ---- -----
Interest-Bearing
Liabilities:
Deposits...................... 200 1,742 19 1,961
FHLB advances................. (361) (1,425) 73 (1,713)
Repurchase
agreements................... 50 576 181 807
-- --- --- ---
Total net change in
expense on interest-
bearing liabilities........... (111) 893 273 1,055
----- --- --- -----
Net change in net
interest income............... $ 420 $2,219 $ (349) $2,290
======= ====== ======= ======
Average Balance Sheet
The following table sets forth certain information relating to the
Corporation's average balance sheet and reflects the average yield on assets and
average cost of liabilities for the periods indicated. Such yields and costs are
derived by dividing income or expense by the average balance of assets or
liabilities, respectively, for the periods presented. Average balances are
derived from month-end balances. Management does not believe that the use of
month-end balances instead of daily average balances has caused any material
difference in the information presented.
Year Ended September 30,
-------------------------------------------------------------------------------
1995 1996
------------------------------------ ------------------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
------- -------- ------ ------- -------- ------
(Dollars in thousands)
ASSETS
Loans................................ $341,557 $28,671 8.39% $369,733 $31,698 8.57%
Investments(1)....................... 15,153 925 6.10 16,730 1,217 7.27
Mortgage-backed
securities.......................... 9,365 732 7.82 23,214 1,805 7.78
-------- ------- ----- -------- ------- -----
Total interest-earning
assets............................... $366,075 $30,328 8.28% $409,677 $34,720 8.46%
======== ======= ===== ======== ======= =====
LIABILITIES
Transaction accounts................. 80,586 1,678 2.08 114,220 2,862 2.51
Passbook accounts.................... 55,370 1,314 2.37 44,631 1,160 2.60
Certificate accounts................. 124,287 6,898 5.55 134,415 7,667 5.70
FHLB advances........................ 112,097 7,319 6.53 112,878 7,079 6.27
Securities sold
under repurchase
agreements.......................... 1,705 63 3.70 6,955 323 4.63
------- -------- ----- -------- ------ -----
Total interest-bearing
liabilities.......................... $374,045 $17,272 4.75% $413,099 $19,091 4.70%
======== ======= ===== ======== ======= =====
Net interest income/
interest rate spread................. $13,056 3.52% $15,629 3.76%
Net yield on earning
assets............................... 3.62% 3.86%
Ratio of earning assets
to interest-bearing
liabilities.......................... 1.02x 1.02x
Year Ended September 30,
--------------------------------------
1997
--------------------------------------
Average Yield/
Balance Interest Rate
------- -------- -----
ASSETS
Loans................................ $ 389,196 $33,769 8.70%
Investments(1)....................... 27,007 1,850 6.85
Mortgage-backed
securities.......................... 33,738 2,446 7.25
---------- ------- ----
Total interest-earning
assets............................... $ 449,941 $38,065 8.46%
========== ======= ====
LIABILITIES
Transaction accounts................. 153,796 4,894 3.18
Passbook accounts.................... 41,143 1,015 2.47
Certificate accounts................. 135,335 7,741 5.72
FHLB advances........................ 90,154 5,366 5.95
Securities sold
under repurchase
agreements.......................... 19,387 1,130 5.82
--------- ------- ----
Total interest-bearing
liabilities.......................... $ 439,815 $20,146 4.57%
========== ======= ====
Net interest income/
interest rate spread................. $17,919 3.89%
Net yield on earning
assets............................... 4.03%
Ratio of earning assets
to interest-bearing
liabilities.......................... 1.03x
- -------------------------
(1) Includes short-term interest-bearing deposits and Federal funds sold.
Lending Activities
General. The principal lending activities of Coastal Federal are the
origination of residential one-to-four family mortgage loans, consumer loans,
commercial business loans and commerical real estate loans. The Bank originates
construction and permanent loans on single family and multi-unit dwellings, as
well as on commercial structures. The Bank emphasizes the origination of
adjustable rate residential and commercial real estate mortgages.
The Bank's loan portfolio totaled approximately $411.9 million at
September 30, 1997, representing approximately 83.4% of its total assets. On
that date, approximately 63.5% of Coastal Federal's total loan portfolio was
secured by mortgages on one-to-four family residential properties.
In an effort to ensure that the yields on its loan portfolio and
investments are interest-rate sensitive, the Bank has implemented a number of
measures, including: (i) emphasis on origination of adjustable rate mortgages on
residential and commercial properties; (ii) origination of construction loans
secured by residential properties, generally with terms for a one-year period;
and (iii) origination of commercial and consumer loans having either adjustable
rates or relatively short maturities. At September 30, 1997, adjustable rate
loans constituted approximatley $318 million (or 77.0%) of the Bank's total loan
portfolio. Therefore, at such date, fixed rate loans comprised only 23.0% of the
total loan portfolio. These lending practices were adopted to shorten the term
of the Bank's assets and make the loan portfolio more responsive to interest
rate volatility.
Loan Portfolio Analysis
The following tables set forth the composition of the Corporation's loan
portfolio by type of loan and type of security as of the dates indicated.
At September 30,
-----------------------------------------------------------------------------------------
1993 1994 1995 1996
------------------ ------------------ ------------------- ------------------
Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ -------
(Dollars in thousands)
Type of Loan:
Mortgage loans:
Construction........................... $ 12,266 4.08% $ 23,222 6.67% $ 27,905 7.34% $ 34,566 8.65%
On existing property................... 206,632 68.86 225,544 64.82 228,881 60.23 231,373 57.89
Income property (commercial)........... 35,328 11.77 42,207 12.13 54,401 14.31 73,295 18.34
Commercial business loans............... 13,913 4.64 14,052 4.04 19,610 5.16 14,831 3.71
Consumer loans:
Mobile home........................... 1,807 .60 1,497 .43 1,204 .32 1,103 .28
Automobiles........................... 5,126 1.71 6,300 1.81 5,941 1.56 7,261 1.82
Equity lines of credit................ 11,362 3.79 12,763 3.67 13,210 3.48 12,441 3.11
Other................................. 13,626 4.55 22,373 6.43 28,887 7.60 24,776 6.20
-------- ------ -------- ----- -------- ------ -------- ------
Total loans and loans held for sale.... $300,060 100.00% $347,958 100.0% $380,039 100.00% $399,646 100.00%
====== ===== ====== ======
Less:
Loans in process...................... (5,607) (13,087) (17,178) (18,589)
Deferred loan(fees)costs.............. (546) (343) (71) 286
Allowance for loan losses............. (2,753) (3,353) (3,578) (4,172)
-------- -------- -------- --------
Total loans net........................ $291,154 $331,175 $359,212 $377,171
======== ======== ======== ========
At September 30,
---------------------
1997
---------------------
Amount Percent
Type of Loan:
Mortgage loans:
Construction........................... $ 34,216 7.93%
On existing property................... 246,323 57.09
Income property (commercial)........... 97,680 22.64
Commercial business loans............... 10,939 2.54
Consumer loans:
Mobile home........................... 1,291 .30
Automobiles........................... 6,055 1.40
Equity lines of credit................ 15,294 3.54
Other................................. 19,659 4.56
-------- ------
Total loans and loans held for sale.... $431,457 100.00%
======
Less:
Loans in process...................... (15,084)
Deferred loan(fees)costs.............. 458
Allowance for loan losses............. (4,902)
Total loans net........................ $411,929
========
Single Family Residential Loans. The Bank actively originates
conventional loans to enable borrowers to purchase existing homes or residential
lots, refinance existing mortgage loans or construct new homes. Mortgage loans
originated by the Bank are generally long-term loans, amortized on a monthly
basis, with principal and interest due each month. The initial contractual loan
payment period for single family residential loans typically range from 15 to 30
years. The Bank's experience indicates that real estate loans remain outstanding
for significantly shorter periods than their contractual terms. Borrowers may
refinance or prepay loans at their option, subject to any prepayment penalty
provisions included in the note. The Bank generally requires mortgage title
insurance on all single family residential mortgage loans.
The Bank offers adjustable rate mortgage loans ("ARMs"), the interest
rates of which adjust based upon either the cost of funds, prime rate or
treasury securities indices. The interest rates on ARMs generally may not adjust
more than 1-2% per year and 4-6% over the life of the loan. The Bank originates
ARMs at below the fully phased-in interest rate but generally qualifies
borrowers at 2% above the initial rate when the loan to value ratio exceeds 80%.
Monthly payments could increase significantly at the first repricing period.
Although Coastal Federal's ARMs have been beneficial in helping Coastal Federal
improve the interest rate sensitivity of its assets, such loans may pose
potential additional risks to Coastal Federal. A precipitous increase in
interest rates could be expected to result in an increase in delinquencies or
defaults on such loans. Whereas a significant decrease in rates or a flat yield
curve could cause repayments to increase significantly.
Coastal Federal also offers one-to-four family residential loans with
fixed rates of interest. These loans generally can be sold in the secondary
market or are portfolio loans where the Bank offers such loans at rates
approximately 1% above conforming loan rates. A large majority of the conforming
fixed rate loans offered by Coastal Federal are originated through Coastal
Federal Mortgage, Inc. (CFM). These loans are generally sold to correspondent
banks servicing released. Loans sold by CFM amounted to $34.5 and $38.4 million,
respectively, in fiscal 1996 and 1997. Coastal Federal sold approximately $6.2
and $5.8 million, respectively, of mortgages in 1996 and 1997 generally to
FHLMC.
At September 30, 1997, approximately $274.2 million or 63.5% of the
Bank's loan portfolio consisted of one-to-four family residential loans.
Construction Loans. The Bank originates construction loans on single
family residences that generally have a term of six to twelve months for
individuals or one year for builders. The individual's loans are usually tied to
a commitment by the Bank to provide permanent financing upon completion of
construction. The interest rate charged on construction loans is indexed to the
prime rate as published in The Wall Street Journal or current permanent loan
rate and varies depending on the terms of the loan and the loan amount. The Bank
customarily requires personal guaranties of payment from the principals of the
borrowing entities.
The interest rate on commercial real estate construction loans
presently offered by the Bank is indexed to either the U.S. Treasury securities
or the prime rate as published in The Wall Street Journal. Commercial real
estate construction financing generally exposes the lender to a greater risk of
loss than long-term financing on improved, occupied real estate, due in part to
the fact that the loans are underwritten on projected rather than historical,
income and rental results. The Bank's risk of loss on such loans is dependent
largely upon the accuracy of the initial appraisal of the property's value at
completion of construction and the estimated cost (including interest) of
completion. If either estimate proves to have been inaccurate and the borrower
is unable to provide additional funds pursuant to his guaranty, the lender
either may be required to advance funds beyond the amount originally committed
to permit completion of the development and/or be confronted at the maturity of
the loan with a project whose value is insufficient to assure full repayment.
The general practice of Coastal Federal is to provide a permanent financing
commitment on commercial properties at the time the Bank provides the
construction financing.
The Bank's underwriting criteria are designed to evaluate and to
minimize the risks of each commercial real estate construction loan. The Bank
considers evidence of the financial stability and reputation of both the
borrower and the contractor, the amount of the borrower's cash equity in the
project, independent evaluation and review of the building costs, local market
conditions, pre-construction sale and leasing information based upon evaluation
of similar projects and the borrower's cash flow projections upon completion.
The Bank generally requires personal guaranties of payment by the principals of
any borrowing entity.
At September 30, 1997, approximately $34.2 million or 7.9% of the
Bank's gross loan portfolio consisted of construction loans on both residential
($19.7 million) and commercial properties ($14.5 million). Undisbursed proceeds
on these loans amounted to $15.1 million at September 30, 1997.
Commercial Real Estate Loans. The Bank may invest, by OTS regulation,
in non-residential real estate loans up to 400% of its capital as computed under
GAAP plus general loan loss reserves. At September 30, 1997, this limited
Coastal Federal's aggregate non-residential real estate loans to approximately
$146.1 million. At such time, the Bank had non-residential real estate loans
outstanding of $120.7 million. The Bank will maintain a level of these loan
types within the guidelines set forth. The commercial real estate loans
originated by the Bank are primarily secured by shopping centers, office
buildings, warehouse facilities, retail outlets, hotels, motels and multi-family
apartment buildings. The interest rate of the commercial real estate loans
presently offered by the Bank generally adjusts every one, three years or five
years and is indexed to U.S. Treasury securities. Such loans generally have a
fifteen to twenty year term, with the payments based up to a similar
amortization schedule. The Bank may require the loan to include a call option at
the Bank's option in five to ten years. The Bank generally requires that such
loans have a minimum debt service coverage of 120% of projected net operating
income together with other generally accepted underwriting criteria. At
September 30, 1997, the Bank had approximately $97.7 million of loans secured by
commercial real estate, representing approximately 22.6% of Coastal Federal's
total loan portfolio.
Commercial real estate lending entails significant additional risks
compared to residential lending. Commercial real estate loans typically involve
large loan balances to single borrowers or groups of related borrowers. The
payment experience of such loans is typically dependent upon the successful
operation of the real estate project. These risks can be significantly affected
by supply and demand conditions in the market for office and retail space and
for apartments and, as such, may be subject, to a greater extent, to adverse
conditions in the economy. In dealing with these risk factors, Coastal Federal
generally limits itself to a real estate market or to borrowers with which it
has experience. The Bank concentrates on originating commercial real estate
loans secured by properties located within its market areas of Horry County,
Florence County, the Pee Dee Region, northeastern Georgetown County, all within
South Carolina and Brunswick County, North Carolina. Additionally, the Bank has,
on a limited basis, originated or purchased commercial real estate loans secured
by properties located in other parts of the Southeast.
Consumer Loans. The Bank permitted by OTS regulations to invest up to
35% of its assets in consumer loans. The Bank currently offers a wide variety of
consumer loans on a secured and unsecured basis including home improvement
loans, loans secured by savings accounts and automobile, truck and boat loans.
The Bank also offers a revolving line of credit secured by owner-occupied real
estate. Total consumer loans amounted to $42.3 million, or 9.8% of the total
loan portfolio, at September 30, 1997.
Coastal Federal has marketed consumer loans in order to provide a wider
range of financial services to its customers. These loans also have a shorter
term and normally higher interest rates on such loans than on residential real
estate loans.
Consumer loans entail greater risk than do residential mortgage loans,
particularly in the case of consumer loans which are unsecured or secured by
assets which may depreciate rapidly, such as automobiles. In the latter case,
repossessed collateral for a defaulted consumer loan may not provide an adequate
source of repayment of the outstanding loan and the remaining deficiency often
does not warrant further substantial collection efforts against the borrower. In
addition, consumer loan collections are dependent on the borrower's continuing
financial stability and, thus, are more likely to be adversely affected by job
loss, divorce, illness or personal bankruptcy. Furthermore, the application of
various federal and state laws, including federal and state bankruptcy and
insolvency laws, may limit the amount recoverable on such loans. Such loans may
also give rise to claims and defenses by the borrower against Coastal Federal as
the holder of the loan, and a borrower may be able to assert claims and defenses
which it has against the seller of the underlying collateral.
Commercial Business Loans. The Bank is permitted under OTS regulations
to make secured or unsecured loans for commercial, corporate, business or
agricultural purposes, including the issuance of letters of credit secured by
real estate, business equipment, inventories, accounts receivable and cash
equivalents. The aggregate amount of such loans outstanding may not exceed 20%
of such institution's assets.
Coastal Federal has been making commercial business loans since 1983 on
both a secured and unsecured basis with terms which generally do not exceed one
year. The majority of these loans have interest rates which adjust with changes
in the prime rate as published in the Wall Street Journal. The Bank's non-real
estate commercial loans primarily consist of short-term loans for working
capital purposes, seasonal loans and lines of credit. The Bank customarily
requires a personal guaranty of payment by the principals of any borrowing
entity and reviews the financial statements and income tax returns of the
guarantors. At September 30, 1997, the Bank had $10.9 million outstanding in
commercial business loans, which represented approximately 2.5% of its loan
portfolio.
Commercial business lending is inherently riskier than residential
mortgage lending and involves risks that are different from those associated
with residential and commercial real estate lending. Real estate lending is
generally considered to be collateral based lending with loan amounts based on
predetermined loan to collateral values and liquidation of the underlying real
estate collateral is viewed as the primary source of repayment in the event of
borrower default. Although commercial business loans are often collateralized by
equipment, inventory, accounts receivable or other business assets, the
liquidation of collateral in the event of a borrower default is often not a
sufficient source of repayment because accounts receivable may be uncollectible
and inventories and equipment may be obsolete or of limited use, among other
things. Accordingly, the repayment of a commercial business loan depends
primarily on the creditworthiness of the borrower (and any guarantors), while
liquidation of collateral is a secondary and often insufficient source of
repayment.
Loan Maturity
The following table sets forth certain information at September 30,
1997 regarding the dollar amount of loans maturing in the Company's loan
portfolio based on their contractual terms to maturity but does not include
scheduled payments or potential prepayments. Demand loans (without a stated
maturity), loans having no stated schedule of repayments and no stated maturity
and overdrafts are reported as due in one year or less.
More than More than More than More than
One Year Three Years Five Years Ten Years
One Year Through Through Through Through Over
or Less Three Years Five Years Ten Years Twenty Years Twenty Years Totals
------- ----------- ---------- --------- ------------ ------------ ------
(In thousands)
First mortgage loans . $ 3,586 $ 7,982 $ 3,999 $ 10,665 $ 62,545 $221,492 $310,269
Other residential and
non-residential ..... 10,834 4,884 4,282 4,890 32,318 8,249 65,457
Equity lines of credit 15,294 -- -- -- -- -- 15,294
Consumer loans ....... 2,743 4,906 3,643 795 536 -- 12,623
Commercial loans ..... 2,386 2,947 1,529 399 1,025 -- 8,286
-------- -------- -------- -------- -------- -------- --------
Total loans ..... $ 34,843 $ 20,719 $ 13,453 $ 16,749 $ 96,424 $229,741 $411,929
======== ======== ======== ======== ======== ======== ========
The following table sets forth the dollar amount of all loans due after
one year at September 30, 1997 which have fixed interest rates and those which
have floating or adjustable interest rates.
Fixed Floating or
Rates Adjustable Rates Totals
----- ---------------- ------
(In thousands)
First mortgage loans......................... $54,317 $252,366 $306,683
Other residential and
non-residential............................. 6,484 48,139 54,623
Consumer loans............................... 9,485 395 9,880
Commercial loans............................. 2,432 3,468 5,900
------- -------- --------
Total loans............................. $72,718 $304,368 $377,086
======= ======== ========
Interest Rate Sensitivity Analysis
The following table illustrates the repricing analysis of the Company's
interest-earning assets and interest-bearing liabilities as of September 30,
1997. For purposes of the table, repricing characteristics of loans include
estimated annual prepayment rates.
Zero to Four Months One Year to Greater than
Three Months to One Year Five Years Five Years Total
------------ ----------- ---------- ---------- -----
(In thousands)
Rate Sensitive Assets(1):
Mortgage loans and
mortgage-backed securities............... $57,040 $223,641 $91,460 $23,324 $395,465
Mortgage-backed securities................ $1,147 $2,943 $14,089 $4,200 $ 22,379
Non-mortgage loans........................ 9,059 3,699 8,150 -- 20,908
Interest-bearing deposits and
investment securities.................... 1,159 1,913 20,220 3,391 26,683
------- -------- -------- ------- --------
Total................................. $68,405 $232,196 $133,919 $30,915 $465,435
======= ======== ======== ======= ========
Rate Sensitive Liabilities:
Core deposits(2).......................... $42,058 $69,741 $62,219 $32,441 $206,459
Time deposits............................. 67,494 48,433 24,730 -- 140,657
Borrowings................................ 52,858 23,720 27,802 1,957 106,337
------- -------- -------- ------- --------
Total................................. $162,410 $141,894 $114,751 $34,398 $453,453
======== ======== ======== ======= ========
Off-Balance Sheet Positions:
Commitments to originate
mortgage loans........................... $1,772 $2,468 $(4,756) $516 --
Interest rate sensitivity gap.............. $(92,233) $92,770 $14,412 $(2,967) $11,982
Cumulative interest
sensitivity gap........................... $(92,233) $537 $14,949 $11,982 --
Cumulative interest sensitivity
gap as a percent of total assets (18.77%) 0.11% 3.04% 2.44% --
(1) Prepayments have been applied to all loans. Prepayment speeds vary
according to the instrument's original maturity, coupon rate and age.
(2) Decay rates have been applied to all core deposits as follows:
NOW MMDA Passbook Non-interest
Accounts Accounts Accounts Demand
-------- -------- -------- ------
Percent Repricing:
1 - 12 months............................ 37.00% 79.00% 17.00% 37.00%
13 - 36 months........................... 33.87 11.00 25.82 33.87
37 - 60 months........................... 9.06 5.24 16.83 9.06
Over 60 months........................... 20.07 4.76 40.35 20.07
------ ------ ------ ------
Total.................................... 100.00% 100.00% 100.00% 100.00%
======= ======= ======= =======
Interest Rate Sensitivity of Net Portfolio Value
The table below measures interest rate risk by estimating the change in
market value of the Bank's assets, liabilities, and off-balance sheet contracts
in response to an instantaneous change in the general level of interest rates.
The procedure for measuring interest rate risk was developed by the Office of
Thrift Supervision ("OTS") to replace the "gap" analysis (the difference between
interest-earning assets and interest-bearing liabilities that mature or reprice
within a specific time period) used previously by the OTS. The model first
estimates the level of the Bank's market value of portfolio equity ("MVPE")
(market value of assets, less market value of liabilities, plus or minus the
market value of any off-balance sheet items) under the current rate environment.
In general, market values are estimated by discounting the estimated cash flows
of each instrument by appropriate discount rates. The model then recalculates
the Bank's MVPE under different interest rate scenarios. The change in MVPE
under the different interest rate scenarios provides a measure of the Bank's
exposure to interest rate risk. Due to OTS reporting requirements,
classifications may vary from GAAP reporting. Further, this report does not
include assets owned by the Company not included in the Bank. The data presented
below is as of September 30, 1997. This information is an estimate and may not
be indicative of actual changes in market values should rates change
significantly at a future date.
-400 -300 -200 -100 +100 +200 +300 +400
Basis Basis Basis Basis No Basis Basis Basis Basis
Points Points Points Points Change Points Points Points Points
------ ------ ------ ------ ------ ------ ------ ------ ------
(In thousands)
ASSETS
Mortgage loans and
securities ......... $ 440,467 $ 436,263 $ 432,780 $ 429,505 $ 425,152 $ 418,999 $ 411,243 $ 402,373 $ 392,891
Non-mortgage loans .. 22,352 22,177 22,006 21,842 21,680 21,523 21,369 21,218 21,073
Cash, deposits and
securities ......... 44,022 43,074 42,161 41,282 40,436 39,621 38,836 38,080 37,351
Repossessed assets .. 253 253 253 253 253 253 253 253 253
Premises and equipmen 7,383 7,383 7,383 7,383 7,383 7,383 7,383 7,383 7,383
Other assets ........ 9,584 10,928 12,846 15,563 19,326 23,372 27,170 30,774 34,197
--------- --------- --------- --------- --------- --------- --------- --------- ---------
TOTAL ............... 524,061 520,078 517,429 515,828 514,230 511,151 506,254 500,081 493,148
========= ========= ========= ========= ========= ========= ========= ========= =========
LIABILITIES
Deposits ............ $ 348,602 $ 347,730 $ 346,876 $ 346,030 $ 345,198 $ 344,380 $ 343,576 $ 342,785 $ 342,004
Borrowings .......... 114,383 112,743 111,158 109,625 108,142 106,707 105,317 103,971 102,666
Other liabilities ... 6,495 6,495 6,495 6,495 6,495 6,495 6,496 6,495 6,496
--------- --------- --------- --------- --------- --------- --------- --------- ---------
TOTAL ............... 469,480 466,968 464,529 462,150 459,835 457,582 455,389 453,251 451,165
========= ========= ========= ========= ========= ========= ========= ========= =========
OFF BALANCE SHEET
POSITIONS .......... $ 992 $ 814 $ 661 $ 516 $ 320 $ 49 $ (230) $ (498) $ (774)
MARKET VALUE OF
PORTFOLIO EQUITY ... $ 58,573 $ 53,924 $ 53,561 $ 54,194 $ 54,715 $ 53,617 $ 50,635 $ 46,331 $ 41,209
Loan Solicitation and Processing. The Bank actively solicits mortgage
loan applications from existing customers, walk-ins, referrals and from real
estate brokers. Commercial real estate loan applications also are obtained by
direct solicitation by loan officers.
Detailed loan applications are obtained to determine the borrower's
ability to repay, and the more significant items on these applications are
verified through the use of credit reports, financial statements and
confirmations through verification forms. After analysis of the loan application
and property or collateral involved, including an appraisal of the property by
independent appraisers approved by the Bank's Board of Directors and reviewed by
the Bank's underwriter, a lending decision is made by the Bank. With respect to
commercial loans, the Bank also reviews the capital adequacy of the business,
the ability of the borrower to repay the loan and honor its other obligations
and general economic and industry conditions. All residential mortgage loan
applications over $400,000 require the approval of the Bank's Loan Committee,
which consists of Directors Clemmons, Gerald, Smart, Springs and Executive Vice
Presidents Rexroad and Stalvey. All first mortgage loan applications in excess
of 95% of the appraised value of the property must be approved by the Board of
Directors.
Loan applicants are promptly notified of the decision of the Bank by a
letter setting forth the terms and conditions of the decision. If approved, such
terms and conditions include the amount of the loan, interest rate, amortization
term, a brief description of real estate to be mortgaged to the Bank and notice
of requirement of insurance coverage necessary to protect the Bank's interest in
the collateral.
The Bank's general policy is to obtain a title insurance policy
insuring that the Bank has a valid lien on the mortgaged real estate and that
the property is free of encumbrances. Borrowers must also obtain paid hazard
insurance policies prior to closing and, when the property is in a flood plain
as designated by the Department of Housing and Urban Development, obtain paid
flood insurance policies. It is the policy of Coastal Federal to require flood
insurance for the full insurable value of the improvements for any such loan
located in a designated flood hazard area. Borrowers on loans which exceed 80%
of the value of the security property are also required to advance funds on a
monthly basis, with each payment of principal and interest, to a mortgage escrow
account from which the Bank makes disbursements for items such as real estate
taxes, hazard insurance premiums and private mortgage insurance premiums. In
cases of flood insurance, it is the Bank's policy to require escrow on these
premiums regardless of the loan-to-value ratio.
Loan Originations, Purchases and Sales. The Bank is a qualified
servicer for FHLMC and FNMA. Depending upon interest rates and economic
conditions, the Bank has sold loans in order to provide additional funds for
lending, to generate servicing fee income, and to decrease the amount of its
long-term, fixed rate loans in order to minimize the gap between the maturities
of its interest-earning assets and interest-bearing liabilities. The Bank
generally continues to collect payments on the loans, to supervise foreclosure
proceedings, if necessary, and to otherwise service the loans. The Bank retains
a portion of the interest paid by the borrower on the loans as consideration for
its servicing activities. At September 30, 1997, the Bank was servicing loans
sold to others with a principal balance of approximately $104.5 million. Sales
of whole loans and participation interests by the Bank are made without right of
recourse to the Bank by the buyer of the loans in the event of default by the
borrower. The majority of the loans sold during the year ended September 30,
1997 were conforming conventional loans originated and sold by Coastal Federal
Mortgage. These loans were sold on a servicing released basis. At September 30,
1997, the Bank's loan portfolio included purchased loans of approximately $22.1
million, which have been primarily secured by single family residences and which
have been written as adjustable rate mortgage loan instruments. These loans are
generally secured by properties located in the Southeast and were purchased
according to the Bank's non-conforming mortgage loan underwriting standards.
Loans Originated, Purchased and Sold
The following table shows total loans originated, purchased, sold and
repaid during the periods indicated.
Year Ended September 30,
---------------------------------------
1995 1996 1997
--------- --------- ---------
(In thousands)
Loans receivable net, at the beginning of the
period ..................................... $ 331,175 $ 359,212 $ 377,171
--------- --------- ---------
Loans originated:
Construction ............................... 31,849 38,172 45,986
Residential ................................ 46,935 60,683 59,289
Nonresidential ............................. 8,307 11,897 13,794
Land ....................................... 7,263 8,355 10,308
Commercial business ........................ 20,145 23,062 33,730
Consumer ................................... 26,530 18,201 15,396
--------- --------- ---------
Total loans originated ................. 141,029 160,370 178,503
--------- --------- ---------
Loans purchased, primarily single
family residental mortgages ................. 6,337 12,448 9,948
--------- --------- ---------
Loans sold .................................. (2,806) (40,672) (44,160)
--------- --------- ---------
Loan principal repayments and other ......... (116,008) (112,926) (109,946)
--------- --------- ---------
Other ....................................... (515) (1,261) 413
--------- --------- ---------
Loans receivable net, at end of period ...... $ 359,212 $ 377,171 $ 411,929
========= ========= =========
Loan Commitments. The Bank, upon the submission of a loan application,
generally provides a 45-day written commitment as to the interest rate
applicable to such loan. If the loan has not been closed within 45 days, the
rate may be adjusted to reflect current market conditions at the Bank's option.
Loans which require closing time in excess of 45 days from the date of
application are issued a written commitment, with a term ranging from three to
six months. For fixed rate loans, the Bank either charges a higher interest rate
on the loan or may charge up to one point to lock in the rate for 180 days. At
September 30, 1997, Coastal Federal had loan commitments of approximately $3.2
million. At September 30, 1997, CFM had loan commitments of approximately $2.3
million.
Loan Origination and Other Fees. Coastal Federal may receive loan
origination fees and discount "points." Loan fees and points are a percentage of
the principal amount of the mortgage loan which are charged to the borrower for
funding the loan. Coastal Federal allows the purchaser to reduce the rate of
interest by the payment of points at the customers options. Fees on long-term
commercial real estate and residential construction loans vary with loan type.
Delinquencies. Coastal Federal's collection procedures provide for a
series of contacts with delinquent borrowers. If the delinquency continues, more
formal efforts are made to contact the delinquent borrower. If a residential
real estate loan continues in a delinquent status for 90 days or more, Coastal
Federal generally initiates foreclosure proceedings. Coastal Federal generally
initiates foreclosure proceedings on a commercial real estate loan if the loan
continues in a delinquent status for 60 days or more. In certain limited
instances, however, Coastal Federal may modify the loan or grant a limited
moratorium on loan payments to enable the borrower to reorganize his financial
affairs.
Problem Assets and Asset Classification. Loans are reviewed on a
regular basis and a reserve for uncollectible interest is established on loans
where collection of interest is questionable, generally when such loans become
90 days delinquent. Loan balances that relate to interest amounts reserved are
considered to be on a nonaccrual basis. Typically, payments received on a
nonaccrual loan are applied to the outstanding principal and interest as
determined at the time of collection of the loan.
The following table sets forth information with respect to the Bank's
non-performing assets at the dates indicated. At each of the dates indicated,
Coastal Federal has no debt that has been restructured.
At September 30,
-------------------------------------------------------
1993 1994 1995 1996 1997
------ ------ ------ ------ ------
(Dollars in thousands)
Loans accounted for on a nonaccrual basis:
Real estate -
Residential ........................... $ 205 $ 79 $ 999 $ 307 $ 71
Commercial ............................ 64 1,056 134 -- --
Commercial business ................... -- -- 154 60 99
Consumer .............................. 44 16 36 78 87
------ ------ ------ ------ ------
Total ................................ 313 1,151 1,323 445 257
------ ------ ------ ------ ------
Accruing loans which are
contractually past due
90 days or more:
Real estate -
Residential ........................... -- -- -- -- --
Commercial ............................ -- -- -- -- --
Commercial business .................... -- -- -- -- --
Consumer ............................... -- -- -- -- --
------ ------ ------ ------ ------
Total ................................ -- -- -- __ -- --
------ ------ ------ ------ ------
Restructured loans ....................... -- -- -- -- --
Real estate owned ........................ 2,197 781 789 323 250
Other nonperforming
assets .................................. -- -- -- -- --
------ ------ ------ ------ ------
Total nonperforming
assets .................................. $2,510 $1,932 $2,112 $ 768 $ 507
====== ====== ====== ====== ======
Total nonaccrual loans to net
loans ................................... .10% .03% .36% .12% .06%
Total nonaccrual loans to total
assets .................................. .09% .03% .33% .10% .05%
Total nonperforming assets
to total assets ......................... .74% .56% .53% .17% .10%
For the year ended September 30, 1997, gross interest income which
would have been recorded had non-accruing loans been current in
accordance with their original terms would have amounted to
approximately $13,000, of which approximately $5,000 was included in
interest income. There were no impaired loans at September 30, 1996 or
1997.
The allowance for uncollectible interest which is netted against
accrued interest receivable totaled $50,000 and $36,000 at September 30, 1996
and 1997, respectively.
The OTS has adopted various changes in its regulations regarding
problem assets of savings institutions. OTS regulations require that each
insured institution review and classify its assets on a regular basis. In
addition, in connection with examinations of insured institutions, OTS examiners
have authority to identify problem assets and, if appropriate, require them to
be classified. There are three classifications for problem assets: substandard,
doubtful and loss. Substandard assets must have one or more defined weaknesses
and are characterized by the distinct possibility that the insured institution
will sustain some loss if the deficiencies are not corrected. Doubtful assets
have the weaknesses of substandard assets with the additional characteristic
that the weaknesses make collection or liquidation in full on the basis of
currently existing facts, conditions and values questionable, and there is a
high possibility of loss. An asset classified loss is considered uncollectible
and of such little value that continuance as an asset of the institution is not
warranted. The regulations also have a special mention category, described as
assets which do not currently expose an insured institution to a sufficient
degree of risk to warrant classification but do possess credit deficiencies or
potential weaknesses deserving management's close attention. Assets classified
as substandard or doubtful require the institution to establish general
allowances for loan losses. If an asset or portion thereof is classified loss,
the insured institution must either establish specific allowances for loan
losses in the amount of 100% of the portion of the asset classified loss or
charge off such amount. A portion of general loss allowances established to
cover possible losses related to assets classified substandard or doubtful may
be included in determining an institution's regulatory capital, while specific
valuation allowances for loan losses generally do not qualify as regulatory
capital.
Coastal Federal had one individual classified asset in excess of
$500,000 as of September 30, 1997. At that date, classified assets amounted to
$6.8 million ($1.6 million substandard; $15,000 doubtful; and $5.2 million
special mention). In the first quarter of fiscal 1998, the classified asset in
excess of $500,000 was paid in full.
Allowance for Loan Losses. In making loans, the Bank recognizes the
fact that credit losses will be experienced and that the risk of loss will vary
with, among other things, the type of loan being made, the creditworthiness of
the borrower over the term of the loan and, in the case of a secured loan, the
quality of the security for the loan.
The Bank's management evaluates the need to establish allowances for
losses on loans and other assets each year based on estimated losses on specific
loans and on any real estate held for sale or investment when a finding is made
that a significant decline in value has occurred. Such evaluation includes a
review of all loans for which full collectibility may not be reasonably assured
and considers, among other matters, the estimated market value of the underlying
collateral of problem loans, prior loss experience, economic conditions and
overall portfolio quality. Additions to the allowance for losses are charged
against earnings in the year they are established. The Bank established
provisions for losses on loans for the years ended September 30, 1995, 1996 and
1997 of $202,000, $790,000 and $760,000, respectively. As a result, the Bank has
a $4.9 million allowance for loan losses as of September 30, 1997. The allowance
as a percentage of loans receivable was 1.19% at September 30, 1997 compared to
1.11% at September 30, 1996. See "Management's Discussion and Analysis
- --Non-Performing Assets and --Allowance for Loan Losses" in the 1997 Annual
Report to Stockholders attached hereto and incorporated by reference.
While the Bank believes it has established its existing allowance for
loan losses in accordance with GAAP at September 30, 1997, there can be no
assurance that regulators, when reviewing the Bank's loan portfolio in the
future, will not request the Bank to significantly increase its allowance for
loan losses, thereby adversely affecting the Bank's financial condition and
earnings.
Loan Loss Allowance Analysis
The following table sets forth an analysis of the Company's allowance for
loan losses for the periods indicated. Where specific loan loss reserves have
been established, any difference between the loss reserve and the amount of loss
realized has been charged or credited to the loan loss allowance as a charge-off
or recovery.
Year Ended September 30,
-------------------------------------------------------------
1993 1994 1995 1996 1997
------- ------- ------- ------- -------
(Dollars in thousands)
Allowance at beginning of
period ............................. $ 1,851 $ 2,753 $ 3,353 $ 3,578 $ 4,172
Allowance recorded on
acquired loans ...................... -- -- -- -- 110
Provision for loan losses ........... 1,389 510 202 790 760
------- ------- ------- ------- -------
Recoveries:
Residential real estate ............ -- 3 232 -- 20
Commercial real estate ............. 11 148 11 75 14
Real estate construction ........... -- -- -- -- --
Consumer ........................... 106 79 12 7 38
------- ------- ------- ------- -------
Total recoveries ................. 117 230 255 82 72
------- ------- ------- ------- -------
Charge-offs:
Residential real estate ............ 71 38 206 24 46
Commercial real estate ............. 392 13 18 216 --
Real estate construction ........... -- -- -- -- --
Consumer ........................... 141 89 8 38 166
------- ------- ------- ------- -------
Total charge-offs ................ 604 140 232 278 212
------- ------- ------- ------- -------
Net charge-offs (recoveries) ..... 487 (90) (23) 196 140
------- ------- ------- ------- -------
Allowance at end of period ......... $ 2,753 $ 3,353 $ 3,578 $ 4,172 $ 4,902
======= ======= ======= ======= =======
Ratio of allowance to net
loans outstanding at the
end of the period .................. 0.98% 1.01% 1.00% 1.11% 1.19%
Ratio of net charge-offs (recoveries)
to average loans outstanding
during the period .................. 0.17% (.03%) (.01%) .05% .04%
Loan Loss Allowance by Category
The following table sets forth the breakdown of the allowance for
loan losses by loan category for the periods indicated.
September 30,
-------------------------------------------------------------------------------------------------
1993 1994 1995
--------------------------------- --------------------------------- ----------------------------
As a % Loan Type As a % Loan Type As a % Loan Type
of out- As a % of out- As a % of out- As a %
standing of out- standing of out- standing of out-
loans in standing loans in standing loans in standing
Amount category loans Amount category loans Amount category loans
------ -------- ----- ------ -------- ----- ------ -------- -----
(Dollars in thousands)
Real Estate -- mortgage
Residential................... $ 542 0.25% 75.48% $ 742 .30% 75.05% $ 803 .31% 72.03%
Commercial.................... 1,901 5.54 12.22 2,296 5.58 11.94 2,371 4.36 14.17
Consumer...................... 310 .89 12.30 315 .71 13.01 404 .80 13.80
------ ------ ------ ------ ------ ------
Total allowance for
loan losses.................. $2,753 0.98% 100.00% $3,353 1.01% 100.00% $3,578 1.00% 100.00%
====== ====== ====== ====== ====== =======
September 30,
-------------------------------------------------------------------
1996 1997
--------------------------------- --------------------------------
As a % Loan Type As a % Loan Type
of out- As a % of out- As a %
standing of out- standing of out-
loans in standing loans in standing
Amount category loans Amount category loans
------ -------- ----- ------ -------- -----
Real Estate -- mortgage
Residential................... $ 837 .37% 65.35% $1,064 .41% 63.56%
Commercial.................... 2,875 3.80 22.34 3,261 2.78 28.52
Consumer...................... 460 1.01 12.31 577 1.77 7.92
------ ---- ------ ------
Total allowance for
loan losses.................. $4,172 1.11% 100.00% $4,902 1.19% 100.00%
====== ====== ====== ======
Investment Activities
Under OTS regulations, the Bank has authority to invest in various
types of liquid assets, including U.S. Treasury obligations, securities of
various federal agencies and of state and municipal governments, deposits at the
FHLB of Atlanta, certificates of deposit of federally insured institutions,
certain bankers' acceptances and federal funds. Subject to various restrictions,
such savings institutions may also invest a portion of their assets in
commercial paper, corporate debt securities and mutual funds, the assets of
which conform to the investments that federally chartered savings institutions
are otherwise authorized to make directly. These institutions are also required
to maintain minimum levels of liquid assets which vary from time to time. See
"Regulation of Coastal Federal - Federal Home Loan Bank System." The Bank may
decide to increase its liquidity above the required levels depending upon the
availability of funds and comparative yields on investments in relation to
return on loans.
Coastal Federal is required under federal regulations to maintain a
minimum amount of liquid assets and is also permitted to make certain other
securities investments. See "Regulation" herein and "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources" in the Annual Report. The balance of the Bank's investments
in short-term securities in excess of regulatory requirements reflects
management's response to the significantly increasing percentage of deposits
with short maturities. At September 30, 1997, Coastal Federal's regulatory
liquidity was 6.1%, which was in excess of the required 4.0%.
Investment decisions are made by the Investment Officer who reports
quarterly to the Asset/Liability Committee ("ALCO Committee"). The ALCO
Committee meets quarterly and consists of Directors Benton, Creel, Bishop,
Springs, Clemmons and Gerald, Chief Financial Officer Rexroad and Executive Vice
Presidents Graham, Griffin and Stalvey. The ALCO Committee acts within policies
established by the Board of Directors. At September 30, 1997, the Bank's
investment portfolio had a market value of approximately $49.2 million. The
investment securities portfolio consisted primarily of U.S. Government agency
securities and mortgage-backed securities. For further information concerning
the Bank's securities portfolio, see Notes 2 and 3 of the Notes to Consolidated
Financial Statements attached hereto and incorporated by reference.
Securities Analysis
The following table sets forth Coastal Federal's investment securities
portfolio at amortized cost at the dates indicated.
September 30,
------------------------------------------------------------------------------------------------
1995 1996 1997
--------------------------- -------------------------- -------------------------
Amortized Percent of Amortized Percent of Amortized Percent of
Cost(1) Portfolio Cost(1) Portfolio Cost(1) Portfolio
(Dollars in thousands)
U.S. Government agency
securities:
FHLMC........................ $ -- -- % $ -- -- % $ 995 3.82%
FHLB......................... 1,000 42.94 17,334 98.13 17,738 67.89
FNMA......................... -- -- -- -- -- --
FFCB......................... 999 42.89 -- -- 7,391 28.29
Municipal.................... 330 14.17 330 1.87 -- --
--- ------- ------ ----- ----- -----
Total....................... $2,329 100.00% $17,664 100.00% $26,124 100.00%
====== ====== ======= ====== ======= ======
(1) The market value of the Bank's investment securities portfolio amounted to
$2.3 million, $17.5 million and $26.2 million at September 30, 1995, 1996
and 1997, respectively.
The following table sets forth the final maturities and weighted
average yields of the securities at amortized cost at September 30, 1997.
Less Than One to Five to
One Year Five Years Ten Years
-------------------- -------------------- -----------------------
Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ -----
(Dollars in thousands)
U.S. Government agency
securities................................ $ -- --% $ -- --% $ -- --%
FHLMC................................... -- -- -- -- 995 6.89
FHLB................................... -- -- 6,506 6.72 11,231 6.93
FNMA................................... -- -- -- -- -- --
FFCB................................... -- -- 3,490 6.84 3,902 7.04
Municipal............................... -- -- -- -- -- --
---- --- ------ ---- ------- ----
Total................................ $ -- --% $9,996(1) 6.78% $16,128(2) 6.95%
==== === ====== ===== ======= ====
(1) Includes $8.7 million subject to call provisions. Should these bonds be
called prior to maturity the Bank may not be able to obtain the same yield
with similar term securities.
(2) Includes $13.8 million subject to call provisions. Should these bonds be
called prior to maturity the Bank may not be able to obtain the same yield
with similar term securities.
The following table sets forth Coastal Federal's mortgage-backed
securities portfolio at amortized cost at the dates indicated.
September 30,
---------------------------------------------------------------------------------
1995 1996 1997
------------------------- ------------------------ ------------------------
Amortized Percent of Amortized Percent of Amortized Percent of
Cost(1) Portfolio Cost(1) Portfolio Cost(1) Portfolio
(Dollars in thousands)
Mortgage-Backed Securities:
FHLMC ................... $11,246 88.02% $18,861 70.75% $14,048 62.79%
FNMA .................... 538 4.22 2,469 9.26 1,861 8.31
GNMA .................... 992 7.76 5,330 19.99 6,471 28.90
------- ------ ------- ------ ------- ------
Total .................. $12,776 100.00% $26,660 100.00% $22,380 100.00%
======= ====== ======= ====== ======= ======
(1) The market value of the Bank's mortgage-backed securities portfolio
amounted to $12.9 million, $27.0 million and $23.0 million at September 30,
1995, 1996 and 1997, respectively.
The following table sets forth the maturities and weighted average
yields of the securities at September 30, 1997.
Less Than One to Five to
One Year Five Years Ten Years
----------------- -------------------- -------------------
Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ -----
(Dollars in thousands)
Mortgage-Backed Securities: ..............
FHLMC................................... $ -- --% $-- --% $14,048 7.90%
FNMA.................................... 216 8.67 -- -- 1,645 6.57
GNMA.................................... -- -- -- -- 6,471 7.46
---- ---- --- -- ------- ----
Total..................................... $216 8.67% $-- --% $22,164 7.67%
==== ==== === == ======= ====
Service Corporation Activities
Coastal Federal has one wholly-owned service corporation: Coastal
Mortgage Bankers and Realty Co., Inc. "Coastal Mortgage Bankers", which was
incorporated in 1970 under the laws of South Carolina.
+------------------------+
| |
| COASTAL FEDERAL |
| |
| |
+------------------------+
|
|
+------------------------+
| |
| COASTAL MORTGAGE |
| BANKERS* |
| |
+------------------------+
|
|
|
|
+------------------------------------------------+----------------------------------------+
| | | | |
+------------------+ +-----------------+ +---------------+ +----------------+ +-------------------+
| North Beach | | Shady Forest | | Sherwood | | Ridge | | 501 Development |
| Investments, Inc.| | Development | | Development | | Development | | Corporation |
| | | Corporation | | Corporation | | Corporation | | |
| | | | | | | | | |
+------------------+ +-----------------+ +---------------+ +----------------+ +-------------------+
- ---------------
* For a description of these subsidiaries, see "Real Estate Development
Activities."
Real Estate Development Activity
With the exception of one project, for which a joint venture was
created to dispose of real estate acquired through foreclosure, the Corporation
has not entered into any new real estate activity since 1984 and has, in fact,
almost eliminated its investment in these real estate activities. These efforts
are reflected in the reduction of Corporation's investment and loans to
subsidiaries from $8.5 million at September 30, 1987 to zero at September 30,
1997.
In prior years, the Bank made loans to purchasers of units in which the
Bank's subsidiaries were involved in a joint venture.
The following table summarizes the balances of permanent loans to
individual unit purchasers, by project, at September 30, 1997 (net of
participations sold to other financial institutions).
Number of Total Slow Loans(1)
Project Borrowers Amount Number Amount
- ------- --------- ------ ------ ------
Beach Cove 87 $5,440,601 -- $ --
Condominium
North Myrtle Beach,
South Carolina
Bluewater 103 $4,207,632 1 $55,529
Condominium
Myrtle Beach,
South Carolina
Cobblestone Villas 58 $2,101,438 -- $ --
Condominium
Myrtle Beach,
South Carolina
Carolina Pines 16 $ 449,483 -- $ --
Condominium
Conway, South Carolina
- ----------
(1) Loans over 60 days delinquent
In most cases, development was undertaken through joint ventures in
which a subsidiary of Coastal Mortgage Bankers made an equity investment and, as
a partner, participated in the profits or losses of the joint ventures. Coastal
Federal generally made loans to the joint ventures, subject to Coastal Federal's
underwriting standards and policies and generally with the personal guarantees
of the partners. Generally, Coastal Federal sold participations in the
construction loans, which had interest and fees at market rates, to other
financial institutions.
The business of real estate development involves substantial risks. In
addition, the development and sale of condominium projects is subject to a
number of federal and state statutes, including, but not limited to, the
Interstate Land Sales Full Disclosure Act, Federal Securities Act of 1933, state
"Blue Sky" laws, state real estate laws, Federal Unfair Trade Practices Act,
South Carolina Unfair Trade Practices Act and the Racketeer Influenced and
Corrupt Organizations Act, the violation of which could result in liability to
the participant. Furthermore, changes in the federal income tax laws have
reduced the attractiveness of rental property as an investment, which may
adversely affect the ability to sell these properties.
Deposit Activities and Other Sources of Funds
General. Deposits and loan repayments are the major source of Coastal
Federal's funds for lending and other investment purposes. Loan repayments are a
relatively stable source of funds, while deposit inflows and outflows and loan
prepayments are significantly influenced by general interest rates and money
market conditions. Borrowings may be used on a short-term basis to compensate
for reductions in the availability of funds from other sources. They may also be
used on a longer term basis for general business purposes.
Deposit Accounts. Deposits are attracted from within Coastal Federal's
primary market area through the offering of a broad selection of deposit
instruments, including NOW checking accounts, money market accounts, regular
statement savings and passbook accounts, certificates of deposit and retirement
savings plans. Deposit account terms vary, according to the minimum balance
required, the time periods the funds must remain on deposit and the interest
rate, among other factors. In determining the terms of its deposit accounts,
Coastal Federal considers the rates offered by its competition, profitability to
Coastal Federal, matching deposit and loan products and its customer preferences
and concerns. Coastal Federal generally reviews its deposit mix and pricing at
least monthly.
Deposit Flow
The following table sets forth the balances of savings deposits in the
various types of savings accounts offered by the Bank at the dates indicated.
At
September 30,
------------------------------------------------------------------------------------
1995 1996 1997
----------------- ------------------------------ ------------------------------
Percent Percent Percent
of of Increase of Increase
Amount Total Amount Total (Decrease) Amount Total (Decrease)
------ ----- ------ ----- ---------- ------ ----- ----------
(Dollars in thousands)
Transaction accounts:
NOW checking ............................. $ 29,852 10.93% $ 35,654 11.38% $ 5,802 $ 38,773 11.17 $ 3,119
Commercial checking ...................... 16,494 6.04 19,926 6.36 3,432 23,765 6.85 3,839
-------- ----- -------- ----- -------- --------- ----- --------
Total transaction accounts ................. 46,346 16.97 55,580 17.74 9,234 62,538 18.02 6,958
-------- ----- -------- ----- -------- --------- ----- --------
Money market demand accounts ............... 41,516 15.20 84,997 27.12 43,481 104,476 30.10 19,479
Savings accounts ........................... 46,421 17.00 42,840 13.66 (3,581) 39,445 11.36 (3,395)
Fixed-rate certificates (original maturity):
3 months .................................. 3,431 1.26 2,122 .68 (1,309) 1,826 .53 (296)
6 months .................................. 9,522 3.49 23,479 7.49 13,957 22,185 6.39 (1,294)
9 months .................................. 26,751 9.80 9,293 2.96 (17,458) 7,342 2.12 (1,951)
12 months ................................. 57,315 21.00 47,059 15.01 (10,256) 43,901 12.64 (3,158)
18 months ................................. 12,426 4.55 20,981 6.69 8,555 32,250 9.29 11,269
24 months ................................. 3,845 1.41 4,049 1.29 204 7,390 2.13 3,341
30 months ................................. 1,786 .65 2,189 .70 403 4,809 1.39 2,620
36 months ................................. 9,504 3.48 8,944 2.85 (560) 9,215 2.65 271
48 months ................................. 4,613 1.69 4,728 1.51 115 5,664 1.63 936
96 months ................................. 24 -- 26 .01 2 27 .01 1
Mini-jumbo ................................ -- -- -- -- -- -- -- --
Jumbo ..................................... -- -- -- -- -- -- -- --
-------- ----- -------- ----- -------- --------- ----- --------
129,217 47.33 122,870 39.20 (6,347) 134,609 38.78 11,739
-------- ----- -------- ----- -------- --------- ----- --------
Variable rate certificates:
(original maturity)
18 months ................................. 7,100 2.60 4,593 1.47 (2,507) 3,678 1.06 (915)
30 months ................................. 2,499 .90 2,550 .81 51 2,370 .68 (180)
-------- ----- -------- ----- -------- --------- ----- --------
Total variable ............................. 9,599 3.50 7,143 2.28 (2,456) 6,048 1.74 (1,095)
-------- ----- -------- ----- -------- --------- ----- --------
Total certificates ......................... 138,816 50.83 130,013 41.48 (8,803) 140,657 40.52 10,644
-------- ----- -------- ----- -------- --------- ----- --------
Total deposits ............................. $273,099 100.00% $313,430 100.00% $ 40,331 $ 347,116 100.00% $ 33,686
======== ====== ======== ====== ======== ========= ====== ========
Time Deposits by Maturity and Rate
The following table sets forth the amount and maturities of time deposits at
September 30, 1997.
Amount Due
-----------------------------------------------------------------------------
Less Than 1-2 2-3 3-4 After
Rate One Year Years Years Years 4 Years Total
- ---- -------- ----- ----- ----- ------- -----
(In thousands)
0.00 - 5.99%........... $ 93,712 $13,956 $2,364 $ 547 $27 $110,606
6.00 - 8.00%........... 18,230 9,482 1,164 807 -- 29,683
8.01 - 10.00%.......... -- 266 102 -- -- 368
-------- ------- ------ ------ --- --------
Total................ $111,942 $23,704 $3,630 $1,354 $27 $140,657
======== ======= ====== ====== === ========
The following table sets forth the amount and maturities of time deposits
with balances of $100,000 or more at September 30, 1997.
Amount Due
----------------------------------------------------------------------------
Within Over 3 Over 6 Over 12
3 months through 6 months through 12 months Months
-------- ---------------- ----------------- ------
(In thousands)
$3,639 $11,141 $7,616 $8,240
====== ======= ====== ======
In the unlikely event Coastal Federal is liquidated, depositors will be
entitled to full payment of their deposit accounts prior to any payment being
made to the Corporation as the sole stockholder of Coastal Federal.
Substantially all of Coastal Federal's depositors are residents of the State of
South Carolina.
Borrowings. Demand and time deposits are the primary source of funds
for Coastal Federal's lending and investment activities and for its general
business purposes. The Bank has in the past, however, relied upon advances from
the FHLB of Atlanta to supplement its supply of lendable funds and to meet
deposit withdrawal requirements. The FHLB of Atlanta has served as one of the
Bank's primary borrowing sources. Advances from the FHLB of Atlanta are
typically secured by the Bank's first mortgage loans. At September 30, 1997,
Coastal Federal had advances totaling $101.5 million from the FHLB of Atlanta
due on various dates through 2005 with a weighted average interest rate of
5.86%.
The FHLB of Atlanta functions as a central reserve bank providing
credit for savings institutions and certain other member financial institutions.
As a member, Coastal Federal is required to own capital stock in the FHLB of
Atlanta and is authorized to apply for advances on the security of such stock
and certain of its mortgage loans and other assets (principally securities which
are obligations of, or guaranteed by, the United States) provided certain
standards related to creditworthiness have been met. Advances are made pursuant
to several different programs. Each credit program has its own interest rate and
range of maturities. Depending on the program, limitations on the amount of
advances are based either on a fixed percentage of an institution's net worth or
on the FHLB's assessment of the institution's creditworthiness. The FHLB of
Atlanta determines specific lines of credit for each member institution.
In addition to the borrowings described above, the Bank, from time to
time, has borrowed funds under reverse repurchase agreements pursuant to which
it sells securities (generally secured by government securities and
mortgage-backed securities) under an agreement to buy them back at a specified
price at a later date. These agreements to repurchase are deemed to be
borrowings collateralized by the securities sold. At September 30, 1997, the
Bank did not have any broker repurchase agreements. The Bank has also offered
repurchase agreements to its customers which are borrowings that are
collateralized by underlying government securities. At September 30, 1997, the
Bank had $2.7 million outstanding in customer repurchase agreements.
The following tables set forth certain information regarding short-term
borrowings by the Bank at the end of and during the periods indicated:
At September 30,
---------------------------------
1995 1996 1997
---- ---- ----
(Dollars in thousands)
Outstanding balance:
Securities sold under agreements
to repurchase:
Customer ............................ $ 2,677 $ 3,365 $ 2,666
Broker .............................. -- --
Short-term FHLB advances .............. 36,989 54,404 68,620
Weighted average rate paid on:
Securities sold under agreements
to repurchase:
Customer ............................ 3.77% 3.57% 3.16%
Broker .............................. -- -- --
Short-term FHLB advances .............. 6.40 5.68 5.60
Maximum amount of borrowings outstanding
at any month end:
Securities sold under agreements
to repurchase:
Customer ............................ $ 3,448 $ 3,950 $ 3,257
Broker .............................. -- 12,840 37,516
Short-term FHLB advances .............. 85,078 68,213 75,020
Approximate average short-term borrowings
outstanding with respect to:
Securities sold under agreements
to repurchase:
Customer ............................ $ 1,700 $ 2,900 $ 2,100
Broker .............................. -- 4,100 17,200
Short-term FHLB advances .............. 61,400 56,600 74,023
Weighted average rate paid on:
Securities sold under agreements
to repurchase:
Customer ............................ 3.70% 3.55% 3.36%
Broker .............................. -- 5.40 5.60
Short-term FHLB advances .............. 6.17 5.68 5.60
Competition
As of September 30, 1997, Coastal Federal had the largest market share
(14.0%) of any financial institution located in Horry County, South Carolina
according to Sheshunoff Information Services, Inc. The Bank faces strong
competition in the attraction of deposits (its primary source of lendable funds)
and in the origination of loans. Its most direct competition for deposits and
loans has historically come from other financial institutions located in its
primary market area. The Bank estimates that there are over 70 offices of other
financial institutions in its primary market area. Particularly in times of high
interest rates, the Bank has faced additional significant competition for
investors' funds from short-term money market securities and other corporate and
government securities. The Bank's competition for loans comes principally from
other financial institutions, mortgage banking companies and mortgage brokers.
Personnel
As of September 30, 1997, the Company had 202 full-time Associates and
15 part-time Associates. The Associates are not represented by a collective
bargaining unit. The Bank believes its relationship with its Associates is
excellent.
REGULATION OF COASTAL FINANCIAL
General
The Corporation is a savings and loan holding company within the
meaning of the Home Owners' Loan Act of 1933 ("HOLA"), as amended by FIRREA. As
such, the Corporation is registered with the OTS and is subject to OTS
regulations, examinations, supervision and reporting requirements. As explained
more fully below under "Regulation of Coastal Federal - Federal Regulation of
Savings Associations," the key provisions of FIRREA replaced the Federal Home
Loan Bank Board ("FHLBB") with the OTS, abolished the Federal Savings and Loan
Insurance Corporation ("FSLIC") and vested the prior insurance responsibilities
of the FSLIC with the FDIC. As a subsidiary of a savings and loan holding
company, the Bank is subject to certain restrictions in its dealings with the
Corporation and with other companies affiliated with the Corporation and also is
subject to regulatory requirements and provisions as a federal savings and loan
association.
Holding Company Acquisitions
The HOLA and OTS regulations generally prohibit a savings and loan
holding company, without prior OTS approval, from acquiring any other savings
association or savings and loan holding company or controlling the assets
thereof. They also prohibit, among other things, any director or officer of a
savings and loan holding company, or any individual who owns or controls more
than 25 percent of the voting shares of such holding company, from acquiring
control of any savings association not a subsidiary of such savings and loan
holding company, unless the acquisition is approved by the OTS.
Holding Company Activities
As a unitary savings and loan holding company, the Corporation
generally is not subject to activity restrictions. If the Corporation acquires
control of another savings bank as a separate subsidiary, it would become a
multiple savings and loan holding company, and the activities of the Corporation
and any of its subsidiaries (other than the Bank or any other SAIF-insured
savings association) would become subject to such restrictions unless such other
associations each qualify as a QTL and were acquired in a supervisory
acquisition.
If the Bank fails the QTL test, the Corporation must obtain the
approval of the OTS prior to continuing after such failure, directly or through
its other subsidiaries, any business activity other than those approved for
multiple savings and loan holding companies or their subsidiaries. In addition,
within one year of such failure the Corporation must register as, and will
become subject to, the restrictions applicable to bank holding companies. The
activities authorized for a bank holding company are more limited than are the
activities authorized for a unitary or multiple savings and loan holding
compa