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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, 1998
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: (843) 448-5151
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [ X ] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
As of December 22, 1998, there were issued and outstanding 6,270,348
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 December 22, 1998, was
$122,271,786(6,270,348 shares at $19.50 per share, which is the ending bid on
December 22, 1998.). 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, 1998 (Parts I and II)
2. Portions of the Proxy Statement for the 1999 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 1998 was limited for CTS.
On February 20, 1998, Coastal Real Estate Investment Corporation
("CREIC") was incorporated in North Carolina. CREIC is a wholly owned operating
subsidiary of Coastal Federal and is a real estate investment trust ("REIT").
All of CREIC's operating activities are consolidated into Coastal Federal. CREIC
engages in the investment and management of real estate related assets,
primarily mortgage loans. On September 1, 1998, CREIC was capitalized with
approximately $131.8 million of mortgage loans from Coastal Federal.
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, eight branch offices located in South Carolina and one
branch office located in Sunset Beach, North Carolina. At September 30, 1998,
Coastal Financial had total assets of $643.6 million, total deposits of $386.3
million and stockholders' equity of $37.9 million. The deposits of the Bank are
insured by the Federal Deposit Insurance Corporation ("FDIC") under the Savings
Association Insurance Fund ("SAIF"). The corporate offices of the Bank are
located at 2619 Oak Street, Myrtle Beach, South Carolina and the telephone
number is (843) 448-5151.
Eight of Coastal Federal's ten 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
21.6% of total loans at September 30, 1998.
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,
1998, 3.4% and 10.3%, respectively, of the Bank's total loan portfolio consisted
of commercial business and consumer loans.
Rate/Volume Analysis
The following table sets forth certain information regarding changes to
interest income and interest expense of the Corporation for the periods
indicated. For each category of interest-earning asset and interest-bearing
liability, information is provided on changes attributed to (i) changes in rate
(changes in rate multiplied by old volume); (ii) changes in volume (changes in
volume multiplied by old rate); (iii) changes in rate-volume (change in rate
multiplied by change in volume); and (iv) the net change (the sum of the prior
columns). Non-accrual loans are included in the average volume calculations.
Year Ended September 30,
----------------------------------------------------------------------------------------
1996 Compared to 1995 1997 Compared to 1996
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 ........................ $ 615 $ 2,361 $ 51 $3,027 $ 502 $ 1,545 $ 24 $ 2,071
Mortgage-backed
securities................... (4) 1,083 (6) 1,073 (123) 820 (56) 641
Investments and
other........................ 177 96 19 292 (70) 747 (44) 633
----- ------- ---- ------ ----- ------- ---- -------
Total net change in
income on interest-
earning assets................ 788 3,540 64 4,392 309 3,112 (76) 3,345
----- ------- ---- ------ ----- ------- ---- -------
Interest-Bearing
Liabilities:
Deposits...................... 300 1,455 44 1,799 200 1,742 19 1,961
FHLB advances................. (289) 51 (2) (240) (361) (1,425) 73 (1,713)
Repurchase
agreements................... 16 194 50 260 50 576 181 807
----- ------- ---- ------ ----- ------- ---- -------
Total net change in
expense on interest-
bearing liabilities........... 27 1,700 92 1,819 (111) 893 273 1,055
----- ------- ---- ------ ----- ------- ---- -------
Net change in net
interest income............... $ 761 $1,840 $ (28) $2,573 $ 420 $2,219 $ (349) $2,290
===== ====== ===== ====== ======= ====== ====== ======
Year Ended September 30,
-----------------------------------------------
1998 Compared to 1997
Increase (Decrease)
Due to
-----------------------------------------------
Rate/
Rate Volume Volume Net
---- ------ ------ ----
(Dollars in thousands)
Interest-Earning Assets:
Loans ........................ $195 $2,240 $13 $2,448
Mortgage-backed
securities................... (482) 4,992 (985) 3,525
Investments and
other........................ 46 (281) (7) (242)
---- ------ --- ------
Total net change in
income on interest-
earning assets................ (241) 6,951 (979) 5,731
---- ------ --- ------
Interest-Bearing
Liabilities:
Deposits...................... (165) 1,089 (13) 911
FHLB advances................. (298) 1,501 (83) 1,120
Repurchase
agreements................... (47) 2,422 (100) 2,275
---- ------ --- ------
Total net change in
expense on interest-
bearing liabilities........... (510) 5,012 (196) 4,306
---- ------ --- ------
Net change in net
interest income............... $269 $1,939 $(783) $1,425
==== ====== ===== ======
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,
-------------------------------------------------------------------------------
1996 1997
----------------------------------- -----------------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
------- -------- ------ ------- -------- ------
(Dollars in thousands)
ASSETS
Loans................................ $369,733 $ 31,698 8.57% $389,196 $33,769 8.70%
Investments(1)....................... 16,730 1,217 7.27 27,007 1,850 6.85
Mortgage-backed
securities.......................... 23,214 1,805 7.78 33,738 2,446 7.25
------ ----- ---- ------ ----- ----
Total interest-earning
assets............................... $409,677 $34,720 8.46% $449,941 $38,065 8.46%
======== ======= ===== ======= ====== =====
LIABILITIES
Transaction accounts................. 114,220 2,862 2.51 153,796 4,894 3.18
Passbook accounts.................... 44,631 1,160 2.60 41,143 1,015 2.47
Certificate accounts................. 134,415 7,667 5.70 135,335 7,741 5.72
FHLB advances........................ 112,878 7,079 6.27 90,154 5,366 5.95
Securities sold
under repurchase
agreements.......................... 6,955 323 4.63 19,387 1,130 5.82
----- --- ---- ------ ----- ----
Total interest-bearing
liabilities.......................... $413,099 $19,091 4.70% $439,815 $20,146 4.57%
======== ======= ===== ======= ====== =====
Net interest income/
interest rate spread................. $15,629 3.76% $17,919 3.89%
Net yield on earning
assets............................... 3.86% 4.03%
Ratio of earning assets
to interest-bearing
liabilities.......................... 1.02x 1.03x
Year Ended September 30,
--------------------------------------
1998
------------------------------------
Average Yield/
Balance Interest Rate
------- -------- -----
(Dollars in thousands)
ASSETS
Loans................................ $414,938 $36,314 8.75%
Investments(1)....................... 22,912 1,608 7.02
Mortgage-backed
securities.......................... 102,597 5,972 5.82
------- ----- ----
Total interest-earning
assets............................... $540,447 $43,894 8.11%
======= ====== ====
LIABILITIES
Transaction accounts................. 179,398 5,756 3.21
Passbook accounts.................... 36,102 924 2.56
Certificate accounts................. 144,569 7,879 5.45
FHLB advances........................ 115,389 6,488 5.62
Securities sold
under repurchase
agreements.......................... 60,998 3,404 5.58
------ ----- ----
Total interest-bearing
liabilities.......................... $536,456 $24,451 4.60%
======= ======= ====
Net interest income/
interest rate spread................. $19,443 3.51%
Net yield on earning
assets............................... 3.64%
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 commercial real estate loans. The Bank originates
construction and permanent loans on single family and multi-unit dwellings, as
well as on commercial structures. The Bank emphasizes the origination of
adjustable rate residential and commercial real estate mortgages.
The Bank's loan portfolio totaled approximately $424.8 million at
September 30, 1998, representing approximately 66.0% of its total assets. On
that date, approximately 65.9% of Coastal Federal's total loan portfolio was
secured by mortgages on one-to-four family residential properties.
In an effort to ensure that the yields on its loan portfolio and
investments are interest-rate sensitive, the Bank has implemented a number of
measures, including: (i) emphasis on origination of adjustable rate mortgages on
residential and commercial properties; (ii) origination of construction loans
secured by residential properties, generally with terms for a one-year period;
and (iii) origination of commercial and consumer loans having either adjustable
rates or relatively short maturities. At September 30, 1998, adjustable rate
loans constituted approximately $329.0 million (or 77.5%) of the Bank's total
loan portfolio. Therefore, at such date, fixed rate loans comprised only 22.5%
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 table set forth the composition of the Corporation's loan
portfolio by type of loan as of the dates indicated.
At September 30,
-----------------------------------------------------
1994 1995
----------------------- -----------------------
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in thousands)
Mortgage loans:
Construction.............................................. $ 23,222 6.67% $27,905 7.34%
On existing property...................................... 225,544 64.82 228,881 60.23
Income property (commercial).............................. 42,207 12.13 54,401 14.31
Commercial business loans.................................. 14,052 4.04 19,610 5.16
Consumer loans:
Mobile home.............................................. 1,497 .43 1,204 .32
Automobiles.............................................. 6,300 1.81 5,941 1.56
Equity lines of credit................................... 12,763 3.67 13,210 3.48
Other.................................................... 22,373 6.43 28,887 7.60
------ ---- ------ ----
Total loans and loans held for sale....................... $347,958 100.00% $380,039 100.00%
====== ======
Less:
Loans in process......................................... (13,087) (17,178)
Deferred loan(fees)costs................................. (343) (71)
Allowance for loan losses............................... (3,353) (3,578)
------ -------
Total loans net........................................... $331,175 $359,212
======== ========
At September 30,
-------------------------------------------------------
1996 1997
---------------------- ----------------------
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in thousands)
Mortgage loans:
Construction.............................................. $34,566 8.65% $ 34,216 7.93%
On existing property...................................... 231,373 57.89 240,268 55.69
Income property (commercial).............................. 73,295 18.34 97,680 22.64
Commercial business loans.................................. 14,831 3.71 10,939 2.54
Consumer loans:
Mobile home.............................................. 1,103 .28 1,291 .30
Automobiles.............................................. 7,261 1.82 6,055 1.40
Equity lines of credit................................... 12,441 3.11 15,294 3.54
Other.................................................... 24,776 6.20 25,714 5.96
------ ---- ------ ----
Total loans and loans held for sale....................... $399,646 100.00% $431,457 100.00%
====== ======
Less:
Loans in process......................................... (18,589) (15,084)
Deferred loan(fees)costs................................. 286 458
Allowance for loan losses............................... (4,172) (4,902)
------- -------
Total loans net........................................... $377,171 $411,929
======== ========
---------------------------
1998
---------------------------
Amount Percent
------ -------
Mortgage loans:
Construction.............................................. $ 31,261 7.09%
On existing property...................................... 254,161 57.63
Income property (commercial).............................. 95,420 21.63
Commercial business loans.................................. 14,848 3.37
Consumer loans:
Mobile home.............................................. 990 .22
Automobiles.............................................. 5,106 1.16
Equity lines of credit................................... 18,655 4.23
Other.................................................... 20,567 4.67
------ ----
Total loans and loans held for sale....................... $441,008 100.00%
======
Less:
Loans in process......................................... (11,292)
Deferred loan(fees)costs................................. 702
Allowance for loan losses............................... (5,668)
--------
Total loans net........................................... $424,750
========
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 generally adjust based upon either the 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. Based upon market
conditions, the Bank may originate ARMs at below the fully phased-in interest
rate but generally qualifies borrowers at 2% above the initial rate when the
loan to value ratio exceeds 80%. Monthly payments could increase significantly
at the first repricing period. Although Coastal Federal's ARMs are beneficial in
helping Coastal Federal improve the interest rate sensitivity of its assets,
such loans may pose potential additional risks to Coastal Federal. A precipitous
increase in interest rates could be expected to result in an increase in
delinquencies or defaults on such loans. Whereas a significant decrease in rates
or a flat yield curve could cause repayments to increase significantly.
Coastal Federal also offers one-to-four family residential loans with
fixed rates of interest. These loans generally can be sold in the secondary
market or are portfolio loans where the Bank offers such loans at rates
approximately 1% above conforming loan rates. A large majority of the conforming
fixed rate loans are generally sold to correspondent banks servicing released.
Loans sold to correspondents amounted to $38.4 and $64.8 million, respectively,
in fiscal 1997 and 1998. Coastal Federal sold approximately $5.8 and $6.9
million, respectively, of mortgages in 1997 and 1998 to FHLMC.
At September 30, 1998, approximately $279.7 million or 65.9% of the
Bank's loan portfolio consisted of one-to-four family residential loans.
Construction Loans. The Bank originates construction loans on single
family residences that generally have a term of six to twelve months for
individuals or one year for builders. The individual's loans are usually tied to
a commitment by the Bank to provide permanent financing upon completion of
construction. The interest rate charged on construction loans is indexed to the
prime rate as published in The Wall Street Journal or current permanent loan
rate and varies depending on the terms of the loan and the loan amount. The Bank
customarily requires personal guaranties of payment from the principals of the
borrowing entities.
The interest rate on commercial real estate construction loans
presently offered by the Bank is indexed to either the U.S. Treasury securities
or the prime rate as published in The Wall Street Journal. Commercial real
estate construction financing generally exposes the lender to a greater risk of
loss than long-term financing on improved, occupied real estate, due in part to
the fact that the loans are underwritten on projected rather than historical,
income and rental results. The Bank's risk of loss on such loans is dependent
largely upon the accuracy of the initial appraisal of the property's value at
completion of construction and the estimated cost (including interest) of
completion. If either estimate proves to have been inaccurate and the borrower
is unable to provide additional funds pursuant to his guaranty, the lender
either may be required to advance funds beyond the amount originally committed
to permit completion of the development and/or be confronted at the maturity of
the loan with a project whose value is insufficient to assure full repayment.
The general practice of Coastal Federal is to provide a permanent financing
commitment on commercial properties at the time the Bank provides the
construction financing.
The Bank's underwriting criteria are designed to evaluate and to
minimize the risks of each commercial real estate construction loan. The Bank
considers evidence of the financial stability and reputation of both the
borrower and the contractor, the amount of the borrower's cash equity in the
project, independent evaluation and review of the building costs, local market
conditions, pre-construction sale and leasing information based upon evaluation
of similar projects and the borrower's cash flow projections upon completion.
The Bank generally requires personal guaranties of payment by the principals of
any borrowing entity.
At September 30, 1998, approximately $31.3 million or 7.1% of the
Bank's gross loan portfolio consisted of construction loans on both residential
($20.3 million) and commercial properties ($11.0 million). Undisbursed proceeds
on these loans amounted to $11.3 million at September 30, 1998.
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, 1998, this limited
Coastal Federal's aggregate non-residential real estate loans to approximately
$178.6 million. At such time, the Bank had non-residential real estate loans
outstanding of $95.4 million. The Bank will maintain a level of these loan types
within the guidelines set forth. The commercial real estate loans originated by
the Bank are primarily secured by shopping centers, office buildings, warehouse
facilities, retail outlets, hotels, motels and multi-family apartment buildings.
The interest rate of the commercial real estate loans presently offered by the
Bank generally adjusts every one, three or five years and is indexed to U.S.
Treasury securities. Such loans generally have a fifteen to twenty year term,
with the payments based up to a similar amortization schedule. The Bank may
require the loan to include a call option at the Bank's option in five to ten
years. The Bank generally requires that such loans have a minimum debt service
coverage of 120% of projected net operating income together with other generally
accepted underwriting criteria.
Commercial real estate lending entails significant additional risks
compared to residential lending. Commercial real estate loans typically involve
large loan balances to single borrowers or groups of related borrowers. The
payment experience of such loans is typically dependent upon the successful
operation of the real estate project. These risks can be significantly affected
by supply and demand conditions in the market for office and retail space and
for apartments and, as such, may be subject, to a greater extent, to adverse
conditions in the economy. In dealing with these risk factors, Coastal Federal
generally limits itself to a real estate market or to borrowers with which it
has experience. The Bank concentrates on originating commercial real estate
loans secured by properties located within its market areas of Horry County,
Florence County, the Pee Dee Region, northeastern Georgetown County, all within
South Carolina and Brunswick County, North Carolina. Additionally, the Bank has,
on a limited basis, originated or purchased commercial real estate loans secured
by properties located in other parts of the Southeast.
Consumer Loans. The Bank is permitted by OTS regulations to invest up
to 35% of its assets in consumer loans. The Bank currently offers a wide variety
of consumer loans on a secured and unsecured basis including home improvement
loans, loans secured by savings accounts and automobile, truck and boat loans.
The Bank also offers a revolving line of credit secured by owner-occupied real
estate. Total consumer loans amounted to $45.3 million, or 10.3% of the total
loan portfolio, at September 30, 1998.
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, 1998, the Bank had $14.8 million outstanding in
commercial business loans, which represented approximately 3.4% of its loan
portfolio.
Commercial business lending is inherently riskier than residential
mortgage lending and involves risks that are different from those associated
with residential and commercial real estate lending. Real estate lending is
generally considered to be collateral based lending with loan amounts based on
predetermined loan to collateral values and liquidation of the underlying real
estate collateral is viewed as the primary source of repayment in the event of
borrower default. Although commercial business loans are often collateralized by
equipment, inventory, accounts receivable or other business assets, the
liquidation of collateral in the event of a borrower default is often not a
sufficient source of repayment because accounts receivable may be uncollectible
and inventories and equipment may be obsolete or of limited use, among other
things. Accordingly, the repayment of a commercial business loan depends
primarily on the creditworthiness of the borrower (and any guarantors), while
liquidation of collateral is a secondary and potentially insufficient source of
repayment.
Loan Maturity
The following table sets forth certain information at September 30,
1998 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
One Year Three Years Five Years
One Year Through Through Through
or Less Three Years Five Years Ten Years
-------- ----------- ---------- ---------
(In thousands)
First mortgage loans........................ $21,841 $ 7,040 $4,011 $14,742
Other residential and.......................
non-residential ........................... 20,074 8,249 2,438 9,635
Equity lines of credit...................... 18,655 -- -- --
Consumer loans.............................. 8,613 7,876 7,130 942
Commercial loans............................ 6,991 4,301 1,141 677
------- ------- ------- -------
Total loans............................ $76,174 $27,466 $14,720 $25,996
======= ======= ======= =======
More than
Ten Years
Through Over
Twenty Years Twenty Years Totals
------------ ------------ ------
(In thousands)
First mortgage loans........................ $60,567 $161,463 $269,664
Other residential and.......................
non-residential ........................... 53,307 2,117 95,820
Equity lines of credit...................... -- -- 18,655
Consumer loans.............................. 1,202 -- 25,763
Commercial loans............................ 1,445 293 14,848
-------- -------- --------
Total loans............................ $116,521 $163,873 $424,750
======== ======== ========
The following table sets forth the dollar amount of all loans due after
one year at September 30, 1998 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......................... $46,190 $228,068 $274,258
Other residential and
non-residential............................. 10,097 50,649 60,746
Consumer loans............................... 9,795 365 10,160
Commercial loans............................. 5,042 2,815 7,857
------- -------- --------
Total loans............................. $71,124 $281,897 $353,021
======= ======== ========
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,
1998. For purposes of the table, repricing characteristics of loans include
estimated annual prepayment rates.
Zero to Four Months One Year to
Three Months to One Year Five Years
------------ ----------- ----------
(In thousands)
Rate Sensitive Assets(1):
Mortgage loans and
mortgage-backed securities.......................... $44,616 $305,428 $191,205
Non-mortgage loans................................... 7,645 2,676 8,384
Interest-bearing deposits and
investment securities............................... 9,650 126 3,753
------- -------- --------
Total............................................ $61,911 $308,230 $203,342
======= ======== ========
Rate Sensitive Liabilities:
Core deposits(2)..................................... $48,831 $83,668 $65,014
Time deposits........................................ 69,270 57,936 27,947
Borrowings........................................... 84,061 94 125,575
-------- -------- --------
Total............................................ $202,162 $141,698 $218,536
======== ======== ========
Off-Balance Sheet Positions:
Commitments to originate
mortgage loans...................................... $6,574 $(812) $(6,540)
Interest rate sensitivity gap......................... $(145,946) $176,069 ($18,995)
Cumulative interest
sensitivity gap...................................... $(145,946) $30,123 $11,128
Cumulative interest sensitivity
gap as a percent of total assets (22.84%) 4.71% 1.74%
Greater than
Five Years Total
---------- -----
(In thousands)
Rate Sensitive Assets(1):
Mortgage loans and
mortgage-backed securities.......................... $34,977 $576,226
Non-mortgage loans................................... -- 18,705
Interest-bearing deposits and
investment securities............................... -- 13,529
------- --------
Total............................................ $34,977 $608,460
======= ========
Rate Sensitive Liabilities:
Core deposits(2)..................................... $33,655 $231,168
Time deposits........................................ -- 155,153
Borrowings........................................... 830 210,560
------- --------
Total............................................ $34,485 $596,881
======= ========
Off-Balance Sheet Positions:
Commitments to originate
mortgage loans...................................... $737 (41)
Interest rate sensitivity gap......................... $1,838 $12,966
Cumulative interest
sensitivity gap...................................... $12,966 --
Cumulative interest sensitivity
gap as a percent of total assets 2.03% --
(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, 1998. This information is an estimate and may not
be indicative of actual market values or the actual changes in market values
should rates change significantly at a future date.
-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........... $616,973 $608,750 $601,400 $594,893 $588,542 $580,947 $571,005
Non-mortgage loans.... 19,863 19,664 19,471 19,281 19,097 18,919 18,744
Cash, deposits and
securities........... 27,367 27,329 27,298 27,272 27,245 27,220 27,193
Repossessed assets.... 43 43 43 43 43 43 43
Premises and equipment 8,848 8,848 8,848 8,848 8,848 8,848 8,848
Other assets.......... 9,393 10,591 11,821 13,733 16,324 20,068 24,328
----- ------ ------ ------ ------ ------ ------
TOTAL................. 682,487 675,225 668,881 664,070 660,099 656,045 650,161
======= ======= ======= ======= ======= ======= =======
LIABILITIES
Deposits.............. $392,861 $391,857 $390,872 $389,908 $388,954 $388,021 $387,102
Borrowings............ 220,623 216,796 213,109 209,554 206,127 202,820 199,629
Other liabilities..... 6,466 6,466 6,466 6,466 6,466 6,466 6,466
------- ------- ------- ------- ------- ------- -------
TOTAL................. 619,950 615,119 610,446 605,928 601,547 597,307 593,197
======= ======= ======= ======= ======= ======= =======
OFF BALANCE SHEET
POSITIONS............ $ 3,267 $2,459 $1,706 $ 1,001 $429 $89 $(166)
MARKET VALUE OF
PORTFOLIO EQUITY..... $65,804 $62,565 $60,141 $59,143 $58,981 $58,827 $56,798
+300 +400
Basis Basis
Points Points
------ ------
(In thousands)
ASSETS
Mortgage loans and
securities........... $559,059 $545,869
Non-mortgage loans.... 18,575 18,409
Cash, deposits and
securities........... 27,163 27,125
Repossessed assets.... 43 43
Premises and equipment 8,848 8,848
Other assets.......... 28,351 32,149
------ ------
TOTAL................. 642,039 632,443
======= =======
LIABILITIES
Deposits.............. $386,195 $385,308
Borrowings............ 196,548 193,572
Other liabilities..... 6,466 6,466
------- -------
TOTAL................. 589,209 585,347
======= =======
OFF BALANCE SHEET
POSITIONS............ $(374) $(570)
MARKET VALUE OF
PORTFOLIO EQUITY..... $52,456 $46,526
Loan Solicitation and Processing. The Bank actively solicits mortgage
loan applications from existing customers, walk-ins, referrals and from real
estate brokers. Commercial real estate loan applications also are obtained by
direct solicitation by loan officers.
Detailed loan applications are obtained to determine the borrower's
ability to repay, and the more significant items on these applications are
verified through the use of credit reports, financial statements and
confirmations through verification forms. After analysis of the loan application
and property or collateral involved, including an appraisal of the property by
independent appraisers approved by the Bank's Board of Directors and reviewed by
the Bank's underwriter, a lending decision is made by the Bank. With respect to
commercial loans, the Bank also reviews the capital adequacy of the business,
the ability of the borrower to repay the loan and honor its other obligations
and general economic and industry conditions. All loan applications over
$500,000 require the approval of the Bank's Internal Loan Committee, Director
Gerald and Executive Vice Presidents Rexroad and Stalvey. All loan applications
greater than $1,000,000 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 97% of the appraised value of the property, unless the borrowers have private
mortgage insurance, must be approved by the Banks' Loan Committee.
Loan applicants are promptly notified of the decision of the Bank by a
letter setting forth the terms and conditions of the decision. If approved, such
terms and conditions include the amount of the loan, interest rate, amortization
term, a brief description of real estate to be mortgaged to the Bank and notice
of requirement of insurance coverage necessary to protect the Bank's interest in
the collateral.
The Bank's general policy is to obtain a title insurance policy
insuring that the Bank has a valid lien on the mortgaged real estate and that
the property is free of encumbrances. Borrowers must also obtain paid hazard
insurance policies prior to closing and, when the property is in a flood plain
as designated by the 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 qualified to
service loans for FHLMC and FNMA. Depending upon interest rates and economic
conditions, the Bank has sold loans in order to provide additional funds for
lending, to generate servicing fee income, and to decrease the amount of its
long-term, fixed rate loans in order to minimize the gap between the maturities
of its interest-earning assets and interest-bearing liabilities. The Bank
generally continues to collect payments on the loans, to supervise foreclosure
proceedings, if necessary, and to otherwise service the loans. The Bank retains
a portion of the interest paid by the borrower on the loans as consideration for
its servicing activities. At September 30, 1998, the Bank was servicing loans
sold to others with a principal balance of approximately $88.0 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,
1998 were conforming conventional loans originated and sold by Coastal Federal
Mortgage. These loans were sold on a servicing released basis. At September 30,
1998, the Bank's consolidated loan portfolio included purchased loans of
approximately $23.0 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,
-----------------------------------
1996 1997 1998
--------- --------- ---------
(In thousands)
Loans receivable net, at the beginning of the
period ..................................... $ 359,212 $ 377,171 411,929
--------- --------- ---------
Loans originated:
Construction ............................... 38,172 45,986 62,805
Residential ................................ 60,683 59,289 70,588
Nonresidential ............................. 11,897 13,794 23,622
Land ....................................... 8,355 10,308 20,025
Commercial business ........................ 23,062 33,730 16,076
Consumer ................................... 18,201 15,396 12,136
--------- --------- ---------
Total loans originated ................. 160,370 178,503 205,252
--------- --------- ---------
Loans purchased, primarily single
family residential mortgages ................ 12,448 9,948 10,442
--------- --------- ---------
Loans sold .................................. (40,672) (44,160) (71,674)
--------- --------- ---------
Loan principal repayments and other ......... (112,926) (109,946) (130,286)
--------- --------- ---------
Other ....................................... (1,261) 413 (913)
--------- --------- ---------
Loans receivable net, at end of period ...... $ 377,171 $ 411,929 $ 424,750
========= ========= =========
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, 1998, the Company had loan commitments of approximately $11.5
million.
Loan Origination and Other Fees. Coastal Federal may receive loan
origination fees and discount "points." Loan fees and points are a percentage of
the principal amount of the mortgage loan which are charged to the borrower for
funding the loan. Coastal Federal allows the purchaser to reduce the rate of
interest by the payment of points at the customers options. Fees on long-term
commercial real estate and residential construction loans vary with loan type.
Delinquencies. Coastal Federal's collection procedures provide for a
series of contacts with delinquent borrowers. If the delinquency continues, more
formal efforts are made to contact the delinquent borrower. If a residential
real estate loan continues in a delinquent status for 90 days or more, Coastal
Federal generally initiates foreclosure proceedings. Coastal Federal generally
initiates foreclosure proceedings on a commercial real estate loan if the loan
continues in a delinquent status for 60 days or more. In certain limited
instances, however, Coastal Federal may modify the loan or grant a limited
moratorium on loan payments to enable the borrower to reorganize his financial
affairs.
Problem Assets and Asset Classification. Loans are reviewed on a
regular basis and a reserve for uncollectible interest is established on loans
where collection of interest is questionable, generally when such loans become
90 days delinquent. Loan balances that relate to interest amounts reserved are
considered to be on a nonaccrual basis. Typically, payments received on a
nonaccrual loan are applied to the outstanding principal and interest as
determined at the time of collection of the loan.
The following table sets forth information with respect to the Bank's
non-performing assets at the dates indicated.
At September 30,
-------------------------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
(Dollars in thousands)
Loans accounted for on a nonaccrual basis:
Real estate -
Residential............................ $ 79 $ 999 $ 307 $ 71 $ 222
Commercial............................... 1,056 134 -- -- --
Commercial business...................... -- 154 60 99 1,962
Consumer................................. 16 36 78 87 73
------ ------ ---- ---- ------
Total................................... 1,151 1,323 445 257 2,257
------ ------ ---- ---- ------
Accruing loans which are contractually
past due 90 days or more:
Real estate -
Residential.............................. -- -- -- -- --
Commercial............................... -- -- -- -- --
Commercial business....................... -- -- -- -- --
Consumer.................................. -- -- -- -- --
------ ------ ---- ---- ------
Total................................... -- -- -- -- --
------ ------ ---- ---- ------
Restructured loans......................... -- -- -- -- --
Real estate owned........................... 781 789 323 250 35
Other nonperforming
assets..................................... -- -- -- -- --
------ ------ ---- ---- ------
Total nonperforming
assets..................................... $1,932 $2,112 $768 $507 $2,292
====== ====== ==== ==== ======
Total nonaccrual loans to net
loans...................................... .03% .36% .12% .06% .54%
Total nonaccrual loans to total
assets..................................... .03% .33% .10% .05% .35%
Total nonperforming assets
to total assets............................ .56% .53% .17% .10% .36%
- ------------
For the year ended September 30, 1998, interest income which would have
been recorded would have been approximately $181,000, had non-accruing
loans been current in accordance with their original terms. There were
no impaired loans at September 30, 1997. There was one impaired loan at
September 30, 1998.
The allowance for uncollectible interest which is netted against
accrued interest receivable totaled $36,000 and $202,000 at September 30, 1997
and 1998, respectively.
The OTS has adopted various changes in its regulations regarding
problem assets of savings institutions. OTS regulations require that each
insured institution review and classify its assets on a regular basis. In
addition, in connection with examinations of insured institutions, OTS examiners
have authority to identify problem assets and, if appropriate, require them to
be classified. There are four classifications for problem assets: special
mention, substandard, doubtful and loss. Substandard assets must have one or
more defined weaknesses and are characterized by the distinct possibility that
the insured institution will sustain some loss if the deficiencies are not
corrected. Doubtful assets have the weaknesses of substandard assets with the
additional characteristic that the weaknesses make collection or liquidation in
full on the basis of currently existing facts, conditions and values
questionable, and there is a high possibility of loss. An asset classified loss
is considered uncollectible and of such little value that continuance as an
asset of the institution is not warranted. The regulations also have a special
mention category, described as assets which do not currently expose an insured
institution to a sufficient degree of risk to warrant classification but do
possess credit deficiencies or potential weaknesses deserving management's close
attention. Assets classified as substandard or doubtful require the institution
to establish general allowances for loan losses. If an asset or portion thereof
is classified loss, the insured institution must either establish specific
allowances for loan losses in the amount of 100% of the portion of the asset
classified loss or charge off such amount. A portion of general loss allowances
established to cover possible losses related to assets classified substandard or
doubtful may be included in determining an institution's regulatory capital,
while specific valuation allowances for loan losses generally do not qualify as
regulatory capital.
Coastal Federal had three individual classified assets in excess of
$500,000 as of September 30, 1998. At that date, classified assets amounted to
$8.6 million ($5.4 million substandard; $124,000 doubtful; and $3.1 million
special mention). Substandard assets consist primarily of two commercial real
estate loans with balances of approximately $3.7 million at September 30, 1998.
Special mention assets consist primarily of one commercial real estate loan with
a balance of approximately $1.6 million at September 30, 1998. The two
substandard loans are fully secured by real estate.
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, 1996, 1997 and
1998 of $790,000, $760,000 and $865,000, respectively. As a result, the Bank has
a $5.7 million allowance for loan losses as of September 30, 1998. The allowance
as a percentage of loans receivable was 1.33% at September 30, 1998 compared to
1.19% at September 30, 1997. See "Management's Discussion and Analysis
- --Non-Performing Assets and --Allowance for Loan Losses" in the 1998 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, 1998, 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,
-----------------------------------------------------
1994 1995 1996 1997 1998
------- ------- ------- ------- -------
(Dollars in thousands)
Allowance at beginning of
period ............................. $ 2,753 $ 3,353 $ 3,578 $ 4,172 $ 4,902
Allowance recorded on
acquired loans ..................... -- -- -- 110 109
Provision for loan losses ........... 510 202 790 760 865
------- ------- ------- ------- -------
Recoveries:
Residential real estate ............ 3 232 -- 20 7
Commercial real estate ............. 148 11 75 14 1
Real estate construction ........... -- -- -- -- --
Consumer ........................... 79 12 7 38 56
------- ------- ------- ------- -------
Total recoveries ................. 230 255 82 72 64
------- ------- ------- ------- -------
Charge-offs:
Residential real estate ............ 38 206 24 46 28
Commercial real estate ............. 13 18 216 -- 17
Real estate construction ........... -- -- -- -- --
Consumer ........................... 89 8 38 166 227
------- ------- ------- ------- -------
Total charge-offs ................ 140 232 278 212 272
------- ------- ------- ------- -------
Net charge-offs (recoveries) ..... (90) (23) 196 140 208
------- ------- ------- ------- -------
Allowance at end of period ......... $ 3,353 $ 3,578 $ 4,172 $ 4,902 $ 5,668
======= ======= ======= ======= =======
Ratio of allowance to net
loans outstanding at the
end of the period .................. 1.01% 1.00% 1.11% 1.19% 1.33%
Ratio of net charge-offs (recoveries)
to average loans outstanding
during the period .................. (.03%) (.01%) .05% .04% .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,
-------------------------------------------------------------------
1994 1995
--------------------------------- ---------------------------------
As a % Loan Type As a % Loan Type
of out- As a % of out- As a %
standing of out- standing of out-
loans in standing loans in standing
Amount category loans Amount category loans
------ -------- -------- ------ -------- --------
(Dollars in thousands)
Real Estate -- mortgage
Residential................. $ 742 .30% 75.05% $ 803 .31% 72.03%
Commercial.................... 2,296 5.58 11.94 2,371 4.36 4.17
Consumer...................... 315 .71 13.01 404 .80 3.80
----- ------ ----- ------
Total allowance for
loan losses.................. $3,353 1.01% 100.00% $3,578 1.00% 100.00%
====== ====== ====== ======
September 30,
-----------------------------------------------------------------------------------------------------
1996 1997 1998
--------------------------------- --------------------------------- -------------------------------
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................ $ 837 .37% 65.35% $1,064 .41% 63.56% $1,375 .47 68.60
Commercial................. 2,875 3.80 22.34 3,261 2.78 28.52 3,685 3.30 26.32
Consumer................... 460 1.01 12.31 577 1.77 7.92 608 2.82 5.08
------ ----- ------ ------ ------ ------
Total allowance for
loan losses............... $4,172 1.11% 100.00% $4,902 1.19% 100.00% $5,668 1.33% 100.00%
====== ====== ====== ====== ====== ======
Investment Activities
Under OTS regulations, the Bank has authority to invest in various
types of liquid assets, including U.S. Treasury obligations, securities of
various federal agencies and of state and municipal governments, deposits at the
FHLB of Atlanta, certificates of deposit of federally insured institutions,
certain bankers' acceptances and federal funds. Subject to various restrictions,
such savings institutions may also invest a portion of their assets in
commercial paper, corporate debt securities and mutual funds, the assets of
which conform to the investments that federally chartered savings institutions
are otherwise authorized to make directly. These institutions are also required
to maintain minimum levels of liquid assets which vary from time to time. See
"Regulation of Coastal Federal - Federal Home Loan Bank System." The Bank may
decide to increase its liquidity above the required levels depending upon the
availability of funds and comparative yields on investments in relation to
return on loans.
Coastal Federal is required under federal regulations to maintain a
minimum amount of liquid assets and is also permitted to make certain other
securities investments. See "Regulation" herein and "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources" in the Annual Report. The balance of the Bank's investments
in short-term securities in excess of regulatory requirements reflects
management's response to the significantly increasing percentage of deposits
with short maturities.
Investment decisions are made by the Investment Officer who reports
quarterly to the Asset/Liability Committee ("ALCO Committee"). The ALCO
Committee meets quarterly and consists of Directors Benton, Creel, Bishop,
Springs, Clemmons and Gerald, Chief Financial Officer Rexroad and Executive Vice
Presidents Graham, Sherry and Stalvey and Vice President Loehr. The ALCO
Committee acts within policies established by the Board of Directors. At
September 30, 1998, the Bank's investment portfolio had a market value of
approximately $180.0 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,
----------------------------------------------------------------------------------------
1996 1997 1998
-------------------------- -------------------------- -----------------------
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 ............................. 17,334 98.13 17,738 67.89 8,840 90.64
FNMA ............................. -- -- -- -- -- --
FFCB ............................. -- -- 7,391 28.29 912 9.36
Municipal ........................ 330 1.87 -- -- -- --
------- ------ ------- ------ ------- ------
Total ........................... $17,664 100.00% $26,124 100.00% $ 9,752 100.00%
======= ====== ======= ====== ======= ======
- -------------
(1) The market value of the Bank's investment securities portfolio amounted
to $17.5 million, $26.2 million and $9.8 million at September 30, 1996,
1997 and 1998, respectively.
The following table sets forth the final maturities and weighted
average yields of the securities at amortized cost at September 30, 1998.
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................................... -- -- -- -- -- --
FHLB................................... -- -- 2,141 6.48 6,699 8.48
FNMA................................... -- -- -- -- -- --
FFCB................................... -- -- 912 7.07 -- --
Municipal............................... -- -- -- -- -- --
---- --- ------ ---- ------ ----
Total................................ $ -- --% $3,053 6.74% $6,699 8.48%
==== === ====== ==== ====== ====
The following table sets forth Coastal Federal's mortgage-backed
securities portfolio at amortized cost at the dates indicated.
September 30,
1996 1997 1998
------------------------- ------------------------- -----------------------
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 ............................... $ 18,861 70.75% $ 14,048 62.79% $ 24,901 14.69%
FNMA ................................ 2,469 9.26 1,861 8.31 95,024 56.05
GNMA ................................ 5,330 19.99 6,471 28.90 49,586 29.26
-------- ------ -------- ------ -------- ------
Total .............................. $ 26,660 100.00% $ 22,380 100.00% $169,511 100.00%
======== ====== ======== ====== ======== ======
- ------
(1) The market value of the Bank's mortgage-backed securities portfolio
amounted to $27.0 million, $23.0 million and $170.2 million at
September 30, 1996, 1997 and 1998, respectively.
The following table sets forth the maturities and weighted average
yields of the securities at September 30, 1998.
Less Than One to Five to Ten Years
One Year Five Years Ten Years and Thereafter
--------------- ------------------ ---------------- -------------------
Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ -----
(Dollars in thousands)
Mortgage-Backed Securities: ..............
FHLMC................................... $ -- --% $ -- --% $ -- --% $24,901 6.64%
FNMA.................................... -- -- -- -- -- -- 95,024 5.55
GNMA.................................... -- -- -- -- -- -- 49,586 6.85
---- --- ---- --- ---- --- -------- ----
Total..................................... $ -- --% $ -- --% $ -- --% $169,511 6.09%
==== === ===== === ==== === ======== ====
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 REAL |
| | ESTATE INVESTMENT |
+------------------------+ | CORPORATION |
| | +-------------------+
| 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."
(1) First tier operating subsidiary of Coastal Federal Savings Bank
consolidated with Coastal Federal Savings Bank for regulatory
reporting. On December 10, 1998 Coastal Federal exchanged its stock of
Coastal Real Estate Investment Corporation for 100% of the outstanding
stock of Coastal Federal Holding Corporation.
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,
1998.
In prior years, the Bank made loans to purchasers of condominium 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, 1998 (net of
participation's sold to other financial institutions).
Slow Loans(1)
Number of Total ---------------------
Project Borrowers Amount Number Amount
- ------- --------- ------ ------ ------
Beach Cove 78 $4,629,418 1 $87,546
Condominium
North Myrtle Beach,
South Carolina
Bluewater 100 $4,060,624 1 $54,118
Condominium
Myrtle Beach,
South Carolina
Cobblestone Villas 50 $1,773,774 -- $ --
Condominium
Myrtle Beach,
South Carolina
Carolina Pines 13 $ 347,465 -- $ --
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.
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,
------------------------------------------------------------------------------------------------
1996 1997 1998
---------------------------- -------------------------------- -------------------------------
Percent Percent Percent
of Increase of Increase of Increase
Amount Total (Decrease) Amount Total (Decrease) Amount Total (Decrease)
------ ----- ---------- ------ ----- ---------- ------ ----- ----------
(Dollars in thousands)
Transaction accounts:
NOW checking.................... $35,654 11.38% $5,802 $38,773 11.17% $3,119 42,434 10.99 3,661
Commercial checking............. 19,926 6.36 3,432 23,765 6.85 3,839 27,285 7.06 3,520
------ ------ ----- ------- ---- ----- ------ ----- -----
Total transaction accounts........ 55,580 17.74 9,234 62,538 18.02 6,958 69,719 18.05 7,181
------ ------ ----- ------ ----- ----- ------ ----- -----
Money market demand accounts...... 84,997 27.12 43,481 104,476 30.10 19,479 124,207 32.15 19,731
Savings accounts.................. 42,840 13.66 (3,581) 39,445 11.36 (3,395) 37,242 9.64 (2,203)
Fixed-rate certificates
(original maturity):
3 months......................... 2,122 .68 (1,309) 1,826 .53 (296) 2,045 .53 219
6 months......................... 23,479 7.49 13,957 22,185 6.39 (1,294) 25,563 6.62 3,378
9 months......................... 9,293 2.96 (17,458) 7,342 2.12 (1,951) 5,396 1.40 (1,946)
12 months........................ 47,059 15.01 (10,256) 43,901 12.64 (3,158) 46,121 11.94 2,220
18 months........................ 20,981 6.69 8,555 32,250 9.29 11,269 35,140 9.10 2,890
24 months........................ 4,049 1.29 204 7,390 2.13 3,341 17,348 4.49 9,958
30 months........................ 2,189 .70 403 4,809 1.39 2,620 6,558 1.70 1,749
36 months........................ 8,944 2.85 (560) 9,215 2.65 271 4,740 1.23 (4,475)
48 months........................ 4,728 1.51 115 5,664 1.63 936 6,852 1.77 1,188
96 months........................ 26 .01 2 27 .01 1 29 .01 2
------- ------ ----- ------ ------ ------ ------- ----- ------
.................................. 122,870 39.20 (6,347) 134,609 38.78 11,739 149,792 38.77 15,183
------- ------ ------- ------- ------ ------ ------- ----- ------
Variable rate certificates:
(original maturity)
18 months........................ 4,593 1.47 (2,507) 3,678 1.06 (915) 3,137 .81 (541)
30 months........................ 2,550 .81 51 2,370 .68 (180) 2,224 .58 (146)
----- ------ ------ ----- ------ ------- ----- -------- -----
Total variable.................... 7,143 2.28 (2,456) 6,048 1.74 (1,095) 5,361 1.39 (687)
----- ------ ------- ----- ------ ------- ----- -------- -----
Total certificates................ 130,013 41.48 (8,803) 140,657 40.52 11,644 155,153 40.16 14,496
------- ------ ------- ------- ------ ------ ------- -------- ------
Total deposits....................$313,430 100.00% $40,331 $347,116 100.00% $33,686 $386,321 100.00% $39,205
======== ====== ======= ======== ====== ======= ======== ======= =======
Time Deposits by Maturity and Rate
The following table sets forth the amount and maturities of time deposits at
September 30, 1998.
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%........... $105,253 $18,467 $3,640 $ 1,367 -- 128,727
6.00 - 8.00%........... 21,656 2,364 1,361 636 -- 26,017
8.01 - 10.00%.......... 297 112 -- -- -- 409
-------- ------- ------ ------ --- -------
Total................ $127,206 $20,943 $5,001 $2,003 $-- 155,153
======== ======= ====== ====== === =======
The following table sets forth the amount and maturities of time deposits
with balances of $100,000 or more at September 30, 1998.
Amount Due
- -----------------------------------------------------------------------------------
Within Over 3 Over 6 Over 12
3 months through 6 months through 12 months Months Total
- -----------------------------------------------------------------------------------
(In thousands)
$7,745 $12,801 $10,132 $5,765 $36,443
====== ======= ======= ====== =======
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, 1998,
Coastal Federal had advances totaling $144.9 million from the FHLB of Atlanta
due on various dates through 2008 with a weighted average interest rate of
5.13%.
The FHLB of Atlanta functions as a central reserve bank providing
credit for financial institutions and certain other member financial
institutions. As a member, Coastal Federal is required to own capital stock in
the FHLB of Atlanta and is authorized to apply for advances on the security of
such stock and certain of its mortgage loans and other assets (principally
securities which are obligations of, or guaranteed by, the United States)
provided certain standards related to creditworthiness have been met. Advances
are made pursuant to several different programs. Each credit program has its own
interest rate and range of maturities. Depending on the program, limitations on
the amount of advances are based either on a fixed percentage of an
institution's net worth or on the FHLB's assessment of the institution's
creditworthiness. The FHLB of Atlanta determines specific lines of credit for
each member institution.
In addition to the borrowings described above, the Bank, from time to
time, has borrowed funds under reverse repurchase agreements pursuant to which
it sells securities (generally secured by government securities and
mortgage-backed securities) under an agreement to buy them back at a specified
price at a later date. These agreements to repurchase are deemed to be
borrowings collateralized by the securities sold. At September 30, 1998, the
Bank had $55.0 million in broker repurchase agreements. The Bank has also
offered repurchase agreements to its customers which are borrowings that are
collateralized by underlying government securities. At September 30, 1998, the
Bank had $4.2 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,
--------------------------------
1996 1997 1998
-------- -------- --------
(Dollars in thousands)
Outstanding balance:
Securities sold under agreements
to repurchase:
Customer ............................... $ 3,365 $ 2,666 $ 4,214
Broker ................................. -- -- 55,000
Short-term FHLB advances.(1) ............. 54,404 68,620 120,235
Weighted average rate paid on:
Securities sold under agreements
to repurchase:
Customer ............................... 3.57% 3.16% 3.43%
Broker ................................. -- -- 5.69
Short-term FHLB advances.(1) ............. 5.