EX-13 8 ex13.txt EXHIBIT 13 ANNUAL REPORT TO STOCKHOLDERS FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2003 COASTAL FINANCIAL CORPORATION 2003 ANNUAL REPORT COASTAL FINANCIAL CORPORATION Corporate Office: 2619 Oak Street o Myrtle Beach, South Carolina o 29577-3129 2003 ANNUAL REPORT 843.205.2000 A Quest for Excellence 1954-2004 Celebrating Our First Fifty Years Of Operation By Focusing On Moving To The Next Level The Transformation From A Very Good Organization Dedication To An Exceptional Organization Dedication On January 12, 1954, when Coastal Federal officially opened its doors for business, its future was already well-secured by the Vision and Values of its founders. These civic-minded individuals envisioned a Community based and owned banking organization which would be a catalyst for enabling the Community, its residents and businesses to reach their full potential. And, thanks to their strong belief that it was, and always would be, inextricably linked as partners with its Community, Coastal Federal's journey, through its first 50 years to what it is today, has to be one of the more interesting stories in the history of American small business. A quick trip back through time takes us from its grand opening in 1954, through a period of very slow growth, during which it remained a one-location bank until 1971. The late-seventies and the decade of the eighties brought rapid growth, but a very difficult economic environment and was followed by the conversion to public ownership in 1990. Since that point, its Transformation To A Very Good Organization, as evidenced by U.S. Banker Magazine having ranked it the #1 Community Bank in the Carolinas for each of the past four years, continues to affirm our belief that, when you have good people working together for the common goals of the Community, there is no limit to the growth and prosperity that can be achieved. Over the past 50 years, in keeping with the Vision and Values of our founders, we have been committed to Exceeding the Expectations of our Customers by delivering our only product, which is Service, in the only manner which adds value, as Trusted Financial Advisors, through our only real competitive advantage, our exceptional Associates. And over the thirteen years since becoming a publicly owned company, all of us at Coastal Financial Corporation have focused on accomplishing Our Basic Corporate Objective Of Maximizing The Value Of Our Shareholders' Investment by working diligently toward the achievement of Our Long-Term Goal Of Being The Best Financial Services Company In Our Marketplace. Our ongoing commitment to the Vision and Values of our founders, as expressed through our QUEST FOR EXCELLENCE Operating Philosophy and our Vision 2005 Plan, has again produced outstanding results for our Shareholders and we are absolutely convinced that this approach will help to ensure that our best days are yet to come and facilitate our Transformation From A Very Good Organization To An Exceptional Organization. Share Price Performance [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR GRAPH IN THE PRINTED MATERIAL.] Initial Public Offering October 4, 1990 $10.00 Sept. 30, 1991 $10.00 Sept. 30, 1992 $27.20 Sept. 30, 1993 $68.31 Sept. 30, 1994 $85.56 Sept. 30, 1995 $85.92 Sept. 30, 1996 $134.94 Sept. 30, 1997 $217.16 Sept. 30, 1998 $215.52 Sept. 30, 1999 $177.72 Sept. 30, 2000 $113.80 Sept. 30, 2001 $217.36 Sept. 30, 2002 $299.07 Sept. 30, 2003 $374.19 The price of Coastal Financial Corporation's common stock increased 25% since September 30, 2002 and has grown at a compound annual rate of over 31% since 1990. These historical results may not be indicative of future stock price performance. Share data has been restated to reflect all stock splits, stock dividends, and reinvested cash dividends. 2 Financial Highlights The following table sets forth certain information concerning the financial position of the Company (including data from operations of its subsidiaries) as of the dates and for the periods indicated. The consolidated data is derived from, and should be read in conjunction with, the Consolidated Financial Statements of the Company and its subsidiaries presented herein.
At or for Years Ended September 30, ------------------------------------------------------------------ 1999 2000 2001 2002 2003 ---------- ---------- ---------- ---------- ---------- (Dollars in thousands, except per share data) Financial Condition Data: Total assets .............................................. $ 713,013 $ 768,838 $ 763,214 $ 950,796 $1,181,209 Loans receivable, net ...................................... 455,351 511,701 488,754 536,851 682,737 Mortgage-backed securities ................................. 182,115 189,239 190,553 331,808 383,324 Cash, interest-bearing deposits and investment securities .. 30,296 25,715 36,320 27,816 37,484 Deposits ................................................... 399,673 406,217 530,364 637,081 697,012 Borrowings ................................................. 262,541 303,151 160,808 228,622 392,797 Stockholders` equity ....................................... 41,237 46,945 57,248 66,386 73,707 Operating Data: Interest income ........................................... $ 49,559 $ 58,079 $ 60,255 $ 53,873 $ 59,214 Interest expense ........................................... 26,991 33,636 33,323 21,846 22,998 ---------- ---------- ---------- ---------- ---------- Net interest income ...................................... 22,568 24,443 26,932 32,027 36,216 Provision for loan losses .................................. 750 978 955 1,235 2,655 ---------- ---------- ---------- ---------- ---------- Net interest income after provision for loan losses ........ 21,818 23,465 25,977 30,792 33,561 ---------- ---------- ---------- ---------- ---------- Other Income: Fees and service charges on loans and deposit accounts ..... 2,025 2,126 2,634 3,148 3,489 Gain on sales of loans held for sale ....................... 979 631 1,295 1,462 2,985 Gain (loss) on sales of investment securities, net ......... 73 (17) (56) 102 -- Gain (loss) on sales of mortgage-backed securities, net .... 191 (1,554) 727 238 469 Real estate operations ..................................... (29) (64) (453) (137) (18) Other income ............................................... 2,334 4,759 3,755 3,326 3,983 ---------- ---------- ---------- ---------- ---------- Total other income ......................................... 5,573 5,881 7,902 8,139 10,908 Total general and administrative expense ................... 15,286 16,191 19,292 22,824 27,156 ---------- ---------- ---------- ---------- ---------- Earnings before income taxes ............................... 12,105 13,155 14,587 16,107 17,313 Income taxes ............................................... 4,390 4,698 5,287 5,901 6,141 ---------- ---------- ---------- ---------- ---------- Net income ................................................ $ 7,715 $ 8,457 $ 9,300 $ 10,206 $ 11,172 ========== ========== ========== ========== ========== Net earnings per common diluted share ...................... $ .56 $ .62 $ .70 $ .77 $ .83 ========== ========== ========== ========== ========== Cash dividends per common share ............................ $ .14 $ .14 $ .16 $ .17 $ .20 ========== ========== ========== ========== ========== Weighted average shares outstanding diluted ................ 13,767 13,571 13,304 13,237 13,441 ========== ========== ========== ========== ==========
All share and per share data have been restated to reflect a 5% stock dividend declared on November 10, 1999, a 10% stock dividend declared on March 14, 2000, a 3 for 2 stock dividend declared on July 31, 2001, and two 10% stock dividends declared on May 27, 2003 and August 28, 2003. Key Operating Ratios: The table below sets forth certain performance ratios of the Company at the dates or for the periods indicated.
At or for Years Ended September 30, ----------------------------------- 1999 2000 2001 2002 2003 ---- ---- ---- ---- ---- Other Data: Return on assets (net income divided by average assets) ..................... 1.14% 1.13% 1.20% 1.23% 1.04% Return on average equity (net income divided by average equity) ............. 19.30% 19.52% 17.75% 16.92% 15.84% Average equity to average assets ............................................ 5.93% 5.80% 6.59% 7.29% 6.59% Book value per share ........................................................ $ 3.06 $ 3.55 $ 4.41 $ 5.18 $ 5.70 Dividend payout ratio ....................................................... 23.28% 22.61% 21.58% 21.77% 23.20% Interest rate spread (difference between average yield on interest-earning assets and average cost of interest-bearing liabilities) .................. 3.55% 3.50% 3.64% 4.14% 3.65% Net interest margin (net interest income as a percentage of average interest-earning assets) .................................................. 3.67% 3.57% 3.77% 4.24% 3.67% Allowance for loan losses to total loans at end of period ................... 1.36% 1.35% 1.42% 1.42% 1.40% Ratio of non-performing assets to total assets (1) .......................... 0.21% 0.73% 0.74% 0.48% 0.77% Tangible capital ratio ...................................................... 6.29% 6.56% 7.28% 6.57% 7.14% Core capital ratio .......................................................... 6.29% 6.56% 7.28% 6.57% 7.14% Risk-based capital ratio .................................................... 12.64% 12.45% 13.30% 12.74% 13.17%
(1) Nonperforming assets consist of nonaccrual loans 90 days or more past due and real estate acquired through foreclosure. 3 Dear Friends The year 2004 marks our 50th anniversary and begins a celebration of our first fifty years of operation. It is also an appropriate opportunity for us to express appreciation to our founders, who created this organization with a strong sense of purpose and values and a clear vision of the opportunities the future would hold, and to the many talented Leaders who have, over the years, encouraged the organization to strive to reach its full potential and facilitated its progress. Unlike the histories of growth by merger and acquisition of many banks across the country, the history of Coastal Federal is all about internal growth fueled by the steady expansion of the Communities of coastal North and South Carolina. In the beginning, growth was very slow as the Grand Strand and its adjacent coastal Communities had not yet been discovered or fully appreciated for their many attributes. Once our Country was solidly back on its feet after World War II, and the members of that great generation who lived within a day's drive discovered and fell in love with this vacation paradise, our Community began to grow like wildfire. And, as the demand for business and real estate development grew, Coastal Federal was there to meet those financial needs with a full array of financial services delivered by qualified and trusted financial advisors. Over the past fifty years, while the world, and its values system has changed at a constantly increasing pace, we at Coastal Financial Corporation, in keeping with the Vision and Values of our founders, have staked our future on our QUEST FOR EXCELLENCE Operating Philosophy which allows us to conduct our operations with a view toward the long-term and a focus on doing the right things for our Associates, our Customers and our Communities. Thanks to the solid foundation established by our founders, we have maintained a strong belief that a shared sense of purpose and values is critical to the attainment of Our Basic Corporate Objective Of Maximizing The Value Of Our Shareholders' Investment and Our Long-Term Goal Of Being The Best Financial Services Company In Our Marketplace. The result of this ever-increasing focus has been the continued evolution of Coastal Financial Corporation to its present status as a Very Good Organization. Our challenge now is The Transformation From A Very Good Organization To An Exceptional Organization. While this journey is an ambitious one, thanks to the strong framework established by our founders, and sustained over the years by each of our subsequent Leaders, it is one which we are well-positioned to undertake. Further evidence of our readiness to begin this move to the next level is present in the results of this year's operations. Despite the very challenging economic conditions of this past year, our commitment to our QUEST FOR EXCELLENCE Operating Philosophy and Vision 2005 Plan has continued to guide our operations and has produced another year of exceptional financial results and some notable milestones: o Coastal Financial Corporation's net income for 2003 totaled $11.2 million, compared to $10.2 million in 2002. On a fully diluted basis, these results equated to a 7.8% increase, from $0.77 per share in 2002 to $0.83 per share in 2003. Major contributors to this growth in net income were continued strong Core Deposit and loan growth and effective expense control. From an overall operations perspective, our strategy of focusing on Core Deposits and promoting more interaction and integration among all of our operating areas has begun to pay off, as reflected in the number of cross-referrals which were recorded this year. o Deposits from the residents and businesses of the Communities we serve increased by approximately $59.9 million, or 9.4% to $697.0 million. o Loans grew by 26%, primarily reflecting a continued strong focus on our business banking line of business. The infrastructure we have developed in support of our business banking activities over the past several years has shown success, and, in order to increase our effectiveness, during 2003, we have continued this investment in infrastructure through the creation of a small business banking group which is specifically designed to embrace the specialized financial services needs of a much larger segment of our small business Community. By clearly differentiating our business banking and commercial banking offerings and approaches, we will be significantly better positioned to meet the unique needs of the businesses and business owners in the Communities we serve. o Our residential banking operations generated total originations in excess of $305 million. o Coastal Investor Services, our Investment Services Division, had another banner year. Assets under management through Raymond James increased by 23% to $212 million. Total revenues from this area of our operations continued to increase, resulting in Raymond James Financial Services ranking Coastal Investor Services fourth, out of over 240 Financial Institution Division affiliates. o The framework supporting our focus on financial planning activities was enhanced with the formation of Coastal Retirement, Estate & Tax Planners, Inc. during the fourth 4 Dear Friends quarter of 2003. Coastal Retirement, Estate and Tax Planners offers professional, objective, fee-based financial planning services and is a crucial step in our overall branding strategy which will make it easier for our Customers to do more of their financial services related business with us. o Our financial services distribution system continued to expand to serve more of the Communities of coastal North Carolina, with the opening of our newest office in Shallotte, North Carolina in September of this year, bringing our total number of full-service Banking Centers to nineteen. o In recognizing the role of technology in our Mission of working toward Exceeding the Expectations of our Customers, during 2003, we completed a long-planned Information Technology Platform system conversion which has armed us with enabling capability to both better serve our Customers and operate at optimum efficiency levels. o Coastal Federal University continued to enable Coastal Financial Corporation's superior performance through its never-ending focus on our philosophy of becoming a learning organization. In addition to delivering an ever-increasing array and number of curriculum offerings designed to enable each of our Associates to achieve their full personal and professional potential, the Dean of Coastal Federal University and our outstanding faculty members helped to facilitate the exceptionally well executed Information Technology Platform conversion by providing approximately 1,000 hours of classroom training. Other key achievements in support of our Transformation To An Exceptional Organization were evidenced by the development of a new Business Banking College curriculum and the initiation of a Leadership Development College. In addition to our excellent operating results for 2003, which again met our high expectations, the market price of Coastal Financial's common stock, at September 30, 2003, was 25.0% higher than the market price at September 30, 2002. And, equally as impressive, is the fact that, since 1990, our operating earnings have increased at a compound annualized rate in excess of 16%. Since becoming a publicly owned company in 1990, Coastal Financial Corporation's stock has grown at a compound annual rate of over 31%, taking our market capitalization from $4.6 million in October 1990, to $180.8 million at the close of this fiscal year. Put another way, an initial investment of $10,000 in October of 1990 would have grown to over $365,000 at September 30, 2003, without regard to the reinvestment of cash dividends. One of the best indicators of performance is Return On Shareholders' Equity, and this measure for 2003 was, again, outstanding. Our Return On Average Shareholders' Equity of 15.8% ranks us among the top performing financial services companies in America. Adding to our own sense of satisfaction with these financial results during 2003 was the continuation of significant public recognition of our progress toward the attainment of Our Basic Corporate Objective Of Maximizing The Value Of Our Shareholders' Investment and Our Long-Term Goal Of Being The Best Financial Services Company In Our Marketplace. Several very good examples follow: o Coastal Financial Corporation, for the 4th consecutive year, was ranked the #1 Community Bank in the Carolinas by U. S. BANKER ------------ MAGAZINE, in its August 2003 publication. In this edition, U. S. -------- BANKER MAGAZINE featured its Ranking of the Top 100 Publicly Traded --------------- Mid-Tier Banks. This ranking spotlighted banks with assets between $1 and $15 billion, based upon a 3-year average measure of Return On Average Equity. Coastal Financial Corporation was ranked 1st in the Carolinas and 39th nationally in this listing. o Coastal Federal Bank, for the sixth consecutive year, placed 1st in voting by the readers of the (Myrtle Beach) SUN NEWS in the -------- Financial Institutions category of the SUN NEWS Best Of The Beach -------- Competition for 2003. o Coastal Federal Bank placed 1st in voting by the readers of the SUN --- NEWS in the Mortgage Company category of the SUN NEWS Best Of The ---- -------- Beach Competition for 2003. o Coastal Investor Services/Raymond James Financial Services placed 1st in voting by the readers of the SUN NEWS in the Financial -------- Planning category of the SUN NEWS Best Of The Beach Competition for -------- 2003. o The 2003 SHESHUNOFF MARKET SHARE REPORT ranked Coastal Federal Bank ----------------------------------- the leader in deposit market share for Horry County for the twelve months ended June 30, 2003. All of us at Coastal Financial are pleased with these forms of recognition because each, in its own way, represents tangible evidence that our focus on the Vision and Values of our founders, as expressed in our QUEST FOR EXCELLENCE Operating Philosophy and our Vision 2005 Plan, has enabled us to continue to deliver value to all of our stakeholders. 5 2003 Our Best Year Yet Given the many and varied challenges which existed during 2003, our operating results continue to affirm what can be achieved through the aligned effort of an organization which is focused on the execution of well-conceived and articulated business strategies. The consciously-held commitment our Associates have for following the Mission, Values and Guiding Principles of our QUEST FOR EXCELLENCE Operating Philosophy in executing the strategies established in our Vision 2005 Plan has enabled the financial performance during fiscal 2003 which, again, met our high expectations and will serve to underpin and gird our Transformation From A Very Good Organization To An Exceptional Organization. Noteworthy Financial Results for Fiscal 2003 DILUTED EARNINGS PER SHARE o Net income for 2003 totaled $11.2 million, compared to $10.2 million in 2002. On a fully diluted basis, these results equated to a 7.8% increase, from $0.77 per share in 2002 to $0.83 per share in 2003. o Shareholders' equity advanced 11.0% to $73.7 million. [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR GRAPH IN THE PRINTED MATERIAL.] 1999 $0.56 2000 $0.62 2001 $0.70 2002 $0.77 2003 $0.83 BOOK VALUE PER SHARE o Book value per share grew 10.0% to $5.70. [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR GRAPH IN THE PRINTED MATERIAL.] 1999 $3.06 2000 $3.55 2001 $4.41 2002 $5.18 2003 $5.70 6 2003 Our Best Year Yet ASSETS o Total assets increased 24.2%, from $950.8 million to $1.2 billion. o Deposits derived from the residents and businesses of the Communities we serve increased 9.4%, from $637.1 million to $697.0 million, the highest level in the Company's history. o Loans receivable increased 26.3%, from $555.5 million to $701.8 million. [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR GRAPH IN THE PRINTED MATERIAL.] (IN MILLIONS) 1999 $713 2000 $769 2001 $763 2002 $951 2003 $1,181 NON-PERFORMING ASSETS TO TOTAL ASSETS o Non-performing assets to total assets increased from 0.48% to 0.77%. [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR GRAPH IN THE PRINTED MATERIAL.] 1999 0.21% 2000 0.73% 2001 0.74% 2002 0.48% 2003 0.77% ALLOWANCE FOR LOAN LOSSES TO NET LOANS o Allowance for loan losses to net loans was at 1.40%. o The Company had net loan charge-offs as a percentage of Average Loans of 0.11% in 2003. [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR GRAPH IN THE PRINTED MATERIAL.] 1999 1.36% 2000 1.35% 2001 1.42% 2002 1.42% 2003 1.40% Success in such key measures of performance are the product of the commitment, dedication and aligned effort of a truly outstanding group of Associates who share a passion for our QUEST FOR EXCELLENCE Operating Philosophy and Vision 2005 Plan. Our continuing trend of exceptional performance has been rewarded in the financial markets by a 3,556% increase in the price of our shares since becoming a public company in October of 1990, vs. 228% for the Standard & Poor's 500 Index over the same period. 7 2003 Our Best Year Yet Over these thirteen years of public ownership, we have methodically focused our individual and collective efforts on accomplishing Our Basic Corporate Objective Of Maximizing The Value Of Our Shareholders' Investment by working diligently toward the achievement of Our Long-Term Goal Of Being The Best Financial Services Company In Our Marketplace. In considering whether we have made real progress toward the attainment of Our Basic Corporate Objective during this period, it is both informative and illustrative to compare the share price performance of Coastal Financial Corporation to the share price performance of other publicly traded financial services companies operating within our marketplace, and to the financial markets as a whole. In the following graphs, we have compared the share price performance of (CFCP) Coastal Financial Corporation to the Nasdaq, S&P 500 and Dow Indices, and to (TSFG) The South Financial Group, the parent company of Carolina First Bank, (WB) Wachovia Corporation, the parent company of Wachovia Bank, (SNV) Synovus Financial Corporation, the parent company of NBSC, (BBT) BB&T Corporation, the parent company of BB&T, (BAC) Bank of America Corporation, the parent company of Bank of America, (FFCH) First Financial Holdings, Inc., the parent company of First Federal Savings and Loan Association of Charleston and (COOP) Cooperative Bankshares, Inc., the parent company of Cooperative Bank. As demonstrated by these graphic representations, which take a look back over our history as a publicly owned company, the price of Coastal Financial Corporation's shares has significantly outperformed the price of the shares of the other publicly traded financial services companies in our marketplace, as well as the Nasdaq, S&P 500 and Dow Indices. These historical results may not be indicative of future stock price performance. 8 13 Year Peer Group Price Performance
DATE CFCP BAC BBT COOP FFCH SNV TSFG WB Oct-90 100 100.00 100.00 100.00 100.00 100.00 100.00 Oct-91 100 216.67 151.40 100 148.47 140.38 104.96 206.19 Oct-92 305.7667 268.12 191.67 293.7375 234.80 173.05 149.62 267.24 Oct-93 755.1197 270.30 231.96 421.875 363.55 216.36 177.10 287.60 Oct-94 854.8522 286.96 229.18 513.2813 363.55 220.68 180.15 318.56 Oct-95 875.1548 381.16 286.11 618.75 448.38 292.80 180.15 351.31 Oct-96 1472.617 546.38 384.73 527.3438 484.73 517.06 213.74 515.01 Oct-97 2197.232 693.48 604.87 942.1875 936.16 564.64 333.97 694.65 Oct-98 2368.642 666.67 794.44 731.25 933.11 902.96 352.10 821.18 Oct-99 1745.315 747.11 808.33 590.625 905.87 834.81 315.84 605.27 Oct-00 1511.879 557.25 708.33 541.4063 817.98 839.68 155.53 429.18 Oct-01 2008.639 683.94 713.33 646.875 1204.07 896.42 243.51 404.93 Oct-02 3090.712 809.28 805.56 787.5 1238.97 797.90 330.53 492.57 Oct-03 3656.134 904.81 798.00 1434.375 1464.86 973.13 382.14 583.18
9 Our 2003 operating and share price performance results clearly put Coastal Financial among the top performing financial services companies in the nation. Thanks to our continuous focus on the Vision and Values established by our founders, we enter 2004 well positioned to continue our journey toward our Transformation From A Very Good Organization To An Exceptional Organization. As indicated by the financial results shown above, our business has continued to grow and prosper. But, as good as these results are, it's always the future that we are most interested in, and it always leads to the question we're often asked: "Can we keep it up?" We continue to believe the answer is a resounding "Yes," as long as we remain focused on our QUEST FOR EXCELLENCE Operating Philosophy and the goals established in our Vision 2005 Plan. CFCP Relative Price Performance Monthly prices (Oct 1990 to Oct 2002) DATE S&P 500 INDENASDAQ) DOW JONES INDUSTRIAL Oct-90 304.0 329.8 2442.3 Oct-91 392.5 543.0 3069.1 Oct-92 418.7 605.2 3226.3 Oct-93 467.8 779.3 3680.6 Oct-94 472.4 777.5 3908.1 Oct-95 581.5 1036.1 4755.5 Oct-96 705.3 1221.5 6029.4 Oct-97 914.6 1593.6 7442.1 Oct-98 1098.7 1771.4 8592.1 Oct-99 1362.9 2966.4 10729.9 Oct-00 1429.4 3369.6 10971.1 Oct-01 1059.8 1690.2 9075.1 Oct-02 885.76 1329.75 8397.03 Oct-03 995.97 1786.94 9275.06 10 Indexes DATE S&P 500 NASDAQ DOW JONES INCFCPRIAL Oct-90 100 100 100 100 Oct-91 129.0954 164.6392 125.6628 100 Oct-92 137.7237 183.4961 132.0984 305.7667 Oct-93 153.8914 236.2826 150.6999 755.1197 Oct-94 155.3783 235.7459 160.0161 854.8522 Oct-95 191.2829 314.148 194.7108 875.1548 Oct-96 231.9967 370.379 246.87 1472.617 Oct-97 300.8618 483.205 304.7123 2197.232 Oct-98 361.4046 537.1104 351.7993 2368.642 11 Indexes DATE S&P 500 NASDAQ DOW JONES INCFCPRIAL Oct-99 448.3322 899.4633 439.3305 1745.315 Oct-00 470.1974 1021.719 449.2063 1511.879 Oct-01 348.6118 512.4924 371.5771 2008.639 Oct-02 291.3684 403.1989 343.8123 3090.712 Oct-03 327.6217 541.8253 379.7628 3656.134 15 A Look Back In reflecting on our founders, I am reminded of the following quotation by an anonymous author: "It has been said that the most powerful thing in life is one's opportunity; it is also the most irretrievable. We must have clear vision, courage, and a quiet mind if we are to see it and seize it as it hurries past us on very quiet feet and disappears as completely as the day that has gone." How easily our founders could have missed seeing that our Community needed an organization like Coastal Federal if their minds had not been alert for this opportunity. Because they were Community-focused individuals, they were prepared when this opportunity came. And because of this Community focus, they understood well that our future success would be a function of Coastal Federal's Associates and their Relationships with their Customers and their Communities. Usually, the indications of the importance of an organization's People are found encoded in the symbolism and heritage of its past. Those symbols are often preserved, even without an organizational requirement for such, by those who see and recognize the value of those symbols, much like the way that members of a family somehow sense which parts of their heritage to pass along to the next generation. In thinking about the early symbolism and legacy of Coastal Federal, I reflect back on having dinner at a small restaurant in Myrtle Beach, on the eve of my joining the Bank as a teller, in February of 1974. Upon finishing my dinner and proceeding to the check out, the cashier inquired as to what I was doing in Myrtle Beach at that time of the year. I responded that I had moved here to begin work for Coastal Federal. Her reply has stuck with me over the years as if I had heard it only yesterday. She said, "those are the nicest people in town." That response has reverberated in my head many times over the years and I have sensed that the value expressed in that statement was that this attribute, this symbolic part of our legacy, was to be saved and passed on to future generations. Therefore, it is not at all surprising that, in our planning initiatives after our conversion to public ownership in the early nineties, we focused almost exclusively on our Associates, our internal Customers, who serve our external Customers. It was, and continues to be, our strong belief that each component part of our organization; the character and competency of our Associates, our Mission of Exceeding the Expectations of our Customers, our Guiding Principles which are Safety and Soundness #1, Profitability #2 and Growth #3, and our overriding focus on creating Shareholder value, is very important. Through our continued work toward planning for our future, the relative significance of each of these elements converged into the creation of our strategic focus which is: We accomplish Our Basic Corporate Objective of Maximizing The Value Of Our Shareholders' Investment by working diligently toward the achievement of Our Long-Term Goal of Being The Best Financial Services Company In Our Marketplace. This focus on our Associates, our Customers and our Communities ultimately lead to the development of our QUEST FOR EXCELLENCE Operating Philosophy and our Vision 2005 Plan. Those Vision and Values oriented instruments have enabled us to develop and maintain a strong focus on the execution of strategies designed to Exceed the Expectations of our Customers, by delivering our only product, which is Service, in the only manner which adds value, as Trusted Financial Advisors, through our only real competitive advantage, our exceptional Associates. [PHOTO] Coastal Federal Bank's First Financial Statement 12 A Look Back [PHOTO] Coastal Federal Bank's First Office. [PHOTO] Elinor Whitsett Coastal Federal Bank's first Associate. [PHOTO] To serve a growing Community, Coastal Federal Bank utilized its mobile office to provide added banking convenience. 13 Looking Ahead Our journey toward The Transformation From A Very Good Organization To An Exceptional Organization is a very ambitious one which will require us to develop an even sharper focus on our QUEST FOR EXCELLENCE Operating Philosophy and our Vision 2005 Plan by continually refocusing on being Totally Committed To Exceeding the Expectations of our Customers in a manner which can ensure that we add value for all of our stakeholders. What must we do to become an exceptional organization? Without question, it will be much more difficult to Transform a Very Good Organization into an Exceptional Organization than it was to Transform an Average Organization into a Very Good Organization. Moving to the next level can only be accomplished through our total focus on our Associates, the total focus of our Associates on our Customers and our working together as a team to earn all of every Customer's financial services related business by maintaining a laser-like focus on exceptionally well-conceived and articulated strategies and by executing those strategies with precision and alignment. The Vision and Values of our founders and the success we have enjoyed over the past thirteen years as a public company have well positioned us for this journey. And, while we are very fortunate to be located in one of the best markets in America, and enjoy many competitive advantages, all of the success that Coastal Financial has achieved over these years is due to our exceptional team of Associates. And we have the best team imaginable. My sincere appreciation goes to our Board Of Directors, Leadership Group and Associates for all they do for all of us on a daily basis. Our 2003 results speak volumes about their commitment to Our Basic Corporate Objective Of Maximizing The Value Of Our Shareholders' Investment by working diligently toward the achievement of Our Long-Term Goal Of Being The Best Financial Services Company In Our Marketplace. During 2002 and 2003, both revenue and earnings reached record levels. In fact, in these two years alone, our net income has increased over 20%, and in the last five years, our net income has increased by more than 63%. Since becoming a publicly owned Company in 1990, we have roughly doubled our earnings every 5 years. As we embark on our 51st year, while we are pleased with our past achievements, we look forward to even greater accomplishments in the years ahead. We have great confidence that, with the advantages of our exceptional Associates, who believe in who we are and what we are about, our great markets, our excellent products and our ever-increasing ability to work together, as a team, toward building even stronger relationships with our Customers and our Communities, The Transformation From A Very Good Organization To An Exceptional Organization will be accomplished and will enable us to continue to achieve superior returns for our Shareholders in the future. All of us at Coastal Financial Corporation appreciate your continued encouragement, loyalty and support, and look to the future with great enthusiasm and excitement. /s/ Michael C. Gerald Michael C. Gerald President and Chief Executive Officer COASTAL COASTAL CP [LOGO] CFU FEDERAL INVESTOR COASTAL COASTAL FEDERAL BANK SERVICES RETIREMENT o ESTATE o TAX UNIVERSITY The right bank for you. PLANNERS 14 Independent Auditors' Report The Board of Directors Coastal Financial Corporation Myrtle Beach, South Carolina We have audited the consolidated statements of financial condition of Coastal Financial Corporation and subsidiaries (the "Company") as of September 30, 2002 and 2003, and the related consolidated statements of operations, stockholders' equity and comprehensive income, and cash flows for each of the years in the three-year period ended September 30, 2003. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company at September 30, 2002 and 2003, and the results of its operations and its cash flows for each of the years in the three-year period ended September 30, 2003, in conformity with accounting principles generally accepted in the United States of America. Greenville, South Carolina October 29, 2003 KPMG LLP 15 COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES Consolidated Statements of Financial Condition September 30, 2002 and 2003
2002 2003 ---------- ---------- (Dollars in thousands) ASSETS Cash and amounts due from banks ...................................... $ 25,802 $ 18,605 Short-term interest-bearing deposits ................................. -- 2,970 Investment securities available for sale ............................. 2,014 15,909 Mortgage-backed securities available for sale ........................ 331,808 383,324 Loans receivable (net of allowance for loan losses of $7,883 at September 30, 2002 and $9,832 at September 30, 2003) ............ 536,851 682,737 Loans receivable held for sale ....................................... 18,694 19,096 Real estate acquired through foreclosure, net ........................ 1,046 1,627 Office property and equipment, net ................................... 13,713 16,088 Federal Home Loan Bank (FHLB) stock, at cost ......................... 10,559 13,991 Accrued interest receivable on loans ................................. 2,232 2,258 Accrued interest receivable on securities ............................ 2,019 2,074 Bank-owned life insurance ............................................ -- 16,165 Other assets ......................................................... 6,058 6,365 ---------- ---------- $ 950,796 $1,181,209 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Deposits ........................................................... 637,081 697,012 Federal funds purchased and securities sold under agreements to repurchase ......................................... 36,884 133,602 Advances from FHLB ................................................. 189,669 244,114 Debt associated with trust preferred securities .................... -- 15,000 Other borrowings ................................................... 2,069 81 Drafts outstanding ................................................. 2,517 2,644 Advances by borrowers for property taxes and insurance ............. 1,386 1,795 Accrued interest payable ........................................... 1,473 1,263 Other liabilities .................................................. 13,331 11,991 ---------- ---------- Total liabilities ................................................ 884,410 1,107,502 ---------- ---------- Stockholders' equity: Serial preferred stock, 1,000,000 shares authorized and unissued ... -- -- Common stock $.01 par value, 15,000,000 shares authorized; 12,811,148 shares at September 30, 2002 and 12,921,298 shares at September 30, 2003 issued and outstanding .............. 128 129 Additional paid-in capital ......................................... 9,922 10,235 Retained earnings, restricted ...................................... 54,954 63,030 Treasury stock, at cost (430,082 shares at September 30, 2002 and 334,508 shares at September 30, 2003) ................... (4,376) (3,375) Accumulated other comprehensive income, net of tax ................. 5,758 3,688 ---------- ---------- Total stockholders' equity ....................................... 66,386 73,707 ---------- ---------- $ 950,796 $1,181,209 ========== ==========
See accompanying notes to consolidated financial statements. 16 COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES Consolidated Statements of Operations Years ended September 30, 2001, 2002 and 2003
2001 2002 2003 ----------- ----------- ----------- (In thousands, except share data) Interest: Loans receivable ......................................... $ 45,899 40,261 41,958 Investment securities .................................... 2,479 2,030 1,840 Mortgage-backed securities ............................... 11,261 11,348 15,279 Other .................................................... 616 234 137 ----------- ----------- ----------- Total interest income ....................................... 60,255 53,873 59,214 ----------- ----------- ----------- Interest expense: Deposits ................................................. 19,380 13,750 11,999 Securities sold under agreements to repurchase ........... 2,810 414 1,931 Advances from FHLB ....................................... 11,133 7,682 9,068 ----------- ----------- ----------- Total interest expense ................................ 33,323 21,846 22,998 ----------- ----------- ----------- Net interest income ................................... 26,932 32,027 36,216 Provision for loan losses ................................... 955 1,235 2,655 ----------- ----------- ----------- Net interest income after provision for loan losses ...... 25,977 30,792 33,561 ----------- ----------- ----------- Other income: Fees and service charges on loans and deposit accounts ... 2,634 3,148 3,489 Gain on sales of loans held for sale ..................... 1,295 1,462 2,985 Gain (loss) on sales of investment securities, net ....... (56) 102 -- Gain on sales of mortgage-backed securities, net ......... 727 238 469 Loss from real estate acquired through foreclosure ....... (453) (137) (18) Income from sales of non-depository products ............. 1,269 1,281 1,176 Federal Home Loan Bank stock dividends ................... 750 463 453 Other income ............................................. 1,736 1,582 2,354 ----------- ----------- ----------- Total other income .................................... 7,902 8,139 10,908 ----------- ----------- ----------- General and administrative expenses: Salaries and employee benefits ........................... 10,546 12,514 13,452 Net occupancy, furniture and fixtures and data processing expense ............................... 4,029 5,044 5,917 FDIC insurance premium ................................... 84 93 104 FHLB prepayment penalties ................................ 1,113 1,083 2,824 Other expense ............................................ 3,520 4,090 4,859 ----------- ----------- ----------- Total general and administrative expense .............. 19,292 22,824 27,156 ----------- ----------- ----------- Income before income taxes ............................ 14,587 16,107 17,313 Income taxes ................................................ 5,287 5,901 6,141 ----------- ----------- ----------- Net income .................................................. $ 9,300 10,206 11,172 =========== =========== =========== Net income per common share Basic .................................................... $ 0.71 0.79 0.87 =========== =========== =========== Diluted .................................................. $ 0.70 0.77 0.83 =========== =========== =========== Average common shares outstanding Basic .................................................... 13,126,000 12,844,000 12,853,000 =========== =========== =========== Diluted .................................................. 13,304,000 13,237,000 13,441,000 =========== =========== ===========
See accompanying notes to consolidated financial statements. 17 COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity and Comprehensive Income Years ended September 30, 2001, 2002 and 2003
Accumulated Other Additional Comprehensive Total Common Paid-in Retained Treasury Income Stockholders' Stock Capital Earnings Stock (Loss) Equity -------- -------- -------- -------- -------- -------- (In thousands) Balance at September 30, 2000 ..................... $ 131 $ 9,722 $ 40,319 $ (1,702) $ (1,525) $ 46,945 Exercise of stock options ......................... -- -- (108) 214 -- 106 Cash dividends .................................... -- -- (2,015) -- -- (2,015) Net income ........................................ -- -- 9,300 -- -- 9,300 Other comprehensive income, net of tax: Unrealized gains arising during period, net of taxes of $3,348 ......................... -- -- -- -- 5,462 -- Less: reclassification adjustment for gains included in net income, net of taxes of $255 ... -- -- -- -- (416) -- -------- -------- -------- -------- -------- -------- Other comprehensive income ........................ -- -- -- -- 5,046 5,046 -------- -------- -------- -------- -------- -------- Comprehensive income .............................. -- -- -- -- -- 14,346 -------- -------- -------- -------- -------- -------- Treasury stock repurchases ........................ (2) -- -- (2,132) -- (2,134) -------- -------- -------- -------- -------- -------- Balance at September 30, 2001 ..................... 129 9,722 47,496 (3,620) 3,521 57,248 Exercise of stock options ......................... -- 200 (526) 1,529 -- 1,203 Cash dividends .................................... -- -- (2,222) -- -- (2,222) Net income ........................................ -- -- 10,206 -- -- 10,206 Other comprehensive income, net of tax: Unrealized gains arising during period, net of taxes of $1,500 ......................... -- -- -- -- 2,449 -- Less: reclassification adjustment for gains included in net income, net of taxes of $128 ... -- -- -- -- (212) -- -------- -------- -------- -------- -------- -------- Other comprehensive income ........................ -- -- -- -- 2,237 2,237 -------- -------- -------- -------- -------- -------- Comprehensive income .............................. -- -- -- -- -- 12,443 -------- -------- -------- -------- -------- -------- Treasury stock repurchases ........................ (1) -- -- (2,285) -- (2,286) -------- -------- -------- -------- -------- -------- Balance at September 30, 2002 ..................... 128 9,922 54,954 (4,376) 5,758 66,386 Exercise of stock options ......................... 1 313 (504) 1,343 -- 1,153 Cash dividends .................................... -- -- (2,592) -- -- (2,592) Net income ........................................ -- -- 11,172 -- -- 11,172 Other comprehensive income, net of tax: Unrealized losses arising during period, net of taxes of $1,097 ......................... -- -- -- -- (1,779) -- Less: reclassification adjustment for gains included in net income, net of taxes of $178 ... -- -- -- -- (291) -- -------- -------- -------- -------- -------- -------- Other comprehensive loss .......................... -- -- -- -- (2,070) (2,070) -------- -------- -------- -------- -------- -------- Comprehensive income .............................. -- -- -- -- -- 9,102 -------- -------- -------- -------- -------- -------- Treasury stock repurchases ........................ -- -- -- (342) -- (342) -------- -------- -------- -------- -------- -------- Balance at September 30, 2003 ..................... $ 129 $ 10,235 $ 63,030 $ (3,375) $ 3,688 $ 73,707 ======== ======== ======== ======== ======== ========
See accompanying notes to consolidated financial statements. 18 COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows Years ended September 30, 2001, 2002 and 2003
2001 2002 2003 --------- --------- --------- (In thousands) Cash flows from operating activities: Net income ............................................................... $ 9,300 10,206 11,172 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation .......................................................... 1,556 2,074 2,374 Provision for loan losses ............................................. 955 1,235 2,655 Gain on sale of mortgage-backed securities available for sale ......... (727) (238) (469) (Gain) loss on sale of investment securities available or sale ........ 56 (102) -- Origination of loans receivable held for sale ......................... (81,778) (100,309) (141,404) Proceeds from sales of loans receivable held for sale ................. 28,541 13,907 45,367 Gain on sale of real estate aquired through foreclosure ............... -- -- (165) Loss on early extinguishment of debt .................................. 1,113 1,083 2,824 (Increase) decrease in: Cash value of life insurance ....................................... -- -- (665) Other assets ....................................................... (1,019) (2,006) (157) Accrued interest receivable ........................................ 548 (127) (81) Increase (decrease) in: Accrued interest payable ........................................... (1,347) 289 (210) Other liabilities .................................................. 428 2,176 (65) --------- --------- --------- Net cash used in operating activities .............................. (42,374) (71,812) (78,824) --------- --------- --------- Cash flows from investing activities: Proceeds from sales of investment securities available for sale .......... 5,125 -- -- Proceeds from maturities of investment securities available for sale ..... 1,595 1,995 2,000 Purchases of investment securities available for sale .................... -- (1,998) (16,141) Purchases of loans receivable ............................................ (20) (233) -- Proceeds from sales of mortgage-backed securities available for sale ..... 164,919 128,169 135,413 Purchases of mortgage-backed securities available for sale ............... (158,004) (254,494) (328,245) Principal collected on mortgage-backed securities available for sale ..... 47,566 72,990 234,321 Origination of loans receivable, net ..................................... (214,296) (317,899) (628,172) Principal collected on loans receivable .................................. 233,653 268,120 477,676 Purchase of bank-owned life insurance .................................... -- -- (15,500) Proceeds from sales of real estate acquired through foreclosure .......... 1,159 1,997 1,539 Purchases of office properties and equipment ............................. (3,188) (2,637) (4,749) Sales (purchases) of FHLB stock, net ..................................... 4,275 (2,935) (3,432) --------- --------- --------- Net cash provided by (used in) investing activities ................... 82,784 (106,925) (145,290) --------- --------- --------- Cash flows from financing activities: Increase in deposits ..................................................... 124,147 106,717 59,931 Increase (decrease) in securities sold under agreements to repurchase .... (57,155) 18,181 96,718 Proceeds from FHLB advances .............................................. 358,771 312,426 715,705 Repayment of FHLB advances ............................................... (443,959) (262,793) (661,260) Proceeds (repayments) from other borrowings, net ......................... -- -- (1,988) Issuance of debt associated with trust preferred securities .............. -- -- 15,000 Cash payments for debt issuance costs .................................... -- -- (150) Prepayment penalties on early extinguishment of debt ..................... (1,113) (1,083) (2,824) Increase (decrease) in advance payments by borrowers for property taxes and insurance ................................................... (7) 136 409 Increase (decrease) in drafts outstanding, net ........................... 102 (60) 127 Repurchase of treasury stock, at cost .................................... (2,134) (2,286) (342) Cash dividends to stockholders and cash for fractional shares ............ (2,015) (2,222) (2,592) Exercise of stock options ................................................ 106 1,203 1,153 --------- --------- --------- Net cash provided by (used in) financing activities ................... (23,257) 170,219 219,887 --------- --------- --------- Net increase (decrease) in cash and cash equivalents ........................ 17,153 (8,518) (4,227) --------- --------- --------- Cash and cash equivalents at beginning of year .............................. 17,167 34,320 25,802 --------- --------- --------- Cash and cash equivalents at end of year .................................... $ 34,320 25,802 21,575 ========= ========= ========= Supplemental information: Interest paid ............................................................ $ 34,670 21,557 23,208 ========= ========= ========= Income taxes paid ........................................................ $ 5,249 5,726 5,325 ========= ========= ========= Supplemental schedule of non-cash investing and financing transactions: Securitization of mortgage loans into mortgage-backed securities ......... $ 47,157 83,982 95,635 ========= ========= ========= Transfer of mortgage loans to real estate acquired through foreclosure ... $ 2,655 680 1,955 ========= ========= =========
See accompanying notes to consolidated financial statements. 19 COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The following is a summary of the more significant accounting policies used in the preparation and presentation of the accompanying consolidated financial statements. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. These estimates and assumptions affect the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements. In addition, they affect the reported amounts of income and expenses during the reporting period. Actual results could differ from these estimates and assumptions. (a) Principles of Consolidation The accompanying consolidated financial statements include the accounts of Coastal Financial Corporation (the "Company"), and its wholly-owned subsidiaries, Coastal Financial Capital Trust I, a statutory trust, Coastal Investor Services, Inc., Coastal Federal Bank (the "Bank") (and the Bank's wholly-owned subsidiaries, Coastal Federal Holding Company (and Coastal Federal Holding Company's wholly-owned subsidiary, Coastal Real Estate Investment Corporation), Coastal Planners Holding Corporation (and Coastal Planners Holding Corporation's wholly-owned subsidiary, Coastal Retirement, Estate and Tax Planners, Inc.), and Coastal Mortgage Bankers and Realty Co., Inc. (and Coastal Mortgage Bankers and Realty Co. Inc.'s wholly-owned subsidiaries, Shady Forest Development Corporation, Sherwood Development Corporation, Ridge Development Corporation, 501 Development Corporation and North Beach Investments, Inc.). In consolidation, all significant intercompany balances and transactions have been eliminated. Coastal Financial Corporation is a unitary thrift holding company organized under the laws of the state of Delaware. (b) Cash and Cash Equivalents For purposes of reporting cash flows, cash and cash equivalents include cash and amounts due from banks, short-term interest-bearing deposits and federal funds sold. Cash and cash equivalents have maturities of three months or less. Accordingly, the carrying amount of such instruments is considered to be a reasonable estimate of fair value. (c) Investment and Mortgage-backed Securities Investment and mortgage-backed securities are accounted for in accordance with Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities". Investments are classified into three categories as follows: (1) Held to Maturity - debt securities that the Company has the positive intent and ability to hold to maturity, which are reported at amortized cost; (2) Trading - debt and equity securities that are bought and held principally for the purpose of selling them in the near term, which are reported at fair value, with unrealized gains and losses included in earnings and (3) Available for Sale - debt and equity securities that may be sold under certain conditions, which are reported at fair value, with unrealized gains and losses excluded from earnings and reported as a separate component of stockholders' equity, net of income taxes. The Company determines investment and mortgage-backed securities classification at the time of purchase. Premiums and discounts on securities are accreted or amortized as an adjustment to income over the estimated life of the security using a method which approximates a level yield. Unrealized losses on securities, reflecting a decline in value judged by the Company to be other than temporary, are charged to income in the consolidated statements of operations. The cost basis of securities sold is determined by specific identification. Purchases and sales of securities are recorded on a trade date basis. The fair value of securities is based on quoted market prices or dealer quotes. (d) Loans Receivable Held for Sale Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated market value in the aggregate. Net unrealized losses are provided for in a valuation allowance by charges to operations. At September 30, 2002 and 2003, the Company had approximately $18.7 million and $19.1 million in mortgage loans held for sale, respectively. Gains or losses on sales of loans are recognized when control over these assets has been surrendered in accordance with SFAS No. 140, "Accounting for Transfer and Servicing of Financial Assets and Extinguishment of Liabilities" ("SFAS No. 140"). (e) Loans Receivable Loans receivable are stated at unpaid principal balances adjusted for unamortized premiums and unearned discounts. The Company recognizes interest income on loans using the simple interest method. 20 COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements - Continued (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued (e) Loans Receivable - CONTINUED The Company follows SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," for determining impairment on certain loans. SFAS No. 114 requires that nonhomogenous impaired loans and certain restructured loans be measured at the present value of expected future cash flows discounted at the loan's effective interest rate, at the loan's observable market price or at the fair value of the collateral if the loan is collateral dependent. A specific reserve is set up for each impaired loan. Accrual of interest income on impaired loans is suspended when, in management's judgment, doubt exists as to the collectibility of principal and interest. If amounts are received on loans for which the accrual of interest has been discontinued, a determination is made as to whether payments received should be recorded as a reduction of the principal balance or as interest income depending on management's judgment as to the collectibility of principal. The loan is returned to accrual status when, in management's judgment, the borrower has demonstrated the ability to make periodic interest and principal payments on a timely basis. Loans are charged-off when the amount of loss is reasonably quantifiable and the loss is likely to occur. Commercial loans are generally placed in nonaccrual status when they become 90-days delinquent or earlier if full collection of principal and interest becomes doubtful. Consumer and mortgage loans are placed in nonaccrual status when they become 90 days delinquent or earlier if full collection of principal and interest becomes doubtful. Interest payments received after a loan is placed in nonaccrual are applied as a principal reduction until such time as the loan is returned to accrual status. Generally, loans are returned to accrual status when the loan is brought current and the ultimate collectibility of principal and interest is no longer in doubt. The Company maintains an allowance for the loss of uncollected interest primarily on loans which are ninety days or more past due. This allowance is reviewed periodically and necessary adjustments, if any, are included in the determination of current interest income. (f) Loan Fees and Discounts The net of origination fees received and direct costs incurred in the origination of loans are deferred and amortized to interest income over the contractual life of the loans adjusted for actual principal repayments using a method approximating a level yield. (g) Allowance for Loan Losses The allowance for loan loss is based on management's ongoing evaluation of the loan portfolio and reflects an amount, that in management's opinion, is adequate to absorb probable losses in the existing portfolio. All loan losses are charged to the allowance and all recoveries are credited to the allowance. Additions to the allowance for loan losses are provided by charges to operations based on various factors which, in management's judgment, deserve current recognition in estimating losses. Such factors considered by management include the market value of the underlying collateral, growth and composition of credit risk within the loan portfolio, loss experience, review of problem assets, delinquency trends, and local and regional economic conditions. Management evaluates the carrying value of loans periodically and the allowance is adjusted accordingly. While management uses the best information available to make evaluations, future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions used in making the evaluation. The allowance for loan losses is subject to periodic evaluation by various regulatory authorities and may be subject to adjustment upon their examination. (h) Concentration of Credit Risk The Company's primary market area includes northeastern South Carolina and southeastern North Carolina predominately along the coastal regions. At September 30, 2003, the majority of the total loan portfolio, as well as a substantial portion of the commercial and real estate loan portfolios, were to borrowers within this region. No areas of significant concentrations of credit risk have been identified. (i) Loan Securitizations The Company packages and sells loans receivable as securities to investors. These transactions are recorded as sales in accordance with SFAS No. 140 when control over these assets has been surrendered. The Company does not retain any interest in the securities sold other than the servicing rights. 21 COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements - Continued (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued (j) Real Estate Owned Real estate acquired in settlement of loans is initially recorded at the lower of cost or net fair value (less estimated costs to sell). If cost exceeds net fair value, the asset is written down to net fair value with the difference being charged against the allowance for loan losses. Subsequent to foreclosure, such assets are carried at the lower of cost or net fair value with any additional write downs being charged as real estate losses. (k) Office Properties and Equipment Office properties and equipment are carried at cost less accumulated depreciation. Depreciation is computed primarily on the straight-line method over estimated useful lives. Estimated lives range up to thirty years for buildings and improvements and up to ten years for furniture, fixtures and equipment. Maintenance and repairs are charged to expense as incurred. Improvements which extend the lives of the respective assets are capitalized. When property or equipment is sold or otherwise disposed of, the cost and related accumulated depreciation are removed from the respective accounts and the resulting gain or loss is reflected in income. (l) Mortgage Servicing Rights SFAS No. 140 requires the recognition of originated mortgage servicing rights ("mortgage servicing rights" or "MSRs") as assets by allocating total costs incurred between the originated loan and the servicing rights retained based on their relative fair values. SFAS No. 140 also requires the recognition of purchased mortgage servicing rights at fair value, which is presumed to be the price paid for the rights. MSRs are amortized in proportion to the servicing income over the estimated life of the related mortgage loan. The amortization method is designed to approximate a level-yield method, taking into consideration the estimated prepayment of the underlying loans. For purposes of measuring impairment, MSRs are reviewed for impairment by management on a quarterly basis. The Company establishes an impairment valuation allowance to record any impairment for MSRs. Subsequent increases in value are recognized only to the extent of the impairment valuation allowance within the same tranche. (m) Income Taxes Deferred taxes are provided for differences in the financial reporting basis for assets and liabilities as compared to their tax bases. A current tax liability or asset is established for taxes presently payable or refundable and a deferred tax liability or asset is established for future taxable or deductible items. (n) Drafts Outstanding The Company invests all excess funds on deposit at other banks (including amounts on deposit for payment of outstanding disbursement checks) on a daily basis in an overnight interest-bearing account. Accordingly, outstanding checks are reported as a liability. (o) Securities Sold Under Agreement to Repurchase The Company maintains collateral for certain customers who wish to deposit amounts greater than $100,000. These agreements function similarly to a certificate of deposit in that the agreement is for a fixed length of time at a fixed interest rate. However, these deposits are not insured by the Federal Deposit Insurance Corporation (the "FDIC"), but are collateralized by an interest in the pledged securities. The Company has classified these borrowings separately from deposits. (p) Stock Based Compensation At September 30, 2003, the Company has one stock option plan which is described more fully in note 17. 22 COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements - Continued (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued (p) Stock Based Compensation- Continued The Company applies the intrinsic value method of APB Opinion No. 25, "Accounting for Stock Issued to Employees" (APB Opinion No. 25) and related interpretations in accounting for its plan. Accordingly, no compensation cost has been recognized for its fixed stock option plans as all options granted under those plans had an exercise price equal to or greater than the market value of the underlying stock at the date of grant. Had compensation cost for the Company's stock-based compensation plans been determined consistent with SFAS Statement No. 123, "Accounting for Stock-Based Compensation", the Company's net income and earnings per share would have been reduced to the proforma amounts indicated below for the years ended September 30 (in thousands except per share data): 2001 2002 2003 ------- ------- ------- Net income As reported $ 9,300 $10,206 $11,172 Proforma 8,805 9,728 10,668 Basic earnings per share As reported $ 0.71 $ 0.79 $ 0.87 Proforma 0.67 0.76 0.83 Diluted earnings per share As reported $ 0.70 $ 0.77 $ 0.83 Proforma 0.66 0.74 0.79 The weighted average fair value per share of options granted in 2001, 2002 and 2003 amounted to $2.46, $3.81 and $5.48, respectively. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 2001, 2002 and 2003, respectively: dividend yield of approximately 2.03%, 1.62% and 1.86%, expected volatility of approximately 42%, 51% and 47%, risk-free interest rate of 5.60%, 4.60% and 3.96%, expected lives of 7.5 years and a vesting period of 5 years. For purposes of the proforma calculation, compensation expense is recognized on a straight line basis over 5 years. (q) Comprehensive Income SFAS No. 130, "Reporting Comprehensive Income" establishes standards for the reporting and presentation of comprehensive income and its components in a full set of financial statements. Comprehensive income consists of net income and net unrealized gains (losses) on securities and is presented in the statements of stockholders' equity and comprehensive income. (r) Disclosures Regarding Segments The Company reports operating segments in accordance with SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS No. 131"). Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and assess performance. SFAS No. 131 requires that a public enterprise report a measure of segment profit or loss, certain specific revenue and expense items, segment assets, information about the way that the operating segments were determined and other items. The Company has one reportable operating segment, Coastal Federal Bank. (s) Derivative Instruments and Hedging Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133") as amended by SFAS No. 137, 138, and 149 establishes accounting and reporting standards for derivatives and hedging activities. It requires an entity to recognize all derivatives as either assets or liabilities in the balance sheet, and measures those instruments at fair value. Changes in the fair value of those derivatives are reported in current earnings or other comprehensive income depending on the purpose for which the derivative is held and whether the derivative qualifies for hedge accounting. The Company does not currently engage in any activities that qualify for hedge accounting under SFAS 133. Accordingly, changes in fair value of these derivative instruments are included in gain on sale of loans held for sale in the consolidated statements of operations. (See note 23). 23 COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements - Continued (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued (t) Reclassification of Losses on Early Extinguishment of Debt The Company adopted SFAS No. 145 "Recissions of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections" ("SFAS No. 145") effective July 1, 2002. In connection with this adoption, the Company reclassified losses on the early extinguishment of debt, which were incurred in fiscal 2001 and 2002 and were $1.1 million in each year. (u) Reclassifications Certain amounts in the 2001 and 2002 consolidated financial statements have been reclassified to conform with the 2003 presentation. Such reclassifications did not change net income or equity as previously reported. (2) INVESTMENT SECURITIES The amortized cost and market value of investment securities available for sale at September 30, 2002 are summarized as follows:
2002 --------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- --------- --------- --------- (In thousands) U.S. Government and agency obligations: Due after one but within five years .. $ -- -- -- -- Due after five years ................. 1,998 16 -- 2,014 --------- --------- --------- --------- $ 1,998 16 -- 2,014 ========= ========= ========= =========
The amortized cost and market value of investment securities available for sale at September 30, 2003 are summarized as follows:
2003 --------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- --------- --------- --------- (In thousands) U.S. Government and agency obligations: Due after five years ................. $ 1,998 9 -- 2,007 State and municipal obligations: Due after five years ................. 14,141 136 (375) 13,902 --------- --------- --------- --------- $ 16,139 145 (375) 15,909 ========= ========= ========= =========
The Company had gross realized gains of $17,000 and gross realized losses of $73,000 for the year ended September 30, 2001. For the year ended September 30, 2002, gross realized gains were $102,000 and there were no gross realized losses. For the year ended September 30, 2003, there were no gross realized gains or losses. (3) MORTGAGE-BACKED SECURITIES Mortgage-backed securities available for sale at September 30, 2002 consisted of the following:
2002 --------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- --------- --------- --------- (In thousands) Collateralized Mortgage Obligations .... $ 36,320 398 (18) 36,700 FNMA ................................... 206,448 6,673 -- 213,121 GNMA ................................... 22,139 891 -- 23,030 FHLMC .................................. 57,628 1,332 (3) 58,957 --------- --------- --------- --------- $ 322,535 9,294 (21) 331,808 ========= ========= ========= =========
24 COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements - Continued (3) MORTGAGE-BACKED SECURITIES - CONTINUED Mortgage-backed securities available for sale at September 30, 2003 consisted of the following:
2003 --------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- --------- --------- --------- (In thousands) Collateralized Mortgage Obligations .... $ 11,617 12 (147) 11,482 FNMA ................................... 205,200 5,483 (730) 209,953 GNMA ................................... 26,659 827 (37) 27,449 FHLMC .................................. 133,674 1,793 (1,027) 134,440 --------- --------- --------- --------- $ 377,150 8,115 (1,941) 383,324 ========= ========= ========= =========
The Company had gross realized gains of $1.0 million and gross realized losses of $312,000 for the year ended September 30, 2001. For the year ended September 30, 2002, the Company had gross realized gains of $462,000 and gross realized losses of $224,000. For the year ended September 30, 2003, the Company had gross realized gains of $695,000 and gross realized losses of $226,000. Certain investment and mortgage-backed securities are pledged to secure other borrowed money and customer deposits in excess of FDIC insurance coverage. The carrying value of the securities pledged at September 30, 2003 was $248.5 million with a fair value of $256.4 million. (4) LOANS RECEIVABLE, NET Loans receivable, net at September 30 consisted of the following: 2002 2003 --------- --------- (In thousands) First mortgage loans: Single family to 4 family units ........... $ 242,602 289,197 Other, primarily commercial real estate ... 202,117 263,688 Residential construction loans ............ 15,105 27,480 Commercial construction loans ............. 30,439 53,747 Consumer and commercial loans: Installment consumer loans ................ 12,882 16,571 Mobile home loans ......................... 3,446 4,607 Savings account loans ..................... 1,613 2,179 Equity lines of credit .................... 24,273 26,639 Commercial and other loans ................ 18,377 24,475 --------- --------- 550,854 708,583 Less: Allowance for loan losses ................. 7,883 9,832 Deferred loan cost, net ................... (245) (556) Undisbursed portion of loans in process ... 6,365 16,570 --------- --------- $ 536,851 682,737 ========= ========= The changes in the allowance for loan losses for the years ended September 30 consisted of the following: 2001 2002 2003 ------- ------- ------- (In thousands) Beginning allowance ............... $ 7,064 7,159 7,883 Provision for loan losses ......... 955 1,235 2,655 Loan recoveries ................... 60 66 136 Loan charge-offs .................. (920) (577) (842) ------- ------- ------- $ 7,159 7,883 9,832 ======= ======= ======= 22 COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements - Continued (4) LOANS RECEIVABLE, NET - Continued Non-accrual loans which were over ninety days delinquent totaled approximately $3.5 million and $7.4 million at September 30, 2002 and 2003, respectively. In fiscal years 2001, 2002 and 2003, interest income which would have been recorded would have been approximately $377,000, $301,000 and $623,000, respectively, had non-accruing loans been current in accordance with their original terms. There were $3.2 million in impaired loans at September 30, 2002. At September 30, 2003, impaired loans totaled $4.9 million. Included in the allowance for loan losses at September 30, 2002 was $194,000 related to impaired loans compared to $263,000 at September 30, 2003. The average recorded investment in impaired loans for the year ended September 30, 2002 was $3.1 million compared to $4.0 million for the year ended September 30, 2003. Interest income recognized on impaired loans in fiscal 2002 was $36,000. Interest income recognized on impaired loans in fiscal 2003 was $134,000. In the normal course of business, to meet the financing needs of its Customers, the Company is a party to financial instruments with off-balance-sheet risk. These financial instruments include commitments to extend credit and stand by letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. The Company's exposure to credit loss in the event of non-performance by the other party to the financial instrument is represented by the contractual amount of these instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. Commitments to extend credit are agreements to lend as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each Customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management's credit evaluation. Unfunded loan commitments and letters of credit at September 30, 2003 were approximately $108.1 million and included the following (in thousands): Loan Commitments: Residential housing and land ............................ $ 39,314 Home equity loans and consumer lines of credit .......... 41,968 Commercial lines of credit .............................. 11,029 Standby letters of credit ............................... 2,851 Unused business and personal credit card lines .......... 12,918 Loans serviced for the benefit of others amounted to approximately $143.3 million, $192.1 million and $219.8 million at September 30, 2001, 2002 and 2003, respectively. During fiscal 2003, the Company securitized $95.6 million of mortgage loans and concurrently sold these mortgage-backed securities to outside third parties and recognized a net gain on sale of $1.7 million, which included $1.3 million related to mortgage servicing rights. The gain is included in gains on sales of loans held for sale in the consolidated statement of operations. The proceeds from sale are included in proceeds from sales of mortgage-backed securities available for sale in the consolidated statement of cash flows. As disclosed in note 9, certain mortgage loans are pledged to secure advances from the Federal Home Loan Bank ("FHLB") of Atlanta. 25 COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements - Continued (4) LOANS RECEIVABLE, NET - Continued The Bank offers mortgage and consumer loans to its directors, and Associates for the financing of their personal residences and for other personal purposes. The Bank also offers commercial loans to companies affiliated with directors. These loans are made in the ordinary course of business and, in management's opinion, are made on substantially the same terms, including interest rates and collateral, prevailing at the time for comparable transactions with other persons and companies. Management does not believe these loans involve more than the normal risk of collectibility or present other unfavorable features. At September 30, 2003, such loans were current with respect to their payment terms. The following is a summary of the activity of loans outstanding to certain executive officers, directors and their affiliates for the year ended September 30, 2003 (in thousands): Balance at September 30, 2002 ...................... $ 1,119 New loans .......................................... 682 Repayments ......................................... (725) ------- Balance at September 30, 2003 ...................... $ 1,076 ======= (5) MORTGAGE SERVICING RIGHTS Mortgage servicing rights, net of the valuation allowance, are included in other assets and totaled $2.2 million and $2.8 million at September 30, 2002 and 2003, respectively. Amortization expense for MSRs totaled $217,000, $505,000 and $1.3 million for the years ended September 30, 2001, 2002 and 2003, respectively. The estimated amortization expense for MSRs held as of September 30, 2003, is $971,000, $859,000, $762,000, $451,000 and $262,000 for fiscal 2004, 2005, 2006, 2007 and 2008 respectively. The estimated amortization expense is based on current information regarding loan payments and prepayments. Amortization expense could change in future periods based on changes in the volume of prepayments and various economic factors. 2002 2003 ------- ------- (In thousands) Balance at beginning of year .............. $ 1,310 2,203 MSRs capitalized .......................... 1,398 1,912 MSRs amortized ............................ (505) (811) Valuation allowance ....................... -- (461) ------- ------- Balance at end of year .................... $ 2,203 2,843 ======= ======= (6) OFFICE PROPERTY AND EQUIPMENT, NET Office property and equipment, net at September 30 consisted of the following: 2002 2003 ------- ------- (In thousands) Land ...................................... $ 3,143 5,532 Building and improvements ................. 10,127 10,532 Furniture, fixtures and equipment ......... 14,297 15,864 ------- ------- 27,567 31,928 Less accumulated depreciation ............. 13,854 15,840 ------- ------- $13,713 16,088 ======= ======= The Company leases office space and various equipment. Total rental expense for the years ended September 30, 2001, 2002 and 2003 was approximately $291,000, $288,000 and $259,000 respectively. 26 COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements - Continued (6) OFFICE PROPERTY AND EQUIPMENT, NET - CONTINUED Future minimum rental payments for operating leases having remaining noncancelable lease terms in excess of one year at September 30, 2003 are as follows (in thousands): 2004 ............................. $ 159 2005 ............................. 157 2006 ............................. 122 2007 ............................. 42 2008 ............................. 20 Thereafter .......................... 212 ----- $ 712 ===== (7) INVESTMENT REQUIRED BY LAW The Bank, as a member of the FHLB of Atlanta, is required to acquire and hold shares of capital stock in the FHLB of Atlanta in an amount equal to the greater of (i) $500 (ii) 1.0% of the aggregate outstanding principal amount of home mortgage loans, home purchase contracts and similar obligations at the end of each calendar year, or (iii) 5% of its advances (borrowings) from the FHLB of Atlanta at the end of each calendar year. The Bank is in compliance with this requirement with an investment in FHLB stock of $14.0 million at September 30, 2003. No ready market exists for this stock and it has no quoted market value. However, redemption of this stock has historically been at par value. (8) DEPOSITS Deposits at September 30 consisted of the following:
2002 2003 -------------------- -------------------- Weighted Weighted Amount Rate Amount Rate -------- -------- -------- -------- (Dollars in thousands) Transaction accounts: Noninterest bearing ............... $ 63,003 --% 86,258 --% NOW ............................... 67,381 0.38 98,171 0.54 Money market checking ............. 212,924 2.16 206,010 1.34 -------- -------- -------- -------- Total transaction accounts ... 343,308 1.41 390,439 0.84 -------- -------- -------- -------- Passbook accounts: Regular passbooks ................. 37,905 1.09 44,919 0.79 Money market ...................... 1,187 1.95 1,317 1.00 -------- -------- -------- -------- Total passbook accounts ...... 39,092 1.12 46,236 0.80 -------- -------- -------- -------- Certificate accounts: 0.00-1.99% ........................ 1,489 87,396 2.00-3.99% ........................ 202,676 149,678 4.00-5.99% ........................ 50,024 19,569 6.00-7.99% ........................ 8 3,161 8.00-10.00% ....................... 484 533 -------- -------- -------- -------- Total certificate accounts ... 254,681 3.46 260,337 2.67 -------- -------- -------- -------- $637,081 2.21% 697,012 1.52% ======== ======== ======== ========
27 COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements - Continued (8) DEPOSITS - CONTINUED The aggregate amount of all deposit accounts with a minimum denomination of $100,000 or more was $245.4 million and $287.9 million at September 30, 2002 and 2003, respectively. Included in certificate accounts were $2.4 million at September 30, 2002 originated by brokers for a fee. The amounts and scheduled maturities of certificate accounts at September 30, are as follows: 2002 2003 -------- -------- (In thousands) Within 1 year ...................................... $201,370 198,723 After 1 but within 2 years ......................... 27,484 50,596 After 2 but within 3 years ......................... 20,358 7,461 Thereafter ......................................... 5,469 3,557 -------- -------- $254,681 260,337 ======== ======== Interest expense on deposits for the years ended September 30 consisted of the following: 2001 2002 2003 ------- ------- ------- (In thousands) Transaction accounts .................... $ 7,404 4,524 3,925 Passbook accounts ....................... 741 459 427 Certificate accounts .................... 11,235 8,767 7,647 ------- ------- ------- $19,380 13,750 11,999 ======= ======= ======= (9) ADVANCES FROM FHLB Advances from the FHLB at September 30 consisted of the following: 2002 2003 -------------------- -------------------- Weighted Weighted Amount Rate Amount Rate -------- -------- -------- -------- (Dollars in thousands) Fiscal Year Maturity 2003 ........................... $ 32,350 2.14% $ -- --% 2004 ........................... 11,235 2.34 34,435 1.32 2005 ........................... 25,500 6.24 13,500 5.17 2006 ........................... 3,270 4.98 5,686 2.81 2007 ........................... 6,223 3.39 5,132 3.00 2008 ........................... 10,000 4.92 4,633 3.28 2009 or greater ................ 101,091 5.27 180,728 4.35 -------- ------ -------- ------ $189,669 4.61% $244,114 3.89% ======== ====== ======== ====== Stock in the FHLB of Atlanta and specific first mortgage loans and mortgage-backed securities of approximately $219.8 million and $275.8 million at September 30, 2002 and 2003, respectively, are pledged as collateral for these advances. The Bank has adopted the policy of pledging excess collateral to facilitate future advances. At September 30, 2003, the excess first mortgage loan collateral pledged to the FHLB will support additional borrowings of approximately $31.6 million. At September 30, 2003, included in the one, three, four and five year maturities were $155.0 million subject to call provisions. Call provisions are more likely to be exercised by the FHLB when rates rise. During fiscal 2001, the Company prepaid approximately $37.7 million of advances from FHLB and incurred gross penalties of approximately $1.1 million. During fiscal 2002, the Company prepaid approximately $59.3 million of advances from FHLB and incurred gross penalties of approximately $1.1 million. During fiscal 2003, the Company prepaid approximately $54.6 million of advances and incurred gross penalties of approximately $2.8 million. Prepayment penalties are included in general and administrative expenses in the statement of operations. Also see note 1 (t). 26 COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements - Continued (10) REPURCHASE AGREEMENTS The following tables set forth certain information regarding repurchase agreements by the Bank at the end of and during the periods indicated:
At September 30, ---------------------------------------- 2001 2002 2003 ------- ------- -------- (Dollars in thousands) Outstanding balance: Securities sold under agreements to repurchase: Customer .......................................... $ 3,703 $ 4,070 $ 7,703 Broker ............................................ 15,000 30,000 125,899 Weighted average rate (at month end) paid on: Securities sold under agreements to repurchase: Customer .......................................... 3.36% 1.37% 0.81% Broker ............................................ 2.97 1.84 1.64 Maximum amount of borrowings outstanding at any month end: Securities sold under agreements to repurchase: Customer .......................................... $ 3,726 $ 5,625 $ 7,703 Broker ............................................ 67,099 30,000 125,899 Approximate average outstanding with respect to: Securities sold under agreements to repurchase: Customer .......................................... $ 2,361 $ 3,600 $ 4,812 Broker ............................................ 45,461 15,007 92,476 Weighted average rate (year to date) paid on: Securities sold under agreements to repurchase: Customer .......................................... 3.73% 1.58% 1.02% Broker ............................................ 5.65 2.39 2.04
Securities sold under agreements to repurchase represent borrowings by the Company with maturities ranging from 1 to 28 months collateralized by securities of the United States government or its agencies, which have been delivered to a third party custodian for safekeeping. Assets pledged to collateralize securities sold under agreements to repurchase had a fair value of $141.4 million at September 30, 2003 and are included in mortgage-backed securities available for sale in the consolidated balance sheet. (11) DEBT ASSOCIATED WITH TRUST PREFERRED SECURITIES On July 3, 2003, Coastal Financial Capital Trust I (the "Trust"), a statutory trust formed by the Company, issued and sold floating rate securities having an aggregate liquidation amount of $15.0 million (the "Capital Securities") to institutional buyers in a pooled trust preferred issue. The Capital Securities generated gross proceeds of $15.0 million. The Trust invested these proceeds in an equivalent amount of junior subordinated debentures of the Company and the Company used the proceeds for general corporate purposes. Issuance costs from the July 3, 2003 sale totaled $150,000. The junior subordinated debentures are unsecured obligations of the Company and are subordinate and junior in right of payment to all present and future senior indebtedness of the Company. The Company has entered into a guarantee, which together with its obligations under the junior subordinated debentures and the declaration of trust governing the Trust, provides a full and unconditional guarantee of the Capital Securities. The Capital Securities accrue and pay distributions semi-annually at a rate per annum equal to 90-day LIBOR plus 305 basis points. At September 30, 2003, the distribution rate on the Capital Securities was 4.16%. The distributions payable on the Capital Securities are cumulative and payable quarterly in arrears. The Company has the right, subject to events of default, to defer payments of interest on the Capital Securities for a period not to exceed 20 consecutive quarters. The Company has no current intention to exercise its right to defer payment of interest on the Capital Securities. 28 COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements - Continued (11) DEBT ASSOCIATED WITH TRUST PREFERRED SECURITIES - CONTINUED The Capital Securities are mandatorily redeemable upon maturity on July 3, 2033. The Company has the right to redeem the Capital Securities in whole or in part, on or after July 3, 2008. If the Capital Securities are redeemed on or after July 3, 2008, the redemption price will be 100% of the principal amount plus accrued and unpaid interest. In addition, the Company may redeem the Capital Securities in whole (but not in part) at any time within 90 days following the occurrence of a tax event, an investment company event, or a capital treatment event at a special redemption price (as defined in the indenture). (12) INCOME TAXES Income tax expense (benefit) for the years ended September 30 consisted of the following:
Current Deferred Total ------- -------- ----- (In thousands) 2001: Federal ............................... $ 4,792 196 4,988 State ................................. 308 (9) 299 ------- ----- ----- $ 5,100 187 5,287 ======= ===== ===== 2002: Federal ............................... $ 5,407 (13) 5,394 State ................................. 507 -- 507 ------- ----- ----- $ 5,914 (13) 5,901 ======= ===== ===== 2003: Federal ............................... $ 4,946 507 5,453 State ................................. 693 (5) 688 ------- ----- ----- $ 5,639 502 6,141 ======= ===== =====
The tax effect of the Company's temporary differences between the financial statement carrying amounts and tax basis of assets and liabilities that give rise to the net deferred tax asset (liability) at September 30, 2002 and 2003 relate to the following:
2002 2003 ------- ----- (In thousands) Deferred tax assets: Allowance for loan losses ...................................................... $ 2,900 3,605 Accrued medical reserves ....................................................... 94 91 Other real estate reserves and deferred gains on other real estate ............. 101 102 Net operating loss carryforwards ............................................... 21 21 Other .......................................................................... 276 282 ------- ------ Total deferred tax assets ........................................................... 3,392 4,101 Less valuation allowance ............................................................ (21) (21) ------- ------ Net deferred tax assets ............................................................. 3,371 4,080 ------- ------ Deferred tax liabilities: Tax bad debt reserve in excess of base year amount ............................. 193 97 Property and equipment principally due to differences in depreciation .......... 310 527 FHLB stock, due to stock dividends not recognized for tax purposes ............. 207 67 Deferred loan fees ............................................................. 565 537 Book over tax basis in investment in unconsolidated subsidiary ................. 2,953 4,009 Unrealized gain on securities available for sale ............................... 3,500 2,225 Mortgage servicing rights ...................................................... 833 1,075 Other .......................................................................... 236 196 ------- ------ Total deferred tax liabilities ...................................................... 8,797 8,733 ------- ------ Net deferred tax liability .......................................................... $(5,426) (4,653) ======= ======
29 COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements - Continued (12) INCOME TAXES - CONTINUED The valuation allowance for deferred tax assets as of September 30, 2002 and 2003 was $21,000. The net change in the total valuation allowance for the years ended September 30, 2002 and 2003 was a decrease of $114,000 and zero, respectively. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. In order to fully realize the deferred tax asset, the company will need to generate future taxable income prior to the expiration of the deferred tax assets governed by the tax code. Based upon the level of historical taxable income and projections for future taxable income over the periods, which the deferred tax assets are deductible, management believes it more likely than not the Company will realize the benefits of these deductible differences, net of the existing valuation allowances at September 30, 2003. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced. The net deferred tax liability is included in other liabilities in the consolidated financial statements. The valuation allowance relates to the state loss carryforwards which may not be ultimately realized to reduce taxes of the Company. A portion of the change in the net deferred tax liability relates to unrealized gains and losses on securities available for sale. A current period deferred tax benefit of $1.3 million for the unrealized gains on securities available for sale has been recorded directly to stockholders' equity. The balance of the change in the deferred tax liability results from the current period deferred tax expense of $502,000. Income taxes of the Company attributable to income before income taxes differ from the amounts computed by applying the Federal income tax rate of 34% for the years ended September 30 to earnings before income taxes as follows:
2001 2002 2003 ------ ----- ----- (In thousands) Computed federal income taxes ............ $4,960 5,476 5,886 State tax, net of federal benefit ........ 197 335 454 Bank-owned life insurance ................ -- -- (226) Other, net ............................... 130 90 27 ------ ----- ----- Total income tax expense ................. $5,287 5,901 6,141 ====== ===== =====
The Bank has been permitted under the Internal Revenue Code to deduct an annual addition to the tax reserve for bad debts in determining taxable income, subject to certain limitations. This addition may differ significantly from the bad debt expense for financial reporting purposes and was based on either 8% of taxable income (the "Percentage of Taxable Income Method") or actual loan loss experience (the "Experience Method") for the years prior to 1997. As a result of tax legislation, the Bank will be required to recapture tax bad debt reserves in excess of pre-1988 based year amounts over a period of approximately six to eight years. In addition, for the period ending September 30, 1997, the Bank was required to change its overall tax method of accounting for bad debts to the experience method. Retained earnings at September 30, 2003 includes approximately $5.2 million representing pre-1988 tax bad debt base year reserve amounts for which no deferred income tax liability has been provided since these reserves are not expected to reverse until indefinite future periods and may never reverse. Circumstances that would require an accrual of a portion or all of this unrecorded tax liability are a reduction in qualifying loan levels relative to the end of 1987, failure to meet the tax definition of a savings bank, dividend payments in excess of current year or accumulated tax earnings and profits, or other distributions in dissolution, liquidation or redemption of the Bank's stock. (13) BENEFIT PLANS The Company has a defined contribution plan covering substantially all Associates. The Company matches Associate contributions based upon the Company meeting certain return on equity operating results. Matching contribution expense was approximately $245,000, $384,000 and $340,000 for fiscal years 2001, 2002 and 2003, respectively. 30 COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements - Continued (14) REGULATORY MATTERS At September 30, 2003, the Bank's loans-to-one borrower limit was approximately $13.9 million. At September 30, 2003, the Bank is in compliance with the core, tangible and risk-based capital requirements and loans-to-one borrower limits. To be categorized as "Well Capitalized" under the prompt corrective action regulations adopted by the Federal Banking Agencies, the Bank must maintain a total risk-based capital ratio as set forth in the following table and not be subject to a capital directive order. As of September 30, 2003, the most recent notification from federal banking agencies categorized the Bank as "well capitalized" under the regulatory framework. To be categorized as "well capitalized," the Bank must maintain minimum total risk-based capital, tier 1 capital, and tier 1 leverage ratios as set forth in the table. Since September 30, 2003, there have been no events or conditions that management believes have changed the Bank's categories. (Dollars in thousands)
Amount to be For Capital Categorized as Actual Adequacy Purposes "Well Capitalized" ------------------- ---------------------- -------------------- Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- As of September 30, 2003: Total Capital: .................... $92,847 13.17% $56,388 8.00% $70,485 10.00% (To Risk Weighted Assets) Tier 1 Capital: ................... $84,153 11.94% N/A N/A $42,291 6.00% (To Risk Weighted Assets) Tier 1 Capital: ................... $84,153 7.14% $35,358 3.00% $58,929 5.00% (To Adjusted Total Assets) Tangible Capital: ................. $84,153 7.14% $17,679 1.50% N/A N/A (To Adjusted Total Assets) As of September 30, 2002: Total Capital: .................... $68,417 12.74% $42,965 8.00% $53,706 10.00% (To Risk Weighted Assets) Tier 1 Capital: ................... $62,028 11.55% N/A N/A $32,223 6.00% (To Risk Weighted Assets) Tier 1 Capital: ................... $62,028 6.57% $37,785 4.00% $47,231 5.00% (To Adjusted Total Assets) Tangible Capital: ................. $62,028 6.57% $14,170 1.50% N/A N/A (To Adjusted Total Assets)
(15) LIQUIDATION ACCOUNT In conjunction with the Bank's conversion to stock form on October 4, 1990, the Bank established, as required by Office of Thrift Supervision (the "OTS") regulations, a liquidation account and maintains this account for the benefit of the remaining eligible account holders as defined under the Bank's plan of conversion. The initial balance of this liquidation account was equal to the Bank's net worth defined by OTS regulations as of the date of the latest statement of financial condition contained in the final offering circular. In the event of a complete liquidation of the Bank (and only in such event) each eligible holder shall be entitled to receive a liquidation distribution from this account in the amount of the then current adjusted balance for deposits then held, before any liquidation distribution may be made to the stockholders. The Bank is prohibited from declaring cash dividends or repurchasing its capital stock if it would cause a reduction in the Bank's net worth below either the balance of the liquidation account or the statutory net worth requirements set by the OTS. 30 COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements - Continued (15) LIQUIDATION ACCOUNT - CONTINUED The Company's ability to pay dividends depends primarily on the Bank's ability to pay dividends to the Company. The Bank is prohibited from declaring cash dividends on its common stock or repurchasing its common stock if the effect thereof would cause its net worth to be reduced below either the amount required for the liquidation account or the minimum regulatory capital requirement. In addition, the Bank is also prohibited from declaring cash dividends and repurchasing its own stock without prior regulatory approval if the total amount of all dividends and stock repurchases (including any proposed dividends and stock repurchases) for the applicable year exceeds its current year's net income plus its retained net income for the preceding two years. (16) EARNINGS PER SHARE Basic earnings per share are computed by dividing net income by the weighted-average number of common shares outstanding. Diluted earnings per share are computed by dividing net income by the weighted average number of common shares and potential common shares outstanding. Potential common shares consist of dilutive stock options determined using the treasury stock method and the average market price of common stock. All share and per share data have been retroactively restated for all common stock dividends. The Company has no antidilutive securities at September 30, 2003. The following is a summary of the reconciliation of average shares outstanding for the years ended September 30:
2001 2002 2003 ----------------------- ----------------------- ----------------------- Basic Diluted Basic Diluted Basic Diluted ---------- ---------- ---------- ---------- ---------- ---------- Weighted average shares outstanding 13,126,000 13,126,000 12,844,000 12,844,000 12,853,000 12,853,000 Effective of dilutive securities: Stock options -- 178,000 -- 393,000 -- 588,000 ---------- ---------- ---------- ---------- ---------- ---------- Average shares outstanding 13,126,000 13,304,000 12,844,000 13,237,000 12,853,000 13,441,000 ========== ========== ========== ========== ========== ==========
(17) STOCK OPTION PLAN The Company's stock option plan provides for stock options to be granted primarily to directors, officers and other key Associates. Options granted under the stock option plan may be incentive stock options or non-incentive stock options. Options vest ratably over a five year period and expire after ten years from the date of grant. The remaining shares of stock reserved for the stock option plan at September 30, 2003 amounted to approximately 303,000 shares. All outstanding options have been retroactively restated to reflect the effects of the common stock dividends. At September 30, 2003, the Company had the following options outstanding:
Weighted Average Weighted Weighted Number Remaining Average Number Average Fiscal Options Contractual Exercise Options Exercise Year Range of exercise prices: Outstanding Life Price Exercisable Price ------ ------------------------- ----------- ----------- -------- ----------- -------- 1995 $2.95 - $3.27 .............. 93,977 1.8 Years $ 3.15 93,977 $ 3.15 1996 $3.48 - $3.83 .............. 9,374 2.1 Years $ 3.48 9,374 $ 3.48 1997 $5.31 - $5.50 .............. 142,290 3.2 Years $ 5.39 142,290 $ 5.39 1998 $7.74 - $11.81 ............. 264,753 4.2 Years $ 8.77 264,753 $ 8.77 1999 $7.85 - $9.30 .............. 197,980 5.1 Years $ 8.66 158,384 $ 8.66 2000 $5.23 - $6.01 .............. 186,699 6.2 Years $ 6.21 112,019 $ 6.21 2001 $5.03 - $7.85 .............. 221,782 7.1 Years $ 5.14 88,713 $ 5.14 2002 $7.52 - $12.35 ............. 209,567 8.1 Years $ 7.64 41,913 $ 7.64 2003 $10.00 - $14.00 ............ 253,589 9.2 Years $11.96 -- N/A --------- --------- ------ ------- ------ $2.95 - $14.00 ............. 1,580,011 6.2 Years $ 7.64 911,423 $ 6.87 ========= ========= ====== ======= ======
31 COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements - Continued (17) STOCK OPTION PLAN - CONTINUED The following is a summary of the activity of the stock option plans for the years 2001, 2002, and 2003.
2001 2002 2003 ----------------------- ---------------------- ----------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price --------- ------- --------- ------ --------- ------- Outstanding, October 1 ............... 1,277,591 $ 7.81 1,469,550 $ 6.47 1,493,391 $ 6.76 Granted .............................. 258,150 5.18 221,764 7.64 261,735 11.90 Cancelled ............................ (28,865) 6.55 (13,150) 7.06 (11,920) 9.13 Exercised ............................ (37,326) 3.87 (184,773) 5.47 (163,195) 6.37 --------- ------- --------- ------ --------- ------- Outstanding, September 30 ............ 1,469,550 $ 6.47 1,493,391 $ 6.76 1,580,011 $ 7.64 ========= ======= ========= ====== ========= =======
(18) COMMON STOCK DIVIDENDS On July 31, 2001, the Company declared a 3 for 2 stock split in the form of a 50% stock dividend aggregating approximately 3,579,000 shares. On May 27, 2003, the Company declared a 10% stock dividend aggregating approximately 1,065,000 shares. On August 28, 2003, the Company declared a 10% stock dividend aggregating approximately 1,174,000 shares. All share and per share data has been retroactively restated to give effect to the common stock dividends. (19) CASH DIVIDENDS On each of December 29, 2000 and March 21, 2001 the Company declared quarterly cash dividends of $.036 per share. On each of June 27, 2001, September 26, 2001, December 19, 2001 and March 20, 2002 the Company declared quarterly cash dividends of $.041 per share. On each of June 19, 2002, September 18, 2002, December 18, 2002 and March 26, 2003, the Company declared quarterly cash dividends of $0.045 per share. On each of June 24, 2003 and September 24, 2003, the Company declared quarterly cash dividends of $0.055 per share. (20) LEGAL MATTERS The Company is not a defendant in any lawsuits. The subsidiaries are defendants in lawsuits arising out of the normal course of business. Based upon current information received from counsel representing the subsidiaries in these matters, the Company believes none of the lawsuits would have a material impact on the Company's financial status. (21) QUARTERLY FINANCIAL DATA (UNAUDITED) Quarterly operating data for the years ended September 30 is summarized as follows (in thousands, except share data):
First Second Third Fourth Quarter Quarter Quarter Quarter ----------- ---------- ---------- ---------- 2002: Total interest income ........................... $ 13,368 12,987 13,498 14,020 Total interest expense .......................... 5,662 5,153 5,278 5,753 ----------- ---------- ---------- ---------- Net interest income ............................. 7,706 7,834 8,220 8,267 Provision for loan losses ....................... 250 255 350 380 ----------- ---------- ---------- ---------- Net interest income after provision for loan losses .................................. 7,456 7,579 7,870 7,887 Other income .................................... 2,173 1,703 1,876 2,387 General and administrative expenses ............. 5,730 5,422 5,640 6,032 ----------- ---------- ---------- ---------- Income before income taxes ...................... 3,899 3,860 4,106 4,242 Income taxes .................................... 1,439 1,393 1,513 1,556 ----------- ---------- ---------- ---------- Net income ...................................... $ 2,460 2,467 2,593 2,686 =========== ========== ========== ========== Net income per common share - diluted ........... $ .19 .19 .20 .20 =========== ========== ========== ========== Weighted average shares outstanding-diluted ..... 13,222,000 13,099,000 13,139,000 13,436,000 =========== ========== ========== ==========
32 COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements - Continued (21) QUARTERLY FINANCIAL DATA (UNAUDITED) - CONTINUED
First Second Third Fourth Quarter Quarter Quarter Quarter ----------- ---------- ---------- ---------- 2003: Total interest income ............................ $ 14,740 14,743 14,790 14,941 Total interest expense ........................... 5,807 5,625 5,779 5,787 ----------- ---------- ---------- ---------- Net interest income .............................. 8,933 9,118 9,011 9,154 Provision for loan losses ........................ 435 870 750 600 ----------- ---------- ---------- ---------- Net interest income after provision for loan losses ................................... 8,498 8,248 8,261 8,554 Other income ..................................... 2,667 2,715 2,945 2,581 General and administrative expenses .............. 6,864 6,683 6,851 6,758 ----------- ---------- ---------- ---------- Income before income taxes ....................... 4,301 4,280 4,355 4,377 Income taxes ..................................... 1,551 1,526 1,575 1,489 ----------- ---------- ---------- ---------- Net income ....................................... $ 2,750 2,754 2,780 2,888 =========== ========== ========== ========== Net income per common share - diluted ............ $ .20 .21 .21 .21 =========== ========== ========== ========== Weighted average shares outstanding-diluted ...... 13,433,000 13,373,000 13,386,000 13,577,000 =========== ========== ========== ==========
(22) COASTAL FINANCIAL CORPORATION FINANCIAL STATEMENTS (PARENT COMPANY ONLY) The following is condensed financial information of Coastal Financial Corporation (parent company only), the primary asset of which is its investment in its bank subsidiary, for the periods indicated. (In thousands): Coastal Financial Corporation Condensed Balance Sheets September 30, 2002 and 2003
2002 2003 ------- ------ Assets Cash .................................................... $ 738 773 Investment in subsidiaries .............................. 67,946 88,088 Deferred tax asset ...................................... 326 441 Other assets ............................................ 71 246 ------- ------ Total assets ...................................... $69,081 89,548 ======= ====== Liabilities and Stockholders' Equity Accounts payable (principally dividends) ................ 626 760 Note payable ............................................ 2,069 81 Debt associated with trust preferred securities -- 15,000 Total stockholders' equity .............................. 66,386 73,707 ------- ------ Total liabilities and stockholders' equity ........ $69,081 89,548 ======= ======
33 COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements - Continued (22) COASTAL FINANCIAL CORPORATION FINANCIAL STATEMENTS (PARENT COMPANY ONLY) - CONTINUED Coastal Financial Corporation Condensed Statements of Operations Years ended September 30, 2001, 2002 and 2003
2001 2002 2003 ------- ------- ------- Income: Interest income ............................................ $ 3 1 1 Management fees ............................................ 300 300 300 Dividends from subsidiary .................................. 4,600 3,470 1,221 Equity in undistributed earnings of subsidiaries ........... 4,732 6,751 10,087 ------- ------- ------- Total income ......................................... 9,635 10,522 11,609 ------- ------- ------- Expenses: Professional fees .......................................... 80 79 20 Supplies and printing ...................................... 39 58 12 Interest expense ........................................... 152 84 213 Other expenses ............................................. 91 96 277 Income tax benefit ......................................... (27) (1) (85) ------- ------- ------- Total expenses ....................................... 335 316 437 ------- ------- ------- Net income ................................................. $ 9,300 10,206 11,172 ======= ======= =======
Coastal Financial Corporation Condensed Statement of Cash Flows Years ended September 30, 2001, 2002 and 2003
2001 2002 2003 ------- ------- ------- Operating activities: Net income ................................................. $ 9,300 10,206 11,172 Adjustments to reconcile net income to net cash provided by: Equity in undistributed net income of subsidiary ........ (4,732) (6,751) (10,087) (Increase) decrease in other assets ..................... (747) 548 (290) Increase (decrease) in other liabilities ................ (108) (104) 134 ------- ------- ------- Total cash provided by operating activities .......... 3,713 3,899 929 ------- ------- ------- Financing activities: Cash dividends to shareholders ............................. (2,015) (2,222) (2,592) Treasury stock repurchases ................................. (2,134) (2,286) (342) Proceeds from stock options ................................ 106 1,203 1,153 Proceeds from trust preferred .............................. -- -- 15,000 Repayment on line of credit ................................ -- -- (1,988) Capital contribution to subsidiary ......................... -- -- (12,125) Other financing activities, net ............................ (1) 3 -- ------- ------- ------- Total cash used by financing activities .............. (4,044) (3,302) (894) ------- ------- ------- Net increase (decrease) in cash and cash equivalents .......... (331) 597 35 Cash and cash equivalents at beginning of the year ............ 472 141 738 ------- ------- ------- Cash and cash equivalents at end of the years ................. $ 141 738 773 ======= ======= =======
34 COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements - Continued (23) CARRYING AMOUNTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts and fair value of financial instruments as of September 30, 2002 and 2003 are summarized below:
2002 2003 ------------------------ ----------------------- Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value -------- ---------- ------- ---------- (In thousands) Financial Assets Cash and cash equivalents .............................. $ 25,802 25,802 21,575 21,575 Investment securities .................................. 2,014 2,014 15,909 15,909 Mortgage-backed securities ............................. 331,808 331,808 383,324 383,324 Loans receivable held for sale ......................... 18,694 19,199 19,096 19,556 Loans receivable, net .................................. 536,851 541,697 682,737 704,171 FHLB stock ............................................. 10,559 10,559 13,991 13,991 Financial Liabilities Deposits: Demand accounts ..................................... 382,400 382,400 436,675 436,675 Certificate accounts ................................ 254,681 258,509 260,337 263,743 Advances from Federal Home Loan Bank ................... 189,669 197,918 244,114 252,271 Securities sold under agreements to repurchase ......... 36,884 36,884 133,602 133,602 Debt associated with trust preferred securities ........ -- -- 15,000 15,000 Other borrowings ....................................... 2,069 2,069 81 81
SFAS 107, "Disclosures about Fair Value of Financial Instruments," requires disclosure of fair value information, whether or not recognized in the statement of financial position, when it is practicable to estimate the fair value. SFAS 107 defines a financial instrument as cash, evidence of an ownership interest in an entity or contractual obligations, which require the exchange of cash, or other financial instruments. Certain items are specifically excluded from the disclosure requirements, including the Company's common stock, premises and equipment, accrued interest receivable and payable, and other asset and liabilities. Fair value approximates book value for the following financial instruments due to the short-term nature of the instrument: cash and due from banks, interest-bearing bank balances, federal funds sold, federal funds purchased and repurchase agreements and other short-term borrowings. Investments and mortgage-backed securities are valued using quoted market prices. Fair value for variable rate loans that reprice frequently is based on the carrying value. Fair values for mortgage loans, consumer loans and all other loans (primarily commercial) which have fixed rates of interest are based on the discounted present value of the estimated future cash flows. Discount rates used in these computations approximates the rates currently offered for similar loans of comparable terms and credit quality. Fair value for demand deposit accounts and interest-bearing accounts with no fixed maturity date is equal to the carrying value. Certificate of deposit accounts are estimated by discounting cash flows from expected maturities using current interest rates on similar instruments. Fair value for FHLB advances, reverse repurchase agreements and long-term debt is based on discounted cash flows using the Company's current incremental borrowing rate. The Company has used management's best estimate fair value based upon the above assumptions. Therefore, the fair values presented may not be the amounts which could be realized in an immediate sale or settlement of the instrument. In addition, any income taxes or other expenses, which would be incurred in an actual sale or settlement, are not taken into consideration in the fair values presented. 35 COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements - Continued (23) CARRYING AMOUNTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS - CONTINUED The Company had $108.1 million of off-balance sheet financial commitments as of September 30, 2003, which are commitments to originate loans, unused consumer lines of credit and undisbursed portion of loans in process. Since these obligations are based on current market rates, the carrying amount is considered to be a reasonable estimate of fair value. The Company originates certain fixed rate residential loans with the intention of selling these loans. Between the time that the Company enters into an interest rate lock or a commitment to originate a fixed rate residential loan with a potential borrower and the time the closed loan is sold, the Company is subject to variability in the market prices related to these commitments. The Company believes that it is prudent to limit the variability of expected proceeds from the sales through forward sales of "to be issued" mortgage backed securities and loans ("forward sales commitments"). The commitment to originate fixed rate residential loans and forward sales commitments are freestanding derivative instruments. They do not generally qualify for hedge accounting treatment so their fair value adjustments are recorded through the income statement in net gains on sale of loans. The commitments to originate fixed rate conforming loans totaled $8.2 million at September, 30 2003. The fair value of these commitments was an asset of approximately $123,000 at September 30, 2003, and is reflected in gain on sales of loans held for sale in the consolidated statements of operations. The forward sales commitments totaled $17.0 million at September 30, 2003. The fair value of these commitments was a liability of approximately $257,000 at September 30, 2003, and is reflected in gain on sales of loans held for sale in the consolidated statements of operations. Fair value estimates are made at the dates indicated above, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale the Company's entire holdings of a particular financial instrument. Because no active market exists for a significant portion of the Company's financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, current interest rates and prepayment trends, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in any of these assumptions used in calculating fair value would also significantly affect the estimates. Changes in market interest rates and prepayment assumptions could significantly change the fair value. Fair value estimates are based on existing on and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. For example, the Company has significant assets and liabilities that are not considered financial assets or liabilities including deposit franchise value, loan servicing portfolio, real estate, deferred tax liabilities, premises and equipment, and goodwill. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of these estimates. (24) COMMITMENTS AND CONTINGENCIES The Company has a $16.0 million outstanding line of credit with a commercial bank at a variable rate of LIBOR plus two percent. The line of credit is secured by 100% of the stock of the Bank. At September 30, 2003, the outstanding balance was approximately $81,000. 36 COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES Managements' Discussion and Analysis Forward Looking Statements This report may contain certain "forward-looking statements" within the meaning of Section 27A of the Securities Exchange Act of 1934, as amended, that represent Coastal Financial Corporation's (the Company) expectations or beliefs concerning future events. Such forward-looking statements are about matters that are inherently subject to risks and uncertainties. Factors that could influence the matters discussed in certain forward-looking statements include the timing and amount of revenues that may be recognized by the Company, continuation of current revenue and expense trends (including trends affecting charge-offs and provisions for loan losses), unforeseen changes in the Company's markets, legal and regulatory changes, and general changes in the economy (particularly in the markets served by the Company). Because of the risks and uncertainties inherent in forward looking statements, readers are cautioned not to place undue reliance on them, whether included in this report or made elsewhere from time to time by the Company or on its behalf. Except as may be required by applicable law or regulation, the Company assumes no obligation to update any forward looking statements. Critical Accounting Policies The Company's significant accounting policies are set forth in Note 1 of the Notes to Consolidated Financial Statements. Of these policies, the Company considers its policy regarding the allowance for loan losses to be its most critical accounting policy, because it requires many of management's most subjective and complex judgments. The Company has developed appropriate policies and procedures for assessing the adequacy of the allowance for loan losses, recognizing that this process requires a number of assumptions and estimates with respect to its loan portfolio. The Company's assessments may be impacted in future periods by changes in economic conditions, the impact of regulatory examinations and the discovery of information with respect to borrowers which were not known by management at the time of the issuance of the consolidated financial statements. For additional discussion concerning the Company's allowance for loan losses and related matters, see "Allowance for Loan Losses". General The Company reported $11.2 million in net income for the year ended September 30, 2003, compared to $10.2 million for the year ended September 30, 2002. Net interest income increased $4.2 million as a result of increased interest income of $5.3 million offset by an increase of $1.2 million in interest expense. Provision for loan losses increased from $1.2 million for the year ended September 30, 2002, to $2.7 million for the year ended September 30, 2003. Other income increased from $8.1 million in fiscal 2002, to $10.9 million in 2003. General and administrative expenses increased $4.3 million or 19.0%, for fiscal 2003, as compared to fiscal 2002. Total assets increased from $950.8 million at September 30, 2002 to $1.2 billion at September 30, 2003, or 24.2%. Liquid assets, consisting of cash, interest-bearing deposits, and securities, increased from $359.6 million at September 30, 2002, to $420.8 million at September 30, 2003. Loans receivable increased 27.2% from $536.9 million at September 30, 2002, to $682.7 million at September 30, 2003. Total loan originations for fiscal 2003 were $769.6 million as compared to $418.2 million for fiscal 2002. The growth in liquid assets was funded by increased deposits of $59.9 million, increased advances from the Federal Home Loan Bank ("FHLB") of Atlanta of $54.4 million and securities sold under agreements to repurchase of $96.7 million. As a result of increased Banking Centers and a strong emphasis on growing local deposits during fiscal 2003, deposits increased 9.4% from $637.1 million at September 30, 2002, to $697.0 million at September 30, 2003. During this same period, transaction deposits (defined as noninterest bearing checking accounts and NOW accounts) increased $54.0 million, money market checking accounts decreased $6.9 million, passbook accounts increased $7.1 million and certificate accounts increased $5.7 million. As a result of $11.2 million in net earnings, less the cash dividends paid to shareholders of approximately $2.6 million, treasury stock repurchases of approximately $342,000, and the net change in unrealized gain (loss) on securities available for sale, net of income tax of $2.1 million, stockholders' equity increased from $66.4 million at September 30, 2002 to $73.7 million at September 30, 2003. Liquidity and Capital Resources Historically, the Company has maintained its liquidity at levels believed by management to be adequate to meet requirements of normal operations, potential deposit outflows and strong loan demand and still allow for optimal investment of funds and return on assets. The following table summarizes future contractual obligations as of September 30, 2003. 37 COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES Management's Discussion and Analysis - Continued
Payment Due by Period ----------------------------------------------------------------------- Less than 1-3 4-5 After 5 Total 1 Year Years Years Years -------- --------- -------- ------- -------- (Dollars in thousands) Contractual Obligations Time deposits ........................... $260,337 $198,723 $ 58,057 $ 3,238 $ 319 Short-term borrowings ................... 118,037 118,037 -- -- -- Long-term debt .......................... 274,760 -- 69,186 9,846 195,728 Operating leases ........................ 712 159 279 62 212 -------- -------- -------- ------- -------- Total contractual cash obligations ... $653,846 $316,919 $127,522 $13,146 $196,259 ======== ======== ======== ======= ========
The principal sources of funds for the Company are cash flows from operations, consisting mainly of mortgage, consumer and commercial loan payments, retail customer deposits, repurchase agreements securitized by mortgage-backed securities and advances from the FHLB of Atlanta. The principal use of cash flows is the origination of loans receivable. The Company originated loans receivable of $296.1 million, $418.2 million and $769.6 million for the years ended September 30, 2001, 2002 and 2003, respectively. A large portion of these loan originations were financed through loan principal repayments which amounted to $233.7 million, $268.1 million and $477.7 million for the years ended September 30, 2001, 2002 and 2003, respectively. In addition, the Company has generally sold conforming fixed rate mortgage loans to correspondent financial institutions in the secondary market to finance future loan originations. For the years ended September 30, 2001, 2002 and 2003, the Company sold loans amounting to $28.5 million, $13.9 million and $45.4 million, respectively. During fiscal 2003, the Company securitized $95.6 million of mortgage loans and concurrently sold these mortgage-backed securities to outside third parties and recognized a net gain on sale of $1.7 million, which included $1.3 million related to mortgage servicing rights. The gain is included in gains on sales of loans held for sale in the consolidated statement of operations. The proceeds from sale are included in proceeds from sales of mortgage-backed securities available for sale in the consolidated statement of cash flows. The Company has no retained interest in the securities that were sold other than the servicing rights. In fiscal 2003 deposits increased from $637.1 million at September 30, 2002, to $697.0 million at September 30, 2003. During fiscal 2003, the Company prepaid approximately $54.6 million of advances from FHLB and incurred gross penalties of approximately $2.8 million which were included in general and administrative expenses in the statement of operations. As a result of this and the repayment of other short-term advances, the weighted average rate on FHLB advances decreased to 3.89% at September 30, 2003, compared to 4.61% at September 30, 2002. At September 30, 2003, the Company had commitments to originate $39.3 million in loans and $68.8 million in unused lines of credit, which the Company expects to fund from normal operations. Traditionally, a significant portion of the unused lines of credit may never be used by the Customer. At September 30, 2003, the Company had $198.7 million of certificates of deposit which were due to mature within one year. Based upon previous experience, the Company believes that a major portion of these certificates will be redeposited. At September 30, 2003, the Company had excess collateral pledged to the FHLB which would support additional FHLB advance borrowings of $31.6 million. Additionally, at September 30, 2003, the Company had repurchase agreement lines of credit and available collateral consisting of investment securities and mortgage-backed securities of $118.9 million as well as federal funds lines available of $20.0 million. As a condition of deposit insurance, current FDIC regulations require that the Bank calculate and maintain a minimum regulatory capital requirement on a quarterly basis and satisfy such requirement at the calculation date and throughout the ensuing quarter. The Bank's tangible and core capital approximated $84.2 million at September 30, 2003, exceeding the Bank's tangible and core requirements by $66.4 million and $48.8 million, respectively. At September 30, 2003, the Bank's capital exceeded its current risk-based minimum capital requirement by $36.5 million. The risk-based capital requirement may increase in the future. Also see Note 14 of the Notes to Consolidated Financial Statements. 38 COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES Management's Discussion and Analysis - Continued Results of Operations Comparison of the Years Ended September 30, 2002 and 2003 General Net earnings were $11.2 million ($0.83 per diluted share) for the year ended September 30, 2003, an increase of 9.5% compared to $10.2 million ($0.77 per diluted share) for the year ended September 30, 2002. As a result of increased net earnings, diluted earnings per share increased 7.8%. Net interest income increased $4.2 million primarily as a result of an increase in interest income of $5.3 million which was partially offset by an increase in interest expense of $1.2 million. Interest Income Interest income for the year ended September 30, 2003, increased 9.9% to $59.2 million as compared to $53.9 million for the year ended September 30, 2002. The yield on interest-earning assets for the year ended September 30, 2002 was 7.10% compared to 6.00% for the year ended September 30, 2003. The average yield on loans receivable for fiscal year 2003 was 6.67% compared to 7.58% in 2002. The yield on investments which includes Investments, Mortgage-Backed Securities, Overnight Funds and Federal Funds, decreased to 4.88% for the fiscal year 2003 from 6.15% for fiscal year 2002. Total interest-earning assets for fiscal year 2003 averaged $987.5 million compared to $765.8 million for the year ended September 30, 2002. The increase in average interest-earning assets is primarily due to an increase in average loans receivable of approximately $98.6 million and average mortgage-backed and investment securities of approximately $133.4 million. Interest Expense Interest expense on interest-bearing liabilities was $23.0 million for the year ended September 30, 2003, as compared to $21.8 million in fiscal 2002. The cost of interest-bearing liabilities was 2.35% for the year ended September 30, 2003, compared to 2.96% in fiscal year 2002. The average cost of deposits for the year ended September 30, 2003, was 1.79% compared to 2.42% for the year ended September 30, 2002. The cost of FHLB advances and reverse repurchase agreements for fiscal 2003 was 4.27% and 2.04%, respectively, compared to 5.11% and 2.39%, respectively, for fiscal 2002. Total average interest-bearing liabilities increased 32.6% from $738.1 million at September 30, 2002, to $978.9 million at September 30, 2003. The increase in average interest-bearing liabilities is due to an increase in average deposits of approximately $99.9 million, average FHLB advances of $62.3 million and average reverse repurchase agreements of $77.5 million. Net Interest Income Net interest income was $36.2 million for the year ended September 30, 2003, an increase of $4.2 million, compared to $32.0 million for the year ended September 30, 2002. The net interest margin decreased to 3.65% for fiscal 2003 compared to 4.14% for fiscal 2002. Average interest-earning assets increased $221.7 million while average interest-bearing liabilities increased $240.8 million. During fiscal 2003, interest rates have decreased. At September 30, 2002 and September 30, 2003, the prime rate of interest was 4.75% and 4.00%, respectively. With the reduction in interest rates, resulting from the Federal Reserve Board's decision to reduce the prime rate by 75 basis points throughout fiscal 2003, the Company's interest-earning assets repriced more quickly than its interest-bearing liabilities. For fiscal 2003, the Company's average balance of core deposits (checking, statement savings and money market) was $412.3 million with an average cost of 1.06%. This compares to average core deposits of $346.7 million at 1.44% in fiscal 2002. As the Federal Reserve has continued to reduce the discount rate, core deposits are not repricing at the same ratio as the Company's interest-earning assets. Should, as a result of continued rate, reductions, refinancing of loans at lower rates and repricing of loans tied to prime or treasury rates outpace the repricing of deposits and borrowings, the Company could experience a significantly reduced net interest margin in the future. Provision for Loan Losses As a result of growth in loans receivable and credit risk associated with problem loans, the Company's provision for loan losses increased from $1.2 million for fiscal 2002 to $2.7 million for fiscal 2003. The allowance for loan losses as a percentage of loans was 1.40% at September 30, 2003 compared to 1.42% at September 30, 2002. This is due to the nature and the risk of the delinquent loans at September 30, 2003 as compared to September 30, 2002. Loans delinquent 90 days or more were $7.4 million or 1.06% of total loans at September 30, 2003, compared to $3.5 million or 0.63% at September 30, 2002. The allowance for loan losses was 132% of loans delinquent more than 90 days at 39 COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES Management's Discussion and Analysis - Continued September 30, 2003, compared to 224% at September 30, 2002. Although the Company experienced an increase in loans delinquent 90 days or more, there was not a corresponding increase in the required allowance for loan loss based on the Company's model. Management believes that the current level of the allowance for loan losses is adequate considering the composition of the loan portfolio, the portfolio's loss experience, delinquency trends, current regional and local economic conditions and other factors. Also see "Nonperforming Assets" and "Allowance for Loan Losses." Other Income In fiscal 2003, total other income increased from $8.1 million for the period ended September 30, 2002, to $10.9 million for the period ended September 30, 2003. As a result of increased transaction deposit accounts, fees and service charges on loans and deposit accounts was $3.5 million for fiscal 2003, compared to $3.1 million for fiscal 2002. Due to a decreased long-term interest rate environment which has resulted in increased fixed-rate mortgage originations, gain on sale of loans was $3.0 million for the year ended September 30, 2003, compared to $1.5 million for the year ended September 30, 2002. Gain on sale of mortgage-backed securities, net was $469,000 for fiscal 2003, compared to $238,000 for fiscal 2002. Other income increased from $1.6 million for the year ended September 30, 2002, to $2.4 million for the year ended September 30, 2003. This is primarily due to $665,000 of income on bank-owned life insurance purchased in December 2002. Other Expense General and administrative expenses were $27.2 million for fiscal 2003 as compared to $22.8 million for fiscal 2002. Salaries and employee benefits increased to $13.5 million for fiscal 2003 as compared to $12.5 million for fiscal 2002, or 7.5%, primarily due to normal increases, increased incentives as a result of increased loan production, and the costs of staffing for a new office. During fiscal 2003, Coastal Federal Bank added an office in Shallotte, North Carolina. Net occupancy, furniture and fixtures and data processing expense increased $873,000 for fiscal 2003, as compared to fiscal 2002. Other expenses increased from $4.1 million in fiscal 2002 to $4.9 million in fiscal 2003. Other expenses included $461,000 of mortgage servicing rights impairment for fiscal 2003. Income Taxes Income taxes increased from $5.9 million in fiscal 2002 to $6.1 million in fiscal 2003 as a result of increased earnings before income taxes. The effective income tax rate as a percentage of pretax income was 35.5% in fiscal 2003 and 36.6% in fiscal 2002. The effective income tax rate declined in connection with an increase in investment interest income generated by bank-owned life insurance and municipal securities that are exempt from federal and certain state taxes. The Company's effective income tax rates take into consideration certain assumptions and estimates made by management. No assurance can be given that either the tax returns submitted by management or the income tax reported on the consolidated financial statements will not be adjusted by either adverse rulings by the U.S. Tax court, changes in the tax code, or assessments made by the Internal Revenue Service. The Company is subject to potential adverse adjustments, including but not limited to: an increase in the statutory federal or state income tax rates, the permanent nondeductibility of amounts currently considered deductible either now or in future periods, and the dependency on the generation of future taxable income, in order to ultimately realize deferred income tax assets. Income tax returns for 2000 and subsequent years are exposed to examination by taxing authorities. Results of Operations Comparison of the Years Ended September 30, 2001 and 2002 General Net earnings were $10.2 million ($0.77 per diluted share) for the year ended September 30, 2002, an increase of 9.7% compared to $9.3 million ($0.70 per diluted share) for the year ended September 30, 2001. As a result of share repurchases and the increase in net earnings, diluted earnings per share increased 10.0%. Net interest income increased $5.1 million primarily as a result of a decrease in interest income of $6.4 million which was accompanied by a decrease in interest expense of $11.5 million. 40 COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES Management's Discussion and Analysis - Continued Interest Income Interest income for the year ended September 30, 2002, decreased 10.6% to $53.9 million as compared to $60.3 million for the year ended September 30, 2001. The yield on interest-earning assets for the year ended September 30, 2001 was 8.26% compared to 7.10% for the year ended September 30, 2002. The average yield on loans receivable for fiscal year 2002 was 7.58% compared to 8.80% in 2001. The yield on investments which includes Investments, Mortgage-Backed Securities, Overnight Funds and Federal Funds, decreased to 6.15% for the fiscal year 2002 from 7.00% for fiscal year 2001. Total interest-earning assets for fiscal year 2002 averaged $765.8 million compared to $738.5 million for the year ended September 30, 2001. The increase in average interest-earning assets is primarily due to an increase in average loans receivable of approximately $9.7 million and average mortgage-backed and investment securities of approximately $21.3 million. Interest Expense Interest expense on interest-bearing liabilities was $21.8 million for the year ended September 30, 2002, as compared to $33.3 million in fiscal 2001. The cost of interest-bearing liabilities was 2.96% for the year ended September 30, 2002, compared to 4.64% in fiscal year 2001. The average cost of deposits for the year ended September 30, 2002, was 2.42% compared to 4.03% for the year ended September 30, 2001. The cost of FHLB advances and reverse repurchase agreements for fiscal 2002 was 5.11% and 2.39%, respectively, compared to 5.90% and 5.99%, respectively, for fiscal 2001. Total average interest-bearing liabilities increased 2.8% from $717.9 million at September 30, 2001, to $738.1 million at September 30, 2002. The increase in average interest-bearing liabilities is due to an increase in average deposits of approximately $87.8 million. This was offset by a decrease in average FHLB advances of $38.4 million and average reverse repurchase agreements of $30.5 million. Net Interest Income Net interest income was $32.0 million for the year ended September 30, 2002, an increase of $5.1 million, compared to $26.9 million for the year ended September 30, 2001. The net interest margin increased to 4.14% for fiscal 2002 compared to 3.62% for fiscal 2001. Average interest-earning assets increased $27.3 million while average interest-bearing liabilities increased $20.2 million. During fiscal 2002, interest rates have decreased. At September 30, 2001 and September 30, 2002, the prime rate of interest was 6.0% and 4.75%, respectively. With the reduction in interest rates, resulting from the Federal Reserve Board's decision to reduce the prime rate by 125 basis points, it is expected that the Company's yield on interest earning assets and cost of deposits and borrowing will decline in fiscal 2003. Consequently, it is expected that a substantial portion of the Company's loan portfolio will be subject to refinancing at lower rates. Should, as a result of continued rate reductions by the Federal Reserve, refinancing of loans at lower rates and repricing of loans tied to prime or treasury rates outpace the repricing of deposits and borrowings, the Company could experience a significantly reduced net interest margin in the future. Provision for Loan Losses As a result of growth in loans receivable, the Company's provision for loan losses increased from $955,000 for fiscal 2001 to $1.2 million for fiscal 2002. The allowance for loan losses as a percentage of loans was 1.42% at September 30, 2002 and 2001. Loans delinquent 90 days or more were .63% of total loans at September 30, 2002, compared to .64% at September 30, 2001. The allowance for loan losses was 224% of loans delinquent more than 90 days at September 30, 2002, compared to 220% at September 30, 2001. Management believes that the current level of the allowance for loan losses is adequate considering the composition of the loan portfolio, the portfolio's loss experience, delinquency trends, current regional and local economic conditions and other factors. Also see "Nonperforming Assets" and "Allowance for Loan Losses." Other Income In fiscal 2001, total other income increased slightly from $7.9 million for the period ended September 30, 2001, to $8.1 million for the period ended September 30, 2002. As a result of increased transaction deposit accounts, fees and service charges on loans and deposit accounts was $3.1 million for fiscal 2002, compared to $2.6 million for fiscal 2001. Due to a decreased long-term interest rate environment which has resulted in increased fixed-rate mortgage originations, gain on sale of loans was $1.5 million for the year ended September 30, 2002, compared to $1.3 million for the year ended September 30, 2001. Gain on sale of mortgage-backed securities, net was $238,000 for fiscal 2002, compared to $727,000 for fiscal 2001. Other income decreased from $1.7 million for the year ended September 30, 2001, to $1.6 million for the year ended September 30, 2002. 41 COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES Management's Discussion and Analysis - Continued Other Expense General and administrative expenses were $22.8 million for fiscal 2002 as compared to $19.3 million for fiscal 2001. Salaries and employee benefits increased to $12.5 million for fiscal 2002 as compared to $10.5 million for fiscal 2001, or 18.7%, primarily due to normal increases and the costs of staffing for new offices. During fiscal 2002, Coastal Federal Bank added offices in Loris and Pawleys Island, South Carolina. Also as a result of the office additions, net occupancy, furniture and fixtures and data processing expense increased $1.0 million for fiscal 2002, as compared to fiscal 2001. Other expenses increased from $3.5 million in fiscal 2001 to $4.1 million in fiscal 2002. The increase is primarily due to increased expenses related to the servicing of deposit accounts. Income Taxes Income taxes increased from $5.3 million in fiscal 2001 to $5.9 million in fiscal 2002 as a result of increased earnings before income taxes. Non-performing Assets Non-performing assets were $9.1 million at September 30, 2003 compared to $4.6 million at September 30, 2002. Loans past due 90 days or more increased from $3.5 million at September 30, 2002, to $7.4 million at September 30, 2003. Real estate acquired through foreclosure increased from $1.0 million at September 30, 2002, to $1.6 million at September 30, 2003. At September 30, 2002, impaired loans totaled $3.2 million. There were $4.9 million in impaired loans at September 30, 2003. Included in the allowance for loan losses at September 30, 2002 was $194,000 related to impaired loans compared to $263,000 at September 30, 2003. The average recorded investment in impaired loans for the year ended September 30, 2002 was $3.1 million compared to $4.0 million for the year ended September 30, 2003. Interest income recognized on impaired loans in fiscal 2002 was $36,000. Interest income recognized on impaired loans in fiscal 2003 was $134,000. Loans are reviewed on a regular basis and an allowance for uncollectible interest is established on loans where collection is questionable, generally when such loans become 90 days delinquent. Loan balances for which interest amounts have been reserved and all loans more than 90 days delinquent are placed on non-accrual status. Typically, payments received on a non-accrual loan are applied to the outstanding principal or recognized as interest based upon the collectability of the loan as determined by management. Allowance for Loan Losses The adequacy of the allowance is analyzed on a quarterly basis. For purposes of this analysis, adequacy is defined as a level of reserves sufficient to absorb probable losses inherent in the portfolio. The methodology employed for this analysis considers historical loan loss experience, the results of loan reviews, current economic conditions, and other qualitative and quantitative factors that warrant current consideration in determining an adequate allowance. The evaluation of the allowance is segregated into general allocations and specific allocations. For general allocations, the portfolio is segregated into risk-similar segments for which historical loss ratios are calculated and adjusted for identified trends or changes in current portfolio characteristics. Historical loss ratios are calculated by product type for consumer loans (installment and revolving), mortgage loans, and commercial loans and may be adjusted for other risk factors. To allow for modeling error, a range of probable loss ratios is then derived for each segment. The resulting percentages are then applied to the dollar amounts of the loans in each segment to arrive at each segment's range of probable loss levels. Certain nonperforming loans are individually assessed for impairment under SFAS 114 and assigned specific allocations. Other identified high-risk loans or credit relationships based on internal risk ratings are also individually assessed and assigned specific allocations. The general allocation also includes a component for probable losses inherent in the portfolio, based on management's analysis, that are not fully captured elsewhere in the allowance. This component serves to address the inherent estimation and imprecision risk in the methodology as well as address management's evaluation of various factors or conditions not otherwise directly measured in the evaluation of the general and specific allocations. Such factors or conditions may include evaluation of current general economic and business conditions; geographic, collateral, or other concentrations; system, procedural, policy, or underwriting changes; experience of lending staff; entry into new markets or new product offerings; and results from internal and external portfolio examinations. 42 COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES Management's Discussion and Analysis - Continued The allocation of the allowance to the respective loan segments is an approximation and not necessarily indicative of future losses or future allocations. The entire allowance is available to absorb losses occurring in the overall loan portfolio. Assessing the adequacy of the allowance is a process that requires considerable judgment. Management's methodology and judgments are based on the information currently available and includes numerous assumptions about current events, which we believe to be reasonable, but which may or may not be valid. Thus, there can be no assurance that loan losses in future periods will not exceed the current allowance amount or that future increases in the allowance will not be required. No assurance can be given that management's ongoing evaluation of the loan portfolio in light of changing economic conditions and other relevant circumstances will not require significant future additions to the allowance, thus adversely affecting the operating results of the Company. Management believes that the current level of the allowance for loan losses is presently adequate considering the composition of the loan portfolio, the portfolio's loss experience, delinquency trends, current regional and local economic conditions and other factors. The allowance is also subject to examination and adequacy testing by regulatory agencies, which may consider such factors as the methodology used to determine adequacy and the size of the allowance relative to that of peer institutions, and other adequacy tests. In addition, such regulatory agencies could require the Company to adjust the allowance based on information available to them at the time of their examination. The Company established provisions for loan losses for the years ended September 30, 2001, 2002 and 2003, of $955,000, $1.2 million and $2.7 million, respectively. For the years ended September 30, 2001, 2002 and 2003, the Company had net charge-offs of $860,000, $511,000 and $706,000, respectively. Net charge-offs as a percentage of average outstanding loans were .17%, .10%, and .11% for fiscal years ended 2001, 2002 and 2003, respectively. At September 30, 2003, the Company had an allowance for loan losses of $9.8 million, which was 1.40% of net loans. Off-Balance Sheet Arrangements In the normal course of operations, the Company engages in a variety of financial transactions that, in accordance with generally accepted accounting principles, are not recorded in the financial statements, or are recorded in amounts that differ from the notional amounts. These transactions involve, to varying degrees, elements of credit, interest rate, and liquidity risk. Such transactions are used by the Company for general corporate purposes or for Customer needs. Corporate purpose transactions are used to help manage credit, interest rate, and liquidity risk or to optimize capital. Customer transactions are used to manage Customers' requests for funding. The Company's off-balance sheet arrangements, which principally include lending commitments and derivatives are described below. At September 30, 2002 and 2003, the Company had no interests in non-consolidated special purpose entities. Lending Commitments. Lending commitments include loan commitments, standby letters of credit and unused business credit card lines. These instruments are not recorded in the consolidated balance sheet until funds are advanced under the commitments. The Company provides these lending commitments to Customers in the normal course of business. Loan commitments for residential housing and land totaled $39.3 million. For retail Customers, loan commitments are generally lines of credit secured by residential property. At September 30, 2003 retail loan commitments totaled $42.0 million. Standby letters of credit are conditional commitments to guarantee performance, typically contract or financial integrity, of a Customer to a third party and totaled $2.9 million at September 30, 2003. Commercial lines of credit and unused business and personal credit card lines, which totaled $23.9 million at September 30, 2003, are generally for short-term borrowings. The Company applies essentially the same credit policies and standards as it does in the lending process when making these commitments. Derivatives. In accordance with SFAS No. 133, the Company records derivatives at fair value, as either assets or liabilities, on the consolidated balance sheet. Derivative transactions are measured in terms of the notional amount, but this amount is not recorded on the balance sheet and is not, when viewed in isolation, a meaningful measure of the risk profile of the instrument. The notional amount is not exchanged, but is used only as the basis upon which interest and other payments are calculated. 43 COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES Management's Discussion and Analysis - Continued At September 30, 2003, the fair value of derivative assets and liabilities totaled $123,000 and $257,000 respectively. The related notional amounts, which are not recorded on the consolidated balance sheet, totaled $8.2 million for the derivative assets and $17.0 million for the derivative liabilities. Interest Rate Risk Disclosure The Bank's Asset Liability Management Committee ("ALCO") monitors and considers methods of managing exposure to interest rate risk. The ALCO consists of members of the Board of Directors and Senior Leadership of the Company and meets quarterly. The Bank's exposure to interest rate risk is reviewed on at least a quarterly basis by the ALCO. Interest rate risk exposure is measured using interest rate sensitivity analysis to determine the Bank's change in net portfolio value in the event of hypothetical changes in interest rates. The ALCO is charged with the responsibility to maintain the level of sensitivity of the Bank's net portfolio value within Board approved limits. Net portfolio value (NPV) represents the market value of portfolio equity and is equal to the market value of assets minus the market value of liabilities, with adjustments made for off-balance sheet items over a range of assumed changes in market interest rates. The Bank's Board of Directors has adopted an interest rate risk policy which establishes maximum allowable decreases in NPV in the event of a sudden and sustained one hundred to four hundred basis point increase or decrease in market interest rates. The following table presents the Bank's projected change in NPV as computed by the OTS for the various rate shock levels as of September 30, 2003.
Board Limit Board Limit Market Value Market Value Minimum NPV Maximum Of Assets Portfolio Equity NPV Change in Interest Rates Ratio Decline in NPV 9/30/03 9/30/03 Ratio ------------------------ ----------- -------------- ------------ ---------------- ----- 300 basis point rise 5.00% 400 BPS $1,169,090 $ 100,277 8.58% 200 basis point rise 6.00% 300 BPS $1,190,866 $ 111,628 9.37% 100 basis point rise 6.00% 250 BPS $1,212,853 $ 121,364 10.01% No Change 6.00% $1,231,968 $ 126,363 10.26% 100 basis point decline 6.00% 250 BPS $1,242,347 $ 125,123 10.07% 200 basis point decline 6.00% 300 BPS N/A N/A N/A 300 basis point decline 6.00% 350 BPS N/A N/A N/A
The preceding table indicates that at September 30, 2003, in the event of a sudden and sustained increase in prevailing market interest rates, the Bank's NPV would be expected to decrease, and that in the event of a sudden decrease in prevailing market interest rates, the Bank's NPV would be expected to change minimally. Values for the 200 and 300 basis point decline are not indicated due to the current level of interest rates. At September 30, 2003, the Bank's estimated changes in NPV were within the limits established by the Board of Directors. Computation of prospective effects of hypothetical interest rate changes are based on numerous assumptions, including relative levels of market interest rates, loan prepayments and deposit decay, and should not be relied upon as indicative of actual results. Further, the computations do not contemplate any actions the ALCO could undertake in response to sudden changes in interest rates. The Bank also uses interest rate sensitivity gap analysis to monitor the relationship between the maturity and repricing of its interest-earning assets and interest-bearing liabilities. Interest rate sensitivity gap is defined as the difference between the amount of interest-earning assets maturing or repricing within a specific time period and the amount of interest-bearing liabilities maturing or repricing within the same time period. A gap is considered positive when the amount of interest-rate-sensitive assets exceeds the amount of interest-rate-sensitive liabilities. Generally, during a period of rising rates, a positive gap would result in an increase in net interest income. Conversely, during a period of falling interest rates, a positive gap would result in a decrease in net interest income. It is ALCO's goal to maintain reasonable balance between exposure to interest rate fluctuations and earnings. Impact of New Accounting Pronouncements In June 2002, the FASB issued Statement of Financial Accounting Standards No. 146 (Statement 146), "Accounting for Costs Associated with Exit or Disposal Activities," which addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs 44 COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES Management's Discussion and Analysis - Continued Incurred in a Restructuring)." This Statement applies to costs associated with an exit activity that does not involve an entity newly acquired in a business combination or with a disposal activity covered by FASB Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. Those costs include, but are not limited to, the following: a) termination benefits provided to current employees that are involuntarily terminated under the terms of a benefit arrangement that, in substance, is not an ongoing benefit arrangement or an individual deferred compensation contract (hereinafter referred to as one-time termination benefits), b) costs to terminate a contract that is not a capital lease and c) costs to consolidate facilities or relocate employees. This Statement does not apply to costs associated with the retirement of a long-lived asset covered by FASB Statement No. 143, "Accounting for Asset Retirement Obligations." A liability for a cost associated with an exit or disposal activity shall be recognized and measured initially at its fair value in the period in which the liability is incurred. A liability for a cost associated with an exit or disposal activity is incurred when the definition of a liability is met. The provisions of this Statement are effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. The Company adopted SFAS 146 on October 1, 2002 and its adoption did not have a material effect on the Company's consolidated financial statements. In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148 (Statement 148), "Accounting for Stock-Based Compensation-Transition and Disclosure, an amendment of FASB Statement No. 123". Statement 148 amends FASB Statement 123, "Accounting for Stock-Based Compensation" (Statement 123) to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, Statement 148 amends the disclosure requirements of Statement 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. Effective January 1, 2003, the Company adopted the initial recognition and initial measurement provisions of Financial Accounting Standards Board Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45"). The Company adopted the disclosure requirements effective as of December 31, 2002. FIN 45 elaborates on the disclosure to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that is has issued. FIN 45 clarifies that a guarantor is required to disclose (a) the nature of the guarantee; (b) the maximum potential amount of future payments under the guarantee; (c) the carrying amount of the liability; and (d) the nature and extent of any recourse provisions or available collateral that would enable the guarantor to recover the amounts paid under the guarantee. FIN 45 also clarifies that a guarantor is required to recognize, at inception of a guarantee, a liability for the obligations it has undertaken in issuing the guarantee at its inception. In January 2003, the FASB issued Financial Accounting Standards Board Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"), which addresses consolidation by business enterprises of variable interest entities. Under FIN 46, an enterprise that holds significant variable interest in a variable interest entity but is not the primary beneficiary is required to disclose the nature, purpose, size and activities of the variable interest entity, its exposure to loss as a result of the variable interest holder's involvement with the entity, and the nature of its involvement with the entity and date when the involvement began. The primary beneficiary of a variable interest entity is required to disclose the nature, purpose, size, and activities of the variable interest entity, the carrying amount and classification of consolidated assets that are collateral for the variable interest entity's obligations, and any lack of recourse by creditors (or beneficial interest holders) of a consolidated variable interest entity to the general creditors (or beneficial interest holders). FIN 46 is effective for the first fiscal year or interim period beginning after June 15, 2003. On October 31, 2003, the FASB proposed a modification and interpretation of FIN 46. Evaluation of the impact of FIN 46 and SFAS No. 150, ("SFAS 150"), "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity," on the treatment of debt associated with trust preferred securities is in process. The Company currently consolidates the trust, which issued the Company's trust preferred securities, in its consolidated financial statements and reports the related debt instruments, referred to as debt associated with trust preferred securities, as a liability on its consolidated balance sheet. Under one potential interpretation of FIN 46, the Company's trust, which issued the Company's trust preferred securities, would no longer be included in the Company's consolidated financial statements. Conversely, SFAS 150 requires the consolidation of these subsidiaries and the presentation of the related debt instruments as a liability. Effective July 1, 2003, the Company adopted SFAS No. 149, (Statement 149), "Amendment of Statement 133 on Derivative Instruments and Hedging Activities," which amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to 45 COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES Management's Discussion and Analysis - Continued as derivatives) and for hedging activities under SFAS No 133, "Accounting for Derivative Instruments and Hedging Activities." Statement 149 clarifies under what circumstances a contract with an initial net investment meets the characteristics of a derivative, clarifies when a derivative contains a financing component, amends the definition of an underlying to conform it to language used in FIN 45, and amends certain other existing pronouncements. Those changes will result in more consistent reporting of contracts as either derivatives or hybrid instruments. Management does not believe the provisions of this standard will have a material impact on the results of future operations. Effective July 1, 2003, the Company adopted SFAS 150, which establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS 150 requires an issuer to classify certain financial instruments that include certain obligations, such as mandatory redemption, repurchase of the issuer's equity, or settlement by issuing equity, as liabilities or assets in some circumstances. Forward contracts to repurchase an issuer's equity shares that require physical settlement in exchange for cash are initially measured at the fair value of the shares at inception, adjusted for any consideration or unstated rights or privileges, which is the same as the amount that would be paid under the conditions specified in the contract if settlement occurred immediately. Those contracts and mandatory redeemable financial instruments are subsequently measured at the present value at the amount to be paid at settlement, if both the amount of cash and the settlement date are fixed, or otherwise, at the amount that would be paid under the conditions specified in the contract if settlement occurred at the reporting date. Other financial instrument are initially and subsequently measured at fair value, unless required by SFAS 150 or other generally accepted accounting principles to be measured differently. The Company had no impact upon adoption since it had no financial instruments, which it considers to be included within the scope of SFAS 150. Capital Standards and Regulatory Matters The Bank's capital standards include: (1) a leverage limit requiring all OTS chartered financial institutions to maintain core capital in an amount not less than 4% of the financial institution's total assets; (2) a tangible capital requirement of not less than 1.5% of total assets; and (3) a risk-based capital requirement of not less than 8.0% of risk weighted assets. For further information concerning the Bank's capital standards, refer to Note 14 of the Notes to the Consolidated Financial Statements. Effects of Inflation and Changing Prices The consolidated financial statements have been prepared in accordance with generally accepted accounting principles which require the measurement of financial position and results of operations in terms of historical dollars, without consideration of change in the relative purchasing power over time due to inflation. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on a financial institution's performance than the effect of inflation. Interest rates do not necessarily change in the same magnitude as the price of goods and services. 46 Board of Directors
Coastal Financial Corporation Coastal Federal Bank Coastal Planners Holding Corporation James C. Benton James C. Benton James T. Clemmons President President Chairman C.L. Benton & Sons, Inc. C.L. Benton & Sons, Inc. Coastal Financial Corporation G. David Bishop G. David Bishop Michael C. Gerald Managing Director Managing Director President and Chief Executive Officer White Harvest Trading Co., LLC White Harvest Trading Co., LLC Coastal Financial Corporation James T. Clemmons James T. Clemmons Jerry L. Rexroad, CPA Chairman Chairman Chief Financial Officer Coastal Financial Corporation Coastal Federal Bank Coastal Planners Holding Corporation James P. Creel James P. Creel President President Creel Corporation Creel Corporation James H. Dusenbury James H. Dusenbury Retired - Attorney Retired - Attorney Dusenbury and Clarkson Law Firm Dusenbury and Clarkson Law Firm Michael C. Gerald Michael C. Gerald President and Chief Executive Officer President and Chief Executive Officer Coastal Financial Corporation Coastal Federal Bank Frank A. Thompson, II Frank A. Thompson, II President President Peoples Underwriters, Inc. Peoples Underwriters, Inc.
47 COASTAL FINANCIAL CORPORATION Leadership Group Sherri J. Adams Shonda C. Chestnut Andrew D. Gable Personal Banking Leader Assistant Vice President Assistant Vice President N. Myrtle Beach Banking Center Leader Closing and Construction Surfside Leader Ginger Allen Assistant Vice President Susan J. Cooke William A. Gehman, III, CPA Senior Underwriter Senior Vice President Senior Vice President Administrative Services Leader Corporate Controller Anthony Ambuhl Corporate Secretary Assistant Vice President Mary L. Geist Commercial Banking Officer Teresa L. Cotney Vice President Personal Banking Leader Data Services Leader Donna P. Bailey Murrells Inlet Assistant Vice President Michael C. Gerald Delivery Systems Resource Patricia A. Coveno President and Chief Executive Administrator Assistant Vice President Officer Banking Resources Leader James R. Baker, MCSE Kenan D. Godwin Assistant Vice President Jerry J. Cox, Jr. Assistant Vice President Systems Engineer Vice President Commercial Banking Officer Community Banking Leader Harry G. Bates, IV Loris Community Amy M. Gore Assistant Vice President Personal Banking Leader Banking Center Leader John L. Creamer Wilmington-Oleander Oak Street Vice President Coastal Investor Services Group Jimmy R. Graham Jeffrey A. Benjamin Executive Vice President Senior Vice President Robert D. Douglas Chief Information Officer Credit Administration Executive Vice President Leader Human Resources Leader Don C. Hamilton Vice President Jill L. Bone Trina S. Dusenbury Residential Banking Leader Personal Banking Leader Vice President Pawleys Island Residential Loan Administration E. Haden Hamilton Jr. Leader President Edna C. Bryant Coastal Investor Services Group Personal Banking Leader Michael L. Evans Bi-Lo Socastee Vice President Lauren E. Henson Loan Review Leader Vice President Cynthia L. Buffington Dean of Coastal Federal University Assistant Vice President Rita E. Fecteau Item Processing Leader Vice President John Michael Hill Accounting Leader Vice President Ronnie L. Burbank Coastal Investor Services Group Vice President J. Daniel Fogle Senior Banking Leader Vice President Debra Hinson Wilmington CBD Residential Banking Leader Assistant Vice President Carolina Forest/ Coastal Investor Services Group Glenn T. Butler, MCSE, CCNA Waccamaw/ Conway Vice President Glenn D. Humbert Network Services Leader Joel P. Foster Vice President Senior Vice President Community Banking Leader Anne R. Caldwell Area Banking Leader Sunset Beach Community Assistant Vice President Myrtle Beach Community Deposit Servicing Leader Lisa B. James Vice President Account Servicing Leader
48 COASTAL FINANCIAL CORPORATION Leadership Group - Continued Ruth S. Kearns Janice B. Metz Douglas E. Shaffer Senior Vice President Assistant Vice President Senior Vice President Customer Recognition Officer Advertising Officer Area Leader North and West Communities Kara S. Kessinger, CPA/PES Abigail E. Mishoe President Assistant Vice President Steven J. Sherry Coastal Retirement Residential Banking Officer Executive Vice President Estate & Tax Chief Marketing Officer Planners, Inc. Lynn T. Murray Senior Vice President Joseph Shumbo L. Eric Keys Customer Relationship Leader Assistant Vice President Vice President Residential Banking Leader Community Banking Leader Deborah J. Myers South Horry Community Assistant Vice President J. Marcus Smith, Jr. Electronic Banking Leader Senior Vice President James Louis LaBruce Internal Audit Outsource Vice President Ronald A. Nolan Commercial Banking Leader Assistant Vice President Carolyn A. Specht Central Horry Community Security Officer Purchasing Leader Scott W. Lander Deborah A. Orobello Phillip G. Stalvey Senior Vice President Personal Banking Leader Executive Vice President Area Leader Little River Banking Leader North Carolina Region Charles S. Page H. Delan Stevens William H. Langfitt Vice President Vice President Personal Banking Leader Banking Center Leader Community Banking Leader Dunes West Community Orit Perez Justin M. Lee Personal Banking Leader Sandra J. Szarek Personal Banking Leader 38th Avenue Bi-Lo Residential Loan Servicing Leader Socastee Derick R. Powers Theresa Z. Tierney Edward L. Loehr, Jr. Banking Center Leader Assistant Vice President Vice President Southport Commercial Banking Officer Budgeting and Treasury Jerry L. Rexroad, CPA Matthew J. Towns Kathleen M. Lutes Executive Vice President Vice President Assistant Vice President Chief Financial Officer Credit Administration Conforming Underwriter Leader David L. Roe Douglas W. Walters Richard M. Marsh Senior Vice President Vice President Personal Banking Leader Small Business Banking Leader Residential Banking Leader Loris North Myrtle Beach Stacy M. Sansbury Michael C. Mauney Personal Banking Leader Sandra R. Zanfini Assistant Vice President Conway Assistant Vice President Collections Leader Assistant Corporate Secretary Eulette W. Sauls Corporate Support Leader Amy E. McLaurin Customer Account Relationship Assistant Vice President System Leader Personal Banking Leader Sunset Beach Sherry G. Schoolfield, CRCM Assistant Vice President Brenda S. Meier Compliance Officer Office Services Leader
49 Locations
Coastal Federal Bank Coastal Planners Holding Corporation Oak Street Banking Center Socastee Banking Center Susan J. Cooke 2619 Oak Street 4801 Socastee Boulevard Corporate Secretary Myrtle Beach, SC 29577-3129 Myrtle Beach, SC 29575 843.205.2000 843.205.2000 843.205.2007 Michael C. Gerald Carolina Forest Banking Center Socastee Banking Center (BI-LO) President and Chief Executive Officer 3894 Renee Drive 5020 Dick Pond Road 843.205.2000 Myrtle Beach, SC 29579 Myrtle Beach, SC 29588 843.205.2016 843.205.2042 Jerry L. Rexroad Executive Vice President, Conway Banking Center Southport Banking Center Chief Financial Officer and Treasurer 310 Wright Boulevard 4956-1 Long Beach Road SE 843.205.2000 Conway, SC 29526 Southport, NC 28461 843.205.2005 843.205.2032 910.454.4173 Dunes Banking Center 7500 North Kings Highway Sunset Beach Banking Center Myrtle Beach, SC 29572 1625 Seaside Road S.W. 843.205.2001 Sunset Beach, NC 28468 843.205.2012 Little River Banking Center 910.579.8160 1602 Highway 17 Little River, SC 29566 Surfside Banking Center 843.205.2014 112 Highway 17 South & Glenns Bay Road Loris Banking Center Surfside Beach, SC 29575 4262 Main Street 843.205.2003 Loris, SC 29569 843.756.4455 Waccamaw Medical Park Banking Center 112 Waccamaw Medical Park Drive Murrells Inlet Banking Center Conway, SC 29526 3348 Highway 17 South 843.205.2009 & Inlet Crossing Murrells Inlet, SC 29576 38th Avenue Banking Center (BI-LO) 843.205.2008 1245 38th Avenue North Myrtle Beach, SC 29577 North Myrtle Beach Banking Center 843.205.2041 521 Main Street North Myrtle Beach, SC 29582 Wilmington Banking Center 843.205.2002 5710 Oleander Drive, Suite 209 Wilmington, NC 28403 Pawleys Island Banking Center 843.205.2031 Coastal Federal Town Center 910.313.1161 11403 Ocean Highway Pawleys Island, SC 29585 Wilmington Downtown Banking Center 843.205.2020 109 Market Street Wilmington, NC 28401 Shallotte Banking Center 843.205.2033 200 Smith Avenue 910.763.2372 Shallotte, NC 28459 910.754.6187
50 Corporate Information Common Stock and Dividend Information The common stock of Coastal Financial Corporation is quoted through the Nasdaq Stock Market under the symbol CFCP. For information contact the Shareholder Relations office. As of November 28, 2003, the Corporation had 1,042 shareholders and 12,933,355 shares of Common Stock outstanding. This does not reflect the number of persons or entities who hold stock in nominee or "street name." The Company's ability to pay dividends depends primarily on the ability of Coastal Federal Bank to pay dividends to the Company. See Notes 14 and 15 of the Notes to Consolidated Financial Statements for further information. Market Price of Common Stock The table below reflects the high and low bid stock prices published by Nasdaq for each quarter. The prices have been adjusted retroactive to reflect stock dividends. HIGH LOW CASH BID BID DIVIDEND Fiscal Year 2003: First Quarter $15.37 $12.31 $0.045 Second Quarter 14.19 11.65 0.045 Third Quarter 13.49 11.70 0.055 Fourth Quarter 15.91 12.44 0.055 Fiscal Year 2002: First Quarter $ 8.18 $ 7.36 $0.041 Second Quarter 7.94 7.65 0.041 Third Quarter 12.43 7.55 0.045 Fourth Quarter 12.77 10.74 0.045 Form 10-K A copy of Coastal Financial Corporation's Annual Report on Form 10-K, as filed with the Securities Exchange Commission for the year ended September 30, 2003, may be obtained without a charge by writing to the Shareholder Relations Officer at the Corporate Address. Annual Meeting of Shareholders The Annual Meeting of Shareholders of Coastal Financial Corporation will be held at the Ocean Reef Resort (formerly Myrtle Beach Martinique), 7100 North Ocean Boulevard, Myrtle Beach, South Carolina, on Tuesday, January 27, 2004 at 2:00 p.m., Eastern Standard Time. Additional Information If you are receiving duplicate mailing of shareholder reports due to multiple accounts, we can consolidate the mailings without affecting your account registration. To do this, or for additional information, contact the Shareholder Relations Office, at the Corporate address shown below. Corporate Offices Coastal Financial Corporation 2619 Oak Street Myrtle Beach, South Carolina 29577 843.205.2000 Transfer Agent and Registrar Registrar and Transfer Company P.O. Box 1010 Cranford, NJ 07016 1.800.866.1340 Ext. 2514 Independent Certified Public Accountants KPMG LLP 55 Beattie Place, Suite 900 Greenville, South Carolina 29601 Special Counsel Muldoon Murphy & Faucette LLP 5101 Wisconsin Avenue Washington, DC 20016 Shareholder Relations Officer Susan J. Cooke Coastal Financial Corporation 2619 Oak Street Myrtle Beach, South Carolina 29577 843.205.2000 Coastal Financial Corporation is an equal opportunity employer and pledges equal opportunities without regard to religion, citizenship, race, color, creed, sex, age, national origin, disability or status as a disabled or Vietnam-Era veteran. COASTAL [LOGO] [LOGO] * COASTAL Securities are FEDERAL EQUAL HOUSING COASTAL INVESTOR RAYMOND JAMES offered exclusively BANK LENDER RETIREMENT o ESTATE o TAX SERVICES FINANCIAL SERVICES through Raymond The right bank for you. MEMBER PLANNERS MEMBER NASD/SIPC James Financial FDIC Committed to your financial future. Services, Inc., member NASD/SIPC, an independent broker/dealer, and are not insured by the FDIC or any other bank insurance, are not deposits or obligations of the bank, are not guaranteed by the bank, and are subject to risk, including the possible loss of principal.
51 (Page left blank intentionally) 52 NOTICE CONCERNING QUARTERLY SHAREHOLDER REPORTS With the rising costs of publishing and mailing quarterly reports and concurrent timeliness of providing these via the Internet on our website at www.coastalfederal.com, we will be sending printed versions of our quarterly shareholder reports only to shareholders who request them. All shareholders will continue to receive the annual report and proxy statement in printed form. Shareholders and other interested parties can obtain quarterly reports and our President's letter from the previous year annual report through Coastal Federal Bank's home page. In addition, our revised website will enable you to learn more about our products and services. For your convenience, we are providing this business reply card, which should be completed and returned to us if you wish to be placed on our quarterly report mailing list. We urge you to help us lower our costs by using the more efficient electronic method of accessing this information. |X| I wish to continue to receive Coastal Financial Corporation's Quarterly Shareholders Reports (Please print clearly) ________________________________________________________________________________ First Name MI Last ________________________________________________________________________________ Address ________________________________________________________________________________ City State Zip Notice Concerning Quarterly Shareholder Reports PLACE STAMP HERE ATTN: SUSAN COOKE COASTAL FINANCIAL CORPORATION 2619 OAK STREET MYRTLE BEACH, SC 29577-3129 65