Item 1. Business - -----------------
General
Coastal Financial Corporation ("Coastal Financial" or the "Company") was incorporated in the State of Delaware in June 1990, for the purpose of becoming a savings and loan holding company for Coastal Federal Bank, formerly named Coastal Federal Savings Bank, ("Coastal Federal" or the "Bank"). On January 28, 1991, the stockholders of the Bank approved a plan to reorganize the Bank into the holding company form of ownership. The reorganization was completed on November 6, 1991, on which date the Bank became the wholly-owned subsidiary of the Company, and the stockholders of the Bank became stockholders of the Company. Prior to completion of the reorganization, the Company had no material assets or liabilities and engaged in no business activities. The financial results contained herein relate primarily to the Company's principal subsidiary, Coastal Federal.
Coastal Federal conducts its business from its main office in Myrtle Beach, South Carolina, twelve additional branch offices located in South Carolina, and five branch offices located in North Carolina. Coastal Federal expects to open another office in Wilmington, N.C. in January 2005. The deposits of the Bank are insured by the Federal Deposit Insurance Corporation ("FDIC") under the Savings Association Insurance Fund ("SAIF"). The corporate offices of the Bank are located at 2619 Oak Street, Myrtle Beach, South Carolina and the telephone number is (843) 205-2000.
Coastal Federal's eighteen offices are located in Horry and Georgetown Counties of South Carolina, and Brunswick and New Hanover Counties of North Carolina. The economy of these four counties depends primarily on tourism. To the extent area businesses rely heavily on tourism for business, decreased tourism would have a significant adverse effect on Coastal Federal's primary deposit base and lending area. Moreover, Coastal Federal would likely experience a higher degree of loan delinquencies should the local economy be materially and adversely affected.
Coastal Federal's principal business currently consists of attracting deposits from the general public and using these funds to originate consumer, commercial business loans, commercial real estate loans and residential mortgage loans.
The Company maintains an Internet website at http://www.coastalfederal.com. ----------------------------- The Company makes available its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to such reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act of 1934, as amended, and other information related to the Company, free of charge, on this site as soon as reasonably practicable after it electronically files those documents with, or otherwise furnishes them to the SEC. The Company's Internet website and the information contained therein or connected thereto are not intended to be incorporated into this annual report on Form 10-K.
Rate/Volume Analysis
The following table sets forth certain information regarding changes to interest income and interest expense of the Company for the periods indicated. For each category of interest-earning asset and interest-bearing liability, information is provided on changes attributed to (i) changes in rate (changes in rate multiplied by old volume); (ii) changes in volume (changes in volume multiplied by old rate), (iii) changes in rate-volume (change in rate multiplied by change in volume), and (iv) the net change (the sum of the prior columns). Non-accrual loans are included in the average volume calculations.
Year Ended September 30, ------------------------------------------- 2004 Compared to 2003 Increase (Decrease) Due to ------------------------------------------- Rate Volume Rate/ Net ---- ------ ----- --- Volume -------- -------- -------- --------
Interest-Earning Assets: Loans $ (3,082) $ 8,515 $ (626) $ 4,807 Mortgage-backed Securities/Investments (383) 2,216 (49) 1,784 -------- -------- -------- --------
Total net change in income on interest- earning assets (3,465) 10,731 (675) 6,591 -------- -------- -------- --------
Interest-Bearing Liabilities: Deposits (2,233) 373 (115) (1,975) FHLB advance (971) 2,942 (315) 1,656 Repurchase
Agreements (344) 925 (185) 396
Other Borrowings (46) 630 (135) 449 -------- -------- -------- --------
Total net change in expense on interest- bearing liabilities (3,594) 4,870 (750) 526 -------- -------- -------- --------
Net change in net Interest income $ 129 $ 5,861 $ 75 $ 6,065 ======== ======== ======== ========
Average Balance Sheet
The following table sets forth certain information relating to the Company's average balance sheet and reflects the average yield on assets and average cost of liabilities for the periods indicated. Such yields and costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods presented. Non-accrual loans are included in average balance calculations.
- ---------------------------------------------------- (1) Includes short-term interest-bearing deposits, Federal funds sold, and investments held to maturity. (2) Average yield for investment classified as available-for-sale is computed using historical cost balances and does not give effect to changes in fair value that are reflected as a component of stockholders' equity.
Lending Activities
General. The principal lending activities of Coastal Federal are the origination of consumer loans, commercial business loans, commercial real estate loans and residential mortgage loans. The Bank originates construction and permanent loans on single family and multi-unit dwellings, as well as on commercial structures. The Bank emphasizes the origination of adjustable rate residential and commercial real estate mortgages.
The Bank's net loan portfolio totaled approximately $799.0 million at September 30, 2004, representing approximately 61.2% of its total assets. On that date, approximately 40.6% of Coastal Federal's total loan portfolio was secured by mortgages on one-to-four family residential properties.
In an effort to ensure that the yields on its loan portfolio and investments are interest-rate sensitive, the Bank has implemented a number of measures, including: (i) emphasis on the origination of adjustable rate mortgages on residential and commercial properties; (ii) origination of construction loans secured by residential properties, generally with terms for a one-year period or less; and (iii) origination of commercial and consumer loans having either adjustable rates or relatively short maturities. At September 30, 2004, adjustable rate loans constituted approximately $614.9 million (or 77.0%) of the Bank's total loan portfolio. Therefore, at such date, fixed rate loans comprised only 23.0% of the total loan portfolio. These lending practices are intended to shorten the term of the Bank's assets and make the loan portfolio more responsive to interest rate volatility.
The company has identified two concentrations of credit risk that it is monitoring. The first involves loans for the acquisition of land and loans for the development of land, which totaled $102.6 million as September 30, 2004 and which are included in the mortgage Loans-Income property (commercial) line in the loan Portfolio Analysis on the following page. The second involves permanent mortgage loans secured by condominium properties, which totaled $65.6 million at September 30, 2004 and is included in the Mortgage Loans-Single family to 4 family units line in the portfolio Analysis on the following page. See Note 1(h) of the Notes to Consolidated Financial Statements in the Annual Report to Shareholders for a complete discussion of this monitored credit risk.
Loan Portfolio Analysis
The following table set forth the composition of the Company's loan portfolio by type of loan as of the dates indicated.
Commercial Business Loans. The Bank is permitted under OTS regulations to make secured or unsecured loans for commercial, corporate, business or agricultural purposes, including the issuance of letters of credit secured by real estate, business equipment, inventories, accounts receivable and cash equivalents. The aggregate amount of such loans outstanding may not exceed 20% of such institution's assets.
Coastal Federal has been making commercial business loans since 1983 on both a secured and unsecured basis with terms that generally do not exceed one year. The majority of these loans have interest rates that adjust with changes in the prime rate as published in The Wall Street Journal. The Bank's non-real ------------------------ estate commercial loans primarily consist of short-term loans for working capital purposes, seasonal loans and lines of credit. The Bank customarily requires a personal guaranty of payment by the principals of any borrowing entity and reviews the financial statements and income tax returns of the guarantors. At September 30, 2004, the Bank had $32.1 million outstanding in commercial business loans, which represented approximately 3.9% of its loan portfolio and 2.5% of total assets.
Commercial business lending is inherently riskier than secured mortgage lending and involves risks that are different from those associated with residential and commercial real estate lending. Real estate lending is generally considered to be collateral based lending with loan amounts based on predetermined loan to collateral values and liquidation of the underlying real estate collateral is viewed as the primary source of repayment in the event of borrower default. Although commercial business loans are often collateralized by equipment, inventory, accounts receivable or other business assets, the liquidation of such collateral in the event of a borrower default is often not a sufficient source of repayment because accounts receivable may be uncollectible and inventories and equipment may be obsolete, of limited use, or have limited marketability, among other things. Accordingly, the repayment of a commercial business loan depends primarily on the creditworthiness of the borrower (and any guarantors), while liquidation of collateral is a secondary and potentially insufficient source of repayment.
Commercial Real Estate Loans. The Bank may invest, by OTS regulation, in non-residential real estate loans up to 400% of its capital as computed under GAAP plus general loan loss reserves. At September 30, 2004, this limited Coastal Federal's aggregate non-residential real estate loans to approximately $408.3 million. At such date, the Bank had non-residential real estate loans outstanding of $312.5 million compared to $263.7 million at September 30, 2003. During fiscal 2001 through 2004, the Bank opened seven offices. The Bank hired commercial lending officers to lead many of these offices and intends to have commercial lending officers leading a majority of its banking offices. As a result of this focus, the Bank has approximately doubled the number of its commercial lending officers
over the last two years. The Bank expects to continue to focus significant origination efforts in commercial real estate and commercial lending. It is expected that the Bank's commercial real estate loans will continue to comprise the most significant portion of the Bank's loan growth in future years.
The commercial real estate loans originated by the Bank are primarily secured by shopping centers, office buildings, warehouse facilities, retail outlets, hotels, motels and multi-family apartment buildings. The interest rate of the commercial real estate loans presently offered by the Bank generally adjusts every one, three or five years and is indexed to U.S. Treasury securities or adjusts monthly indexed to the prime interest rate. Such loans generally have a fifteen to twenty year term, with the payments based on a similar amortization schedule. In many cases, the Bank may require the loan to include a call option at the Bank's option in three to ten years. The Bank generally requires that such loans have a minimum debt service coverage of 120% of projected net operating income together with other generally accepted underwriting criteria.
Commercial real estate lending entails significant additional risks compared to residential lending. Commercial real estate loans typically involve large loan balances to single borrowers or groups of related borrowers. The payment experience of such loans is typically dependent upon the successful operation of the real estate project. These risks can be significantly affected by supply and demand conditions in the market for office and retail space and for apartments and, as such may be subject, to a greater extent, to adverse conditions in the economy. In dealing with these risk factors, Coastal Federal generally limits itself to a real estate market or to borrowers with which it has experience. The Bank concentrates on originating commercial real estate loans secured by properties located within its market areas of Horry and Georgetown Counties, South Carolina and Brunswick and New Hanover Counties, North Carolina. Additionally, the Bank has, on a limited basis, originated commercial real estate loans secured by properties located in other parts of North and South Carolina.
Consumer Loans. The Bank is permitted by OTS regulations to invest up to 35% of its assets in consumer loans. The Bank currently offers a wide variety of consumer loans on a secured and unsecured basis including home improvement loans, loans secured by savings accounts and automobile, truck and boat loans. The Bank also offers a revolving line of credit secured by owner-occupied real estate. Total consumer loans, including equity lines of credit generally secured by one-to-four family residences, amounted to $55.6 million, or 6.7% of the total loan portfolio, and 4.3% of total assets, at September 30, 2004.
Coastal Federal offers consumer loans in order to provide a wider range of financial services to its customers. These loans also
have a shorter term and normally higher interest rates than residential real estate loans.
Consumer loans entail greater risk than do residential mortgage loans, particularly in the case of consumer loans which are unsecured or secured by assets which may depreciate rapidly, such as automobiles, boats and other moving vehicles. In such cases, repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan and the remaining deficiency often does not warrant further substantial collection efforts against the borrower. In addition, consumer loan collections are dependent on the borrower's continuing financial stability and, thus, are more likely to be adversely affected by job loss, a change in family status such as divorce, illness or personal bankruptcy. Furthermore, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount recoverable on such loans. Such loans may also give rise to claims and defenses by the borrower against Coastal Federal as the holder of the loan, and a borrower may be able to assert claims and defenses which it has against the seller of the underlying collateral.
Residential Mortgage Loans. The Bank originates loans to enable borrowers to purchase existing homes or residential lots, refinance existing mortgage loans or construct new homes. Residential mortgage loans originated by the Bank are generally long-term loans, amortized on a monthly basis, with principal and interest due each month. The contractual loan payment period for residential mortgage loans typically ranges from 10 to 30 years. The Bank's experience indicates that real estate loans remain outstanding for significantly shorter periods than their contractual terms. Borrowers may refinance or prepay loans at their option, subject to any prepayment penalty provisions included in the note. The Bank generally requires mortgagee title insurance on all single-family first mortgage and residential mortgage loans.
The Bank offers adjustable rate residential mortgage loans ("ARMs"), the interest rates of which generally adjust based upon treasury securities indices. Although Coastal Federal's ARMs are beneficial in helping the Bank improve the interest rate sensitivity of its assets, such loans may pose potential additional risks to Coastal Federal. A precipitous increase in interest rates could be expected to result in an increase in delinquencies or defaults on such loans, whereas a significant decrease in rates could cause repayments to increase significantly.
Coastal Federal also offers residential mortgage loans with fixed rates of interest. These loans generally can be sold in the secondary market or are portfolio loans where the Bank offers such loans at rates somewhat above conforming loan rates. In addition, Coastal Federal securitized loans into FHLMC mortgage-backed
securities of $95.6 million and $46.8 million in 2003 and 2004, respectively. The securitized mortgage-backed securities were generally sold in the secondary market within a few days of securitization.
At September 30, 2004, approximately $337.5 million or 40.6% of the Bank's loan portfolio, and 25.9% of total assets, consisted of one-to-four family residential loans.
Construction Loans. The Bank originates residential construction loans that generally have a term of six to twelve months for individuals or one year for builders. The individual's loans are generally tied to a commitment by the Bank to provide permanent financing upon completion of construction. The interest rate charged on construction loans is indexed to the prime rate as published in The Wall Street Journal or the current permanent loan rate and varies depending - ----------------------- on the terms of the loan and the loan amount. The Bank customarily requires personal guaranties of payment from the principals of the borrowing entities.
The interest rate on commercial real estate construction loans presently offered by the Bank is generally indexed to the prime rate as published in The --- Wall Street Journal. Residential and commercial real estate construction - --------------------- financing generally expose the Bank to a greater risk of loss than long-term financing on improved, occupied real estate, due in part to the fact that the loans are underwritten on projected, rather than historical, income and rental results. The Bank's risk of loss on such loans generally depends largely upon the accuracy of the initial appraisal of the property's value at completion of construction and the estimated cost (including interest) of completion. If either estimate proves to have been inaccurate and the borrower is unable to provide additional funds pursuant to his guaranty, the lender either may be required to advance funds beyond the amount originally committed to permit completion of the development and/or be confronted at the maturity of the loan with a project whose value is insufficient to assure full repayment. Coastal Federal generally provides a permanent financing commitment on residential and commercial properties at the time the Bank provides the construction financing.
The Bank's underwriting criteria are designed to evaluate and to minimize the risks of each residential and commercial real estate construction loan. The Bank considers evidence of the financial stability and reputation of both the borrower and the contractor, the amount of the borrower's cash equity in the project, independent evaluation and review of the building costs, local market conditions, pre-construction sale and leasing information based upon evaluation of similar projects and the borrower's cash flow projections upon completion. The Bank generally requires personal guaranties of payment by the principals of any borrowing entity.
At September 30, 2004, approximately $93.3 million or 11.2% of the Bank's gross loan portfolio consisted of construction loans on both residential ($82.8 million) and commercial properties ($10.5 million). Undisbursed proceeds on these loans amounted to $21.6 million at September 30, 2004.
Loan Maturity
The following table sets forth certain information at September 30, 2004 regarding the dollar amount of loans maturing in the Company's loan portfolio based on their contractual terms to maturity including scheduled payments and potential prepayments. Specific prepayment speeds applied to loans are a function of their underlying coupons, lifetime rate caps and maturities. Demand loans (without a stated maturity), loans having no stated schedule of repayments and no stated maturity and overdrafts are reported as due in one year or less.
More than One Year One Year Through More than or Less Five Years Five Years Totals ------- ---------- ---------- ------ (In thousands)
First mortgage loans $ 224,383 $ 271,260 $ 37,544 $ 533,187 Other residential and non-residential 64,353 104,445 19,687 188,485 Equity lines of credit 29,464 1,442 -- 30,906 Consumer loans 7,710 16,208 782 24,700 Commercial loans 17,820 14,281 -- 32,101 --------- --------- --------- --------- Total loans $ 343,730 $ 407,636 $ 58,013 $ 809,379 ========= ========= ========= ========= Add (Subtract): Deferred loan costs, net 674 Allowance for loan losses (11,077) --------- Total loans, net $ 798,976 =========
The following table sets forth the dollar amount of all loans expected to be repaid one year or later after September 30, 2004, which have fixed interest rates and those which have floating or adjustable interest rates.
Fixed Floating or Rates Adjustable Rates Totals ----- ---------------- ------ (In thousands)
First mortgage loans $ 88,743 $220,061 $308,804 Other residential and non-residential 19,306 104,826 124,132 Equity lines of credit 1,442 -- 1,442 Consumer loans 10,773 6,217 16,990 Commercial loans 6,890 7,391 14,281 -------- -------- -------- Total loans $127,154 $338,495 $465,649 ======== ======== ========
Loan Solicitation and Processing. The Bank actively solicits mortgage loan applications from the communities it serves. Detailed loan applications are obtained to determine the borrower's ability to repay, and more significant items on these applications are verified. After analysis of the loan application and property or collateral involved, including an independent appraisal of property, the Bank's underwriter or Credit Administration Group reviews the loan, and the Bank makes a lending decision. With respect to commercial loans, the Bank also reviews the capital adequacy of the business, the ability of the borrower to repay the loan and honor its other obligations and general economic and industry conditions. Loans are approved based on size, requiring higher levels of authorization for larger dollar loan amounts. A member of the Bank's Internal Loan Committee must approve all residential mortgage loan applications in excess of 80% of the lesser of appraised value or purchase price of the property, unless the borrowers have private mortgage insurance.
The Bank's general policy is to obtain customary title and flood insurance on real estate loans. Borrowers must also obtain paid hazard insurance policies prior to closing. Borrowers on residential mortgage loans, which exceed 80% of the value of the security property, are also generally required to escrow funds on a monthly basis for real estate taxes, hazard insurance premiums, and private mortgage insurance premiums.
Residential Mortgage Loan Originations, Purchases and Sales. The Bank may, depending on economic conditions, purchase or sell mortgage loans to manage the interest rate sensitivity of interest-earning assets and interest-bearing liabilities, to provide additional funding for lending activities, and generate service fee income. The Bank retains a portion of the interest paid by the borrower on the loans as consideration for its servicing activities.
Loan Commitments. The Bank, upon the submission of a loan application, generally provides a 45-day written commitment as to the interest rate applicable to such loan. If the loan has not been closed within 45 days, the rate may be adjusted to reflect current market conditions at the Bank's option. Loans that require closing time in excess of 45 days from the date of application are issued a written commitment, with a term ranging from three to six months. For fixed rate loans, the Bank charges either a higher interest rate or points to lock in the rate for 180 days. Refer to page 23 of the Annual Report for more information.
Delinquencies. Coastal Federal's collection procedures provide for a series of contacts with delinquent borrowers. If the delinquency continues, more formal efforts are made to contact the delinquent borrower. If a residential mortgage loan continues in a delinquent status for 90 days or more, Coastal Federal generally initiates foreclosure proceedings. Coastal Federal generally initiates collection activities on a commercial mortgage loan if the loan continues in a delinquent status for 30 days or more. In certain limited instances, however, Coastal Federal may modify the loan or grant a limited moratorium on loan payments to enable the borrower to reorganize his financial affairs.
Problem Assets and Asset Classification. Loans are reviewed on a regular basis and a reserve for uncollectible interest is established on loans where collection of interest is questionable, generally when such loans become 90 days delinquent. Loan balances that relate to interest amounts reserved are considered to be on a nonaccrual basis. Typically, payments received on a nonaccrual loan are applied to the outstanding principal and interest as determined at the time of collection of the loan.
The following table sets forth information with respect to the Bank's non-performing assets at the dates indicated.
Please refer to page 23 of the Annual Report for additional information on impaired loans and lost interest income.
The allowance for uncollectible interest which is netted against accrued interest receivable totaled $691,000 and $605,000 at September 30, 2003 and 2004, respectively.
OTS regulations require that each insured institution review and classify its assets on a regular basis. In addition, in connection with examinations of insured institutions, OTS examiners have authority to identify problem assets and, if appropriate, require them to be classified. There are four classifications for problem assets: special mention, substandard, doubtful and loss. Assets categorized as special mention have potential credit weakness and require close management attention, but are not yet classified further. Assets classified as substandard or doubtful require the institution to establish general allowances for loan losses. If an asset or portion thereof is classified loss, the insured institution must either establish specific allowances for loan losses in the amount of 100% of the portion of the asset classified loss or charge off such amount. A portion of general loss allowances established to cover possible losses related to assets classified substandard or doubtful may be included in determining an institution's regulatory capital, while specific valuation allowances for loan losses generally do not qualify as regulatory capital.
Coastal Federal had five individually classified assets in excess of $1.3 million as of September 30, 2004. At that date, classified assets amounted to $26.3 million ($10.8 million substandard; $908,000 doubtful; and $14.6 million special mention). Substandard assets consist primarily of twenty-four loans with aggregate balances of approximately $8.2 million at September 30, 2004. The largest amount to any one borrower was $1.1 million. Special mention assets consist primarily of twenty-eight loans with aggregate balances of approximately $13.8 million at September 30, 2004.
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 loan 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. 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.
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 are believed 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 management to adjust the allowance based on information available to them at the time of their examination.
See Note 4 of the Notes to the Consolidated Financial Statements and "Management's Discussion and Analysis - Non-Performing Assets" in the 2004 Annual Report to Stockholders attached hereto and incorporated by reference.
Loan Loss Allowance Analysis
The following table sets forth analysis of the Company's allowance for loan losses for the periods indicated. Where specific loan loss reserves have been established, any difference between the loss reserve and the amount of the loss realized has been charged or credited to the loan loss allowance as a charge-off or recovery.
Loan Loss Allowance by Category
I The following table sets forth the breakdown of the allowance for loan losses by loan category for the periods indicated.
Investment Activities
Under OTS regulations, the Bank has authority to invest in various types of liquid assets, including U.S. Treasury obligations, securities of various federal agencies and of state and municipal governments, deposits at the FHLB of Atlanta, certificates of deposit of federally insured institutions, certain bankers' acceptances and federal funds. Subject to various restrictions, such regulated institutions may also invest a portion of their assets in commercial paper, corporate debt securities and mutual funds, the assets of which conform to the investments that OTS-chartered institutions are otherwise authorized to make directly. These institutions are also required to maintain minimum levels of liquid assets which vary from time to time. See "Regulation and Supervision - Federal Home Loan Bank System." The Bank may decide to increase its liquidity above the required levels depending upon the availability of funds and comparative yields on investments in relation to return on loans.
Coastal Federal is required under federal regulations to maintain a minimum amount of liquid assets and is also permitted to make certain other securities investments. See "Regulation and Supervision" herein and "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources" in the Annual Report.
Investment decisions are made in accordance with the Bank's approved Investment Policy by the Investment Officer who reports quarterly to the Asset/Liability Management Committee ("ALCO Committee"). The ALCO Committee meets quarterly and consists of Directors Creel, Bishop, Thompson, Clemmons and Gerald, and Executive Vice Presidents Graham, Rexroad, Douglas, Sherry and Stalvey and Vice President Loehr. The ALCO Committee acts within policies established by the Board of Directors. At September 30, 2004, the Bank's investment portfolio had a market value of approximately $405.6 million. The investment securities portfolio consisted primarily of mortgage-backed securities. For further information concerning the Bank's securities portfolio, see Notes 2 and 3 of the Notes to Consolidated Financial Statements attached hereto and incorporated by reference.
At September 30, 2004, Coastal Federal did not own any securities, other than those disclosed in the Securities Analysis to follow, which had an aggregate book value in excess of 10% of its stockholder's equity at that date.
Securities Analysis
The following table sets forth Coastal Federal's investment securities portfolio at amortized cost at the dates indicated.
(1) The market value of the Bank's investment securities portfolio amounted to $2.0 million, $15.9 million and $31.3 million at September 30, 2002, 2003 and 2004, respectively.
The following table sets forth the final maturities and weighted average yields of the securities at amortized cost at September 30, 2004.
(2) All assets in the preceding table are classified as available for sale, with the exception of the FHLB bond with a cost of $7,840 shown in the More than Five to Ten Year Category, which is classified as held to maturity.
(3) The yield on state and municipal obligations is not computed on a tax equivalent basis.
The following table sets forth Coastal Federal's mortgage-backed securities portfolio, at amortized cost, at the dates indicated.
(1) The market value of the Bank's mortgage-backed securities portfolio amounted to $331.8 million, $383.3 million and $374.3 million at September 30, 2002, 2003 and 2004, respectively.
The following table sets forth the maturities and weighted average yields of the securities, at amortized cost, at September 30, 2004.
Service Corporation Activities
The Company has four wholly-owned subsidiaries, Coastal Federal Bank, Coastal Financial Capital Trust I (see Note 11 of the Notes to the Consolidated Financial Statements), Coastal Planners Holding Corporation, and Coastal Investor Services, Inc (inactive).
Coastal Federal Bank has two wholly-owned subsidiaries: Coastal Mortgage Bankers and Realty Co., Inc. ("Coastal Mortgage Bankers"), which was incorporated in 1970 under the laws of South Carolina, and Coastal Federal Holding Corporation ("CHFC"), which was incorporated in 1998 under the laws of Delaware. As of September 30, 2004, Coastal Mortgage Bankers has one first tier subsidiary, Sherwood Development Corporation, which is inactive. Four other inactive subsidiaries, North Beach Investments, Inc., Shady Forest Development Corporation, Ridge Development Corporation, and 501 Development Corporation, were dissolved on September 30, 2004. Coastal Mortgage Bankers is not active in any real estate operations.
On February 20, 1998, Coastal Real Estate Investment Corporation ("CREIC") was incorporated in North Carolina. CREIC is a wholly-owned operating subsidiary of CFHC and is a real estate investment trust ("REIT"). CREIC engages in the investment in, and management of, real estate related assets, primarily mortgage loans. CFHC engages in the management of its investment in CREIC and the management of the related dividends received on that investment. On September 1, 1998, CREIC was capitalized with approximately $131.8 million of mortgage loans from Coastal Federal. On December 10, 1998, CREIC became a wholly-owned subsidiary of CFHC through an exchange of stock transaction. On January 10, 2002, January 10, 2003 and January 24, 2003, CREIC received capital contributions from CFHC of $35.0 million, $50.0 million and $50.0 million, respectively, to purchase loans.
Coastal Federal Capital Trust I was formed as a statutory trust under the laws of the state of Delaware, for the purpose of issuing capital securities to institutional investors in a trust preferred issue. During 2004, the Company deconsolidated the Trust for financial reporting purposes as a result the Financial Accounting Standards Board Interpretation No. 46 "Consolidation of Variable Interest Entities". Refer to Note 11 of the Notes to Consolidated Financial Statements for further information.
Coastal Planners Holding Corporation has one subsidiary, Coastal Retirement, Estate and Tax Planners, Inc., which was formed during the forth quarter of 2003 and offers objective, fee-based financial planning and tax preparation services.
Deposit Activities and Other Sources of Funds
General. Deposits and loan repayments are the major source of Coastal Federal's funds for lending and other investment purposes. Loan repayments are a relatively stable source of funds, while deposit inflows and outflows and loan prepayments are significantly influenced by general interest rates and money market conditions. Borrowings may be used to compensate for reductions in the availability of funds from other sources. They may also be used for general business purposes.
Deposit Accounts. Deposits are attracted from within Coastal Federal's primary market area through the offering of a broad selection of deposit instruments, including checking accounts, money market accounts, savings accounts, certificates of deposit and retirement accounts. Deposit account terms vary, according to the minimum balance required, the time periods the funds must remain on deposit and the interest rate, among other factors. In determining the terms of its deposit accounts, Coastal Federal considers the rates offered by its competition, profitability to Coastal Federal, matching deposit and loan products and its customer preferences and concerns. Coastal Federal generally reviews its deposit mix and pricing at least monthly.
Time Deposits with balances of $100,000 or More
The following table sets forth the amount and maturities of time deposits with balances of $100,000 or more at September 30, 2004.
Deposit Flow
The following table sets forth the balances of deposits in the various types of deposit accounts offered by the Bank at the dates indicated.
Borrowings. Demand and time deposits are the primary source of funds for Coastal Federal's lending and investment activities and for its general business purposes. The Bank has in the past, however, relied upon advances from the FHLB of Atlanta to supplement its supply of lendable funds and to meet deposit withdrawal requirements. The FHLB of Atlanta has served as one of the Bank's primary borrowing sources. Advances from the FHLB of Atlanta are typically secured by the Bank's first mortgage loans and certain of the Bank's mortgage-backed securities portfolio. At September 30, 2004, Coastal Federal had advances totaling $ 328.5 million from the FHLB of Atlanta due on various dates through 2018 with a weighted average interest rate of 3.64%. Certain of these advances are subject to call provisions. Call provisions are more likely to be exercised by the FHLB when rates rise. See Note 9 in the Notes to the Consolidated Financial Statements of the 2004 Annual Report to Shareholders for further information on the call provisions of various FHLB advances.
The FHLB of Atlanta functions as a central reserve bank providing credit for financial institutions and certain other member financial institutions. As a member, Coastal Federal is required to own capital stock in the FHLB of Atlanta and is authorized to apply for advances on the security of such stock and certain of its mortgage loans, certain commercial real estate loans, and other assets (principally securities which are obligations of, or guaranteed by, the United States) provided certain standards related to creditworthiness have been met. The FHLB of Atlanta determines specific lines of credit for each member institution.
In addition to the borrowing described above, the Bank may borrow funds under reverse repurchase agreements pursuant to which it sells securities (generally secured by government securities and mortgage-backed securities) under an agreement to buy them back at a specified price at a later date. These agreements to repurchase are deemed to be borrowings collateralized by the securities sold. At September 30, 2004, the Company had repurchase agreement lines of credit and available collateral consisting of investment securities and mortgage-backed securities of $68.4 million, as well as federal funds lines available of $20.0 million.
The Company had $15.5 million of junior subordinated debentures outstanding on September 30, 2004. For more information on these debentures, please see Note 11 of the Notes to the Consolidated Financial Statements in the 2004 Annual Report to Stockholders attached hereto and incorporated by reference.
The following tables set forth certain information regarding short-term borrowings by the Bank at the end of and during the periods indicated:
(1) Short-term FHLB advances include various advances which are subject to call by FHLB within one year.
Competition
As of June 30, 2004, the most recent date for which published data is available, Coastal Federal held the largest share of deposits, a 16.4% share, in Horry County, S.C. according to the Federal Deposit Insurance Corporation. Coastal Federal also held the third highest market share of deposits in Brunswick County, N.C. with an 8.9% share. The Bank faces strong competition in the attraction of deposits (its primary source of lendable funds) and in the origination of loans. Its most direct competition for deposits and loans has historically come from other financial institutions located in its primary market area. The Bank estimates that there are over 89 offices of other financial institutions in Horry County, and 29 offices in Brunswick County. Particularly in times of high interest rates, the Bank has faced additional significant competition for investors' funds from short-term money market securities and other corporate and government securities. The Bank's competition for loans comes principally from other financial institutions, mortgage banking companies and mortgage brokers.
Personnel
As of September 30, 2004, the Company had 354 full-time Associates and 19 part-time Associates. The Associates are not represented by a collective bargaining unit. The Bank believes its relationship with its Associates is excellent.
REGULATION AND SUPERVISION
General
As a savings and loan holding company, the Company is required by federal law to file reports with, and otherwise comply with, the rules and regulations of the Office of Thrift Supervision. The Bank is subject to extensive regulation, examination and supervision by the Office of Thrift Supervision, as its primary federal regulator, and the Federal Deposit Insurance Corporation, as the deposit insurer. The Bank is a member of the Federal Home Loan Bank System and, with respect to deposit insurance, of the Savings Association Insurance Fund managed by the Federal Deposit Insurance Corporation. The Bank must file reports with the Office of Thrift Supervision and the Federal Deposit Insurance Corporation concerning its activities and financial condition in addition to obtaining regulatory approvals prior to entering into certain transactions such as mergers with, or acquisitions of, other financial institutions. The Office of Thrift Supervision and/or the Federal Deposit Insurance Corporation conduct periodic examinations to test the Bank's safety and soundness and compliance with various regulatory requirements. This regulation and supervision establishes a comprehensive framework of activities in which an institution can engage and is intended primarily for the protection of the insurance fund and
depositors. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. Any change in such regulatory requirements and policies, whether by the Office of Thrift Supervision, the Federal Deposit Insurance Corporation or the Congress, could have a material adverse impact on the Company, the Bank and their operations. Certain of the regulatory requirements applicable to the Bank and to the Company are referred to below or elsewhere herein. The description of statutory provisions and regulations applicable to OTS regulated institutions and their holding companies set forth in this Form 10-K does not purport to be a complete description of such statutes and regulations and their effects on the Bank and the Company.
Holding Company Regulation
The Company is a nondiversified unitary savings and loan holding company within the meaning of federal law. Under prior law, a unitary savings and loan holding company, such as the Company, was not generally restricted as to the types of business activities in which it may engage, provided that the Bank continued to be a qualified thrift lender. See "Federal Savings Institution Regulation - QTL Test." The Gramm-Leach-Bliley Act of 1999 provides that no company may acquire control of an OTS regulated institution after May 4, 1999 unless it engages only in the financial activities permitted for financial holding companies under the law or for multiple savings and loan holding companies as described below. Further, the Gramm-Leach-Bliley Act specifies that existing savings and loan holding companies may only engage in such activities. The Gramm-Leach-Bliley Act, however, grandfathered the unrestricted authority for activities with respect to unitary savings and loan holding companies existing prior to May 4, 1999, so long as the Bank continues to comply with the QTL Test. The Company does qualify for the grandfathering. Upon any non-supervisory acquisition by the Company of another savings institution or savings bank that meets the qualified thrift lender test and is deemed to be a savings institution by the Office of Thrift Supervision, the Company would become a multiple savings and loan holding company (if the acquired institution is held as a separate subsidiary) and would generally be limited to activities permissible for bank holding companies under Section 4(c)(8) of the Bank Holding Company Act, subject to the prior approval of the Office of Thrift Supervision, and certain activities authorized by Office of Thrift Supervision regulation.
A savings and loan holding company is prohibited from, directly or indirectly, acquiring more than 5% of the voting stock of another financial institution or savings and loan holding company, without prior written approval of the Office of Thrift Supervision and from acquiring or retaining control of a depository institution that is not insured by the Federal Deposit Insurance Corporation. In evaluating applications by holding companies to acquire savings institutions, the Office of Thrift Supervision considers the financial and managerial resources and
future prospects of the Company and institution involved, the effect of the acquisition on the risk to the deposit insurance funds, the convenience and needs of the community and competitive factors.
The Office of Thrift Supervision may not approve any acquisition that would result in a multiple savings and loan holding company controlling savings institutions in more than one state, subject to two exceptions: (i) the approval of interstate supervisory acquisitions by savings and loan holding companies and (ii) the acquisition of a savings institution in another state if the laws of the state of the target savings institution specifically permit such acquisitions. The states vary in the extent to which they permit interstate savings and loan holding company acquisitions.
Although savings and loan holding companies are not currently subject to specific capital requirements or specific restrictions on the payment of dividends or other capital distributions, federal regulations do prescribe such restrictions on subsidiary savings institutions as described below. The Bank must notify the Office of Thrift Supervision 30 days before declaring any dividend to the Company. In addition, the financial impact of a holding company on its subsidiary institution is a matter that is evaluated by the Office of Thrift Supervision and the agency has authority to order cessation of activities or divestiture of subsidiaries deemed to pose a threat to the safety and soundness of the institution.
Acquisition of the Company. Under the Federal Change in Bank Control Act ("CIBCA"), a notice must be submitted to the Office of Thrift Supervision if any person (including a company), or group acting in concert, seeks to acquire 10% or more of the Company's outstanding voting stock, unless the Office of Thrift Supervision has found that the acquisition will not result in a change of control of the Company. Under the CIBCA, the Office of Thrift Supervision has 60 days from the filing of a complete notice to act, taking into consideration certain factors, including the financial and managerial resources of the acquirer and the anti-trust effects of the acquisition. Any company that so acquires control would then be subject to regulation as a savings and loan holding company.
Sarbanes-Oxley Act of 2002
The Sarbanes-Oxley Act of 2002, which implemented legislative reforms intended to address corporate and accounting fraud, restricts the scope of services that may be provided by accounting firms to their public company audit clients and any non-audit services being provided to a public company audit client will require preapproval by the company's audit committee. In addition, the Sarbanes-Oxley Act requires chief executive officers and chief financial officers, or their equivalent, to certify to the accuracy of periodic reports filed with the Securities and Exchange Commission, subject to civil and criminal penalties if they knowingly or willingly violate this certification requirement.
Under the Sarbanes-Oxley Act, bonuses issued to top executives before restatement of a company's financial statements are now subject to disgorgement if such restatement was due to corporate misconduct. Executives are also prohibited from insider trading during retirement plan "blackout" periods, and loans to company executives (other than loans by financial institutions permitted by federal rules and regulations) are restricted. The legislation accelerates the time frame for disclosures by public companies and changes in ownership in a company's securities by directors and executive officers.
The Sarbanes-Oxley Act also increases the oversight of, and codifies certain requirements relating to audit committees of public companies and how they interact with the company's "registered public accounting firm." Among other requirements, companies must disclose whether at least one member of the committee is a "financial expert" (as such term is defined by the Securities and Exchange Commission) and if not, why not.
Although we anticipate that we will incur additional expense in complying with the provisions of the Sarbanes-Oxley Act and the resulting regulations, management does not expect that such compliance will have a material impact on our results of operations or financial condition.
Federal Savings Institution Regulation
Business Activities. Federal law and regulations govern the activities of federal savings banks. These laws and regulations delineate the nature and extent of the activities in which federal savings banks may engage. In particular, certain lending authority for federal savings banks, e.g., commercial, non-residential real property loans and consumer loans, is limited to a specified percentage of the institution's capital or assets.
Capital Requirements. The Office of Thrift Supervision capital regulations require their regulated institutions to meet three minimum
capital standards: a 1.5% tangible capital ratio, a 4% leverage ratio (3% for institutions receiving the highest rating on the CAMELS examination rating system) and an 8% risk-based capital ratio. In addition, the prompt corrective action standards discussed below also establish, in effect, a minimum 2% tangible capital standard, a 4% leverage ratio (3% for institutions receiving the highest rating on the CAMELS system), and, together with the risk-based capital standard itself, a 4% Tier 1 risk-based capital standard. The Office of Thrift Supervision regulations also require that, in meeting the tangible, leverage and risk-based capital standards, institutions must generally deduct investments in and loans to subsidiaries engaged in activities as principal that are not permissible for a national bank.
The risk-based capital standard for savings institutions requires the maintenance of Tier 1 (core) and total capital (which is defined as core capital and supplementary capital) to risk-weighted assets of at least 4% and 8%, respectively. In determining the amount of risk-weighted assets, all assets, including certain off-balance sheet assets, are multiplied by a risk-weight factor of 0% to 100%, assigned by the Office of Thrift Supervision capital regulation based on the risks believed inherent in the type of asset. Core (Tier 1) capital is defined as common stockholders' equity (including retained earnings), certain noncumulative perpetual preferred stock and related surplus, and minority interests in equity accounts of consolidated subsidiaries less intangibles other than certain mortgage servicing rights and credit card relationships. The components of supplementary capital currently include cumulative preferred stock, long-term perpetual preferred stock, mandatory convertible securities, subordinated debt and intermediate preferred stock, the allowance for loan and lease losses limited to a maximum of 1.25% of risk-weighted assets and up to 45% of unrealized gains on available-for-sale equity securities with readily determinable fair market values. Overall, the amount of supplementary capital included as part of total capital cannot exceed 100% of core capital.
The OTS has authority to establish higher capital requirements where it determines that the circumstances of a particular institution require it. At September 30, 2004, the Bank met each of its capital requirements. See Note 14 of the Notes to Consolidated Financial Statements for further information.
Prompt Corrective Regulatory Action. The Office of Thrift Supervision is required to take certain supervisory actions against undercapitalized institutions, the severity of which depends upon the institution's degree of undercapitalization. Generally, an institution that has a ratio of total capital to risk weighted assets of less than 8%, a ratio of Tier 1 (core) capital to risk-weighted assets of less than 4% or a ratio of core capital to total assets of less than 4% (3% or less for institutions with the highest examination rating) is considered to be "undercapitalized." An institution that has a total risk-based capital ratio less than 6%, a Tier 1 capital ratio of less than 3% or a leverage ratio that is less than 3% is considered to be "significantly undercapitalized" and an institution that has a tangible
capital to assets ratio equal to or less than 2% is deemed to be "critically undercapitalized." Subject to a narrow exception, the Office of Thrift Supervision is required to appoint a receiver or conservator for an institution that is "critically undercapitalized." The regulation also provides that a capital restoration plan must be filed with the Office of Thrift Supervision within 45 days of the date an institution receives notice that it is "undercapitalized," "significantly undercapitalized" or "critically undercapitalized." Compliance with the plan must be guaranteed by any parent holding company. In addition, numerous mandatory supervisory actions become immediately applicable to an undercapitalized institution, including, but not limited to, increased monitoring by regulators and restrictions on growth, capital distributions and expansion. The Office of Thrift Supervision could also take any one of a number of discretionary supervisory actions, including the issuance of a capital directive and the replacement of senior executive officers and directors.
Insurance of Deposit Accounts. The Bank is a member of the Savings Association Insurance Fund. The Federal Deposit Insurance Corporation maintains a risk-based assessment system by which institutions are assigned to one of three categories based on their capitalization and one of three subcategories based on examination ratings and other supervisory information. An institution's assessment rate depends upon the categories to which it is assigned. Assessment rates for Savings Association Insurance Fund member institutions are determined semi-annually by the Federal Deposit Insurance Corporation and currently range from zero basis points for the healthiest institutions to 27 basis points of assessable deposits for the riskiest.
The Federal Deposit Insurance Corporation has authority to increase insurance assessments. A significant increase in Savings Association Insurance Fund insurance premiums would likely have an adverse effect on the operating expenses and results of operations of the Bank. Management cannot predict what insurance assessment rates will be in the future.
Insurance of deposits may be terminated by the Federal Deposit Insurance Corporation upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the Federal Deposit Insurance Corporation or the Office of Thrift Supervision. The management of the Bank does not know of any practice, condition or violation that might lead to termination of deposit insurance.
Loans to One Borrower. Federal law provides that OTS regulated institutions are generally subject to the limits on loans to one borrower applicable to national banks. Such an institution may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of its unimpaired capital and surplus. An additional amount may be lent, equal to 10% of unimpaired capital and surplus, if secured by specified readily marketable collateral. At September 30,
2004, the Bank's limit on loans to one borrower was $16.0 million, and the Bank's largest aggregate outstanding balance of loans to one borrower was $10.5 million.
QTL Test. The HOLA requires OTS regulated institutions to meet a qualified thrift lender test. Under the test, such an institution is required to either qualify as a "domestic building and loan association" under the Internal Revenue Code or maintain at least 65% of its "portfolio assets" (total assets less: (i) specified liquid assets up to 20% of total assets; (ii) intangibles, including goodwill; and (iii) the value of property used to conduct business) in certain "qualified thrift investments" (primarily residential mortgages and related investments, including certain mortgage-backed securities) in at least 9 months out of each 12 month period.
An institution that fails the qualified thrift lender test is subject to certain operating restrictions and may be required to convert to a bank charter. As of September 30, 2004, the Bank met the qualified thrift lender test. Recent legislation has expanded the extent to which education loans, credit card loans and small business loans may be considered "qualified thrift investments."
Limitation on Capital Distributions. Office of Thrift Supervision regulations impose limitations upon all capital distributions by a regulated institution, including cash dividends, payments to repurchase its shares and payments to shareholders of another institution in a cash-out merger. Under the regulations, an application to and the prior approval of the Office of Thrift Supervision is required prior to any capital distribution if the institution does not meet the criteria for "expedited treatment" of applications under Office of Thrift Supervision regulations (i.e., generally, examination ratings in the two top categories), the total capital distributions for the calendar year exceed net income for that year plus the amount of retained net income for the preceding two years, the institution would be undercapitalized following the distribution or the distribution would otherwise be contrary to a statute, regulation or agreement with Office of Thrift Supervision. If an application is not required, the institution must still provide prior notice to Office of Thrift Supervision of the capital distribution if, like the Bank, it is a subsidiary of a holding company. In the event the Bank's capital fell below its regulatory requirements or the Office of Thrift Supervision notified it that it was in need of more than normal supervision, the Bank's ability to make capital distributions could be restricted. In addition, the Office of Thrift Supervision could prohibit a proposed capital distribution by any institution, which would otherwise be permitted by the regulation, if the Office of Thrift Supervision determines that such distribution would constitute an unsafe or unsound practice.
Assessments. OTS regulated institutions are required to pay assessments to the Office of Thrift Supervision to fund the agency's operations. The general assessments, paid on a semi-annual basis, are computed upon the institution's total assets, including consolidated
subsidiaries, as reported in the Bank's latest quarterly thrift financial report. The assessments paid by the Bank for the fiscal year ended September 30, 2004 totaled $224,000.
Transactions with Related Parties. The Bank's authority to engage in transactions with "affiliates" (e.g., any company that controls or is under common control with an institution, including the Company and its non-OTS regulated institution subsidiaries) is limited by federal law. The aggregate amount of covered transactions with any individual affiliate is limited to 10% of the capital and surplus of the institution. The aggregate amount of covered transactions with all affiliates is limited to 20% of the institution's capital and surplus. Certain transactions with affiliates are required to be secured by collateral in an amount and of a type described in federal law. The purchase of low quality assets from affiliates is generally prohibited. The transactions with affiliates must be on terms and under circumstances that are at least as favorable to the institution as those prevailing at the time for comparable transactions with non-affiliated companies. In addition, OTS regulated institutions are prohibited from lending to any affiliate that is engaged in activities that are not permissible for bank holding companies and no such institution may purchase the securities of any affiliate other than a subsidiary.
The Bank's authority to extend credit to executive officers, directors and 10% shareholders ("insiders"), as well as entities such persons control, is also governed by federal law. Such loans are required to be made on terms substantially the same as those offered to unaffiliated individuals and not involve more than the normal risk of repayment. Recent legislation created an exception for loans made pursuant to a benefit or compensation program that is widely available to all employees of the institution and does not give preference to insiders over other employees. The law limits both the individual and aggregate amount of loans the Bank may make to insiders based, in part, on the Bank's capital position and requires certain board approval procedures to be followed.
Enforcement. The Office of Thrift Supervision has primary enforcement responsibility over their regulated institutions and has the authority to bring actions against the institution and all institution-affiliated parties, including stockholders, and any attorneys, appraisers and accountants who knowingly or recklessly participate in wrongful action likely to have an adverse effect on an insured institution. Formal enforcement action may range from the issuance of a capital directive or cease and desist order, to removal of officers and/or directors, to institution of receivership, conservatorship or termination of deposit insurance. Civil penalties cover a wide range of violations and can amount to $25,000 per day, or even $1 million per day in especially egregious cases. The Federal Deposit Insurance Corporation has the authority to recommend to the Director of the Office of Thrift Supervision that enforcement action to be taken with respect to a particular regulated institution. If the Director does not take action, the Federal Deposit Insurance Corporation has authority to take
such action under certain circumstances. Federal law also establishes criminal penalties for certain violations.
Standards for Safety and Soundness. The federal banking agencies have adopted Interagency Guidelines prescribing Standards for Safety and Soundness. The guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. If the Office of Thrift Supervision determines that a regulated institution fails to meet any standard prescribed by the guidelines, the Office of Thrift Supervision may require the institution to submit an acceptable plan to achieve compliance with the standard.
Federal Home Loan Bank System
The Bank is a member of the Federal Home Loan Bank System, which consists of 12 regional Federal Home Loan Banks. The Federal Home Loan Bank provides a central credit facility primarily for member institutions. The Bank, as a member of the Federal Home Loan Bank, is required to acquire and hold shares of capital stock in that Federal Home Loan Bank in an amount at least equal to $500, 1.0% of the aggregate principal amount of its unpaid residential mortgage loans and similar obligations at the beginning of each year, or 1/20 of its advances (borrowings) from the Federal Home Loan Bank, whichever is greater. The Bank was in compliance with this requirement with an investment in Federal Home Loan Bank stock at September 30, 2004 of $16.9 million.
The Federal Home Loan Banks are required to provide funds for the resolution of insolvent thrifts in the late 1980s and to contribute funds for affordable housing programs. These requirements could reduce the amount of dividends that the Federal Home Loan Banks pay to their members and could also result in the Federal Home Loan Banks imposing a higher rate of interest on advances to their members. If dividends were reduced, or interest on future Federal Home Loan Bank advances increased, the Bank's net interest income would likely also be reduced. Recent legislation has changed the structure of the Federal Home Loan Banks funding obligations for insolvent thrifts, revised the capital structure of the Federal Home Loan Banks and implemented entirely voluntary membership for Federal Home Loan Banks. Management cannot predict the effect that these changes may have with respect to its Federal Home Loan Bank membership.
Federal Reserve System
The Federal Reserve Board regulations require OTS regulated institutions to maintain non-interest earning reserves against their transaction accounts (primarily NOW and regular checking accounts). The regulations generally provide that reserves be maintained against aggregate transaction accounts as follows: a 3% reserve ratio is assessed on net transaction accounts up to and including $45.4 million;
a 10% reserve ratio is applied above $45.4 million. The first $6.6 million of otherwise reservable balances (subject to adjustments by the Federal Reserve Board) are exempted from the reserve requirements. The amounts are adjusted annually. The Bank complies with the foregoing requirements.
Privacy Requirements of the GLBA
The Gramm-Leach-Bliley Act of 1999 provides for sweeping financial modernization for commercial banks, savings banks, securities firms, insurance companies, and other financial institutions operating in the United States. Among other provisions, the Gramm-Leach-Bliley Act places limitations on the sharing of consumer financial information with unaffiliated third parties. Specifically, the Gramm-Leach-Bliley Act requires all financial institutions offering financial products or services to retail customers to provide such customers with the financial institution's privacy policy and provide such customers the opportunity to "opt out" of the sharing of personal financial information with unaffiliated third parties.
Anti-Money Laundering
The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (referred to as the "USA PATRIOT Act") significantly expands the responsibilities of financial institutions, including savings and loan associations, in preventing the use of the U.S. financial system to fund terrorist activities. Title III of the USA PATRIOT Act provides for a significant overhaul of the U.S. anti-money laundering regime. Among other provisions, it requires financial institutions operating in the United States to develop new anti-money laundering compliance programs, due diligence policies and controls to ensure the detection and reporting of money laundering. Such required compliance programs are intended to supplement existing compliance requirements, also applicable to financial institutions, under the Bank Secrecy Act and the Office of Foreign Assets Control Regulations. We have established policies and procedures to ensure compliance with the USA PATRIOT Act's provisions, and the impact of the USA PATRIOT Act on our operations has not been material.
Other Regulations
Interest and other charges collected or contracted for by Coastal Federal are subject to state usury laws and federal laws concerning interest rates. Coastal Federal's loan operations are also subject to federal laws applicable to credit transactions, such as the:
o Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;
o Home Mortgage Disclosure Act of 1975, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves;
o Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit;
o Fair Credit Reporting Act of 1978, governing the use and provision of information to credit reporting agencies;
o Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies; and
o Rules and regulations of the various federal agencies charged with the responsibility of implementing such federal laws.
The deposit operations of Coastal Federal also are subject to the:
o Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records;
o Electronic Funds Transfer Act and Regulation E promulgated thereunder, which governs automatic deposits to and withdrawals from deposit accounts and customers' rights and liabilities arising from the use of automated teller machines and other electronic banking services; and
o Check Clearing for the 21st Century Act (also known as "Check 21"), which, effective October 28, 2004, gives "substitute checks," such as digital check images and copies made from that image, the same legal standing as the original paper check.
TAXATION
Federal Taxation
General. The Company and the Bank report their income via a consolidated return on a fiscal year basis using the accrual method of accounting and are subject to federal income taxation in the same manner as other corporations with some exceptions, including particularly the Bank's reserve for bad debts discussed below. The following discussion of tax matters is intended only as a summary and does not purport to be a comprehensive description of the tax rules applicable to the Bank or the Company.
Tax Bad Debt Reserves. For discussion related to the Bank's Tax Bad Debt Reserves, please refer to Note 12 of the Company's Annual Report to Stockholders for the fiscal year ended September 30, 2004.
Distributions. To the extent that the Bank makes "nondividend distributions" to the Company that are considered as made: (i) from the reserve for losses on qualifying real property loans, to the extent the reserve for such losses exceeds the amount that would have been allowed under the experience method; or (ii) from the supplemental reserve for losses on loans ("Excess Distributions"), then an amount based on the amount distributed will be included in the Bank's taxable income. Nondividend distributions include distributions in excess of the Bank's current and accumulated earnings and profits, distributions in redemption of stock, and distributions in partial or complete liquidation. However, dividends paid out of the Bank's current or accumulated earnings and profits, as calculated for federal income tax purposes, will not be considered to result in a distribution from the Bank's bad debt reserve. Thus, any dividends to the Company that would reduce amounts appropriated to the Bank's bad debt reserve and deducted for federal income tax purposes would create a tax liability for the Bank. The amount of additional taxable income attributable to an Excess Distribution is an amount that, when reduced by the tax attributable to the income, is equal to the amount of the distribution. Thus, if, the Bank makes a "nondividend distribution," then approximately one and one-half times the amount so used would be includable in gross income for federal income tax purposes, assuming a 35% corporate income tax rate (exclusive of state and local taxes). See "Regulation" for limits on the payment of dividends by the Bank. The Bank does not intend to pay dividends that would result in a recapture of any portion of its tax bad debt reserve.
Corporate Alternative Minimum Tax. The Code imposes a tax on alternative minimum taxable income ("AMTI") at a rate of 20%. Generally,
only 90% of AMTI can be offset by net operating loss carryovers. AMTI is increased by an amount equal to 75% of the amount by which the Bank's adjusted current earnings exceeds its AMTI (prior to reduction for net operating losses).
Dividends-Received Deduction and Other Matters. The Company may exclude from its income 100% of dividends received from the Bank as a member of the same affiliated group of corporations. The corporate dividends-received deduction is generally 70% in the case of dividends received from unaffiliated corporations with which the Company and the Bank will not file a consolidated tax return, except that if the Company or the Bank owns more than 20% of the stock of a corporation distributing a dividend, then 80% of any dividends received may be deducted.
State Income Taxation. South Carolina has adopted the Code as it relates to OTS regulated institutions, effective for taxable years beginning after December 31, 1985. Coastal Federal is subject to South Carolina income tax at the rate of 6% and North Carolina income tax at a rate of 6.9%. This rate of tax is imposed on OTS regulated institutions in lieu of the general state business corporation income tax.
For information regarding income taxes payable by Coastal Federal, see Note 12 of the Notes to Consolidated Financial Statements.
Audits. There have not been any audits of the Company's federal or state income tax returns during the past five years.
Item 2.
Item 2. Properties - ------------------
The principal offices of the Company are located in a 25,000 square foot Main Office at 2619 Oak Street in Myrtle Beach, SC. This facility also houses Coastal Mortgage Bankers and Realty Co, Inc, Coastal Investor Services, a division of Coastal Federal Bank, and many corporate functions. Several of the Bank's operations groups, including loan and deposit servicing, human resources, marketing, and residential lending administration, are in separate buildings owned by the Bank in Myrtle Beach. The Bank also owns a facility in Conway, SC, which houses its Item Processing and Technology functions.
At September 30, 2004, the Bank operated 13 branches in South Carolina and 5 branches in North Carolina. Of these, 4 are leased and 14 are owned.
The net book value of the Company's investment in office, properties and equipment totaled $18.8 million at September 30, 2004. See Note 6 of the Notes to the Consolidated Financial Statements. Coastal Federal uses the services of an independent data processing service to process customer records and monetary transactions, post deposit and general ledger entries and record activity in installment lending, loan servicing and loan originations.
Item 3.
Item 3. Legal Proceedings - -------------------------
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.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders - -----------------------------------------------------------
Not Applicable.
PART II
Item 5.
Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters - -------------------------------------------------------------------------------- and Issuer Purchases of Equity Securities -----------------------------------------
The information contained under the section captioned "Market for the Corporation's Common Stock and Related Stockholder Matters" in the Corporation's Annual Report to Stockholders for the Fiscal Year Ended September 30, 2004 ("Annual Report") is incorporated herein by reference.
Item 6.
Item 6. Selected Financial Data - -------------------------------
The information contained in the section captioned "Financial Highlights" in the Annual Report is incorporated herein by reference.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results - -------------------------------------------------------------------------------- of Operations -------------
The information contained in the section captioned "Management's Discussion and Analysis" in the Annual Report is incorporated herein by reference.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk - -------------------------------------------------------------------
The information contained in the section captioned "Interest Rate Risk Disclosure" in the Annual Report is incorporated herein by reference.
Item 8.
Item 8. Financial Statements and Supplementary Data - ---------------------------------------------------
The consolidated financial statements contained in the Annual Report which are listed under Item 14 herein are incorporated herein by reference.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and - -------------------------------------------------------------------------------- Financial Disclosure --------------------
The registrant has not, within the 24 months before the date of the most recent financial statements, changed its accountants, nor have there been any disagreements on accounting and financial disclosure.
Item 9A.
Item 9A. Evaluation of Disclosure Controls and Procedures and Changes in - -------------------------------------------------------------------------------- Internal Controls -----------------
The Company's management, including the Company's principal executive officer and principal financial officer, have evaluated the effectiveness of the Company's "disclosure controls and procedures," as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended, (the "Exchange Act"). Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company's disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the Securities and Exchange Commission (the "SEC") (1) is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and (2) is accumulated and communicated to the Company's management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. In addition, based on that evaluation, no change in the Company's internal control over financial reporting occurred during the year ended September 30, 2004 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.
Item 9B.
Item 9B. Other Information - --------------------------
None.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant - -----------------------------------------------------------
The information called for by Item 10 with respect to directors and Section 16 matters is set forth in the Registrant's Proxy Statement for its 2005 Annaul Meeting of Shareholders under the caption "Election of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance", respectively, and is hereby incorporated by reference. The information called for by Item 10 with respect to the indentification of the members of the Registrant's Audit Committe and the presence of an audit committee financial expert is set forth in the Registrant's Proxy Statement for the 2005 Annual Meeting of Shareholders under the captions "Committees of the Board of Directors" and is hereby incorporated by reference.
Certain executive officers of the Bank also serve as executive officers of the Corporation. The day-to-day management duties of the executive officers of the Company and the Bank relate primarily to their duties as to the Bank. The executive officers of the Company and the Bank are elected annually by the respective Boards of
Directors and hold office until their successors have been elected and qualified or until they are removed from office.
Executive Officers of the Registrant - ------------------------------------
Name, Age and Position Business Experience - ---------------------- -------------------
Michael C. Gerald, 55 Mr. Gerald has been associated with President, Chief Executive Coastal Federal since 1974 and serves as Officer and a Director Director, President and Chief Executive Officer of the Corporation and Bank. Mr. Gerald also serves as Director and President of Coastal Mortgage Bankers & Realty Company, Inc., as Director and President of Coastal Real Estate Investment Corporation, and as a Director of Coastal Retirement, Estate and Tax Planners, Inc. He currently serves on the Board of Visitors of Coastal Carolina University's Wall School of Business, as Chairman of the Board of Directors of the Waccamaw Community Foundation, on the Board of Directors of the Coastal Education Foundation, and on the Board of Trustees of the USC Business Partnership Foundation.
Jimmy R. Graham, 56, Mr. Graham serves as Executive Vice Executive Vice President and President and Chief Information Officer Chief Information Officer of Coastal Federal. Mr. Graham serves as Executive Vice President of Coastal Financial Corporation. He has been associated with the bank since 1977.
Jerry L. Rexroad, CPA, 44, Mr. Rexroad joined the Company in April Executive Vice President and 1995 and is Executive Vice President and Chief Financial Officer Chief Financial Officer of Coastal Federal and Coastal Financial Corporation. Mr. Rexroad also serves as the Chief Financial Officer and a Director for Coastal Mortgage Bankers & Realty Company, Inc., Coastal Investor Services, Inc., Coastal Planners Holding Corporation, Coastal Retirement Estate and Tax Planners, Coastal Federal Mortgage, Coastal Real Estate Investment Corporation and President of Coastal Federal Holdings Corporation. He is a Past Chairman of the Board of Directors for Junior Achievement of Horry County as well as Past Chairman of the Board of Directors for Junior Achievement of Greenville. Mr. Rexroad is a Director of PowerHouse Ministries, Inc. and Chairman of the Board of Deacons at Grand Strand Baptist Church. He is a certified public accountant, and is a member of the AICPA and SCACPA. Prior to joining the Company, Mr. Rexroad was a partner with KPMG LLP where he was partner in charge of the Financial Institutions practice in South Carolina.
Phillip G. Stalvey, 48, Mr. Stalvey is Executive Vice President Executive Vice President and Banking Group Leader for the Bank. and Banking Group Leader He also serves as an Executive Vice President of the Corporation and is a director of Coastal Federal Mortgage and Coastal Investor Services, Inc. He has been associated with Coastal Federal for the past 23 years. In addition, Mr. Stalvey is a member of the Florence Stake Presidency with his Church and a member of the Myrtle Beach Air Force Base Redevelopment Authority.
Steven J. Sherry, 53 Mr. Sherry joined the Company in May Executive Vice President and 1998 and is Executive Vice President and Director of Marketing Director of Marketing for the Bank. He also serves as Executive Vice President and Chief Marketing Officer for Coastal Financial Corporation. Mr. Sherry is a member of the Bank Marketing Association. He is active with Horry County United Way and serves on the Executive Board of the Franklin G. Burroughs-Simeon B. Chapin Art Museum. Mr. Sherry holds numerous achievement awards for marketing and advertising.
Susan J. Cooke, 54 Ms. Cooke is Senior Vice President and Senior Vice President and Corporate Secretary for Coastal Federal Corporate Secretary and for Coastal Financial Corporation, Corporate Secretary for Coastal Mortgage Bankers & Realty Company, Inc., and Coastal Investor Services, Inc. Ms. Cooke has been employed with Coastal Federal for seventeen years. She is a member of the American Society of Corporate Secretaries, Inc., the National Association for Female Executives, and is a Board Member of the Community Kitchen of Myrtle Beach, Inc.
Robert D. Douglas, 45 Mr. Douglas joined the corporation in Executive Vice President June 1994 and serves as Executive Vice Human Resources/Coastal President of the Bank and Coastal Federal University Group Financial Corporation. He previously served as Chairman of the Human Resources Committee of the South Carolina Community Bankers Association. He has served on various advisory committees for the Horry County Drug and Alcohol Commission, the South Carolina Employment Security Commission, Coastal Carolina and Horry Georgetown Technical College, and the Grand Strand Area Chamber of Commerce. He is a member of the Coastal Organization for Human Resources Management and serves as a member of Coastal Carolina University Career Services Advisory Board.
The Company has adopted a Code of Ethics, a copy of which is incorporated by reference to the September 30, 2003 Form 10-K filed on December 22, 2003. The Company intends to disclose any changes or waivers from the Code of Ethics in a report on Form 8-K.
Item 11.
Item 11. Executive Compensation - -------------------------------
The information contained under the section captioned "Proposal I -- Election of Directors -- Executive Compensation" in the Proxy Statement is incorporated herein by reference.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management - -----------------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by reference to the section captioned "Stock Ownership" of the Proxy Statement.
(b) Security Ownership of Management
Information required by this item is incorporated herein by reference to the section captioned "Stock Ownership" of the Proxy Statement.
(c) Management of the Corporation knows of no arrangements, including any pledge by any person of securities of the Corporation, the operation of which may at a subsequent date result in a change in control of the registrant.
(d) Equity Compensation Plan Information as of September 30, 2004
Item 13.
Item 13. Certain Relationships and Related Transactions - -------------------------------------------------------
The information required by this item is incorporated herein by reference to the section captioned "Transactions with Management" in the Proxy Statement.
Item 14.
Item 14. Principal Accountant Fees and Services - -----------------------------------------------
The information required by this item is incorporated herein by reference to the section captioned "Auditing and Related Fees" in the Proxy Statement.
PART IV
Item 15.
Item 15. Exhibits and Financial Statement Schedules - ---------------------------------------------------
1. Report of Independent Registered Public Accounting Firm (1)
2. All Financial Statements (1)
(a) Consolidated Statements of Financial Condition as of September 30, 2003 and 2004.
(b) Consolidated Statements of Operations for the Years Ended September 30, 2002, 2003, 2004.
(c) Consolidated Statements of Stockholders' Equity and Comprehensive Income for the Years Ended September 30, 2002, 2003, 2004.
(d) Consolidated Statements of Cash Flows for the Years Ended September 30, 2002, 2003, 2004.
(e) Notes to Consolidated Financial Statements.
3. All Schedules have been omitted, as the required information is either inapplicable or included in the Notes to consolidated Financial Statements.
4. Exhibits
3 (a) Certificate of Incorporation of Coastal Financial Corporation (1)
3 (b) Certificate of Amendment to Certificate of Incorporation of Coastal Financial Corporation (5)
3 (c) Bylaws of Coastal Financial Corporation (1)
10 (a) Employment Agreement with Michael C. Gerald (7)
(b) Employment Agreement with Jerry L. Rexroad (7)
(c) Employment Agreement with Phillip G. Stalvey (7)
(d) Employment Agreement with Steven J. Sherry (7)
(e) Employment Agreement with Jimmy R. Graham (7)
(f) 1990 Stock Option Plan (2)
(g) Directors Performance Plan (3)
(h) 2000 Stock Option Plan (4)
(i) Loan Agreement with Bankers Bank (6)
13 Annual Report to Stockholders for the Fiscal Year Ended September 30, 2004
14 Code of Ethics (7)
21 Subsidiaries of the Registrant
23 Consent of Independent Registered Public Accounting Firm
31 (a) Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
31 (b) Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
32 (a) Section 1350 Certification of Chief Executive Officer
32 (b) Section 1350 Certification of Chief Financial Officer
(1) Incorporated by reference to Registration Statement on Form S-4 filed with the Securities and Exchange Commission on November 26, 1990.
(2) Incorporated by reference to 1995 Form 10-K filed with the Securities and Exchange Commission on December 29, 1995.
(3) Incorporated by reference to the proxy statement for the 1996 Annual Meeting of Stockholders.
(4) Incorporated by reference to the proxy statement for the 2000 Annual Meeting of Stockholders.
(5) Incorporated by reference to the March 31, 1998 Form 10-Q filed with the Securities and Exchange Commission on May 15, 1998.
(6) Incorporated by reference to the December 31, 1997 Form 10-Q filed with the Securities and Exchange Commission on February 13, 1998.
(7) Incorporated by reference to the September 30, 2003 Form 10-K filed with the Securities and Exchange Commission on December 22, 2003.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
COASTAL FINANCIAL CORPORATION
Date: December 9, 2004 By: /s/Michael C. Gerald -------------------- Michael C. Gerald President/Chief Executive Officer (Duly Authorized Representative)
Pursuant to the requirement of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
By: /s/Michael C. Gerald By: /s/Jerry L. Rexroad -------------------- ------------------- Michael C. Gerald Jerry L. Rexroad President/Chief Executive Executive Vice President Officer And a Director And Chief Financial Officer (Principal Executive (Principal Financial and Officer) Accounting Officer)
Date: December 9, 2004 December 9, 2004
By: /s/James T. Clemmons By: /s/Frank A. Thompson, II -------------------- ------------------------ James T. Clemmons Frank A. Thompson, II Chairman of the Board Director
Date: December 9, 2004 Date: December 9, 2004
By: /s/James C. Benton By: /s/James P. Creel ------------------ ----------------- James C. Benton James P. Creel Director Director
Date: December 9, 2004 Date: December 9, 2004
By: /s/G. David Bishop By: /s/James H. Dusenbury ------------------ --------------------- G. David Bishop James H. Dusenbury Director Director
Date: December 9, 2004 Date: December 9, 2004
By: /s/E. Lawton Benton By: /s/J. Robert Calliham ------------------- --------------------- E. Lawton Benton J. Robert Calliham Director Director
Date: December 9, 2004 Date: December 9, 2004