UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
FORM 10-Q
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended June 30, 1997
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to __________
Commission File Number: 0-19684
COASTAL FINANCIAL CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
State of Delaware 57-0925911
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2619 N. OAK STREET, MYRTLE BEACH, S. C. 29577
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (803) 448-5151
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [ X ] NO [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of (June 30, 1997).
Common Stock $.01 Par Value Per Share 4,640,751 Shares
- --------------------------------------------------------------------------------
(Class) (Outstanding)
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COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER AND NINE MONTHS ENDED JUNE 30, 1997
TABLE OF CONTENTS
PART 1- Consolidated Financial Statements
Item
1. Financial Statements (unaudited):
Consolidated Statements of Financial Condition
as of September 30, 1996 and June 30, 1997
Consolidated Statements of Operations for the three
months ended June 30, 1996 and 1997
Consolidated Statements of Operations for the nine
months ended June 30, 1996 and 1997
Consolidated Statements of Cash Flows for the nine
months ended June 30, 1996 and 1997
Consolidated Statements of Stockholders' Equity
Notes to Consolidated Financial Statements
2. Management's Discussion and Analysis of
Financial Condition
3. Management's Discussion and Analysis of Operations
for the three months ended June 30, 1996 and 1997
3. Management's Discussion and Analysis of Operations
for the nine months ended June 30, 1996 and 1997
Part II - Other Information
Item
1. Legal Proceedings
2. Changes in Securities
3. Default Upon Senior Securities
4. Submission of Matters to a Vote of Securities Holders
5. Other Materially Important Events
6. Exhibits and Reports on Form 8-K
Signatures
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<TABLE>
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PART 1. FINANCIAL INFORMATION
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30, June 30,
1996 1997
--------- ---------
(Unaudited)
(Dollars in thousands)
<S> <C> <C>
ASSETS:
Cash & amounts due from banks .................... $ 15,639 $ 14,057
Short-term interest-bearing deposits ............. 5,222 2,597
Investment securities held to maturity
(market value of $332 at September 30, 1996.... 330 --
Investment securities available for sale ......... 17,141 29,330
Mortgage-backed securities available for sale .... 27,029 42,939
Loans receivable (net of allowance for
loan losses of $4,172 at September 30,
1996 and $4,600 at June 30, 1997) ............. 370,368 389,423
Loans receivable held for sale ................... 6,803 5,332
Real estate acquired through foreclosure ......... 323 545
Office property and equipment, net ............... 5,736 5,981
Federal Home Loan Bank stock, at cost ............ 5,228 4,737
Accrued interest receivable on loans ............. 2,444 2,965
Accrued interest receivable on investments ....... 526 880
Other assets and deferred charges ................ 2,923 3,975
--------- ---------
$ 459,712 $ 502,761
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY:
LIABILITIES:
Deposits ......................................... $ 313,430 $ 331,996
Securities sold under agreements to
repurchase .................................... 5,333 40,256
Advances from Federal Home Loan Bank ............. 104,553 92,329
Drafts outstanding ............................... 1,922 1,046
Advances by borrowers for property taxes
and insurance .................................. 1,435 1,103
Accrued interest payable ......................... 798 848
Other liabilities ................................ 4,560 4,159
--------- ---------
Total liabilities .............................. 432,031 471,737
--------- ---------
</TABLE>
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<TABLE>
<CAPTION>
PART 1. FINANCIAL INFORMATION
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(CONTINUED)
September 30, June 30,
1996 1997
--------- ---------
(Unaudited)
(Dollars in thousands)
<S> <C> <C>
STOCKHOLDERS' EQUITY:
Serial preferred stock, 1,000,000 shares
authorized and unissued ....................... -- --
Common stock, $.01 par value, 5,000,000
shares authorized; 4,589,007 shares at
September 30, 1996 and 4,640,751 shares
at June 30, 1997 issued and outstanding ....... 46 46
Additional paid-in capital ....................... 8,698 8,698
Retained earnings ................................ 20,015 22,351
Treasury stock, at cost (54,161 and 15,543
shares, respectively) .......................... (1,185) (390)
Unrealized gain (loss) on securities available
for sale, net of income taxes .................. 107 319
--------- ---------
Total stockholders' equity ..................... 27,681 31,024
--------- ---------
$ 459,712 $ 502,761
========= =========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
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<TABLE>
<CAPTION>
PART 1. FINANCIAL INFORMATION
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 1996 AND 1997
1996 1997
----------- -----------
(Unaudited)
(Dollars in thousands)
<S> <C> <C>
Interest income:
Loans receivable ............................ $ 7,890 $ 8,542
Investment securities ....................... 235 513
Mortgage-backed securities .................. 546 713
Other ....................................... 77 38
----------- -----------
Total interest income ....................... 8,748 9,806
----------- -----------
Interest expense:
Deposits .................................... 2,833 3,410
Securities sold under agreement to
repurchase ................................ 101 523
Advances from Federal Home Loan Bank ........ 1,727 1,280
----------- -----------
Total interest expense ...................... 4,661 5,213
----------- -----------
Net interest income ......................... 4,087 4,593
Provision for loan losses ...................... 300 190
----------- -----------
Net interest income after provision
for loan losses ........................... 3,787 4,403
----------- -----------
Other income:
Fees and service charges .................... 379 367
Income (loss) from real estate owned ........ 183 (33)
Income from real estate held for investment . 79 --
Gain on sale of loans receivable, net ....... 212 225
Gain on sale of securities available for sale -- 3
Other income ................................ 438 432
----------- -----------
1,291 994
----------- -----------
General and administrative expenses:
Salaries and employee benefits .............. 1,578 1,714
Net occupancy, furniture and fixtures
and data processing expense ............... 722 677
FDIC insurance premium ...................... 156 52
Other expenses .............................. 659 556
----------- -----------
3,115 2,999
----------- -----------
</TABLE>
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<TABLE>
<CAPTION>
PART 1. FINANCIAL INFORMATION
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 1996 AND 1997
(CONTINUED)
1996 1997
----------- -----------
(Unaudited)
(Dollars in thousands)
<S> <C> <C>
Earnings before income taxes ................... 1,963 2,398
Income taxes ................................... 729 882
----------- -----------
Net income ..................................... $ 1,234 $ 1,516
=========== ===========
Earnings per common share ...................... $ .26 $ .31
=========== ===========
Weighted average common equivalent
shares outstanding ........................... 4,797,000 4,898,000
=========== ===========
Dividends per share ............................ $ .075 $ .09
=========== ===========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
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<TABLE>
<CAPTION>
PART 1. FINANCIAL INFORMATION
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED JUNE 30, 1996 AND 1997
1996 1997
----------- -----------
(Unaudited)
(Dollars in thousands)
<S> <C> <C>
Interest income:
Loans receivable .......................... $ 23,636 $ 24,939
Investment securities ..................... 451 1,123
Mortgage-backed securities ................ 1,259 1,761
Other ..................................... 387 209
----------- -----------
Total interest income ..................... 25,733 28,032
----------- -----------
Interest expense:
Deposits .................................. 8,621 10,116
Securities sold under agreement to
repurchase .............................. 228 854
Advances from Federal Home Loan Bank ...... 5,254 3,906
----------- -----------
Total interest expense .................... 14,103 14,876
----------- -----------
Net interest income ....................... 11,630 13,156
Provision for loan losses .................... 640 540
----------- -----------
Net interest income after provision
for loan losses ......................... 10,990 12,616
----------- -----------
Other income:
Fees and service charges .................. 1,023 1,209
Income (loss) from real estate owned ...... 201 (106)
Income from real estate held for investment 148 278
Gain on sale of loans receivable, net ..... 809 628
Gain (loss) on sale of securities
available for sale ....................... (12) 33
Other income .............................. 1,189 1,287
----------- -----------
3,358 3,329
----------- -----------
General and administrative expenses:
Salaries and employee benefits ............ 4,641 5,051
Net occupancy, furniture and fixtures
and data processing expense ............. 2,086 2,133
FDIC insurance premium .................... 461 231
Other expenses ............................ 1,674 1,955
----------- -----------
8,862 9,370
----------- -----------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PART 1. FINANCIAL INFORMATION
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED JUNE 30, 1996 AND 1997
(CONTINUED)
1996 1997
----------- -----------
(Unaudited)
(Dollars in thousands)
<S> <C> <C>
Earnings before income taxes ................. 5,486 6,575
Income taxes ................................. 2,027 2,405
----------- -----------
Net income ................................... $ 3,459 $ 4,170
=========== ===========
Earnings per common share .................... $ .72 $ .86
=========== ===========
Weighted average common equivalent
shares outstanding ......................... 4,781,000 4,865,000
=========== ===========
Dividends per share .......................... $ .225 $ .24
=========== ===========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PART 1. FINANCIAL INFORMATION
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE NINE MONTHS ENDED JUNE 30, 1996 AND 1997
1996 1997
--------- ---------
(Unaudited)
(In thousands)
<S> <C> <C>
Cash flows from operating activities:
Net earnings ............................................... $ 3,459 $ 4,170
Adjustments to reconcile net earnings
to net cash provided by (used in) operating activities:
Income from real estate
held for investment .................................. (148) (278)
Depreciation .......................................... 540 643
Provision for loan losses ............................. 640 540
Origination of loans receivable
held for sale ....................................... (34,600) (29,652)
Proceeds from sales of loans receivable
held for sale ....................................... 31,366 31,123
(Increase) decrease in:
Other assets and deferred charges ...................... (1,277) (1,052)
Accrued interest receivable ............................ (952) (875)
Increase (decrease) in:
Accrued interest payable ............................... (14) 50
Other liabilities ...................................... 628 (401)
--------- ---------
Net cash provided by (used in)
operating activities ............................ (358) 4,268
--------- ---------
Cash flows from investing activities:
Purchases of investment securities
available for sale .................................... (21,535) (20,023)
Proceeds from sales of investment
securities available for sale ......................... 7,000 2,399
Proceeds from maturities of investment
securities available for sale .......................... 1,000 5,936
Proceeds from maturities of mortgage-backed
securities available for sale .......................... -- 949
Purchases of mortgage-backed securities
available for sale .................................... (10,686) (24,636)
Proceeds from sales of mortgage-backed
securities available for sale ......................... 8,068 4,712
Origination of loans receivable, net ....................... (95,238) (103,523)
Purchase of loans receivable ............................... (12,448) (3,065)
Principal collected on loans receivable
and mortgage-backed securities, net ................... 76,356 89,517
Proceeds from sale of real estate
acquired through foreclosure, net ..................... 946 135
Purchases of office properties and
equipment .............................................. (787) (888)
Purchases of FHLB stock, net ............................... (1,508) 491
Other investing activities, net ............................ 96 51
--------- ---------
Net cash used in
investing activities ............................ (48,736) (47,945)
--------- ---------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PART 1. FINANCIAL INFORMATION
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED JUNE 30, 1996 AND 1997
(CONTINUED)
1996 1997
--------- ---------
(Unaudited)
(In thousands)
<S> <C> <C>
Cash flows from financing activities:
Increase in deposits, net .................... $ 18,795 $ 18,566
Increase in securities sold
under agreement to repurchase, net .......... 3,188 34,923
Proceeds from FHLB advances .................. 75,850 122,470
Repayment of FHLB advances ................... (48,352) (134,694)
Decrease in advance payments by borrowers
for property taxes and insurance .......... (509) (332)
Decrease in drafts outstanding, net .......... (801) (876)
Dividend to stockholders ..................... (1,059) (1,198)
Other financing activities, net .............. 281 611
--------- ---------
Net cash provided by financing activities .... 47,393 39,470
--------- ---------
Net decrease
in cash and cash equivalents ................ (1,701) (4,207)
--------- ---------
Cash and cash equivalents at beginning
of the period ................................ 11,201 20,861
--------- ---------
Cash and cash equivalents at end
of the period ................................ $ 9,500 $ 16,654
========= =========
Supplemental information:
Interest paid ................................ $ 25,747 $ 14,826
========= =========
Income taxes paid ............................ $ 2,237 $ 1,410
========= =========
Supplemental schedule of non-cash investing
and financing transactions:
Transfer of mortgage loans to real estate
acquired through foreclosure .............. $ 471 $ 357
========= =========
Collateralization of mortgage loans to FHLMC
participation certificates ................ $ 19,366 $ --
========= =========
Transfer of investment securities held to
maturity to available for sale ............. $ 14,775 $ --
========= =========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
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<TABLE>
<CAPTION>
PART 1. FINANCIAL INFORMATION
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Additional Total
Common Paid-In Retained Treasury Stockholders'
Stock Capital Earnings Stock Other Equity
----------- ----------- ----------- ----------- ----------- -----------
(Unaudited)
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at September
30, 1995 $ 46 $ 8,698 $ 18,674 $ (2,598) $ - - $ 24,820
Exercise of stock
options - - - - (863) 970 - - 107
Issuance of shares
in acquisition
of Coastal Federal
Mortgage - - - - (67) 443 - - 376
Cash paid for
fractional shares - - - - (17) - - - - (17)
Cash dividends - - - - (1,433) - - - - (1,433)
Unrealized gain on
securities available
for sale, net of
income taxes - - - - - - - - 107 107
Net income - - - - 3,721 - - - - 3,721
----------- ----------- ----------- ----------- ----------- -----------
Balance at September
30, 1996 $ 46 $ 8,698 $ 20,015 $ (1,185) $ 107 $ 27,681
Exercise of stock
options - - - - (636) 795 - - 159
Cash dividends - - - - (1,198) - - - - (1,198)
Change in unrealized gain
on securities available
for sale, net of
income taxes - - - - - - - - 212 (212)
Net income - - - - 4,170 - - - - 4,170
----------- ----------- ----------- ----------- ----------- -----------
Balance at June
30, 1997 $ 46 $ 8,698 $ 22,351 $ (390) $ 319 $ 31,024
========== ========== ========== ===== ========== ==========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
<PAGE>
PART 1. FINANCIAL INFORMATION
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements were prepared in
accordance with instructions for Form 10-Q and, therefore, do not include all
disclosures necessary for a complete presentation of financial condition,
results of operations, cash flows and changes in stockholders' equity in
conformity with generally accepted accounting principles. All adjustments,
consisting only of normal recurring accruals, which in the opinion of management
are necessary for fair presentation of the interim financial statements, have
been included. The results of operations for the three and nine month periods
ended June 30, 1997 are not necessarily indicative of the results which may be
expected for the entire fiscal year. These consolidated financial statements
should be read in conjunction with the Company's audited consolidated financial
statements and related notes for the year ended September 30, 1996, included in
the Company's 1996 Annual Report to Stockholders. The principal business of the
Company is conducted by its wholly-owned subsidiary, Coastal Federal Savings
Bank ("the Bank"). The information presented hereon, therefore, relates
primarily to the Bank.
(2) LOANS RECEIVABLE, NET
Loans receivable, net consist of the following:
<TABLE>
<CAPTION>
September 30, June 30,
1996 1997
--------- ---------
(Unaudited)
(In thousands)
<S> <C> <C>
First mortgage loans:
Single family to 4 family units ............. $ 228,192 $ 232,409
Other, primarily commercial
real estate ................................ 66,335 77,822
Construction loans .......................... 34,566 38,870
Consumer and commercial loans:
Installment consumer loans .................. 28,600 30,772
Mobile home loans ........................... 1,103 1,401
Deposit account loans ....................... 436 1,211
Equity lines of credit ...................... 12,441 13,736
Commercial and other loans .................. 21,170 17,995
--------- ---------
392,843 414,216
Less:
Allowance for loan losses ................... 4,172 4,600
Deferred loan fees (costs) .................. (286) (370)
Undisbursed portion of loans in process ..... 18,589 20,563
--------- ---------
$ 370,368 $ 389,423
========= =========
</TABLE>
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COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The changes in the allowance for loan losses consist of the following for the
nine months ended:
<TABLE>
<CAPTION>
June 30,
1996 1997
------- -------
(Unaudited)
(In thousands)
<S> <C> <C>
Beginning allowances ..................... $ 3,578 $ 4,173
Provision for loan losses ................ 640 540
Allowance on acquired loans .............. -- 25
Loan recoveries .......................... 70 57
Loan charge-offs ......................... (251) (195)
------- -------
Ending allowance ......................... $ 4,037 $ 4,600
======= =======
</TABLE>
PART 1. FINANCIAL INFORMATION
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(3) DEPOSITS
Deposits consist of the following:
<TABLE>
<CAPTION>
September 30, 1996 June 30, 1997
--------------------- ------------------------
Weighted Weighted
Amount Rate Amount Rate
-------- ---- -------- ----
(Unaudited)
(In thousands)
<S> <C> <C> <C> <C>
Transaction accounts ....... $140,577 3.24% $155,150 3.26%
Passbook accounts .......... 42,840 2.66 37,790 2.64
Certificate accounts ....... 130,013 5.64 139,056 5.67
-------- ---- -------- ----
$313,430 4.12% $331,996 4.19%
======== ==== ======== ====
</TABLE>
<PAGE>
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(4) ADVANCES FROM FEDERAL HOME LOAN BANK
Advances from Federal Home Loan Bank ("FHLB") consist of the following:
<TABLE>
<CAPTION>
September 30, 1996 June 30, 1997
--------------------- ------------------------
Weighted Weighted
Amount Rate Amount Rate
Maturing within: (Unaudited)
(In thousands)
<S> <C> <C> <C> <C>
1 year ..................... $ 54,404 5.68% $ 58,400 5.96%
2 years .................... 20,120 5.90 15,505 6.28
3 years .................... 13,105 6.35 5,661 6.21
4 years .................... 6,861 6.46 3,746 6.44
5 years and thereafter ..... 10,063 6.90 9,017 6.87
-------- ---- -------- ----
$104,553 5.97% $ 92,329 6.15%
======== ==== ======== ====
</TABLE>
At September 30, 1996, and June 30, 1997, the Bank had pledged first mortgage
loans with unpaid balances of approximately $223.4 million and $217.2 million,
respectively, as collateral for FHLB advances.
(5) EARNINGS PER SHARE
Earnings per share for the three and nine month periods ended June 30, 1996 and
1997, are computed by dividing net earnings by the weighted average common
equivalent shares outstanding during the respective periods. Common share
equivalents include dilutive common stock option share equivalents determined by
using the treasury stock method. All share and per share data have been
retroactively restated for all common stock dividends.
(6) COMMON STOCK DIVIDENDS
On May 30, 1995, the Company declared a 5% common stock dividend aggregating
102,003 shares. On January 9, 1996 and June 20, 1996, the Company declared a
five for four stock splits in the form of a 25% stock dividends, aggregating
approximately 542,000 and 687,000 shares, respectively. On April 30, 1997, the
Company declared a four for three stock split in the form of a 33% stock
dividend, aggregating approximately 1,160,000 shares. All share and per share
data has been retroactively restated to give effect to the common stock
dividends.
<PAGE>
PART 1. FINANCIAL INFORMATION
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
DISCUSSION OF FINANCIAL CONDITION CHANGES FROM SEPTEMBER 30, 1996 TO JUNE 30,
1997
GENERAL
The Company reported $4.2 million in net earnings for the nine months ended June
30, 1997, compared to net earnings of $3.5 million for the nine months ended
June 30, 1996. Net interest income increased $1.5 million primarily as a result
of an increase in interest income of $2.3 million which was offset by an
increase in interest expense of $773,000. Provision for loan losses decreased
from $640,000 for the nine months ended June 30, 1996, to $540,000 for the nine
months ended June 30, 1997. Other income decreased from $3.4 million for the
nine months ended June 30, 1996, to $3.3 million for the nine months ended June
30, 1997. General and administrative expenses increased from $8.9 million for
the nine months ended June 30, 1996, to $9.4 million for the nine months ended
June 30, 1997.
Liquid assets, consisting of cash, interest-bearing deposits, and investment
securities available for sale, increased from $38.3 million at September 30,
1996, to $46.0 million at June 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
In accordance with Office of Thrift Supervision (OTS) regulations, the Company
is required to maintain specific levels of cash and "liquid" investments in
qualifying types of United States Treasury and Federal Agency Securities and
other investments generally having maturities of five years or less. The
required level of such investments is calculated on a "liquidity base"
consisting of net withdrawable accounts and short-term borrowings, and is equal
to 5% of such amount. Short-term liquid assets must be 1.0% of the liquidity
base.
Historically, the Company has maintained its liquidity at levels believed by
management to be adequate to meet the requirements of normal operations,
potential deposit out-flows and strong loan demand and still allow for optimal
investment of funds and return on assets.
The Company's liquidity was 8.0% and 7.0% at September 30, 1996, and June 30,
1997, respectively as calculated in accordance with OTS regulations.
The principal sources of funds for the Company are cash flows from operations,
consisting mainly of mortgage, consumer and commercial loan payments, retail
customer deposits, advances from the FHLB, and loan sales.
The principal use of cash flows is the origination of loans receivable. The
Company originated loans receivable of $129.8 million for the nine months ended
June 30, 1996, compared to $133.2 million for the nine months ended June 30,
1997. The majority of these loan originations were financed through loan and
mortgage-backed securities principal repayments which amounted to $76.4 million
and $89.5 million for the nine month periods ended June 30, 1996 and 1997,
respectively. In addition, the Company sells certain loans in the secondary
<PAGE>
PART 1. FINANCIAL INFORMATION
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION- CONTINUED
COMPARISONS OF THE THREE MONTHS ENDED JUNE 30, 1996 AND 1997
LIQUIDITY AND CAPITAL RESOURCES- CONTINUED
market to finance future loan originations. Generally, these loans have
consisted only of mortgage loans which have been originated in the current
period. For the nine month period ended June 30, 1996, the Company sold $31.4
million in mortgage loans compared to $31.1 million sold for the nine month
period ended June 30, 1997.
The Bank experienced an increase of $18.6 million in deposits for the nine month
period ended June 30, 1997, primarily as a result of increased certificate of
deposit growth. During fiscal 1997, the Company funded a portion of its loan
growth and increase in securities available for sale with advances from the FHLB
and reverse repurchase agreements.
At June 30, 1997, the Company had commitments to originate $3.6 million in
mortgage loans, and $30.2 million in undisbursed lines of credit, which the
Company expects to fund from normal operations.
At June 30, 1997, the Company had $113.7 million of certificates of deposits
which were due to mature within one year. Based upon previous experience, the
Company believes that a major portion of these certificates will be renewed.
Additionally, at June 30, 1997, the Company had pledged first mortgage loans in
the amount of $217.4 million to the FHLB which could support approximately $70.6
million in additional advances.
As a condition of deposit insurance, current Federal Deposit Insurance
Corporation(FDIC) regulations require that the Bank calculate and maintain a
minimum regulatory capital requirement on a quarterly basis and satisfy such
requirement as of the calculation date and throughout the quarter. The Bank's
capital is approximately $30.4 million at June 30, 1997, exceeding tangible and
core capital requirements by $22.9 million and $15.4 million, respectively. At
June 30, 1997, the Bank's risk-based capital of approximately $33.9 million
exceeded its current risk-based capital requirement by $9.1 million.
(For further information see Regulatory Matters).
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS FOR THE THREE MONTHS ENDED
JUNE 30, 1996 AND 1997
GENERAL
Net income increased from $1.2 million for the three months ended June 30, 1996,
to $1.5 million for three months ended June 30, 1997, or 22.9%. Net interest
income increased $506,000 primarily as a result of an increase of $1.1 million
in interest income offset by a $552,000 increase in interest expense. Provision
for loan losses decreased from $300,000 for three months ended June 30, 1996, to
$190,000 for the three months ended June 30, 1997. Other income decreased
$297,000 primarily as a result of losses from real estate owned.
<PAGE>
PART 1. FINANCIAL INFORMATION
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT DISCUSSION AND ANALYSIS OF OPERATION- CONTINUED
COMPARISONS OF THE THREE MONTHS ENDED JUNE 30, 1996 AND 1997
INTEREST INCOME
Interest income for the three months ended June 30, 1997, increased to $9.8
million as compared to $8.7 million for the three months ended June 30, 1996.
The earning asset yield for the three months ended June 30, 1997, was 8.51%
compared to a yield of 8.34% for the three months ended June 30, 1996. The
average yield on loans receivable for the three months ended June 30, 1997, was
8.77% compared to 8.44% for the three months ended June 30, 1996. The increase
in yield primarily resulted from repricing of adjustable-rate mortgage loans as
a result of higher general market rates during the second and third quarters of
fiscal year 1997. The yield on investments increased to 6.90% for the three
months ended June 30, 1997, from 6.55% for the three months ended June 30, 1996
as a result of higher general market rates. Total average interest-earning
assets were $464.6 million for the quarter ended June 30, 1997, as compared to
$424.9 million for the quarter ended June 30, 1996.
INTEREST EXPENSE
Interest expense on interest-bearing liabilities was $5.2 million for the three
months ended June 30, 1997, as compared to $4.7 million for June 30, 1996. As a
result of increased general market rates, the average cost of deposits for the
three months ended June 30, 1997, was 4.13% compared to 3.95% for the three
months ended June 30, 1996. The cost on interest-bearing liabilities was 4.60%
for the three months ended June 30, 1997, as compared to 4.52% for the three
months ended June 30, 1996. The cost of FHLB advances and reverse repurchase
agreements was 5.96% and 5.69%, respectively, for the three months ended June
30, 1997. For the three months ended June 30, 1996, the cost was 5.86% and 5.75%
respectively. Total average interest-bearing liabilities increased from $412.7
million at June 30, 1996 to $453.3 million at June 30, 1997.
NET INTEREST INCOME
Net interest income was $4.6 million for the three months ended June 30, 1997,
as compared to $4.1 million for the three months ended June 30, 1996. The net
interest margin increased to 4.02% for the three months ended June 30, 1997,
from 3.82% for the three months ended June 30, 1996.
PROVISION FOR LOAN LOSSES
The provision for loan losses decreased from $300,000 for the period ended June
30, 1996, to $190,000 for the three months ended June 30, 1997. For the three
months ended June 30, 1997, net charge-offs were $68,000 compared to net
charge-offs of $119,000 for the three months ended June 30, 1996. The allowance
for loan losses as a percentage of total loans was 1.17% at June 30, 1997,
compared to 1.11% at September 30, 1996. Loans delinquent 90 days or more were
.13% of total loans at June 30, 1997, compared to .12% at September 30, 1996.
The allowance for loan losses was 905% of loans delinquent more than 90 days at
June 30, 1997, as compared to 938% at September 30, 1996. Management believes
that the current level of allowances is adequate considering the Company's
current loss experience and delinquency trends, among other criteria.
<PAGE>
PART 1. FINANCIAL INFORMATION
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT DISCUSSION AND ANALYSIS OF OPERATION- CONTINUED
COMPARISONS OF THE THREE MONTHS ENDED JUNE 30, 1996 AND 1997
OTHER INCOME
For the three months ended June 30, 1997, other income decreased 23.0% to
$994,000 compared to $1.3 million for the three months ended June 30, 1996.
Losses from real estate owned were $33,000 for the quarter ended June 30, 1997,
compared to income of $183,000 for the quarter ended June 30, 1996.
Additionally, income from real estate held for investment was $79,000 for the
quarter ended June 30, 1996. There was no sales of real estate for the quarter
ended June 30, 1997.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses decreased from $3.1 million for the three
months ended June 30, 1996, to $3.0 million for the three months ended June 30,
1997. Salaries and employee benefits increased slightly from $1.6 million for
the three months ended June 30, 1996, to $1.7 million for the three months ended
June 30, 1997. Net occupancy, furniture and fixtures and data processing
expenses decreased $45,000 when comparing the two periods. FDIC insurance
premiums were $156,000 for the quarter ended June 30, 1996, compared to $52,000
for the quarter ended June 30, 1997 as a result of the recapitalization of the
SAIF during 1996. As a result of the recapitalization the Company's deposit
insurance premiums decreased from .23% of insured deposits to .065% of insured
deposits. Other expenses were $556,000 for the quarter ended June 30, 1997,
compared to $659,000 for the quarter ended June 30, 1996.
INCOME TAXES
Income taxes increased from $729,000 for the three months ended June 30, 1996,
to $882,000 for the three months ended June 30, 1997, as a result of increased
income before taxes.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATION FOR THE NINE MONTHS ENDED JUNE
30, 1996 AND 1997
GENERAL
Net income increased from $3.5 million for the nine months ended June 30, 1996,
to $4.2 million for nine months ended June 30, 1997, or 20.6%. Net interest
income increased $1.5 million primarily as a result of an increase in interest
income of $2.3 million offset by an increase of $773,000 in interest expense.
Provision for loan losses decreased from $640,000 for nine months ended June 30,
1996, to $540,000 for the nine months ended June 30, 1997. Other income
increased $29,000. General and administrative expenses increased $508,000.
INTEREST INCOME
Interest income for the nine months ended June 30, 1997, increased to $28.0
million as compared to $25.7 million for the nine months ended June 30, 1996.
The earning asset yield for the nine months ended June 30, 1997, was 8.44%
compared to a yield of 8.45% for the nine months ended June 30, 1996. The
<PAGE>
PART 1. FINANCIAL INFORMATION
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT DISCUSSION AND ANALYSIS OF OPERATION- CONTINUED
COMPARISONS OF THE NINE MONTHS ENDED JUNE 30, 1996 AND 1997
INTEREST INCOME - CONTINUED
average yield on loans receivable for the nine months ended June 30, 1997, was
8.65% compared to 8.54% for the nine months ended June 30, 1996. The yield on
investments increased to 6.80% for the nine months ended June 30, 1997, from
6.47% for the nine months ended June 30, 1996. Total average earning assets were
$445.7 million for the nine month period ended June 30, 1997, as compared to
$409.7 million for the nine month period ended June 30, 1996.
INTEREST EXPENSE
Interest expense on interest-bearing liabilities was $14.9 million for the nine
months ended June 30, 1997, as compared to $14.1 million for the nine months
ended June 30, 1996. The average cost of deposits for the nine months ended June
30, 1997, was 4.15% compared to 4.10% for the nine months ended June 30, 1996.
The cost of interest-bearing liabilities was 4.57% for the nine months ended
June 30, 1997, as compared to 4.70% for the nine months ended June 30, 1996.
Total average interest-bearing liabilities increased from $398.7 million at June
30, 1996 to $432.3 million at June 30, 1997.
NET INTEREST INCOME
Net interest income was $13.2 million for the nine months ended June 30, 1997,
as compared to $11.6 million for the nine months ended June 30, 1996. The net
interest margin increased to 3.87% for the nine months ended June 30, 1997, from
3.75% for the nine months ended June 30, 1996. Since the majority of the
Company's assets are adjustable rate mortgage loans which reprice annually
versus many of the Company's liabilities which reprice more quickly, the Company
may experience a decrease in its interest rate spread should interest rates
increase rapidly.
PROVISION FOR LOAN LOSSES
The provision for loan losses decreased from $640,000 for the period ended June
30, 1996, to $540,000 for the nine months ended June 30, 1997. For the nine
months ended June 30, 1997, net charge-offs were $138,000 compared to net
charge-offs of $181,000 for the nine months ended June 30, 1996. The allowance
for loan losses as a percentage of total loans was 1.17% at June 30, 1997,
compared to 1.11% at September 30, 1996. Management believes that the current
level of allowances is adequate considering the Company's current loss
experience and delinquency trends, among other criteria.
OTHER INCOME
For the nine months ended June 30, 1997, other income decreased slightly to $3.3
million compared to $3.4 million for the nine months ended June 30, 1996. Fees &
service charges for the nine months ended June 30, 1996 were $1.0 million
compared to $1.2 million for the nine months ended June 30, 1997. Income from
real estate held for investment increased by $130,000 when comparing the two
periods. This is the result of a land sale that occurred in the first quarter of
fiscal 1997. Other income increased from $1.2 million for the nine months ended
June 30, 1996 compared to $1.3 million for the nine months ended June 30, 1997.
These were partially offset by a decrease in gain on sale of loans of $181,000 &
an increase in losses from real estate owned of $307,000.
<PAGE>
PART 1. FINANCIAL INFORMATION
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT DISCUSSION AND ANALYSIS OF OPERATION
COMPARISONS OF THE NINE MONTHS ENDED JUNE 30, 1996 AND 1997
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased from $8.9 million for the nine
months ended June 30, 1996, to $9.4 million for the nine months ended June 30,
1997. Salaries and employee benefits increased $410,000, or 8.8%. Net occupancy,
furniture and fixtures and data processing expense increased $47,000. Other
expense was $1.7 million for the nine months ended June 30, 1996, compared to
$2.0 million for the nine months ended June 30, 1997. This is primarily
attributed to increased marketing expenses of $49,000, checking related expenses
of $88,000, expenses related to ATM and debit cards of $45,000 and legal fees of
$26,000. These were partially offset by a decrease in FDIC premiums of $230,000.
INCOME TAXES
Income taxes increased from $2.0 million for the nine months ended June 30,
1996, to $2.4 million for the nine months ended June 30, 1997, as a result of
increased income before taxes.
REGULATORY MATTERS
Under the FDICIA prompt corrective action provisions applicable to banks, to be
categorized as "Well Capitalized", the institution must maintain a total
risk-based capital ratio as set forth in the following table and not be subject
to a capital directive order.
<TABLE>
<CAPTION>
Categorized as "Well
Capitalized" Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provision
------------------- ------------------ -------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
As of June 30, 1997:
Total Capital: ............ $33,924 10.94% $24,803 8.00% $31,004 10.00%
(To Risk Weighted Assets)
Tier 1 Capital: ........... $30,391 9.80% $ N/A N/A% $18,602 6.00%
(To Risk Weighted Assets)
Tier 1 Capital: ........... $30,391 6.08% $15,006 3.00% $25,010 5.00%
(To Total Assets)
Tangible Capital: ......... $30,391 6.08% $ 7,503 1.50% $ N/A N/A%
(To Total Assets)
</TABLE>
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock Based
Compensation" which is effective for financial statements issued for fiscal
years beginning after December 15, 1995. SFAS No. 123 provides guidance on the
<PAGE>
PART 1. FINANCIAL INFORMATION
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS - CONTINUED
valuation of compensation costs arising from both fixed and performance stock
compensation plans. SFAS No. 123 encourages but does not require entities to
account for stock compensation awards based on their estimated fair value on the
date they are granted. Entities can continue to follow current accounting
requirements, which generally do not result in an expense charge for most
options. However, they must disclose in a footnote to their financial statements
what the effect on net income and earnings per share would have been had they
used the fair value model. The Company expects to continue its current
accounting practice. Therefore, this statement will generally not have a
material effect on future operating results.
In June, 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities." This statement
will become effective for transactions occurring after December 31, 1996 and
supersedes SFAS No. 122. The Statement uses a "financial components" approach
that focuses on control to determine the proper accounting for financial asset
transfers. Under that approach, after financial assets are transferred, an
entity would recognize on its balance sheet all assets it controls and
liabilities it has incurred. The entity would remove from the balance sheet
those assets it no longer controls and liabilities it has satisfied. The
adoption of this standard did not have a material effect on the Company's
financial statements in fiscal 1997.
In February 1997, the FASB issued SFAS No. 128, Earnings per Share, which is
effective for both interim and annual periods ending after December 15, 1997.
This statement supersedes Accounting Principles Board Opinion No. 15, Earnings
per Share. The purpose of this statement is to simplify current reporting and
make U.S. reporting comparable to international standards. The statement
requires dual presentation of basic and diluted EPS by entities with complex
capital structures (as defined by the statement). The Company anticipates that
adoption of this standard will not have a material affect on EPS.
Also, in February 1997, the FASB issued SFAS No. 129, Disclosure of information
about Capital Structure, which is effective for financial statements for periods
ending after December 15, 1997. This statement applies to both public and
nonpublic entities. The new statement requires no change for entities subject to
the existing requirements. The Company anticipates that adoption of the standard
will not have a material affect on the Company.
In June 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 130, Reporting Comprehensive Income
(Statement 130). Statement 130 establishes standards for reporting and display
of comprehensive income and its components in a full set of general purpose
financial statements. Enterprises are required to classify items of "other
comprehensive income" by their nature in the financial statement and display the
balance of other comprehensive income separately in the equity section of a
statement of financial position. Statement 130 is effective for both interim and
annual periods beginning after December 15, 1997. Earlier application is
permitted. Comparative financial statements provided for earlier periods are
required to be reclassified to reflect the provisions of this statement. The
Company will adopt Statement 130 effective March 31, 1998, and will provide the
required disclosures in the Company's Form 10-Q.
<PAGE>
PART 1. FINANCIAL INFORMATION
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS - CONTINUED
In June 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 131, Disclosures about Segments of an
Enterprise and Related Information (Statement 131). Statement 131 establishes
standards for the way public business enterprises are to report information
about operating segments in annual financial statements and requires those
enterprises to report selected information about operating segments in interim
financial reports issued to shareholders. Statement 131 is effective for
financial statements for periods beginning after December 15, 1997. Earlier
application is encouraged. In the initial year of application, comparative
information for earlier years is to be restated, unless it is impractical to do
so. Statement 131 need not be applied to interim financial statements in the
initial year of its application, but comparative information for interim periods
in the initial year of application shall be reported in financial statements for
interim periods in the second year of application. It is not anticipated that
this standard will materially effect the Company.
EFFECT ON INFLATION AND CHANGING PRICES
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles which require the
measurement of financial position and results of operations in terms of
historical dollars, without consideration of change in the relative purchasing
power over time due to inflation. Unlike most industrial companies, virtually
all of the assets and liabilities of a financial institution are monetary in
nature. As a result, interest rates have a more significant impact on a
financial institution's performance than the effects of inflation. Interest
rates do not necessarily change in the same magnitude as the price of goods and
services.
FORWARD LOOKING STATEMENTS
This report may contain certain "forward-looking statements" within the meaning
of Section 27A of the Securities Exchange Act of 1934, as amended, that
represent the Company's expectations or beliefs concerning future events. Such
forward-looking statements are about matters that are inherently subject to
risks and uncertainties. Factors that could influence the matters discussed in
certain forward-looking statements include the timing and amount of revenues
that may be recognized by the Company, continuation of current revenue and
expense trends (including trends affecting charge-offs), absence of unforeseen
changes in the Company's markets, legal and regulatory changes, and general
changes in economy (particularly in the markets served by the Company).
<PAGE>
PART 2. OTHER INFORMATION
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Item 1. Legal Proceedings
Not Applicable.
Item 2. Changes In Securities
Not Applicable.
Item 3. Defaults Upon Senior Securities
Not Applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable.
Item 5. Other Information
Not Applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3 (a) Certificate of Incorporation of Coastal Financial
Corporation*
3 (b) Bylaws of Coastal Financial Corporation*
10 (a) Employment Agreement with Michael C. Gerald**
(b) Employment Agreement with Jerry L. Rexroad**
(c) Employment Agreement with Phillip G. Stalvey**
(d) Employment Agreement with Allen W. Griffin**
(e) Employment Agreement with Jimmy R. Graham**
(f) Employment Agreement with Richard L. Granger**
(g) Employment Agreement with Robert S. O'Harra**
(h) 1990 Stock Option Plan**
(i) Directors Performance Plan***
(j) Credit agreement between Coastal Financial Corporation
and Bank South dated as of December 19, 1995****
27 Financial Data Schedule
(b) The Company did not file any current reports on Form 8-K during the
quarter under report.
<PAGE>
* Incorporated by reference to Registration Statement on Form S-4 filed
with the Securities and Exchange Commission on November 26, 1990.
** Incorporated by reference to 1995 Form 10-K filed with the Securities
and Exchange Commission on December 29, 1995.
*** Incorporated by reference to the proxy statement for the 1997 Annual
Meeting of Stockholders.
**** Incorporated by reference to current report on Form 8-K dated January
17, 1996.
<PAGE>
SIGNATURES
Pursuant to the requirement of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
COASTAL FINANCIAL CORPORATION
August 13, 1997 /s/Michael C. Gerald
- --------------- --------------------
Date: Michael C. Gerald
President and Chief Executive Officer
August 13, 1997 /s/Jerry L. Rexroad
- --------------- -------------------
Date: Jerry L. Rexroad
Executive Vice President and
Chief Financial Officer
<TABLE> <S> <C>
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<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> JUN-30-1997
<CASH> 14,057
<INT-BEARING-DEPOSITS> 2,597
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<ALLOWANCE> 4,600
<TOTAL-ASSETS> 502,761
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<SHORT-TERM> 99,702
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