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 March 31, 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 (March 31, 1997). Shares outstanding reflect the
four for three stock split declared on April 30, 1997.
Common Stock $.01 Par Value Per Share 4,636,696 Shares
(Class) (Outstanding)
<PAGE>
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER AND SIX MONTHS ENDED MARCH 31, 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 March 31, 1997
Consolidated Statements of Operations for the three
months ended March 31, 1996 and 1997
Consolidated Statements of Operations for the six
months ended March 31, 1996 and 1997
Consolidated Statements of Cash Flows for the six
months ended March 31, 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 March 31, 1996 and 1997
3. Management's Discussion and Analysis of Operations
for the six months ended March 31, 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
<PAGE>
<TABLE>
<CAPTION>
PART 1. FINANCIAL INFORMATION
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30, March 31,
1996 1997
--------- ---------
(Unaudited)
(Dollars in thousands)
<S> <C> <C>
ASSETS:
Cash & amounts due from banks .................... $ 15,639 $ 12,446
Short-term interest-bearing deposits ............. 5,222 1,948
Investment securities held to maturity
(market value of $332 at September 30,1996).... 330 --
Investment securities available for sale ......... 17,141 25,839
Mortgage-backed securities available for sale .... 27,029 38,837
Loans receivable (net of allowance for
loan losses of $4,172 at September 30,
1996 and $4,477 at March 31, 1997) ............ 370,368 382,277
Loans receivable held for sale ................... 6,803 5,048
Real estate acquired through foreclosure ......... 323 518
Office property and equipment, net ............... 5,736 5,915
Federal Home Loan Bank stock, at cost ............ 5,228 4,612
Accrued interest receivable on loans ............. 2,444 2,582
Accrued interest receivable on investments ....... 526 609
Other assets and deferred charges ................ 2,923 3,979
--------- ---------
$ 459,712 $ 484,610
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY:
LIABILITIES:
Deposits ......................................... $ 313,430 $ 332,193
Securities sold under agreements to
repurchase .................................... 3,365 1,431
Advances from Federal Home Loan Bank ............. 104,553 85,944
Other borrowings ................................. 1,968 28,402
Drafts outstanding ............................... 1,922 1,597
Advances by borrowers for property taxes
and insurance .................................. 1,435 798
Accrued interest payable ......................... 798 731
Other liabilities ................................ 4,560 3,978
--------- ---------
Total liabilities .............................. 432,031 455,074
--------- ---------
<PAGE>
<CAPTION>
PART 1. FINANCIAL INFORMATION
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (CONTINUED)
September 30, March 31,
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 4,636,696 shares
at March 31, 1997 issued and outstanding ...... 46 46
Additional paid-in capital ....................... 8,698 8,698
Retained earnings ................................ 20,015 21,319
Treasury stock, at cost (54,161 and 19,255
shares, respectively) .......................... (1,185) (461)
Unrealized gain (loss) on securities available
for sale, net of income taxes .................. 107 (66)
--------- ---------
Total stockholders' equity ..................... 27,681 29,536
--------- ---------
$ 459,712 $ 484,610
========= =========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PART 1. FINANCIAL INFORMATION
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997
1996 1997
----------- -----------
(Unaudited)
(Dollars in thousands)
<S> <C> <C>
Interest income:
Loans receivable ............................ $ 7,891 $ 8,275
Investment securities ....................... 130 322
Mortgage-backed securities .................. 414 560
Other ....................................... 142 72
----------- -----------
Total interest income ....................... 8,577 9,229
----------- -----------
Interest expense:
Deposits .................................... 2,805 3,365
Securities sold under agreement to
repurchase ................................ 91 214
Advances from Federal Home Loan Bank ........ 1,789 1,273
----------- -----------
Total interest expense ...................... 4,685 4,852
----------- -----------
Net interest income ......................... 3,892 4,377
Provision for loan losses ...................... 225 120
----------- -----------
Net interest income after provision
for loan losses ........................... 3,667 4,257
----------- -----------
Other income:
Fees and service charges .................... 331 417
Income (loss) from real estate owned ........ 55 (18)
Loss from real estate held for investment ... (27) --
Gain on sale of loans receivable, net ....... 318 175
Gain on sale of securities available for sale 6 12
Other income ................................ 449 433
----------- -----------
1,132 1,019
----------- -----------
General and administrative expenses:
Salaries and employee benefits .............. 1,629 1,649
Net occupancy, furniture and fixtures
and data processing expense ............... 697 696
FDIC insurance premium ...................... 156 50
Other expenses .............................. 473 715
----------- -----------
2,955 3,110
----------- -----------
<PAGE>
<CAPTION>
PART 1. FINANCIAL INFORMATION
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997 (CONTINUED)
1996 1997
----------- -----------
(Unaudited)
(Dollars in thousands)
<S> <C> <C>
Earnings before income taxes ................... 1,844 2,166
Income taxes ................................... 676 790
----------- -----------
Net income ..................................... $ 1,168 $ 1,376
=========== ===========
Earnings per common share ...................... $ .24 $ .28
=========== ===========
Weighted average common equivalent
shares outstanding ........................... 4,793,000 4,855,000
=========== ===========
Dividends per share ............................ $ .0825 $ .0825
=========== ===========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PART 1. FINANCIAL INFORMATION
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED MARCH 31, 1996 AND 1997
1996 1997
----------- -----------
(Unaudited)
(Dollars in thousands)
<S> <C> <C>
Interest income:
Loans receivable .......................... $ 15,746 $ 16,397
Investment securities ..................... 217 611
Mortgage-backed securities ................ 713 1,048
Other ..................................... 309 170
----------- -----------
Total interest income ..................... 16,985 18,226
----------- -----------
Interest expense:
Deposits .................................. 5,788 6,706
Securities sold under agreement to
repurchase .............................. 127 330
Advances from Federal Home Loan Bank ...... 3,527 2,626
----------- -----------
Total interest expense .................... 9,442 9,662
----------- -----------
Net interest income ....................... 7,543 8,564
Provision for loan losses .................... 340 350
----------- -----------
Net interest income after provision
for loan losses ......................... 7,203 8,214
----------- -----------
Other income:
Fees and service charges .................. 645 843
Income (loss) from real estate owned ...... 18 (74)
Income from real estate held for investment 69 278
Gain on sale of loans receivable, net ..... 597 403
Gain (loss) on sale of securities
available for sale ....................... (12) 30
Other income .............................. 750 853
----------- -----------
2,067 2,333
----------- -----------
General and administrative expenses:
Salaries and employee benefits ............ 3,063 3,337
Net occupancy, furniture and fixtures
and data processing expense ............. 1,365 1,456
FDIC insurance premium .................... 305 179
Other expenses ............................ 1,014 1,398
----------- -----------
5,747 6,370
----------- -----------
<PAGE>
<CAPTION>
PART 1. FINANCIAL INFORMATION
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED MARCH 31, 1996 AND 1997 (CONTINUED)
1996 1997
----------- -----------
(Unaudited)
(Dollars in thousands)
<S> <C> <C>
Earnings before income taxes ................. 3,523 4,177
Income taxes ................................. 1,297 1,523
----------- -----------
Net income ................................... $ 2,226 $ 2,654
=========== ===========
Earnings per common share .................... $ .47 $ .55
=========== ===========
Weighted average common equivalent
shares outstanding ......................... 4,767,000 4,848,000
=========== ===========
Dividends per share .......................... $ .165 $ .165
=========== ===========
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 SIX MONTHS ENDED MARCH 31, 1996 AND 1997
1996 1997
-------- --------
(Unaudited)
(In thousands)
<S> <C> <C>
Cash flows from operating activities:
Net earnings ..................................... $ 2,226 $ 2,654
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Income from real estate
held for investment ........................ (69) (278)
Depreciation ................................ 357 427
Provision for loan losses ................... 340 350
Origination of loans receivable
held for sale ............................. (21,936) (17,979)
Proceeds from sales of loans receivable
held for sale ............................. 19,014 19,734
(Increase) decrease in:
Other assets and deferred charges ............ (276) (1,056)
Accrued interest receivable .................. (594) (221)
Increase (decrease) in:
Accrued interest payable ..................... 149 (67)
Other liabilities ............................ 329 (582)
-------- --------
Net cash provided by (used in)
operating activities .................. (460) 2,982
-------- --------
Cash flows from investing activities:
Purchases of investment securities
available for sale .......................... (15,996) (14,177)
Proceeds from sales of investment
securities available for sale ............... 7,000 --
Proceeds from maturities of investment
securities available for sale ................ -- 5,686
Proceeds from maturities of mortgage-backed
securities available for sale ................ -- 949
Purchases of mortgage-backed securities
available for sale .......................... (8,952) (15,167)
Proceeds from sales of mortgage-backed
securities available for sale ............... 8,068 --
Origination of loans receivable, net ............. (67,824) (59,956)
Purchase of loans receivable ..................... (12,448) (3,065)
Principal collected on loans receivable
and mortgage-backed securities, net ......... 57,617 52,712
Proceeds from sale of real estate
acquired through foreclosure, net ........... 20 75
Purchases of office properties and
equipment .................................... (623) (606)
Purchases of FHLB stock, net ..................... (986) 616
Other investing activities, net .................. 82 51
-------- --------
Net cash used in
investing activities .................. (34,042) (32,882)
-------- --------
<PAGE>
<CAPTION>
PART 1. FINANCIAL INFORMATION
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED MARCH 31, 1996 AND 1997 (CONTINUED)
1996 1997
--------- --------
(Unaudited)
(In thousands)
<S> <C> <C>
Cash flows from financing activities:
Increase in deposits, net $ 10,814 $ 18,763
Decrease in securities sold
under agreement to repurchase, net (36) (1,934)
Proceeds from FHLB advances 56,650 62,500
Repayment of FHLB advances (35,742) (81,109)
Proceeds from other borrowings 7,435 26,434
Decrease in advance payments by borrowers
for property taxes and insurance (843) (637)
Decrease in drafts outstanding, net (768) (325)
Dividend to stockholders (682) (769)
Other financing activities, net 208 510
--------- --------
Net cash provided by financing activities 37,036 23,433
--------- --------
Net increase (decrease)
in cash and cash equivalents 2,534 (6,467)
--------- --------
Cash and cash equivalents at beginning
of the period 11,201 20,861
--------- --------
Cash and cash equivalents at end
of the period $ 13,735 $ 14,394
======== =======
Supplemental information:
Interest paid $ 16,837 $ 9,729
======== =======
Income taxes paid $ 1,492 $ 270
======== =======
Supplemental schedule of non-cash investing
and financing transactions:
Transfer of mortgage loans to real estate
acquired through foreclosure $ 40 $ 270
======== =======
Collateralization of mortgage loans to FHLMC
participation certificates $ 11,692 $ --
======== =======
Transfer of investment securities held to
maturity to available for sale $ 14,775 $ - -
======== =======
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
<PAGE>
<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 - - - - (581) 724 - - 143
Cash dividends - - - - (769) - - - - (769)
Change in unrealized gain
on securities available
for sale, net of
income taxes - - - - - - - - (173) (173)
Net income - - - - 2,654 - - - - 2,654
----------- ----------- ----------- ----------- ----------- -----------
Balance at March
30, 1997 $ 46 $ 8,698 $ 21,319 $ (461) $ (66) $ 29,536
========== ========== ========== ===== ========== ==========
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 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 six month periods ended March 31, 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, March 31,
1996 1997
--------- ---------
(Unaudited)
(In thousands)
<S> <C> <C>
First mortgage loans:
Single family to 4 family units ............. $ 224,570 $ 230,734
Other, primarily commercial
real estate ................................ 64,181 73,753
Construction loans .......................... 34,566 31,488
Consumer and commercial loans:
Installment consumer loans .................. 28,600 25,829
Mobile home loans ........................... 1,103 1,426
Deposit account loans ....................... 436 1,074
Equity lines of credit ...................... 12,441 13,109
Commercial and other loans .................. 26,946 24,824
--------- ---------
392,843 402,237
Less:
Allowance for loan losses ................... 4,172 4,477
Deferred loan fees (costs) .................. (286) (378)
Undisbursed portion of loans in process ..... 18,589 15,861
--------- ---------
$ 370,368 $ 382,277
========= =========
</TABLE>
<PAGE>
PART 1. FINANCIAL INFORMATION
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(2) LOANS RECEIVABLE, NET (CONTINUED)
The changes in the allowance for loan losses consist of the following for the
six months ended:
<TABLE>
<CAPTION>
March 31,
1996 1997
------- -------
(Unaudited)
(In thousands)
<S> <C> <C>
Beginning allowances ..................... $ 3,578 $ 4,172
Provision for loan losses ................ 340 375
Loan recoveries .......................... 11 43
Loan charge-offs ......................... (73) (113)
------- -------
Ending allowance ......................... $ 3,856 $ 4,477
======= =======
</TABLE>
(3) DEPOSITS
Deposits consist of the following:
<TABLE>
<CAPTION>
September 30, 1996 March 31, 1997
------------------------ -----------------------
Weighted Weighted
Amount Rate Amount Rate
-------- ---- -------- ----
(Unaudited)
(In thousands)
<S> <C> <C> <C> <C>
Transaction accounts ....... $140,577 3.24% $151,255 3.34%
Passbook accounts .......... 42,840 2.66 38,890 2.60
Certificate accounts ....... 130,013 5.64 142,048 5.71
-------- ---- -------- ----
$313,430 4.12% $332,193 4.25%
======== ==== ======== ====
</TABLE>
<PAGE>
PART 1. FINANCIAL INFORMATION
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(4) ADVANCES FROM FEDERAL HOME LOAN BANK
Advances from Federal Home Loan Bank ("FHLB") consist of the following:
<TABLE>
<CAPTION>
September 30, 1996 March 31, 1997
------------------------ -----------------------
Weighted Weighted
Amount Rate Amount Rate
-------- ---- -------- ----
(Unaudited)
(In thousands)
<S> <C> <C> <C> <C>
1 year $ 54,404 5.68 % $ 41,506 6.12%
2 years 20,120 5.90 3,898 5.30
3 years 13,105 6.35 20,577 6.35
4 years 6,861 6.46 1,926 6.47
5 years and thereafter 10,063 6.90 18,037 6.68
-------- ---- -------- ----
$104,553 5.97% $ 85,944 6.26%
======== ==== ====== ====
</TABLE>
At September 30, 1996, and March 31, 1997, the Bank had pledged first mortgage
loans with unpaid balances of approximately $223.4 million and $216.7 million,
respectively, as collateral for FHLB advances.
(5) EARNINGS PER SHARE
Earnings per share for the three and six month periods ended March 31, 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 split in the form of a 25% stock dividend, 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 MARCH 31, 1997
GENERAL
The Company reported $2.7 million in net earnings for the six months ended March
31, 1997, compared to net earnings of $2.2 million for the six months ended
March 31, 1996. Net interest income increased $1.0 million primarily as a result
of an increase in interest income of $1.2 million which was offset by an
increase in interest expense of $220,000. Provision for loan losses increased
from $340,000 for the six months ended March 31, 1996, to $350,000 for the six
months ended March 31, 1997. Other income increased from $2.1 million for the
six months ended March 31, 1996, to $2.3 million for the six months ended March
31, 1997. General and administrative expenses increased from $5.7 million for
the six months ended March 31, 1996, to $6.4 million for the six months ended
March 31, 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 $40.2 million at March 31, 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 6.6% at September 30, 1996, and March 31,
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 $89.8 million for the six months ended
March 31, 1996, compared to $77.9 million for the six months ended March 31,
1997. The majority of these loan originations were financed through loan and
mortgage-backed securities principal repayments which amounted to $57.6 million
<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 MARCH 31, 1996 AND 1997
LIQUIDITY AND CAPITAL RESOURCES- CONTINUED
and $52.7 million for the six month periods ended March 31, 1996 and 1997,
respectively. In addition, the Company sells certain loans in the secondary
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 six month period ended March 31, 1996, the Company sold $19.0
million in mortgage loans compared to $19.7 million sold for the six month
period ended March 31, 1997.
The Bank experienced an increase of $18.8 million in deposits for the six month
period ended March 31, 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 March 31, 1997, the Company had commitments to originate $3.9 million in
mortgage loans, and $29.8 million in undisbursed lines of credit, which the
Company expects to fund from normal operations.
At March 31, 1997, the Company had $117.1 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 March 31, 1997, the Company had pledged first mortgage loans in
the amount of $216.7 million to the FHLB which could support approximately $76.6
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 $29.3 million at March 31, 1997, exceeding tangible and
core capital requirements by $22.0 million and $14.8 million, respectively. At
March 31, 1997, the Bank's risk-based capital of approximately $32.7 million
exceeded its current risk-based capital requirement by $8.8 million. (For
further information see Regulatory Matters).
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATION FOR THE THREE MONTHS ENDED
MARCH 31, 1996 AND 1997
GENERAL
Net income increased from $1.2 million for the three months ended March 31,
1996, to $1.4 million for three months ended March 31, 1997, or 17.8%. Net
interest income increased $485,000 primarily as a result of an increase of
$652,000 in interest income offset by a $167,000 increase in interest expense.
Provision for loan losses decreased from $225,000 for three months ended March
31, 1996, to $120,000 for the three months ended March 31, 1997. Other income
decreased $113,000 primarily as a result of decreased income from the subsidiary
companies.
<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 MARCH 31, 1996 AND 1997
INTEREST INCOME
Interest income for the three months ended March 31, 1997, increased to $9.2
million as compared to $8.6 million for the three months ended March 31, 1996.
The earning asset yield for the three months ended March 31, 1997, was 8.45%
compared to a yield of 8.48% for the three months ended March 31, 1996. The
average yield on loans receivable for the three months ended March 31, 1997, was
8.66% compared to 8.58% for the three months ended March 31, 1996. The increase
in yield primarily resulted from repricing of adjustable-rate mortgage loans as
a result of higher general market rates during fiscal year 1997. The yield on
investments increased to 6.69% for the three months ended March 31, 1997, from
6.55% for the three months ended March 31, 1996. Total average interest-earning
assets were $440.6 million for the quarter ended March 31, 1997, as compared to
$409.8 million for the quarter ended March 31, 1996.
INTEREST EXPENSE
Interest expense on interest-bearing liabilities was $4.9 million for the three
months ended March 31, 1997, as compared to $4.7 million for March 31, 1996. The
average cost of deposits for the three months ended March 31, 1997, was 4.14%
compared to 4.03% for the three months ended March 31, 1996. As a result of a
greater portion of the Bank's balance sheet being funded by lower cost of
deposits, rather than outside borrowings, the cost on interest-bearing
liabilities was 4.51% for the three months ended March 31, 1997, as compared to
4.68% for the three months ended March 31, 1996. The cost on FHLB advances and
reverse repurchase agreements was 5.79% and 5.50%, respectively, for the three
months ended March 31, 1997. For the three months ended March 31, 1996, the cost
was 6.27% and 5.45% respectively. Total average interest-bearing liabilities
increased from $398.3 million at March 31, 1996 to $426.1 million at March 31,
1997.
NET INTEREST INCOME
Net interest income was $4.4 million for the three months ended March 31, 1997,
as compared to $3.9 million for the three months ended March 31, 1996. The net
interest margin increased to 3.94% for the three months ended March 31, 1997,
from 3.80% for the three months ended March 31, 1996.
PROVISION FOR LOAN LOSSES
The provision for loan losses decreased from $225,000 for the period ended March
31, 1996, to $120,000 for the three months ended March 31, 1997. For the three
months ended March 31, 1997, net charge-offs were $45,000 compared to net
charge-offs of $53,000 for the three months ended March 31, 1996. The allowance
for loan losses as a percentage of total loans was 1.16% at March 31, 1997,
compared to 1.11% at September 30, 1996. Loans delinquent 90 days or more were
.20% of total loans at March 31, 1997, compared to .12% at September 30, 1996.
The allowance for loan losses was 590% of loans delinquent more than 90 days at
March 31, 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'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION- CONTINUED
COMPARISONS OF THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997
OTHER INCOME
For the three months ended March 31, 1997, other income decreased 10.0% to $1.0
million compared to $1.1 million for the three months ended March 31, 1996.
Losses from real estate owned were $18,000 for the quarter ended March 31, 1997,
compared to income of $55,000 for the quarter ended March 31, 1996. Gain on sale
of loans was $175,000 for the three months ended March 31, 1997 compared to
$318,000 for the three months ended March 31, 1996. This is primarily
attributable to lower volume in the Coastal Federal Mortgage subsidiary. These
were partially offset by increased fees & services charges of $86,000.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased from $3.0 million for the three
months ended March 31, 1996, to $3.1 million for the three months ended March
31, 1997. Other expenses were $715,000 for the quarter ended March 31, 1997,
compared to $473,000 for the quarter ended March 31, 1996. This is primarily
attributable to increased marketing expenses of $95,000, expenses related to
checking accounts of $29,000 and miscellaneous expenses of $27,000. The increase
in other expenses were partially offset by lower FDIC premiums of $106,000 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.
INCOME TAXES
Income taxes increased from $676,000 for the three months ended March 31, 1996,
to $790,000 for the three months ended March 31, 1997, as a result of increased
income before taxes.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATION FOR THE SIX MONTHS ENDED MARCH
31, 1996 AND 1997
GENERAL
Net income increased from $2.2 million for the six months ended March 31, 1996,
to $2.7 million for six months ended March 31, 1997, or 19.2%. Net interest
income increased $1.0 million primarily as a result of an increase in interest
income of $1.2 million offset by an increase of $220,000 in interest expense.
Provision for loan losses increased from $340,000 for six months ended March 31,
1996, to $350,000 for the six months ended March 31, 1997. Other income
increased $266,000. General and administrative expenses increased $623,000.
<PAGE>
PART 1. FINANCIAL INFORMATION
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT DISCUSSION AND ANALYSIS OF OPERATION- CONTINUED
COMPARISONS OF THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997
INTEREST INCOME
Interest income for the six months ended March 31, 1997, increased to $18.2
million as compared to $17.0 million for the six months ended March 31, 1996.
The earning asset yield for the six months ended March 31, 1997, was 8.43%
compared to a yield of 8.52% for the six months ended March 31, 1996. The
average yield on loans receivable for the six months ended March 31, 1997, was
8.63% compared to 8.61% for the six months ended March 31, 1996. The yield on
investments increased to 6.72% for the six months ended March 31, 1997, from
6.41% for the six months ended March 31, 1996. Total average earning assets were
$436.2 million for the six month period ended March 31, 1997, as compared to
$402.5 million for the six month period ended March 31, 1996.
INTEREST EXPENSE
Interest expense on interest-bearing liabilities was $9.7 million for the six
months ended March 31, 1997, as compared to $9.4 million for the six months
ended March 31, 1996. The average cost of deposits for the six months ended
March 31, 1997, was 4.16% compared to 4.18% for the six months ended March 31,
1996. As a result of a greater portion of the balance sheet being funded by
lower cost deposit accounts rather than advances and other borrowings, the cost
of interest-bearing liabilities was 4.48% for the six months ended March 31,
1997, as compared to 4.80% for the six months ended March 31, 1996. Total
average interest-bearing liabilities increased from $392.1 million at March 31,
1996 to $429.1 million at March 31, 1997.
NET INTEREST INCOME
Net interest income was $8.6 million for the six months ended March 31, 1997, as
compared to $7.5 million for the six months ended March 31, 1996. The net
interest margin increased to 3.95% for the six months ended March 31, 1997, from
3.72% for the six months ended March 31, 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 increased from $340,000 for the period ended March
31, 1996, to $350,000 for the six months ended March 31, 1997. For the six
months ended March 31, 1997, net charge-offs were $70,000 compared to net
charge-offs of $62,000 for the six months ended March 31, 1996. The allowance
for loan losses as a percentage of total loans was 1.16% at March 31, 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.
<PAGE>
PART 1. FINANCIAL INFORMATION
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT DISCUSSION AND ANALYSIS OF OPERATION- CONTINUED
COMPARISONS OF THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997
OTHER INCOME
For the six months ended March 31, 1997, other income increased 12.9% to $2.3
million compared to $2.1 million for the six months ended March 31, 1996. Fees &
service charges for the six months ended March 31, 1996 were $645,000 compared
to $843,000 for the six months ended March 31, 1997. Income from real estate
held for investment increased by $209,000 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 $750,000 for the six months ended March 31, 1996
compared to $853,000 for the six months ended March 31, 1997, primarily from an
increase of $96,000 in ATM & debit card fees. These were partially offset by
decreased gain on sale of loans of $194,000 & increased losses from real estate
owned of $92,000.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased from $5.7 million for the six
months ended March 31, 1996, to $6.4 million for the six months ended March 31,
1997. Salaries and employee benefits increased $274,000, or 8.9%. Net occupancy,
furniture and fixtures and data processing expense increased $91,000. Other
expense was $1.0 million for the six months ended March 31, 1996, compared to
$1.4 million for the six months ended March 31, 1997. This is primarily due to
increased marketing expense of $79,000, checking related expenses of $102,000,
ATM & debit card expenses of $38,000, legal fees of $18,000 and miscellaneous
expenses of $39,000. These were partially offset by lower FDIC premiums of
$126,000.
INCOME TAXES
Income taxes increased from $1.3 million for the six months ended March 31,
1996, to $1.5 million for the six months ended March 31, 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 subect
to a capital directive order.
<PAGE>
PART 1. FINANCIAL INFORMATION
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT DISCUSSION AND ANALYSIS OF OPERATION- CONTINUED
COMPARISONS OF THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997
REGULATORY MATTERS - CONTINUED
<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 March 31, 1997:
Total Capital: $32,709 10.95% $32,709 8.00% $29,872 10.00%
(To Risk Weighted Assets)
Tier 1 Capital: $29,259 9.79% $29,259 N/A $17,923 6.00%
(To Risk Weighted Assets)
Tier 1 Capital: $29,259 6.06% $29,259 3.00% $24,135 5.00%
(To Total Assets)
Tangible Capital: $29,259 6.06% $29,259 1.50% $24,135 N/A
(To Total Assets)
</TABLE>
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
In May 1995, the FASB issued SFAS No. 122, "Accounting for Mortgage Servicing
Rights, an amendment of SFAS No. 65" which is effective prospectively for fiscal
years beginning after December 15, 1995. The statement requires the recognition
of an asset for the right to service mortgage loans for others, regardless of
how those rights were acquired (either purchased or originated). Further, it
amends SFAS 65 to require assessment of impairment based on fair value. Based
upon the Company's present mortgage lending operations, this statement did not
have a material effect on the Company.
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
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.
<PAGE>
PART 1. FINANCIAL INFORMATION
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS - CONTINUED
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.
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 befiefs 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 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
The Bank was a defendant in two significant lawsuits as summarized below.
The first action commenced on August 9, 1993, and the Plaintiff is seeking
approximately $400,000 in damages. The Plaintiff contended that the Bank
breached its fiduciary duties in handling of their accounts. The Bank defended
this suit and was found without damages on October 28, 1996 by the South
Carolina Circuit Court. The Plaintiff appealed this lawsuit on November 12,
1996. On February 11, 1997 the appeal of this lawsuit was denied.
The second lawsuit involves a wholly-owned subsidiary of Coastal Mortgage
Bankers & Realty Company, Inc. An answer to this suit was filed on October 29,
1993 on behalf of the Joint Venture. The Plaintiff's complaint was amended to
add additional Defendants on June 25, 1994. The Plaintiff alleged construction
deficiencies and was seeking damages in excess of $15.0 million. A subsidiary of
the Bank is a one-third owner in the joint venture company which was being sued.
On April 11, 1997 this lawsuit was settled and did not have a material adverse
effect on the Company.
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
At the annual stockholders meeting held on January 27, 1997, the following
items were ratified.
(a) The election of directors of all nominees: J.T. Clemmons, G. David
Bishop, Samuel A. Smart and James H. Dusenbury.
A total of 3,447,187 votes were entitled to be cast. Votes for Bishop were
2,821,396 with 6,024 withheld; votes for J. T. Clemmons were 2,823,082 with
4,337 withheld; votes for Samuel A. Smart were 2,826,579 with 840 withheld;
James H. Dusenbury were 2,826,579 with 8410 votes withheld.
J. T. Clemmons, G. David Bishop, and Samuel A. Smart are directors whose terms
continued after the meeting. New Director, James H. Dusenbury was elected.
(b)Ratification of an amendment to Coastal Financial Corporation's 1990
Stock Option and Incentive Plan.
A total of 3,447,187 votes were entitled to be cast. Votes for the Plan were
2,792,865 and votes against were 23,621 and votes abstained were 10,933.
<PAGE>
PART 2. OTHER INFORMATION - CONTINUED
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
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***
27 Financial Data Schedule
(b) The Company did not file any current reports on Form 8-K during the
quarter under report.
- -------------
* 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 10K 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.
<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
Date /s/Michael C. Gerald
--------------------
Michael C. Gerald
President and Chief Executive Officer
Date /s/Jerry L. Rexroad
-------------------
Jerry L.Rexroad
Executive Vice President and
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> MAR-31-1997
<CASH> 12,446
<INT-BEARING-DEPOSITS> 1,948
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 64,676
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 387,325
<ALLOWANCE> 4,477
<TOTAL-ASSETS> 484,610
<DEPOSITS> 332,193
<SHORT-TERM> 72,936
<LIABILITIES-OTHER> 5,507
<LONG-TERM> 44,438
0
0
<COMMON> 34
<OTHER-SE> 29,502
<TOTAL-LIABILITIES-AND-EQUITY> 484,610
<INTEREST-LOAN> 16,397
<INTEREST-INVEST> 1,659
<INTEREST-OTHER> 170
<INTEREST-TOTAL> 18,226
<INTEREST-DEPOSIT> 6,706
<INTEREST-EXPENSE> 9,662
<INTEREST-INCOME-NET> 8,564
<LOAN-LOSSES> (403)
<SECURITIES-GAINS> 30
<EXPENSE-OTHER> 6,370
<INCOME-PRETAX> 4,177
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,654
<EPS-PRIMARY> .55
<EPS-DILUTED> 0
<YIELD-ACTUAL> 8.43
<LOANS-NON> 0
<LOANS-PAST> 759
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 4,454
<CHARGE-OFFS> 113
<RECOVERIES> 43
<ALLOWANCE-CLOSE> 23
<ALLOWANCE-DOMESTIC> 4,477
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
