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 December 31, 1996
( ) 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 (December 31, 1996).
Common Stock $.01 Par Value Per Share 3,452,112 Shares
- --------------------------------------------------------------------------------
(Class) (Outstanding)
<PAGE>
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 31, 1996
TABLE OF CONTENTS
PART 1- Consolidated Financial Statements
Item
1. Financial Statements (unaudited):
Consolidated Statements of Financial Condition
as of September 30, 1996 and December 31, 1996
Consolidated Statements of Operations for the three
months ended December 31, 1995 and 1996
Consolidated Statements of Cash Flows for the three
months ended December 31, 1995 and 1996
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 December 31, 1995 and 1996
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,December 31,
1996 1996
(Unaudited)
(Dollars in thousands)
<S> <C> <C>
ASSETS:
Cash & amounts due from banks .................... $ 15,639 $ 12,385
Short-term interest-bearing deposits ............. 5,222 1,056
Investment securities held to maturity
(market value of $332 at September 30,
1996 and $331 at December 31, 1996) ........... 330 330
Investment securities available for sale ......... 17,141 14,365
Mortgage-backed securities available for sale .... 27,029 27,756
Loans receivable (net of allowance for
loan losses of $4,172 at September 30,
1996 and $4,377 at December 31, 1996) ......... 370,368 375,326
Loans receivable held for sale ................... 6,803 6,069
Real estate acquired through foreclosure ......... 323 258
Office property and equipment, net ............... 5,736 5,866
Federal Home Loan Bank stock, at cost ............ 5,228 4,545
Accrued interest receivable on loans ............. 2,444 2,446
Accrued interest receivable on investment
securities .................................... 526 548
Other assets and deferred charges ................ 2,923 3,005
--------- ---------
$ 459,712 $ 453,955
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY:
LIABILITIES:
Deposits ......................................... $ 313,430 $ 322,048
Securities sold under agreements to
repurchase .................................... 3,365 2,747
Advances from Federal Home Loan Bank ............. 104,553 90,903
Other borrowings ................................. 1,968 3,555
Drafts outstanding ............................... 1,922 759
Advances by borrowers for property taxes
and insurance ................................. 1,435 430
Accrued interest payable ......................... 798 771
Other liabilities ................................ 4,560 3,814
--------- ---------
Total liabilities .............................. 432,031 425,027
--------- ---------
<PAGE>
<CAPTION>
PART 1. FINANCIAL INFORMATION
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (CONTINUED)
September 30,December 31,
1996 1996
(Unaudited)
(Dollars in thousands)
(continued)
<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; 3,442,616 shares at
September 30, 1996 and 3,452,112 shares
at December 31, 1996 issued and outstanding ... 34 34
Additional paid-in capital ....................... 8,710 8,710
Retained earnings ................................ 20,015 20,781
Treasury stock, at cost (54,161 and 44,665
shares, respectively) .......................... (1,185) (971)
Unrealized gain on securities available
for sale, net of income taxes .................. 107 374
--------- ---------
Total stockholders' equity ..................... 27,681 28,928
--------- ---------
$ 459,712 $ 453,955
========= =========
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 DECEMBER 31, 1995 AND 1996
1995 1996
---- ----
(Unaudited)
(Dollars in thousands
except per share data)
<S> <C> <C>
Interest income:
Loans receivable .......................... $ 7,855 $ 8,121
Investment securities ..................... 87 289
Mortgage-backed securities ................ 299 488
Other ..................................... 167 99
----------- -----------
Total interest income ..................... 8,408 8,997
----------- -----------
Interest expense:
Deposits .................................. 2,983 3,342
Securities sold under agreements to
repurchase .............................. 28 25
Advances from Federal Home Loan Bank ...... 1,738 1,352
Other borrowings .......................... 8 91
----------- -----------
Total interest expense .................... 4,757 4,810
----------- -----------
Net interest income ....................... 3,651 4,187
Provision for loan losses .................... 115 230
----------- -----------
Net interest income after provision
for loan losses ......................... 3,536 3,957
----------- -----------
Other income:
Fees and service charges on loans and
deposit accounts ........................ 313 426
Loss from real estate owned ............... (36) (55)
Income from real estate partnerships ...... 96 327
Gain on sale of loans receivable, net ..... 279 228
Gain (loss) on sale of securities
available for sale ...................... (18) 18
Other income .............................. 301 419
----------- -----------
Total other income ........................ 935 1,363
----------- -----------
Other expense:
Salaries and employee benefits ............ 1,434 1,688
Net occupancy, furniture and fixtures
and data processing expense ............. 667 760
FDIC insurance premium .................... 150 129
Other expenses ............................ 541 731
----------- -----------
Total other expense ....................... 2,792 3,308
----------- -----------
<PAGE>
<CAPTION>
PART 1. FINANCIAL INFORMATION
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED DECEMBER 31, 1995 AND 1996 (CONTINUED)
1995 1996
---- ----
(Unaudited)
(Dollars in thousands
except per share data)
<S> <C> <C>
Earnings before income taxes ................. 1,679 2,012
Income taxes ................................. 621 734
----------- -----------
Net Earnings ................................. $ 1,058 $ 1,278
=========== ===========
Earnings per common share .................... $ .30 $ .35
=========== ===========
Weighted average common shares outstanding ... 3,558,000 3,631,000
=========== ===========
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 THREE MONTHS ENDED DECEMBER 31, 1995 AND 1996
1995 1996
---- ----
(Unaudited)
(In thousands)
<S> <C> <C>
Cash flows from operating activities:
Net earnings ..................................... $ 1,058 $ 1,278
Adjustments to reconcile net earnings
to net cash used in operating activities:
Income from real estate partnerships ........ (96) (327)
Depreciation ................................ 176 213
Provision for loan losses ................... 115 230
Origination of loans receivable held for sale .... (10,336) (20,153)
Proceeds from sales of loans receivable
held for sale .............................. 7,894 11,647
(Increase) decrease in:
Other assets and deferred charges ............ 216 (82)
Accrued interest receivable .................. (273) (24)
Increase (decrease) in:
Accrued interest payable ..................... 161 (27)
Other liabilities ............................ 516 (746)
-------- --------
Net cash used in operating activities ......... (569) (7,991)
-------- --------
Cash flows from investing activities:
Purchases of investment securities
available for sale ........................... (7,000) (1,502)
Proceeds from sales of investment
securities available for sale ............... 1,000 --
Proceeds from maturities of investment
securities available for sale ............... -- 4,356
Purchase of mortgage-backed securities
available for sale .......................... (4,877) (2,411)
Origination of loans receivable .................. (26,191) (22,896)
Purchase of loans receivable ..................... (6,922) --
Principal collected on loans receivable
and mortgage-backed securities .............. 27,632 28,050
Proceeds from sale of real estate
acquired through foreclosure ................ -- 65
Purchase of office properties and
equipment .................................... (424) (343)
Purchase of FHLB stock ........................... (1,064) 683
Other investing activities, net .................. 104 51
-------- --------
Net cash provided by (used in)
investing activities .................. (17,742) 6,053
-------- --------
<PAGE>
<CAPTION>
PART 1. FINANCIAL INFORMATION
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE THREE MONTHS ENDED DECEMBER 31, 1995 AND 1996 (CONTINUED)
1995 1996
---- ----
(Unaudited)
(In thousands)
<S> <C> <C>
Cash flows from financing activities:
Increase (decrease) in deposits ................ $ 86 $ 8,618
Increase (decrease) in securities
sold under agreement to repurchase .......... 525 (618)
Proceeds from FHLB advances .................... 43,900 21,000
Repayment of FHLB advances ..................... (21,418) (34,650)
Proceeds from other borrowings ................. 3,442 1,587
Decrease in advance payments by borrowers
for property taxes and insurance ............ (1,152) (1,005)
Decrease in drafts outstanding ................. (601) (1,163)
Dividend to stockholders ....................... (337) (380)
Other financing activities, net ................ 389 1,129
-------- --------
Net cash provided (used) by financing
activities ................................... 24,834 (5,482)
-------- --------
Net increase (decrease)
in cash and cash equivalents .................. 6,523 (7,420)
-------- --------
Cash and cash equivalents at beginning
of the period .................................. 11,201 20,861
-------- --------
Cash and cash equivalents at end
of the period .................................. $ 17,724 $ 13,441
======== ========
Supplemental information:
Interest paid .................................. $ 4,596 $ 4,837
======== ========
Income taxes paid .............................. $ 492 $ 20
======== ========
Supplemental schedule of non-cash investing
and financing transactions:
Transfer of mortgage loans to real estate
acquired through foreclosure ................ $ 40 $ --
======== ========
Collateralization of mortgage loans to FHLMC
participation certificates .................. $ 7,157 $ --
======== ========
Transfer of mortgage loans to mortgage
loans held for sale ......................... $ 8,775 $ --
======== ========
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 ............. $ 34 $ 8,710 $ 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 .............. $ 34 $ 8,710 $ 20,015 $ (1,185) $ 107 $ 27,681
Exercise of stock
options ............... -- -- (132) 214 -- 82
Cash dividends .......... -- -- (380) -- -- (380)
Change in unrealized gain
on securities available
for sale, net of
income taxes .......... -- -- -- -- 267 267
Net income .............. -- -- 1,278 -- -- 1,278
-------- -------- -------- -------- -------- --------
Balance at December
30, 1996 ............. $ 34 $ 8,710 $ 20,781 $ (971) $ 374 $ 28,928
======== ======== ======== ======== ======== ========
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 operations for the three month period ended December 31, 1996 are not
necessarily indicative of presentation of the interim financial statements, have
been included. The results of the results which may be expected for the entire
fiscal year. These unaudited 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 ("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, December 31,
1996 1996
--------- ---------
(Unaudited)
(In thousands)
<S> <C> <C>
First mortgage loans:
Single family to 4 family units ........... $ 224,570 $ 225,112
Other, primarily commercial
real estate ............................ 61,180 61,401
Construction loans ........................ 34,566 32,094
Consumer and commercial loans:
Installment consumer loans ................ 31,601 30,573
Mobile home loans ......................... 1,103 1,083
Deposit account loans ..................... 436 397
Equity lines of credit .................... 12,441 12,863
Commercial and other loans ................ 26,946 31,107
--------- ---------
392,843 394,630
Less:
Allowance for loan losses ................. 4,172 4,377
Deferred loan costs ....................... (286) (324)
Undisbursed portion of loans in process ... 18,589 15,251
--------- ---------
$ 370,368 $ 375,326
========= =========
</TABLE>
<PAGE>
PART 1. FINANCIAL INFORMATION
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The changes in the allowance for loan losses consist of the following for the
three months ended:
<TABLE>
<CAPTION>
December 31,
1995 1996
------- -------
(Unaudited)
(In thousands)
<S> <C> <C>
Beginning allowance .................... $ 3,578 $ 4,172
Provision for loan losses .............. 115 230
Loan recoveries ........................ 6 29
Loan charge-offs ....................... (15) (54)
------- -------
Ending allowance ....................... $ 3,684 $ 4,377
======= =======
</TABLE>
(3) DEPOSITS
Deposits consist of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1996 1996
--------------------- -----------------------
Weighted Weighted
Amount Rate Amount Rate
(Unaudited)
(In thousands)
<S> <C> <C> <C> <C>
Transaction accounts ....... $140,577 3.24% $ 142,182 3.50%
Passbook accounts .......... 42,840 2.66 39,398 2.57
Certificate accounts ....... 130,013 5.64 140,468 5.68
-------- ---- -------- ----
$313,430 4.12% $322,048 4.31%
======== ==== ======== ====
</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, December 31,
1996 1996
----------------------------------------------
Weighted Weighted
Amount Rate Amount Rate
-------- ---- -------- -----
Maturing within: (Unaudited)
(In thousands)
<S> <C> <C> <C> <C>
1 year ..................... $ 54,404 5.68 % $ 38,904 5.40%
2 years .................... 20,120 5.90 24,224 6.27
3 years .................... 13,105 6.35 9,001 5.57
4 years .................... 6,861 6.46 7,561 6.41
5 years and thereafter ..... 10,063 6.90 11,213 6.85
-------- - -------- ----
$104,553 5.97% $ 90,903 5.91%
======== ==== ======== ====
</TABLE>
Included in advances from the Federal Home Loan Bank and shown maturing within
one year are advances with call options by the FHLB. At December 31, 1996,
callable advances with call dates within one year included $5 million with a
five year term at 5.60%, $5 million with a five year term at 4.76% and $10
million with a two year term at 5.22%. At September 30, 1996, and December 31,
1996, the Bank had pledged first mortgage loans with unpaid balances of
approximately $223.4 million and $230.7 million, respectively, as collateral for
FHLB advances.
(5) EARNINGS PER SHARE
Earnings per share for the three month periods ended December 31, 1995 and 1996,
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. All 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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DISCUSSION OF FINANCIAL CONDITION CHANGES FROM SEPTEMBER 30, 1996 TO DECEMBER
31, 1996
GENERAL
The Company reported $1.3 million in net earnings for the three months ended
December 31, 1996, compared to net earnings of $1.1 million for the three months
ended December 31, 1995. Net interest income increased $536,000 primarily as a
result of an increase in interest income of $589,000 which was offset by an
increase in interest expense of $53,000. Provision for loan losses increased
from $115,000 for the three months ended December 31, 1995, to $230,000 for the
three months ended December 31, 1996. Other income increased from $935,000 for
the three months ended December 31, 1995, to $1.4 million for the three months
ended December 31, 1996. General and administrative expenses increased from $2.8
million for the three months ended December 31, 1995, to $3.3 million for the
three months ended December 31, 1996.
Liquid assets, consisting of cash, interest-bearing deposits, and investment
securities, decreased from $38.3 million at September 30, 1996, to $28.1 million
at December 31, 1996.
Primarily, as a result of net earnings of $1.3 million for the three months
ended December 31, 1996, less dividends of approximately $380,000, stockholder's
equity increased from $27.7 million at September 30, 1996, to $28.9 million at
December 31, 1996.
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 Bank's liquidity was 8.0% and 6.8% at September 30, 1996, and December 31,
1996, respectively as calculated in accordance with OTS regulations. During the
three months ended December 31, 1996, the Bank experienced a slight decline in
its level of liquidity as a result of a lower level of loan sales, and
securities maturities in the first quarter.
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.
<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 DECEMBER 31, 1994 AND 1995
LIQUIDITY AND CAPITAL RESOURCES - CONTINUED
The principal use of cash flows is the origination of loans receivable. The
Company originated loans receivable of $43.0 million for the three months ended
December 31, 1996, compared to $36.5 million for the three months ended December
31, 1995. The majority of these loan originations were financed through loan
principal repayments which amounted to $27.6 million and $28.1 million for the
three month periods ended December 31, 1995 and 1996, 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 three month period ended
December 31, 1996, the Company sold $11.6 million in mortgage loans compared to
$7.9 million sold for the three month period ended December 31, 1995.
At December 31, 1996, the Company had commitments to originate $4.9 million in
mortgage loans, and $28.0 million in undisbursed lines of credit which the
Company expects to fund from normal operations.
At December 31, 1996, the Company had $107.5 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 December 31, 1996, the Company had pledged first mortgage loans
in the amount of $230.7 million to the FHLB which could support additional
advances of approximately $82.0 million.
As a condition of deposit insurance, current FDIC regulations require that the
Bank calculate and maintain a minimum regulatory capital requirement on a
quarterly basis and satisfy such requirement as of the calculation date and
throughout the quarter. The Bank's capital is approximately $28.2 million at
December 31, 1996, exceeding tangible and core capital requirements by $21.5
million and $14.7 million, respectively. At December 31, 1996, the Bank's
risk-based capital of approximately $31.7 million exceeded its current
risk-based capital requirement by $8.3 million. (For further information see
Regulatory Matters).
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATION
FOR THE THREE MONTHS ENDED DECEMBER 31, 1995 AND 1996
GENERAL
Net income increased from $1.1 million for the three months ended December 31,
1995, to $1.3 million for three months ended December 31, 1996. Net interest
income increased $536,000 primarily as a result of an increase in interest
expense of $53,000 and an increase of $589,000 in interest income. Provision for
loan losses increased from $115,000 for three months ended December 31, 1995, to
$230,000 for the three months ended December 31, 1996. Other income increased
$428,000 primarily as a result of increased income from real estate partnerships
of $231,000 and increased fee income on deposits.
<PAGE>
PART 1. FINANCIAL INFORMATION
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT DISCUSSION AND ANALYSIS OF OPERATION- CONTINUED
COMPARISONS OF THE THREE MONTHS ENDED DECEMBER 31, 1994 AND 1995
INTEREST INCOME
Interest income for the three months ended December 31, 1996, increased to $9.0
million as compared to $8.4 million for the three months ended December 31, 1995
primarily as a result of increases in the average balances of loans and
investment securities. The yield on earning assets for the three months ended
December 31, 1996, was 8.39% compared to a yield of 8.59% for the three months
ended December 31, 1995. The average yield on loans receivable for the three
months ended December 31, 1996, was 8.57% compared to 8.67% for the three months
ended December 31, 1995. The decrease in yield primarily resulted from repricing
of adjustable-rate mortgage loans as a result of declines in the one year
treasury index. With the recent decrease in short-term interest rates, loans
should reprice at only slightly higher levels throughout fiscal 1997. The
average loan balance for the quarter ended December 31, 1996 was $377.8 million
compared to $362.0 million for the quarter ended December 31, 1995. The yield on
securities increased to 6.76% for the three months ended December 31, 1996, from
6.20% for the three months ended December 31, 1995. The average securities
balance was $17.1 million for the quarter ended December 31, 1996, compared to
$5.6 million for the quarter ended December 31, 1995. Total average earning
assets were $431.6 million for the quarter ended December 31, 1996, as compared
to $395.5 million for the quarter ended December 31, 1995.
INTEREST EXPENSE
Interest expense on interest-bearing liabilities was $4.8 million for the three
months ended December 31, 1995 and 1996. The average cost of deposits for the
three months ended December 31, 1996, was 4.17% compared to 4.33% for the three
months ended December 31, 1995. The cost on interest-bearing liabilities was
4.59% for the three months ended December 31, 1996, as compared to 4.93% for the
three months ended December 31, 1995. The Company has decreased its cost of
borrowings primarily through the increase in core deposits which have a lower
cost than FHLB advances. Total average interest-bearing liabilities increased
from $385.6 million at December 31, 1995 to $417.5 million at December 31, 1996.
NET INTEREST INCOME
Net interest income was $4.2 million for the three months ended December 31,
1996, as compared to $3.7 million for the three months ended December 31, 1995.
The net interest margin increased to 3.80% for the three months ended December
31, 1996, from 3.66% for the three months ended December 31, 1995. 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 short-term decrease in its interest rate
spread should interest rates increase rapidly. In addition, the Company has
approximately 35% of its assets funded by core deposits. Since these liabilities
may not be able to be repriced in a decreasing interest rate environment, a
significant decrease in short-term interest rates would reduce the Company's net
interest margin.
<PAGE>
PART 1. FINANCIAL INFORMATION
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT DISCUSSION AND ANALYSIS OF OPERATION- CONTINUED
COMPARISONS OF THE THREE MONTHS ENDED DECEMBER 31, 1994 AND 1995
PROVISION FOR LOAN LOSSES
The provision for loan losses increased from $115,000 for the period ended
December 31, 1995, to $230,000 for the three months ended December 31, 1996. For
the three months ended December 31, 1996, net charge-offs were $25,000 compared
to net charge-offs of $9,000 for the three months ended December 31, 1995. The
allowance for loan losses as a percentage of total loans was 1.15% at December
31, 1996, compared to 1.11% at September 30, 1996. Loans delinquent 90 days or
more were .16% of total loans at December 31, 1996, compared to .12% at
September 30, 1996. The allowance for loan losses was 744% of loans delinquent
more than 90 days at December 31, 1996, as compared to 938% at September 30,
1996. Management believes that the current level of allowances is adequate
considering loss experience and delinquency trends, among other criteria.
OTHER INCOME
For the three months ended December 31, 1996, other income increased 45.8% to
$1.4 million compared to $935,000 for the three months ended December 31, 1995.
Fees from loan and deposit accounts increased $113,000 due to the growth in
consumer checking accounts. Income from real estate partnerships was $327,000
for the quarter ended December 31,1996 compared to $96,000 for the quarter ended
December 31, 1995. This increase is due to the sale of land held by the Bank's
subsidiary. Other income increased by $118,000 for the quarter ended December
31, 1996 compared to the same 1995 period. This is primarily attributed to
increased fees from ATM transactions, increased debit card fee income, and
increased safe deposit box rental income.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased from $2.8 million for the three
months ended December 31, 1995, to $3.3 million for the three months ended
December 31, 1996. Salaries and employee benefits increased $254,000, or 19.7%.
A significant portion of this increase is for additional personnel in the
mortgage banking area of the Bank and Coastal Federal Mortgage, Inc. Coastal
Federal Mortgage was acquired in November, 1995 and, therefore, only had two
months of expense in 1995. Net occupancy, furniture and fixtures and data
processing expense increased $93,000. The increase is primarily attributed to
the addition of Coastal Federal Mortgage. Other expense was $731,000 for the
quarter ended December 31, 1996 compared to $541,000 for the quarter ended
December 31, 1995. This increase is primarily attributed to increased expenses
related to the growth in checking services, ATMs and debit cards as well as the
addition of Coastal Federal Mortgage.
INCOME TAXES
Income taxes increased from $621,000 for the three months ended December 31,
1995, to $734,000 for the three months ended December 31, 1996, as a result of
increased income before taxes.
<PAGE>
PART 1. FINANCIAL INFORMATION
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
REGULATORY MATTERS
The regulatory capital requirements for the Bank's compliance with such
requirements at December 31, 1996 is as follows:
<TABLE>
<CAPTION>
Amount Percent of Assets
------ -----------------
<S> <C> <C>
Tangible capital ........................ 28,218 6.22
Tangible capital
requirement ............................. 6,768 1.50
------- ------
Excess .................................. $21,450 4.72%
======= =====
Core capital ............................ $28,218 6.22%
Core capital
requirement ............................. 13,537 3.00
------- -----
Excess .................................. $14,681 3.22%
======= =====
Risk-based capital ...................... $31,657 10.83%
Minimum risk-based
capital requirement ..................... 23,390 8.00
------- -----
Excess .................................. $ 8,267 2.83%
======= =====
</TABLE>
<PAGE>
PART 1. FINANCIAL INFORMATION
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
On June 30, 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of"
which is effective for financial statements issued for fiscal years beginning
after December 15, 1995. SFAS No. 121 provides guidance for recognition and
measurement of impairment of long-lived assets, certain identifiable
intangibles, and goodwill related both to assets to be held and used and assets
to be disposed of. The Company adopted this statement effective October, 1996.
The adoption of this statement did not have a material effect on the Company.
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 operation, 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.
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 Company
does not anticipate that adoption of this standard will have a material effect
on the Company's financial statements in fiscal 1997.
<PAGE>
PART 1. FINANCIAL INFORMATION
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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.
<PAGE>
PART 2. OTHER INFORMATION
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Item 1. Legal Proceedings
The Bank is 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.
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 alleges construction
deficiencies and seeks damages in excess of $15.0 million. The cause of action
is negligent construction, breach of implied warranty of workmanship,
habitability and fitness. A subsidiary of the Bank is a one-third owner in the
joint venture company which is being sued. The joint venture is vigorously
defending this suit.
Based upon the present status of these cases, the Corporation's understanding of
the facts in each case, and discussion with its legal representatives, the
Corporation does not believe that any of these lawsuits represent a material FAS
5 contingency which would require accrual or financial statement disclosure. As
a result, the Corporation has not established any specific allowances for the
suits. Due to the nature of the uncertainty of litigation, the Corporation can
not predict the amount of loss, if any, that may ultimately result from this
litigation.
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) No exhibits are required to be filed by the Registrant pursuant to item
601 of Regulation S-K.
(b) The Company did not file any current reports on Form 8-K during the
quarter under report.
<PAGE>
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
February 14, 1997 /s/Michael C. Gerald
- ----------------- -------------------------
Date Michael C. Gerald
President and Chief Executive Officer
February 14, 1997 /s/Jerry L. Rexroad
- ----------------- -------------------------
Date Executive Vice President and
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> DEC-31-1996
<CASH> 12,385
<INT-BEARING-DEPOSITS> 1,056
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 42,121
<INVESTMENTS-CARRYING> 330
<INVESTMENTS-MARKET> 0
<LOANS> 381,395
<ALLOWANCE> 4,377
<TOTAL-ASSETS> 453,955
<DEPOSITS> 322,048
<SHORT-TERM> 45,965
<LIABILITIES-OTHER> 5,015
<LONG-TERM> 51,999
0
0
<COMMON> 34
<OTHER-SE> 28,894
<TOTAL-LIABILITIES-AND-EQUITY> 453,955
<INTEREST-LOAN> 8,121
<INTEREST-INVEST> 777
<INTEREST-OTHER> 99
<INTEREST-TOTAL> 8,997
<INTEREST-DEPOSIT> 3,342
<INTEREST-EXPENSE> 4,810
<INTEREST-INCOME-NET> 4,187
<LOAN-LOSSES> (228)
<SECURITIES-GAINS> 18
<EXPENSE-OTHER> 3,308
<INCOME-PRETAX> 2,012
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,278
<EPS-PRIMARY> .35
<EPS-DILUTED> 0
<YIELD-ACTUAL> 8.39
<LOANS-NON> 0
<LOANS-PAST> 588
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 4,354
<CHARGE-OFFS> 54
<RECOVERIES> 29
<ALLOWANCE-CLOSE> 23
<ALLOWANCE-DOMESTIC> 4,377
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
