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, 1998
( ) 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 (843) 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 [ ] NO [ X ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of December 31, 1998.
Common Stock $.01 Par Value Per Share 6,272,569 Shares
- --------------------------------------------------------------------------------
(Class) (Outstanding)
<PAGE>
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 31, 1998
TABLE OF CONTENTS
PART I- Consolidated Financial Information
Item 1. Consolidated Financial Statements (unaudited):
Consolidated Statements of Financial Condition
as of September 30, 1998 and December 31, 1998
Consolidated Statements of Operations for the three
months ended December 31, 1997 and 1998
Consolidated Statements of Cash Flows for the three
months ended December 31, 1997 and 1998
Consolidated Statements of Stockholders' Equity
Notes to Consolidated Financial Statements
2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
3. Quantitative and Qualitative Disclosures about
Market Risk
Part II - Other Information
Item 1. Legal Proceedings
2. Changes in Securities and Use of Proceeds
3. Default Upon Senior Securities
4. Submission of Matters to a Vote of Securities Holders
5. Other information
6. Exhibits and Reports on Form 8-K
Signatures
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30, December 31,
1998 1998
-------- --------
(Unaudited)
(Dollars in thousands)
<S> <C> <C>
ASSETS:
Cash & amounts due from banks ...................... $ 11,978 $ 11,690
Short-term interest-bearing deposits ............... 3,688 4,400
Investment securities available for sale ........... 9,841 4,048
Mortgage-backed securities available for sale ...... 170,181 173,552
Loans receivable (net of allowance for
loan losses of $5,668 at September 30,
1998 and $5,795 at December 31, 1998) ........... 414,264 431,648
Loans receivable held for sale ..................... 10,486 15,448
Real estate acquired through foreclosure ........... 35 35
Office property and equipment, net ................. 9,001 9,821
Federal Home Loan Bank stock, at cost .............. 7,266 8,651
Accrued interest receivable on loans ............... 2,546 2,726
Accrued interest receivable on investments ......... 1,324 1,248
Other assets and deferred charges .................. 2,950 2,819
-------- --------
$643,560 $666,086
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
LIABILITIES:
Deposits ........................................... $386,321 $391,038
Securities sold under agreements to
repurchase ...................................... 59,214 50,941
Advances from Federal Home Loan Bank ............... 144,909 173,025
Other borrowings ................................... 6,437 3,503
Drafts outstanding ................................. 1,615 1,746
Advances by borrowers for property taxes
and insurance .................................... 1,329 470
Accrued interest payable ........................... 1,352 969
Other liabilities .................................. 4,532 5,155
-------- --------
Total liabilities ................................ 605,709 626,847
-------- --------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(continued)
September 30, December 31,
1998 1998
-------- --------
(Unaudited)
(Dollars in thousands)
<S> <C> <C>
STOCKHOLDERS' EQUITY:
Serial preferred stock, 1,000,000 shares
authorized and unissued ......................... -- --
Common stock, $.01 par value, 15,000,000
shares authorized; 6,263,777 shares at
September 30, 1998 and 6,272,569 shares
at December 31, 1998 issued and outstanding ..... 63 63
Additional paid-in capital ......................... 8,983 9,031
Retained earnings .................................. 28,369 29,715
Accumulated other comprehensive
income, net of tax ............................... 436 430
-------- --------
Total stockholders' equity ....................... 37,851 39,239
-------- --------
$643,560 $666,086
======== ========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED DECEMBER 31, 1997 AND 1998
1997 1998
----------- -----------
(Unaudited)
(Dollars in thousands,
except per share data)
<S> <C> <C>
Interest income:
Loans receivable ........................... $ 8,977 $ 9,339
Investment securities ...................... 468 168
Mortgage-backed securities ................ 652 2,322
Other ..................................... 80 102
----------- -----------
Total interest income ..................... 10,177 11,931
----------- -----------
Interest expense:
Deposits .................................... 3,602 3,854
Securities sold under agreements to
repurchase ................................ 369 755
Advances from Federal Home Loan Bank ........ 1,476 2,219
----------- -----------
Total interest expense .................... 5,447 6,828
----------- -----------
Net interest income ......................... 4,730 5,103
Provision for loan losses ...................... 190 185
----------- -----------
Net interest income after provision
for loan losses ........................... 4,540 4,918
----------- -----------
Other income:
Fees and service charges .................... 403 470
Loss from real estate owned ................. (20) (17)
Income from real estate held for investment .. 218 --
Gain on sale of loans receivable, net ....... 357 361
Gain on sale of securities available for sale 16 182
Other income ................................ 461 486
----------- -----------
1,435 1,482
----------- -----------
General and administrative expenses:
Salaries and employee benefits .............. 1,884 2,028
Net occupancy, furniture and fixtures
and data processing expense ............... 789 892
FDIC insurance premium ...................... 52 53
Other expenses .............................. 673 631
----------- -----------
3,398 3,604
----------- -----------
Earnings before income taxes ................... 2,577 2,796
Income taxes ................................... 950 1,006
----------- -----------
Net income ..................................... $ 1,627 $ 1,790
=========== ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED DECEMBER 31, 1997 AND 1998
(continued)
1997 1998
----------- -----------
(Unaudited)
(Dollars in thousands,
except per share data)
<S> <C> <C>
Earnings per common share
Basic ........................................ $ .26 $ .29
=========== ===========
Diluted ...................................... $ .25 $ .27
=========== ===========
Weighted average common shares
outstanding - basic .......................... 6,232,000 6,273,000
=========== ===========
Weighted average common shares
outstanding - diluted ........................ 6,548,000 6,602,000
=========== ===========
Dividends per share ............................ $ .0675 $ .07
=========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE THREE MONTHS ENDED DECEMBER 31, 1997 AND 1998
1997 1998
-------- --------
(Unaudited)
(In thousands)
<S> <C> <C>
Cash flows from operating activities:
Net earnings ................................. $ 1,627 $ 1,790
Adjustments to reconcile net earnings
to net cash provided by
operating activities:
Income from real estate
held for investment .................... (218) --
Depreciation ............................ 239 279
Provision for loan losses ............... 190 185
Origination of loans receivable
held for sale ......................... (12,661) (23,612)
Proceeds from sales of loans receivable
held for sale ......................... 14,214 18,650
(Increase) decrease in:
Other assets and deferred charges ........ (179) 131
Accrued interest receivable .............. (217) (104)
Increase (decrease) in:
Accrued interest payable ................. 119 (383)
Other liabilities ......................... 300 623
-------- --------
Net cash provided by (used in)
operating activities .............. 3,414 (2,441)
-------- --------
Cash flows from investing activities:
Purchases of investment securities
available for sale ...................... (8,808) (640)
Proceeds from sales of investment
securities available for sale ........... 1,000 2,000
Proceeds from maturities of investment
securities available for sale ............ 3,113 4,400
Purchases of mortgage-backed securities
available for sale ...................... (58,306) (47,609)
Proceeds from sales of mortgage-backed
securities available for sale ........... 7,151 17,533
Origination of loans receivable, net ......... (50,946) (46,770)
Purchase of loans receivable ................. (2,068) --
Principal collected on loans receivable
and mortgage-backed securities, net ..... 46,088 55,491
Proceeds from sale of real estate
acquired through foreclosure, net ....... 4 --
Purchases of office properties and
equipment ................................ (542) (1,099)
Purchases of FHLB stock, net ................. (900) (1,385)
-------- --------
Net cash used in
investing activities .............. (64,214) (18,079)
-------- --------
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED DECEMBER 31, 1997 AND 1998 (CONTINUED)
1997 1998
-------- --------
(Unaudited)
(In thousands)
<S> <C> <C>
Cash flows from financing activities:
Increase (decrease) in deposits, net ............. $ (3,368) $ 4,717
Increase (decrease) in securities sold
under agreement to repurchase, net .............. 42,830 (8,273)
Proceeds from FHLB advances ...................... 82,080 82,600
Repayment of FHLB advances ....................... (53,200) (54,484)
Proceeds(repaymments)from other borrowings,net .... 472 (2,934)
Decrease in advance payments by borrowers
for property taxes and insurance, net ......... (914) (859)
Increase in drafts outstanding, net .............. 247 131
Dividend to stockholders ......................... (416) (444)
Other financing activities, net .................. 230 490
-------- --------
Net cash provided by financing ................... 67,961 20,944
-------- --------
activities
Net increase
in cash and cash equivalents .................... 7,161 424
-------- --------
Cash and cash equivalents at beginning
of the period .................................... 13,411 15,666
-------- --------
Cash and cash equivalents at end
of the period .................................... $ 20,572 $ 16,090
======== ========
Supplemental information:
Interest paid .................................... $ 10,058 $ 7,211
======== ========
Income taxes paid ................................ $ 216 $ 12
======== ========
Supplemental schedule of non-cash investing
and financing transactions:
Transfer of mortgage loans to real estate
acquired through foreclosure .................. $ 8 $ --
======== ========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Accumulated
Other
Additional Compre- Total
Common Paid-In Treasury Retained hensive Stockholders'
Stock Capital Stock Earnings Income Equity
----- ------- ----- -------- ------ ------
(Unaudited)
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at September
30, 1997 .................. $ 46 $ 8,698 $ (182) $ 23,402 $ 427 $ 32,391
Net income .................. -- -- -- 1,627 -- 1,627
Other comprehensive
income, net of tax:
Unrealized gains arising
during period, net of
taxes of $29,000 ........... -- -- -- -- 48 --
Less: reclassification
adjustment for gains
included in net income,
net of taxes of $9,000 ..... -- -- -- -- (16) --
--------
Other comprehensive income -- -- -- -- 32 32
-------- --------
Comprehensive income ........ -- -- -- -- -- 1,659
--------
Exercise of stock
options ................... -- 32 182 (160) -- 54
Cash dividends .............. -- -- -- (416) -- (416)
Balance at December
31, 1997 .................. $ 46 $ 8,730 $ 0 $ 24,453 $ 459 $ 33,688
======== ======== ======== ======== ======== ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(continued)
Accumulated
Other
Additional Compre- Total
Common Paid-In Treasury Retained hensive Stockholders'
Stock Capital Stock Earnings Income Equity
----- ------- ----- -------- ------ ------
(Unaudited)
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at September
30, 1998 .................. $ 63 $ 8,983 $ 0 $ 28,369 $ 436 $ 37,851
Net income .................. -- -- -- 1,790 -- 1,790
Other comprehensive
income, net of tax:
Unrealized gains arising
during period, net of
taxes of $106,000 .......... -- -- -- -- 176 --
Less: reclassification
adjustment for gains
included in net income,
net of taxes of $109,000 ... -- -- -- -- (182) --
--------
Other comprehensive income -- -- -- -- (6) (6)
-------- --------
Comprehensive income ........ -- -- -- -- -- 1,784
--------
Exercise of stock
options ................... -- 48 -- -- -- 48
Cash dividends .............. -- -- -- (444) -- (444)
Balance at December
31, 1998 .................. $ 63 $ 9,031 $ 0 $ 29,715 $ 430 $ 39,239
======== ======== ======== ======== ======== ========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. 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 month period ended
December 31, 1998 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, 1998, included in
the Company's 1998 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, December 31,
1998 1998
--------- ---------
(Unaudited)
(In thousands)
<S> <C> <C>
First mortgage loans:
Single family to 4 family units ............. $ 248,781 $ 242,762
Other, primarily commercial
real estate ................................ 95,420 112,071
Construction loans .......................... 31,261 37,650
Consumer and commercial loans:
Installment consumer loans .................. 19,489 20,717
Mobile home loans ........................... 990 1,013
Deposit account loans ....................... 1,078 1,103
Equity lines of credit ...................... 18,655 18,771
Commercial and other loans .................. 14,848 14,310
--------- ---------
430,522 448,397
Less:
Allowance for loan losses ................... 5,668 5,795
Deferred loan fees (costs) .................. (702) (937)
Undisbursed portion of loans in process ..... 11,292 11,891
--------- ---------
$ 414,264 $ 431,648
========= =========
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. 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,
1997 1998
------- -------
(Unaudited)
(In thousands)
<S> <C> <C>
Beginning allowances ..................... $ 4,902 $ 5,668
Provision for loan losses ................ 190 185
Allowance on acquired loans .............. 29 --
Loan recoveries .......................... 2 9
Loan charge-offs ......................... (51) (67)
------- -------
Ending allowance ......................... $ 5,072 $ 5,795
======= =======
</TABLE>
(3) DEPOSITS
Deposits consist of the following:
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1998
----------------------- -----------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
-------- ---- -------- ----
(Unaudited)
(In thousands)
<S> <C> <C> <C> <C>
Transaction accounts ....... $193,926 3.12% $205,262 2.97%
Passbook accounts .......... 37,242 2.52 36,182 2.52
Certificate accounts ....... 155,153 5.38 149,594 5.24
-------- ---- -------- ----
$386,321 3.96% $391,038 3.79%
======== ==== ======== ====
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. 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, 1998 December 31, 1998
---------------------- ----------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
Maturing within: (Unaudited)
(In thousands)
<S> <C> <C> <C> <C>
1 year ......................... $ 28,235 5.74 % $ 57,101 5.22 %
2 years ........................ 6,961 6.19 39,706 5.09
3 years ........................ 32,146 4.83 8,761 6.35
4 years ........................ 4,261 6.62 32,457 5.15
5 years and thereafter ......... 73,306 5.21 35,000 5.09
-------- ---- -------- ----
$144,909 5.13 % $173,025 5.21 %
======== ==== ======== ====
</TABLE>
At September 30, 1998, and December 31, 1998, the Bank had pledged first
mortgage loans with unpaid balances of approximately $231.2 million and $171.4
million, respectively, as collateral for FHLB advances.
(5) EARNINGS PER SHARE
Basic earnings per share for the three month periods ended December 31, 1997 and
1998, are computed by dividing net earnings by the actual common equivalent
shares outstanding during the respective periods. Diluted earnings per share for
the three month periods ended December 31, 1997 and 1998, 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 6, 1998, the Company declared a four-for-three stock split in the form of
a 33% stock dividend, aggregating approximately 1,562,000 shares. All share and
per share data has been retroactively restated to give effect to the common
stock dividends.
(7) COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 130, Reporting Comprehensive Income
(Statement 130). SFAS No. 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
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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. SFAS No. 130 is effective for fiscal years
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 adopted
Statement 130 in the first quarter of fiscal 1999.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 2. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
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).
DISCUSSION OF FINANCIAL CONDITION CHANGES FROM SEPTEMBER 30, 1998 TO DECEMBER
31, 1998
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, Federal Agency Securities,
mortgage-backed securities, and certain other investments. The required level of
such investments is calculated on a "liquidity base" consisting of net
withdrawlable accounts and short-term borrowings, and is currently equal to 4%
of such amount.
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 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 and purchase of securities.
The Company originated loans receivable of $63.6 million for the three months
ended December 31, 1997, compared to $70.4 million for the three months ended
December 31, 1998. The majority of these loan originations were financed through
loan and mortgage-backed securities principal repayments which amounted to $46.1
million and $55.5 million for the three month periods ended December 31, 1997
and 1998, 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, 1998, the Company sold
$14.2 million in mortgage loans compared to $18.7 million sold for the three
month period ended December 31, 1998.
For the three month period ended December 31, 1997, the Company purchased $67.1
million in investment and mortgage-backed securities. For the three month period
ended December 31, 1998, the Company purchased $48.2 million in investment and
mortgage-backed securities. The securities purchased generally reprice in less
than five years. A majority of the mortgage-backed securities purchased were
primarily secured by one year ARMs. These purchases were funded primarily with
short-term reverse repurchase agreements and FHLB advances.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 2. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES (Continued)
The Bank experienced an increase of $4.7 million in deposits for the three month
period ended December 31, 1998, primarily as a result of increased transaction
accounts of $11.3 million. This was offset by decreases in passbook accounts of
$1.1 million and certificate accounts of $5.6 million.
At December 31, 1998, the Company had commitments to originate $5.3 million in
mortgage loans, and $29.5 million in undisbursed lines of credit, which the
Company expects to fund from normal operations.
At December 31, 1998, the Company had $121.8 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, 1998, the Company had repurchase agreement lines
of credit and available collateral consisting of investment securities and
mortgage-backed securities of $ 109.3 million as well as federal funds available
of $15.0 million.
OTS 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, as
calculated under OTS regulations, is approximately $40.3 million at December 31,
1998, exceeding tangible and core capital requirements by $30.3 million and
$13.6 million, respectively. At December 31, 1998, the Bank's risk-based capital
of approximately $44.8 million exceeded its current risk-based capital
requirement by $15.2 million. (For further information see Regulatory Capital
Matters).
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS FOR THE THREE MONTHS ENDED
DECEMBER 31, 1997 AND 1998
GENERAL
Net income increased from $1.6 million for the three months ended December 31,
1997, to $1.8 million for three months ended December 31, 1998, or 10.0%. Net
interest income increased $373,000 primarily as a result of an increase of $1.8
million in interest income offset by a $1.4 million increase in interest
expense. Provision for loan losses decreased slightly from $190,000 for three
months ended December 31, 1997, to $185,000 for the three months ended December
31, 1998. General and administrative expense increased from $3.4 million for the
quarter ended December 31, 1997, to $3.6 million for the quarter ended December
31, 1998.
INTEREST INCOME
Interest income for the three months ended December 31, 1998, increased to $11.9
million as compared to $10.2 million for the three months ended December 31,
1997. The earning asset yield for the three months ended December 31, 1998, was
7.77% compared to a yield of 8.41% for the three months ended December 31, 1997.
The average yield on loans receivable for the three months ended December 31,
<PAGE>
PART I. FINANCIAL INFORMATION
Item 2. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
1998 was 8.82% compared to 8.71% for the three months ended December 31, 1997.
The yield on investments decreased to 6.49% for the three months ended December
31, 1998, from 6.72% for the three months ended December 31, 1997. At December
31, 1997, the prime rate was 8.50% compared to 7.75% at December 31, 1998. The
Bank expects that its yield on both loans and mortgage-backed securities will
continue to decline as certain loans which adjust annually continue to reprice.
Total average interest-earning assets were $622.3 million for the quarter ended
December 31, 1998, as compared to $487.3 million for the quarter ended December
31, 1997. The increase in average interest-earning assets is due to an increase
in average loans receivable of approximately $12.4 million and mortgage-backed
securities of approximately $134.5 million. Over the last twelve months, the
Company has increased it's portfolio of mortgage-backed securities funded by
advances and other borrowed money.
INTEREST EXPENSE
Interest expense of interest-bearing liabilities was $6.8 million for the three
months ended December 31, 1998, as compared to $5.4 million for December 31,
1997. The average cost of deposits for the three months ended December 31, 1998,
was 3.93% compared to 4.18% for the three months ended December 31, 1997.
The cost of interest-bearing liabilities was 4.45% for the three months ended
December 31, 1998, as compared to 4.61% for the three months ended December 31,
1997. The cost of FHLB advances and reverse repurchase agreements was 5.32% and
5.79%, respectively, for the three months ended December 31, 1998. For the three
months ended December 31, 1997, the cost was 5.82% and 5.77%, respectively.
Total average interest-bearing liabilities increased from $470.3 million at
December 31, 1997 to $613.4 million at December 31, 1998. The increase in
average interest-bearing liabilities is due to an increase in average deposits
of approximately $47.7 million, FHLB advances of $65.5 million and reverse
repurchase agreements of $28.8 million.
NET INTEREST INCOME
Net interest income was $5.1 million for the three months ended December 31,
1998, as compared to $4.7 million for the three months ended December 31, 1997.
The net interest margin was 3.32% for the three months ended December 31, 1998,
and 3.80% for the three months ended December 31, 1997. During the second
quarter of fiscal 1998, the Bank entered into a leverage strategy by purchasing
ARM mortgage-backed securities which were funded by repurchase agreements and
short-term advances. This strategy has an expected spread of approximately fifty
basis points during the first year.
PROVISION FOR LOAN LOSSES
The provision for loan losses decreased slightly from $190,000 for the period
ended December 31, 1997, to $185,000 for the three months ended December 31,
1998. For the three months ended December 31, 1998, net charge-offs were $58,000
compared to net charge-offs of $49,000 for the three months ended December 31,
1997. The allowance for loan losses as a percentage of total loans was 1.30% at
December 31, 1998, compared to 1.33% at September 30, 1998. Loans delinquent 90
days or more were .73% of total loans at December 31, 1998, compared to .54% at
<PAGE>
PART I. FINANCIAL INFORMATION
Item 2. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
September 30, 1998. The allowance for loan losses was 178% of loans delinquent
more than 90 days at December 31, 1998, as compared to 251% at September 30,
1998. Non-performing loans as of December 31, 1998, included one significant
loan with a balance of approximately $2.0 million. Subsequent to the quarter
ended December 31, 1998, the loan was paid in full on February 9, 1999.
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 I. FINANCIAL INFORMATION
Item 2. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT DISCUSSION AND ANALYSIS OF OPERATION- CONTINUED
COMPARISONS OF THE THREE MONTHS ENDED DECEMBER 31, 1997 AND 1998
OTHER INCOME
For the three months ended December 31, 1998, other income was $1.4 million
compared to $1.5 million for the quarter ended December 31, 1997. Gain on sale
of securities was $182,000 for the quarter ended December 31, 1998, compared to
$16,000 for the quarter ended December 31, 1997. This was offset by decreased
income from real estate held for investment which was $218,000 for the quarter
ended December 31, 1997. This was due to a land sale by one of the Bank's
subsidiaries. There was no income from land sales during the quarter ended
December 31, 1998.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased from $3.4 million for the three
months ended December 31, 1997, to $3.6 million for the three months ended
December 31, 1998. Salaries and employee benefits increased from $1.9 million
for the three months ended December 31, 1997, to $2.0 million for the three
months ended December 31, 1998 primarily due to increased lending Associates.
Net occupancy, furniture and fixtures and data processing expenses increased
$103,000 when comparing the two periods. This is primarily a result of increased
maintenance, lease expense and depreciation expense due to the addition of the
Coastal Federal University facility and the North Carolina Office in Sunset
Beach, NC. Other expenses were $631,000 for the quarter ended December 31, 1998,
compared to $673,000 for the quarter ended December 31, 1997.
INCOME TAXES
Income taxes increased from $950,000 for the three months ended December 31,
1997, to $1.0 million for the three months ended December 31, 1998, as a result
of increased income before taxes.
REGULATORY CAPITAL MATTERS
To be categorized as "Well Capitalized" under the prompt corrective action
regulations adopted by the Federal Banking Agencies, the Bank must maintain a
total risk-based capital ratio as set forth in the following table and not be
subject to a capital directive order.
<TABLE>
<CAPTION>
Categorized as "Well Capitalized" Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provision
---------------------- ---------------------- ----------------------
Amount Ratio Amount Ratio Amount Ratio
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998:
Total Capital: $44,800 12.09% $29,646 8.00% $37,058 10.00%
(To Risk Weighted Assets)
Tier 1 Capital: $40,301 10.88% $N/A N/A% $22,235 6.00%
(To Risk Weighted Assets)
Tier 1 Capital: $40,301 6.05% $19,983 3.00% $33,404 5.00%
(To Total Assets)
Tangible Capital: $40,301 6.05% $9,991 1.50% $N/A N/A%
(To Total Assets)
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
Item 2. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT DISCUSSION AND ANALYSIS OF OPERATION- CONTINUED
COMPARISONS OF THE THREE MONTHS ENDED DECEMBER 31, 1997 AND 1998
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information (Statement 131). SFAS No. 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. SFAS No. 131 is effective for
financial statements for fiscal years 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. SFAS No. 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 affect the Company.
SFAS 133, Accounting for Derivative Instruments and Hedging Activities
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts and hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position, and measure those
instruments at fair value. If certain conditions are met, a derivative may be
specifically designated as (a) a hedge of the exposure to changes in the fair
value of a recognized asset and liability or a firm commitment, (b) a hedge of
the exposure to variable cash flows of a forecasted transaction, or (c) a hedge
of the foreign currency exposure of a net investment in a foreign corporation.
This statement is effective for fiscal quarters in fiscal years beginning after
June 15, 1999. It is not anticipated that this standard will materially affect
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.
YEAR 2000 COMPLIANCE
The Company is a user of computers, computer software and equipment utilizing
embedded microprocessors that will be affected by the year 2000 issue. The year
2000 issue exists because many computer systems and applications use two-digit
date fields to designate a year. As the century date change occurs,
date-sensitive systems may recognize the year 2000 as 1900, or not at all. This
inability to recognize or properly treat the year 2000 may cause erroneous
results, ranging from system malfunctions to incorrect or incomplete processing.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 2. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT DISCUSSION AND ANALYSIS OF OPERATION- CONTINUED
COMPARISONS OF THE THREE MONTHS ENDED DECEMBER 31, 1997 AND 1998
The Company's year 2000 committee consists of the Chief Executive Officer, three
Executive Vice Presidents, two Vice Presidents, and one Associate from the
Internal Audit Group. The committee makes a monthly progress report to the Board
of Directors. The committee has developed and is implementing a comprehensive
plan to make all information and non-information technology assets year 2000
compliant. The plan is comprised of the following phases:
1. Awareness - Educational initiatives on year 2000 issues and concerns. This
phase is ongoing, especially as it relates to informing customers of the
Company's year 2000 preparedness.
2. Assessment - Inventory of all technology assets and identification of
third-party vendors vendors and service providers. This phase was completed
as of August 31, 1998.
3. Renovation - Review of vendor and service providers responses to the
Company's year 2000 inquires and development of a follow-up plan and
timeline. This phase was completed as of October 15, 1998.
4. Validation - Testing all systems and third-party vendors for year 2000
compliance. The Company is currently in this phase of its plan. A third-
party service bureau processes all customer transactions and has completed
upgrades to its systems to be year 2000 compliant. The Company will test
the third-party systems by reviewing the results of transactions at six
different test dates before and after the year 2000 date change covering
all of the applications used by the Company. Testing was completed as of
November 16, 1998. In the event that testing reveals that the third-party
systems are not year 2000 compliant, the Company's service bureau intends
to either transfer the Company to other systems that are year 2000
compliant and provide additional resources to resolve the year 2000 issues.
Other parties whose year 2000 compliance may effect the Company include the
FHLB of Atlanta, brokerage firms, the operator of the Company's ATM network
and the Company's 401K administrator. These third-parties have indicated
their compliance or intended compliance. Where it is possible to do so, the
Company has scheduled testing with these third-parties. Where testing is
not possible, the Company will rely on certifications from vendors and
service providers.
5. Implementation - Replacement or repair of non-compliant technology. As the
Company progresses through the validation phase, the Company expects to
determine necessary remedial actions and provide for their implementation.
The Company has already implemented a new year 2000 compliant computerized
teller system and has verified the year 2000 compliance of its computer
hardware and other equipment containing embedded microprocessors. The
Company's plan provides for year 2000 readiness to be completed by February
28, 1999.
The Company estimates its total cost to replace computer equipment,
software programs or other equipment containing embedded microprocessors
that were not year 2000 compliant to be $118,000, of which $64,385 has been
incurred as of December 31, 1998. System maintenance or modification costs
are charged to expense as incurred, while the cost of new hardware,
<PAGE>
PART I. FINANCIAL INFORMATION
Item 2. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT DISCUSSION AND ANALYSIS OF OPERATION- CONTINUED
COMPARISONS OF THE THREE MONTHS ENDED DECEMBER 31, 1997 AND 1998
5. Implementation - (continued)
software or other equipment is capitalized and amortized over their
estimated useful lives. The Company does not separately track the internal
costs and time that its own Associates spend on year 2000 issues, which are
principally payroll costs.
Because the Company depends substantially on its computer systems and those
of third-parties, the failure of these systems to be year 2000 compliant
could cause substantial disruption of the Company's business and could have
a material adverse financial impact on the Company. Failure to resolve year
2000 issues presents the following risks to the Company; (1) the Company
could lose customers to other financial institutions, resulting in a loss
of revenue, if the Company's third-party service bureau is unable to
properly process customer transactions; (2) governmental agencies, such as
the Federal Home Loan Company, and correspondent institutions could fail to
provide funds to the Company, which could materially impair the Company's
liquidity and affect the Company's ability to fund loans and deposit
withdrawals; (3) concern on the part of depositors that year 2000 issues
could impair access to their deposit account balances could result in the
Company experiencing deposit outflows prior to December 31, 1999; and (4)
the Company could incur increased personnel costs if additional staff is
required to perform functions that inoperative systems would have otherwise
performed. Management believes that it is not possible to estimate the
potential lost revenue due to the year 2000 issue, as the extent and
longevity of any potential problem cannot be predicted. Because
substantially all of the Company's loan portfolio consists of loans to
individuals rather than commercial enterprises, management believes that
year 2000 issues will not impair the ability of the Company's borrowers to
repay their debt.
There can be no assurances that the Company's year 2000 plan will
effectively address the year 2000 issues, that the Company's estimates of
the timing and costs of completing the plan will ultimately be accurate or
that the impact of any failure of the Company or its third-party vendors
and service providers to be year 2000 compliant will not have a material
adverse effect on the Company's business, financial condition or results of
operations.
The Company has developed a contingency plan for year 2000 in the event
there is a malfunction in any of the critical application software. The
plan provides for alternative methods to conduct business until application
problems can be rectified.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At December 31, 1998, no material changes have occurred in market risk
disclosures included in the Company's Annual Report to Stockholders for the year
ended September 30, 1998.
<PAGE>
PART II. OTHER INFORMATION
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Item 1. Legal Proceedings
The Bank is a defendant in one significant lawsuit. The action commenced on
December 1, 1997, and the Plaintiffs are seeking approximately $1.5 million in
actual damages as well as punitive damages. The cause of action is breach of
fiduciary duties, negligence, fraud, civil conspiracy and breach of contract
arising out of a lending relationship. At this date, the Bank does not know if
or when the action will go to trial. The Bank will vigorously defend this suit
and does not anticipate any settlement discussions.
Item 2. Changes In Securities and Use of Proceeds
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.
<PAGE>
PART II. OTHER INFORMATION
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3 (a) Certificate of Incorporation of Coastal Financial
Corporation**
3 (b) Certificate of Amendment to Certificate of
Incorporation of Coastal Financial Corporation*******
(c) 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 Steven J. Sherry*******
(g) 1990 Stock Option Plan***
(h) Directors Performance Plan****
(i) Loan Agreement with Bankers Bank******
27 Financial Data Schedule
(b) No reports on Form 8-K have been filed during the quarter covered by this
report.
- -------------
* Incorporated by reference from the Annual Report to
Stockholders for the fiscal year ended September 30, 1997,
attached as an exhibit hereto.
** 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 1996
Annual Meeting of Stockholders.
<PAGE>
PART II. OTHER INFORMATION
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
(continued)
***** Incorporated by reference to 1997 Form 10-K filed with the
Securities and Exchange Commission on January 2, 1998.
****** Incorporated by reference to December 31, 1997 Form 10-Q filed
with Securities and Exchange Commission on February 13, 1998.
******* Incorporated by reference to March 31, 1998 Form 10-Q filed
with Securities and Exchange Commission on May 15, 1998.
******* Incorporated by reference to 1998 Form 10-K filed with
Securities and Exchange Commission on December 29, 1998.
<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
February 16, 1999 /s/ Michael C. Gerald
- ----------------- ---------------------
Date Michael C. Gerald
President and Chief Executive Officer
February 16, 1999 /s/Jerry L. Rexroad
- ----------------- -------------------
Date Jerry L. Rexroad
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-30-1999
<PERIOD-END> DEC-31-1998
<CASH> 11,690
<INT-BEARING-DEPOSITS> 4,400
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 177,600
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 447,096
<ALLOWANCE> 5,795
<TOTAL-ASSETS> 666,086
<DEPOSITS> 391,038
<SHORT-TERM> 203,291
<LIABILITIES-OTHER> 6,594
<LONG-TERM> 25,924
0
0
<COMMON> 63
<OTHER-SE> 39,176
<TOTAL-LIABILITIES-AND-EQUITY> 666,086
<INTEREST-LOAN> 9,339
<INTEREST-INVEST> 2,490
<INTEREST-OTHER> 102
<INTEREST-TOTAL> 11,391
<INTEREST-DEPOSIT> 3,854
<INTEREST-EXPENSE> 6,828
<INTEREST-INCOME-NET> 5,103
<LOAN-LOSSES> (361)
<SECURITIES-GAINS> 182
<EXPENSE-OTHER> 3,604
<INCOME-PRETAX> 2,796
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,790
<EPS-PRIMARY> .29
<EPS-DILUTED> 0
<YIELD-ACTUAL> 7.77
<LOANS-NON> 0
<LOANS-PAST> 3,251
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 5,795
<CHARGE-OFFS> 67
<RECOVERIES> 9
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</TABLE>
