UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
FORM 10-Q
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended June 30, 1999
( ) 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 June 30, 1999.
Common Stock $.01 Par Value Per Share 6,438,694 Shares
- --------------------------------------------------------------------------------
(Class) (Outstanding)
<PAGE>
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1999
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 June 30, 1999
Consolidated Statements of Operations for the three
months ended June 30, 1998 and 1999
Consolidated Statements of Operations for the nine
months ended June 30, 1998 and 1999
Consolidated Statements of Cash Flows for the nine
months ended June 30, 1998 and 1999
Consolidated Statements of Stockholders' Equity
and Comprehensive Income
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.Defaults 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, June 30,
1998 1999
--------- ---------
(Unaudited)
(In thousands)
<S> <C> <C>
ASSETS:
Cash & amounts due from banks ................... $ 11,978 $ 14,581
Short-term interest-bearing deposits ............ 3,688 1,345
Investment securities available for sale ........ 9,841 4,873
Mortgage-backed securities available for sale ... 170,181 170,325
Loans receivable (net of allowance for
loan losses of $5,668 at September 30,
1998 and $6,267 at June 30, 1999) ............ 414,264 437,345
Loans receivable held for sale .................. 10,486 23,785
Real estate acquired through foreclosure ........ 35 140
Office property and equipment, net .............. 9,001 10,554
Federal Home Loan Bank stock, at cost ........... 7,266 7,576
Accrued interest receivable on loans ............ 2,546 2,726
Accrued interest receivable on investments ...... 1,324 1,222
Other assets and deferred charges ............... 2,950 2,565
--------- ---------
$ 643,560 $ 677,037
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY:
LIABILITIES:
Deposits ........................................ $ 386,321 $ 390,822
Securities sold under agreements to
repurchase ................................... 59,214 89,418
Advances from Federal Home Loan Bank ............ 144,909 144,524
Other borrowings ................................ 6,437 2,569
Drafts outstanding .............................. 1,615 1,213
Advances by borrowers for property taxes
and insurance ................................. 1,329 1,144
Accrued interest payable ........................ 1,352 1,029
Other liabilities ............................... 4,532 5,602
--------- ---------
Total liabilities ............................. 605,709 636,321
--------- ---------
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(continued)
September 30, June 30,
1998 1999
--------- ---------
(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 6,438,694 shares
at June 30, 1999 issued and outstanding ...... 63 64
Additional paid-in capital ...................... 8,983 9,323
Retained earnings ............................... 28,369 32,739
Treasury stock, at cost (14,300 shares) ......... -- (226)
Accumulated other comprehensive
income, net of tax ............................ 436 (1,184)
--------- ---------
Total stockholders' equity .................... 37,851 40,716
--------- ---------
$ 643,560 $ 677,037
========= =========
</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 JUNE 30, 1998 AND 1999
1998 1999
----------- -----------
(Unaudited)
(Dollars in thousands,
except per share data)
<S> <C> <C>
Interest income:
Loans receivable ........................... $ 9,169 $ 9,641
Investment securities ...................... 241 466
Mortgage-backed securities ................ 1,793 2,232
Other ..................................... 91 95
----------- -----------
Total interest income ..................... 11,294 12,434
----------- -----------
Interest expense:
Deposits .................................... 3,612 3,552
Securities sold under agreements to
repurchase ................................ 1,068 1,055
Advances from Federal Home Loan Bank ........ 1,649 2,034
----------- -----------
Total interest expense .................... 6,329 6,641
----------- -----------
Net interest income ......................... 4,965 5,793
Provision for loan losses ...................... 240 190
----------- -----------
Net interest income after provision
for loan losses ........................... 4,725 5,603
----------- -----------
Other income:
Fees and service charges .................... 469 466
Income (loss) from real estate owned ........ (22) (7)
Gain on sale of loans receivable, net ....... 279 245
Gain on sale of securities available for sale 242 24
Other income ................................ 553 588
----------- -----------
1,521 1,316
----------- -----------
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 1998 AND 1999 (continued)
1998 1999
----------- -----------
(Unaudited)
(Dollars in thousands,
except per share data)
<S> <C> <C>
General and administrative expenses:
Salaries and employee benefits .............. 1,898 2,166
Net occupancy, furniture and fixtures
and data processing expense ............... 837 861
FDIC insurance premium ...................... 53 57
Other expenses .............................. 656 691
----------- -----------
3,444 3,775
----------- -----------
Earnings before income taxes ................... 2,802 3,144
Income taxes ................................... 1,040 1,159
----------- -----------
Net income ..................................... $ 1,762 $ 1,985
=========== ===========
Earnings per common share
Basic ........................................ $ .28 $ .31
=========== ===========
Diluted ...................................... $ .27 $ .30
=========== ===========
Weighted average common shares
outstanding - basic .......................... 6,256,000 6,439,000
=========== ===========
Weighted average common shares
outstanding - diluted ........................ 6,581,000 6,577,000
=========== ===========
Dividends per share ............................ $ .07 $ .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 OPERATIONS
FOR THE NINE MONTHS ENDED JUNE 30, 1998 AND 1999
1998 1999
----------- -----------
(Unaudited)
(Dollars in thousands,
except per share data)
<S> <C> <C>
Interest income:
Loans receivable ........................... $ 27,182 $ 28,780
Investment securities ...................... 1,095 1,033
Mortgage-backed securities ................ 3,732 6,731
Other ..................................... 236 274
----------- -----------
Total interest income ..................... 32,245 36,818
----------- -----------
Interest expense:
Deposits .................................... 10,645 11,037
Securities sold under agreements to
repurchase ................................ 2,338 2,706
Advances from Federal Home Loan Bank ........ 4,748 6,418
----------- -----------
Total interest expense .................... 17,731 20,161
----------- -----------
Net interest income ......................... 14,514 16,657
Provision for loan losses ...................... 680 600
----------- -----------
Net interest income after provision
for loan losses ........................... 13,834 16,057
----------- -----------
Other income:
Fees and service charges .................... 1,292 1,530
Loss from real estate owned ................. (76) (21)
Income from real estate held for investment .. 221 --
Gain on sale of loans receivable, net ....... 976 822
Gain on sale of securities available for sale 510 249
Other income ................................ 1,519 1,732
----------- -----------
4,442 4,312
----------- -----------
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED JUNE 30, 1998 AND 1999 (continued)
1998 1999
----------- -----------
(Unaudited)
(Dollars in thousands,
except per share data)
<S> <C> <C>
General and administrative expenses:
Salaries and employee benefits .............. 5,605 6,326
Net occupancy, furniture and fixtures
and data processing expense ............... 2,395 2,661
FDIC insurance premium ...................... 158 163
Other expenses .............................. 2,100 2,223
----------- -----------
10,258 11,373
----------- -----------
Earnings before income taxes ................... 8,018 8,996
Income taxes ................................... 2,949 3,282
----------- -----------
Net income ..................................... $ 5,069 $ 5,714
=========== ===========
Earnings per common share
Basic ........................................ $ .81 $ .90
=========== ===========
Diluted ...................................... $ .77 $ .87
=========== ===========
Weighted average common shares
outstanding - basic .......................... 6,245,000 6,363,000
=========== ===========
Weighted average common shares
outstanding - diluted ........................ 6,560,000 6,574,000
=========== ===========
Dividends per share ............................ $ .14 $ .14
=========== ===========
</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 FLOWS
FOR THE NINE MONTHS ENDED JUNE 30, 1998 AND 1999
1998 1999
--------- ---------
(Unaudited)
(In thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income ..................................... $ 5,069 $ 5,714
Adjustments to reconcile net earnings
to net cash provided by (used in)
operating activities:
Income from real estate
held for investment ...................... (221) --
Depreciation .............................. 753 876
Provision for loan losses ................. 680 600
Origination of loans receivable
held for sale ........................... (50,611) (41,749)
Proceeds from sales of loans receivable
held for sale ........................... 52,436 28,451
(Increase) decrease in:
Other assets and deferred charges .......... 159 385
Accrued interest receivable ................ (627) (78)
Increase (decrease) in:
Accrued interest payable ................... 216 (323)
Other liabilities ........................... (211) 1,070
--------- ---------
Net cash provided by (used in)
operating activities ................ 7,643 (5,054)
--------- ---------
Cash flows from investing activities:
Purchases of investment securities
available for sale ........................ (15,167) (10,147)
Proceeds from sales of investment
securities available for sale ............. 4,500 9,735
Proceeds from maturities of investment
securities available for sale .............. 22,596 5,165
Purchases of mortgage-backed securities
available for sale ........................ (226,852) (153,961)
Proceeds from sales of mortgage-backed
securities available for sale ............. 77,947 88,090
Origination of loans receivable, net ........... (99,314) (168,679)
Purchase of loans receivable ................... (10,442) (1,710)
Principal collected on loans receivable, net ... 102,963 146,602
Principal collected on mortgage-backed
securities, net ........................... 21,201 62,783
Proceeds from sale of real estate
acquired through foreclosure, net ......... 27 --
Purchases of office properties and
equipment .................................. (1,629) (2,429)
Purchases of FHLB stock, net ................... (743) (310)
--------- ---------
Net cash used in
investing activities ................ (124,913) (24,861)
--------- ---------
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JUNE 30, 1998 AND 1999 (Continued)
1998 1999
--------- ---------
(Unaudited)
(In thousands)
<S> <C> <C>
Cash flows from financing activities:
Increase in deposits, net ........................................... $ 20,806 $ 4,501
Increase in securities sold
under agreement to repurchase, net ................................. 73,560 30,204
Proceeds from FHLB advances ......................................... 176,025 204,850
Repayment of FHLB advances .......................................... (154,294) (205,235)
Proceeds(repayments)from other
borrowings, net ................................................... 2,993 (3,868)
Decrease in advance payments by borrowers
for property taxes and insurance, net ............................ (321) (185)
Increase (decrease) in drafts outstanding, net ...................... 123 (402)
Dividends to stockholders ........................................... (1,271) (1,344)
Other financing activities, net ..................................... 430 1,654
--------- ---------
Net cash provided by financing ...................................... 118,051 30,175
--------- ---------
activities
Net increase in cash and cash equivalents ............................. 781 260
--------- ---------
Cash and cash equivalents at beginning
of the period ....................................................... 13,411 15,666
--------- ---------
Cash and cash equivalents at end
of the period ....................................................... $ 14,192 $ 15,926
========= =========
Supplemental information:
Interest paid ....................................................... $ 17,515 $ 20,484
========= =========
Income taxes paid ................................................... $ 2,872 $ 1,675
========= =========
Supplemental schedule of non-cash investing and financing transactions:
Transfer of mortgage loans to real estate
acquired through foreclosure ..................................... $ 48 $ 105
========= =========
Securitization of mortgage loans into
mortgage-backed securities ....................................... $ -- $ 15,825
========= =========
</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 AND COMPREHENSIVE INCOME
Accumulated
Other
Compre-
Additional hensive Total
Common Paid-In Treasury Retained Income stockholders'
Stock Capital Stock Earnings (Loss) Equity
----- ------- ----- -------- ------ ------
(Unaudited)
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at September
30, 1997 ................... $ 62 $ 8,682 $ (182) $ 23,402 $ 427 $ 32,391
Net income ................... -- -- -- 5,069 -- 5,069
Other comprehensive
income, net of tax:
Unrealized gains arising
during period, net of
taxes of $203,000 ........... -- -- -- -- 305 --
Less: reclassification
adjustment for gains
included in net income,
net of taxes of $204,000 .... -- -- -- -- (306) --
-------- --------
Other comprehensive income - - -- -- -- -- (1) (1)
-------- --------
Comprehensive income ......... -- -- -- -- -- 5,068
--------
Exercise of stock
options .................... -- 191 182 (183) -- 190
Cash dividends ............... -- -- -- (1,271) -- (1,271)
Balance at June
30, 1998 ................... $ 62 $ 8,873 $ 0 $ 27,017 $ 426 $ 36,378
======== ======== ======== ======== ======== ========
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (continued)
Accumulated
Other
Compre-
Additional hensive Total
Common Paid-In Treasury Retained Income Stockholders'
Stock Capital Stock Earnings (Loss) 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 ................... -- -- -- 5,714 -- 5,714
Other comprehensive
income, net of tax:
Unrealized losses arising
during period, net of
taxes of $588,400 ........... -- -- -- -- (1,471) --
Less: reclassification
adjustment for gains
included in net income,
net of taxes of $99,600 ..... -- -- -- -- (149) --
-------- --------
Other comprehensive loss ..... -- -- -- -- (1,620) (1,620)
-------- --------
Comprehensive income ......... -- -- -- -- -- 4,094
--------
Treasury stock repurchases ... -- -- (226) -- -- (226)
Exercise of stock
options .................... 1 340 -- -- -- 341
Cash dividends ............... -- -- -- (1,344) -- (1,344)
Balance at June
30, 1999 ................... $ 64 $ 9,323 $ (226) $ 32,739 $ (1,184) $ 40,716
======== ======== ======== ======== ======== ========
</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 and nine month periods
ended June 30, 1999 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 consists of the following:
<TABLE>
<CAPTION>
September 30, June 30,
1998 1999
--------- ---------
(Unaudited)
(In thousands)
<S> <C> <C>
First mortgage loans:
Single family to 4 family units ............. $ 248,781 $ 244,046
Other, primarily commercial
real estate ................................ 95,420 113,048
Construction loans .......................... 31,261 36,295
Consumer and commercial loans:
Installment consumer loans .................. 19,489 19,962
Mobile home loans ........................... 990 888
Deposit account loans ....................... 1,078 1,408
Equity lines of credit ...................... 18,655 20,419
Commercial and other loans .................. 14,848 24,162
--------- ---------
430,522 460,228
Less:
Allowance for loan losses ................... 5,668 6,267
Deferred loan fees (costs), net ............. (702) (290)
Undisbursed portion of loans in process ..... 11,292 16,906
--------- ---------
$ 414,264 $ 437,345
========= =========
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The changes in the allowance for loan losses consist of the following for the
nine months ended:
<TABLE>
<CAPTION>
Nine Months Ended June 30,
--------------------------
1998 1999
------ ------
(Dollars in thousands)
<S> <C> <C>
Allowance at beginning of
period .................................... $4,902 $5,668
Allowance recorded on
acquired loans ............................ 109 21
Provision for loan losses .................. 680 600
------ ------
Recoveries:
Residential real estate ................... 4 2
Commercial real estate .................... -- 137
Consumer .................................. 30 65
------ ------
Total recoveries ........................ 34 204
------ ------
Charge-offs:
Residential real estate ................... -- --
Commercial real estate .................... -- --
Consumer .................................. 206 226
------ ------
Total charge-offs ....................... 206 226
------ ------
Net charge-offs ......................... 172 22
------ ------
Allowance at end of period ................ $5,519 $6,267
====== ======
Ratio of allowance to net
loans outstanding at the
end of the period ......................... 1.34% 1.36%
====== ======
Ratio of net charge-offs
to average loans outstanding
during the period ......................... .06% .01%
====== ======
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
At June 30, 1999
Percent of Loans in each
Balance at end of period applicable to: Amount category to total loans
------ -----------------------
<S> <C> <C>
Residential Real Estate........................... $1,591 71.52%
Commercial Real Estate............................ 4,110 27.61
Consumer.......................................... 566 .87
------ ------
$6,267 100.00%
====== ======
</TABLE>
Non-accrual loans, which were over ninety days delinquent, totaled approximately
$465,000 at June 30, 1999. For the nine months ended June 30, 1999, interest
income, which would have been recorded, would have been approximately $7,000 had
non-accruing loans been current in accordance with their original terms.
(3) DEPOSITS
Deposits consist of the following:
<TABLE>
<CAPTION>
September 30, 1998 June 30, 1999
----------------------- ------------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
------ ---- ------ ----
(Unaudited)
(In thousands)
<S> <C> <C> <C> <C>
Transaction accounts ....... $193,926 3.12% $215,679 3.00%
Passbook accounts .......... 37,242 2.52 37,958 2.61
Certificate accounts ....... 155,153 5.38 137,185 5.02
-------- ---- -------- ----
$386,321 3.96% $390,822 3.67%
======== ==== ======== ====
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(4) ADVANCES FROM FEDERAL HOME LOAN BANK
Advances from Federal Home Loan Bank ("FHLB") consist of the following:
<TABLE>
<CAPTION>
September 30, 1998 June 30, 1999
------------------------ ------------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
------ ---- ------ ----
Maturing within: (Unaudited)
(In thousands)
<S> <C> <C> <C> <C>
1 year ..................... $ 28,235 5.74% $ 53,061 5.98%
2 years .................... 6,961 6.19 10,046 5.84
3 years .................... 32,146 4.83 3,742 6.77
4 years .................... 4,261 6.62 38,375 5.32
5 years and thereafter ..... 73,306 5.21 39,300 4.99
-------- ---- -------- ----
$144,909 5.13% $144,524 5.55%
======== ==== ======== ====
</TABLE>
At September 30, 1998, and June 30, 1999, the Bank had pledged first mortgage
loans with unpaid balances of approximately $231.2 million and $206.8 million,
respectively, as collateral for FHLB advances. At June 30, 1999, included in the
two, four and five years and thereafter maturities were $60 million subject to
call provisions. Call provisions are more likely to be exercised by the FHLB
when rates rise.
(5) EARNINGS PER SHARE
Basic earnings per share for the three and nine month periods ended June 30,
1998 and 1999, are computed by dividing net income by the weighted average
common shares outstanding during the respective periods. Diluted earnings per
share for the three and nine month periods ended June 30, 1998 and 1999, are
computed by dividing net earnings by the weighted average dilutive shares
outstanding during the respective periods. All share and per share data have
been retroactively restated for all common stock splits.
(6) COMMON STOCK DIVIDENDS
On May 6, 1998, the Company declared a four-for-three stock split, aggregating
approximately 1,562,000 shares. All share and per share data were retroactively
restated to give effect to the common stock split.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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
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 and the required disclosure is
presented in the accompanying consolidated statements of stockholders' equity
and comprehensive income.
<PAGE>
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, general changes
in the economy (particularly in the markets served by the Company), and the
impact of the Year 2000 computer issue.
DISCUSSION OF FINANCIAL CONDITION CHANGES FROM SEPTEMBER 30, 1998 TO JUNE 30,
1999
- --------------------------------------------------------------------------------
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
withdrawable accounts and short-term borrowings, and is currently equal to 4% of
such amount. At June 30, 1999, the Bank's regulatory liquidity level was
approximately 11%.
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 $149.9 million for the nine months
ended June 30, 1998, compared to $210.4 million for the nine months ended June
30, 1999. The majority of these loan originations were financed through loan and
mortgage-backed securities principal repayments, which amounted to $124.2
million and $209.4 million for the nine month periods ended June 30, 1998 and
1999, 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 nine month period ended June 30, 1998, the Company sold $52.4
million in mortgage loans compared to $28.5 million sold for the nine month
period ended June 30, 1999.
<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
- -------------------------------------------
For the nine month period ended June 30, 1998, the Company purchased $242.0
million in investment and mortgage-backed securities. For the nine month period
ended June 30, 1999, the Company purchased $164.1 million in investment and
mortgage-backed securities. These purchases were funded primarily by repayments
within the securities portfolio, short-term reverse repurchase agreements and
FHLB advances.
The Bank experienced an increase of $4.5 million in deposits for the nine month
period ended June 30, 1999. For the nine month period ended June 30, 1999,
transaction accounts increased $21.8 million. This was offset by a decrease in
certificate accounts of $18.0 million.
At June 30, 1999, the Company had commitments to originate $7.7 million in
mortgage loans, and $29.9 million in undisbursed lines of credit, which the
Company expects to fund from normal operations.
At June 30, 1999, the Company had $105.5 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 June 30, 1999, the Company had repurchase agreement lines of
credit and available collateral consisting of investment securities and
mortgage-backed securities of $78.7 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 $43.0 million at June 30,
1999, exceeding the core capital requirement by $15.9 million. At June 30, 1999,
the Bank's risk-based capital of approximately $47.5 million exceeded its
current risk-based capital requirement by $17.4 million. (For further
information see Regulatory Capital Matters).
<PAGE>
PART I. FINANCIAL INFORMATION
Item 2. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS FOR THE THREE MONTHS ENDED
- -----------------------------------------------------------------------------
JUNE 30, 1998 AND 1999
- ----------------------
GENERAL
- -------
Net income increased from $1.8 million for the three months ended June 30, 1998,
to $2.0 million for three months ended June 30, 1999, or 12.7%. Net interest
income increased $828,000 primarily as a result of an increase of $1.1 million
in interest income offset by a $312,000 increase in interest expense. Provision
for loan losses decreased from $240,000 for three months ended June 30, 1998, to
$190,000 for the three months ended June 30, 1999. General and administrative
expense increased from $3.4 million for the quarter ended June 30, 1998, to $3.8
million for the quarter ended June 30, 1999.
INTEREST INCOME
- ---------------
Interest income for the three months ended June 30, 1999, increased to $12.4
million as compared to $11.3 million for the three months ended June 30, 1998.
The earning asset yield for the three months ended June 30, 1999, was 7.80%
compared to a yield of 8.07% for the three months ended June 30, 1998. The
average yield on loans receivable for the three months ended June 30, 1999,was
8.39% compared to 8.83% for the three months ended June 30, 1998. The yield on
investments decreased to 6.21% for the three months ended June 30, 1999, from
6.77% for the three months ended June 30, 1998. The yield on investment
securities decreased due to increased amortization of premiums on ARM
mortgage-backed securities, which had higher than expected prepayments. Total
average interest-earning assets were $645.6 million for the quarter ended June
30, 1999 as compared to $565.5 million for the quarter ended June 30, 1998. The
increase in average interest-earning assets is due to an increase in average
loans receivable of approximately $44.1 million and securities of approximately
$34.3 million.
INTEREST EXPENSE
- ----------------
Interest expense on interest-bearing liabilities was $6.6 million for the three
months ended June 30, 1999, as compared to $6.3 million for June 30, 1998. Due
to increased transaction deposits and reduced interest rates in the first half
of 1999, the average cost of deposits for the three months ended June 30, 1999,
was 3.70% compared to 4.05% for the three months ended June 30, 1998. The cost
of interest-bearing liabilities was 4.30% for the three months ended June 30,
1999, as compared to 4.57% for the three months ended June 30, 1998. The cost of
FHLB advances and reverse repurchase agreements was 5.24% and 5.40%,
respectively, for the three months ended June 30, 1999. For the three months
ended June 30, 1998, the cost was 5.57% and 5.67%, respectively. Total average
interest-bearing liabilities increased from $538.2 million at June 30, 1998 to
$617.9 million at June 30, 1999. The increase in average interest-bearing
liabilities is due to an increase in average deposits of approximately $27.2
million, FHLB advances of $36.8 million and reverse repurchase agreements of
$15.8 million.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 2. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS - CONTINUED
COMPARISONS OF THE THREE MONTHS ENDED JUNE 30, 1998 AND 1999
NET INTEREST INCOME
- -------------------
Net interest income was $5.8 million for the three months ended June 30, 1999,
as compared to $5.0 million for the three months ended June 30, 1998. The net
interest margin was 3.50% for the three months ended June 30, 1999, and 1998.
PROVISION FOR LOAN LOSSES
- -------------------------
The provision for loan losses decreased from $240,000 for the period ended June
30, 1998, to $190,000 for the three months ended June 30, 1999. For the three
months ended June 30, 1999, net charge-offs were $83,000 compared to net
charge-offs of $80,000 for the three months ended June 30, 1998. The allowance
for loan losses as a percentage of total loans was 1.36% at June 30, 1999,
compared to 1.33% at September 30, 1998. Loans delinquent 90 days or more were
.10% of total loans at June 30, 1999, compared to .54% at September 30, 1998.
The allowance for loan losses was 1,348% of loans delinquent more than 90 days
at June 30, 1999, as compared to 251% at September 30, 1998. Management believes
that the current level of allowances is adequate considering the Company's
current loss experience and delinquency trends, among other criteria.
OTHER INCOME
- ------------
For the three months ended June 30, 1999, other income was $1.3 million compared
to $1.5 million for the quarter ended June 30, 1998. Gain on sale of loans was
$245,000 for the quarter ended June 30, 1999, compared to $279,000 for the
quarter ended June 30, 1998. The Company experienced lower gains on sales as a
result of rising interest rates during the period. Gain on sale of securities
was $24,000 for the three months ended June 30, 1999 compared to $242,000 for
the three months ended June 30, 1998. Other income was $588,000 for the quarter
ended June 30, 1999 compared to $553,000 for the quarter ended June 30, 1998.
GENERAL AND ADMINISTRATIVE EXPENSES
- -----------------------------------
General and administrative expenses increased from $3.4 million for the three
months ended June 30, 1998, to $3.8 million for the three months ended June 30,
1999. Salaries and employee benefits increased from $1.9 million for the three
months ended June 30, 1998, to $2.2 million for the three months ended June 30,
1999 primarily due to increased lending Associates. Net occupancy, furniture and
fixtures and data processing expenses increased $24,000 when comparing the two
periods. Other expenses were $691,000 for the quarter ended June 30, 1999,
compared to $656,000 for the quarter ended June 30, 1998.
INCOME TAXES
- ------------
Income taxes increased from $1.0 million for the three months ended June 30,
1998, to $1.2 million for the three months ended June 30, 1999, as a result of
increased income before taxes.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 2. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT DISCUSSION AND ANALYSIS OF OPERATION- CONTINUED
COMPARISONS OF THE NINE MONTHS ENDED JUNE 30, 1998 AND 1999
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS FOR THE NINE MONTHS ENDED
- ----------------------------------------------------------------------------
JUNE 30, 1998 AND 1999
- ----------------------
GENERAL
- -------
Net income increased from $5.1 million for the nine months ended June 30, 1998,
to $5.7 million for nine months ended June 30, 1999, or 12.7%. Net interest
income increased $2.1 million primarily as a result of an increase in interest
income of $4.6 million offset by an increase of $2.4 million in interest
expense. Provision for loan losses decreased from $680,000 for the nine months
ended June 30, 1998, to $600,000 for the nine months ended June 30, 1999. Other
income decreased $130,000. General and administrative expenses increased $1.1
million.
INTEREST INCOME
- ---------------
Interest income for the nine months ended June 30, 1999, increased to $36.8
million as compared to $32.2 million for the nine months ended June 30, 1998.
The earning asset yield for the nine months ended June 30, 1999, was 7.79%
compared to a yield of 8.19% for the nine months ended June 30, 1998. The
average yield on loans receivable for the nine months ended June 30, 1999, was
8.56% compared to 8.75% for the nine months ended June 30, 1998. The yield on
investments decreased to 5.85% for the nine months ended June 30, 1999, from
6.69% for the nine months ended June 30, 1998. Total average earning assets were
$638.6 million for the nine month period ended June 30, 1999, as compared to
$530.6 million for the nine month period ended June 30, 1998.
INTEREST EXPENSE
- ----------------
Interest expense on interest-bearing liabilities was $20.2 million for the nine
months ended June 30, 1999, as compared to $17.7 million for the nine months
ended June 30, 1998. The average cost of deposits for the nine months ended June
30, 1999, was 3.80% compared to 4.08% for the nine months ended June 30, 1998.
The cost of interest-bearing liabilities was 4.34% for the nine months ended
June 30, 1999, as compared to 4.57% for the nine months ended June 30, 1998.
Total average interest-bearing liabilities increased from $511.7 million at June
30, 1998 to $613.3 million at June 30, 1999.
NET INTEREST INCOME
- -------------------
Net interest income was $16.7 million for the nine months ended June 30, 1999,
as compared to $14.5 million for the nine months ended June 30, 1998. The net
interest margin decreased to 3.44% for the six months ended June 30, 1999, from
3.62% for the nine months ended June 30, 1998. Since a high percentage 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.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 2. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT DISCUSSION AND ANALYSIS OF OPERATION- CONTINUED
COMPARISONS OF THE NINE MONTHS ENDED JUNE 30, 1998 AND 1999
PROVISION FOR LOAN LOSSES
- -------------------------
The provision for loan losses decreased from $680,000 for the period ended June
30, 1998, to $600,000 for the nine months ended June 30, 1999. For the nine
months ended June 30, 1999, net charge-offs were $22,000 compared to net
charge-offs of $172,000 for the nine months ended June 30, 1998. The allowance
for loan losses as a percentage of total loans was 1.36% at June 30, 1999,
compared to 1.33% at September 30, 1998. Management believes that the current
level of allowances is adequate considering the Company's current loss
experience and delinquency trends, among other criteria.
OTHER INCOME
- ------------
For the nine months ended June 30, 1999, other income decreased $130,000 to $4.3
million compared to $4.4 million for the nine months ended June 30, 1998. Fees
and service charges for the nine months ended June 30, 1999 were $1.5 million
compared to $1.3 million for the nine months ended June 30, 1999 primarily due
to growth in core checking accounts. Other income increased from $1.5 million
for the nine months ended June 30, 1998 compared to $1.7 million for the nine
months ended June 30, 1999. Gain on sale of loans was $976,000 for the nine
months ended June 30, 1998, compared to $822,000 for the nine months ended June
30, 1999. The Company experienced lower gains on sales as a result of rising
interest rates during the period and reduced sales. Gain on sale of securities
was $510,000 for the nine months ended June 30, 1998, compared to $249,000 for
the nine months ended June 30, 1999.
GENERAL AND ADMINISTRATIVE EXPENSES
- -----------------------------------
General and administrative expenses increased from $10.3 million for the nine
months ended June 30, 1998, to $11.4 million for the nine months ended June 30,
1999. Salaries and employee benefits increased $721,000 or 12.9% primarily as a
result of increased lending personnel. Net occupancy, furniture and fixtures and
data processing expense increased $266,000 primarily as 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 expense was $2.1 million for the nine months ended June 30,
1998, compared to $2.2 million for the nine months ended June 30, 1999.
INCOME TAXES
- ------------
Income taxes increased from $2.9 million for the nine months ended June 30,
1998, to $3.3 million for the nine months ended June 30, 1999, as a result of
increased income before taxes.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 2. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT DISCUSSION AND ANALYSIS OF OPERATION- CONTINUED
COMPARISONS OF THE NINE MONTHS ENDED JUNE 30, 1998 AND 1999
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 June 30, 1999:
Total Capital: $47,509 12.62% $30,109 8.00% $37,636 10.00%
(To Risk Weighted Assets)
Tier 1 Capital: $42,969 11.42% $N/A N/A% $22,581 6.00%
(To Risk Weighted Assets)
Tier 1 Capital: $42,969 6.35% $27,081 4.00% $33,852 5.00%
(To Total Assets)
Tangible Capital: $42,969 6.35% $10,156 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 NINE MONTHS ENDED JUNE 30, 1998 AND 1999
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. The Company is reviewing the
standard to determine if additional disclosure is required.
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 of all fiscal years beginning
after June 15, 2000 with earlier adoption permitted as amended by SFAS 137. 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.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 2. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT DISCUSSION AND ANALYSIS OF OPERATION- CONTINUED
COMPARISONS OF THE NINE MONTHS ENDED JUNE 30, 1998 AND 1999
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.
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 inquiries 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. The results of the test were all positive.
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 scheduled testing with these third-parties. The testing was
completed by June 30, 1999. All of the test results were positive. Where
testing is not possible, the Company will rely on certifications from
vendors and service providers.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 2. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT DISCUSSION AND ANALYSIS OF OPERATION- CONTINUED
COMPARISONS OF THE NINE MONTHS ENDED JUNE 30, 1998 AND 1999
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 for year 2000 readiness was completed by June 30, 1999.
The Company estimates its total cost to replace computer equipment,
software programs or other equipment containing embedded microprocessors
that was not year 2000 compliant to be $228,000, of which $188,369 has been
incurred as of June 30, 1999. System maintenance or modification costs are
charged to expense as incurred, while the cost of new hardware, 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 Bank, 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
primarily secured by real estate management believes that year 2000 issues
will not significantly impair the ability of the Company's borrowers to
repay their debt.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 2. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT DISCUSSION AND ANALYSIS OF OPERATION- CONTINUED
COMPARISONS OF THE NINE MONTHS ENDED JUNE 30, 1998 AND 1999
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.
The Company has recognized that its commercial borrowers may also face
risks from year 2000 issues. The Company has identified its material loan
relationships and completed year 2000 surveys of those customers to assess
their vulnerability to year 2000 problems and their readiness for year 2000
compliance. The Company is continuing to monitor its commercial borrowers
for year 2000 risk and feels that its commercial relationships do not pose
an inordinate risk at this time.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- -------------------------------------------------------------------
At June 30, 1999, 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 Company is not a party to any legal proceedings at this time. 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 causes of action are 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.
- -------------
<PAGE>
PART II. OTHER INFORMATION
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
* 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.
***** 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 June 30, 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
August 16, 1999 /s/Michael C. Gerald
- --------------- --------------------
Date Michael C. Gerald
President and Chief Executive Officer
August 16, 1999 /s/Jerry L. Rexroad
- --------------- -------------------
Date Jerry L. Rexroad
Executive Vice President and
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 9
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