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, 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 December 31, 1999.
Common Stock $.01 Par Value Per Share 6,712,008 Shares
- --------------------------------------------------------------------------------
(Class) (Outstanding)
<PAGE>
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 31, 1999
TABLE OF CONTENTS
- -----------------
PART I- Consolidated Financial Information
Item
1. Consolidated Financial Statements (unaudited):
Consolidated Statements of Financial Condition
as of September 30, 1999 and December 31, 1999
Consolidated Statements of Operations for the three
months ended December 31, 1998 and 1999
Consolidated Statements of Cash Flows for the three
months ended December 31, 1998 and 1999
Consolidated Statements of Stockholders' Equity
and Comprehensive Income as of December 31, 1998 and
December 31, 1999
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
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
September 30, December 31,
1999 1999
--------- ---------
(Unaudited)
(In thousands)
<S> <C> <C>
ASSETS:
Cash & amounts due from banks $ 21,988 $ 22,092
Short-term interest-bearing deposits 2,245 11,447
Investment securities available for sale 6,063 8,987
Mortgage-backed securities available for sale 182,115 180,191
Loans receivable (net of allowance for
loan losses of $6,430 at September 30,
1999 and $6,616 at December 31, 1999) 455,351 476,202
Loans receivable held for sale 16,636 19,171
Real estate acquired through foreclosure 96 --
Office property and equipment, net 11,236 11,647
Federal Home Loan Bank stock, at cost 8,201 7,639
Accrued interest receivable on loans 2,861 2,709
Accrued interest receivable on investments 1,333 1,434
Other assets and deferred charges 4,888 2,600
--------- ---------
$ 713,013 $ 744,119
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY:
LIABILITIES:
Deposits $ 399,673 $ 418,258
Securities sold under agreements to
repurchase 96,948 121,143
Advances from Federal Home Loan Bank 164,024 152,774
Other borrowings 1,569 1,569
Drafts outstanding 1,383 1,837
Advances by borrowers for property taxes
and insurance 1,346 412
Accrued interest payable 1,156 2,655
Other liabilities 5,677 4,593
--------- ---------
Total liabilities 671,776 703,241
--------- ---------
STOCKHOLDERS' EQUITY:
Serial preferred stock, 1,000,000 shares
authorized and unissued -- --
Common stock, $.01 par value, 15,000,000
shares authorized; 6,751,389 shares at
September 30, 1999 and 6,712,008 shares
at December 31, 1999 issued and outstanding 67 67
Additional paid-in capital 9,320 14,114
Retained earnings 34,288 31,289
Treasury stock, at cost (23,100 and 62,950
shares, respectively) (356) (866)
Accumulated other comprehensive
loss, net of tax (2,082) (3,726)
--------- ---------
Total stockholders' equity 41,237 40,878
--------- ---------
$ 713,013 $ 744,119
========= =========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED DECEMBER 31, 1998 AND 1999
<TABLE>
<CAPTION>
1998 1999
----------- -----------
(Unaudited)
(Dollars in thousands,
except per share data)
<S> <C> <C>
Interest income:
Loans receivable $ 9,339 $ 10,273
Investment securities 168 525
Mortgage-backed securities 2,322 2,584
Other 102 261
----------- -----------
Total interest income 11,931 13,643
----------- -----------
Interest expense:
Deposits 3,854 3,758
Securities sold under agreements to
repurchase 755 1,569
Advances from Federal Home Loan Bank 2,219 2,292
----------- -----------
Total interest expense 6,828 7,619
----------- -----------
Net interest income 5,103 6,024
Provision for loan losses 185 245
----------- -----------
Net interest income after provision
for loan losses 4,918 5,779
----------- -----------
Other income:
Fees and service charges 470 567
Income (loss) from real estate owned (17) (20)
Gain on sale of loans receivable, net 361 191
Gain on sale of securities available for sale 182 11
Other income 486 714
----------- -----------
1,482 1,463
----------- -----------
General and administrative expenses:
Salaries and employee benefits 2,028 2,297
Net occupancy, furniture and fixtures
and data processing expense 892 979
FDIC insurance premium 53 58
Other expenses 631 775
----------- -----------
3,604 4,109
----------- -----------
Earnings before income taxes 2,796 3,133
Income taxes 1,006 1,128
----------- -----------
Net income $ 1,790 $ 2,005
=========== ===========
Earnings per common share
Basic $ .27 $ .30
=========== ===========
Diluted $ .26 $ .29
=========== ===========
Weighted average common shares
outstanding - basic 6,587,000 6,742,000
=========== ===========
Weighted average common shares
outstanding - diluted 6,932,000 6,851,000
=========== ===========
Dividends per share $ .067 $ .07
=========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED DECEMBER 31, 1998 AND 1999
<TABLE>
<CAPTION>
1998 1999
-------- --------
(Unaudited)
(In thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,790 $ 2,005
Adjustments to reconcile net earnings
to net cash provided by (used in)
operating activities:
Depreciation 279 335
Provision for loan losses 185 245
Origination of loans receivable
held for sale (23,612) (8,826)
Proceeds from sales of loans receivable
held for sale 18,650 6,291
(Increase) decrease in:
Other assets and deferred charges 131 2,288
Accrued interest receivable (104) 51
Increase (decrease) in:
Accrued interest payable (383) 1,499
Other liabilities 623 (1,084)
-------- --------
Net cash provided by (used in)
operating activities (2,441) 2,804
-------- --------
Cash flows from investing activities:
Purchases of investment securities
available for sale (640) (5,015)
Proceeds from sales of investment
securities available for sale 2,000 2,000
Proceeds from maturities of investment
securities available for sale 4,400 --
Purchases of mortgage-backed securities
available for sale (47,609) (27,300)
Proceeds from sales of mortgage-backed
securities available for sale 17,533 20,031
Origination of loans receivable, net (46,770) (37,838)
Purchase of loans receivable -- (4,027)
Principal collected on loans receivable, net 29,673 20,769
Principal collected on mortgage-backed
securities, net 25,818 6,612
Proceeds from sale of real estate
acquired through foreclosure, net -- 96
Purchases of office properties and
equipment (1,099) (746)
Sales (purchases) of FHLB stock, net (1,385) 562
-------- --------
Net cash used in
investing activities (18,079) (24,856)
-------- --------
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED DECEMBER 31, 1998 AND 1999 (CONTINUED)
<TABLE>
<CAPTION>
1998 1999
-------- --------
(Unaudited)
(In thousands)
<S> <C> <C>
Cash flows from financing activities:
Increase in deposits, net $ 4,717 $ 18,585
Increase (decrease) in securities sold
under agreement to repurchase, net (8,273) 24,195
Proceeds from FHLB advances 82,600 86,650
Repayment of FHLB advances (54,484) (97,900)
Repayments from other
borrowings, net (2,934) --
Decrease in advance payments by borrowers
for property taxes and insurance, net (859) (934)
Increase in drafts outstanding, net 131 454
Repurchase of treasury stock, at cost -- (569)
Dividends to stockholders (444) (473)
Other financing activities, net 490 1,350
-------- --------
Net cash provided by financing
activities 20,944 31,358
-------- --------
Net increase in cash and cash equivalents 424 9,306
-------- --------
Cash and cash equivalents at beginning
of the period 15,666 24,233
-------- --------
Cash and cash equivalents at end
of the period $ 16,090 $ 33,539
======== ========
Supplemental information:
Interest paid $ 7,211 $ 6,120
======== ========
Income taxes paid $ 12 $ 276
======== ========
Supplemental schedule of non-cash investing and
financing transactions:
Transfer of mortgage loans to real estate
acquired through foreclosure $ -- $ --
======== ========
Securitization of mortgage loans into
mortgage-backed securities $ -- $ 6,205
======== ========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
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 $ 64 $ 8,982 $ - - $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 $41,000 - - - - - - - - 107 - -
Less: reclassification
adjustment for gains
included in net income,
net of taxes of $69,000 - - - - - - - - (113) - -
-------
Other comprehensive income - - - - - - - - (6) (6)
------- -------
Comprehensive income - - - - - - - - - - 1,784
-------
Exercise of stock
options - - 48 - - - - - - 48
Cash dividends - - - - - - (444) - - (444)
Balance at December
31, 1998 $ 64 $ 9,030 $ - - $29,715 $ 430 $39,239
======= ======= ====== ======= ======= =======
Balance at September
30, 1999 $ 64 $ 9,323 $ (356) $34,288 $(2,082) $41,237
Net income - - - - - - 2,005 - - 2,005
Other comprehensive
income, net of tax:
Unrealized losses arising
during period, net of
taxes of $622,000 - - - - - - - - (1,637) - -
Less: reclassification
adjustment for gains
included in net income,
net of taxes of $4 - - - - - - - - (7) - -
-------
Other comprehensive loss - - - - - - - - (1,644) (1,644)
------- -------
Comprehensive income - - - - - - - - - - 361
Treasury stock repurchases - - - - (569) - - - - (569)
Exercise of stock
options - - 300 59 (37) - - 322
Cash dividends - - - - - - (473) - - (473)
Common stock dividend 3 4,491 - - (4,494) - - - -
------- ------- ------ ------- ------- -------
Balance at December
31, 1999 $ 67 $14,114 $ (866) $31,289 $(3,726) $40,878
======= ======= ====== ======= ======= =======
</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, 1999 are not necessarily indicative of the results which may be
expected for the entire fiscal year. These unaudited consolidated financial
statements should be read in conjunction with the Company's audited consolidated
financial statements and related notes for the year ended September 30, 1999,
included in the Company's 1999 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:
September 30, December 31,
1999 1999
--------- ---------
(Unaudited)
(In thousands)
First mortgage loans:
Single family to 4 family units $ 248,433 $ 263,281
Other, primarily commercial
real estate 114,931 118,341
Construction loans 46,766 48,382
Consumer and commercial loans:
Installment consumer loans 20,026 18,366
Mobile home loans 1,166 1,130
Deposit account loans 1,521 1,552
Equity lines of credit 21,081 21,969
Commercial and other loans 22,818 26,553
--------- ---------
476,742 499,574
Less:
Allowance for loan losses 6,430 6,616
Deferred loan fees (costs), net (354) (437)
Undisbursed portion of loans in process 15,315 17,193
--------- ---------
$ 455,351 $ 476,202
========= =========
<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
three months ended:
Three Months Ended December 31,
-------------------------------
1998 1999
------ ------
(Dollars in thousands)
Allowance at beginning of
period ...................................... $5,668 $6,430
Allowance recorded on
acquired loans .............................. -- 50
Provision for loan losses .................... 185 245
------ ------
Recoveries:
Residential real estate ..................... 4 --
Commercial real estate ...................... -- --
Consumer .................................... 5 21
------ ------
Total recoveries .......................... 9 21
------ ------
Charge-offs:
Residential real estate ..................... -- 10
Commercial real estate ...................... -- --
Consumer .................................... 67 120
------ ------
Total charge-offs ......................... 67 130
------ ------
Net charge-offs ........................... 58 109
------ ------
Allowance at end of period .................. $5,795 $6,616
====== ======
Ratio of allowance to net
loans outstanding at the
end of the period ........................... 1.30% 1.34%
====== ======
Ratio of net charge-offs
to average loans outstanding
during the period (annualized) .............. .05% .09%
====== ======
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
At December 31, 1999
Percent of Loans in each
Balance at end of period applicable to: Amount category to total loans
------ -----------------------
Residential Real Estate..................... $1,871 71.00%
Commercial Real Estate...................... 4,308 26.69
Consumer.................................... 437 2.31
------ ------
$6,616 100.00%
====== ======
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Non-accrual loans, which were over ninety days delinquent, totaled approximately
$2.3 million at December 31, 1999. For the three months ended December 31, 1999,
interest income, which would have been recorded, would have been approximately
$44,000 had non-accruing loans been current in accordance with their original
terms.
(3) DEPOSITS
Deposits consist of the following:
September 30, 1999 December 31, 1999
---------------------- --------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
-------- ---- -------- ----
(Unaudited)
(In thousands)
Transaction accounts $226,218 2.85% $215,020 2.88%
Passbook accounts 39,212 2.65 34,390 2.44
Certificate accounts 134,243 4.94 168,848 5.00
-------- ---- -------- ----
$399,673 3.54% $418,258 3.70%
======== ==== ======== ====
At September 30, 1999 and December 31, 1999, respectively, there were $5.3
million and $37.6 million of certificate accounts originated by brokers. These
accounts generally mature within 90 days of origination.
(4) ADVANCES FROM FEDERAL HOME LOAN BANK
Advances from Federal Home Loan Bank ("FHLB") consist of the following:
September 30, 1999 December 31, 1999
---------------------- --------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
-------- ---- -------- ----
(Unaudited)
(In thousands)
Maturing within:
1 year $ 15,461 5.85% $ 30,661 5.92%
2 years 38,946 5.56 34,245 6.12
3 years 4,761 6.82 8,911 6.44
4 years 37,357 5.28 2,457 6.39
5 years and thereafter 67,499 5.00 76,500 5.22
-------- ---- -------- ----
$164,024 5.33% $152,774 5.65%
======== ==== ======== ====
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
At September 30, 1999, and December 31, 1999, the Bank had pledged first
mortgage loans with unpaid balances of approximately $212.1 million and $246.0
million, respectively, as collateral for FHLB advances. At September 30, 1999
and December 31, 1999, included in the four and five years and thereafter
maturities were $101.5 million and $76.5 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 month periods ended December 31, 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 month periods ended December 31, 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 and dividends.
(6) COMMON STOCK DIVIDENDS
On May 6, 1998, the Company declared a four-for-three stock split, aggregating
approximately 1,562,000 shares. On November 10, 1999, the company declared a 5%
stock dividend aggregating approximately 321,000 shares.
(7) DISCLOSURES REGARDING SEGMENTS
The Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information" in fiscal year 1999. SFAS No. 131 established standards
for the way that public businesses report information about operating segments
in annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports
issued to shareholders. It also establishes standards for related disclosures
about products and services, geographic areas, and major customers. The Company
adopted SFAS No. 131 without any impact on their consolidated financial
statements.
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 the economy (particularly in the markets served by the Company). The
Company disclaims any obligation to update such forward looking statements.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 2. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
DISCUSSION OF FINANCIAL CONDITION CHANGES FROM SEPTEMBER 30, 1999 TO
DECEMBER 31, 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 December 31, 1999, the Bank's regulatory liquidity level was
approximately 12%.
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 $70.4 million for the three months
ended December 31, 1998, compared to $46.7 million for the three months ended
December 31, 1999. A portion of these loan originations were financed through
loan and mortgage-backed securities principal repayments, which amounted to
$55.5 million and $27.4 million for the three month periods ended December 31,
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 three month period ended December 31, 1998, the Company sold
$18.7 million in mortgage loans compared to $6.3 million sold for the three
month period ended December 31, 1999.
For the three month period ended December 31, 1998, the Company purchased $48.2
million in investment and mortgage-backed securities. For the three month period
ended December 31, 1999, the Company purchased $32.3 million in investment and
mortgage-backed securities. These purchases were funded primarily by repayments
of $6.6 million within the securities portfolio, sales of mortgage-backed
securities of $20.0 million, short-term reverse repurchase agreements and FHLB
advances.
The Bank experienced an increase of $18.6 million in deposits for the three
month period ended December 31, 1999. For the three month period ended December
31, 1999, transaction accounts decreased $11.2 million and passbook accounts
decreased $4.8 million. This was offset by an increase in certificate accounts
of $34.6 million. The increase in certificate accounts is primarily due to a
$32.3 million growth in brokered deposits.
<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
At December 31, 1999, the Company had commitments to originate $4.1 million in
mortgage loans, and $33.0 million in undisbursed lines of credit, which the
Company expects to fund from normal operations.
At December 31, 1999, the Company had $146.3 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, 1999, the Company had repurchase
agreement lines of credit and available collateral consisting of investment
securities and mortgage-backed securities of $48.8 million as well as federal
funds available of $15.0 million.
As a result of $2.0 million in net earnings, less the cash dividends paid to
stockholders of approximately $473,000, treasury stock repurchases of
approximately $569,000 and the net change in unrealized loss on securities
available for sale, net of income tax of $1.6 million, stockholders' equity
decreased from $41.2 million at September 30, 1999 to $40.9 million at December
31, 1999.
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 $46.0 million at December 31,
1999, exceeding the core capital requirement by $16.1 million. At December 31,
1999, the Bank's risk-based capital of approximately $51.0 million exceeded its
current risk-based capital requirement by $18.2 million. (For further
information see Regulatory Capital Matters)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS FOR THE THREE MONTHS ENDED
DECEMBER 31, 1998 AND 1999
GENERAL
Net income increased from $1.8 million for the three months ended December 31,
1998, to $2.0 million for three months ended December 31, 1999, or 12.0%. Net
interest income increased $921,000 primarily as a result of an increase of $1.7
million in interest income offset by a $791,000 increase in interest expense.
Provision for loan losses increased from $185,000 for three months ended
December 31, 1998, to $245,000 for the three months ended December 31, 1999.
General and administrative expense increased from $3.6 million for the quarter
ended December 31, 1998, to $4.1 million for the quarter ended December 31,
1999.
<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 DECEMBER 31, 1998 AND 1999
INTEREST INCOME
Interest income for the three months ended December 31, 1999, increased to $13.6
million as compared to $11.9 million for the three months ended December 31,
1998. The earning asset yield for the three months ended December 31, 1999, was
8.00% compared to a yield of 7.77% for the three months ended December 31, 1998.
The average yield on loans receivable for the three months ended December 31,
1999,was 8.51% compared to 8.82% for the three months ended December 31, 1998.
The yield on investments increased to 6.83% for the three months ended December
31, 1999, from 6.49% for the three months ended December 31, 1998. Total average
interest-earning assets were $690.6 million for the quarter ended December 31,
1999 as compared to $622.3 million for the quarter ended December 31, 1998. The
increase in average interest-earning assets is due to an increase in average
loans receivable of approximately $59.8 million and cash in FHLB of
approximately $11.0 million.
INTEREST EXPENSE
Interest expense on interest-bearing liabilities was $7.6 million for the three
months ended December 31, 1999, as compared to $6.8 million for December 31,
1998. Due to increased average transaction deposits balances, the average cost
of deposits for the three months ended December 31, 1999, was 3.74% compared to
3.93% for the three months ended December 31, 1998. The cost of interest-bearing
liabilities was 4.48% for the three months ended December 31, 1999, as compared
to 4.45% for the three months ended December 31, 1998. The cost of FHLB advances
and reverse repurchase agreements was 5.42% and 5.88%, respectively, for the
three months ended December 31, 1999. For the three months ended December 31,
1998, the cost of FHLB advances and reverse repurchase agreements was 5.32% and
5.79%, respectively. Total average interest-bearing liabilities increased from
$613.4 million at December 31, 1998 to $677.6 million at December 31, 1999. The
increase in average interest-bearing liabilities is due to an increase in
average deposits of approximately $9.8 million, FHLB advances of $2.2 million
and reverse repurchase agreements of $51.8 million.
NET INTEREST INCOME
Net interest income was $6.0 million for the three months ended December 31,
1999, as compared to $5.1 million for the three months ended December 31, 1998.
The net interest margin was 3.52% for the three months ended December 31, 1999,
compared to 3.32% for the three months ended December 31, 1998. At December 31,
1998, the prime rate of interest was 7.75% compared to 8.50% at December 31,
1999. Should interest rates continue to increase, the Bank's net interest margin
will decline.
<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 DECEMBER 31, 1998 AND 1999
PROVISION FOR LOAN LOSSES
Due to growth in loans receivable of $20.9 million, the provision for loan
losses increased from $185,000 for the period ended December 31, 1998, to
$245,000 for the three months ended December 31, 1999. For the three months
ended December 31, 1999, net charge-offs were $109,000 compared to net
charge-offs of $58,000 for the three months ended December 31, 1998. The
allowance for loan losses as a percentage of total loans was 1.34% at December
31, 1999, compared to 1.36% at September 30, 1999 and 1.30% at December 31,
1998. Loans delinquent 90 days or more were .47% of total loans at December 31,
1999, compared to .30% at September 30, 1999. The allowance for loan losses was
283% of loans delinquent more than 90 days at December 31, 1999, as compared to
449% at September 30, 1999. Management believes that the current level of
allowance is adequate considering the Company's current loss experience and
delinquency trends, among other criteria.
OTHER INCOME
For the three months ended December 31, 1999 and 1998, other income was $1.5
million. Fees and service charges were $567,000 for the three months ended
December 31, 1999, compared to $470,000 for the three months ended December 31,
1998. During the quarter ended December 31, 1998, interest rates for thirty year
conforming loans were generally ranging from 7.25% to 7.50% with no origination
fee. These compare to rates ranging from 8.25% to 8.50% for the quarter ending
December 31, 1999. Given the rise in interest rates mortgage loan refinancings
were greatly reduced. In addition, adjustable rate, conforming loans increased.
Generally ARM conforming loans have a smaller margin than fixed rate conforming
loans when sold in the secondary market. As a result of these factors, gain on
sale of loans was $191,000 for the quarter ended December 31, 1999, compared to
$361,000 for the quarter ended December 31, 1998. Should interest rates continue
to increase, gain on sale of loans may decline further. Gain on sale of
securities was $11,000 for the three months ended December 31, 1999 compared to
$182,000 for the three months ended December 31, 1998. Other income was $714,000
for the quarter ended December 31, 1999 compared to $486,000 for the quarter
ended December 31, 1998. This is primarily due to increased commissions from the
sale of non-depository products and rental income.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased from $3.6 million for the three
months ended December 31, 1998, to $4.1 million for the three months ended
December 31, 1999. Salaries and employee benefits increased from $2.0 million
for the three months ended December 31, 1998, to $2.3 million for the three
months ended December 31, 1999 primarily due to staffing for two new Sales
Centers and a loan production office in Wilmington, NC. Also as a result of the
three office additions, net occupancy, furniture and fixtures and data
processing expenses increased $87,000 when comparing the two periods. Other
expenses were $775,000 for the quarter ended December 31, 1999, compared to
$631,000 for the quarter ended December 31, 1998. This is primarily due to
increased marketing expenses and professional fees.
<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 DECEMBER 31, 1998 AND 1999
INCOME TAXES
Income taxes increased slightly from $1.0 million for the three months ended
December 31, 1998, to $1.1 million for the three months ended December 31, 1999,
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, 1999:
Total Capital: $51,008 12.44% $32,804 8.00% $41,005 10.00%
(To Risk Weighted Assets)
Tier 1 Capital: $46,040 11.23% $N/A N/A% $24,603 6.00%
(To Risk Weighted Assets)
Tier 1 Capital: $46,040 6.19% $29,768 4.00% $37,210 5.00%
(To Total Assets)
Tangible Capital: $46,040 6.19% $11,163 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, 1998 AND 1999
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 changes the previous accounting
definition of a derivative and discusses the appropriateness of hedge accounting
for various forms of hedging activities. Under this standard, all derivatives
are measured at fair value and recognized in the statement of financial position
as assets or liabilities. As amended by SFAS 137, SFAS 133 is effective for all
fiscal quarters of all fiscal years beginning after June 15, 2000, with earlier
adoption permitted. Management does not expect that this standard will have a
material effect on the Company.
YEAR 2000
Before January 1, 2000, the Bank had implemented and satisfactorily tested a
comprehensive plan to address the effect of the Year 2000 date change on the
Bank's mission critical computer systems. While there can be no assurances that
the Bank's Year 2000 plan has effectively addressed the Year 2000 issue, the
Bank has not been notified, and it is unaware of, any vendor or service provider
problems related to Year 2000, and all of the Bank's systems have performed
properly since January 1, 2000. Likewise, the Bank is unaware of any Year 2000
issues that have materially impaired the ability of its borrowers to repay their
debts.
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 3. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT DISCUSSION AND ANALYSIS OF OPERATION- CONTINUED
COMPARISONS OF THE THREE MONTHS ENDED DECEMBER 31, 1998 AND 1999
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At December 31, 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, 1999.
<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
was a defendant in one significant lawsuit. The action commenced on December 1,
1997, and the Plaintiffs were 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. The lawsuit was settled during the
quarter ended December 31, 1999 with no material impact to the Bank's financial
condition.
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) The Company filed a Form 8-K on November 12, 1999 to report the
signing of an agreement to sell its Florence, South Carolina branch
office to First Federal Savings and Loan Association of Cheraw. A copy
of the agreement is filed as an exhibit to the Form 8-K.
- -------------
* 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 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 14, 2000 /s/ Michael C. Gerald
- ----------------- ----------------------
Date Michael C. Gerald
President and Chief Executive Officer
February 14, 2000 /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-30-2000
<PERIOD-END> DEC-31-1999
<CASH> 22,092
<INT-BEARING-DEPOSITS> 11,447
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 189,178
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 495,373
<ALLOWANCE> 6,616
<TOTAL-ASSETS> 744,119
<DEPOSITS> 418,258
<SHORT-TERM> 245,373
<LIABILITIES-OTHER> 9,497
<LONG-TERM> 30,113
0
0
<COMMON> 67
<OTHER-SE> 40,811
<TOTAL-LIABILITIES-AND-EQUITY> 744,119
<INTEREST-LOAN> 10,273
<INTEREST-INVEST> 3,109
<INTEREST-OTHER> 261
<INTEREST-TOTAL> 13,643
<INTEREST-DEPOSIT> 3,758
<INTEREST-EXPENSE> 7,619
<INTEREST-INCOME-NET> 6,024
<LOAN-LOSSES> (191)
<SECURITIES-GAINS> 11
<EXPENSE-OTHER> 4,109
<INCOME-PRETAX> 3,133
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,005
<EPS-BASIC> .30
<EPS-DILUTED> .29
<YIELD-ACTUAL> 8.00
<LOANS-NON> 0
<LOANS-PAST> 2,337
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 6,616
<CHARGE-OFFS> 130
<RECOVERIES> 21
<ALLOWANCE-CLOSE> 0
<ALLOWANCE-DOMESTIC> 6,616
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
