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, 2001
[ ] 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 OAK STREET, MYRTLE BEACH, S. C. 29577
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (843) 205-2000
--------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of December 31, 2001.
Common Stock $.01 Par Value Per Share 10,616,481 Shares
- --------------------------------------------------------------------------------
(Class) (Outstanding)
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 31, 2001
TABLE OF CONTENTS PAGE
PART I- Consolidated Financial Information
Item
1. Consolidated Financial Statements (unaudited):
Consolidated Statements of Financial Condition
as of September 30, 2001 and December 31, 2001 3
Consolidated Statements of Operations for the three
months ended December 31, 2000 and 2001 4-5
Consolidated Statements of Cash Flows for the three
months ended December 31, 2000 and 2001 6-7
Consolidated Statements of Stockholders' Equity
and Comprehensive Income for the three months ended
December 31, 2000 and 2001 8
Notes to Consolidated Financial Statements 9-12
2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13-17
3. Quantitative and Qualitative Disclosures About 18
Market Risk
Part II - Other Information
Item
1. Legal Proceedings 19
2. Changes in Securities and Use of Proceeds 19
3. Defaults Upon Senior Securities 19
4. Submission of Matters to a Vote of Securities Holders 19
5. Other information 19
6. Exhibits and Reports on Form 8-K 20-21
Signatures 22
2
PART I. FINANCIAL INFORMATION
Item 1. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30,December 31,
2001 2001
---- ----
(Unaudited)
(In thousands,
except share data)
ASSETS:
Cash and amounts due from banks $ 24,966 $ 23,044
Short-term interest-bearing deposits 9,354 418
Investment securities available for sale 192,553 197,965
Loans receivable (net of allowance for
loan losses of $7,159 at September 30,
2001 and $7,244 at December 31, 2001) 488,754 493,586
Loans receivable held for sale 16,274 19,834
Real estate acquired through foreclosure 2,363 1,969
Office property and equipment, net 13,150 13,525
Federal Home Loan Bank stock, at cost 7,624 7,764
Accrued interest receivable on loans 2,783 2,525
Accrued interest receivable on investments 1,341 1,323
Other assets and deferred charges 4,052 4,938
--------- ---------
$ 763,214 $ 766,891
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY:
LIABILITIES:
Deposits $ 530,364 $ 521,132
Securities sold under agreements to
repurchase 18,703 27,160
Advances from Federal Home Loan Bank 140,036 144,575
Other borrowings 2,069 2,069
Drafts outstanding 2,577 1,961
Advances by borrowers for property taxes
and insurance 1,250 283
Accrued interest payable 1,184 1,277
Other liabilities 9,783 10,851
--------- ---------
Total liabilities 705,966 709,308
--------- ---------
STOCKHOLDERS' EQUITY:
Serial preferred stock, 1,000,000 shares
authorized and unissued -- --
Common stock, $.01 par value, 15,000,000
shares authorized; 10,693,325 shares at
September 30, 2001 and 10,616,481 shares
at December 31, 2001 issued and outstanding 107 106
Additional paid-in capital 9,744 9,744
Retained earnings 47,496 49,351
Treasury stock, at cost (324,483 and 401,327
shares, respectively) (3,620) (4,183)
Accumulated other comprehensive income,
net of tax 3,521 2,565
--------- ---------
Total stockholders' equity 57,248 57,583
--------- ---------
$ 763,214 $ 766,891
========= =========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3
PART I. FINANCIAL INFORMATION
Item 1. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED DECEMBER 31, 2000 AND 2001
2000 2001
---- ----
(Unaudited)
(In thousands,
except share data)
Interest income:
Loans receivable $ 11,998 $ 10,252
Investment securities 623 575
Mortgage-backed securities 2,876 2,473
Other 158 68
-------- --------
Total interest income 15,655 13,368
-------- --------
Interest expense:
Deposits 4,755 3,609
Securities sold under agreements to
repurchase 1,190 127
Advances from Federal Home Loan Bank 3,500 1,926
-------- --------
Total interest expense 9,445 5,662
-------- --------
Net interest income 6,210 7,706
-------- --------
Provision for loan losses 270 250
-------- --------
Net interest income after provision
for loan losses 5,940 7,456
-------- --------
Other income:
Fees and service charges 551 768
Loss from real estate owned (90) (106)
Gain on sale of loans receivable, net 150 556
Gain on sale of securities
available for sale 30 131
Other income 997 824
-------- --------
1,638 2,173
-------- --------
General and administrative expenses:
Salaries and employee benefits 2,415 3,002
Net occupancy, furniture and fixtures
and data processing expense 928 1,112
FDIC insurance premium 20 23
Other expenses 737 1,113
-------- --------
4,100 5,250
-------- --------
Income before income taxes and
extraordinary item 3,478 4,379
Income taxes 1,261 1,621
-------- --------
Income before extraordinary item 2,217 2,758
-------- --------
(CONTINUED)
4
PART I. FINANCIAL INFORMATION
Item 1. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED DECEMBER 31, 2000 AND 2001
2000 2001
---- ----
(Unaudited)
(In thousands,
except share data)
Extraordinary loss on extinguishment of
debt, net of income taxes of $182 -- 298
----------- ------------
Net income $ 2,217 $ 2,460
=========== ===========
Earnings per common share
before extraordinary item
Basic $ .20 $ .26
=========== ===========
Diluted $ .20 $ .25
=========== ===========
Effect of extraordinary item on
earnings per common share
Basic $ -- $ (.03)
=========== ===========
Diluted $ -- $ (.02)
=========== ===========
Earnings per common share
after extraordinary item
Basic $ .20 $ .23
=========== ===========
Diluted $ .20 $ .23
=========== ===========
Weighted average common shares
outstanding - basic 10,907,000 10,664,000
=========== ===========
Weighted average common shares
outstanding - diluted 10,997,000 10,927,000
=========== ===========
Dividends per share $ .043 $ .05
=========== ===========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5
PART I. FINANCIAL INFORMATION
Item 1. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED DECEMBER 31, 2000 AND 2001
2000 2001
---- ----
(Unaudited)
(In thousands)
Cash flows from operating activities:
Net earnings $ 2,217 $ 2,460
Adjustments to reconcile net income
to net cash provided by
operating activities:
Depreciation 364 458
Provision for loan losses 270 250
Origination of loans receivable
held for sale (3,548) (31,968)
Proceeds from sales of loans receivable
held for sale 4,540 28,408
(Increase) decrease in:
Other assets and deferred charges (642) (886)
Accrued interest receivable (254) 276
Increase in:
Accrued interest payable 522 93
Other liabilities 773 1,654
-------- --------
Net cash provided by
operating activities 4,242 745
-------- --------
Cash flows from investing activities:
Purchases of investment securities
available for sale (40,408) (39,803)
Proceeds from sales of investment
securities available for sale 32,826 39,712
Origination of loans receivable, net (25,508) (67,302)
Principal collected on loans receivable, net 19,868 36,262
Principal collected on mortgage-backed
securities, net 6,771 18,960
Proceeds from sale of real estate
acquired through foreclosure, net 404 529
Purchases of office properties and
equipment (699) (833)
Purchases of FHLB stock, net -- (140)
-------- --------
Net cash used in
investing activities (6,746) (12,615)
-------- --------
6
PART I. FINANCIAL INFORMATION
Item 1. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED DECEMBER 31, 2000 AND 2001 (CONTINUED)
2000 2001
---- ----
(Unaudited)
(In thousands)
Cash flows from financing activities:
Increase (decrease) in deposits, net $ 23,136 $ (9,232)
Increase (decrease) in securities sold
under agreement to repurchase, net (11,962) 8,457
Proceeds from FHLB advances 204,000 55,762
Repayment of FHLB advances (213,901) (51,223)
Decrease in advance payments by borrowers
for property taxes and insurance, net (1,068) (967)
Decrease in drafts outstanding, net (1,127) (616)
Repurchase of treasury stock, at cost (369) (698)
Dividends to stockholders (471) (530)
Exercise of stock options 7 59
--------- ---------
Net cash provided by (used in) financing (1,755) 1,012
activities --------- ---------
Net decrease in cash and cash
equivalents (4,259) (10,858)
--------- ---------
Cash and cash equivalents at beginning
of the period 17,167 34,320
--------- ---------
Cash and cash equivalents at end
of the period $ 12,908 $ 23,462
--------- ---------
Supplemental information:
Interest paid $ 8,923 $ 5,569
========= =========
Income taxes paid $ 427 $ 1,330
========= =========
Supplemental schedule of non-cash investing
and financing transactions:
Transfer of mortgage loans to real estate
acquired through foreclosure $ 303 $ 135
========= =========
Securitization of mortgage loans into
mortgage-backed securities $ -- $ 25,823
========= =========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7
PART I. FINANCIAL INFORMATION
Item 1. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
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)
Balance at September
30, 2000 $ 73 $ 9,780 $ (1,702) $ 40,319 $ (1,525) $ 46,945
Net income -- -- -- 2,217 -- 2,217
Other comprehensive
income, net of tax:
Unrealized gains arising
during period, net of
taxes of $919 -- -- -- -- 2,419 --
Less: reclassification
adjustment for gains
included in net income,
net of taxes of $11 -- -- -- -- (19) --
--------
Other comprehensive income -- -- -- -- 2,400 2,400
-------- --------
Comprehensive income -- -- -- -- -- 4,617
--------
Treasury stock repurchases (1) -- (368) -- -- (369)
Exercise of stock
options -- -- 8 (1) -- 7
Cash dividends -- -- -- (471) -- (471)
Balance at December 31, ---------
2000 $ 72 $ 9,780 $ (2,062) $ 42,064 $ 875 $ 50,729
======== ======== ======== ======== ======== ========
Balance at September
30, 2001 $ 107 $ 9,744 $ (3,620) $ 47,496 $ 3,521 $ 57,248
Net income -- -- -- 2,460 -- 2,460
Other comprehensive
loss, net of tax:
Unrealized losses arising
during period, net of
taxes of $536 -- -- -- -- (875) --
Less: reclassification
adjustment for gains
included in net income,
net of taxes of $50 -- -- -- -- (81) --
--------
Other comprehensive loss -- -- -- -- (956) (956)
-------- --------
Comprehensive income -- -- -- -- -- 1,504
---------
Treasury stock repurchases (1) -- (697) -- -- (698)
Exercise of stock
options -- -- 134 (75) -- 59
Cash dividends -- -- -- (530) -- (530)
Balance at December -------- -------- -------- -------- -------- --------
31, 2001 $ 106 $ 9,744 $ (4,183) $ 49,351 $ 2,565 $ 57,583
======== ======== ======== ======== ======== ========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8
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, 2001 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, 2001,
included in the Company's 2001 Annual Report to Stockholders. The principal
business of the Company is conducted by its wholly-owned subsidiary, Coastal
Federal 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,
2001 2001
---- ----
(Unaudited)
(In thousands)
First mortgage loans:
Single family to 4 family units $ 252,396 $ 241,482
Other, primarily commercial
real estate 137,282 143,113
Construction loans 60,765 67,268
Consumer and commercial loans:
Installment consumer loans 14,539 13,890
Mobile home loans 2,056 7,135
Deposit account loans 1,221 1,166
Equity lines of credit 22,379 22,017
Commercial and other loans 18,886 16,430
--------- ---------
509,524 512,501
Less:
Allowance for loan losses 7,159 7,244
Deferred loan costs, net (372) (381)
Undisbursed portion of loans in process 13,983 12,052
--------- ---------
$ 488,754 $ 493,586
========= =========
9
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,
2000 2001
(Unaudited)
(Dollars in thousands)
Allowance at beginning of period ............. $7,064 $7,159
Provision for loan losses .................... 270 250
------ ------
Recoveries:
Residential real estate ..................... -- --
Commercial real estate ...................... -- --
Consumer .................................... 14 4
------ ------
Total recoveries .......................... 14 4
------ ------
Charge-offs:
Residential real estate ..................... 47 57
Commercial real estate ...................... -- --
Consumer .................................... 140 112
------ ------
Total charge-offs ......................... 187 169
------ ------
Net charge-offs ........................... 173 165
------ ------
Allowance at end of period .................. $7,161 $7,244
====== ======
Ratio of allowance to net
loans outstanding at the
end of the period ........................... 1.36% 1.41%
====== ======
Ratio of net charge-offs
to average loans outstanding
during the period (annualized) .............. .13% .13%
====== ======
Non-accrual loans, which were over ninety days delinquent, totaled approximately
$5.4 million and $4.7 million at December 31, 2001 and December 31, 2000,
respectively. For the three months ended December 31, 2000 and 2001, interest
income, which would have been recorded, would have been approximately $67,000
and $131,000, respectively, had non-accruing loans been current in accordance
with their original terms.
At December 31, 2001, impaired loans totaled $3.2 million. There were $4.4
million in impaired loans at December 31, 2000. Included in the allowance for
loan losses at December 31, 2001 was $236,000 related to impaired loans compared
to $545,000 at December 31, 2000. The average recorded investment in impaired
loans for the three months ended December 31, 2001 was $3.3 million compared to
$4.4 million for the quarter ended December 31, 2000. No interest income was
recognized on impaired loans for the quarter ended December 31, 2001. Interest
income of $53,000 was recognized on impaired loans for the quarter ended
December 31, 2000.
(3) DEPOSITS
Deposits consist of the following:
September 30, 2001 December 31, 2001
--------------------------------------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
------ ---- ------ ----
(Unaudited)
(In thousands)
Transaction accounts $298,655 1.96% $284,895 1.40%
Passbook accounts 33,317 1.70 33,278 1.21
Certificate accounts 198,392 4.82 202,959 4.19
-------- ---- -------- ----
$530,364 3.01% $521,132 2.48%
======== ==== ======== ====
10
PART I. FINANCIAL INFORMATION
Item 1. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(4) ADVANCES FROM FEDERAL HOME LOAN BANK
Advances from Federal Home Loan Bank ("FHLB") consist of the following:
September 30, 2001 December 31, 2001
--------------------------------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
------ ---- ------ ----
Maturing within: (Unaudited)
(In thousands)
1 year $ 1,400 4.15% $ 7,800 1.91%
2 years 23,231 4.30 23,355 3.15
3 years 2,220 5.21 235 4.92
4 years 400 5.24 27,400 6.21
5 years and thereafter 112,785 5.73 85,785 5.57
-------- ---- -------- ----
$140,036 5.46% $144,575 5.10%
======== ==== ======== ====
At September 30, 2001, and December 31, 2001, the Bank had pledged first
mortgage loans and mortgage-backed securities with unpaid balances of
approximately $204.0 million and $192.6 million, respectively, as collateral for
FHLB advances. At September 30, 2001, included in the one, two and four years
maturities were $109.0 million of advances subject to call provisions. At
December 31, 2001, included in the one, two, four and five years and thereafter
maturities were $109.0 million of advances 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 period ended December 31, 2000 and
2001, 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 period ended December 31, 2000 and 2001, 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.
RECONCILIATION OF AVERAGE SHARES OUTSTANDING
(Unaudited in thousands)
For the Quarter Ended December 31,
2000 2000 2001 2001
----------------------------------------------------------
BASIC DILUTED BASIC DILUTED
----------------------------------------------------------
Weighted average shares outstanding 10,907,000 10,907,000 10,664,000 10,664,000
----------------------------------------------------------
Effective of Dilutive Securities:
Stock options - - 90,000 - - 263,000
----------------------------------------------------------
10,907,000 10,997,000 10,664,000 10,927,000
----------------------------------------------------------
11
PART I. FINANCIAL INFORMATION
Item 1. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(6) COMMON STOCK DIVIDENDS
On July 31, 2001, the Company declared a 3 for 2 stock split in the form of a
50% stock dividend aggregating approximately 3,579,000 shares. All share and per
share data have been retroactively restated for all common stock splits and
dividends.
(7) EXTRAORDINARY ITEM
The extraordinary item for the quarter ended December 31, 2001, relates to
prepayment penalties on advances from FHLB of $480,000, net of income taxes of
$182,000.
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.
12
PART I. FINANCIAL INFORMATION
Item 1. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DISCUSSION OF FINANCIAL CONDITION CHANGES FROM
----------------------------------------------
SEPTEMBER 30, 2001 TO DECEMBER 31, 2001
---------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Historically, the Bank 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 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 investment securities. The Company originated
loans receivable of $29.1 million for the three months ended December 31, 2000,
compared to $99.3 million for the three months ended December 31, 2001,
primarily as a result of reduced interest rates. A portion of these loan
originations were financed through loan principal repayments, which amounted to
$19.9 million and $36.3 million for the three month periods ended December 31,
2000 and 2001, 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 within the
previous year. For the three month period ended December 31, 2000, the Company
sold $4.5 million in mortgage loans held for sale, compared to $28.4 million
sold for the three month period ended December 31, 2001.
For the three month period ended December 31, 2000, the Company purchased $40.4
million in investment and mortgage-backed securities. For the three month period
ended December 31, 2001, the Company purchased $39.8 million in investment and
mortgage-backed securities. These purchases were funded primarily by repayments
of $19.0 million within the securities portfolio and sales of investment
securities of $39.7 million.
Overall the Bank experienced a decrease of $9.2 million in deposits for the
three month period ended December 31, 2001. For the three month period ended
December 31, 2001, transaction accounts decreased $13.8 million and certificate
accounts increased $4.6 million. At December 31, 2001, the Company had $172.2
million of certificates of deposits, which were due to mature within one year.
The Company believes that the majority of these certificates of deposits will
renew with the Bank.
At December 31, 2001, the Company had commitments to originate $11.7 million in
mortgage loans, and $38.2 million in undisbursed lines of credit, which the
Company expects to fund from normal operations. Additionally, at December 31,
2001, the Company had federal funds available of $10.0 million.
As a result of $2.5 million in net income, less the cash dividends paid to
stockholders of approximately $530,000, treasury stock repurchases of
approximately $698,000 and the net change in unrealized gain on securities
available for sale, net of income tax of $956,000, stockholders' equity
increased from $57.2 million at September 30, 2001 to $57.6 million at December
31, 2001.
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 $57.2 million at December 31,
2001, exceeding the core capital requirement by $26.6 million. At December 31,
2001, the Bank's risk-based capital of approximately $62.8 million exceeded its
current risk-based capital requirement by $25.7 million. (For further
information see Regulatory Capital Matters)
GENERAL
- -------
Net income increased from $2.2 million for the three months ended December 31,
2000, to $2.5 million for three months ended December 31, 2001, or 11.0%. Net
interest income increased $1.5 million primarily as a result of a decrease of
$2.3 million in interest income and a $3.8 million decrease in interest expense.
Provision for loan losses was $270,000 for the three months ended December 31,
2000 compared to $250,000 for the quarter ended December 31, 2001. Other income
increased $535,000. General and administrative expense was $4.1 million for the
quarter ended December 31, 2000 compared to $5.3 million for the quarter ended
December 31, 2001.
13
PART1. FINANCIAL INFORMATION
Item 2. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS FOR THE THREE MONTHS ENDED
DECEMBER 31, 2000 AND 2001
INTEREST INCOME
- ---------------
Interest income for the three months ended December 31, 2001, decreased to $13.4
million as compared to $15.7 million for the three months ended December 31,
2000. The earning asset yield for the three months ended December 31, 2001, was
7.55% compared to a yield of 8.61% for the three months ended December 31, 2000.
The average yield on loans receivable for the three months ended December 31,
2001,was 8.01% compared to 9.17% for the three months ended December 31, 2000.
The yield on investments decreased to 6.43% for the three months ended December
31, 2001, from 7.19% for the three months ended December 31, 2000. Total average
interest-earning assets were $714.6 million for the quarter ended December 31,
2001 as compared to $737.7 million for the quarter ended December 31, 2000. The
decrease in average interest-earning assets is primarily due to a decrease in
average loans receivable of approximately $11.6 million and investment
securities of approximately $4.9 million.
INTEREST EXPENSE
- ----------------
Interest expense on interest-bearing liabilities was $5.7 million for the three
months ended December 31, 2001, as compared to $9.4 million for December 31,
2000. The average cost of deposits for the three months ended December 31, 2001,
was 2.73% compared to 4.41% for the three months ended December 31, 2000. The
cost of interest-bearing liabilities was 3.28% for the three months ended
December 31, 2001, as compared to 5.25% for the three months ended December 31,
2000. The cost of FHLB advances and reverse repurchase agreements was 5.38% and
2.85%, respectively, for the three months ended December 31, 2001. For the three
months ended December 31, 2000, the cost of FHLB advances and reverse repurchase
agreements was 6.48% and 6.71%, respectively. Total average interest-bearing
liabilities decreased from $716.5 million at December 31, 2000 to $691.2 million
at December 31, 2001. The decrease in average interest-bearing liabilities is
due to an increase in average deposits of approximately $97.4 million. This was
offset primarily by a decrease in reverse repurchase agreements of $57.2 million
and FHLB advances of $72.9 million.
NET INTEREST INCOME
- -------------------
Net interest income was $7.7 million for the three months ended December 31,
2001, as compared to $6.2 million for the three months ended December 31, 2000.
The net interest margin was 4.27% for the three months ended December 31, 2001,
compared to 3.37% for the three months ended December 31, 2000. With the
reduction in interest rates, resulting from the Federal Reserve Board's decision
to reduce the discount rate, it is expected that the Bank's yield on interest
earning assets and cost of deposits and borrowings will decline. Consequently,
it is expected that a substantial portion of the Bank's loan portfolio will be
subject to refinancing at lower rates. Should refinancing of loans at lower
rates and repricing of loans tied to prime or treasury rates outpace the
repricing of deposits and borrowings the Bank could experience a significantly
reduced margin in the future. Should the Federal Reserve continue to reduce
rates, the Bank could experience reductions in its net interest margin.
PROVISION FOR LOAN LOSSES
- -------------------------
The provision for loan losses was $270,000 for the three months ended December
31, 2000 compared to $250,000 for the three months ended December 31, 2001. For
the three months ended December 31, 2001, net charge-offs were $165,000 compared
to net charge-offs of $173,000 for the three months ended December 31, 2000. The
allowance for loan losses as a percentage of total loans was 1.41% at December
31, 2001, compared to 1.42% at September 30, 2001 and 1.36% at December 31,
2000. Loans delinquent 90 days or more were 1.04% of total loans at December 31,
2001, compared to .64% at September 30, 2001. The allowance for loan losses was
135% of loans delinquent more than 90 days at December 31, 2001, as compared to
220% at September 30, 2001. Management believes that the current level of
allowance is adequate considering the Company's current loss experience and
delinquency trends, among other criteria.
14
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, 2000 AND 2001
OTHER INCOME
- ------------
For the three months ended December 31, 2001, other income was $2.2 million
compared to $1.6 million for the three months ended December 31, 2000. As a
result of increased transaction account balances of approximately $86.6 million,
fees and service charges from deposit accounts were $768,000 for the three
months ended December 31, 2001, compared to $551,000 for the three months ended
December 31, 2000. As a result of increased loan sales, gain on sale of loans
was $556,000 for the quarter ended December 31, 2001, compared to $150,000 for
the quarter ended December 31, 2000. The Bank's margin on loans sold in the
secondary market has improved as a result of the low interest rate environment.
Gain on sales of securities was $131,000 for the quarter ended December 31,
2001, compared to $30,000 for the quarter ended December 31, 2000. Other income
was $824,000 for the three months ended December 31, 2001, as compared to
$997,000 for the three months ended December 31, 2000.
GENERAL AND ADMINISTRATIVE EXPENSES
- -----------------------------------
General and administrative expenses were $4.1 million for the quarter ended
December 31, 2000 compared to $5.3 million for the quarter ended December 31,
2001. Salaries and employee benefits were $2.4 million for the three months
ended December 31, 2000, as compared to $3.0 million for the three months ended
December 31, 2001 primarily due to the addition of new Sales Centers and
additional business banking Associates. Also as a result of new Sales Centers,
net occupancy, furniture and fixtures and data processing expenses increased
$184,000 when comparing the two periods. Other expenses were $1.1 million for
the quarter ended December 31, 2001, compared to $737,000 for the quarter ended
December 31, 2000.
INCOME TAXES
- ------------
Income taxes were $1.3 million for the three months ended December 31, 2000,
compared to $1.6 million for the three months ended December 31, 2001.
EXTRAORDINARY ITEM
- ------------------
The extraordinary item for the quarter ended December 31, 2001 relates to
penalties incurred from the early repayment of advances from FHLB of $480,000,
net of income taxes of $182,000.
15
PART I. FINANCIAL INFORMATION
Item 2. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATION- CONTINUED
COMPARISONS OF THE THREE MONTHS ENDED DECEMBER 31, 2000 AND 2001
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.
Categorized as "Well
Capitalized" Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provision
------ ----------------- ----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars In Thousands)
As of December 31, 2001:
Total Capital: $62,777 13.53% $38,089 8.00% $47,611 10.00%
(To Risk Weighted Assets)
Tier 1 Capital: $57,174 12.32% N/A N/A $28,566 6.00%
(To Risk Weighted Assets)
Tier 1 Capital: $57,174 7.48% $30,662 4.00% $38,328 5.00%
(To Total Assets)
Tangible Capital: $57,174 7.48% $11,498 1.50% N/A N/A
(To Total Assets)
16
PART I. FINANCIAL INFORMATION
Item 2. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATION- CONTINUED
COMPARISONS OF THE THREE MONTHS ENDED DECEMBER 31, 2000 AND 2001
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
- ---------------------------------------
In July 2001, the FASB issued Statement No. 141, Business Combinations, and
Statement No. 142, Goodwill and Other Intangible Assets. Statement 141 requires
that the purchase method of accounting be used for all business combinations
initiated after June 30, 2001 as well as all purchase method business
combinations completed after June 30, 2001. Statement 141 also specifies
criteria intangible assets acquired in a purchase method business combination
must meet to be recognized and reported apart from goodwill. Statement 142 will
require that goodwill and intangible assets with indefinite useful lives no
longer be amortized, but instead tested for impairment at least annually in
accordance with the provisions of Statement 142. Statement 142 will also require
that intangible assets with estimable useful lives be amortized over their
respective estimated useful lives to their estimated residual values, and
reviewed for impairment in accordance with Statement No. 121, Accounting for
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. The
Company adopted Statement 141 in July 2001 and adopted Statement 142 on October
1, 2001. The Company does not have any intangible assets affected by these
standards.
In August 2001, the Financial Accounting Standards Board issued SFAS 144,
Accounting for the Impairment or Disposal of Long-Lived Assets which addresses
the financial accounting and reporting for the impairment or disposal of
long-lived assets. While SFAS 144 supersedes SFAS 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, it
retains many of the fundamental provisions of that Statement. The provisions of
SFAS 144 are effective for financial statements issued for fiscal years
beginning after December 15, 2001, and interim periods within those fiscal
years. The Company will adopt SFAS 144 on October 1, 2002 and has not yet
determined the impact from adoption.
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.
17
PART I. FINANCIAL INFORMATION
Item 3. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATION- CONTINUED
COMPARISONS OF THE THREE MONTHS ENDED DECEMBER 31, 2000 AND 2001
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- ------- ----------------------------------------------------------
At December 31, 2001, no material changes have occurred in market risk
disclosures included in the Company's Annual Report to Stockholders for the year
ended September 30, 2001, filed as an exhibit to the Company's Annual Report on
form 10-K.
18
PART II. OTHER INFORMATION
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Item 1. Legal Proceedings
-----------------
The Company is not a defendant in any lawsuits. The subsidiaries are
defendants in lawsuits arising out of the normal course of business. Based upon
current information received from counsel representing the subsidiaries in these
matters, the Company believes none of the lawsuits would have a material impact
on the Company's financial status.
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.
19
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 (1)
(b) Certificate of Amendment to Certificate of
Incorporation of Coastal Financial Corporation(6)
(c) Bylaws of Coastal Financial Corporation (1)
10 (a) Employment Agreement with Michael C. Gerald (2)
(b) Employment Agreement with Jerry L. Rexroad (2)
(c) Employment Agreement with Phillip G. Stalvey (4)
(d) Employment Agreement with Jimmy R. Graham (2)
(e) Employment Agreement with Steven J. Sherry (7)
(f) 1990 Stock Option Plan (2)
(g) Directors Performance Plan (3)
(h) Loan Agreement with Bankers Bank (5)
(i) Coastal Financial Corporation 2000 Stock Option Plan (8)
(b) No reports on Form 8-K have been filed during the quarter covered by this
report.
_____________
(1) Incorporated by reference to Registration Statement on Form S-4 filed with
the Securities and Exchange Commission on November 26, 1990.
(2) Incorporated by reference to 1995 Form 10-K filed with the Securities and
Exchange Commission on December 29, 1995.
(3) Incorporated by reference to the definitive proxy statement for the 1996
Annual Meeting of Stockholders.
(4) Incorporated by reference to 1997 Form 10-K filed with the Securities and
Exchange Commission on January 2, 1998.
(5) Incorporated by reference to December 31, 1997 Form 10-Q filed with
Securities and Exchange Commission on February 13, 1998.
20
PART II. OTHER INFORMATION
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
(6) Incorporated by reference to March 31, 1998 Form 10-Q filed with Securities
and Exchange Commission on May 15, 1998.
(7) Incorporated by reference to 1998 Form 10-K filed with Securities and
Exchange Commission on December 29, 1998.
(8) Incorporated by reference to the definitive proxy statement for the 2000
Annual Meeting of Stockholders filed December 22, 1999.
21
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, 2002 /s/ Michael C. Gerald
- ----------------- --------------------------------------
Date Michael C. Gerald
President and Chief Executive Officer
February 14, 2002 /s/ Jerry L. Rexroad
- ----------------- --------------------------------------
Date Jerry L. Rexroad
Executive Vice President and
Chief Financial Officer
22