UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 2002
( ) 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
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(Exact name of registrant as specified in its charter)
State of Delaware 57-0925911
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2619 OAK STREET, MYRTLE BEACH, S. C. 29577
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(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 June 30, 2002.
Common Stock $.01 Par Value Per Share 10,544,476 Shares
- --------------------------------------------------------------------------------
(Class) (Outstanding)
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2002
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 June 30, 2002 3
Consolidated Statements of Operations for the three
months ended June 30, 2001 and 2002 4-5
Consolidated Statements of Operations for the nine
months ended June 30, 2001 and 2002 6-7
Consolidated Statements of Cash Flows for the nine
months ended June 30, 2001 and 2002 8-9
Consolidated Statements of Stockholders' Equity
and Comprehensive Income for the nine months ended
June 30, 2001 and 2002 10
Notes to Consolidated Financial Statements 11-14
2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 15-23
3. Quantitative and Qualitative Disclosures About
Market Risk 24
Part II - Other Information
Item
1. Legal Proceedings 25
2. Changes in Securities and Use of Proceeds 25
3. Defaults Upon Senior Securities 25
4. Submission of Matters to a Vote of Securities Holders 25
5. Other information 25
6. Exhibits and Reports on Form 8-K 26
Signatures 31
2
PART I. FINANCIAL INFORMATION
Item 1. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30, June 30,
2001 2002
---- ----
(Unaudited)
(In thousands,
except share data)
ASSETS:
Cash and amounts due from banks $ 24,966 $ 26,932
Short-term interest-bearing deposits 9,354 13,586
Investment securities available for sale 192,553 248,554
Loans receivable (net of allowance for
loan losses of $7,159 at September 30,
2001 and $7,613 at June 30, 2002) 488,754 523,467
Loans receivable held for sale 16,274 14,501
Real estate acquired through foreclosure 2,363 1,962
Office property and equipment, net 13,150 13,901
Federal Home Loan Bank stock, at cost 7,624 8,309
Accrued interest receivable on loans 2,783 2,361
Accrued interest receivable on investments 1,341 1,504
Other assets and deferred charges 4,052 6,210
--------- ---------
$ 763,214 $ 861,287
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY:
LIABILITIES:
Deposits $ 530,364 $ 615,813
Securities sold under agreements to
repurchase 18,703 19,890
Advances from Federal Home Loan Bank 140,036 146,267
Other borrowings 2,069 2,069
Drafts outstanding 2,577 2,279
Advances by borrowers for property taxes
and insurance 1,250 1,017
Accrued interest payable 1,184 1,187
Other liabilities 9,783 10,780
--------- ---------
Total liabilities 705,966 799,302
--------- ---------
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 10,544,476 shares
at June 30, 2002 issued and outstanding 107 105
Additional paid-in capital 9,744 9,744
Retained earnings 47,496 52,896
Treasury stock, at cost (324,483 and 473,332
shares, respectively) (3,620) (4,898)
Accumulated other comprehensive income,
net of tax 3,521 4,138
--------- ---------
Total stockholders' equity 57,248 61,985
--------- ---------
$ 763,214 $ 861,287
========= =========
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 JUNE 30, 2001 AND 2002
2001 2002
---- ----
(Unaudited)
(In thousands,
except share data)
Interest income:
Loans receivable $ 11,382 $ 10,050
Investment securities 656 453
Mortgage-backed securities 2,814 2,949
Other 151 46
-------- ---------
Total interest income 15,003 13,498
-------- ---------
Interest expense:
Deposits 4,917 3,309
Securities sold under agreements to
repurchase 524 92
Advances from Federal Home Loan Bank 2,471 1,877
-------- ---------
Total interest expense 7,912 5,278
-------- ---------
Net interest income 7,091 8,220
Provision for loan losses 235 350
-------- ---------
Net interest income after provision
for loan losses 6,856 7,870
-------- ---------
Other income:
Fees and service charges 709 791
Loss from real estate owned (212) (38)
Gain on sale of loans receivable, net 382 213
Gain on sale of securities
available for sale 286 70
Other income 915 840
-------- ---------
2,080 1,876
-------- ---------
General and administrative expenses:
Salaries and employee benefits 2,691 3,185
Net occupancy, furniture and fixtures
and data processing expense 1,013 1,353
FDIC insurance premium 20 23
Other expenses 939 972
-------- ---------
4,663 5,533
-------- ---------
Income before income taxes and
extraordinary item 4,273 4,213
Income taxes 1,579 1,554
-------- ---------
Income before extraordinary item 2,694 2,659
-------- ---------
(CONTINUED)
5
PART I. FINANCIAL INFORMATION
Item 1. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 2001 AND 2002
2001 2002
---- ----
(Unaudited)
(In thousands,
except share data)
Extraordinary loss on extinguishment of
debt, net of income taxes of $160 and
$41, respectively 299 66
------------- ------------
Net income $ 2,395 $ 2,593
============= ============
Earnings per common share
before extraordinary item
Basic $ .25 $ .25
============= ============
Diluted $ .25 $ .24
============= ============
Effect of extraordinary item on
earnings per common share
Basic $ (.03) $ --
============= ============
Diluted $ (.03) $ --
============= ============
Earnings per common share
after extraordinary item
Basic $ .22 $ .25
============= ============
Diluted $ .22 $ .24
============= ============
Weighted average common shares
outstanding - basic 10,782,000 10,529,000
============= ============
Weighted average common shares
outstanding - diluted 10,958,000 10,859,000
============= ============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6
PART I. FINANCIAL INFORMATION
Item 1. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED JUNE 30, 2001 AND 2002
2001 2002
---- ----
(Unaudited)
(In thousands,
except share data)
Interest income:
Loans receivable $ 35,046 $ 30,171
Investment securities 1,911 1,584
Mortgage-backed securities 8,602 7,972
Other 510 126
-------- --------
Total interest income 46,069 39,853
-------- --------
Interest expense:
Deposits 14,814 10,135
Securities sold under agreements to
repurchase 2,621 314
Advances from Federal Home Loan Bank 8,968 5,644
-------- --------
Total interest expense 26,403 16,093
-------- --------
Net interest income 19,666 23,760
Provision for loan losses 730 855
-------- --------
Net interest income after provision
for loan losses 18,936 22,905
-------- --------
Other income:
Fees and service charges 1,928 2,302
Loss from real estate owned (350) (188)
Gain on sale of loans receivable, net 862 1,025
Gain on sale of securities
available for sale 642 141
Other income 2,880 2,472
-------- --------
5,962 5,752
-------- --------
General and administrative expenses:
Salaries and employee benefits 7,759 9,254
Net occupancy, furniture and fixtures
and data processing expense 2,967 3,634
FDIC insurance premium 61 70
Other expenses 2,531 3,052
-------- --------
13,318 16,010
-------- --------
Income before income taxes and
extraordinary item 11,580 12,647
Income taxes 4,183 4,642
-------- --------
Income before extraordinary item 7,397 8,005
-------- --------
(CONTINUED)
6
PART I. FINANCIAL INFORMATION
Item 1. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED JUNE 30, 2001 AND 2002
2001 2002
---- ----
(Unaudited)
(In thousands,
except share data)
Extraordinary loss on extinguishment of
debt, net of income taxes of $297 and
$297, respectively 555 485
---------- ----------
Net income $ 6,842 $ 7,520
========== ==========
Earnings per common share
before extraordinary item
Basic $ .68 $ .75
========== ==========
Diluted $ .67 $ .73
========== ==========
Effect of extraordinary item on
earnings per common share
Basic $ (.05) $ (.04)
========== ==========
Diluted $ (.05) $ (.04)
========== ==========
Earnings per common share
after extraordinary item
Basic $ .63 $ .71
========== ==========
Diluted $ .62 $ .69
========== ==========
Weighted average common shares
outstanding - basic 10,880,000 10,625,000
========== ==========
Weighted average common shares
outstanding - diluted 10,998,000 10,899,000
========== ==========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7
PART I. FINANCIAL INFORMATION
Item 1. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JUNE 30, 2001 AND 2002
2001 2002
---- ----
(Unaudited)
(In thousands)
Cash flows from operating activities:
Net income $ 6,842 $ 7,520
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation 1,130 1,510
Provision for loan losses 730 855
Gain on sale of mortgage-backed
securities available for sale (642) (141)
Origination of loans receivable
held for sale (55,853) (67,940)
Proceeds from sales of loans receivable
held for sale 47,472 69,713
(Increase) decrease in:
Other assets and deferred charges (2,183) (2,158)
Accrued interest receivable 146 259
Increase (decrease)in:
Accrued interest payable (914) 3
Other liabilities 421 620
-------- --------
Net cash provided by (used in)
operating activities (2,851) 10,241
-------- --------
Cash flows from investing activities:
Purchases of investment securities
available for sale (141,765) (152,334)
Proceeds from sales of investment
securities available for sale 139,074 104,687
Origination of loans receivable, net (152,869) (299,656)
Purchase of loans receivable (10) (233)
Principal collected on loans receivable, net 140,988 199,191
Principal collected on mortgage-backed
securities, net 30,705 57,453
Proceeds from sale of real estate
acquired through foreclosure, net 826 859
Purchases of office properties and
equipment (1,941) (2,261)
Sales (purchases) of FHLB stock, net 2,139 (685)
-------- --------
Net cash provided by (used in)
investing activities 17,147 (92,979)
-------- --------
(CONTINUED)
8
PART I. FINANCIAL INFORMATION
Item 1. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JUNE 30, 2001 AND 2002 (CONTINUED)
2001 2002
---- ----
(Unaudited)
(In thousands)
Cash flows from financing activities:
Increase in deposits, net $ 107,801 $ 85,449
Increase (decrease) in securities sold
under agreement to repurchase, net (59,137) 1,187
Proceeds from FHLB advances 326,236 212,762
Repayment of FHLB advances (379,024) (206,531)
Decrease in advance payments by borrowers
for property taxes and insurance, net (327) (233)
Decrease in drafts outstanding, net (514) (298)
Repurchase of treasury stock, at cost (1,488) (2,243)
Dividends to stockholders (1,476) (1,639)
Exercise of stock options 71 482
--------- ---------
Net cash provided by (used in) financing activities (7,858) 88,936
--------- ---------
Net increase in cash and cash
equivalents 6,438 6,198
--------- ---------
Cash and cash equivalents at beginning
of the period 17,167 34,320
--------- ---------
Cash and cash equivalents at end
of the period $ 23,605 $ 40,518
========= =========
Supplemental information:
Interest paid $ 27,317 $ 16,090
========= =========
Income taxes paid $ 3,799 $ 6,455
========= =========
Supplemental schedule of non-cash investing
and financing transactions:
Transfer of mortgage loans to real estate
acquired through foreclosure $ 2,360 $ 458
========= =========
Securitization of mortgage loans into
mortgage-backed securities $ 21,673 $ 64,672
========= =========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9
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 $ 109 $ 9,744 $ (1,702) $ 40,319 $ (1,525) $ 46,945
Net income -- -- -- 6,842 -- 6,842
Other comprehensive
income, net of tax:
Unrealized gains arising
during period, net of
taxes of $2,068 -- -- -- -- 3,374 --
Less: reclassification
adjustment for gains
included in net income,
net of taxes of $244 -- -- -- -- (398) --
-----
Other comprehensive income -- -- -- -- 2,976 2,976
----- --------
Comprehensive income -- -- -- -- -- 9,818
--------
Treasury stock repurchases (1) -- (1,487) -- -- (1,488)
Exercise of stock
options -- 161 (90) -- 71
Cash dividends -- -- -- (1,476) -- (1,476)
Balance at June 30, -------- -------- --------- ----------- -------- --------
2001 $ 108 $ 9,744 $ (3,028) $ 45,595 $ 1,451 $ 53,870
======== ======== ========= =========== ======== ========
Balance at September
30, 2001 $ 107 $ 9,744 $ (3,620) $ 47,496 $ 3,521 $ 57,248
Net income -- -- -- 7,520 -- 7,520
Other comprehensive
income, net of tax:
Unrealized gains arising
during period, net of
taxes of $431 -- -- -- -- 704 --
Less: reclassification
adjustment for gains
included in net income,
net of taxes of $54 -- -- -- -- (87) --
--------
Other comprehensive income -- -- -- -- 617 617
-------- --------
Comprehensive income -- -- -- -- -- 8,137
--------
Treasury stock repurchases (2) -- (2,241) -- -- (2,243)
Exercise of stock
options -- -- 963 (481) -- 482
Cash dividends -- -- -- (1,639) -- (1,639)
Balance at June -------- -------- --------- ----------- -------- --------
30, 2002 $ 105 $ 9,744 $ (4,898) $ 52,896 $ 4,138 $ 61,985
======== ======== ========= =========== ======== ========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10
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 accounting principles generally accepted in the United States of
America. 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, 2002 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, June 30,
2001 2002
---- ----
(Unaudited)
(In thousands)
First mortgage loans:
Single family to 4 family units $ 252,396 $ 246,707
Other, primarily commercial
real estate 137,282 186,567
Construction loans 60,765 48,556
Consumer and commercial loans:
Installment consumer loans 14,539 14,527
Mobile home loans 2,056 2,794
Deposit account loans 1,221 1,559
Equity lines of credit 22,379 24,003
Commercial and other loans 18,886 18,284
-------- --------
509,524 542,997
Less:
Allowance for loan losses 7,159 7,613
Deferred loan costs, net (372) (114)
Undisbursed portion of loans in process 13,983 12,031
-------- --------
$ 488,754 $ 523,467
========= =========
11
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:
Nine Months Ended June 30,
--------------------------
2001 2002
---- ----
(Unaudited)
(Dollars in thousands)
Allowance at beginning of period ............ $7,064 $7,159
Provision for loan losses ................... 730 855
------ ------
Recoveries:
Residential real estate .................... 2 --
Commercial real estate ..................... -- --
Consumer ................................... 51 23
------ ------
Total recoveries ......................... 53 23
------ ------
Charge-offs:
Residential real estate .................... 257 57
Commercial real estate ..................... 98 --
Consumer ................................... 332 367
------ ------
Total charge-offs ........................ 687 424
------ ------
Net charge-offs .......................... 634 401
------ ------
Allowance at end of period ................. $7,160 $7,613
====== ======
Ratio of allowance to net
loans outstanding at the
end of the period .......................... 1.38% 1.42%
====== ======
Ratio of net charge-offs
to average loans outstanding
during the period (annualized) ............. .16% .10%
====== ======
Non-accrual loans, which includes loans over ninety days delinquent, totaled
approximately $3.8 million and $3.1 million at June 30, 2002 and 2001,
respectively. For the quarter ended June 30, 2001, interest income, which would
have been recorded, would have been approximately $56,000. For the quarter ended
June 30, 2002, interest income, which would have been recorded, would have been
approximately $107,000. For the nine months ended June 30, 2001 and 2002,
interest income, which would have been recorded, would have been approximately
$100,000 and $244,000, respectively, had non-accruing loans been current in
accordance with their original terms.
At June 30, 2002, impaired loans totaled $3.0 million. There were $2.3 million
in impaired loans at June 30, 2001. Included in the allowance for loan losses at
June 30, 2002 was $234,000 related to impaired loans compared to $196,000 at
June 30, 2001. The average recorded investment in impaired loans for the nine
months ended June 30, 2002 was $3.2 million compared to $3.9 million for the
nine months ended June 30, 2001. Interest income of $14,000 and $21,000 was
recognized on impaired loans for the quarter and nine months ended June 30,
2002, respectively. Interest income of $33,000 and $121,000 was recognized on
impaired loans for the quarter and for the nine months ended June 30, 2001,
respectively.
12
PART I. FINANCIAL INFORMATION
Item 1. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) DEPOSITS
Deposits consist of the following:
September 30, 2001 June 30, 2002
-------------------------------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
------ ---- ------ ----
(Unaudited)
(In thousands)
Transaction accounts $298,655 1.96% $339,560 1.50%
Passbook accounts 33,317 1.70 38,332 1.22
Certificate accounts 198,392 4.82 237,921 3.40
-------- ---- -------- ----
$530,364 3.01% $615,813 2.22%
======== ==== ======== ====
(4) ADVANCES FROM FEDERAL HOME LOAN BANK
Advances from Federal Home Loan Bank ("FHLB") consist of the following:
September 30, 2001 June 30, 2002
----------------------------------------------------
Weighted Weighted Weighted
Average Average
Amount Rate Amount Rate
------ ---- ------ ----
Maturing within: (Unaudited)
(In thousands)
1 year $ 1,400 4.15% $ 12,500 3.00%
2 years 23,231 4.30 22,262 2.96
3 years 2,220 5.21 235 4.92
4 years 400 5.24 28,270 6.16
5 years and thereafter 112,785 5.73 83,000 5.53
----------- ---- --------- ----
$ 140,036 5.46% $ 146,267 5.04%
=========== ==== ========= ====
At September 30, 2001, and June 30, 2002, the Bank had pledged first mortgage
loans and mortgage-backed securities with unpaid balances of approximately
$204.0 million and $185.1 million, respectively, as collateral for FHLB
advances. At September 30, 2001, included in the one, two and five years
maturities were $109.0 million of advances subject to call provisions. At June
30, 2002, included in the 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. At June 30, 2002, the Bank
had $38.8 million available for additional advances.
(5) EARNINGS PER SHARE
Basic earnings per share for the three and nine month periods ended June 30 ,
2001 and 2002, 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, 2001 and 2002, 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.
13
PART I. FINANCIAL INFORMATION
Item 1. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RECONCILIATION OF AVERAGE SHARES OUTSTANDING
(Unaudited in thousands)
For the Quarter Ended June 30,
2001 2001 2002 2002
------------------------ ---------------------
BASIC DILUTED BASIC DILUTED
------------------------ ---------------------
Weighted average shares outstanding 10,782,000 10,782,000 10,529,000 10,529,000
Effective of Dilutive Securities:
Stock options - - 176,000 - - 330,000
------------------------ ------------------------
10,782,000 10,958,000 10,529,000 10,859,000
------------------------ ------------------------
For the Nine Months Ended June 30,
2001 2001 2002 2002
------------------------ ---------------------
BASIC DILUTED BASIC DILUTED
------------------------ ---------------------
Weighted average shares outstanding 10,880,000 10,880,000 10,625,000 10,625,000
------------------------ ---------------------
Effective of Dilutive Securities:
Stock options - - 118,000 - - 274,000
------------------------ ---------------------
10,880,000 10,998,000 10,625,000 10,899,000
------------------------ ---------------------
(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 June 30, 2001 relates to prepayment
penalties on advances from FHLB of $459,000 net of income taxes of $160,000. The
extraordinary item for the nine months ended June 30, 2001, relates to
prepayment penalties on advances from FHLB of $852,000 net of income taxes of
$297,000.
The extraordinary item for the quarter ended June 30, 2002, relates to
prepayment penalties on advances from FHLB of $107.000, net of income taxes of
$41,000. For the nine months ended June 30, 2002, prepayment penalties on
advances from FHLB were $782.000 net of income taxes of $297,000.
14
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).
Except as required by applicable law and regulation, the Company disclaims any
obligation to update such forward looking statements.
CRITICAL ACCOUNTING POLICIES
- -----------------------------
The Bank considers its policy regarding the allowance for loan losses to be its
most critical accounting policy due to the significant degree of management
judgment. The Bank has developed policies and procedures for assessing the
adequacy of the allowance, recognizing that this process requires a significant
number of assumptions and estimates with respect to its loan portfolio. The Bank
assessments of future loan losses may be impacted in future periods by changes
in economic and market conditions, the impact of regulatory examinations,
weather related events such as hurricanes or major storms, and the discovery of
information with respect to certain borrowers and or guarantors, which is not
known to management at the time of the issuance of the consolidated financial
statements.
OFF-BALANCE SHEET ARRANGEMENTS
- ------------------------------
In the normal course of operations, the Bank engages in a variety of financial
transactions that, in accordance with generally accepted accounting principles,
or are recorded in amounts that differ from the notional amounts. These
transactions involve, to varying degrees, elements of credit, interest rate, and
liquidity risk. Such transactions are used by the Bank for general corporate
purposes or for customer needs. Corporate purpose transactions are used to help
manage customers' requests for funding.
The Bank's off-balance sheet arrangements, which principally include lending
commitments and derivatives, are described below. At June 30, 2002 and 2001, the
Bank had no interests in non-consolidated special purpose entities.
Lending Commitments. Lending Commitments include loan commitments, standby
letters of credit, unused business and consumer credit card lines, and unused
business and consumer lines of credit. These instruments are not recorded in the
consolidated balance sheet until funds are advanced under the commitments. The
Bank provides these lending commitments to customers in the normal course of
business.
For commercial customers, loan commitments generally take the form of revolving
credit arrangements to finance customers' working capital requirements. For
retail customers, loan commitments are generally lines of credit secured by
residential property. At June 30, 2002, commercial and retail loan commitments
totaled $16.4 million. Standby letters of credit are conditional commitments to
guarantee performance, typically contract or financial integrity, of a customer
to a third party and totaled $4.0 million at June 30, 2002. Unused business
credit card lines, which totaled $979,000 at June 30, 2002, are generally for
short-term borrowings. The Bank applies essentially the same credit policies and
standards as it does in the lending process when making these commitments.
Derivatives. The Bank originates certain fixed rate residential loans with the
intention of selling these loans. Between the time that the Bank enters into an
interest rate lock or a commitment to originate a fixed rate residential loan
with a potential borrower and the time the closed loan is sold, the Bank is
subject to variability in the market prices related to these commitments. The
Bank believes that it is prudent to limit the variability of expected proceeds
from the sales through forward sales of "to be issued" mortgage backed
securities and loans ("forward sales commitments"). The commitment to originate
fixed rate residential loans and forward sales commitments are freestanding
15
Item 2. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
derivative instruments. When such instruments do not qualify for hedge
accounting treatment, their fair value adjustments are recorded through the
income statement in net gains on sale of loans. The commitments to originate
fixed rate conforming loans totaled $7.2 million at June 30, 2002. The fair
value of the loan commitments was a gain of approximately $58,000 at June 30,
2002. As of June 30, 2002 the Bank had sold $10.0 million in forward commitments
to deliver fixed rate mortgage-backed securities which had an unrealized loss of
$98,000. The Bank had sold call options on 15 year mortgage-backed securities to
deliver $3.0 million, which had an unrealized loss of $21,000 at June 30, 2002.
In addition, the Bank had purchased $3.0 million put options on the 10 year
treasury bond which had an unrealized gain of $2,000. The aggregate loss was
$60,000 for the quarter for all off balance sheet commitments.
16
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 JUNE 30,
- --------------------------------------------------------------------------------
2002
- ----
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
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 loan payments, 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 $208.7 million for the nine months ended June 30, 2001, compared
to $367.6 million for the nine months ended June 30, 2002, primarily as a result
of reduced interest rates. A portion of these loan originations were financed
through loan principal repayments, which amounted to $141.0 million and $199.2
million for the nine month periods ended June 30, 2001 and 2002, 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 nine month
period ended June 30, 2001, the Company sold $47.5 million in mortgage loans
held for sale, compared to $69.7 million sold for the nine month period ended
June 30, 2002. Loan originations have increased as a result of falling interest
rates over the last twelve months. Consequently, the Bank has experienced
prepayment of a portion of its mortgage and commercial loan portfolio. Many of
the Bank's adjustable rate residential mortgage loans were refinanced into
conforming fixed rate mortgage loans. A significant portion of these fixed rate
loans were sold into the secondary market.
For the nine month period ended June 30, 2001, the Company purchased $141.8
million in investment and mortgage-backed securities. For the nine month period
ended June 30, 2002, the Company purchased $152.3 million in investment and
mortgage-backed securities. These purchases were funded primarily by repayments
of $57.4 million within the securities portfolio and sales of investment
securities of $104.7 million.
Overall the Bank experienced an increase of $85.4 million in deposits for the
nine month period ended June 30, 2002. For the nine month period ended June 30,
2002, transaction accounts increased $40.9 million which the Bank primarily
believes is due to seasonal effects of Customer deposits during the summer
months along with the growth of new Sales Centers. During the same period,
certificate accounts increased $39.5 million primarily due to special offers in
many of the Bank's new Sales Centers. At June 30, 2002, the Company had $193.4
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.
As a result of $7.5 million in net income, less the cash dividends paid to
stockholders of approximately $1.6 million, treasury stock repurchases of
approximately $2.2 million and the net change in unrealized gain on securities
available for sale, net of income tax of $617,000 stockholders' equity increased
from $57.2 million at September 30, 2001 to $62.0 million at June 30, 2002.
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 $59.4 million at June 30,
2002, exceeding the core capital requirement by $25.1 million. At June 30, 2002,
the Bank's risk-based capital, as calculated under OTS regulations, were
approximately $65.5 million and exceeded its current risk-based capital
requirement by $25.0 million. (For further information see Regulatory Capital
Matters)
17
PART I. FINANCIAL INFORMATION
Item 2. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS FOR THE THREE MONTHS ENDED
- -----------------------------------------------------------------------------
JUNE 30, 2001 AND 2002
- ----------------------
GENERAL
- -------
Net income increased from $2.4 million for the three months ended June 30, 2001,
to $2.6 million for the three months ended June 30, 2002, or 8.3%. Net interest
income increased $1.1 million primarily as a result of a decrease of $1.5
million in interest income and a $2.6 million decrease in interest expense.
Provision for loan losses was $235,000 for the three months ended June 30, 2001
compared to $350,000 for the quarter ended June 30, 2002. Other income decreased
$204,000. General and administrative expense was $4.7 million for the quarter
ended June 30, 2001 compared to $5.5 million for the quarter ended June 30,
2002.
INTEREST INCOME
- ---------------
Interest income for the three months ended June 30, 2002, decreased to $13.5
million as compared to $15.0 million for the three months ended June 30, 2001.
The earning assets yield for the three months ended June 30, 2002, was 7.08%
compared to a yield of 8.08% for the three months ended June 30, 2001. As a
result of significantly declining interest rates during fiscal 2002, the Bank's
yield on assets and cost of funds has declined. At June 30, 2001 the one year
treasury rate and prime rate of interest were approximately 3.46% and 6.75%,
respectively, which compared to 2.13% and 4.75% at June 30, 2002, respectively.
The average yield on loans receivable for the three months ended June 30,
2002,was 7.53% compared to 8.67% for the three months ended June 30, 2001. The
yield on investments decreased to 6.20% for the three months ended June 30,
2002, from 6.77% for the three months ended June 30, 2001. Total average
interest-earning assets were $768.5 million for the quarter ended June 30, 2002
as compared to $751.2 million for the quarter ended June 30, 2001. The increase
in average interest-earning assets is primarily due to a increase in average
loans receivable of approximately $8.7 million, investment securities of
approximately $14.5 million and a decrease of cash in FHLB of approximately $5.9
million.
INTEREST EXPENSE
- ----------------
Interest expense on interest-bearing liabilities was $5.3 million for the three
months ended June 30, 2002, as compared to $7.9 million for June 30, 2001. The
average cost of deposits for the three months ended June 30, 2002, was 2.28%
compared to 3.91% for the three months ended June 30, 2001. The cost of
interest-bearing liabilities was 2.83% for the three months ended June 30, 2002,
as compared to 4.37% for the three months ended June 30, 2001. The cost of FHLB
advances and reverse repurchase agreements was 5.08% and 2.21%, respectively,
for the three months ended June 30, 2002. For the three months ended June 30,
2001, the cost of FHLB advances and reverse repurchase agreements was 5.59% and
4.85%, respectively. Total average interest-bearing liabilities increased from
$723.7 million at June 30, 2001 to $746.2 million at June 30, 2002. The increase
in average interest-bearing liabilities is due to an increase in average
deposits of approximately $77.7 million. This was offset primarily by a decrease
in FHLB advances of $28.9 million and $27.0 million in reverse repurchase
agreements.
NET INTEREST INCOME
- -------------------
Net interest income was $8.2 million for the three months ended June 30, 2002,
as compared to $7.1 million for the three months ended June 30, 2001. The net
interest margin was 4.25% for the three months ended June 30, 2002, compared to
3.70% for the three months ended June 30, 2001. With the reduction in interest
rates, it is expected that the Bank's yield on interest earning assets and cost
of deposits and borrowings will continue to decline. Consequently, it is
expected that a substantial portion of the Bank's loan portfolio will be subject
to refinancing at lower rates. It is expected that the refinancing of loans at
lower rates and repricing of loans tied to prime or treasury rates will outpace
the repricing of deposits and borrowings. Should interest rates remain at these
historically low levels, the Bank would most likely experience a reduced margin
for the remainder of fiscal 2002.
18
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, 2001 AND 2002
PROVISION FOR LOAN LOSSES
- -------------------------
As a result of the growth in the loan portfolio, the growth coming primarily
from commercial real estate loans, the provision for loan losses was $235,000
for the three months ended June 30, 2001 compared to $350,000 for the three
months ended June 30, 2002. For the three months ended June 30, 2002, net
charge-offs were $165,000 compared to net charge-offs of $234,000 for the three
months ended June 30, 2001. The allowance for loan losses as a percentage of
total loans was 1.42% at June 30, 2002, compared to 1.42% at September 30, 2001
and 1.38% at June 30, 2001. Loans delinquent 90 days or more were .71% of total
loans at June 30, 2002, compared to .64% at September 30, 2001. The allowance
for loan losses was 201% of loans delinquent more than 90 days at June 30, 2002,
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.
OTHER INCOME
- ------------
For the three months ended June 30, 2002, other income was $1.9 million compared
to $2.1 million for the three months ended June 30, 2001. As a result of
increased transaction account balances of approximately $51.8 million, fees and
service charges from deposit accounts were $791,000 for the three months ended
June 30, 2002, compared to $709,000 for the three months ended June 30, 2001.
Gain on sale of loans was $213,000 for the quarter ended June 30, 2002, compared
to $382,000 for the quarter ended June 30, 2001. Gain on sales of securities was
$70,000 for the quarter ended June 30, 2002, compared to a gain of $286,000 for
the quarter ended June 30, 2001. Other income was $840,000 for the three months
ended June 30, 2002, as compared to $915,000 for the three months ended June 30,
2001.
GENERAL AND ADMINISTRATIVE EXPENSES
- -----------------------------------
General and administrative expenses increased from $4.7 million for the quarter
ended June 30, 2001 to $5.5 million for the quarter ended June 30, 2002.
Salaries and employee benefits were $2.7 million for the three months ended June
30, 2001, as compared to $3.2 million for the three months ended June 30, 2002
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 $340,000 when
comparing the two periods. The Bank had eleven, twelve and seventeen operating
Sales Centers at September 30, 2000, 2001 and June 30, 2002, respectively. Other
expenses were $972,000 for the quarter ended June 30, 2002, compared to $939,000
for the quarter ended June 30, 2001. This increase is primary attributed to the
disposal of telephone equipment of $70,000.
INCOME TAXES
- ------------
Income taxes were $1.6 million for each of the three months ended June 30, 2001
and June 30, 2002, respectively.
EXTRAORDINARY ITEM
- ------------------
The extraordinary item for the quarter ended June 30, 2002 relates to penalties
incurred from the early repayment of advances from FHLB of $107,000, net of
income taxes of $41,000.
19
PART I. FINANCIAL INFORMATION
Item 2. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS - CONTINUED
COMPARISONS OF THE NINE MONTHS ENDED JUNE 30, 2001 AND 2002
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS FOR THE NINE MONTHS ENDED
- ----------------------------------------------------------------------------
JUNE 30, 2001 AND 2002.
- -----------------------
GENERAL
- -------
Net income increased from $6.8 million for the nine months ended June 30, 2001,
to $7.5 million for the nine months ended June 30, 2002, or 9.9%. Net interest
income increased $4.1 million primarily as a result of a decrease in interest
income of $6.2 million offset by a decrease of $10.3 million in interest
expense. Provision for loan losses increased from $730,000 for the nine months
ended June 30, 2001, to $855,000 for the nine months ended June 30, 2002. Other
income decreased $210,000. General and administrative expenses increased $2.7
million.
INTEREST INCOME
- ---------------
Interest income for the nine months ended June 30, 2002, decreased to $39.9
million as compared to $46.1 million for the nine months ended June 30, 2001. As
a result of significantly declining interest rates during fiscal 2002, the
Bank's yield on assets and cost of funds has declined. At June 30, 2001 the one
year treasury rate and prime rate of interest were approximately 3.46% and
6.75%, respectively, which compared to 2.13% and 4.75% at June 30, 2002,
respectively. The earning asset yield for the nine months ended June 30, 2002,
was 7.28% compared to a yield of 8.37% for the nine months ended June 30, 2001.
The average yield on loans receivable for the nine months ended June 30, 2002,
was 7.73% compared to 8.91% for the nine months ended June 30, 2001. The yield
on investments decreased to 6.30% for the nine months ended June 30, 2002, from
7.12% for the nine months ended June 30, 2001. Total average earning assets were
$735.8 million for the nine months period ended June 30, 2002, as compared to
$742.9 million for the nine month period ended June 30, 2001.
INTEREST EXPENSE
- ----------------
Interest expense on interest-bearing liabilities was $16.1 million for the nine
months ended June 30, 2002, as compared to $26.4 million for the nine months
ended June 30, 2001. The average cost of deposits for the nine months ended June
30, 2002, was 2.45% compared to 4.23% for the nine months ended June 30, 2001.
The cost of interest-bearing liabilities was 2.98% for the nine months ended
June 30, 2002, as compared to 4.84% for the nine months ended June 30, 2001.
Total average interest-bearing liabilities decreased from $723.4 million at June
30, 2001 to $716.7 million at June 30, 2002.
NET INTEREST INCOME
- -------------------
Net interest income was $23.8 million for the nine months ended June 30, 2002,
as compared to $19.7 million for the nine months ended June 30, 2001. The net
interest margin increased to 4.30% for the nine months ended June 30, 2002, from
3.53% for the nine months ended June 30, 2001.
PROVISIONS FOR LOAN LOSSES
- --------------------------
As a result of the growth in the loan portfolio, the growth coming primarily
from commercial real estate loans, the provisions for loan losses increased from
$730,000 for the period ended June 30, 2001, to $855,000 for the nine months
ended June 30, 2002. For the nine months ended June 30, 2002, net charge-offs
were $401,000 compared to net charge-offs of $634,000 for the nine months ended
June 30, 2001. The allowance for loan losses as a percentage of total loans was
1.42% at June 30, 2002 and September 30, 2001, respectively. Management believes
that the current level of allowance is adequate considering the Company's
current loss experience and delinquency trends, among other criteria.
20
PART I. FINANCIAL INFORMATION
Item 2. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS - CONTINUED
COMPARISONS OF THE NINE MONTHS ENDED JUNE 30, 2001 AND 2002
OTHER INCOME
- ------------
For the nine months ended June 30, 2002 other income was $5.8 million compared
to $6.0 million for the nine months ended June 30, 2001. Fees and service
charges for the nine months ended June 30, 2002 were $2.3 million compared to
$1.9 million for the nine months ended June 30, 2001. As a result of falling
interest rates, the Bank experienced significant refinancing of its adjustable
mortgage loans. The majority of these loans were refinanced into fixed rate
mortgages, which were sold to the secondary market. As a result, gain on sale of
loans was $862,000 for the nine months ended June 30, 2001, compared to $1.0
million for the nine months ended June 30, 2002. Gain on sale of securities was
$642,000 for the nine months ended June 30, 2001, compared to gains of $141,000
for the nine months ended June 30, 2002. Other income was $2.5 million for the
nine months ended June 30, 2002, compared to $2.9 million for the nine months
ended June 30, 2001.
GENERAL AND ADMINISTRATIVE EXPENSES
- -----------------------------------
General and administrative expenses increased from $13.3 million for the nine
months ended June 30, 2001 to $16.0 million for the nine months ended June 30,
2002. Salaries and employee benefits increased $1.5 million, or 19.3% primarily
due to staffing for new Sales Centers and additional business banking
Associates. Other expenses were $3.1 million for the nine months ended June 30,
2002, compared to $2.5 million for the nine months ended June 30, 2001. As a
result of the Bank's name change from Coastal Federal Savings Bank to Coastal
Federal Bank, in the first fiscal quarter, the Bank has incurred additional
marketing expenses of $83,000 and a loss from the disposal of old signage of
$60,000. In addition, in the second and third quarters, the Bank disposed of
telephone equipment and incurred a loss of $120,000.
INCOME TAXES
- ------------
Income taxes increased from $4.2 million for the nine months ended June 30,
2001, to $4.6 million for the nine months ended June 30, 2002, as a result of
increased income before taxes.
EXTRAORDINARY ITEM
- ------------------
The extraordinary item for the nine months ended June 30, 2002 relates to
prepayment penalties on advances from FHLB of $782,000, net of income taxes of
$297,000.
21
PART I. FINANCIAL INFORMATION
Item 2. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATION- CONTINUED
COMPARISONS OF THE NINE MONTHS ENDED JUNE 30, 2001 AND 2002
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 June 30, 2002:
Total Capital: $65,466 12.95% $40,440 8.00% $50,550 10.00%
(To Risk Weighted Assets)
Tier 1 Capital: $59,388 11.75% N/A N/A $30,330 6.00%
(To Risk Weighted Assets)
Tier 1 Capital: $59,388 6.93% $34,443 4.00% $43,054 5.00%
(To Total Assets)
Tangible Capital: $59,388 6.93% $12,916 1.50% N/A N/A
(To Total Assets)
22
PART I. FINANCIAL INFORMATION
Item 2. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATION- CONTINUED
COMPARISONS OF THE NINE MONTHS ENDED JUNE 30, 2001 AND 2002
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 also requires
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 does not expect a
material impact from its adoption.
In April 2002, the FASB issued Statement of Financial Accounting Standards No.
145 (Statement 145), "Rescission of FASB Statements No. 4, 44, and 64, Amendment
of FASB Statement No. 13, and Technical Corrections". This Statement rescinds
FASB Statement No. 4, "Reporting Gains and Losses from Extinguishment of Debt",
and an amendment of that Statement, FASB Statement No. 64, "Extinguishment of
Debt Made to Satisfy Sinking-Fund Requirements". This Statement also rescinds
FASB Statement No. 44, "Accounting for Intangible Assets of Motor Carriers".
This Statement amends FASB Statement No. 13, "Accounting for Leases", to
eliminate an inconsistency between the required accounting for sale-leaseback
transactions and the required accounting for certain lease modifications that
have economic effects that are similar to sale-leaseback transactions. This
Statement also amends other existing authoritative pronouncements to make
various technical corrections, clarify meanings, or describe their applicability
under changed conditions. The company will adopt SFAS 145 on July 1, 2002.
In June 2002, the FASB issued Statement of Financial Accounting Standards No.
146 (Statement 146), "Accounting for Costs Associated with Exit or Disposal
Activities," which addresses financial accounting and reporting for costs
associated with exit or disposal activities and nullifies Emerging Issues Task
Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." This Statement applies to costs associated
with an exit activity that does not involve an entity newly acquired in a
business combination or with a disposal activity covered by FASB Statement No.
144, Accounting for the Impairment or Disposal of Long-Lived Assets. Those costs
include, but are not limited to, the following: a) termination benefits provided
to current employees that are involuntarily terminated under the terms of a
benefit arrangement that, in substance, is not an ongoing benefit arrangement or
an individual deferred compensation contract (hereinafter referred to as
one-time termination benefits), b) costs to terminate a contract that is not a
capital lease and c) costs to consolidate facilities or relocate employees. This
Statement does not apply to costs associated with the retirement of a long-lived
asset covered by FASB Statement No. 143, Accounting for Asset Retirement
Obligations. A liability for a cost associated with an exit or disposal activity
shall be recognized and measured initially at its fair value in the period in
which the liability is incurred. A liability for a cost associated with an exit
or disposal activity is incurred when the definition of a liability is met. The
provisions of this Statement are effective for exit or disposal activities that
are initiated after December 31, 2002, with early application encouraged. The
impact of adoption on the Company is not known at this time.
23
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.
24
PART I. FINANCIAL INFORMATION
Item 3. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATION- CONTINUED
COMPARISONS OF THE NINE MONTHS ENDED JUNE 30, 2001 AND 2002
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- ------- ----------------------------------------------------------
At June 30, 2002, based upon currently available information, the Company does
not believe there are material changes which 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.
25
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.
26
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)
99 (a) Chief Executive Officer Certification
(b) Chief Financial Officer Certification
(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.
27
PART II. OTHER INFORMATION
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
(6) Incorporated by reference to June 30, 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.
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