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 March 31, 2003
(_) 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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act)
YES X NO __
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of March 31, 2003.
Common Stock $.01 Par Value Per Share 10,635,967 Shares
- --------------------------------------------------------------------------------
(Class) (Outstanding)
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2003
TABLE OF CONTENTS PAGE
- ----------------- ----
PART I- Consolidated Financial Information
Item
1. Consolidated Financial Statements (unaudited):
Consolidated Statements of Financial Condition
as of September 30, 2002 and March 31, 2003 3
Consolidated Statements of Operations for the three
months ended March 31, 2002 and 2003 4
Consolidated Statements of Operations for the six
months ended March 31, 2002 and 2003 5
Consolidated Statements of Stockholders' Equity
and Comprehensive Income for the six months ended
March 31, 2002 and 2003 6
Consolidated Statements of Cash Flows for the six
months ended March 31, 2002 and 2003 7-8
Notes to Consolidated Financial Statements 9-13
2.Management's Discussion and Analysis of
Financial Condition and Results of Operations 14-22
3.Quantitative and Qualitative Disclosures About
Market Risk 23
4.Controls and procedures 23
Part II - Other Information
Item
1.Legal Proceedings 24
2.Changes in Securities and Use of Proceeds 24
3.Defaults Upon Senior Securities 24
4.Submission of Matters to a Vote of Securities Holders 24
5.Other information 24
6.Exhibits and Reports on Form 8-K 24-25
Signatures 26
Certifications 27-28
Exhibits
99(a) Section 906 Certifiaction-Preseident/Chief Executive Officer 29
99(b) Section 906 Certifiaction-EVP/Chief Financial Officer 30
2
PART I. FINANCIAL INFORMATION
Item 1. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30, March 31,
2002 2003
---- ----
(Unaudited)
(In thousands,
except share data)
ASSETS:
Cash and amounts due from banks $ 25,802 $ 29,911
Short-term interest-bearing deposits -- 4,188
Investment securities available for sale 2,014 2,017
Mortgage-backed securities available for sale 331,808 343,365
Loans receivable (net of allowance for
loan losses of $7,883 at September 30,
2002 and $8,889 at March 31, 2003) 536,851 624,788
Loans receivable held for sale 18,694 12,054
Real estate acquired through foreclosure 1,046 1,912
Office property and equipment, net 13,713 15,356
Federal Home Loan Bank stock, at cost 10,559 10,486
Accrued interest receivable on loans 2,232 2,066
Accrued interest receivable on securities 2,019 1,998
Cash value of life insurance -- 15,724
Other assets 6,058 6,004
----------- -----------
$ 950,796 $ 1,069,869
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY:
LIABILITIES:
Deposits $ 637,081 $ 671,192
Securities sold under agreements to repurchase 36,884 103,806
Advances from Federal Home Loan Bank 189,669 204,729
Other borrowings 2,069 2,069
Drafts outstanding 2,517 2,444
Advances by borrowers for property taxes
and insurance 1,386 897
Accrued interest payable 1,473 1,490
Other liabilities 13,331 12,564
----------- -----------
Total liabilities 884,410 999,191
----------- -----------
STOCKHOLDERS' EQUITY:
Serial preferred stock, 1,000,000 shares
authorized and unissued -- --
Common stock, $.01 par value, 15,000,000
shares authorized; 10,587,726 shares at
September 30, 2002 and 10,635,967 shares
at March 31, 2003 issued and outstanding 106 106
Additional paid-in capital 9,944 10,039
Retained earnings 54,954 58,896
Treasury stock, at cost (430,082 shares at
September 30, 2002 and 381,841 shares at
March 31, 2003) (4,376) (3,921)
Accumulated other comprehensive income,
net of tax 5,758 5,558
----------- -----------
Total stockholders' equity 66,386 70,678
----------- -----------
$ 950,796 $ 1,069,869
=========== ===========
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 MARCH 31, 2002 AND 2003
2002 2003
---- ----
(Unaudited)
(In thousands,
except share data)
Interest income:
Loans receivable $ 9,869 $ 10,257
Investment securities 556 509
Mortgage-backed securities 2,550 3,950
Other 12 27
------------ ------------
Total interest income 12,987 14,743
------------ ------------
Interest expense:
Deposits 3,217 2,967
Securities sold under agreements to
repurchase 96 502
Advances from Federal Home Loan Bank 1,840 2,156
------------ ------------
Total interest expense 5,153 5,625
------------ ------------
Net interest income 7,834 9,118
Provision for loan losses 255 870
------------ ------------
Net interest income after provision
for loan losses 7,579 8,248
------------ ------------
Other income:
Fees and service charges 743 806
Loss from real estate owned (44) (31)
Gain on sales of loans held for sale 256 604
Gain (loss) on sales of investment securities
available for sale and mortgage-backed
securities available for sale (60) 301
Other income 808 1,035
------------ ------------
1,703 2,715
------------ ------------
General and administrative expenses:
Salaries and employee benefits 3,068 3,443
Net occupancy, furniture and fixtures
and data processing expense 1,170 1,458
FDIC insurance premium 24 26
Prepayment penalties on FHLB advances 196 564
Other expenses 964 1,192
------------ ------------
5,422 6,683
------------ ------------
Income before income taxes 3,860 4,280
Income taxes 1,393 1,526
------------ ------------
Net income $ 2,467 $ 2,754
============ ============
Earnings per common share
Basic $ .23 $ .26
============ ============
Diluted $ .23 $ .25
============ ============
Weighted average common shares outstanding
Basic 10,584,000 10,627,000
============ ============
Diluted 10,826,000 11,052,000
============ ============
Dividends per share $ .05 $ .055
============ ============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4
PART I. FINANCIAL INFORMATION
Item 1. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED MARCH 31, 2002 AND 2003
2002 2003
---- ----
(Unaudited)
(In thousands,
except share data)
Interest income:
Loans receivable $ 20,121 $ 20,369
Investment securities 1,131 1,015
Mortgage-backed securities 5,023 8,037
Other 80 62
------------ ------------
Total interest income 26,355 29,483
------------ ------------
Interest expense:
Deposits 6,826 6,322
Securities sold under agreements to
repurchase 222 806
Advances from Federal Home Loan Bank 3,767 4,304
------------ ------------
Total interest expense 10,815 11,432
------------ ------------
Net interest income 15,540 18,051
Provision for loan losses 505 1,305
------------ ------------
Net interest income after provision
for loan losses 15,035 16,746
------------ ------------
Other income:
Fees and service charges 1,510 1,692
Loss from real estate owned (150) (83)
Gain on sales of loans held for sale 812 1,380
Gain on sales of investment securities
available for sale and mortgage-backed
securities available for sale 71 515
Other income 1,634 1,878
------------ ------------
3,877 5,382
------------ ------------
General and administrative expenses:
Salaries and employee benefits 6,070 6,635
Net occupancy, furniture and fixtures
and data processing expense 2,281 2,935
FDIC insurance premium 47 52
Prepayment penalties on FHLB advances 676 1,678
Other expenses 2,079 2,247
------------ ------------
11,153 13,547
------------ ------------
Income before income taxes 7,759 8,581
Income taxes 2,832 3,077
------------ ------------
Net income $ 4,927 $ 5,504
============ ============
Earnings per common share
Basic $ .46 $ .52
============ ============
Diluted $ .45 $ .50
============ ============
Weighted average common shares outstanding
Basic 10,657,000 10,601,000
============ ============
Diluted 10,913,000 11,086,000
============ ============
Dividends per share $ .10 $ .11
============ ============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5
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 Retained Treasury Income Stockholders'
Stock Capital Earnings Stock (Loss) Equity
----- ------- -------- ----- ------ ------
(Unaudited)
(In thousands)
Balance at September
30, 2001 $ 107 $ 9,744 $ 47,496 $ (3,620) $ 3,521 $ 57,248
Net income -- -- 4,927 -- -- 4,927
Other comprehensive
loss:
Unrealized losses arising
during period, net of
taxes of $1,018 -- -- -- -- (1,660) --
Less: reclassification
adjustment for gains
included in net income,
net of taxes of $27 -- -- -- -- 44 --
----------
Other comprehensive loss -- -- -- -- (1,616) (1,616)
---------- --------
Comprehensive income -- -- -- -- -- 3,311
--------
Treasury stock repurchases (1) -- -- (1,286) -- (1,287)
Exercise of stock
options -- -- (332) 514 -- 182
Cash dividends -- -- (1,058) -- -- (1,058)
Balance at March -------- -------- -------- -------- ---------- --------
31, 2002 $ 106 $ 9,744 $ 51,033 $ (4,392) $ 1,905 $ 58,396
======== ======== ======== ======== ========== ========
Balance at September
30, 2002 $ 106 $ 9,944 $ 54,954 $ (4,376) $ 5,758 $ 66,386
Net income -- -- 5,504 -- -- 5,504
Other comprehensive
income:
Unrealized gains arising
during period, net of
taxes of $73 -- -- -- -- 119 --
Less: reclassification
adjustment for gains
included in net income,
net of taxes of $196 -- -- -- -- (319) --
--------
Other comprehensive loss -- -- -- -- (200) (200)
-------- --------
Comprehensive income -- -- -- -- -- 5,304
--------
Treasury stock repurchases -- -- -- (342) -- (342)
Exercise of stock
options -- 95 (392) 797 -- 500
Cash dividends -- -- (1,170) -- -- (1,170)
Balance at March -------- -------- -------- -------- -------- --------
31, 2003 $ 106 $ 10,039 $ 58,896 $ (3,921) $ 5,558 $ 70,678
======== ======== ======== ======== ======== ========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6
PART I. FINANCIAL INFORMATION
Item 1. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED MARCH 31, 2002 AND 2003
2002 2003
---- ----
(Unaudited)
(In thousands)
Cash flows from operating activities:
Net earnings $ 4,927 $ 5,504
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 955 1,198
Provision for loan losses 505 1,305
Gain on sale of investment securities
available for sale and mortgage-backed
securities available for sale (71) (515)
Prepayment penalties on FHLB advances 676 1,678
Origination of loans receivable held for sale (48,468) (55,851)
Proceeds from sales of loans receivable held for sale 52,948 62,491
Impairment loss from write-down of mortgage
servicing rights -- 106
(Increase) decrease in:
Cash value of life insurance -- (224)
Accrued interest receivable 312 187
Other assets (491) (52)
Increase in:
Accrued interest payable 208 17
Other liabilities (213) (644)
--------- ---------
Net cash provided by operating activities 11,288 15,200
--------- ---------
Cash flows from investing activities:
Issuer exercise of call of investment
securities available for sale -- 2,000
Purchases of investment securities available for sale -- (2,017)
Origination of loans receivable (203,532) (302,398)
Principal collected on loans receivable 177,864 212,181
Purchases of mortgage-backed securities
available for sale (94,647) (150,524)
Proceeds from sales of mortgage-backed
securities available for sale 22,885 53,439
Principal collected on mortgage-backed
securities, net 39,990 85,734
Proceeds from sale of real estate
acquired through foreclosure, net 680 109
Purchases of office properties and equipment (1,804) (2,841)
(Purchases) sales of FHLB stock, net (685) 73
Purchase of bank-owned life insurance -- (15,500)
--------- ---------
Net cash used in investing activities (59,249) (119,744)
--------- ---------
(CONTINUED)
7
PART I. FINANCIAL INFORMATION
Item 1. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED MARCH 31, 2002 AND 2003 - CONTINUED
2002 2003
---- ----
(Unaudited)
(In thousands)
Cash flows from financing activities:
Increase in deposits, net $ 25,822 $ 34,111
(Decrease) increase in securities sold under
agreement to repurchase, net (776) 66,922
Proceeds from FHLB advances 171,762 394,667
Repayment of FHLB advances (159,516) (379,607)
Prepayment penalties on FHLB advances (676) (1,678)
Decrease in advance payments by borrowers
for property taxes and insurance, net (605) (489)
Decrease in drafts outstanding, net (1,359) (73)
Repurchase of treasury stock, at cost (1,287) (342)
Dividends to stockholders (1,058) (1,170)
Exercise of stock options 182 500
--------- ---------
Net cash provided by financing activities 32,489 112,841
--------- ---------
Net (decrease) increase in cash and cash equivalents (15,472) 8,297
Cash and cash equivalents at beginning
of the period 34,320 25,802
--------- ---------
Cash and cash equivalents at end
of the period $ 18,848 $ 34,099
========= =========
Supplemental information:
Interest paid $ 10,607 $ 11,415
========= =========
Income taxes paid $ 4,030 $ 2,712
========= =========
Supplemental schedule of non-cash investing
and financing transactions:
Transfer of mortgage loans to real estate
acquired through foreclosure $ 305 $ 975
========= =========
Stock options exercised by the surrender
of outstanding common shares $ -- $ 77
========= =========
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 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
six-month period ended March 31, 2003 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, 2002, included in the Company's 2002 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 herein, therefore, relates primarily to the Bank.
Certain prior year amounts have been reclassified to conform to current year
presentation.
(2) LOANS RECEIVABLE, NET
Loans receivable, net consists of the following:
September 30, March 31,
2002 2003
------------ ----------
(Unaudited)
(In thousands)
First mortgage loans:
Single family to 4 family units $ 233,571 $ 267,310
Other, primarily commercial real estate 202,117 237,512
Residential construction loans 17,771 21,889
Commercial construction loans 30,439 35,321
Consumer and commercial loans:
Installment consumer loans 12,882 15,452
Mobile home loans 3,446 4,140
Savings account loans 1,613 1,964
Equity lines of credit 24,273 27,368
Commercial and other loans 18,377 22,339
--------- ---------
544,489 633,295
Less:
Allowance for loan losses 7,883 8,889
Deferred loan costs, net (245) (382)
--------- ---------
$ 536,851 $ 624,788
========= =========
9
PART I. FINANCIAL INFORMATION
Item 1. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
The changes in the allowance for loan losses consist of the following for the
six months ended:
Six Months Ended March 31,
--------------------------
2002 2003
---- ----
(Unaudited)
(Dollars in thousands)
Allowance at beginning of period $7,159 $7,883
Provision for loan losses 505 1,305
------ ------
Recoveries:
Residential real estate -- --
Commercial real estate -- 1
Consumer 18 31
------ ------
Total recoveries 18 32
------ ------
Charge-offs:
Residential real estate 57 12
Commercial real estate -- 65
Consumer 197 254
------ ------
Total charge-offs 254 331
------ ------
Net charge-offs 236 299
------ ------
Allowance at end of period $7,428 $8,889
====== ======
Ratio of allowance to total net loans
outstanding at the end of the period 1.41% 1.40%
====== ======
Ratio of net charge-offs to average
total loans outstanding during the period (annualized) .09% .10%
====== ======
Non-accrual loans, which are loans over ninety days delinquent, totaled
approximately $5.5 million and $5.2 million at March 31, 2002 and 2003,
respectively. For the six months ended March 31, 2003 and 2002, interest income,
which would have been recorded, would have been approximately $311,000 and
$262,000, respectively, had non-accruing loans been current in accordance with
their original terms.
At March 31, 2003, impaired loans totaled $3.6 million. There were $3.2 million
in impaired loans at March 31, 2002. Included in the allowance for loan losses
at March 31, 2003 was $270,000 related to impaired loans compared to $225,000 at
March 31, 2002. The average recorded investment in impaired loans for the six
months ended March 31, 2003 was $3.4 million compared to $3.3 million for the
six months ended March 31, 2002. Interest income of $16,000 and $32,000 was
recognized on impaired loans for the quarter and six months ended March 31,
2003, respectively. Interest income of $7,000 was recognized on impaired loans
for the quarter and six months ended March 31, 2002.
(3) DEPOSITS
Deposits consist of the following:
September 30, 2002 March 31, 2003
------------------ ------------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
------ ---- ------ ----
(Unaudited)
(In thousands)
Transaction accounts $343,308 1.41% $371,014 1.08%
Passbook and statement
savings accounts 39,092 1.12 42,983 1.03
Certificate accounts 254,681 3.46 257,195 2.98
-------- --------
$637,081 2.21% $671,192 1.81%
======== ========
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, 2002 March 31, 2003
------------------ ----------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
------ ---- ------ ----
Maturing within: (Unaudited)
(In thousands)
1 year $ 32,350 2.14% $ 6,242 1.90%
2 years 11,235 2.34 235 4.92
3 years 25,500 6.24 19,020 5.77
4 years 3,270 4.98 3,000 3.29
5 years 6,223 3.39 5,891 3.16
After 5 years 111,091 5.23 170,341 4.45
-------- --------
$189,669 4.61% $204,729 4.44%
========= =========
At September 30, 2002, and March 31, 2003, the Bank had pledged first mortgage
loans and mortgage-backed securities with unpaid balances of approximately
$219.8 million and $265.3 million, respectively, as collateral for FHLB
advances. At September 30, 2002, included in the three, four, five and after
five years maturities were $109.0 million of advances subject to call
provisions. At March 31, 2003, included in the one, three, four, five and after
five years maturities were $156.0 million, with a weighted average rate of
4.59%, of advances subject to call provisions. Callable advances at March 31,
2003 are summarized as follows: $63.0 million callable in fiscal 2003, with a
weighted average rate of 5.38%; $29.0 million callable in fiscal 2005, with a
weighted average rate of 6.28%; $2.0 million callable in fiscal 2006, with a
weighted average rate of 4.72%, $35.0 million callable in fiscal 2007, with a
weighted average rate of 3.00%, and $27.0 million callable after fiscal 2007,
with a weighted average rate of 2.96%. Call provisions are more likely to be
exercised by the FHLB when interest rates rise.
(5) EARNINGS PER SHARE
Basic earnings per share for the three and six months ended March 31, 2002 and
2003, 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 six months ended March 31, 2002 and 2003, are computed by dividing net
earnings by the weighted average dilutive shares outstanding during the
respective periods. At March 31, 2003 a total of 211,000 options with exercise
prices ranging from $13.44 to $14.95 per share were excluded from the
calculation of diluted earnings per share because the exercise price was greater
than the average market price of the common shares.
11
PART I. FINANCIAL INFORMATION
Item 1. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The following is a reconciliation of average shares outstanding used to
calculate basic and fully diluted earnings per share.
For the Quarter Ended March 31,
(Unaudited)
2002 2002 2003 2003
-------------------------- ---------------------------
BASIC DILUTED BASIC DILUTED
-------------------------- ---------------------------
Weighted average shares outstanding 10,584,000 10,584,000 10,627,000 10,627,000
Effect of dilutive securities-
Stock options -- 242,000 -- 425,000
-------------------------- ---------------------------
10,584,000 10,826,000 10,627,000 11,052,000
========================== ===========================
For the Six Months Ended March 31,
(Unaudited)
2002 2002 2003 2003
-------------------------- ---------------------------
BASIC DILUTED BASIC DILUTED
-------------------------- ---------------------------
Weighted average shares outstanding 10,657,000 10,657,000 10,601,000 10,601,000
Effect of dilutive securities-
Stock options -- 256,000 -- 485,000
-------------------------- ---------------------------
10,657,000 10,913,000 10,601,000 11,086,000
========================== ===========================
(6) STOCK-BASED COMPENSATION
At March 31, 2003, the Company had a stock option plan that provides for stock
options to be granted primarily to directors, officers and other key employees.
The plan is more fully described in Note 16 of the Notes to Consolidated
Financial Statements included in the Company's 10-K for the year ended September
30, 2002. The Company accounts for the plan under the recognition and
measurement principles of APB Opinion No. 25, "Accounting for Stock Issued to
Employees", and related interpretations. No stock-based employee or director
compensation cost is reflected in net income, as all options granted under the
plan had an exercise price equal to the market value of the underlying common
stock on the date of grant.
The following table illustrates the effect on net income and earnings per share
if the Company had applied the fair value recognition provisions of FASB
Statement 123, "Accounting for Stock-Based Compensation", to stock-based
employee and non-employee compensation.
Three Months Ended March 31,
----------------------------
2002 2003
---- ----
(Unaudited)
(Dollars in thousands)
Net income, as reported $ 2,467 $ 2,754
Deduct: Total stock-based employee and director
compensation expense determined under
fair value based method for all awards,
net of related tax effects (119) (129)
------- ---------
Pro forma net income $ 2,348 $ 2,625
======= =========
Basic earnings per share:
As reported $ .23 $ .26
======= =========
Pro forma $ .22 $ .25
======= =========
Diluted earnings per share:
As reported $ .23 $ .25
======= =========
Pro forma $ .22 $ .24
======= =========
12
PART I. FINANCIAL INFORMATION
Item 1. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Six Months Ended March 31,
--------------------------
2002 2003
---- ----
(Unaudited)
(Dollars in thousands)
Net income, as reported $ 4,927 $ 5,504
Deduct: Total stock-based employee and director
compensation expense determined under
fair value based method for all awards,
net of related tax effects (246) (252)
----------- -----------
Pro forma net income $ 4,681 $ 5,252
=========== ===========
Basic earnings per share:
As reported $ .46 $ .52
=========== ===========
Pro forma $ .44 $ .50
=========== ===========
Diluted earnings per share:
As reported $ .45 $ .50
=========== ===========
Pro forma $ .43 $ .47
=========== ===========
13
PART I. FINANCIAL INFORMATION
Item 2. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
FORWARD LOOKING STATEMENTS
- --------------------------
This report may contain certain "forward-looking statements" within the meaning
of Section 27A of the Securities Exchange Act of 1934, as amended, that
represent the Company's expectations or beliefs concerning future events. Such
forward-looking statements are about matters that are inherently subject to
risks and uncertainties. Factors that could influence the matters discussed in
certain forward-looking statements include the timing and amount of revenues
that may be recognized by the Company, continuation of current revenue and
expense trends (including trends affecting charge-offs), absence of unforeseen
changes in the Company's markets, legal and regulatory changes, and general
changes in the economy (particularly in the markets served by the Company).
Except as required by applicable law and regulations, the Company disclaims any
obligation to update such forward-looking statements.
CRITICAL ACCOUNTING POLICIES
- ----------------------------
The Company 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 Company 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
Company 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. Further, a significant portion of the Company's loans are
supported by collateral which is significantly affected by changes in the
tourism industry. The tourism industry is the major economic force in many of
the markets the Company serves and future changes in tourism could significantly
impact collateral values.
OFF-BALANCE SHEET ARRANGEMENTS
- ------------------------------
In the normal course of operations, the Company engages in a variety of
financial transactions that, in accordance with generally accepted accounting
principles, 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 Company for general corporate
purposes or to satisfy 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 March 31, 2003 and
September 30, 2002, the Company 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. Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company applies essentially the same
credit policies and standards as it does in the lending process when making
these loans.
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 March 31, 2003, unfunded business and retail lines of
credit commitments totaled $44.0 million. Unused business and personal credit
card lines, which totaled $12.6 million at March 31, 2003, are generally for
short-term borrowings.
14
PART I. FINANCIAL INFORMATION
Item 2. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION-CONTINUED
Standby letters of credit obligate the Company to meet certain financial
obligations of its customers, if, under the contractual terms of the agreement,
the customers are unable to do so. The financial standby letters of credit
issued by the Company are irrevocable, and totaled $3.7 million at March 31,
2003. Payment is only guaranteed under these letters of credit upon the
borrower's failure to perform its obligations to the beneficiary. As such, there
are no "stand-ready obligations" in any of the letters of credit issued by the
Company and the contingent obligations are accounted for in accordance with SFAS
NO. 5, "Accounting for Contingencies". At March 31, 2003, the Company recorded
no contingent liability as such amounts were not considered material.
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 Company is
subject to variability in the market prices related to these commitments. The
Company 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
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 $22.1 million at March 31, 2003. The fair
value of the loan commitments was an asset of approximately $219,000 at March
31, 2003. As of March 31, 2003, the Company had sold $14 million in forward
commitments to deliver fixed rate mortgage-backed securities, which were
recorded as a derivative asset of $41,000. In addition, the Company sold options
to sell mortgage-backed securities with a notional amount of $9 million and was
recorded as a derivative liability of approximately $80,000.
DISCUSSION OF FINANCIAL CONDITION CHANGES FROM SEPTEMBER 30, 2002 TO MARCH 31,
- ------------------------------------------------------------------------------
2003
- ----
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,
securitization of loans and subsequent sales, 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 $252.0 million for the
six months ended March 31, 2002, compared to $358.2 million for the six months
ended March 31, 2003, primarily as a result of increased business banking
lending activity and increased residential lending activity which included
significant refinancing activities due to decreased interest rates. A portion of
these loan originations were financed through loan principal repayments, which
amounted to $177.9 million and $212.2 million for the six month periods ended
March 31, 2002 and 2003, 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 six month period ended March 31, 2002, the
Company sold $53.0 million in mortgage loans held for sale, compared to $62.5
million sold for the six month period ended March 31, 2003. Loan originations
increased as a result of falling interest rates over the last two years.
Consequently, the Bank has experienced prepayment of a portion of its mortgage
and commercial loan portfolio. A portion 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 then sold into the
secondary market.
During the six month period ended March 31, 2003, the Company securitized $43.0
million of mortgage loans and concurrently sold these mortgage-backed securities
to outside third parties and recognized a gain on sale of $1.41 million, which
included $593,000 related to Mortgage Servicing Rights. During the six month
period ended March 31, 2002, the Company securitized $49.0 million of mortgage
loans and concurrently sold these mortgage-backed
15
PART I. FINANCIAL INFORMATION
Item 2. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
DISCUSSION OF FINANCIAL CONDITION CHANGES FROM SEPTEMBER 30, 2002 TO MARCH 31,
2003-CONTINUED
securities to outside third parties and recognized a gain on sale of $1.0
million, which included $722,000 related to mortgage servicing rights. The gain
is included in gains sales of loans held for sale in the consolidated statement
of operations. The proceeds from sale are included in proceeds from sales of
loans receivable held for sale in the consolidated statement of cash flows. The
Company has no retained interest in the securities that were sold.
For the six-month period ended March 31, 2002, the Company purchased $94.6
million in investment and mortgage-backed securities. For the six-month period
ended March 31, 2003, the Company purchased $152.5 million in investment and
mortgage-backed securities. These purchases during the six-month period ended
March 31, 2003 were funded primarily by repayments of $87.7 million within the
securities portfolio and sales of investment securities of $53.4 million.
Overall the Bank experienced an increase of $34.1 million in deposits for the
six-month period ended March 31, 2003. For the six-month period ended March 31,
2003, transaction accounts increased $27.7 million, passbook and statement
savings accounts increased $3.9 million, and certificate accounts increased $2.5
million. At March 31, 2003, the Company had $180.5 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 Company. At
March 31, 2003, the Company had commitments to originate $28.3 million in
mortgage loans, and $42.5 million in undisbursed lines of credit, which the
Company expects to fund from normal operations. Additionally, at March 31, 2003,
the Company had outstanding available lines for federal funds of $20 million.
As a result of $5.5 million in net income, less the cash dividends paid to
stockholders of approximately $1.2 million, proceeds of approximately $500,000
from the exercise of stock options, $342,000 of treasury stock repurchases, and
the net decrease in unrealized gain on securities available for sale, net of
income tax of $200,000, stockholders' equity increased from $66.4 million at
September 30, 2002 to $70.7 million at March 31, 2003.
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 $67.0 million at March 31,
2003, exceeding the core capital requirement by $35.0 million. At March 31,
2003, the Bank's risk-based capital of approximately $74.4 million exceeded its
current risk-based capital requirement by $24.4 million. (For further
information see Regulatory Capital Matters).
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS FOR THE THREE MONTHS ENDED
- -----------------------------------------------------------------------------
MARCH 31, 2002 AND 2003
- -----------------------
GENERAL
- -------
Net income increased from $2.5 million for the three months ended March 31,
2002, to $2.8 million for three months ended March 31, 2003, or 11.6%. Net
interest income increased $1.3 million primarily as a result of an increase of
$1.8 million in interest income, which offset a $472,000 increase in interest
expense. Provision for loan losses was $255,000 for the three months ended March
31, 2002 compared to $870,000 for the quarter ended March 31, 2003. Other income
increased approximately $1 million. General and administrative expense was $5.4
million for the quarter ended March 31, 2002 compared to $6.7 million for the
quarter ended March 31, 2003.
INTEREST INCOME
- ---------------
Interest income for the three months ended March 31, 2003, increased to $14.7
million as compared to $13.0 million for the three months ended March 31, 2002.
The earning asset yield for the three months ended March 31, 2003, was 6.26%
compared to a yield of 7.25% for the three months ended March 31, 2002. As a
result of significant declining interest rates over the last two years, the
Bank's yield on assets and cost of funds has declined.
16
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 MARCH 31, 2002 AND 2003
At March 31, 2001, 2002 and 2003, the one-year treasury rate of interest was
approximately 4.19%, 2.66% and 1.32%, respectively. At March 31, 2001, 2002 and
2003, the prime rate interest was approximately 8.0%, 4.75% and 4.25%,
respectively. The average yield on loans receivable for the three months ended
March 31, 2003, was 6.85% compared to 7.65% for three months ended March 31,
2002. The yield on investments decreased to 5.26% for the three months ended
March 31, 2003, from 6.30% for the three months ended March 31, 2002. Total
average interest-earning assets were $941.6 for the quarter ended March 31, 2003
as compared to $716.0 million for the quarter ended March 31, 2002. The increase
in average interest-earning assets is primarily due to an increase in average
loans receivable of approximately $82.9 million and investment securities of
approximately $141.6 million.
INTEREST EXPENSE
- ----------------
Interest expense on interest-bearing liabilities was $5.6 million for the three
months ended March 31, 2003, as compared to $5.2 million for the three months
ended March 31, 2002. The average cost of deposits for the three months ended
March 31, 2003, was 1.87% compared to 2.38% for the three months ended March 31,
2002. The cost of interest-bearing liabilities was 2.39% for the three months
ended March 31, 2003, as compared to 2.92% for the three months ended March 31,
2002. The cost of FHLB advances and reverse repurchase agreements was 4.34% and
1.92%, respectively, for the three months ended March 31, 2003. For the three
months ended March 31, 2002, the cost of FHLB advances and reverse repurchase
agreements was 4.99% and 2.18%, respectively. Total average interest-bearing
liabilities increased from $706.8 million at March 31, 2002 to $941.5 million at
March 31, 2003. The increase in average interest-bearing liabilities is due to
an increase in average deposits of approximately $95.7 million. This was
accompanied by an increase in reverse repurchase agreements of $87.4 million and
FHLB advances of $51.0 million.
NET INTEREST INCOME
- -------------------
Net interest income was $9.1 million for the three months ended March 31, 2003,
as compared to $7.8 million for the three months ended March 31, 2002. The net
interest margin was 3.87% for the three months ended March 31, 2003, compared to
4.33% for the three months ended March 31, 2002. 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 portion of the Bank's loan portfolio will be subject to refinancing at
lower rates. It is expected that 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 expects to experience a reduced margin for the remainder of
fiscal 2003.
PROVISION FOR LOAN LOSSES
- -------------------------
As a result of the growth in the loan portfolio and increased charge-offs in the
second quarter, the provision for loan losses was $870,000 for the three months
ended March 31, 2003 compared to $255,000 for the three months ended March 31,
2002. From September 30, 2002 to March 31, 2003, the Company's commercial and
consumer loan portfolio increased approximately $51 million. For the three
months ended March 31, 2003, net charge-offs were $263,000 compared to net
charge-offs of $71,000 for the three months ended March 31, 2002. The allowance
for loan losses as a percentage of total loans was 1.40% at March 31, 2003,
compared to 1.42% at September 30, 2002 and 1.41% at March 31, 2002. Loans
delinquent 90 days or more were .82% of total loans at March 31, 2003, compared
to .63% at September 30, 2002. The allowance for loan losses was 170% of loans
delinquent more than 90 days at March 31, 2003, as compared to 224% at September
30, 2002. Management believes that the current level of allowance is adequate
considering the Company's current loss experience and delinquency trends,
current regional and local economic conditions, among other criteria. Principal
among the other factors is the economy and geographical location of Horry
County, the Company's primary market area. The Horry County economy relies
heavily on tourism, a highly cyclical industry. Horry County, located on the
Atlantic seaboard, is susceptible to hurricanes and tropical storms, which could
result in significant property damage. Furthermore, the Company does not
require, as a condition
17
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 MARCH 31, 2002 AND 2003
granting a real estate loan, hurricane insurance on the underlying collateral
property and the vast majority of borrowers do not voluntarily obtain hurricane
insurance because of its prohibitive cost.
OTHER INCOME
- ------------
For the three months ended March 31, 2003, other income was $2.7 million
compared to $1.7 million for the three months ended March 31, 2002. As a result
of increased transaction account balances that were $296.5 million at March 31,
2002 and increased to $371.0 million at March 31, 2003, fees and service charges
from deposit accounts were $806,000 for the three months ended March 31, 2003,
compared to $743,000 for the three months ended March 31, 2002. As a result of
increased loan sales, gain on sale of loans was $604,000 for the quarter March
31, 2003, compared to $256,000 for the quarter ended March 31, 2002. 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 $301,000 for the
quarter ended March 31, 2003, compared to a loss of $60,000 for the quarter
ended March 31, 2002. Other income was $1 million for the three months ended
March 31, 2003, as compared to $808,000 for the three months ended March 31,
2002. The increase in other income for the three-month period ended March 31,
2003 is due primarily to $216,000 of income from bank-owned life insurance put
into place in December 2002.
GENERAL AND ADMINISTRATIVE EXPENSES
- -----------------------------------
General and administrative expenses were $5.4 million for the quarter ended
March 31, 2002 compared to $6.7 million for the quarter ended March 31, 2003.
Salaries and employee benefits were $3.1 million for the three months ended
March 31, 2002, as compared to $3.4 million for the three months ended March 31,
2003, an increase of 12.2%, primarily due to the addition of new Banking Centers
and additional business banking Associates. Also as a result of new Banking
Centers, net occupancy, furniture and fixtures and data processing expenses
increased $288,000 when comparing the two periods. General and administrative
expenses also included prepayment penalties on FHLB advances of $564,000 and
$196,000 for the quarter ended March 31, 2003 and 2002, respectively. Other
expenses were $964,000 for the quarter ended March 31, 2002 and $1.2 million for
the quarter ended March 31, 2003. Other expenses included $62,000 of mortgage
service rights impairment for the quarter ended March 31, 2003.
INCOME TAXES
- ------------
Income taxes were $1.4 million for the three months ended March 31, 2002,
compared to $1.5 million for the three months ended March 31, 2003.
18
PART I. FINANCIAL INFORMATION
Item 2. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS-CONTINUED
COMPARISONS OF THE SIX MONTHS ENDED MARCH 31, 2002 AND 2003
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS FOR THE SIX MONTHS ENDED
- ---------------------------------------------------------------------------
MARCH 31, 2002 AND 2003
- -----------------------
GENERAL
- -------
Net income increased from $4.9 million for the six months ended March 31, 2002,
to $5.5 million for six months ended March 31, 2003, or 11.7%. Net interest
income increased $2.5 million primarily as a result of an increase of $3.1
million in interest income and a $617,000 increase in interest expense.
Provision for loan losses was $505,000 for the six months ended March 31, 2002
compared to $1.3 million for the six months ended March 31, 2003. Other income
increased $1.5 million. General and administrative expense was $11.2 million for
the six months ended March 31, 2002 compared to $13.5 million for the six months
ended March 31, 2003.
INTEREST INCOME
- ---------------
Interest income for the six months ended March 31, 2003, increased to $29.5
million as compared to $26.4 million for the six months ended March 31, 2002.
The earning asset yield for the six months ended March 31, 2003, was 6.32%
compared to a yield of 7.41% for the six months ended March 31, 2002. As a
result of significant declining interest rates over the last two years, the
Bank's yield on assets and cost of funds has declined. At March 31, 2001, 2002
and 2003, the one-year treasury rate of interest was approximately 4.19%, 2.66%
and 1.32%, respectively. At March 31, 2001, 2002 and 2003, the prime rate of
interest was approximately 8.0%, 4.75% and 4.25%, respectively. The average
yield on loans receivable for the six months ended March 31, 2003, was 6.91%
compared to 7.83% for six months ended March 31, 2002. The yield on investments
decreased to 5.32% for the six months ended March 31, 2003, from 6.36% for the
six months ended March 31, 2002. Total average interest-earning assets were
$933.5 for the six months ended March 31, 2003 as compared to $711.5 million for
the six months ended March 31, 2002. The increase in average interest-earning
assets is primarily due to an increase in average loans receivable of
approximately $75.2 million and investment securities of approximately $146.8
million.
INTEREST EXPENSE
- ----------------
Interest expense on interest-bearing liabilities was $11.4 million for the six
months ended March 31, 2003, as compared to $10.8 million for the six months
ended March 31, 2002. The average cost of deposits for the six months ended
March 31, 2003, was 1.97% compared to 2.54% for the six months ended March 31,
2002. The cost of interest-bearing liabilities was 2.48% for the six months
ended March 31, 2003, as compared to 3.08% for the six months ended March 31,
2002. The cost of FHLB advances and reverse repurchase agreements was 4.39% and
1.96%, respectively, for the six months ended March 31, 2003. For the six months
ended March 31, 2002, the cost of FHLB advances and reverse repurchase
agreements was 5.18% and 2.52%, respectively. Total average interest-bearing
liabilities increased from $702.0 million at March 31, 2002 to $923.6 million at
March 31, 2003. The increase in average interest-bearing liabilities is due to
an increase in average deposits of approximately $105.6 million. This was
accompanied by an increase in reverse repurchase agreements of $64.7 million and
FHLB advances of $50.9 million.
NET INTEREST INCOME
- -------------------
Net interest income was $18.0 million for the six months ended March 31, 2003,
as compared to $15.5 million for the six months ended March 31, 2002. The net
interest margin was 3.84% for the six months ended March 31, 2003, compared to
4.33% for the six months ended March 31, 2002. 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 portion of the Bank's loan portfolio will be subject to refinancing at
lower rates. It is expected that 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 expects to experience a reduced margin for the remainder of
fiscal 2003.
19
PART I. FINANCIAL INFORMATION
Item 2. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS-CONTINUED
COMPARISONS OF THE SIX MONTHS ENDED MARCH 31, 2002 AND 2003
PROVISION FOR LOAN LOSSES
- -------------------------
As a result of the growth in the loan portfolio and increased charge-offs for
the first six months, the provision for loan losses was $1.3 million for the six
months ended March 31, 2003 compared to $505,000 for the six months ended March
31, 2002. From September 30, 2002 to March 31, 2003, the Company's commercial
and consumer loan portfolio increased approximately $51 million. For the six
months ended March 31, 2003, net charge-offs were $299,000 compared to net
charge-offs of $236,000 for the six months ended March 31, 2002. The allowance
for loan losses as a percentage of total loans was 1.40% at March 31, 2003,
compared to 1.42% at September 30, 2002 and 1.41% at March 31, 2002. Loans
delinquent 90 days or more were .82% of total loans at March 31, 2003, compared
to .63% at September 30, 2002. The allowance for loan losses was 170% of loans
delinquent more than 90 days at March 31, 2003, as compared to 224% at September
30, 2002. Management believes that the current level of allowance is adequate
considering the Company's current loss experience and delinquency trends,
current regional and local economic conditions, among other criteria. Principal
among the other factors is the economy and geographical location of Horry
County, the Company's primary market area. The Horry County economy relies
heavily on tourism, a highly cyclical industry. Horry County, located on the
Atlantic seaboard, is susceptible to hurricanes and tropical storms, which could
result in significant property damage. Furthermore, the Company does not
require, as a granting a real estate loan, hurricane insurance on the underlying
collateral property and the vast majority of borrowers do not voluntarily obtain
hurricane insurance because of its prohibitive cost.
OTHER INCOME
- ------------
For the six months ended March 31, 2003, other income was $5.4 million compared
to $3.9 million for the six months ended March 31, 2002. As a result of
increased transaction account balances of $296.5 million at March 31, 2002 to
$371.0 million at March 31, 2003, fees and service charges from deposit accounts
were $1.7 million for the six months ended March 31, 2003, compared to $1.5
million for the six months ended March 31, 2002. As a result of increased loan
sales, gain on sale of loans was $1.4 million for the six months ended March 31,
2003, compared to $812,000 for the six months ended March 31, 2002. The
Company'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 $515,000
for the six months ended March 31, 2003, compared to $71,000 for the six months
ended March 31, 2002. Other income was $1.9 million for the six months ended
March 31, 2003, as compared to $1.6 million for the six months ended March 31,
2002. The increase in other income is due primarily to $224,000 of income on
bank-owned life insurance put into place in December 2002.
GENERAL AND ADMINISTRATIVE EXPENSES
- -----------------------------------
General and administrative expenses were $11.2 million for the six months ended
March 31, 2002 compared to $13.5 million for the six months ended March 31,
2003. Salaries and employee benefits were $6.1 million for the six months ended
March 31, 2002, as compared to $6.6 million for the six months ended March 31,
2003, an increase of 9.3%, primarily due to the addition of new Banking Centers
and additional business banking Associates. Also as a result of new Banking
Centers, net occupancy, furniture and fixtures and data processing expenses
increased $654,000 when comparing the two periods. General and administrative
expenses also include prepayment penalties on FHLB advances of $1.7 million and
$676,000 for the six ended March 31, 2003 and 2002, respectively. Other expenses
were approximately $2.1 million for the six-month period ended March 31, 2002
and $2.2 million for the six-month period ended March 31, 2003. Other expenses
included $106,000 of mortgage service rights impairment for the six months ended
March 31, 2003.
INCOME TAXES
- ------------
Income taxes were $2.8 million for the six months ended March 31, 2002, compared
to $3.1 million for the six months ended March 31, 2003.
20
PART I. FINANCIAL INFORMATION
Item 2. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS-CONTINUED COMPARISONS OF THE
SIX MONTHS ENDED MARCH 31, 2002 AND 2003
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 March 31, 2003:
Total Capital: $74,390 11.91% $49,978 8.00% $62,473 10.00%
(To Risk Weighted Assets)
Tier 1 Capital: $66,957 10.72% N/A N/A $37,484 6.00%
(To Risk Weighted Assets)
Tier 1 Capital: $66,957 6.29% $31,923 3.00% $53,204 5.00%
(To Total Assets)
Tangible Capital: $66,957 6.29% $15,961 1.50% N/A N/A
(To Total Assets)
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
- ---------------------------------------
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
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 adopted Statement 145 on July 1, 2002. In connection
with this adoption, the Company reclassified losses on early extinguishment of
debt of $196,000 and $676,000 that were incurred in the three months and six
months ended March 31, 2002, respectively, to prepayment penalties on FHLB
advances included under general and administrative expenses.
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
21
PART I. FINANCIAL INFORMATION
Item 2. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS-CONTINUED COMPARISONS OF THE
SIX MONTHS ENDED MARCH 31, 2002 AND 2003
this Statement are effective for exit or disposal activities that are initiated
after December 31, 2002, with early application encouraged. The Company adopted
SFAS 146 on October 1, 2002 and its adoption did not have a material effect on
the Company's consolidated financial statements.
In December 2002, the FASB issued Statement of Financial Accounting Standards
No. 148 (Statement 148), "Accounting for Stock-Based Compensation-Transition and
Disclosure, an amendment of FASB Statement No. 123". Statement 148 amends FASB
Statement 123, "Accounting for Stock-Based Compensation" (Statement 123) to
provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, Statement 148 amends the disclosure requirements of Statement 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. The Company adopted the
disclosure provisions of Statement 148 for the three months and six months ended
March 31, 2003.
Effective January 1, 2003, the Company adopted the initial recognition and
initial measurement provisions of Financial Accounting Standards Board
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45").
The Company adopted the disclosure requirements effective as of December 31,
2002. FIN 45 elaborates on the disclosure to be made by a guarantor in its
interim and annual financial statements about its obligations under certain
guarantees that is has issued. It also clarifies that a guarantor is required to
recognize, at the inception of the guarantee, a liability for the fair value of
the obligation undertaken in issuing the guarantee. FIN 45 clarifies that a
guarantor is required to disclose (a) the nature of the guarantee; (b) the
maximum potential amount of future payments under the guarantee; (c) the
carrying amount of the liability; and (d) the nature and extent of any recourse
provisions or available collateral that would enable the guarantor to recover
the amounts paid under the guarantee.
In January 2003, the FASB issued Financial Accounting Standards Board
Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"),
which addresses consolidation by business enterprises of variable interest
entities. Under FIN 46, an enterprise that holds significant variable interest
in a variable interest entity but is not the primary beneficiary is required to
disclose the nature, purpose, size and activities of the variable interest
entity, its exposure to loss as a result of the variable interest holder's
involvement with the entity, and the nature of its involvement with the entity
and date when the involvement began. The primary beneficiary of a variable
interest entity is required to disclose the nature, purpose, size, and
activities of the variable interest entity, the carrying amount and
classification of consolidated assets that are collateral for the variable
interest entity's obligations, and any lack of recourse by creditors (or
beneficial interest holders) of a consolidated variable interest entity to the
general creditors (or beneficial interest holders). FIN 46 is effective for the
first fiscal year or interim period beginning after June 15, 2003. The impact to
the Company upon adoption is currently not known.
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.
22
PART I. FINANCIAL INFORMATION
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- -------------------------------------------------------------------
At March 31, 2003, no material changes have occurred in market risk disclosures
included in the Company's Annual Report to Stockholders for the year ended
September 30, 2002, filed as an exhibit to the Company's Annual Report on Form
10-K.
Item 4. CONTROLS AND PROCEDURES
- --------------------------------
(a) Evaluation of Disclosure Controls and Procedures. The Company maintains
controls and procedures designed to ensure that information required to be
disclosed in the reports that the Company files or submits under the
Securities and Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in the rules and forms of the
Securities and Exchange Commission. Based upon their evaluation of those
controls and procedures performed within 90 days of the filing date of this
report, the Company's Chief Executive Officer and its Chief Financial
Officer concluded that the Company's disclosure controls and procedures
were adequate.
(b) Changes in Internal Controls. The Company made no significant changes in
its internal controls or other factors that could significantly affect
these controls subsequent to the date of the evaluation of those controls
by the Chief Executive Officer and Chief Financial Officer.
The Company's data processing system is an integral component of its system
of internal controls. The Company is scheduled to undergo a data processing
system conversion in May 2003. Although the Company expects the conversion
to be successful, no assurances can be given that system conversion issues
will not have a material adverse effect on the Company's internal controls.
23
PART II. OTHER INFORMATION
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Item 1. Legal Proceedings
-----------------
The Company is a defendant in one lawsuit related to activities in the
Bank, arising out of the normal course of business. The subsidiaries are also
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
---------------------------------------------------
At the Company's annual stockholders meeting held on January 28, 2003 the
following items were ratified:
(a) The election as directors of all nominees: James T. Clemmons, Frank A.
Thompson, II, and G. David Bishop.
At the meeting, a total of 10,606,948 votes were entitled to be cast. Votes
for James T. Clemmons were 8,188,907 with 200,129 withheld; votes for Frank A.
Thompson, II were 8,209,680 with 179,356 withheld, and votes for G. David Bishop
were 8,206,679 with 182,357 withheld. The directors whose terms continued and
the years their terms expire are as follows: James H. Dusenbury (2004), Michael
C. Gerald (2004), James P. Creel (2005) and James C. Benton (2005).
Item 5. Other Information
-----------------
Not Applicable.
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)
24
PART II. OTHER INFORMATION
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
(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 Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
(b) Chief Financial Officer Certification Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
(b) Report on Form 8-K
None
_____________
(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.
(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.
25
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
May 14, 2003 /s/ Michael C. Gerald
------------ -------------------------------------
Date Michael C. Gerald
President and Chief Executive Officer
May 14, 2003 /s/ Jerry L. Rexroad
------------ -------------------------------------
Date Jerry L. Rexroad
Executive Vice President and
Chief Financial Officer
26
CERTIFICATION
I, Michael C. Gerald, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Coastal Financial
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 14, 2003 /s/Michael C. Gerald
------------ ---------------------------------
Michael C. Gerald
President/Chief Executive Officer
27
CERTIFICATION
I, Jerry L. Rexroad, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Coastal Financial
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 14, 2003 /s/Jerry L. Rexroad
------------ ----------------------------------------
Jerry L. Rexroad
Executive Vice President/Chief Financial
Officer
28