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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------------
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarter Ended June 30, 2004
(_) 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 June 30, 2004.
Common Stock $.01 Par Value Per Share 14,414,532 Shares
- --------------------------------------------------------------------------------
(Class) (Outstanding)
On July 30, 2004, the Company declared a 10% stock dividend. The stock
dividend will be payable August 27, 2004 to Shareholders of record on August 13,
2004.
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2004
TABLE OF CONTENTS PAGE
- ----------------- ----
PART I-Consolidated Financial Information
Item
1. Consolidated Financial Statements (unaudited):
Consolidated Statements of Financial Condition
as of September 30, 2003 and June 30, 2004 3
Consolidated Statements of Operations for the three
months ended June 30, 2003 and 2004 4
Consolidated Statements of Operations for the nine 5
months ended June 30, 2003 and 2004
Consolidated Statements of Stockholders' Equity
and Comprehensive Income for the nine months ended
June 30, 2003 and 2004 6
Consolidated Statements of Cash Flows for the nine
months ended June 30, 2003 and 2004 7-8
Notes to Consolidated Financial Statements 9-14
2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 15-25
3. Quantitative and Qualitative Disclosures About 25
Market Risk
4. Controls and Procedures 25-26
Part II - Other Information
Item
1. Legal Proceedings 26
2. Changes in Securities, Use of Proceeds and Issuer
Purchases of Equity Securities 26
3. Defaults Upon Senior Securities 26
4. Submission of Matters to a Vote of Securities Holders 26
5. Other Information 26
6. Exhibits and Reports on Form 8-K 26-27
Signatures 28
Exhibits
31-1 Rule 13a-14(a)/15d-14(a) Certification (Chief Executive Officer) 29
31-2 Rule 13a-14(a)/15d-14(a) Certification (Chief Financial Officer) 30
32-1 Section 1350 Certification (Chief Executive Officer) 31
32-2 Section 1350 Certification (Chief Financial Officer) 32
2
PART I. FINANCIAL INFORMATION
Item 1. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30, June 30,
2003 2004
---- ----
(Unaudited)
(In thousands,
except share data)
ASSETS:
Cash and amounts due from banks $ 18,605 $ 27,836
Short-term interest-bearing deposits 2,970 2,148
Investment securities available for sale 15,909 16,933
Mortgage-backed securities available for sale 383,324 378,647
Loans receivable (net of allowance for
loan losses of $9,832 at September 30,
2003 and $10,842 at June 30, 2004) 682,737 776,292
Loans receivable held for sale 19,096 7,791
Real estate acquired through foreclosure, net 1,627 1,055
Office property and equipment, net 16,088 17,566
Federal Home Loan Bank (FHLB)stock, at cost 13,991 14,652
Accrued interest receivable on loans 2,258 2,641
Accrued interest receivable on securities 2,074 2,037
Bank-owned life insurance 16,165 21,385
Other assets 6,365 10,894
----------- -----------
$ 1,181,209 $ 1,279,877
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY:
LIABILITIES:
Deposits $ 697,012 $ 763,990
Securities sold under agreements to repurchase 133,602 124,019
Advances from FHLB 244,114 284,042
Junior subordinated debt -- 15,464
Debt associated with trust preferred securities 15,000 --
Other borrowings 81 --
Drafts outstanding 2,644 3,274
Advances by borrowers for property taxes
and insurance 1,795 1,462
Accrued interest payable 1,263 1,343
Other liabilities 11,991 8,161
----------- -----------
Total liabilities 1,107,502 1,201,755
=========== ===========
STOCKHOLDERS' EQUITY:
Serial preferred stock, 1,000,000 shares
authorized and unissued -- --
Common stock, $.01 par value, 25,000,000
shares authorized; 14,213,428 shares at
September 30, 2003 and 14,414,532 shares
at June 30, 2004 issued and outstanding 142 144
Additional paid-in capital 10,222 10,518
Retained earnings, restricted 63,030 70,596
Treasury stock, at cost (334,508 shares at
September 30, 2003 and 148,901 shares at
June 30, 2004) (3,375) (1,508)
Accumulated other comprehensive income (loss),
net of tax 3,688 (1,628)
----------- -----------
Total stockholders' equity 73,707 78,122
----------- -----------
$ 1,181,209 $ 1,279,877
=========== ===========
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, 2003 AND 2004
2003 2004
---- ----
(Unaudited)
(In thousands,
except share data)
Interest income:
Loans receivable $ 10,715 $ 11,783
Investment securities 502 750
Mortgage-backed securities 3,526 4,107
Other 47 21
------------ ------------
Total interest income 14,790 16,661
------------ ------------
Interest expense:
Deposits 2,938 2,445
Securities sold under agreements to repurchase 476 486
Advances from FHLB 2,348 2,800
Other borrowings 17 161
------------ ------------
Total interest expense 5,779 5,892
------------ ------------
Net interest income 9,011 10,769
Provision for loan losses 750 200
------------ -------------
Net interest income after provision
for loan losses 8,261 10,569
------------ ------------
Other income:
Fees and service charges on loans and deposit accounts 889 964
Gain from real estate owned 111 96
Gain on sales of loans held for sale 875 315
Gain (loss) on sales of investment securities
available for sale and mortgage-backed
securities available for sale 146 (440)
Income from sales of non-depository products 264 416
FHLB stock dividends 110 132
Other income 550 638
------------ ------------
Total other income 2,945 2,121
------------ ------------
General and administrative expenses:
Salaries and employee benefits 3,307 4,003
Net occupancy, furniture and fixtures
and data processing expense 1,490 1,482
FDIC insurance premium 26 26
FHLB prepayment penalties 750 --
Other expenses 1,278 1,262
------------ ------------
Total general and administrative expense 6,851 6,773
------------ ------------
Income before income taxes 4,355 5,917
Income taxes 1,575 2,018
------------ ------------
Net income $ 2,780 $ 3,899
============ ============
Net income per common share
Basic $ .18 $ .25
============ ============
Diluted $ .17 $ .23
============ ============
Weighted average common shares outstanding
Basic 15,582,000 15,846,000
============ ============
Diluted 16,197,000 16,687,000
============ ============
Dividends per share $ .045 $ .045
============ ============
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 NINE MONTHS ENDED JUNE 30, 2003 AND 2004
2003 2004
---- ----
(Unaudited)
(In thousands,
except share data)
Interest income:
Loans receivable $ 31,083 $ 34,182
Investment securities 1,517 2,062
Mortgage-backed securities 11,563 12,048
Other 110 60
------------ ------------
Total interest income 44,273 48,352
------------ ------------
Interest expense:
Deposits 9,260 7,510
Securities sold under agreements to repurchase 1,245 1,662
Advances from FHLB 6,652 7,811
Other borrowings 54 483
------------ ------------
Total interest expense 17,211 17,466
------------ ------------
Net interest income 27,062 30,886
Provision for loan losses 2,055 1,250
------------ ------------
Net interest income after provision
for loan losses 25,007 29,636
------------ ------------
Other income:
Fees and service charges on loans and deposit accounts 2,582 2,746
Gain from real estate owned 29 5
Gain on sales of loans held for sale 2,255 1,115
Gain (loss) on sales of investment securities
available for sale and mortgage-backed
securities available for sale 662 (707)
Income from sales of non-depository products 925 1,441
FHLB stock dividends 350 362
Other income 1,525 1,917
------------ ------------
Total other income 8,328 6,879
------------ ------------
General and administrative expenses:
Salaries and employee benefits 9,941 12,006
Net occupancy, furniture and fixtures
and data processing expense 4,425 4,547
FDIC insurance premium 78 79
FHLB prepayment penalties 2,428 77
Other expenses 3,526 3,409
------------ ------------
Total general and administrative expense 20,398 20,118
------------ ------------
Income before income taxes 12,937 16,397
Income taxes 4,652 5,502
------------ ------------
Net income $ 8,285 $ 10,895
============ ============
Net income per common share
Basic $ .53 $ .69
============ ============
Diluted $ .51 $ .66
============ ============
Weighted average common shares outstanding
Basic 15,537,000 15,721,000
============ ============
Diluted 16,222,000 16,606,000
============ ============
Dividends per share $ .12 $ .135
============ ============
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
FOR THE NINE MONTHS ENDED JUNE 30, 2003 AND 2004
Accumulated
Other
Additional Compre- Total
Common Paid-In Retained Treasury hensive Stockholders'
Stock Capital Earnings Stock Income(Loss) Equity
------- -------- -------- -------- ----------- --------
(Unaudited)
(In thousands)
Balance at September
30, 2002 $ 116 $ 9,934 $ 54,954 $ (4,376) $ 5,758 $ 66,386
Net income -- -- 8,285 -- -- 8,285
Other comprehensive
income:
Unrealized losses arising
during period, net of
tax benefit of $378 -- -- -- -- (618) --
Less: reclassification
adjustment for gains
included in net income,
net of taxes of $252 -- -- -- -- (410) --
--------
Other comprehensive loss -- -- -- -- (1,028) (1,028)
-------- --------
Comprehensive income -- -- -- -- -- 7,257
--------
Treasury stock repurchases -- -- -- (342) -- (342)
Exercise of stock
options 1 94 (338) 1,024 -- 781
Cash dividends -- -- (1,873) -- -- (1,873)
Balance at June ------- -------- -------- -------- -------- --------
30, 2003 $ 117 $ 10,028 $ 61,028 $ (3,694) $ 4,730 $ 72,209
======= ======== ======== ======== ======== ========
Balance at September
30, 2003 $ 142 $ 10,222 $ 63,030 $ (3,375) $ 3,688 $ 73,707
Net income -- -- 10,895 -- -- 10,895
Other comprehensive
income:
Unrealized losses arising
during period, net of
tax benefit of $3,527 -- -- -- -- (5,754) --
Less: reclassification
adjustment for losses
included in net income,
net of tax benefit of $269 -- -- -- -- 438 --
--------
Other comprehensive loss -- -- -- -- (5,316) (5,316)
-------- --------
Comprehensive income -- -- -- -- -- 5,579
--------
Exercise of stock
options 2 296 (1,176) 1,867 -- 989
Cash dividends -- - - (2,153) -- -- (2,153)
Balance at June ------- -------- -------- -------- -------- --------
30, 2004 $ 144 $ 10,518 $ 70,596 $ (1,508) $ (1,628) $ 78,122
======= ======== ======== ======== ======== ========
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 NINE MONTHS ENDED JUNE 30, 2003 AND 2004
2003 2004
---- ----
(Unaudited)
(In thousands)
Cash flows from operating activities:
Net income $ 8,285 $ 10,895
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation 1,794 1,611
Provision for loan losses 2,055 1,250
(Gain) loss on sale of investment securities
available for sale and mortgage-backed
securities available for sale (662) 707
Gain on sale of real estate acquired through foreclosure (153) --
FHLB prepayment penalties 2,428 77
Origination of loans receivable held for sale (96,000) (42,896)
Proceeds from sales of loans receivable held for sale 96,103 22,465
Impairment loss (recovery) from write-down of originated
mortgage servicing rights, net 262 (81)
Increase in:
Cash value of life insurance (439) (720)
Accrued interest receivable (263) (346)
Other assets (774) (3,984)
Increase (decrease) in:
Accrued interest payable (144) 80
Other liabilities (49) (572)
--------- ---------
Net cash provided by (used in) operating activities 12,443 (11,514)
--------- ---------
Cash flows from investing activities:
Issuer exercise of call of investment
securities available for sale 2,000 2,000
Purchases of investment securities available for sale (9,729) (5,371)
Origination of loans receivable (374,638) (424,686)
Principal collected on loans receivable 254,950 329,366
Purchases of mortgage-backed securities
available for sale (265,879) (206,612)
Proceeds from sales of investment
securities available for sale -- 1,893
Proceeds from sales of mortgage-backed
securities available for sale 86,083 143,190
Principal collected on mortgage-backed
securities, net 147,689 91,008
Proceeds from sale of real estate
acquired through foreclosure, net 1,391 1,087
Purchases of office properties and equipment (3,644) (3,147)
Proceeds from sales of office properties
and equipment -- 58
(Purchases) sales of FHLB stock, net 59 (661)
Purchase of bank-owned life insurance (15,500) (4,500)
--------- ---------
Net cash used in investing activities (177,218) (76,375)
--------- ---------
(CONTINUED)
7
PART I. FINANCIAL INFORMATION
Item 1. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JUNE 30, 2003 AND 2004 (CONTINUED)
2003 2004
---- ----
(Unaudited)
(In thousands)
Cash flows from financing activities:
Increase (decrease) in deposits, net $ 75,841 $ 66,978
Increase (decrease) in securities sold under
agreement to repurchase, net 77,051 (9,583)
Proceeds from FHLB advances 486,861 533,176
Repayment of FHLB advances (467,539) (493,248)
Prepayment penalties on FHLB advances (2,428) (77)
Proceeds (repayments) of other borrowings 2,006 (81)
Decrease in advance payments by borrowers
for property taxes and insurance, net 16 (333)
Increase in drafts outstanding, net 1,220 630
Repurchase of treasury stock, at cost (342) --
Dividends to stockholders (1,873) (2,153)
Exercise of stock options 781 989
--------- ----------
Net cash provided by financing activities 171,594 96,298
--------- ----------
Net increase in cash and cash equivalents 6,819 8,409
Cash and cash equivalents at beginning
of the period 25,802 21,575
--------- ----------
Cash and cash equivalents at end
of the period $ 32,621 $ 29,984
========= ==========
Supplemental information:
Interest paid $ 17,355 $ 17,386
========= ==========
Income taxes paid $ 3,697 $ 5,638
========= ==========
Supplemental schedule of non-cash investing
and financing transactions:
Transfer of mortgage loans to real estate
acquired through foreclosure $ 1,927 $ 515
========= ==========
Securitization of mortgage loans into
mortgage-backed securities $ 60,952 $ 31,736
========= ==========
Increase in other assets and junior subordinated
debt resulting from deconsolidation under FIN 46R $ -- $ 464
========= ==========
Change in unrealized loss in investment securities
and mortgage-backed securities available
for sale, net of tax $ (1,028) $ (5,316)
========= ==========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8
PART I. FINANCIAL INFORMATION
Item 1. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(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, 2004 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 Coastal
Financial Corporation and Subsidiaries' the "Company") audited consolidated
financial statements and related notes for the year ended September 30, 2003,
included in the Company's 2003 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.
The Company determines whether it has a controlling financial interest in an
entity by first evaluating whether the entity is a voting interest entity or a
variable interest entity under accounting principles generally accepted in the
United States of America. Voting interest entities are entities in which the
total equity investment at risk is sufficient to enable each entity to finance
itself independently and provides the equity holders with the obligation to
absorb losses, the right to receive residual returns and the right to make
decisions about the entity's activities. The Company consolidates voting
interest entities in which it has all, or at least a majority of, the voting
interest. As defined in applicable accounting standards, variable interest
entities ("VIEs") are entities that lack one or more of the characteristics of a
voting interest entity described above. A controlling financial interest in an
entity is present when an enterprise has a variable interest, a combination of
variable interests, that will absorb a majority of the entity's expected losses,
receive a majority of the entity's expected residual returns, or both. The
enterprise with a controlling financial interest, known as the primary
beneficiary, consolidates the VIE.
Prior to January 1, 2004, the Company consolidated its wholly-owned subsidiary,
Coastal Financial Capital Trust I ("Trust"). In December 2003, the Financial
Accounting Standards Board issued a revised version of Interpretation No. 46
("FIN 46") "Consolidation of Variable Interest Entities." The revised FIN 46
clarifies some of the provisions of the original interpretation and adds new
scope exceptions. As a result of the changes, the Company deconsolidated the
Trust, increasing other assets by $464,000, increasing junior subordinated
debt-trust preferred securities by $15.5 million and reducing debt associated
with trust preferred securities by $15.0 million.
Certain prior period amounts have been reclassified to conform to current year
presentation.
9
PART I. FINANCIAL INFORMATION
Item 1. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-CONTINUED
(2) LOANS RECEIVABLE, NET
Loans receivable, net consists of the following:
September 30, June 30,
2003 2004
------------- --------
(Unaudited)
(In thousands)
First mortgage loans:
Single family to 4 family units $ 290,395 $ 322,832
Land and land development 62,221 95,938
Residential lots 20,327 28,990
Other, primarily commercial real estate 179,283 187,883
Residential construction loans 56,950 78,838
Commercial construction loans 24,943 7,584
Consumer and commercial loans:
Installment consumer loans 16,581 17,856
Mobile home loans 4,607 5,068
Savings account loans 2,179 2,138
Equity lines of credit 26,640 30,069
Commercial and other loans 24,457 31,922
--------- ---------
708,583 809,118
Less:
Allowance for loan losses 9,832 10,842
Deferred loan costs, net (556) (702)
Undisbursed portion of loans in process 16,570 22,686
--------- ---------
$ 682,737 $ 776,292
========= =========
The changes in the allowance for loan losses consist of the following for the
nine months ended:
Nine Months Ended June 30,
--------------------------
2003 2004
---- ----
(Unaudited)
(Dollars in thousands)
Allowance at beginning of period $ 7,883 $ 9,832
Provision for loan losses 2,055 1,250
------- --------
Recoveries:
Residential loans -- --
Commercial loans 13 149
Consumer loans 26 41
------- --------
Total recoveries 39 190
------- --------
Charge-offs:
Residential loans 39 --
Commercial loans 177 109
Consumer loans 332 321
------- --------
Total charge-offs 548 430
------- --------
Net charge-offs 509 240
------- --------
Allowance at end of period $ 9,429 $ 10,842
======= ========
Ratio of allowance to total net loans
outstanding at the end of the period 1.40% 1.38%
======= ========
Ratio of net charge-offs to average
total loans outstanding during the period (annualized) .11% .04%
======= ========
10
PART I. FINANCIAL INFORMATION
Item 1. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED
Non-accrual loans, which are primarily loans over ninety days delinquent,
totaled approximately $5.9 million and $4.8 million at June 30, 2003 and 2004,
respectively. For the nine months ended June 30, 2003 and 2004, interest income,
which would have been recorded, would have been approximately $461,000 and
$184,000, respectively, had non-accruing loans been current in accordance with
their original terms.
At June 30, 2004, impaired loans totaled $3.4 million. There were $5.0 million
in impaired loans at June 30, 2003. Included in the allowance for loan losses at
June 30, 2004 was $266,000 related to impaired loans compared to $376,000 at
June 30, 2003. The average recorded investment in impaired loans for the nine
months ended June 30, 2004 was $4.1 million compared to $3.8 million for the
nine months ended June 30, 2003. Interest income of $60,000 and $240,000 was
recognized on impaired loans for the quarter and nine months ended June 30,
2004, respectively. Interest income of $28,000 and $60,000 was recognized on
impaired loans for the quarter and nine months ended June 30, 2003,
respectively.
(3) DEPOSITS
Deposits consist of the following:
September 30, 2003 June 30, 2004
------------------ ---------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
------ ---- ------ ----
(Unaudited)
(Dollars in thousands)
Transaction accounts $ 390,439 0.84% $ 463,558 0.80%
Statement savings accounts 46,236 0.80 55,275 0.79
Certificate accounts 260,337 2.67 245,157 2.47
--------- ---------
$ 697,012 1.52% $ 763,990 1.33%
========= =========
(4) ADVANCES FROM FEDERAL HOME LOAN BANK
Advances from Federal Home Loan Bank ("FHLB") consist of the following:
September 30, 2003 June 30, 2004
------------------ --------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
------ ---- ------ ----
Maturing within: (Unaudited)
(Dollars in thousands)
1 year $ 34,435 1.32% $ 9,535 1.82%
2 years 13,500 5.17 14,741 5.13
3 years 5,686 2.81 8,294 1.63
4 years 5,132 3.00 4,951 3.07
5 years 4,633 3.28 29,130 2.15
After 5 years 180,728 4.35 217,391 4.19
--------- ---------
$ 244,114 3.89% $ 284,042 3.86%
========= =========
At September 30, 2003 and June 30, 2004, the Bank had pledged first mortgage
loans and mortgage-backed securities with unpaid balances of approximately
$275.8 million and $330.6 million, respectively, as collateral for FHLB
advances. At June 30, 2004, included in the two, three, four, five and after
five years maturities were $218.0 million, with a weighted average rate of
3.91%, of advances subject to call provisions. Callable advances at June 30,
2004 are summarized as follows: $57.0 million callable in fiscal 2004, with a
weighted average rate of 5.32%; $36.0 million callable in fiscal 2005, with a
weighted average rate of 5.30%; $28.0 million callable in fiscal 2006, with a
weighted average rate of 2.29%; $35.0 million callable in fiscal 2007, with a
weighted average rate of 3.00%; $37.0 million callable in fiscal 2008, with a
weighted average rate of 2.98%; and $25.0 million callable in fiscal 2009, with
a weighted average rate of 3.13%. Call provisions are more likely to be
exercised by the FHLB when interest rates rise. If exercised, the Company may
have to replace called advances with borrowings at a higher interest rate.
11
PART I. FINANCIAL INFORMATION
Item 1. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED
(5) EARNINGS PER SHARE
Basic earnings per share for the three and nine months ended June 30, 2003 and
2004, 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 months ended June 30, 2003 and 2004, are computed by dividing net
earnings by the weighted average dilutive shares outstanding during the
respective periods.
The following is a reconciliation of average shares outstanding used to
calculate basic and fully diluted earnings per share.
For the Quarter Ended June 30,
(Unaudited)
2003 2003 2004 2004
------------------------------------------------------------
BASIC DILUTED BASIC DILUTED
------------------------------------------------------------
Weighted average shares outstanding 15,582,000 15,582,000 15,846,000 15,846,000
Effect of dilutive securities-
Stock options -- 615,000 -- 841,000
------------------------------------------------------------
15,582,000 16,197,000 15,846,000 16,687,000
============================================================
For the Nine Months Ended June 30,
(Unaudited)
2003 2003 2004 2004
------------------------------------------------------------
BASIC DILUTED BASIC DILUTED
------------------------------------------------------------
Weighted average shares outstanding 15,537,000 15,537,000 15,721,000 15,721,000
Effect of dilutive securities-
Stock options -- 685,000 -- 885,000
------------------------------------------------------------
15,537,000 16,222,000 15,721,000 16,606,000
============================================================
(6) STOCK-BASED COMPENSATION
At June 30, 2004, the Company had a stock option plan that provides for stock
options to be granted primarily to directors, officers and other key Associates.
The plan is more fully described in Note 17 of the Notes to Consolidated
Financial Statements included in the Company's 10-K for the year ended September
30, 2003. The Company applies the intrinsic value method of APB Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB Opinion No. 25) and related
interpretations in accounting for its plan. Accordingly, no compensation cost
has been recognized for its fixed stock option plans as all options granted
under those plans had an exercise price equal to or greater than the market
value of the underlying stock at the date of grant. Had compensation cost for
the Company's stock-based compensation plans been determined consistent with
SFAS Statement No. 123, "Accounting for Stock-Based Compensation", the Company's
net income and earnings per share would have been reduced to the proforma
amounts indicated below for the quarters and nine months ended June 30.
12
PART I. FINANCIAL INFORMATION
Item 1. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED
Three Months Ended June 30,
----------------------------
2003 2004
---- ----
(Unaudited)
(Dollars in thousands)
Net income, as reported $ 2,780 $ 3,899
Deduct: Total stock-based employee and director
compensation expense determined under
fair value based method for all awards,
net of related tax effects (126) (156)
------- -------
Pro forma net income $ 2,654 $ 3,743
======= =======
Basic earnings per share:
As reported $ .18 $ .25
======= =======
Pro forma $ .17 $ .24
======= =======
Diluted earnings per share:
As reported $ .17 $ .23
======= =======
Pro forma $ .16 $ .22
======= =======
Nine Months Ended June 30,
--------------------------
2003 2004
---- ----
(Unaudited)
(Dollars in thousands)
Net income, as reported $ 8,285 $ 10,895
Deduct: Total stock-based employee and director
compensation expense determined under
fair value based method for all awards,
net of related tax effects (378) (442)
------- --------
Pro forma net income $ 7,907 $ 10,453
======= ========
Basic earnings per share:
As reported $ .53 $ .69
======= ========
Pro forma $ .51 $ .66
======= ========
Diluted earnings per share:
As reported $ .51 $ .66
======= ========
Pro forma $ .49 $ .63
======= ========
(7) COMMON STOCK DIVIDEND
On May 27, 2003, August 28, 2003 and February 18, 2004, the Company declared a
10% stock dividend, aggregating approximately 1,065,000 shares, 1,174,000 shares
and 1,308,000 shares respectively.
On July 30, 2004, the Company declared a 10% stock dividend. The stock dividend
will be payable August 27, 2004 to Shareholders of record as of August 13, 2004.
All average share and per share data have been retroactively restated for the
stock dividends. Actual outstanding shares at June 30, 2004 and September 30,
2003 in the accompanying balance sheet have not been retroactively restated.
13
PART I. FINANCIAL INFORMATION
Item 1. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED
(8) GUARANTEES
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. Payment is only guaranteed under these
letters of credit upon the borrower's failure to perform its obligations to the
beneficiary. The Company can seek recovery of the amounts paid from the borrower
and the letters of credit are generally collateralized. Commitments under
standby letters of credit are usually one year or less. At June 30, 2004, the
Company has recorded no liability for the current carrying amount of the
obligation to perform as a guarantor, as such amounts are not considered
material. The maximum potential amount of undiscounted future payments related
to standby letters of credit at June 30, 2004 was $4.4 million.
(9) DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITES
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 sales of loans held for sale. The commitments to
originate fixed rate conforming loans totaled $7.5 million at June 30, 2004. The
fair value of the loan commitments was an asset of approximately $76,000 at June
30, 2004. As of June 30, 2004, the Company had sold $12.0 million in forward
commitments to deliver fixed rate mortgage-backed securities, which were
recorded as a derivative liability of $83,000.
(10) JUNIOR SUBORDINATED DEBT
The Company determines whether it has a controlling financial interest in an
entity by first evaluating whether the entity is a voting interest entity or a
variable interest entity under accounting principles generally accepted in the
United States of America. Voting interest entities are entities in which the
total equity investment at risk is sufficient to enable each entity to finance
itself independently and provides the equity holders with the obligation to
absorb losses, the right to receive residual returns and the right to make
decisions about the entity's activities. The Company consolidates voting
interest entities in which it has all, or at least a majority of, the voting
interest. As defined in applicable accounting standards, variable interest
entities ("VIEs") are entities that lack one or more of the characteristics of a
voting interest entity described above. A controlling financial interest in an
entity is present when an enterprise has a variable interest, a combination of
variable interests, that will absorb a majority of the entity's expected losses,
receive a majority of the entity's expected residual returns, or both. The
enterprise with a controlling financial interest, known as the primary
beneficiary, consolidates the VIE.
Prior to January 1, 2004, the Company consolidated its wholly-owned subsidiary,
Coastal Financial Capital Trust I ("Trust"). In December 2003, the Financial
Accounting Standards Board issued a revised version of Interpretation No. 46
("FIN 46") "Consolidation of Variable Interest Entities." The revised FIN 46
clarifies some of the provisions of the original interpretation and adds new
scope exceptions. As a result of the changes, the Company deconsolidated the
Trust, increasing other assets by $464,000, increasing junior subordinated
debt-trust preferred securities by $15.5 million and reducing debt associated
with trust preferred securities by $15.0 million.
14
PART I. FINANCIAL INFORMATION
Item 2. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
consolidated financial statements of Coastal Financial Corporation and
Subsidiaries and the notes thereto.
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 and provisions for loan
losses), 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). Because of the risks and uncertainties inherent in forward
looking statements, readers are cautioned not to place undue reliance on them,
whether included in this report or made elsewhere from time to time by the
Company or on its behalf. Except as may be required by applicable law or
regulation, the Company assumes no obligation to update any forward looking
statements.
OVERVIEW
- --------
Coastal Financial Corporation is a unitary thrift holding company incorporated
in Delaware with one wholly-owned banking subsidiary, Coastal Federal Bank (the
"Bank" or "Coastal Federal"). The Company also owns Coastal Planners Holding
Corporation, whose subsidiary Coastal Retirement, Estate and Tax Planners, Inc.,
offers fee-based financial planning services. The Company's primary business
activities are conducted by the Bank. The Company and Bank's principal executive
offices are located in Myrtle Beach, South Carolina.
Coastal Federal Bank is a full service financial services company with 19
branches located in four counties throughout the coastal regions of South
Carolina and North Carolina. The Bank has twelve offices in Horry County, South
Carolina; one office in Georgetown County, South Carolina; four offices in
Brunswick County, North Carolina; and two offices in New Hanover County, North
Carolina.
The Bank's primary market areas are located along the coastal regions of South
Carolina and North Carolina and predominately center around the Metro regions of
Myrtle Beach, South Carolina and Wilmington, North Carolina, and their
surrounding counties. Coastal Federal's primary market is Horry County, South
Carolina where the Bank has the number one market share of deposits as of June
30, 2003 with 16.4% of deposits as reported by Sheshunoff Market Share Report.
The Bank also has the third highest market share of deposits as of June 30, 2003
in Brunswick County, North Carolina with 8.4% of deposits as reported by
Sheshunoff Market Share Report.
The primary business activities in Horry County are centered around the tourism
industry. To the extent that Horry County businesses rely heavily on tourism
business, decreased tourism would have a significant adverse effect on Coastal
Federal's primary deposit base and lending area. Moreover, the Bank would likely
experience a higher degree of loan delinquencies should the local economy be
materially and adversely affected.
Coastal Federal's principal business consists of attracting core deposits from
Customers in its primary market locations and using these funds to meet the
lending needs of its Customers as well as providing numerous financial products
and services to meet its Customer's needs.
Through its branch locations, the Bank provides a wide range of banking
products, including interest-bearing and non-interest bearing checking accounts;
business sweep accounts; business cash management services; statement savings
accounts; money market accounts; certificates of deposit; individual retirement
accounts; merchant services; commercial, business, personal, real estate,
residential mortgage and home equity loans; safe deposit boxes; and electronic
banking services. The Bank has four ATMs at off-site locations and an ATM at
each branch. The Bank also offers a wide range of financial products through its
division, Coastal Investor Services, including stocks, bonds, mutual funds,
annuities, insurance, and retirement products.
15
PART I. FINANCIAL INFORMATION
Item 2. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - CONTINUED
CRITICAL ACCOUNTING POLICIES
- ----------------------------
The Company considers its policy regarding the allowance for loan losses to be
its most critical accounting policy, because it requires many of management's
most subjective and complex judgments. The Company has developed appropriate
policies and procedures for assessing the adequacy of the allowance for loan
losses, recognizing that this requires a number of assumptions and estimates
with respect to its loan portfolio. The Company's assessments may be impacted in
future periods by changes in economic conditions, the impact of regulatory
examinations and the discovery of information with respect to borrowers which
were not known by management at the time of the issuance of the consolidated
financial statements.
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.
Lending Commitments. Lending commitments include loan commitments, standby
letters of credit, unused business and personal credit card lines, and unused
business and personal 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 business customers, commercial loan commitments generally take the form of
revolving credit arrangements to finance customers' working capital
requirements. For personal customers, loan commitments are generally lines of
credit which are unsecured or are secured by residential property. At June 30,
2004, unfunded business and personal lines of credit commitments totaled $54.4
million. Unused business and personal credit card lines, which totaled $13.7
million at June 30, 2004, are generally for short-term borrowings. The Company
also had commitments to originate $17.1 million in residential mortgage loans.
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. Payment is only guaranteed under these
letters of credit upon the borrower's failure to perform its obligations to the
beneficiary. The Company can seek recovery of the amounts paid from the borrower
and these standby letters of credit are generally collateralized. Commitments
under standby letters of credit are usually one year or less. At June 30, 2004,
the Company has recorded no liability for the current carrying amount of the
obligation to perform as a guarantor, as such amounts are not considered
material. The maximum potential amount of undiscounted future payments related
to standby letters of credit at June 30, 2004 was $4.4 million.
16
PART I. FINANCIAL INFORMATION
Item 2. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - CONTINUED
Derivatives and Hedging Activities. 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 $7.5 million at
June 30, 2004. The fair value of the loan commitments was an asset of
approximately $76,000 at June 30, 2004. As of June 30, 2004, the Company had
sold $12.0 million in forward commitments to deliver fixed rate mortgage- backed
securities, which were recorded as a derivative liability of $83,000.
DISCUSSION OF FINANCIAL CONDITION CHANGES FROM SEPTEMBER 30, 2003 TO JUNE
- --------------------------------------------------------------------------------
30,2004
- -------
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 provide 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 securities.
The Company originated loans receivable of $470.6 million for the nine months
ended June 30, 2003, compared to $467.6 million for the nine months ended June
30, 2004. Loan principal repayments amounted to $255.0 million in the first nine
months of 2003 compared to $329.4 million for the nine months ended June 30,
2004. In addition, the Company sells certain loans in the secondary market to
finance future loan originations. In the first nine months of fiscal 2003, the
Company sold loans or securitized and sold loans totaling $157.1 million
compared to $54.2 million in the nine months ended June 30, 2004. Generally,
these loans have consisted only of mortgage loans, which have been originated
within the prior twelve months.
During the nine month period ended June 30, 2004, the Company securitized $31.7
million of mortgage loans and concurrently sold these mortgage-backed securities
to outside third parties and recognized a net gain on sale of $789,000, which
included $417,000 related to mortgage servicing rights. The gain is included in
gains on sales of loans held for sale in the consolidated statement of
operations. The proceeds from sale are included in proceeds from sales of
mortgage-backed securities available for sale in the consolidated statement of
cash flows. The Company has no retained interest in the securities that were
sold other than servicing rights.
For the nine-month period ended June 30, 2003, the Company purchased $275.6
million in investment and mortgage-backed securities. For the nine-month period
ended June 30, 2004, the Company purchased $212.0 million in investment and
mortgage-backed securities. These purchases during the nine-month period ended
June 30, 2004 were funded primarily by repayments of $91.0 million within the
securities portfolio and sales of mortgage-backed securities of $143.2 million.
The Company experienced an increase of $67.0 million in deposits for the nine
month period ended June 30, 2004. The Company is focused on growing core
deposits. For the nine month period ended June 30, 2004, transaction accounts
increased $73.1 million, statement savings accounts increased $9.0 million, and
certificate accounts decreased $15.2 million.
At June 30, 2004 the Company had $206.2 million of certificates of deposits that
were due to mature within one year.
17
PART I. FINANCIAL INFORMATION
Item 2. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - CONTINUED
The Company believes that the majority of these certificates of deposits will
renew with the Company. At June 30, 2004, the Company had commitments to
originate $17.1 million in residential mortgage loans, $54.4 million in
undisbursed business and retail lines of credit and $13.7 million in unused
business and personal credit card lines, which the Company expects to fund from
normal operations. At June 30, 2004, the Company had $43.1 million available in
FHLB advances. Additionally, at June 30, 2004, the Company had outstanding
available lines for federal funds of $20.0 million.
The Company funded the majority of its loan growth with increases in FHLB
advances and growth in deposits. During the nine months ended June 30, 2004, the
Company borrowed $71.5 million of new advances with a term greater than one year
from the FHLB with a weighted average rate of 2.72%.
As a result of $10.9 million in net income, less the cash dividends paid to
stockholders of approximately $2.2 million, proceeds of approximately $989,000
from the exercise of stock options, and the net decrease in unrealized gain on
securities available for sale, net of income tax, of $5.3 million, stockholders'
equity increased from $73.7 million at September 30, 2003 to $78.1 million at
June 30, 2004.
The Company's securities available for sale had an unrealized gain, net of tax
of $3.7 million at September 30, 2003 compared to an unrealized loss, net of tax
of $1.6 million at June 30, 2004. The decrease in the market value of the
securities available for sale was the result of increased intermediate term
interest rates. The Company's securities are comprised of mortgage-backed
securities or municipal bonds that are generally rated AAA or have a guarantee
from Federal Home Loan Mortgage Corporation ("FHLMC"), Federal National Mortgage
Association ("FNMA") or the Government National Mortgage Association ("GNMA").
None of the decline in market value was due to a change in the investment grade
of the Company's securities. The Company believes it has only temporary losses
on securities available for sale.
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 $94.2 million at June 30,
2004, exceeding the core capital requirement by $55.7 million. At June 30, 2004,
the Bank's risk-based capital of approximately $103.4 million exceeded its
current risk-based capital requirement by $41.6 million. (For further
information see Regulatory Capital Matters).
The table below summarizes future contractual obligations as of June 30, 2004:
Payments Due by Period
------------------------------------------------------
Less than 1-3 4-5 After 5
Total 1 Year Years Years Years
--------- --------- --------- -------- ----------
Time deposits $ 245,157 $ 206,180 $ 34,493 $ 3,789 $ 695
Short-term borrowings 123,554 123,554 -- -- --
Long-term debt 299,971 -- 33,035 34,081 232,855
Operating leases 625 188 194 45 198
--------- --------- --------- -------- ---------
Total contractual cash
obligations $ 669,307 $ 329,922 $ 67,722 $ 37,915 $ 233,748
========= ========= ========= ======== =========
Purchase commitments. The Company has entered into various contracts to purchase
equipment and software products to improve productivity and Customer service.
The price of the equipment and software is approximately $1.7 million. The
annual maintenance fees are approximately $150,000. The Company expects to
complete the purchases in the fourth fiscal quarter of 2004 and the first fiscal
quarter of 2005.
EARNINGS SUMMARY
- ----------------
Net income increased from $8.3 million, or $.51 per diluted share, for the nine
months ended June 30, 2003 to $10.9 million, or $.66 per diluted share for the
nine months ended June 30, 2004. This 31.5% increase in net income resulted from
increased net interest income of $3.8 million, or 14.1%, reduced general and
administrative expenses of $280,000, decreased provision for loan losses of
$805,000 and was somewhat offset by decreased other income of $1.4 million and
increased tax expense at $850,000.
Despite the decrease in the net interest margin as a result of continued
declining interest rates, from 3.76% for the nine months ended June 30, 2003 to
3.58% for the nine months ended June 30, 2004, net interest income increased
14.1%. The increase in net interest income is primarily attributable to an
increase in average earning assets of $193.9 million, or 20.3%. For the nine
months ended June 30, 2004, average loans receivable increased to $744.7 million
an increase of 22.3%, when compared to $609.1 million for the nine months ended
June 30, 2003. In addition, average balances of investment securities increased
approximately $64.0 million. The investment securities were primarily funded
with longer-term advances. The Company's advances with a maturity greater than
four years increased from $184.2 million at June 30, 2003 to $246.5 million at
June 30, 2004.
18
PART I. FINANCIAL INFORMATION
Item 2. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - CONTINUED
Although loans receivable increased $93.6 million for the nine months ended,
June 30, 2004, the provision for loan losses decreased by $805,000. This is
primarily attributed to an improved credit risk profile associated with problem
loans at June 30, 2004. During the nine months ended June 30, 2004, the Bank had
several large loans that were criticized or classified by the Bank, aggregating
$8.2 million that were paid off.
Total other income decreased from $8.3 million for the nine months ended June
30, 2003 to $6.9 million for the nine months ended June 30, 2004. This was
primarily a result of decreased gains on sales of loans held for sale of $1.1
million. The Company experienced a significant reduction in residential loan
refinancings in the first nine months of fiscal 2004 compared to fiscal 2003 due
to interest rates, which increased slightly beginning in September 2003. The
Company also had increased net loss on securities available for sale of $1.4
million in the first nine months of 2004 when comparing to the first nine months
of 2003. This was offset by increased income from the sales of non- depository
products of $516,000 and other income of $392,000. The increase in other income
was primarily due to increased income from bank owned life insurance of
$281,000.
Total general and administrative expenses decreased from $20.4 million for the
nine months ended June 30, 2003 to $20.1 million for the nine months ended June
30, 2004. Salaries and employee benefits increased $2.1 million or 20.8% when
comparing the two periods. This was offset primarily by a decrease of $2.4
million in FHLB prepayment penalties.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS FOR THE THREE MONTHS ENDED
- --------------------------------------------------------------------------------
JUNE 30, 2003 AND 2004
- ----------------------
INTEREST INCOME
- ---------------
Despite a reduction in the average yield, the Company's growth in average
interest earning assets of 18.8% resulted in interest income for the three
months ended June 30, 2004, increasing to $16.7 million, or 12.7% as compared to
$14.8 million for the three months ended June 30, 2003. The earning asset yield
for the three months ended June 30, 2004, was 5.61% compared to a yield of 5.92%
for the three months ended June 30, 2003. As a result of significant declining
interest rates over much of the last two years, the Bank's yield on assets and
cost of funds has declined. Interest rates have recently begun to increase. At
June 30, 2002, 2003 and 2004, the one-year treasury rate of interest was
approximately 2.10%, 1.02% and 2.16%, respectively. At June 30, 2002, 2003 and
2004, the prime rate of interest was approximately 4.75%, 4.00% and 4.00%,
respectively. On July 1, 2004, the prime rate was increased to 4.25%.
The average yield on loans receivable for the three months ended June 30, 2004,
was 6.05% compared to 6.61% for three months ended June 30, 2003. The Company's
yield on loans has continued to decline as loans in the portfolio have
refinanced at lower rates. The yield on investments decreased slightly to 4.79%
for the three months ended June 30, 2004, from 4.83% for the three months ended
June 30, 2003. The yield on investments has declined due to payoff of higher
yielding mortgage-backed securities (MBS) resulting from significant prepayments
during fiscal 2003. These higher yielding MBS were replaced with lower yielding
MBS. Total average interest-earning assets were $1.2 billion for the quarter
ended June 30, 2004 as compared to $999.1 million for the quarter ended June 30,
2003. The increase in average interest-earning assets is primarily due to an
increase in average loans receivable of approximately $130.5 million and
investment securities of approximately $71.9 million.
19
PART I. FINANCIAL INFORMATION
Item 2. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - CONTINUED
INTEREST EXPENSE
- ----------------
Interest expense on interest-bearing liabilities was $5.9 million for the three
months ended June 30, 2004, as compared to $5.8 million for the three months
ended June 30, 2003. The average cost of deposits for the three months ended
June 30, 2004, was 1.33% compared to 1.73% for the three months ended June 30,
2003. This is primarily due to lower market rates for fiscal 2004 and the
composition of deposits when comparing the two periods. Deposits at June 30,
2004 were $764.0 million with transaction accounts comprising 60.7% compared to
$713.9 million with transaction accounts comprising 54.6% at June 30, 2003. The
cost of interest- bearing liabilities was 1.98% for the three months ended June
30, 2004, as compared to 2.31% for the three months ended June 30, 2003. The
cost of FHLB advances, other borrowings and reverse repurchase agreements was
3.73%, 4.29% and 1.38%, respectively, for the three months ended June 30, 2004.
For the three months ended June 30, 2003, the cost of FHLB advances, other
borrowings and reverse repurchase agreements was 4.46%, 2.48% and 1.84%,
respectively. The decrease for FHLB advances and reverse repurchase agreements
is primarily due to lower interest rates in fiscal 2004 compared to fiscal 2003.
The increase in other borrowings is due to the junior subordinated debt of $15.0
million at a variable rate tied to the 90-day LIBOR plus 305 basis points. Total
average interest-bearing liabilities increased from $999.3 million at June 30,
2003 to $1.2 billion at June 30, 2004. The increase in average interest-bearing
liabilities is due to an increase in average deposits of approximately $52.7
million. This was accompanied by an increase in reverse repurchase agreements of
$33.2 million, FHLB advances of $89.3 million and $15.0 million of junior
subordinated debt related to trust preferred securities.
NET INTEREST INCOME
- -------------------
Net interest income was $10.8 million for the three months ended June 30, 2004,
as compared to $9.0 million for the three months ended June 30, 2003. With the
reduction in interest rates over the last two years, the Bank continued to
experience a decrease in its net interest margin through December 31, 2003.
However, as rates stabilized over the last nine months, the Bank's net interest
margin has generally stabilized, and actually increased in the last two
quarters. The net interest margin for the quarters ended March 31, 2003, June
30, 2003, September 30, 2003, December 31, 2003 and March 31, 2004 was 3.87%,
3.61%, 3.65%, 3.48% and 3.58% respectively. In the quarter ended June 30, 2004,
the net interest margin actually continued to increase slightly to 3.63%.
Throughout the quarter ended June 30, 2004, intermediate interest rates have
increased approximately 100 basis points. The Bank believes that over time this
should slow the refinancing of loans at lower rates. Based upon the most recent
information available, management believes that its net interest margin should
remain stable and could increase slightly if short-term rates rise
commensurately with long-term rates. Projection of the impact of interest rates
on the Bank's net interest margin is often imprecise due to the fact the
short-term and long-term interest rates often move very differently.
PROVISION FOR LOAN LOSSES
- -------------------------
The Company's provision for loan losses decreased from $750,000 for the three
months ended June 30, 2003, compared to $200,000 for the three months ended June
30, 2004. This is due to the nature and the risk profile of the loans delinquent
90 days or more at June 30, 2004 as compared to June 30, 2003. The allowance for
loan losses as a percentage of loans was 1.38% at June 30, 2004 as compared to
1.40% at June 30, 2003. Loans delinquent 90 days or more were $4.8 million or
..61% of total loans at June 30, 2004, compared to $5.9 million or .88% at June
30, 2003. The allowance for loan losses was 226% of loans delinquent more than
90 days at June 30, 2004, compared to 160% at June 30, 2003. Net charge-offs for
the three months ended June 30, 2004 and 2003 were $116,000 and $210,000,
respectively. Management believes that current level of the allowance for loan
losses is adequate considering the composition of the loan portfolio, the
portfolio's loss experience, delinquency trends, current regional and local
economic conditions and other factors.
20
PART I. FINANCIAL INFORMATION
Item 2. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - CONTINUED
OTHER INCOME
- ------------
For the three months ended June 30, 2004, other income was $2.1 million compared
to $2.9 million for the three months ended June 30, 2003. Fees and service
charges from deposit accounts were $964,000 for the three months ended June 30,
2004, compared to $889,000 for the three months ended June 30, 2003. The
increase in fees and service charges is primarily due to the growth in
transaction accounts. During the three months ended June 30, 2004, the Company
securitized loans into mortgage-backed securities ("MBS") of $8.7 million and
then sold the MBS and sold loans held for sale of $13.3 million, aggregating
$22.0 million. During the three months ended June 30, 2003, the Company
securitized loans into mortgage-backed securities ("MBS") of $18.8 million and
then sold the MBS and sold loans held for sale of $13.5 million, aggregating
$32.3 million. Originations of loans held for sale have declined as interest
rates began to increase in September 2003. This increase in rates has
significantly curtailed mortgage refinancing. Based upon current interest rates,
the Company expects mortgage refinancing to continue significantly below last
years levels. Gain on sale of loans was $315,000 for the quarter ended June 30,
2004, compared to $875,000 for the quarter ended June 30, 2003. Loss on sales of
securities was $440,000 for the quarter ended June 30, 2004, compared to gains
of $146,000 for the quarter ended June 30, 2003. Income from sales of
non-depository products increased $152,000 when comparing the two periods.
GENERAL AND ADMINISTRATIVE EXPENSES
- -----------------------------------
General and administrative expenses were $6.9 million for the quarter ended June
30, 2003, compared to $6.8 million for the quarter ended June 30, 2004. Salaries
and employee benefits were $3.3 million for the three months ended June 30,
2003, as compared to $4.0 million for the three months ended June 30, 2004, an
increase of 21.0%. This is primarily due to the addition of new branches,
additional business banking Associates and increased expense related commission
from the sale of non-depository products. The Company has added several
Associates in a Banking Group that is focused on growing small to medium sized
business banking relationships. The Company employed 352 Associates at June 30,
2004, compared to 301 Associates at June 30, 2003. For the quarter ended June
30, 2003, there were $750,000 of prepayment penalties on FHLB advances included
in general and administrative expenses. For the quarter ended June 30, 2004,
there were no prepayment penalties. Other expenses were $1.3 million for the
quarters ended June 30, 2003 and 2004. Other expenses included $155,000 of
mortgage service rights impairment for the three months ended June 30, 2003 and
$14,000 of mortgage service rights recovery for the three months ended June 30,
2004.
INCOME TAXES
- ------------
Income taxes were $1.6 million for the three months ended June 30, 2003 compared
to $2.0 million for the three months ended June 30, 2004. The effective income
tax rate as a percentage of pretax income was 34.1% and 36.2% for the quarters
ended June 30, 2004 and 2003, respectively. The effective income tax rate
primarily declined in connection with an increase in income generated by
bank-owned life insurance and municipal securities that are exempt from federal
and certain state taxes. The Company's effective income tax rates take into
consideration certain assumptions and estimates made by management. No assurance
can be given that either the tax returns submitted by management or the income
tax reported on the consolidated financial statements will not be adjusted by
either adverse rulings by the U.S. Tax court, changes in the tax code, or
assessments made by local, state or federal taxing authorities. The Company is
subject to potential adverse adjustments, including but not limited to: an
increase in the statutory federal or state income tax rates, the permanent
non-deductibility of amounts currently considered deductible either now or in
future periods, and the dependency on the generation of the future taxable
income, in order to ultimately realize deferred income tax assets.
21
PART I. FINANCIAL INFORMATION
Item 2. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS-CONTINUED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS FOR THE NINE MONTHS ENDED
- ----------------------------------------------------------------------------
JUNE 30, 2003 AND 2004
- ----------------------
INTEREST INCOME
- ---------------
Despite a reduction in the average yield, the Company's growth in average
interest earning assets of 20.3% resulted in an increase in interest income for
the nine months ended June 30, 2004, of $4.1 million to $48.4 million, or 9.2%
as compared to $44.3 million for the nine months ended June 30, 2003. The
earning asset yield for the nine months ended June 30, 2004, was 5.61% compared
to a yield of 6.18% for the nine months ended June 30, 2003. As a result of
significant declining interest rates over much of the last two years, the Bank's
yield on assets and cost of funds has declined. Interest rates have very
recently begun to increase. At June 30, 2002, 2003 and 2004, the one-year
treasury rate of interest was approximately 2.10%, 1.02% and 2.16%,
respectively. At June 30, 2002, 2003 and 2004, the prime rate of interest was
approximately 4.75%, 4.00% and 4.00%, respectively. On July 1, 2004, the prime
rate was increased to 4.25%. The average yield on loans receivable for the nine
months ended June 30, 2004, was 6.12% compared to 6.80% for nine months ended
June 30, 2003. The yield on investments decreased to 4.68% for the nine months
ended June 30, 2004, from 5.16% for the nine months ended June 30, 2003. The
yield on investments has declined due to payoff of higher yielding
mortgage-backed securities (MBS) resulting from significant prepayments during
fiscal 2003. These higher yielding MBS were replaced with lower yielding MBS.
Total average interest-earning assets were $1.1 billion for the nine months
ended June 30, 2004 as compared to $955.4 million for the nine months ended June
30, 2003. The increase in average interest-earning assets is primarily due to an
increase in average loans receivable of approximately $135.6 million and
investment securities of approximately $64.0 million.
INTEREST EXPENSE
- ----------------
Interest expense on interest-bearing liabilities was $17.5 million for the nine
months ended June 30, 2004, as compared to $17.2 million for the nine months
ended June 30, 2003. The average cost of deposits for the nine months ended June
30, 2004, was 1.42% compared to 1.88% for the nine months ended June 30, 2003.
The cost of interest-bearing liabilities was 2.03% for the nine months ended
June 30, 2004, as compared to 2.42% for the nine months ended June 30, 2003. The
cost of FHLB advances, other borrowings and reverse repurchase agreements was
3.83%, 4.29% and 1.47%, respectively, for the nine months ended June 30, 2004.
For the nine months ended June 30, 2003, the cost of FHLB advances, other
borrowings and reverse repurchase agreements was 4.41%, 3.14% and 1.85%,
respectively. Total average interest-bearing liabilities increased from $950.2
million at June 30, 2003 to $1.1 billion at June 30, 2004. The increase in
average interest-bearing liabilities is due to an increase in average deposits
of approximately $49.5 million. This was accompanied by an increase in reverse
repurchase agreements of $58.5 million and FHLB advances of $70.8 million.
NET INTEREST INCOME
- -------------------
Net interest income was $30.9 million for the nine months ended June 30, 2004,
as compared to $27.1 million for the nine months ended June 30, 2003. With the
reduction in interest rates over the last two years, the Bank continued to
experience a decrease in its net interest margin through December 31, 2003.
However, as rates stabilized over the last nine months, the Bank's net interest
margin declined at a much slower pace and actually increased slightly in the
most recent quarter. The net interest margin for the quarters ended March 31,
2003, June 30, 2003, September 30, 2003, December 31, 2003, March 31, 2004 and
June 30, 2004 was 3.87%, 3.61%, 3.65%, 3.48%, 3.58% and 3.63% respectively. For
the nine months ended June 30, 2004, the net interest margin was 3.58%.
Throughout the quarter ended June 30, 2004, intermediate interest rates have
increased approximately 100 basis points. Management believes that over time
this should slow the refinancing of loans at lower rates. Based upon the most
recent information available, management believes that its net interest margin
should remain stable and could increase slightly if short-term rates rise
commensurately with long-term rates. Projection of the impact of interest rates
on the Bank's net interest margin is often imprecise due to the fact that
short-term and long-term interest rates often move very differently.
22
PART I. FINANCIAL INFORMATION
Item 2. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - CONTINUED
PROVISION FOR LOAN LOSSES
- -------------------------
The Company's provision for loan losses decreased from $2.1 million for the nine
months ended June 30, 2003, compared to $1.3 million for the nine months ended
June 30, 2004. This is due to the nature and the risk profile of the loans
delinquent 90 days or more at June 30, 2004 as compared to June 30, 2003. The
allowance for loan losses as a percentage of loans was 1.38% at June 30, 2004 as
compared to 1.40% at June 30, 2003. Loans delinquent 90 days or more were $4.8
million or .61% of total loans at June 30, 2004, compared to $5.9 million or
..88% at June 30, 2003. The allowance for loan losses was 226% of loans
delinquent more than 90 days at June 30, 2004, compared to 160% at June 30,
2003. Net charge- offs for the nine months ended June 30, 2004 and 2003 were
$240,000 and $509,000, respectively. Management believes that the current level
of the allowance for loan losses is adequate considering the composition of the
loan portfolio, the portfolio's loss experience, delinquency trends, current
regional and local economic conditions and other factors. Subsequent to June 30,
2004, a non-accrual loan secured by commercial property was paid in full. The
original amount of the loan was $1.7 million and the balance was $522,000 at
June 30, 2004. As a result of this, the Bank will recognize approximately
$320,000 of interest income its fourth fiscal quarter.
OTHER INCOME
- ------------
For the nine months ended June 30, 2004, other income was $6.9 million compared
to $8.3 million for the nine months ended June 30, 2003. As a result of
increased transaction account balances of $389.0 million at June 30, 2003 to
$463.6 million at June 30, 2004, fees and service charges from deposit accounts
were $2.7 million for the nine months ended June 30, 2004, compared to $2.6
million for the nine months ended June 30, 2003. Gain on sale of loans was $1.1
million for the nine months ended June 30, 2004, compared to $2.3 million for
the nine months ended June 30, 2003. Loss on sales of securities was $707,000
for the nine months ended June 30, 2004, compared to gains of $662,000 for the
nine months ended June 30, 2003. Other income was $3.7 million for the nine
months ended June 30, 2004, as compared to $2.8 million for the nine months
ended June 30, 2003. This increase is primarily due to increased sales of
non-depository products and services.
GENERAL AND ADMINISTRATIVE EXPENSES
- -----------------------------------
General and administrative expenses were $20.4 million for the nine months ended
June 30, 2003 compared to $20.1 million for the nine months ended June 30, 2004.
Salaries and employee benefits were $9.9 million for the nine months ended June
30, 2003, as compared to $12.0 million for the nine months ended June 30, 2004,
an increase of 20.8%. This is primarily due to the addition of new branches,
additional business banking Associates and increased expense related commission
from the sale of non-depository products. The Company employed 352 Associates at
June 30, 2004, compared to 301 Associates at June 30, 2003. Also as a result of
new branches, net occupancy, furniture and fixtures and data processing expenses
increased $122,000 when comparing the two periods. General and administrative
expenses also include prepayment penalties on FHLB advances of $2.4 million and
$77,000 for the nine months ended June 30, 2003 and 2004, respectively. For the
nine months ended June 30, 2004, the Company prepaid $4.6 million of FHLB
advances with a weighted average rate of 3.21%. Other expenses were
approximately $3.5 million for the nine month period ended June 30, 2003 and
$3.4 million for the nine month period ended June 30, 2004. Other expenses
included $262,000 of mortgage service rights impairment for the nine months
ended June 30, 2003 and $106,000 of mortgage service rights recovery for the
nine months ended June 30, 2004.
INCOME TAXES
- ------------
Income taxes were $4.7 million for the nine months ended June 30, 2003, compared
to $5.5 million for the nine months ended June 30, 2004. The effective income
tax rate as a percentage of pretax income was 33.6% and 36.0% for the nine
months ended June 30, 2004 and 2003, respectively. The effective income tax rate
primarily declined in connection with an increase in income generated by
bank-owned life insurance and municipal securities that are exempt from federal
and certain state taxes.
The Company's effective income tax rates take into consideration certain
assumptions and estimates made by management. No assurance can be given that
either the tax returns submitted by management or the income tax reported on the
consolidated financial statements will not be adjusted by either adverse rulings
by the U.S. Tax court, changes in the tax code, or assessments made by local,
state or federal taxing authorities. The
23
PART I. FINANCIAL INFORMATION
Item 2. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - CONTINUED
INCOME TAXES - CONTINUED
- ------------------------
Company is subject to potential adverse adjustments, including but not limited
to: an increase in the statutory federal or state income tax rates, the
permanent non-deductibility of amounts currently considered deductible either
now or in future periods, and the dependency on the generation of the future
taxable income, in order to ultimately realize deferred income tax assets.
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, 2004:
Total Capital: $103,410 13.39% $61,777 8.00% $77,222 10.00%
(To Risk Weighted Assets)
Tier 1 Capital: $ 94,189 12.20% N/A N/A $46,333 6.00%
(To Risk Weighted Assets)
Tier 1 Capital: $ 94,189 7.35% $38,452 3.00% $64,005 5.00%
(To Total Assets)
Tangible Capital: $ 94,189 7.35% $19,202 1.50% N/A N/A
(To Total Assets)
NEW ACCOUNTING PRONOUNCEMENTS
- -----------------------------
Effective January 1, 2004, the Company adopted FASB Interpretation No. 46 ("FIN
46"), "Consolidation of Variable Interest Entities," 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 credit of the primary beneficiary. In
accordance with these rules, the Company deconsolidated Coastal Financial
Capital Trust I at January 1, 2004, which had been formed to raise capital by
issuing preferred securities to an institutional investor. The deconsolidation
of this wholly-owned subsidiary, increased other assets by $464,000, increased
junior subordinated debt-trust preferred securities by $15.5 million, and
reduced debt associated with trust preferred securities by $15.0 million. The
full and unconditional guarantee by the Company for the preferred securities
remains in effect.
The Federal Reserve presently considers the trust preferred securities to
qualify as Tier 1 Capital. This may change in the future based on the
application and interpretation by the Federal Reserve Board of FIN 46R. As FIN
46R was recently issued and contains provisions that the accounting profession
and banking regulators continue to analyze, the Company's assessment of the
impact of FIN 46R on its trust preferred securities is ongoing. However, at this
time and based on management's current interpretation, the Company does not
believe that the implementation of FIN 46R will have a material impact on the
Company's financial condition.
24
PART I. FINANCIAL INFORMATION
Item 2. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - CONTINUED
FASB Statement No. 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity, was issued in May 2003. The
Statement establishes standards for the classification and measurement of
certain financial instruments with characteristics of both liabilities and
equity. The Statement also includes required disclosures for financial
instruments within its scope. For the Company, the Statement was effective for
instruments entered into or modified after May 31, 2003 and otherwise will be
effective as of January 1, 2004, except for mandatorily redeemable financial
instruments. For certain mandatorily redeemable financial instruments, the
Statement will be effective for the Company on January 1, 2005. The effective
date has been deferred indefinitely for certain other types of mandatorily
redeemable financial instruments. The Company currently does not have any
financial instruments that are within the scope of this Statement.
On March 9, 2004, the Securities and Exchange Commission staff issued Staff
Accounting Bulletin No. 105, "Application of Accounting Principles to Loan
Commitments" ("SAB 105"). SAB 105 provides recognition guidance for entities
that issue loan commitments that are required to be accounted for as derivative
instruments. SAB 105 indicates that the expected future cash flows related to
the associated servicing of the loan and any other internally- developed
intangible assets should not be considered when recognizing a loan commitment at
inception or through its life. SAB 105 also discusses disclosure requirements
for loan commitments and is effective for loan commitments accounted for as
derivatives and entered into subsequent to March 31, 2004. The Company currently
does not include the associated servicing of the loan when recognizing loan
commitments at inception and throughout its life. The Company adopted SAB 105 on
April 1, 2004 with no material impact.
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.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- -------------------------------------------------------------------
At June 30, 2004, no material changes have occurred in market risk disclosures
included in the Company's Annual Report to Stockholders for the year ended
September 30, 2003, filed as an exhibit to the Company's Annual Report on Form
10-K.
Item 4. CONTROLS AND PROCEDURES
- -------------------------------
The Company's management, including the Company's principal executive officer
and principal financial officer, have evaluated the effectiveness of the
Company's "disclosure controls and procedures," as such term is defined in Rule
13a-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). Based upon their evaluation, the principal executive officer and
principal financial officer concluded that, as of the end of the period covered
by this report, the Company's disclosure controls and procedures were effective
for the purpose of ensuring that the information required to be disclosed in the
reports that the Company files or submits under the Exchange Act with the
Securities and Exchange Commission (the "SEC") (1) is recorded, processed,
summarized and reported within the time periods specified in the SEC's rules and
forms, and (2) is accumulated and communicated to the Company's management,
including its principal executive and principal financial officers, as
appropriate to allow timely decisions regarding required disclosure. In
addition, based on that evaluation, no change in the Company's internal control
over financial reporting occurred during the quarter ended June 30, 2004 that
has materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
25
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 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, Use of Proceeds and Issuer Purchases of Equity
- -----------------------------------------------------------------------------
Securities
- ----------
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.
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 (9)
(b) Employment Agreement with Jerry L. Rexroad (9)
(c) Employment Agreement with Phillip G. Stalvey (9)
26
PART II. OTHER INFORMATION
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES - CONTINUED
(d) Employment Agreement with Jimmy R. Graham (9)
(e) Employment Agreement with Steven J. Sherry (9)
(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)
31-(a) Rule 13a-14(a)/15d-14(a) Certification (Chief Executive
Officer)
31-(b) Rule 13a-14(a)/15d-14(a) Certification (Chief Financial
Officer)
32-(a) Section 1350 Certification (Chief Executive Officer)
32-(b) Section 1350 Certification (Chief Financial Officer)
(b) Report on Form 8-K
The Company furnished a Form 8-K on April 29, 2004 to report the
Company's second quarter earnings. A copy of the Company's press
release dated April 28, 2004 was attached as an exhibit.
- -----------
(1) Incorporated by reference to Registration Statement on Form S-4 filed
with the Securities and Exchange Commission on November 26, 1990.
Incorporated by reference to 1995 Form 10-K filed with the Securities
(2) and Exchange Commission on December 29, 1995.
Incorporated by reference to the definitive proxy statement for the
(3) 1996 Annual Meeting of Stockholders.
Incorporated by reference to 1997 Form 10-K filed with the Securities
(4) and Exchange Commission on January 2, 1998.
Incorporated by reference to December 31, 1997 Form 10-Q filed with
(5) Securities and Exchange Commission on February 13, 1998.
Incorporated by reference to March 31, 1998 Form 10-Q filed with
(6) Securities and Exchange Commission on May 15, 1998.
Incorporated by reference to 1998 Form 10-K filed with Securities and
(7) Exchange Commission on December 29, 1998.
Incorporated by reference to the definitive proxy statement for the
(8) 2000 Annual Meeting of Stockholders filed December 22, 1999.
Incorporated by reference to 2003 Form 10-K filed with Securities and
(9) Exchange Commission on December 22, 2003.
27
SIGNATURES
Pursuant to the requirement of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
COASTAL FINANCIAL CORPORATION
August 12, 2004 /s/ Michael C. Gerald
--------------- ----------------------
Date Michael C. Gerald
President and Chief Executive Officer
August 12, 2004 /s/ Jerry L. Rexroad
--------------- ---------------------
Date Jerry L. Rexroad
Executive Vice President and
Chief Financial Officer
28