-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UBlVKi0l3Ccgsqh9mRRBS6EEwJPiX43jycNia9v7F1XqViznwvaCP2W+1ajiLK7x rCa/UvXwgXlOk2ioGUUeqA== 0000914317-05-001680.txt : 20050510 0000914317-05-001680.hdr.sgml : 20050510 20050510140731 ACCESSION NUMBER: 0000914317-05-001680 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20050331 FILED AS OF DATE: 20050510 DATE AS OF CHANGE: 20050510 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COASTAL FINANCIAL CORP /DE CENTRAL INDEX KEY: 0000935930 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 570925911 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 333-01274 FILM NUMBER: 05815543 BUSINESS ADDRESS: STREET 1: 2619 NORTH OAK CITY: MYRTLE BEACH STATE: SC ZIP: 29577-3129 BUSINESS PHONE: 8432052000 10-Q 1 form10q-68749_coastal.txt 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 quarterly period ended March 31, 2005 |_| 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, 2005. Common Stock $.01 Par Value Per Share 17,647,279 Shares - -------------------------------------------------------------------------------- (Class) (Outstanding) 1 COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2005
TABLE OF CONTENTS PAGE - ----------------- ---- PART I- Financial Information Item 1. Consolidated Financial Statements (unaudited): Consolidated Statements of Financial Condition as of September 30, 2004 and March 31, 2005 3 Consolidated Statements of Operations for the three months ended March 31, 2004 and 2005 4 Consolidated Statements of Operations for the six months ended March 31, 2004 and 2005 5 Consolidated Statements of Stockholders' Equity and Comprehensive Income for the six months ended March 31, 2004 and 2005 6 Consolidated Statements of Cash Flows for the six months ended March 31, 2004 and 2005 7-8 Notes to Consolidated Financial Statements 9-14 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 15-28 3. Quantitative and Qualitative Disclosures About 28-29 Market Risk 4. Controls and Procedures 29 Part II - Other Information Item 1. Legal Proceedings 30 2. Unregistered Sales of Equity Securities and Use of Proceeds 30 3. Defaults Upon Senior Securities 30 4. Submission of Matters to a Vote of Securities Holders 30 5. Other Information 30 6. Exhibits 30-31 Signatures 32 Exhibits 31(a) Rule 13a-14(a)/15d-14(a) Certification (Chief Executive Officer) 33 (b) Rule 13a-14(a)/15d-14(a) Certification (Chief Financial Officer) 34 32(a) Section 1350 Certification (Chief Executive Officer) 35 (b) Section 1350 Certification (Chief Financial Officer) 36
2 PART I. FINANCIAL INFORMATION Item 1. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30, March 31, 2004 2005 ---- ---- (Unaudited) (In thousands, Except share data) ASSETS: Cash and amounts due from banks $ 28,401 $ 35,356 Short-term interest-bearing deposits 1,251 4,221 Investment securities available for sale 23,449 21,775 Mortgage-backed securities available for sale 374,283 437,682 Investment securities held to maturity 7,840 10,000 Loans receivable (net of allowance for loan losses of $11,077 at September 30, 2004 and $11,768 at March 31, 2005) 790,730 857,988 Loans receivable held for sale 8,246 6,418 Real estate acquired through foreclosure 785 534 Office property and equipment, net 18,844 20,315 Federal Home Loan Bank stock, at cost 16,900 16,367 Accrued interest receivable on loans 2,877 3,369 Accrued interest receivable on securities 2,473 2,277 Cash value of life insurance 21,627 22,101 Other assets 7,779 10,943 ----------- ----------- $ 1,305,485 $ 1,449,346 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY: LIABILITIES: Deposits $ 753,379 $ 891,469 Securities sold under agreements to repurchase 107,173 136,000 Advances from Federal Home Loan Bank 328,507 302,157 Junior subordinated debt 15,464 15,464 Drafts outstanding 2,792 4,279 Advances by borrowers for property taxes and insurance 1,750 1,069 Accrued interest payable 1,502 1,994 Other liabilities 9,570 7,380 ----------- ----------- 1,220,137 1,359,812 ----------- ----------- STOCKHOLDERS' EQUITY: Serial preferred stock, 1,000,000 shares authorized and unissued -- -- Common stock, $.01 par value, 25,000,000 shares authorized; 17,486,784 shares at September 30, 2004 and 17,647,279 shares at March 31, 2005 issued and outstanding 175 176 Additional paid-in capital 10,624 10,971 Retained earnings, restricted 73,533 79,526 Treasury stock, at cost (108,557 shares at September 30, 2004 and zero at March 31, 2005) (1,182) -- Accumulated other comprehensive income (loss), net of tax 2,198 (1,139) ----------- ----------- Total stockholders' equity 85,348 89,534 ----------- ----------- $ 1,305,485 $ 1,449,346 =========== ===========
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, 2004 AND 2005
2004 2005 ---- ---- (Unaudited) (In thousands, Except per share) Interest income: Loans receivable $ 11,320 $ 13,364 Investment securities 833 1,231 Mortgage-backed securities 3,982 4,250 Other 20 67 ------------ ------------ Total interest income 16,155 18,912 ------------ ------------ Interest expense: Deposits 2,471 2,939 Securities sold under agreements to repurchase 609 746 Advances from Federal Home Loan Bank 2,607 3,128 Other borrowings 161 203 ------------ ------------ Total interest expense 5,848 7,016 ------------ ------------ Net interest income 10,307 11,896 Provision for loan losses 500 625 ------------ ------------ Net interest income after provision for loan losses 9,807 11,271 ------------ ------------ Other income: Fees and service charges on loan and deposit accounts 879 1,423 Gain on sales of loans held for sale 359 244 Gain (loss) on sales of investment securities available for sale and mortgage-backed securities available for sale (67) 88 Gain on investment security held to maturity called by issuer -- 160 Loss from real estate owned (52) (6) Income from sales of non-depository products 472 470 Federal Home Loan Bank stock dividends 121 213 Other income 718 744 ------------ ------------ 2,430 3,336 ------------ ------------ General and administrative expenses: Salaries and employee benefits 4,009 4,496 Net occupancy, furniture and fixtures and data processing expenses 1,536 1,859 FDIC insurance premium 27 26 FHLB prepayment penalties 68 -- Marketing expenses 197 482 Other expense 892 1,456 ------------ ------------ 6,729 8,319 ------------ ------------ Income before income taxes 5,508 6,288 Income taxes 1,831 2,153 ------------ ------------ Net income $ 3,677 $ 4,135 ============ ============ Net income per common share: Basic $ .21 $ .23 ============ ============ Diluted $ .20 $ .22 ============ ============ Weighted average common shares outstanding: Basic 17,349,000 17,602,000 ============ ============ Diluted 18,323,000 18,658,000 ============ ============ Dividends per share $ .041 $ .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 SIX MONTHS ENDED MARCH 31, 2004 AND 2005
2004 2005 ---- ---- (Unaudited) (In thousands, Except per share) Interest income: Loans receivable $ 22,398 $ 26,104 Investment securities 1,311 2,375 Mortgage-backed securities 7,941 8,257 Other 42 122 ------------ ------------ Total interest income 31,692 36,858 ------------ ------------ Interest expense: Deposits 5,065 5,435 Securities sold under agreements to repurchase 1,165 1,312 Advances from Federal Home Loan Bank 5,011 6,296 Other borrowings 333 403 ------------ ------------ Total interest expense 11,574 13,446 ------------ ------------ Net interest income 20,118 23,412 Provision for loan losses 1,050 975 ------------ ------------ Net interest income after provision for loan losses 19,068 22,437 ------------ ------------ Other income: Fees and service charges on loan and deposit accounts 1,782 2,513 Gain on sales of loans held for sale 800 554 Gain (loss) on sales of investment securities available for sale and mortgage-backed securities available for sale (267) 246 Gain on investment security held to maturity called by issuer -- 160 Loss from real estate owned (92) (45) Income from sales of non-depository products 1,025 930 Federal Home Loan Bank stock dividends 230 350 Other income 1,279 1,394 ------------ ------------ 4,757 6,102 ------------ ------------ General and administrative expenses: Salaries and employee benefits 8,003 8,920 Net occupancy, furniture and fixtures and data processing expenses 3,065 3,599 FDIC insurance premium 53 53 FHLB prepayment penalties 77 -- Marketing expenses 379 993 Other expense 1,768 2,535 ------------ ------------ 13,345 16,100 ------------ ------------ Income before income taxes 10,480 12,439 Income taxes 3,484 4,260 ------------ ------------ Net income $ 6,996 $ 8,179 ============ ============ Net income per common share: Basic $ .41 $ .47 ============ ============ Diluted $ .38 $ .44 ============ ============ Weighted average common shares outstanding: Basic 17,247,000 17,525,000 ============ ============ Diluted 18,236,000 18,515,000 ============ ============ Dividends per share $ .083 $ .09 ============ ============
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 SIX MONTHS ENDED MARCH 31, 2004 AND 2005
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, 2003 $ 172 $ 10,192 $ 63,030 $ (3,375) $ 3,688 $ 73,707 Net income -- -- 6,996 -- -- 6,996 Other comprehensive income: Unrealized gains arising during period, net of taxes of $468 -- -- -- -- 763 -- Less: reclassification adjustment for gains included in net income, net of taxes of $101 -- -- -- -- 166 -- ---------- Other comprehensive income -- -- -- -- 929 929 ---------- ---------- Comprehensive income -- -- -- -- -- 7,925 ---------- Exercise of stock options 1 243 (990) 1,552 -- 806 Cash dividends -- -- (1,432) -- -- (1,432) ---------- ---------- ---------- ---------- ---------- ---------- Balance at March 31, 2004 $ 173 $ 10,435 $ 67,604 $ (1,823) $ 4,617 $ 81,006 ========== ========== ========== ========== ========== ========== Balance at September 30, 2004 $ 175 $ 10,624 $ 73,533 $ (1,182) $ 2,198 $ 85,348 Net income -- -- 8,179 -- -- 8,179 Other comprehensive income: Unrealized losses arising during period, net of taxes of $2,139 -- -- -- -- (3,490) -- Less: reclassification adjustment for gains included in net income, net of taxes of $93 -- -- -- -- 153 -- ---------- Other comprehensive income -- -- -- -- (3,337) (3,337) ---------- ---------- Comprehensive income -- -- -- -- -- 4,842 ---------- Exercise of stock options 1 347 (602) 1,182 -- 928 Cash dividends -- -- (1,584) -- -- (1,584) ---------- ---------- ---------- ---------- ---------- ---------- Balance at March 31, 2005 $ 176 $ 10,971 $ 79,526 $ -- $ (1,139) $ 89,534 ========== ========== ========== ========== ========== ==========
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, 2004 AND 2005
2004 2005 ---- ---- (Unaudited) (In thousands) Cash flows from operating activities: Net income $ 6,996 $ 8,179 Adjustments to reconcile net income to net cash Used in operating activities: Depreciation 1,081 1,271 Provision for loan losses 1,050 975 (Gain) loss on sale of investment securities available for sale and mortgage-backed securities available for sale 267 (246) Gain on call of investment security called by issuer -- (160) Loss on sale of real estate acquired through foreclosure -- 19 Loss on disposal of office properties and equipment -- 124 Prepayment penalties on FHLB advances 77 -- Origination of loans receivable held for sale (26,900) (26,623) Proceeds from sales of loans receivable held for sale 9,158 8,371 Impairment recovery from write-down of mortgage servicing rights (92) (155) (Increase) decrease in: Cash value of life insurance (481) (474) Accrued interest receivable (152) (296) Other assets (1,733) (3,009) Increase (decrease) in: Accrued interest payable 112 492 Other liabilities (911) 102 --------- --------- Net cash used in operating activities (11,528) (11,430) --------- --------- Cash flows from investing activities: Proceeds from sales of investment securities available for sale 2,946 3,371 Proceeds from issuer call of investment securities available for sale 2,000 1,950 Proceeds from issuer call of investment securities held to maturity -- 8,000 Purchases of investment securities available for sale (4,854) (3,659) Purchases of investment securities held to maturity -- (10,000) Proceeds from sales of mortgage-backed securities available for sale 143,050 95,200 Purchases of mortgage-backed securities available for sale (188,843) (186,568) Principal collected on mortgage-backed securities available for sale 57,049 42,678 Origination of loans receivable, net (276,734) (349,851) Proceeds from sale of commercial loan participations -- 13,251 Principal collected on loans receivable 206,097 267,904 Purchase of bank-owned life insurance (4,500) -- Proceeds from sales of real estate acquired through foreclosure, net 873 695 Purchases of office properties and equipment (1,750) (2,866) Proceeds from sales of office properties and equipment 57 -- Change in FHLB stock, net (751) 533 --------- --------- Net cash used in investing activities (65,360) (119,362) --------- ---------
(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, 2004 AND 2005 (CONTINUED)
2004 2005 ---- ---- (Unaudited) (In thousands) Cash flows from financing activities: Increase (decrease) in deposits $ (102) $ 138,090 Increase in securities sold under agreements To repurchase, net 30,475 28,827 Proceeds from FHLB advances 355,076 372,850 Repayment of FHLB advances (311,748) (399,200) Prepayment penalties on early extinguishment of debt (77) -- Decrease in advance payments by borrowers for Property taxes and insurance, net (717) (681) Increase in drafts outstanding, net 1,016 1,487 Cash dividends to stockholders (1,432) (1,584) Proceeds from exercise of stock options 806 928 ----------- ----------- Net cash provided by financing activities 73,297 140,717 ----------- ----------- Net increase (decrease) in cash and cash equivalents (3,591) 9,925 Cash and cash equivalents at beginning of period 21,575 29,652 ----------- ----------- Cash and cash equivalents at end of period $ 17,984 $ 39,577 =========== =========== Supplemental information: Interest paid $ 11,462 $ 12,954 =========== =========== Income taxes paid $ 3,261 $ 3,492 =========== =========== Supplemental schedule of non-cash investing and Financing transactions: Securitization of mortgage loans into mortgage-backed securities $ 23,071 $ 20,080 =========== =========== Transfer of mortgage loans to real estate acquired Through foreclosure $ 515 $ 463 =========== =========== Increase in other assets and junior subordinated debt resulting from deconsolidation under FIN 46R $ 464 $ -- =========== =========== Unrealized gain (loss) in investment securities and mortgage-backed securities available for sale, net of tax $ 929 $ (3,337) =========== ===========
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 six-month period ended March 31, 2005 are not necessarily indicative of the results that 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, 2004, included in the Company's 2004 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 period amounts have been reclassified to conform to current year presentation. (2) INVESTMENT SECURITIES AVAILABLE FOR SALE The unrealized losses on investment securities were attributable to increases in interest rates, rather than credit quality. The unrealized losses are comprised of four securities totaling $3,000 at September 30, 2004 and twelve securities totaling $118,000 at March 31, 2005 that have had continuous losses of less than 12 months. There were ten securities totaling $81,000 at September 30, 2004 and two securities totaling $25,000 at March 31, 2005 with continuous losses 12 months or longer. None of the individual investment securities had an unrealized loss that exceeded 5% of its amortized cost in either period. (3) MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE Gross unrealized losses on mortgage-backed securities and the length of time the securities have been in a continuous loss position were as follows:
September 30, 2004 ------------------------------------------------------------------------------------------ Less than 12 Months 12 Months or Longer Total -------------------------- --------------------------- -------------------------- (Unaudited) (Dollars in thousands) Fair Unrealized Fair Unrealized Fair Unrealized Value Losses Value Losses Value Losses ----- ------ ----- ------ ----- ------ Collateralized Mortgage $ 29,362 (221) 2,113 (98) 31,475 (319) Obligations FNMA 21,027 (116) 22,117 (545) 43,144 (661) GNMA 6,456 (5) -- -- 6,456 (5) FHLMC 46,457 (226) 20,829 (567) 67,286 (793) --------- --------- --------- --------- --------- --------- $ 103,302 (568) 45,059 (1,210) 148,361 (1,778) ========= ========= ========= ========= ========= ========= March 31, 2005 ------------------------------------------------------------------------------------------ Less than 12 Months 12 Months or Longer Total -------------------------- --------------------------- -------------------------- (Unaudited) (Dollars in thousands) Fair Unrealized Fair Unrealized Fair Unrealized Value Losses Value Losses Value Losses ----- ------ ----- ------ ----- ------ Collateralized Mortgage $ 64,228 (847) 11,359 (399) 75,587 (1,246) Obligations FNMA 97,409 (1,384) 16,357 (446) 113,766 (1,830) GNMA 39,314 (298) -- -- 39,314 (298) FHLMC 60,084 (609) 26,646 (891) 86,730 (1,500) --------- --------- --------- --------- --------- --------- $ 261,035 (3,138) 54,362 (1,736) 315,397 (4,874) ========= ========= ========= ========= ========= =========
9 PART I. FINANCIAL INFORMATION Item 1. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-CONTINUED (3) MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE - CONTINUED The unrealized losses on mortgage-backed securities were attributable to increases in interest rates, rather than credit quality. The unrealized losses are comprised of 25 securities at September 30, 2004 and 68 securities at March 31, 2005 that have had continuous losses of less than 12 months. There were 8 securities at September 30, 2004 and 14 securities at March 31, 2005, with continuous losses 12 months or longer. None of the individual investment securities had an unrealized loss that exceeded 5% of its amortized cost in either period. (4) LOANS RECEIVABLE, NET Loans receivable, net consists of the following: September 30, March 31, 2004 2005 ------------- ----------- (Unaudited) (Dollars in thousands) First mortgage loans: Single family to four family units $ 329,287 $ 340,146 Land and land development 99,697 94,779 Residential lots 29,839 33,558 Other, primarily commercial real estate 182,924 216,568 Construction loans on residential properties 82,789 102,738 Construction loans on commercial properties 10,503 8,766 Consumer and commercial loans: Installment consumer loans 18,024 19,802 Mobile home loans 4,618 4,611 Savings account loans 2,058 1,956 Equity lines of credit 30,906 33,042 Commercial and other loans 32,101 35,883 --------- --------- 822,746 891,849 Less: Allowance for loan losses 11,077 11,768 Deferred loan costs, net (674) (536) Undisbursed portion of loans in process 21,613 22,629 --------- --------- $ 790,730 $ 857,988 ========= ========= The changes in the allowance for loan losses consist of the following for the six months ended: Six Months Ended March 31, -------------------------- 2004 2005 ---- ---- (Unaudited) (Dollars in thousands) Allowance at beginning of period $ 9,832 $ 11,077 Provision for loan losses 1,050 975 --------- --------- Recoveries: Residential loans -- -- Commercial loans 148 17 Consumer loans 34 56 --------- --------- Total recoveries 182 73 --------- --------- Charge-offs: Residential loans -- -- Commercial loans 52 158 Consumer loans 254 199 --------- --------- Total charge-offs 306 357 --------- --------- Net charge-offs 124 284 --------- --------- Allowance at end of period $ 10,758 $ 11,768 ========= ========= 10 PART I. FINANCIAL INFORMATION Item 1. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED (4) LOANS RECEIVABLE, NET - CONTINUED
Six Months Ended March 31, -------------------------- 2004 2005 ---- ---- (Unaudited) Ratio of allowance to total net loans outstanding at the end of the period 1.41% 1.36% ==== ==== Ratio of net charge-offs to average total loans outstanding during the period (annualized) .03% .07% ==== ====
Non-accrual loans, which are primarily loans over ninety days delinquent, totaled approximately $6.1 million and $7.1 million at March 31, 2004 and 2005, respectively. For the six months ended March 31, 2004 and 2005, interest income, which would have been recorded, would have been approximately $138,000 and $243,000, respectively, had non-accruing loans been current in accordance with their original terms. At March 31, 2005, impaired loans totaled $5.1 million. There were $3.8 million in impaired loans at March 31, 2004. Included in the allowance for loan losses at March 31, 2005 was $591,000 related to impaired loans compared to $300,000 at March 31, 2004. The average recorded investment in impaired loans for the six months ended March 31, 2005 was $4.1 million compared to $4.3 million for the six months ended March 31, 2004. Interest income of $65,000 and $98,000 was recognized on impaired loans for the quarter and six months ended March 31, 2005. Interest income of $71,000 and $180,000 was recognized on impaired loans for the quarter and six months ended March 31, 2004. (5) DEPOSITS Deposits consist of the following:
September 30, 2004 March 31, 2005 ------------------ -------------- Weighted Weighted Average Average Amount Rate Amount Rate ------ ---- ------ ---- (Unaudited) (Dollars in thousands) Checking accounts $233,128 0.22% $287,136 0.24% Money market accounts 224,468 1.37 220,737 1.80 Statement savings accounts 55,205 0.80 67,561 0.89 Certificate accounts 240,578 2.49 316,035 2.75 -------- -------- $753,379 1.33% $891,469 1.57% ======== ========
Included in certificate accounts ("CDs") are $85.6 million of brokered CDs at March 31, 2005. There were no brokered CDs at September 20, 2004. The average rate and remaining term of brokered CDs at March 31, 2005 was 2.91% and five months, respectively. (6) ADVANCES FROM FEDERAL HOME LOAN BANK Advances from Federal Home Loan Bank ("FHLB") consist of the following:
September 30, 2004 March 31, 2005 ------------------ -------------- Weighted Weighted Average Average Amount Rate Amount Rate ------ ---- ------ ---- (Unaudited) (Dollars in thousands) Maturing within: 1 year $ 64,500 2.78% $ 39,391 3.85% 2 years 4,177 2.79 5,086 2.88 3 years 11,560 2.23 11,160 2.82 4 years 3,977 3.18 27,880 2.10 5 years 31,803 2.36 7,150 3.84 After 5 years 212,490 4.20 211,490 4.20 -------- -------- $328,507 3.64% $302,157 3.88% ======== ========
11 PART I. FINANCIAL INFORMATION Item 1. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED (6) ADVANCES FROM FEDERAL HOME LOAN BANK - CONTINUED At September 30, 2004, and March 31, 2005, the Bank had pledged first mortgage loans and mortgage-backed securities with unpaid balances of approximately $357.3 million and $379.2 million, respectively, as collateral for FHLB advances. At March 31, 2005, included in the one, three, four, and after five years maturities were $218.0 million, with a weighted average rate of 3.94%, of advances subject to call provisions. Callable advances at March 31, 2005 are summarized as follows: $10.0 million callable in fiscal 2005, with a weighted average rate of 6.31%; $8.0 million callable in fiscal 2007, with a weighted average rate of 2.67%; $25.0 million callable in fiscal 2008, with a weighted average rate of 1.99%; and $175.0 million callable after fiscal 2009, with a weighted average rate of 4.14%. Call provisions are more likely to be exercised by the FHLB when interest rates rise. (7) EARNINGS PER SHARE Basic earnings per share for the six months ended March 31, 2004 and 2005 are computed by dividing net income by the weighted average common shares outstanding during the respective periods. Diluted earnings per share for the six months ended March 31, 2004 and 2005 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 March 31, (Unaudited) 2004 2004 2005 2005 -------------------------- -------------------------- BASIC DILUTED BASIC DILUTED -------------------------- -------------------------- Weighted average shares outstanding 17,349,000 17,349,000 17,602,000 17,602,000 Effect of dilutive securities- Stock options -- 974,000 -- 1,056,000 -------------------------- -------------------------- 17,349,000 18,323,000 17,602,000 18,658,000 =========================== ========================== For the Six Months Ended March 31, (Unaudited) 2004 2004 2005 2005 -------------------------- -------------------------- BASIC DILUTED BASIC DILUTED -------------------------- -------------------------- Weighted average shares outstanding 17,247,000 17,247,000 17,525,000 17,525,000 Effect of dilutive securities- Stock options -- 989,000 -- 990,000 -------------------------- -------------------------- 17,247,000 18,236,000 17,525,000 18,515,000 =========================== ==========================
(8) STOCK BASED COMPENSATION At March 31, 2005, 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 Annual Report for the year ended September 30, 2004. 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. 12 PART I. FINANCIAL INFORMATION Item 1. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED (8) STOCK BASED COMPENSATION - CONTINUED 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, ---------------------------- 2004 2005 ---- ---- (Unaudited) (Dollars in thousands) Net income, as reported $ 3,677 $ 4,135 Deduct: Total stock-based employee and director compensation expense determined under fair value based method for all awards, net of related tax effects (155) (200) ----------- ----------- Pro forma net income $ 3,522 $ 3,935 =========== =========== Basic earnings per share: As reported $ .21 $ .23 =========== =========== Pro forma $ .20 $ .22 =========== =========== Diluted earnings per share: As reported $ .20 $ .22 =========== =========== Pro forma $ .19 $ .21 =========== =========== Six Months Ended March 31, -------------------------- 2004 2005 ---- ---- (Unaudited) (Dollars in thousands) Net income, as reported $ 6,996 $ 8,179 Deduct: Total stock-based employee and director compensation expense determined under fair value based method for all awards, net of related tax effects (286) (375) ----------- ----------- Pro forma net income $ 6,710 $ 7,804 =========== =========== Basic earnings per share: As reported $ .41 $ .47 =========== =========== Pro forma $ .39 $ .44 =========== =========== Diluted earnings per share: As reported $ .38 $ .44 =========== =========== Pro forma $ .37 $ .42 =========== ===========
(9) COMMON STOCK DIVIDEND On February 18, 2004, July 30, 2004 and December 15, 2004, the Company declared 10% stock dividends, aggregating approximately 1,308,000, 1,442,000 and 1,594,000 shares, respectively. The most recent common stock dividend was payable January 20, 2005 to Shareholders of record as of January 6, 2005. All share and per share data have been retroactively restated for the stock dividends. 13 PART I. FINANCIAL INFORMATION Item 1. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED (10) 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; however, these standby letters of credit are generally not collateralized. Commitments under standby letters of credit are usually one year or less. At March 31, 2005, 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 March 31, 2004 and 2005 was $3.1 million and $5.9 million, respectively. (11) 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. Since 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 $4.5 million at March 31, 2005. The fair value of the loan commitments was an asset of approximately $19,000 at March 31, 2005. As of March 31, 2005, the Company had sold $5.0 million in forward commitments to deliver fixed rate mortgage-backed securities, which were recorded as a derivative asset of $42,000. 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. All forward-looking statements are based on assumptions and involve risks and uncertainties, many of which are beyond our control and which may cause our actual results, performance or achievements to differ materially from the results, performance or achievements contemplated by the forward-looking statements. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They often include words such as "believe," "expect," "anticipate," "intend," "plan," "estimate" or words of similar meaning, or future or conditional verbs such as "will," "would," "should," "could" or "may." Forward-looking statements speak only as of the date they are made. Such risks and uncertainties include, among other things: o Competitive pressures among depository and other financial institutions in our market areas may increase significantly. o Adverse changes in the economy or business conditions, either nationally or in our market areas, could increase credit-related losses and expenses and/or limit growth. o Increases in defaults by borrowers and other delinquencies could result in increases in our provision for losses on loans and related expenses. o Our inability to manage growth effectively, including the successful expansion of our Customer support, administrative infrastructure and internal management systems, could adversely affect our results of operations and prospects. o Fluctuations in interest rates and market prices could reduce our net interest margin and asset valuations and increase our expenses. o The consequences of continued bank acquisitions and mergers in our market areas, resulting in fewer but much larger and financially stronger competitors, could increase competition for financial services to our detriment. o Our continued growth will depend in part on our ability to enter new markets successfully and capitalize on other growth opportunities. o Changes in legislative or regulatory requirements, or actions by the Securities and Exchange Commission ("SEC") or the Financial Accounting Standards Board ("FASB"), applicable to the Company and its subsidiaries could increase costs, limit certain operations and adversely affect results of operations. o Changes in tax requirements, including tax rate changes, new tax laws and revised tax law interpretations may increase our tax expense or adversely affect our Customers' businesses. o Company initiatives now in place or introduced in the future, not producing results consistent with historic growth rates or results which justify their costs. In light of these risks, uncertainties and assumptions, you should not place undue reliance on any forward-looking statements in this report. We undertake no obligation to publicly update or otherwise revise any forward-looking statements, whether as a result of new information, future events or otherwise. 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 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 and tax preparation services. The primary business activities of the Company 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; three offices in Brunswick County, North Carolina; and three 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, 2004 with 16.4% of deposits as reported by the FDIC Summary of Deposits Report. The Bank also has the third highest market share of deposits as of June 30, 2004 in Brunswick County, North Carolina with 8.9% of deposits as reported by the FDIC Summary of Deposits 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 for its Customers. 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; certificate of deposit accounts; 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 six ATMs at off-site locations and an ATM at each branch. The Bank also makes available a wide range of financial products through its relationship with Raymond James Financial Services, including stocks, bonds, mutual funds, annuities, insurance, and retirement products. In the fourth fiscal quarter of 2004, the Bank began two significant new initiatives. The first was The Experience of FANtastic! Customer Service. This initiative focuses on Customer service and convenience. The Bank is in the process of redesigning its infrastructure, software and products to improve Customer service and convenience and Associate productivity. In addition, in order to improve Customer service and convenience, the Bank added an extended-hours Call Center and introduced "6 Day Branch Banking" with extended operating hours. The Call Center employs 20 to 25 Associates. The Bank experienced increased salary and benefit expenses in the first six months of fiscal 2005 and anticipates these expenses continuing thereafter associated with the hiring, training and placement of these new Associates. 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 OVERVIEW - CONTINUED - -------------------- The second initiative was Totally Free Checking With a Gift that was introduced in September 2004. The Bank has incurred, and will continue to incur, significant marketing costs associated with this campaign. In the first two fiscal quarters of 2005, marketing expenses were $993,000 compared to $379,000 in the comparable 2004 period. The Bank expects to realize significant benefits from this strategy consisting of increased Bank lobby traffic, increased number of personal checking accounts and higher fee income as a result of those checking accounts. In the first two fiscal quarters of fiscal 2005, checking account balances grew approximately 23%. This rate of growth could necessitate the hiring of additional Associates to open and service these accounts. The Associates being hired for these two initiatives are expected to have total compensation averaging between $28,000 and $35,000 per Associate. CRITICAL ACCOUNTING POLICIES - ---------------------------- The Company's accounting policies are in accordance with accounting principles generally accepted in the Unites States of America and with general practice within the banking industry. In order to understand our financial condition and results of operations, it is important to understand our more critical accounting policies and the extent to which we use judgment and estimates in applying those policies. The Company considers its policies regarding the allowance for loan losses and income taxes to be its most critical accounting policies due to the significant degree of the levels of subjectivity and management judgment necessary to account for these matters. Different assumptions in the application of these policies could result in material changes in the Company's consolidated financial statements. The Company's accounting policies are set forth in Note 1 of the Notes to Consolidated Financial Statements in the Company's 2004 Annual Report to Stockholders. For additional discussion concerning the Company's allowance for loan losses and related matters, see "Allowance for Loan Losses" and see "Income Taxes" for additional discussion concerning income taxes in the Company's 2004 Annual Report to Stockholders. 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, 2005 and September 30, 2004, 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 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 that are unsecured or are secured by residential property. 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. Standby letters of credit are generally collateralized and are usually one year or less. 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 OFF-BALANCE SHEET ARRANGEMENTS, CONTINUED - ----------------------------------------- At March 31, 2005, 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 March 31, 2004 and 2005 was $3.1 million and $5.9 million, respectively. A summary of loans receivable with undisbursed commitments to extend credit at March 31 follows:
2004 2005 ---- ---- (In thousands) Residential mortgage loans in process $ 22,870 $ 24,386 Business and consumer credit card lines 13,367 14,455 Consumer home equity lines 36,792 42,591 Other consumer lines of credit 4,166 4,597 Commercial real estate and construction and land development 68,315 73,050 Other commercial lines of credit 3,782 3,618 ----------- ----------- Total loans receivable with undisbursed commitments $ 149,292 $ 162,697 =========== ===========
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. Since 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 $4.5 million at March 31, 2005. The fair value of the loan commitments was an asset of approximately $19,000 at March 31, 2005. As of March 31, 2005, the Company had sold $5.0 million in forward commitments to deliver fixed rate mortgage-backed securities, which were recorded as a derivative asset of $42,000. DISCUSSION OF FINANCIAL CONDITION CHANGES FROM SEPTEMBER 30, 2004 TO MARCH 31, - ------------------------------------------------------------------------------ 2005 - ---- 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 $303.6 million for the six months ended March 31, 2004, compared to $376.5 million for the six months ended March 31, 2005. Loan principal repayments amounted to $206.1 million in the first two quarters of 2004 compared to $267.9 million for the six months ended March 31, 2005. In addition, the Company sells certain loans in the secondary market to finance future loan originations. In the first two quarters of fiscal 2004, the Company sold mortgage loans or securitized and sold mortgage loans totaling $32.2 million that compares to $28.4 million for the six months ended March 31, 2005. In addition, the Bank sold $13.3 million of commercial loan participations in the first six months ended March 31, 2005. No commercial loan participations were sold in the six months ended March 31, 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 LIQUIDITY AND CAPITAL RESOURCES, CONTINUED - ------------------------------------------ During the six month period ended March 31, 2005, the Company securitized $20.1 million of mortgage loans and concurrently sold these mortgage-backed securities to outside third parties and recognized a net gain on sale of $466,000, which included $273,000 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 six month period ended March 31, 2005, the Company purchased $200.2 million in investment and mortgage-backed securities. For the six month period ended March 31, 2004, the Company purchased $193.7 million in investment and mortgage-backed securities. These purchases during the six month period ended March 31, 2005 were primarily funded by borrowings, repayments of $42.7 million within the securities portfolio and sales of mortgage-backed securities of $95.2 million. During the six month periods ended March 31, 2005 the Company sold commercial loan participations totaling $13.3 million. No commercial loan participations were sold in 2004. Total deposits increased $138.1 million between September 30, 2004 and March 31, 2005. The Company places significant emphasis on growth in money market and checking accounts. Money market and checking accounts have increased from approximately $457.6 million at September 30, 2004 to $507.9 million at March 31, 2005, an increase of $50.3 million or 11.0%. Core deposits (defined as money market accounts, checking accounts and statement savings accounts) have increased from $512.8 million at September 30, 2004 to $575.4 million at March 31, 2005, an increase of 12.2%. At March 31, 2005, the Company had $285.5 million of certificates of deposits ("CDs") that were due to mature within one year. Included in these CDs were brokered CDs totaling $85.6 million. Based on past experience, the Company believes that the majority of the non-brokered certificates of deposits will renew with the Company. At March 31, 2005, the Company had commitments to originate $24.9 million in residential mortgage loans, $50.8 million in undisbursed business and retail lines of credit, $14.5 million in unused business and personal credit card lines, and $73.0 million in commercial real estate and construction and land development which the Company expects to fund from normal operations. At March 31, 2005, the Company had $67.6 million available in FHLB advances. Additionally, at March 31, 2005, the Company had outstanding available lines for federal funds of $20.0 million. As a result of $8.2 million in net income, less the cash dividends paid to stockholders of approximately $1.6 million, proceeds of approximately $928,000 from the exercise of stock options, and the net decrease in unrealized gain (loss) on securities available for sale, net of income tax of $3.3 million, stockholders' equity increased from $85.3 million at September 30, 2004 to $89.5 million at March 31, 2005. 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 $104.3 million at March 31, 2005, exceeding the core capital requirement by $60.8 million. At March 31, 2005, the Bank's risk-based capital of approximately $114.3 million exceeded its current risk-based capital requirement by $46.6 million. (For further information see Regulatory Capital Matters). 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 LIQUIDITY AND CAPITAL RESOURCES, CONTINUED - ------------------------------------------ The table below summarizes future contractual obligations as of March 31, 2005:
Payments Due by Period -------------------------------------------------------------------------- Less than 1-3 4-5 After 5 Total 1 Year Years Years Years ---------- ---------- ---------- ---------- ---------- Time deposits $ 316,035 $ 285,534 $ 27,264 $ 2,423 $ 814 Short-term borrowings 175,391 175,391 -- -- -- Long-term debt 278,230 -- 16,246 35,030 226,954 Operating leases 613 140 172 76 225 ---------- ---------- ---------- ---------- ---------- Total contractual cash obligations $ 770,269 $ 461,065 $ 43,682 $ 37,529 $ 227,993 ========== ========== ========== ========== ==========
Purchase commitments. The Company has entered into a contract to purchase land. The price for the property is approximately $1.3 million and will be purchased in the third fiscal quarter of 2005. EARNINGS SUMMARY - ---------------- Net income increased from $7.0 million, or $.38 per diluted share, for the six months ended March 31, 2004 to $8.2 million, or $.44 per diluted share for the six months ended March 31, 2005. This 16.9% increase in net income resulted from increased net interest income of $3.3 million, or 16.4%, decreased provision for loan losses of $75,000, an increase in other income of $1.3 million, offset by increased general and administrative expenses of $2.8 million, and increased income taxes of $776,000. As a result of growth in loans receivable and investments and an increased net interest margin, net interest income increased 16.4%. The net interest margin increased from 3.55% for the six months ended March 31, 2004 to 3.67% for the six months ended March 31, 2005. The increase in net interest income is primarily attributable to an increase in average earning assets of $145.2 million, or 12.8%. Average loans receivable increased $108.4 million for the six months ended March 31, 2005 compared to March 31, 2004. In addition, average balances of investment securities increased approximately $36.8 million. The investment securities were primarily funded with FHLB advances. The Company's advances increased from $287.4 million at March 31, 2004 to $302.2 million at March 31, 2005. Provision for loan losses decreased by $75,000 for the six months ended March 31, 2005 when compared to the prior year primarily due to improving economic conditions and a change in the risk factors of the Bank's criticized loans and loans delinquent ninety days or more at March 31, 2005, as compared to March 31, 2004. The allowance for loan losses as a percentage of net loans was 1.36% at March 31, 2005 compared to 1.41% at March 31, 2004. Other income increased from $4.8 million for the six months ended March 31, 2004 to $6.1 million for the six months ended March 31, 2005. This was a result of an increase in fees and service charges on loan and deposit accounts of $731,000 and increased Federal Home Loan Bank stock dividends of $120,000 offset by a decrease in gains on sales of loans held for sale of $246,000. The Company also had gains on sales of securities available for sale and mortgage backed securities available for sale of $246,000 for the six months ended March 31, 2005, compared to losses of $267,000 for the six months ended March 31, 2004. In addition, the Company had gain on investment security held to maturity called by issuer of $160,000 for the six months ended March 31, 2005 and $0 for the six months ended March 31, 2004. General and administrative expenses increased from $13.3 million for the six months ended March 31, 2004 to $16.1 million for the six months ended March 31, 2005. Compensation increased from $8.0 million for the first two quarters of fiscal 2004 to $8.9 million in the first two quarters of fiscal 2005, primarily due to an increase in the number of banking Associates in business banking, Associates in the Company's expanded hours call center, Associates in new branches and normal salary increases. Marketing expenses were $379,000 for the six months ended March 31, 2004, compared to $993,000 for the six months ended March 31, 2005. In addition, other expense was $1.8 million for the six months ended March 31, 2004, compared to $2.5 million for the six months ended March 31, 2005. 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 MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS FOR THE THREE MONTHS ENDED - ----------------------------------------------------------------------------- MARCH 31, 2004 AND 2005 - ----------------------- INTEREST INCOME - --------------- Interest income for the three months ended March 31, 2005, increased to $18.9 million as compared to $16.2 million for the three months ended March 31, 2004. The earning asset yield for the three months ended March 31, 2005, was 5.83% compared to a yield of 5.63% for the three months ended March 31, 2004. The average yield on loans receivable for the three months ended March 31, 2005, was 6.34% compared to 6.10% for three months ended March 31, 2004. The increased yield on loans is primarily due to the increased yield on commercial loans with interest rates tied to the prime lending rate. The prime rate was 5.75% at March 31, 2005, compared to 4.00% at March 31, 2004. Due to a decline in amortization of premiums on investment securities due to slower prepayments in fiscal 2005, the yield on investments increased to 4.88% for the three months ended March 31, 2005, from 4.77% for the three months ended March 31, 2004. Total average interest-earning assets were $1.3 billion for the quarter ended March 31, 2005 as compared to $1.1 billion for the quarter ended March 31, 2004. The increase in average interest-earning assets is primarily due to an increase in average loans receivable of approximately $101.0 million resulting primarily from growth in the commercial loan portfolio and an increase in investment securities of approximately $48.9 million, primarily funded by borrowings. INTEREST EXPENSE - ---------------- Interest expense on interest-bearing liabilities was $7.0 million for the three months ended March 31, 2005, as compared to $5.8 million for the three months ended March 31, 2004. The average cost of deposits for the three months ended March 31, 2005, was 1.43% compared to 1.45% for the three months ended March 31, 2004. The cost of interest-bearing liabilities was 2.16% for the three months ended March 31, 2005 compared to 2.05% for the three months ended March 31, 2004. The cost of FHLB advances, reverse repurchase agreements and other borrowings was 3.69%, 2.38% and 5.41%, respectively, for the three months ended March 31, 2005. For the three months ended March 31, 2004, the cost of FHLB advances, reverse repurchase agreements and other borrowings was 3.80%, 1.48% and 4.32%, respectively. The increased cost of funds on other borrowings is due to the increased short-term interest rates. At March 31, 2005, the federal funds rate was 2.96% compared to 1.05% at March 31, 2004. Total average interest-bearing liabilities increased from $1.1 billion at March 31, 2004 to $1.3 billion at March 31, 2005. The increase in average interest-bearing liabilities is due to an increase in average deposits of approximately $139.6 million, increased average FHLB advances of $64.1 million used to fund loan and investment securities growth and increased average Customer repurchase agreements of $13.3 million. This increase was partially offset by a decrease in average reverse repurchase agreements of $54.5 million. NET INTEREST INCOME - ------------------- Net interest income was $11.9 million for the three months ended March 31, 2005, as compared to $10.3 million for the three months ended March 31, 2004. The net interest margin was 3.68% for the three months ended March 31, 2005, compared to 3.58% for the three months ended March 31, 2004. The following table summarizes the average balance sheet and the related yields on interest-earning assets and deposits and borrowings for the three months ended March 31, 2004 and 2005: 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 THREE MONTHS ENDED - ----------------------------------------------------------------------------- MARCH 31, 2004 AND 2005 - CONTINUED - ----------------------------------- NET INTEREST INCOME - CONTINUED - -------------------------------
Three Months Ended March 31, ---------------------------- 2004 2005 ---- ---- Average Income/ Yield/ Average Income/ Yield/ Balance (1) Expense Rate Balance (1) Expense Rate ----------- ------- ---- ----------- ------- ---- Assets Earning assets Loans (2) $ 741,855 $ 11,320 6.10% $ 842,846 $ 13,364 6.34% Investment Securities, MBS Securities and Other (3) 405,504 4,835 4.77% 454,434 5,548 4.88% ---------- ---------- ---------- ---------- Total earning assets $1,147,359 $ 16,155 5.63% 1,297,280 $ 18,912 5.83% ========== ---------- ========== ---------- Liabilities Deposits 681,160 2,471 1.45% 820,735 2,939 1.43% Borrowings 457,929 3,377 2.95% 480,771 4,077 3.39% ---------- ---------- ---------- ---------- Total interest-bearing Liabilities $1,139,089 5,848 2.05% $1,301,506 7,016 2.16% ========== ---------- ========== ---------- Net interest income $ 10,307 $ 11,896 ========== ========== Net interest margin 3.58% 3.68% Net yield on earning 3.59% 3.67% Assets
(1) The average balances are derived from monthly balances. (2) Nonaccrual loans are included in average balances for yield computations. (3) Investment securities include taxable and tax-exempt securities. Net interest income has not been adjusted to produce a tax-equivalent yield. PROVISION FOR LOAN LOSSES - ------------------------- The Company's provision for loan losses increased from $500,000 for the three months ended March 31, 2004, to $625,000 for the three months ended March 31, 2005 primarily due to growth in loan balances at March 31, 2005. The allowance for loan losses as a percentage of loans was 1.36% at March 31, 2005 as compared to 1.41% at March 31, 2004. The allowance as a percentage of loans declined due to improving economic conditions and the risk factors related to the underlying portfolio. Loans delinquent 90 days or more were $7.1 million or .82% of total loans at March 31, 2005, compared to $6.1 million or .79% of total loans at March 31, 2004. The allowance for loan losses was 165% of loans delinquent more than 90 days at March 31, 2005, compared to 177% at March 31, 2004. Net charge-offs for the three months ended March 31, 2005 were $269,000 compared to $59,000 for the three months ended March 31, 2004. 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. OTHER INCOME - ------------ For the three months ended March 31, 2005, other income was $3.3 million compared to $2.4 million for the three months ended March 31, 2004. Fees and service charges from deposit accounts increased $544,000 or 62% to $1.4 million for the three months ended March 31, 2005, compared to $879,000 for the three months ended March 31, 2004. The majority of this 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 MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS FOR THE THREE MONTHS ENDED - ----------------------------------------------------------------------------- MARCH 31, 2004 AND 2005 - CONTINUED - ----------------------------------- OTHER INCOME, CONTINUED - ----------------------- increase is due to fee income from increased personal checking accounts. In the first two quarters of fiscal 2005, checking account balances grew approximately 23%. Gain on sale of loans was $244,000 for the quarter ended March 31, 2005, compared to $359,000 for the quarter ended March 31, 2004. Gains on sales of securities available for sale were $88,000 for the quarter ended March 31, 2005, compared to losses of $67,000 for the quarter ended March 31, 2004. Other income was $744,000 for the three months ended March 31, 2005, as compared to $718,000 for the three months ended March 31, 2004. In addition, the Company had gain on investment security held to maturity called by issuer of $160,000 for the three months ended March 31, 2005 and $0 for the three months ended March 31, 2004. The increase was primarily due to increased fee income from ATM activity and debit card transaction fee income. GENERAL AND ADMINISTRATIVE EXPENSES - ----------------------------------- General and administrative expenses were $6.7 million for the quarter ended March 31, 2004 compared to $8.3 million for the quarter ended March 31, 2005. Salaries and employee benefits were $4.0 million for the three months ended March 31, 2004, as compared to $4.5 million for the three months ended March 31, 2005, an increase of 12.1%, primarily due to an increase in the number of banking Associates in business banking, Associates in the Company's expanded hours call center, Associates in new branches, and normal salary increases. The Company has added several Associates in a Banking Group that is focused on growing small to medium sized business banking relationships. Also as a result of new branches, equipment purchased to improve Customer convenience and increased checking activity, net occupancy, furniture and fixtures and data processing expenses increased $323,000, including increased depreciation of $145,000, when comparing the two periods. Marketing expenses were $197,000 for the three months ended March 31, 2004, compared to $482,000 for the three months ended March 31, 2005. This is primarily attributed to the Bank's "Totally Free Checking With a Gift" initiative; introduction of Penny Pavilion, the Bank's free coin counting service; marketing of the Bank's expanded banking hours, including Saturday banking at all Bank branches; and marketing of the Bank's new branch in Wilmington, NC. The Bank's "Totally Free Checking With a Gift" promotion involves significant direct mail advertising as well as direct media advertising. Other expenses were $892,000 for the quarter ended March 31, 2004 compared to $1.5 million for the quarter ended March 31, 2005. Other expense increased due to increased debit card and ATM transaction expenses of $75,000, loss on write-off of signage related to the Bank's re-branding efforts in conjunction with the initiation of "6 Day Branch Banking" of $122,000, increased costs incurred related to compliance with Sarbanes-Oxley of $130,000 and increased deposit account losses of $111,000. The increase in net deposit losses and increased debit card and ATM transaction expenses are tied directly to the increased number of personal checking accounts. The Bank expects to incur similar increased professional expenses related to the implementation of Sarbanes-Oxley compliance throughout the remainder of the year. INCOME TAXES - ------------ Income taxes were $1.8 million for the three months ended March 31, 2004 compared to $2.2 million for the three months ended March 31, 2005. The effective income tax rate as a percentage of pretax income was 33.24% and 34.24% for the quarters ended March 31, 2004 and 2005, respectively. The effective income tax rate differs from the statutory rate primarily due to income generated by bank-owned life insurance, municipal securities that are exempt from federal and certain state taxes, and the increase in the current quarter earnings over the comparable prior year earnings that are subject to higher incremental tax rates. 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 the Internal Revenue Service. The Company is subject to potential adverse adjustments, including but not limited to: an increase in 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 MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS FOR THE THREE MONTHS ENDED - ----------------------------------------------------------------------------- MARCH 31, 2004 AND 2005 - CONTINUED - ----------------------------------- INCOME TAXES, CONTINUED - ----------------------- 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. MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS FOR THE SIX MONTHS ENDED - --------------------------------------------------------------------------- MARCH 31, 2004 AND 2005 - ----------------------- INTEREST INCOME - --------------- Interest income for the six months ended March 31, 2005, increased to $36.9 million as compared to $31.7 million for the six months ended March 31, 2004. The earning asset yield for the six months ended March 31, 2005, was 5.78% compared to a yield of 5.61% for the six months ended March 31, 2004. The average yield on loans receivable for the six months ended March 31, 2005, was 6.25% compared to 6.16% for the six months ended March 31, 2004. The increased yield on loans is primarily due to the increased yield on commercial loans with interest rates tied to the prime lending rate. The prime rate was 5.75% at March 31, 2005, compared to 4.00% at March 31, 2004. Due to a decline in amortization of premiums on investment securities due to slower prepayments in fiscal 2005, the yield on investments increased to 4.89% for the six months ended March 31, 2005, from 4.61% for the six months ended March 31, 2004. Total average interest-earning assets were $1.3 billion for the six months ended March 31, 2005 as compared to $1.1 billion for the six months ended March 31, 2004. The increase in average interest-earning assets is primarily due to an increase in average loans receivable of approximately $108.4 million resulting primarily from growth in the commercial loan portfolio and an increase in investment securities of approximately $36.8 million, primarily funded by borrowings. INTEREST EXPENSE - ---------------- Interest expense on interest-bearing liabilities was $13.4 million for the six months ended March 31, 2005, as compared to $11.6 million for the six months ended March 31, 2004. The average cost of deposits for the six months ended March 31, 2005, was 1.37% compared to 1.47% for the six months ended March 31, 2004. The cost of interest-bearing liabilities was 2.11% for the six months ended March 31, 2005 compared to 2.06% for the six months ended March 31, 2004. The cost of FHLB advances, reverse repurchase agreements and other borrowings was 3.68%, 2.15% and 5.37%, respectively, for the six months ended March 31, 2005. For the six months ended March 31, 2004, the cost of FHLB advances, reverse repurchase agreements and other borrowings was 3.89%, 1.51% and 4.31%, respectively. The increased cost of funds on other borrowings is due to the increased short-term interest rates. At March 31, 2005, the federal funds rate was 2.96% compared to 1.05% at March 31, 2004. Total average interest-bearing liabilities increased from $1.1 billion at March 31, 2004 to $1.3 billion at March 31, 2005. The increase in average interest-bearing liabilities is due to an increase in average deposits of approximately $101.5 million as a result of the Company's focus on checking growth, increased average FHLB advances of $84.6 million used to fund loan and investment securities growth and increased average Customer repurchase agreements of $8.3 million. This increase was partially offset by a decrease in average reverse repurchase agreements of $51.4 million. NET INTEREST INCOME - ------------------- Net interest income was $23.4 million for the six months ended March 31, 2005, as compared to $20.1 million for the six months ended March 31, 2004. The net interest margin was 3.67% for the six months ended March 31, 2005, compared to 3.55% for the six months ended March 31, 2004. 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 MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS FOR THE SIX MONTHS ENDED - --------------------------------------------------------------------------- MARCH 31, 2004 AND 2005 - CONTINUED - ----------------------------------- NET INTEREST INCOME - CONTINUED - ------------------------------- The following table summarizes the average balance sheet and the related yields on interest-earning assets and deposits and borrowings for the six months ended March 31, 2004 and 2005:
Six Months Ended March 31, -------------------------- 2004 2005 ---- ---- Average Income/ Yield/ Average Income/ Yield/ Balance (1) Expense Rate Balance (1) Expense Rate ----------- ------- ---- ----------- ------- ---- Assets Earning assets Loans (2) $ 727,430 $ 22,398 6.16% $ 835,820 $ 26,104 6.25% Investment Securities, MBS Securities and Other (3) 403,023 9,294 4.61% 439,783 10,753 4.89% ---------- ---------- ---------- ---------- Total earning assets $1,130,453 $ 31,692 5.61% $1,275,603 $ 36,857 5.78% ========== ---------- ========== ---------- Liabilities Deposits 691,148 5,065 1.47% 792,635 5,434 1.37% Borrowings 431,753 6,509 3.02% 481,365 8,011 3.33% ---------- ---------- ---------- ---------- Total interest-bearing Liabilities $1,122,901 11,574 2.06% $1,274,000 13,445 2.11% ========== ---------- ========== ---------- Net interest income $ 20,118 $ 23,412 ========== ========== Net interest margin 3.55% 3.67% Net yield on earning 3.56% 3.67% Assets
(1) The average balances are derived from monthly balances. (2) Nonaccrual loans are included in average balances for yield computations. (3) Investment securities include taxable and tax-exempt securities. Net interest income has not been adjusted to produce a tax-equivalent yield. PROVISION FOR LOAN LOSSES - ------------------------- The Company's provision for loan losses decreased $75,000 from $1.1 million for the six months ended March 31, 2004, to $975,000 for the six months ended March 31, 2005 primarily due to improving economic conditions and the risk factors related to the underlying portfolio. The allowance for loan losses as a percentage of loans was 1.36% at March 31, 2005 as compared to 1.41% at March 31, 2004. Loans delinquent 90 days or more were $7.1 million or .82% of total loans at March 31, 2005, compared to $6.1 million or 0.79% of total loans at March 31, 2004. The allowance for loan losses was 165% of loans delinquent more than 90 days at March 31, 2005, compared to 177% at March 31, 2004. Net charge-offs for the six months ended March 31, 2005 were $284,000 compared to $124,000 for the six months ended March 31, 2004. 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. 25 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 SIX MONTHS ENDED - --------------------------------------------------------------------------- MARCH 31, 2004 AND 2005 - CONTINUED - ----------------------------------- OTHER INCOME - ------------ For the six months ended March 31, 2005, other income was $6.1 million compared to $4.8 million for the six months ended March 31, 2004. Fees and service charges from deposit accounts increased $731,000 or 41% to $2.5 million for the six months ended March 31, 2005, compared to $1.8 million for the six months ended March 31, 2004. The majority of this increase is due to fee income from increased personal checking accounts. In the first two quarters of fiscal 2005, checking account balances grew approximately 23%. During the six months ended March 31, 2004, the Company securitized mortgage loans into mortgage-backed securities ("MBS") and then sold the MBS and sold loans aggregating $32.2 million of loans held for sale compared to $28.5 million for the six months ended March 31, 2005. Gain on sale of loans was $554,000 for the six months ended March 31, 2005, compared to $800,000 for the six months ended March 31, 2004. Gains on sales of securities were $246,000 for the six months ended March 31, 2005, compared to losses of $267,000 for the six months ended March 31, 2004. In addition, the Company had gain on investment security held to maturity called by issuer of $160,000 for the six months ended March 31, 2005 and $0 for the six months ended March 31, 2004. Other income was $1.4 million for the six months ended March 31, 2005, as compared to $1.3 million for the six months ended March 31, 2004. The increase was primarily due to increased fee income from ATM activity and debit card transaction fee income. GENERAL AND ADMINISTRATIVE EXPENSES - ----------------------------------- General and administrative expenses were $13.3 million for the six months ended March 31, 2004 compared to $16.1 million for the six months ended March 31, 2005. Salaries and employee benefits were $8.0 million for the six months ended March 31, 2004, as compared to $8.9 million for the six months ended March 31, 2005, an increase of 11.5%, primarily due to an increase in the number of banking Associates in business banking, Associates in the Company's expanded hours call center, Associates in new branches and normal salary increases. The Company has added several Associates in a Banking Group that is focused on growing small to medium sized business banking relationships. Also as a result of new branches, equipment purchased to improve Customer convenience and increased checking activity, net occupancy, furniture and fixtures and data processing expenses increased $534,000, including increased depreciation of $193,000, when comparing the two periods. Marketing expenses were $379,000 for the six months ended March 31, 2004, compared to $993,000 for the six months ended March 31, 2005. This is primarily attributed to the Bank's "Totally Free Checking With a Gift" initiative; introduction of Penny Pavilion, the Bank's free coin counting service; marketing of the Bank's expanded banking hours, including Saturday banking at all Bank branches; and marketing of the Bank's new branch in Wilmington, NC. The Bank's "Totally Free Checking With a Gift" promotion involves significant direct mail advertising as well as direct media advertising. Other expenses were $1.8 million for the six months ended March 31, 2004 compared to $2.5 million for the six months ended March 31, 2005. Other expense increased due to increased debit card and ATM transaction expenses of $160,000, loss on write-off of signage related to the Bank's re-branding efforts in conjunction with the initiation of "6 Day Branch Banking" of $122,000, costs incurred related to compliance with Sarbanes-Oxley of $130,000 and increased deposit account losses of $175,000. The increase in net deposit losses are tied directly to the increased number of personal checking accounts. The Bank expects to incur similar increased professional expenses related to the implementation of Sarbanes-Oxley compliance throughout the remainder of the year. INCOME TAXES - ------------ Income taxes were $3.5 million for the six months ended March 31, 2004 compared to $4.3 million for the six months ended March 31, 2005. The effective income tax rate as a percentage of pretax income was 33.24% and 34.25% for the six months ended March 31, 2004 and 2005, respectively. The effective income tax rate differs from the statutory rate primarily due to income generated by bank-owned life insurance, municipal securities that are exempt from federal and certain state taxes, and the increase in the current six months earnings over the comparable prior year earnings that are subject to higher incremental tax rates. 26 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 SIX MONTHS ENDED - --------------------------------------------------------------------------- MARCH 31, 2004 AND 2005 - CONTINUED - ----------------------------------- INCOME TAXES - CONTINUED - ------------------------ 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 the Internal Revenue Service. 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. 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, 2005: Total Capital: $114,321 13.50% $67,759 8.00% $84,699 10.00% (To Risk Weighted Assets) Tier 1 Capital: $104,326 12.32% N/A N/A $50,819 6.00% (To Risk Weighted Assets) Tier 1 Capital: $104,326 7.19% $43,540 3.00% $72,510 5.00% (To Total Assets) Tangible Capital: $104,326 7.19% $21,770 1.50% N/A N/A (To Total Assets)
RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS - ------------------------------------------ In March 2004, the Financial Accounting Standards Board ("FASB") issued EITF No. 03-1 ("EITF 03-1"), "The Meaning of Other-Than-Temporary Impairment and Its Application of Certain Investments," which provided guidance for evaluating whether an investment is other-than-temporarily impaired and its application to investments classified as either available for sale or held to maturity under FASB Statement No. 115, "Accounting for Certain Investments in Debt and Equity Securities," and investments accounted for under the cost or equity method of accounting. In September 2004, the FASB issued FASB Staff Position ("FSP") EITF No. 03-1-1, a delay of the effective date for the measurement and recognition guidance contained in paragraphs 10-20 of EITF 03-1 until the FASB issues final guidance, expected in 2005. Paragraphs 10 through 20 of EITF 03-1 provide guidance on when impairment of debt and equity securities is considered other-than-temporary. This guidance generally states impairment is considered other-than-temporary unless the holder of the security has both the intent and ability to hold the security until the fair value recovers and evidence supporting the recovery outweighs evidence to the contrary. The Company adopted the guidance of EITF 03-1, excluding paragraphs 10-20 effective as of September 30, 2004. As a result of this adoption, the Company provides additional 27 Item 2. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS, CONTINUED - ----------------------------------------------------- disclosures, which are found in Notes 2 and 3 of this report. The initial adoption of this issue, which excludes paragraphs 10-20 did not have a material impact on the financial condition or results of operations of the Company. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS - ----------------------------------------- In December 2004, the FASB issued Statement of Financial Accounting Standards ("SFAS") No. 123 (Revised 2004), "Share-Based Payment" ("SFAS 123R"). This standard requires expensing of stock options and other share-based payments and supersedes SFAS No. 123 that had allowed companies to choose between expensing stock options or showing proforma disclosure only. This standard is effective for the Company as of October 1, 2005 and will apply to all awards granted, modified, cancelled or repurchased after that date. The Company is currently evaluating the expected impact that the adoption of SFAS 123R will have on its financial condition or results of operations. On March 29, 2005 the SEC Staff issued Staff Accounting Bulletin No. 107 ("SAB 107"). SAB 107 expresses the views of the SEC staff regarding the interaction of SFAS 123R and certain SEC rules and regulations and provides the SEC staff's view regarding the valuation of share-based payment arrangements for public companies. The Company is currently evaluating the expected impact that SAB 107 will have on its financial condition or results of operations. 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. PART I. FINANCIAL INFORMATION COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - ------------------------------------------------------------------ The Bank's Asset Liability Management Committee ("ALCO") monitors and considers methods of managing exposure to interest rate risk. The ALCO consists of members of the Board of Directors and Senior Leadership of the Company and meets quarterly. The Bank's exposure to interest rate risk is reviewed on at least a quarterly basis by the ALCO. Interest rate risk exposure is measured using interest rate sensitivity analysis to determine the Company's change in net portfolio value in the event of hypothetical changes in interest rates. The ALCO is charged with the responsibility to maintain the level of sensitivity of the Bank's net portfolio value with Board approved limits. Net portfolio value (NPV) represents the market value of portfolio equity and is equal to the market value of assets minus the market value of liabilities, with adjustments made for off-balance sheet items over a range of assumed changes in market interest rates. The Bank's Board of Directors has adopted an interest rate risk policy which establishes maximum allowable decreases in NPV in the event of a sudden and sustained one hundred to four hundred basis point increase or decrease in market interest rates. The following table presents the Bank's change in NPV as computed by the OTS for various rate shock levels as of March 31, 2005. 28 PART I. FINANCIAL INFORMATION COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK, CONTINUED - -----------------------------------------------------------------------------
Board Board Market Market Limit Limit Value Value Minimum NPV Maximum Of Assets Portfolio NPV Change in interest rates Ratio Decline in NPV 03/31/05 03/31/05 Ratio - ------------------------------- ------------- ----------------- ------------ ----------- ------ 300 basis point rise 5.00% 400 BPS $1,444,364 $133,513 9.24% 200 basis point rise 6.00% 300 BPS $1,469,666 $149,417 10.17% 100 basis point rise 6.00% 250 BPS $1,494,371 $161,914 10.83% No change 6.00% $1,516,427 $175,471 11.57% 100 basis point decline 6.00% 250 BPS $1,531,338 $181,937 11.88% 200 basis point decline 6.00% 300 BPS N/A N/A N/A 300 basis point decline 6.00% 350 BPS N/A N/A N/A
The preceding table indicates that at March 31, 2005, in the event of a sudden and sustained increase in prevailing market interest rates, the Bank's NPV would be expected to decrease, and that in the event of a sudden decrease in prevailing market interest rates, the Bank's NPV would be expected to increase minimally. Values for the 200 and 300 basis point decline are not indicated due to the level of interest rates at March 31, 2005. At March 31, 2005, the Bank's estimated changes in NPV were within the limits established by the Board of Directors. Computation of prospective effects of hypothetical interest rate changes are based on numerous assumptions, including relative levels of market interest rates, loan prepayments and deposit decay, and should not be relied upon as indicative of actual results. Further, the computations do not contemplate any actions the ALCO could undertake in response to sudden changes in interest rates. 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 material changes in the Company's internal control over financial reporting occurred during the quarter ended March 31, 2005 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. 29 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 Company and its subsidiaries in these matters, the Company believes none of the lawsuits would have a material impact on the Company's financial condition. Item 2. Unregistered Sales of Equity 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 25, 2005 the following items were ratified: The election of directors of all nominees: E. Lawton Benton and James P. Creel. At the meeting, a total of 15,935,823 votes were entitled to be cast. Votes for E. Lawton Benton were 13,619,108 with 58,734 withheld; votes for James P. Creel were 13,362,100 with 315,742 withheld. The directors whose terms continued and the years their terms expire are as follows: G. David Bishop (2006), James T. Clemmons (2006), Frank A. Thompson, II (2006), J. Robert Calliham (2007), James H. Dusenbury (2007) and Michael C. Gerald (2007). Item 5. Other Information ----------------- Not Applicable. Item 6. Exhibits -------- Exhibits 3 (a) Certificate of Incorporation of Coastal Financial Corporation (1) (b) Certificate of Amendment to Certificate of Incorporation of Coastal Financial Corporation (4) (c) Bylaws of Coastal Financial Corporation (1) 10 (a) Employment Agreement with Michael C. Gerald (6) (b) Employment Agreement with Jerry L. Rexroad (6) (c) Employment Agreement with Phillip G. Stalvey (6) (d) Employment Agreement with Jimmy R. Graham (6) (e) Employment Agreement with Steven J. Sherry (6) (f) 1990 Stock Option Plan (2) (g) Directors Performance Plan (3) (h) Coastal Financial Corporation 2000 Stock Option Plan (5) 31 (a) Rule 13a-14(a)/15d-14(a) Certification (Chief Executive Officer) (b) Rule 13a-14(a)/15d-14(a) Certification (Chief Financial Officer) 32 (a) Section 1350 Certification (Chief Executive Officer) (b) Section 1350 Certification (Chief Financial Officer) 30 PART II. OTHER INFORMATION COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES - CONTINUED Item 6. Exhibits, continued ------------------- (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 March 31, 1998 Form 10-Q filed with Securities and Exchange Commission on May 15, 1998. (5) Incorporated by reference to the definitive proxy statement for the 2000 Annual Meeting of Stockholders filed December 22, 1999. (6) Incorporated by reference to 2003 Form 10-K filed with Securities and Exchange Commission on December 22, 2003. 31 SIGNATURES Pursuant to the requirement of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. COASTAL FINANCIAL CORPORATION May 10, 2005 /s/ Michael C. Gerald ------------ ---------------------- Date Michael C. Gerald President and Chief Executive Officer May 10, 2005 /s/ Jerry L. Rexroad ------------ --------------------- Date Jerry L. Rexroad Executive Vice President and Chief Financial Officer 32 EX-31.A 2 ex31-a.txt Exhibit 31(a) Rule 13a-14(a)/15d-14(a) Certification (Chief Executive Officer) 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 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15e and 15d-15e) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, 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 and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 10, 2005 /s/ Michael C. Gerald ------------ --------------------- Michael C. Gerald President/Chief Executive Officer 33 EX-31.B 3 ex31-b.txt Exhibit 31(b) Rule 13a-14(a)/15d-14(a) Certification (Chief Financial Officer) 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 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15e and 15d-15e) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, 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 and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 10, 2005 /s/Jerry L. Rexroad ------------ ------------------- Jerry L. Rexroad Executive Vice President and Chief Financial Officer 34 EX-32.A 4 ex32-a.txt Exhibit 32(a) SECTION 1350 Certification (Chief Executive Officer) In connection with the Quarterly Report of Coastal Financial Corporation, Inc. (the "Company") on Form 10-Q for the period ended March 31, 2005 as filed with the Securities and Exchange Commission (the "Report"), I Michael C. Gerald, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. ss.1350, as adopted pursuant to ss.906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the period covered by the Report. This Certification is provided as of May 10, 2005. /s/ Michael C. Gerald --------------------------------- Michael C. Gerald President/Chief Executive Officer 35 EX-32.B 5 ex32-b.txt Exhibit 32(b) SECTION 1350 Certification (Chief Financial Officer) In connection with the Quarterly Report of Coastal Financial Corporation, Inc. (the "Company") on Form 10-Q for the period ended March 31, 2005 as filed with the Securities and Exchange Commission (the "Report"), I Jerry L. Rexroad, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss.1350, as adopted pursuant to ss.906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the period covered by the Report. This Certification is provided as of May 10, 2005. /s/ Jerry L. Rexroad ----------------------------------- Jerry L. Rexroad Executive Vice President and Chief Financial Officer 36 -----END PRIVACY-ENHANCED MESSAGE-----