SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
/X/ Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
FOR QUARTER ENDED June 30, 1998
or
Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Transition Period From: To:
Commission File Number: 0-19398
First Coastal Bankshares, Inc.
----------------------------------------------------------
(Exact name of Registrant as Specified in its Charter)
Virginia 54-1534067
- ------------------------------- -------------------
(State or other jurisdiction of (IRS Employer ID No.)
incorporation or organization
2101 Parks Avenue
Virginia Beach, Virginia 23451
- ------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(757) 428-9331
----------------
N/A
- --------------------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year
If Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed
all documents and reports required to be filed by Section 13
or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
YES x NO
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable
date: 4,984,420
------------
FIRST COASTAL BANKSHARES, INC.
CONTENTS
PART I - FINANCIAL INFORMATION
ITEM I
Unaudited Consolidated Statement of Financial
Condition as of June 30, 1998 and December 31,1997 . . . . . . . . . . 1
Unaudited Consolidated Statement of Income for
the three and six months ended June 30, 1998 and 1997. . . . . . . . . 2
Unaudited Consolidated Statement of Cash Flows
for the six months ended June 30, 1998 and 1997. . . . . . . . . . . . 3 - 4
Unaudited Consolidated Statement of Stockholders'
Equity for the six months ended June 30, 1998. . . . . . . . . . . . . 5
Notes to Unaudited Consolidated Financial Statements . . . . . . . . . 6
Item II
Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . . . . . . . . . 7 - 14
PART II - OTHER INFORMATION
ITEM 1
Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . 15
ITEM 2
Changes in Securities. . . . . . . . . . . . . . . . . . . . . . . . . 15
ITEM 3
Defaults Upon Senior Securities. . . . . . . . . . . . . . . . . . . . 15
ITEM 4
Submission of Matters to a Vote of Security Holders. . . . . . . . . . 15
ITEM 5
Other Information. . . . . . . . . . . . . . . . . . . . . . . . . . . 15
ITEM 6
Exhibits and Report of Form 8-K. . . . . . . . . . . . . . . . . . . . 15
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
-i-
<Page 1>
FIRST COASTAL BANKSHARES, INC.
UNAUDITED CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
(Dollars in thousands, except share data)
June 30, December 31,
1998 1997
--------------------------
ASSETS
Cash and amounts due from banks. . . . . . . . . . . $ 9,424 $ 7,236
Federal funds sold and interest
bearing deposits. . . . . . . . . . . . . . . . . 364 194
Investment securities
Held-to-maturity (approximate fair
value $6,994 and $10,786,
respectively). . . . . . . . . . . . . . . . 7,037 11,006
Available-for-sale . . . . . . . . . . . . . . . 9,952 8,407
Mortgage-backed and related securities
Held-to-maturity (approximate fair
value $19,454 and $23,780,
respectively). . . . . . . . . . . . . . . . 19,991 24,369
Available-for-sale. . . . . . . . . . . . . . . . 79,801 86,637
Loans receivable, net
Held-for-investment . . . . . . . . . . . . . . . 446,016 454,477
Held-for-sale . . . . . . . . . . . . . . . . . . 11,978 8,356
Foreclosed real estate, net. . . . . . . . . . . . . 2,778 2,382
Property and equipment, net. . . . . . . . . . . . . 6,461 6,888
Accrued income receivable, net . . . . . . . . . . . 4,168 4,414
Other assets . . . . . . . . . . . . . . . . . . . . 5,783 1,822
--------- ---------
$ 603,753 $ 616,188
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits . . . . . . . . . . . . . . . . . . . $ 409,321 $ 407,443
Advances from the Federal Home
Loan Bank. . . . . . . . . . . . . . . . . . . 133,984 143,084
Securities sold under agreements
to repurchase. . . . . . . . . . . . . . . . . 9,685 17,033
Advance payments by borrowers
for taxes and insurance. . . . . . . . . . . . 1,234 906
Other liabilities. . . . . . . . . . . . . . . . . 4,261 3,573
--------- ---------
558,485 572,039
--------- ---------
STOCKHOLDERS' EQUITY
Serial preferred stock, authorized
5,000,000 shares, no shares issued
or outstanding. . . . . . . . . . . . . . . . . -- --
Common stock, $.01 par value, 10,000,000
shares authorized; 4,984,420 shares
issued and outstanding in 1998
(4,980,611 in 1997) . . . . . . . . . . . . . . 50 50
Capital in excess of par value . . . . . . . . . . 9,533 9,465
Retained earnings - substantially
restricted. . . . . . . . . . . . . . . . . . . 36,029 34,588
Accumulated other comprehensive
income (loss) . . . . . . . . . . . . . . . . . (344) 46
--------- ---------
45,268 44,149
--------- ---------
$ 603,753 $ 616,188
========= =========
Notes to Unaudited Consolidated Financial Statements
are an integral part of this statement
<Page 2>
FIRST COASTAL BANKSHARES, INC.
UNAUDITED CONSOLIDATED STATEMENT OF INCOME
(Dollars in thousands, except per share data)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
-------------------- -------------------
1998 1997 1998 1997
-------- -------- -------- --------
Interest and fees on loans. . . . . . . . . $ 9,898 $ 10,083 $ 19,881 $ 19,810
Interest on mortgage-backed
and related securities . . . . . . . . . 1,781 1,707 3,708 3,483
Other interest and
dividend income. . . . . . . . . . . . . 324 433 669 873
-------- -------- -------- --------
Total interest income. . . . . . . . . . 12,003 12,223 24,258 24,166
-------- -------- -------- --------
Interest on deposits. . . . . . . . . . . . 4,945 4,923 9,882 10,065
Interest on advances from
Federal Home Loan Bank . . . . . . . . . 2,007 2,307 4,235 4,369
Interest on repurchase
agreements . . . . . . . . . . . . . . . 182 189 416 278
-------- -------- -------- --------
Total interest expense . . . . . . . . . 7,134 7,419 14,533 14,712
-------- -------- -------- --------
Net interest income . . . . . . . . . . . . 4,869 4,804 9,725 9,454
Provision for loan losses . . . . . . . . . -- 100 -- 175
-------- -------- -------- --------
Net interest income after
provision for loan losses. . . . . . . . 4,869 4,704 9,725 9,279
-------- -------- -------- --------
OTHER INCOME
Gain on sales of loans. . . . . . . . . . . 720 263 1,181 515
Gain on sales of foreclosed
real estate. . . . . . . . . . . . . . . 25 17 28 40
Retail banking fees . . . . . . . . . . . . 522 346 901 612
Mortgage loan servicing fees. . . . . . . . 168 184 337 356
Other . . . . . . . . . . . . . . . . . . . 124 80 245 154
-------- -------- -------- --------
1,559 890 2,692 1,677
-------- -------- -------- --------
OTHER EXPENSES
Salaries and employee
benefits. . . . . . . . . . . . . . . . . 2,485 1,905 4,735 3,777
Net occupancy expense . . . . . . . . . . . 908 757 1,754 1,502
Provision for losses on
foreclosed real estate . . . . . . . . . 37 -- 37 --
Other net expense of
foreclosed real estate . . . . . . . . . 66 41 131 78
Federal deposit insurance
premiums. . . . . . . . . . . . . . . . . 64 102 125 206
Other . . . . . . . . . . . . . . . . . . . 1,238 1,157 2,368 2,318
-------- -------- -------- --------
4,798 3,962 9,150 7,881
-------- -------- -------- --------
Income before income taxes. . . . . . . . . 1,630 1,632 3,267 3,075
Provision for income taxes. . . . . . . . . 602 645 1,228 1,193
-------- -------- -------- --------
Net income . . . . . . . . . . . . . . . . $ 1,028 $ 987 $ 2,039 $ 1,882
======== ========= ========= =========
Earnings per share, basic . . . . . . . . . $ 0.21 $ 0.20 $ 0.41 $ 0.38
Earnings per share, diluted . . . . . . . . 0.20 0.20 0.40 0.37
========= ========= ========= =========
Dividend per common share . . . . . . . . . $ 0.06 $ 0.05 $ 0.12 $ 0.10
========= ========= ========= =========
The Notes to Unaudited Consolidated Financial Statements
are an integral part of this statement
<Page 3>
FIRST COASTAL BANKSHARES, INC.
UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in thousands)
For the Six Months
Ended June 30,
1998 1997
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,039 $ 1,882
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Provision for loan losses . . . . . . . . . . . . . . . . . . . . -- 175
Provision for losses on foreclosed real
estate, net . . . . . . . . . . . . . . . . . . . . . . . . . (4) --
Depreciation. . . . . . . . . . . . . . . . . . . . . . . . . . . 628 538
Amortization of loan discounts, premiums and
fees, net . . . . . . . . . . . . . . . . . . . . . . . . . . (241) (360)
Amortization of other discounts and premiums, net . . . . . . . . 6 12
Gain on sales of foreclosed real estate . . . . . . . . . . . . . (28) (40)
Gain on sales of loans. . . . . . . . . . . . . . . . . . . . . . (1,181) (515)
Originations of loans held-for-sale . . . . . . . . . . . . . . . (98,239) (59,114)
Proceeds from sales of loans receivable
held-for-sale . . . . . . . . . . . . . . . . . . . . . . . . 95,798 57,892
Decrease (increase) in accrued income receivable. . . . . . . . . 246 (189)
Increase in other assets. . . . . . . . . . . . . . . . . . . . . (3,759) (933)
Increase (decrease) in other liabilities. . . . . . . . . . . . . 688 (1,075)
-------- ---------
Net cash provided (used) by operating
activities. . . . . . . . . . . . . . . . . . . . . . . . . (4,047) (1,727)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Net decrease (increase) in loans receivable . . . . . . . . . . . 6,811 (21,762)
Principal payments received on mortgage-backed
and related securities . . . . . . . . . . . . . . . . . . . . 19,808 12,834
Proceeds from maturities of investment securities . . . . . . . . 5,052 5,637
Proceeds from sales of foreclosed real estate . . . . . . . . . . 1,539 225
Purchases of:
Mortgage-backed securities available-for-sale. . . . . . . . . (9,243) (4,071)
Investment securities available-for-sale . . . . . . . . . . . (2,577) (2,284)
Property and equipment . . . . . . . . . . . . . . . . . . . . (201) (533)
Additions to foreclosed real estate. . . . . . . . . . . . . . (12) (107)
-------- ---------
Net cash provided (used) by investing activities. . . . . . . . . 21,177 (10,061)
--------- ---------
Continued
The Notes to Unaudited Consolidated Financial Statements
are an integral part of this statement
<Page 4>
FIRST COASTAL BANKSHARES, INC.
UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in thousands)
For the Six Months
Ended June 30,
1998 1997
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in money market deposit accounts,
NOW accounts and savings deposits . . . . . . . $ 22,721 $ 6,866
Net decrease in time deposits . . . . . . . . . . . (20,843) (43,505)
Proceeds from Federal Home Loan Bank advances . . . 121,000 115,700
Payments on Federal Home Loan Bank advances . . . . (130,100) (79,026)
Net increase (decrease) in securities sold under
agreements to repurchase. . . . . . . . . . . . . (7,348) 10,714
Net increase in advance payments by borrowers . . . 328 527
Proceeds from issuance of common stock. . . . . . . 68 59
Cash dividends paid . . . . . . . . . . . . . . . . (598) (497)
--------- ---------
Net cash provided (used) by
financing activities. . . . . . . . . . . . (14,772) 10,838
--------- ---------
Increase (decrease) in cash and
cash equivalents . . . . . . . . . . . . . . . . . 2,358 (950)
Cash and cash equivalents at beginning of period . . . 7,430 7,335
--------- ---------
Cash and cash equivalents at end of period . . . . . . $ 9,788 $ 6,385
========= =========
CASH AND CASH EQUIVALENTS INCLUDES
Cash and amounts due from banks . . . . . . . . . . $ 9,424 $ 3,842
Federal funds sold and interest
bearing deposits. . . . . . . . . . . . . . . . 364 2,543
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid on deposits . . . . . . . . . . . . . $ 14,352 $ 15,071
Income taxes paid . . . . . . . . . . . . . . . . . 1,652 628
SCHEDULE OF NONCASH INVESTING ACTIVITIES
Real estate acquired in settlement
of loans, net of allowances . . . . . . . . . . . $ 1,891 $ 1,581
The Notes to Unaudited Consolidated Financial Statements
are an integral part of this statement
<Page 5>
FIRST COASTAL BANKSHARES, INC.
UNAUDITED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Dollars in thousands, except share data)
Capital Accumulated
In Excess Other
Common Stock of Retained Comprehensive
Shares Amount Par Value Earnings Income (loss) Total
----------------------------------------------------------------------------------
Balance,
December 31,1997 4,980,611 $ 50 $ 9,465 $ 34,588 $ 46 $ 44,149
Net income for the
six months ended
June 30, 1998 2,039 2,039
Sale of shares of
common stock to
employee stock
purchase plan 2,397 43 43
Issuance of common
stock under
dividend rein-
vestment plan 1,412 25 25
Net unrealized loss
on securities
available-for-
sale, net of tax (390) (390)
Cash dividends paid (598) (598)
-------- ------- ------- ------- ------- -------
Balance,
June 30, 1998 4,984,420 $ 50 $ 9,533 $ 36,029 $ (344) $ 45,268
========= ======= ======= ======= ======= =======
Balance,
December 31, 1996 4,970,307 $ 50 $ 9,336 $ 31,480 $ (39) $ 40,827
Net income for the
six months ended
June 30, 1997 1,882 1,882
Sale of shares of
common stock to
employee stock
purchase plan 3,559 39 39
Issuance of common
stock under
dividend rein-
vestment plan 1,375 15 15
Exercise of stock
options 750 5 5
Net unrealized loss
on securities
available-for-
sale, net of tax 35 35
Cash dividends paid (497) (497)
------- ------- ------- ------- ------- -------
Balance,
June 30, 1997 4,975,991 $ 50 $ 9,395 $ 32,865 $ (4) $ 42,306
======== ======== ======= ======= ======= =======
The Notes to Unaudited Consolidated Financial Statements
are an integral part of this statement
<Page 6>
FIRST COASTAL BANKSHARES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. The accompanying unaudited consolidated financial
statements are prepared in accordance with the
instructions to Form 10-Q and do not include all of
the disclosures and footnotes required by generally
accepted accounting principles for complete financial
statements. In the opinion of the management of First
Coastal Bankshares, Inc. (the "Company") the financial
statements reflect all adjustments, consisting of only
normal recurring accruals, necessary to present fairly
the financial position of the Company. The
consolidated financial statements include the accounts
of the Company and First Coastal Bank (the "Bank") and
its wholly-owned subsidiaries.
The Notes to the Consolidated Financial Statements of
the Annual Report on Form 10-K for the fiscal year
ended December 31,1997 should be read in conjunction
with this Form 10-Q.
2. Net unamortized premiums on loans and mortgage-backed
securities amounted to $2,550,000 at June 30, 1998.
Deferred loan fees at June 30, 1998 amounted to
$1,410,000.
3. The results of operations for the three and six months
ended June 30, 1998 are not necessarily indicative of
the results to be expected for the entire fiscal year
or any other period.
4. In addition to undisbursed loan funds of $43,657,000,
the Bank had outstanding commitments to purchase or
originate $34,404,000 in loans and investment
securities at June 30, 1998. The Company also had
outstanding commitments to sell $19,890,000 in loans
and securities at June 30, 1998.
5. The weighted average number of shares used in the
computation of basic and diluted earnings per share is
as follows (in thousands):
For the three For the six
months ended months ended
June 30 June 30
----------------- ---------------
1998 1997 1998 1997
----------------- ------------------
Weighted average shares outstanding - basic 4,983 4,973 4,982 4,972
Effect of dilutive stock options 163 82 167 73
Weighted average shares outstanding - diluted 5,146 5,055 5,149 5,045
6. Effective January 1, 1998, the Company adopted
Statement of Financial Accounting Standards No. 130
(SFAS 130), "Reporting Comprehensive Income."
Comprehensive income includes net income for the
period plus other items of comprehensive income as
described in SFAS 130. The only item of other
comprehensive income applicable to the Company is the
change in unrealized gains and losses on securities
available-for-sale. Total comprehensive income for
the three months ending June 30, 1998 and 1997 was
$880,000 and $1,303,000, respectively. Total
comprehensive income for the six months ending June
30, 1998 and 1997 was $1,649,000 and $1,917,000,
respectively.
<Page 7>
FIRST COASTAL BANKSHARES, INC.
ITEM II. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
ASSETS
The Company's total assets at June 30, 1998 were $604
million which is a decrease of $12.4 million or 2.0% from
December 31, 1997. The net decrease is due to a $4.9
million decrease in total loans receivable and an $11.2
million decrease in mortgage-backed and related securities.
The mix of the Company's loans receivable continues to shift
away from 1-4 family residential loans and toward the
Company's other loan categories as shown in the following
table (dollars in thousands):
06/30/98 12/31/97 06/30/97
---------- ---------- ---------
Loans
Residential mortgage $ 241,845 $ 280,620 $ 300,120
Commercial real estate 73,495 68,910 71,931
Construction 58,051 48,321 44,373
Land acquisition 16,003 15,751 17,448
Commercial 37,990 24,750 16,658
Consumer 22,903 20,422 19,303
Held-for-sale 11,978 8,356 6,522
--------- --------- ---------
Total $ 462,265 $ 467,130 $ 476,355
========= ========= =========
The net decreases in residential mortgage loans noted above
were caused by increased prepayments and declining
originations of such loans due to a flat yield curve and
declining interest rates. This interest rate environment
results in increased prepayments of the Company's
residential mortgage loans as borrowers seek to refinance
their loans at lower fixed rates, thus shifting the
origination of new loans away from the Company's portfolio
loan products which are shorter term and variable rate
loans. The Company sells all of its longer term, fixed rate
loans in the secondary market.
The overall increase in the Company's other loan categories
(collectively, non-residential) is the direct result of the
Company's emphasis on originating such loans.
The decrease in the Bank's mortgage-backed and related
securities portfolio at June 30, 1998 as compared to
December 31,1997 was due to the increased prepayments of the
underlying loans combined with management's decision not to
purchase or replace such securities at this time.
LIABILITIES
Total liabilities decreased by $13.6 million or 2.4% to $558
million during the first six months of 1998. This net
decrease is mainly due to a $9.1 million decrease in
advances from the Federal Home Loan Bank and a $7.3 million
decrease in securities sold under agreements to repurchase.
These decreases were partially offset by a $1.9 million
increase in deposits.
Management's objective is to grow the Hampton Roads retail
deposit base and de-emphasize other deposits and brokered
deposits. Components of total deposits at the periods
indicated are as follows (in thousands):
<Page 8>
6/30/98 12/31/97 6/30/97
--------- --------- ---------
Hampton Roads Retail Deposits
Non-interest checking $ 24,305 $ 17,310 $ 14,774
Interest checking 19,844 16,778 15,475
Savings 112,242 99,071 75,844
CD's 173,449 184,653 184,267
Other and Non-Local Deposits $ 31,513 $ 36,723 $ 44,216
Brokered CD's $ 47,968 $ 52,908 $ 51,904
NON-PERFORMING ASSETS
Non-performing assets of the Bank comprise delinquent loans
on which income accrual has ceased or is being fully
reserved, and property acquired through foreclosure or
repossession. Non-performing assets totaled $7.1 million at
June 30, 1998 and $6.9 million, at December 31, 1997.
The delinquent loan component of non-performing assets was
$4.3 million, $4.6 million, and $3.7 million, at June 30,
1998, December 31, 1997 and June 30, 1997, respectively.
The delinquent loans were substantially secured by single-
family residential properties at June 30, 1998.
Allowances for possible losses on loans and foreclosed real
estate are maintained by the Bank. The following table sets
forth the activity in the Bank's allowance for loan losses
and allowance for losses on foreclosed real estate for the
periods indicated:
1998 1997
--------------------------------------
ALLOWANCE FOR LOAN LOSSES
Balance, January 1 . . . . . . . . . . . . . . . . . $4,297,000 $4,390,000
Provision for loan losses. . . . . . . . . . . . . . -- 175,000
Less net charges-offs. . . . . . . . . . . . . . . . 26,000 153,000
--------- ----------
Balance, June 30, . . . . . . . . . . . . . . . . . $4,271,000 $4,412,000
========= ==========
ALLOWANCE FOR LOSSES ON FORECLOSED REAL ESTATE
Balance, January 1 . . . . . . . . . . . . . . . . . $ 335,000 $ 235,000
Provision for losses on foreclosed
real estate. . . . . . . . . . . . . . . . . . . 37,000 --
Less net charges to the allowance. . . . . . . . . . 41,000 --
--------- ---------
Balance, June 30,. . . . . . . . . . . . . . . . . . $ 331,000 $ 235,000
========= =========
RESULTS OF OPERATIONS: Three Months Ended June 30, 1998 and 1997
NET OPERATING RESULTS
For the three months ended June 30, 1998, the Company earned
$1,028,000 or $.20 per diluted share as compared to $987,000
or $.20 per diluted share for the same period in 1997.
NET INTEREST INCOME
Net interest income during the quarter ended June 30,1998
was $4.9 million as compared to $4.8 million during the same
period of 1997. The net interest margin for the quarter
ended June 30, 1998 was 3.27% as compared to 3.22% during
the second quarter of 1997.
<Page 9>
The following table sets forth the weighted average yields
earned on the Company's assets, the weighted average
interest rates paid on the Company's liabilities, and the
net yield on average interest earning assets for the periods
indicated. Average balances are determined on a daily basis
and nonperforming loans are included in the average loan
amount (dollars in thousands).
For the three-months ended June 30,
-----------------------------------------------------------
1998 1997
----------------------------------------------------------
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
-------- --------- -------- -------- -------- --------
Interest earning assets
Loans. . . . . . . . . . . . . . . . $ 467,733 $ 9,898 8.47% $ 465,425 $ 10,083 8.66%
Mortgage-backed and related
securities . . . . . . . . . . . . 106,150 1,781 6.71% 98,827 1,707 6.91%
Investment securities and other
earning assets . . . . . . . . . . 20,969 324 6.20% 27,429 433 6.34%
-------- -------- ------ -------- -------- ------
Total earning assets 594,852 12,003 8.07% 591,681 12,223 8.26%
Nonearning assets. . . . . . . . . . . 23,236 16,854
-------- --------
Total assets . . . . . . . . . . . 618,088 608,535
======== ========
Interest bearing liabilities
Time deposits. . . . . . . . . . . . 252,782 3,521 5.59% 279,268 3,995 5.75%
Interest bearing demand and
other deposits . . . . . . . . . . 143,216 1,424 3.99% 101,691 929 3.66%
FHLB advances. . . . . . . . . . . . 134,406 2,007 5.99% 149,406 2,307 6.19%
Other borrowings . . . . . . . . . . 13,436 182 5.46% 13,273 189 5.70%
-------- -------- ------ -------- -------- ------
Total interest bearing
liabilities. . . . . . . . . . . 543,840 7,134 5.26% 543,638 7,419 5.48%
Noninterest bearing liabilities. . . . 29,487 23,995
-------- --------
Total liabilities. . . . . . . . . . . 573,327 567,633
Equity . . . . . . . . . . . . . . . . 44,761 40,902
-------- --------
Liabilities and equity . . . . . . . . 618,088 608,535
======== ========
-------- --------
Net interest income. . . . . . . . . . 4,869 4,804
======== ========
------ ------
Interest rate spread . . . . . . . . . 2.81% 2.78%
====== ======
Net interest margin. . . . . . . . . . 3.27% 3.22%
====== ======
OTHER INCOME
Other income during the second quarter of 1998 increased by
$669,000 or 75.2% compared with the second quarter of 1997
due to large increases in retail banking fees and gains on
sales of loans. The increased retail banking fees resulted
primarily from the fees associated with an increased number
of checking accounts, additional ATM's in service during the
1998 quarter compared to 1997, and an increase in the second
quarter of 1998 of the fee for non-customer ATM transactions
at Company owned ATM's.
In addition, gains on sales of loans increased substantially
to $720,000 for the three months ended June 30, 1998 as
compared to $263,000 for the same period of 1997. The
increase in gain on sale is directly related to the increase
in sales (fundings) during the period. The table below
compares certain mortgage banking information for the
quarter ended June 30, 1998 to the same period in 1997 (in
thousands):
<Page 10>
For the Quarter Ended June 30,
----------------------------------------------------------
$ %
1998 1997 Increase Increase
----------------------------------------------------------
Applications. . . . . . . . . $61,599 $39,752 $21,847 55%
Closings. . . . . . . . . . . 55,534 32,506 23,028 71%
Fundings. . . . . . . . . . . 53,790 27,179 26,611 98%
Ending Pipeline . . . . . . . 72,088 21,872 50,216 230%
OTHER EXPENSES
Other expenses increased $836,000 or 21.1% during the second
quarter of 1998 as compared to the same period in 1997.
This increase was primarily due to a $731,000 combined net
increase in salary, benefits and net occupancy expense which
is the result of the cost incurred to operate and staff two
additional retail banking offices opened in the second
quarter of 1998, the cost of additional ATM's, and the cost
of additional loan officers and support staff added
throughout the second half of 1997 and the first half of
1998 in support of the Company's objective of increasing
local, non-residential loan portfolios.
In addition, the Company closed one branch during June 1998.
As a result of these initiatives, the Company operates 16
branches at June 30, 1998 versus 15 a year earlier, has 38
ATM's in service versus 21 a year earlier, and has 253
employees versus 205 at June 30, 1997.
Additional other expenses are as follows (in thousands):
For the Three Months
Ended June 30
---------------------------
1998 1997
---------------------------
Loan servicing. . . . . . . . . . . $ 123 $ 114
Service bureau. . . . . . . . . . . 238 180
Advertising . . . . . . . . . . . . 191 190
Legal and accounting. . . . . . . . 130 98
Office supplies . . . . . . . . . . 217 144
Other . . . . . . . . . . . . . . . 339 431
------- --------
$1,238 $1,157
RESULTS OF OPERATION: Six months Ended June 30, 1998 and 1997
NET OPERATING RESULTS
For the six months ended June 30, 1998, the Company earned
$2,039,000 or $.40 per diluted share as compared to
$1,882,000 or $0.37 per share for the same period in 1997.
NET INTEREST INCOME
Net interest income during the six months ended June 30,
1998 was $9.7 million as compared to $9.5 million during the
same period of 1997. The net interest margin for the six
months ended June 30, 1998 was 3.21% as compared to 3.17%
during the first six months of 1997.
The following table sets forth the weighted average yields
earned on the Company's assets, the weighted average
interest rates paid on the Company's liabilities, and the
net yield on average interest earning assets for the periods
indicated. Average balances are determined on a daily basis
and nonperforming loans are included in the average loan
amount (dollars in thousands).
<Page 11>
For the Six-Months Ended June 30,
-----------------------------------------------------------
1998 1997
-------------------------- ------------------------------
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
-------- --------- -------- -------- -------- --------
Interest earning assets
Loans. . . . . . . . . . . . . . . . $ 469,379 $ 19,881 8.48% $ 460,401 $ 19,810 8.61%
Mortgage-backed and related
securities . . . . . . . . . . . . 109,817 3,708 6.75% 101,186 3,483 6.88%
Investment securities and other
earning assets . . . . . . . . . . 22,542 669 5.98% 27,798 873 6.33%
-------- -------- ------ -------- -------- ------
Total earning assets 601,738 24,258 8.07% 589,385 24,166 8.21%
Nonearning assets. . . . . . . . . . . 20,918 15,366
-------- --------
Total assets . . . . . . . . . . . 622,656 604,751
======== ========
Interest bearing liabilities
Time deposits. . . . . . . . . . . . 256,139 7,153 5.63% 288,076 8,247 5.78%
Interest bearing demand and
other deposits . . . . . . . . . . 137,316 2,729 4.00% 100,876 1,818 3.63%
FHLB advances. . . . . . . . . . . . 141,677 4,235 6.03% 142,604 4,369 6.18%
Other borrowings . . . . . . . . . . 15,183 416 5.53% 10,063 278 5.58%
-------- -------- ------ -------- -------- ------
Total interest bearing
liabilities. . . . . . . . . . . 550,315 14,533 5.32% 541,619 14,712 5.48%
Noninterest bearing liabilities. . . . 28,056 22,339
-------- --------
Total liabilities. . . . . . . . . . . 578,371 563,958
Equity . . . . . . . . . . . . . . . . 44,285 40,793
-------- --------
Liabilities and equity . . . . . . . . 622,656 604,751
======== ========
-------- --------
Net interest income. . . . . . . . . . 9,725 9,454
======== ========
------ ------
Interest rate spread . . . . . . . . . 2.75% 2.73%
====== ======
Net interest margin. . . . . . . . . . 3.21% 3.17%
====== ======
OTHER INCOME
Other income during the first six months of 1998 increased
by $1,015,000 or 60.5% compared with the first six months of
1997 due to large increases in retail banking fees and gains
on sales of loans. The increased retail banking fees
resulted primarily from the fees associated with an
increased number of checking accounts, additional ATM's in
service during the first six months of 1998 compared to
1997, and an increase in the second quarter of 1998 of the
fee, begun during the second quarter of 1997, for non-
customer ATM transactions at Company owned ATM's.
In addition, gains on sales of loans increased substantially
to $1,181,000 for the first six months of 1998 as compared
to $515,000 for the same period of 1997. The increase in
gain on sale is directly related to the increase in sales
(fundings) during the period. The table below compares
certain mortgage banking information for the six months
ended June 30, 1998 to the same period in 1997 (in
thousands):
For the Six Months Ended June 30,
---------------------------------------------
$ %
1998 1997 Increase Increase
------- --------- -------- --------
Applications $143,554 $79,825 $ 63,279 80%
Closings 98,239 59,114 39,125 66%
Fundings 89,365 50,950 38,415 75%
Ending Pipeline 72,088 21,872 50,216 230%
<Page 12>
OTHER EXPENSES
Other expenses increased $1,269,000 or 16.1% during the
first six months of 1998 as compared to the same period in
1997. This increase was primarily due to a $1,210,000
combined net increase in salary, benefits and net occupancy
expense which is the result of the cost incurred to operate
and staff two additional retail banking offices opened in
the second quarter of 1998, the cost of additional ATM's,
and the cost of additional loan officers and support staff
added throughout the second half of 1997 and the first half
of 1998 in support of the Company's objective of increasing
local, non-residential loan portfolios.
For the six months ended
June 30
-------------------------
1998 1997
-------------------------
Loan servicing $235 $230
Service bureau 476 387
Advertising 384 433
Legal and accounting 263 240
Office supplies 375 297
Other 635 731
------- -------
$ 2,368 $ 2,318
======= =======
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY
There has been no material adverse changes during the six
months ended June 30, 1998 in the ability of the Company to
fund its operations. The Office of Thrift Supervision
("OTS") has established minimum liquidity requirements for
savings associations. Current regulations require a
liquidity level of at least 4%. The Bank's liquidity ratio
at June 30, 1998 was 5.68% and exceeded 4% at each
measurement date during the first six months of 1998.
REGULATORY CAPITAL STANDARDS
The Company is in compliance with all of its regulatory
capital requirements at June 30, 1998.
MARKET RISK
Management of the Company believes that during the six
months ended June 30, 1998 there has not been a material
adverse change in the market risk, defined as risk of loss
arising from changes in market rates and prices of the
Company.
YEAR 2000
The Company's Year 2000 effort is proceeding in accordance
with a written plan which has been adopted by the Company's
Board of Directors. Progress reports are provided to the
Board at least quarterly.
The Company's plan is divided into four broad areas of
concern: hardware, software, service providers and
customers. Year 2000 issues being addressed in each of
these areas include both information technology related and
non-information technology related.
Overall, the Company has identified specific issues related
to each broad area of concern and has satisfactorily
completed assessment tasks to be performed with respect to
each group as follows:
<Page 13>
Area Tasks % Complete
----- ------- -----------
Hardware Obtain information 60%
from manufacturers and
vendors that individual
pieces of hardware are
Year 2000 compliant
Software Obtain information 44%
from manufacturers and
vendors that software
applications are
Year 2000 compliant
Service Providers Obtain information 34%
from individual
service providers as
to whether they are
Year 2000 compliant
Customers Obtain information 61%
from significant
customers as to
whether they are
Year 2000 compliant
At June 30, 1998 the Company expected to be near the end of
the assessment phase of its plan and estimates that 95% of
the tasks to be accomplished had been completed. There are
no material, incomplete tasks pursuant to the Company's
plan.
Activities scheduled for the third quarter include the
majority of our own independent testing to be performed and
further progress on the items noted above. Also scheduled
is a determination of the level of testing to be performed
on the Company's main transaction processing system which is
provided by a third party at the third party's data center;
the testing of transactions processed by the data center may
be less than 100% because numerous other clients of the
service provider and the OTS use or could potentially be
testing many of the same transactions, and a sharing
arrangement would be cost beneficial to all parties.
The Company presently estimates that it will spend $350,000,
approximately 30% of which will be to replace outdated
computers which have been fully depreciated. The remainder
of the estimated cost which includes salary of staff
temporarily assigned to the project will be expensed as
incurred. Management of the Company expects its Year 2000
remediation efforts to be largely complete by June 30, 1999.
IMPACT OF FUTURE ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 133 (the
"Statement") "Accounting for Derivative Instruments and
Hedging Activities" was issued during June 1998.
This Statement establishes accounting and reporting
standards for derivative instruments, including certain
derivative instruments embedded in other contracts,
(collectively referred to as derivatives) and for hedging
activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the statement
of financial position and measure those instruments at fair
value. If certain conditions are met, a derivative may be
specifically designated as (a) a hedge of the exposure to
<Page 14>
changes in the fair value of a recognized asset or liability
or an unrecognized firm commitment, (b) a hedge of the
exposure to variable cash flows of a forecasted transaction,
or (c) a hedge of the foreign currency exposure of a net
investment in a foreign operation, an unrecognized firm
commitment, an available-for-sale security, or a foreign-
currency-denominated forecasted transaction.
The accounting for changes in the fair value of a derivative
(that is, gains and losses) depends on the intended use of
the derivative and the resulting designation.
Under this Statement, an entity that elects to apply hedge
accounting is required to establish at the inception of the
hedge the method it will use for assessing the effectiveness
of the hedging derivative and the measurement approach for
determining the ineffective aspect of the hedge. Those
methods must be consistent with the entity's approach to
managing risk.
This Statement generally precludes designating a
nonderivative financial instrument as a hedge of an asset,
liability, unrecognized firm commitment, or forecasted
transaction.
This Statement is effective for all fiscal quarters of
fiscal years beginning after June 15, 1999. Initial
application of this Statement should be as of the beginning
of an entity's fiscal quarter; on that date, hedging
relationships must be designated anew and documented
pursuant to the provisions of this Statement. Earlier
application of all of the provisions of this Statement is
encouraged, but it is permitted only as of the beginning of
any fiscal quarter that begins after issuance of this
Statement. This Statement should not be applied
retroactively to financial statements of prior periods.
Management is presently unsure when the Statement will be
adopted; however, it will be no later than January 1, 2000.
This Statement is not expected to have a material effect on
the Company's financial condition or results of operations.
<Page 15>
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
Inapplicable
ITEM 2 - CHANGES IN SECURITIES
Inapplicable
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
Inapplicable
ITEM 4 - None
ITEM 5 - OTHER INFORMATION
None
ITEM 6 - EXHIBITS AND REPORT ON FORM 8-K
(a) Exhibits - None
(b) Reports on Form 8-K - None
<Page 16>
SIGNATURES
Pursuant to the requirements 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.
FIRST COASTAL BANKSHARES, INC.
August 12, 1998 /s/ John A. B. Davies, Jr.
- ----------------- -------------------------
Date John A. B. Davies, Jr.
President/
Chief Executive Officer
August 12, 1998 /s/ Dennis R. Stewart
- ---------------- -------------------------
Date Dennis R. Stewart
Executive Vice President/
Chief Financial Officer