UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
(Mark one): [X] Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the quarterly period ended March 31, 1995
[ ] 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 0-14087
FIRST COASTAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 06-1177661
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
36 Thomas Drive, Westbrook, Maine 04092
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (207) 774-5000
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 [ ]
The number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date, is:
Class: Common Stock, Par Value $1.00 per share
Outstanding at April 27, 1995: 6,006,745 shares
INDEX
FIRST COASTAL CORPORATION AND SUBSIDIARY
PART I - FINANCIAL INFORMATION
Page
----
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 1995
(Unaudited) and December 31, 1994; 3
Condensed Consolidated Statements of Operations (Unaudited) for
the three months ended March 31, 1995 and 1994; 4
Condensed Consolidated Statements of Cash Flows (Unaudited) for
the three months ended March 31, 1995 and 1994; 5
Notes to Condensed Consolidated Financial Statements
(Unaudited), March 31, 1995 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
PART II - OTHER INFORMATION
Item 1. Legal Proceedings. 22
Item 4. Submission of Matters to a Vote of Security Holders. 22
Item 6. Exhibits and Reports on Form 8-K. 23
SIGNATURES 24
2
CONDENSED CONSOLIDATED BALANCE SHEETS
First Coastal Corporation and Subsidiary
- - - - - - ---------------------------------------------------------------------------------------
(Unaudited)
(in thousands) March 31,1995 December 31,1994
- - - - - - ---------------------------------------------------------------------------------------
ASSETS
Noninterest earning deposits and cash $ 3,088 $ 4,701
Interest earning deposits 3,145 6,636
Federal funds sold 10,000 10,000
Trading securities -- 915
Investment securities:
Held-to-Maturity 6,849 6,822
Available-for-Sale 10,049 9,924
--------- ---------
16,898 16,746
Federal Home Loan Bank stock-at cost 1,315 1,315
Loans held for sale 238 185
Loans 107,628 109,656
Less:Deferred loan fees, net (19) (31)
Allowance for loan losses (3,620) (4,042)
--------- ---------
103,989 105,583
Premises and equipment 2,879 2,941
Real estate owned and in-substance repossessions 2,732 2,925
Other assets 2,321 2,265
--------- ---------
TOTAL ASSETS $ 146,605 $ 154,212
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits $ 127,027 $ 130,037
Advances from Federal Home Loan Bank 7,667 12,612
Note payable to the FDIC 9,000 9,000
Accrued expenses and other liabilities 500 549
--------- ---------
TOTAL LIABILITIES 144,194 152,198
STOCKHOLDERS' EQUITY
Preferred Stock, $1 par value; Authorized
1,000,000 shares; none outstanding
Common Stock, $1 par value; Authorized 6,700,000 shares;
issued and outstanding 1995 and 1994 - 6,006,745 6,007 6,007
Paid-in Capital 23,968 23,968
Retained earnings deficit (27,451) (27,676)
Unrealized loss on available for sale securities (113) (285)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 2,411 2,014
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 146,605 $ 154,212
========= =========
See Notes to condensed consolidated financial statements.
3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
First Coastal Corporation and Subsidiary
- - - - - - -------------------------------------------------------------------------------------
(in thousands, except per share amounts) Three Months Ended March 31,
- - - - - - -------------------------------------------------------------------------------------
1995 1994
----------- -----------
Interest and Dividend Income
Interest and fees on loans $ 2,430 $ 2,537
Interest and dividends on investment securities 269 86
Other interest income 218 205
----------- -----------
Total Interest and Dividend Income 2,917 2,828
----------- -----------
Interest Expense
Deposits 1,154 1,161
Borrowings from Federal Home Loan Bank 172 328
FDIC Note 73 --
----------- -----------
Total Interest Expense 1,399 1,489
----------- -----------
Net Interest Income Before Provision for
Loan Losses 1,518 1,339
Provision for Loan Losses 100 67
----------- -----------
Net Interest Income After Provision for
Loan Losses 1,418 1,272
Other Income
Service charges on deposit accounts 58 73
Gain on investment securities transactions -- 29
Gain on sales of mortgage loans -- 43
Other 110 86
----------- -----------
168 231
----------- -----------
Other Expenses
Salaries and employee benefits 542 523
Occupancy 112 168
Net cost of operation or real estate owned
and in-substance repossessions (7) 133
Other 714 933
----------- -----------
1,361 1,757
----------- -----------
Income(Loss)Before Income Taxes and Minority Interest 225 (254)
Income Tax -- --
Minority Interest in Net Loss -- (11)
----------- -----------
NET INCOME (LOSS) $ 225 $ (243)
=========== ===========
PER SHARE AMOUNTS
Weighted Average Shares Outstanding 6,006,745 6,006,745
Income(Loss) Per Share $ .04 $ (.04)
=========== ===========
See Notes to condensed consolidated financial statements
4
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
First Coastal Corporation and Subsidiary
Three Months Ended March 31,
------------------------
(in thousands) 1995 1994
- - - - - - ------------------------------------------------------------------------------------------
Operating Activities
Net Income (loss) $ 225 $ (243)
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses 100 66
Writedowns of REO and ISR 14 15
Provision for depreciation and amortization 73 77
Amortization of investment security (discounts) (93) (10)
Realized investment securities gains -- (29)
Gains from assets held in trading accounts (33) --
Realized gains on assets held for sale -- (40)
Decrease in trading account securities 948 --
Net change in loans held for sale (53) 1,969
Decrease (increase) in interest receivable 58 (7)
Increase in interest payable 72 7
Net change in other assets 648 366
Net change in other liabilities (121) 24
-------- --------
Net cash provided by operating activities 1,838 2,195
-------- --------
Investing Activities
Proceeds from sales and maturities of investment securities
available for sale 1,049 51
Purchases of investment securities available for sale -- (5,968)
Purchases of investment securities held to maturity (936) (963)
Net change in loans 911 2,873
Net purchases of premises and equipment (11) (10)
-------- --------
Net cash provided (used) by investing activities 1,013 (4,017)
-------- --------
Financing Activities
Net change in deposits (3,010) (1,784)
Proceeds from borrowings -- --
Payments on borrowings (4,945) (1,154)
-------- --------
Net cash used by financing activities (7,955) (2,938)
-------- --------
Decrease in cash and cash equivalents (5,104) (4,760)
Cash and cash equivalents at beginning of period 11,337 33,539
-------- --------
Cash and cash equivalents (interest and noninterest bearing) at
end of period $ 6,233 $ 28,779
======== ========
Noncash Investing Activities
Change in unrealized holding losses on investment securities
available for sale $ 172 $ 49
Securities available for sale collateralized by portfolio
mortgage loans -- 1,003
Transfer of loans to real estate owned and in-substance
repossessions 583 --
See Notes to consolidated financial statements.
5
FIRST COASTAL CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1995
NOTE A - REGULATORY MATTERS
On September 6, 1991, First Coastal Corporation (the "Corporation") announced
that its Connecticut subsidiary, Suffield Bank, was placed into receivership by
the Connecticut Banking Department and the Federal Deposit Insurance Corporation
("FDIC") was appointed as the receiver. Under the Federal Deposit Insurance Act
("FDIA"), as amended by the Financial Institutions Reform, Recovery and
Enforcement Act of 1989 ("FIRREA"), commonly-controlled depository institutions
such as Suffield Bank and Coastal Savings Bank ("Coastal" or the "Bank") are
liable for any loss incurred by the FDIC, or any loss which the FDIC reasonably
anticipates incurring, in connection with the default of one or more of the
commonly-controlled institutions. The FDIC had up to two years from September 6,
1991 to assert a cross guaranty claim against the Bank.
On September 3, 1991, the Corporation announced that Coastal had filed an
application with the FDIC for a waiver of any cross guaranty liability arising
from Suffield Bank. On September 9, 1992, the FDIC notified Coastal that it had
denied this request. The FDIC also indicated that it had authorized the issuance
of an assessment of liability under the cross guaranty provision and claimed an
anticipated loss to the Bank Insurance Fund resulting from the failure of
Suffield Bank in an amount which, if successfully asserted, would likely result
in the appointment of a receiver for Coastal. The FDIC delegated to the Director
of Supervision the authority to negotiate a settlement of the cross guaranty
liability prior to issuing a notice of assessment. On September 1, 1993, the
FDIC notified Coastal that it had until February 14, 1994 or such later date as
may be extended by the FDIC, to reach a settlement with the FDIC over the FDIC's
cross guaranty claim against Coastal resulting from the September 1991 failure
of Suffield Bank. In establishing a February 14, 1994 deadline for payment of
the cross guaranty liability, the FDIC indicated that its intention was to
negotiate a reasonable settlement of the cross guaranty claim, which would
enable the FDIC to maximize its recovery of losses incurred as a result of the
failure of the affiliated Suffield Bank.
On April 26, 1994, the Corporation, Coastal Bancorp ("Bancorp") and the Bank
entered into a definitive Settlement Agreement with the FDIC (the "Original
Settlement Agreement"). The Original Settlement Agreement provided that in
consideration for the waiver of the FDIC's cross guaranty claim against the
Bank, the FDIC would receive shares of a new class of convertible preferred
stock of Coastal, representing on conversion a 95% ownership position in the
Bank. The waiver of the cross guaranty claim was conditional and would become
final and unconditional upon the earlier of the date on which no shares of the
convertible preferred stock were outstanding or three years after the closing
date of the settlement, provided there had been no judicial determinations (or
pending actions asserting) that the stock was not validly issued, fully paid or
non-assessable.
6
Pursuant to the Original Settlement Agreement, the preferred stock would
automatically convert to common stock upon its sale by the FDIC to any third
party. The outstanding common stock of Coastal, representing a 5% ownership
interest in the Bank on a post conversion basis, would continue to be held by
the Corporation. While the preferred stock was to be voting stock, the FDIC
agreed to grant a revocable proxy to Coastal so that such shares would be voted
in proportion to the votes cast by the other holders of the Bank's common stock,
subject to certain exceptions and limitations.
In connection with the execution of the Original Settlement Agreement, Bancorp
paid the FDIC $200,000 and the FDIC delivered to Bancorp the shares of preferred
and common stock it held in Bancorp as receiver of Suffield Bank and a waiver
and release with respect to any rights related to the stock. As a result of
Bancorp's purchase of the stock, First Coastal became the owner of 100% of the
outstanding capital stock of Bancorp.
The Original Settlement Agreement contemplated the occurrence of certain
additional transactions, including the merger of Bancorp into the Corporation or
the dissolution and liquidation of Bancorp and the distribution of its assets to
the Corporation. On July 26, 1994, Bancorp filed articles of dissolution with
the Secretary of State of the State of Maine effecting the dissolution and
liquidation of Bancorp, pursuant to which all of its remaining assets were
distributed to, and all of its remaining liabilities were assumed by, the
Corporation with the effect that the Bank became a direct wholly-owned
subsidiary of the Corporation. The Original Settlement Agreement also
contemplated the dissolution and liquidation of the Corporation in order to
facilitate the distribution of its assets (and those acquired from Bancorp) to
its stockholders. The Original Settlement Agreement provided that the only
assets of the Corporation that could be distributed to the stockholders of the
Corporation were the shares of Coastal (or cash proceeds from the sale of such
shares) representing a 5% ownership interest in the Bank (and cash in lieu of
fractional shares), subject to the satisfaction by the Corporation of all of its
debts and liabilities.
On July 20, 1994, prior to the Corporation submitting the Original Settlement
Agreement to its stockholders for approval, the United States Court of Federal
Claims issued an opinion in a case captioned Branch v. United States, No.
93-133C ("Branch"), which raised significant taking issues under the U.S.
Constitution adverse to the FDIC in connection with its assertion of cross
guaranty claims. After considering the Branch decision, the Boards of Directors
of the Corporation and the Bank concluded that it was in the best interests of
the Corporation, the Bank and the Corporation's stockholders to seek to modify
the terms of the Original Settlement Agreement.
Following extensive negotiations by the parties, the FDIC, the Corporation and
the Bank entered into the Amended and Restated Settlement Agreement dated as of
November 23, 1994 (the "Amended and Restated Settlement Agreement"), providing
for the settlement of the FDIC's cross guaranty claim against the Bank.
On January 31, 1995, following the receipt of stockholder approval, the
Corporation, Coastal and the FDIC consummated the Amended and Restated
Settlement Agreement, pursuant to which
7
the Corporation issued to the FDIC a non-recourse promissory note (the "Note")
in the principal amount of $9 million in consideration of the unconditional and
irrevocable waiver and release of the cross guaranty claim. The Corporation's
obligations under the Note are secured by a pledge by the Corporation of 100,000
shares of common stock, par value $1.00 per share, of the Bank ("CSB Common
Stock"), representing 100% of the outstanding CSB Common Stock, pursuant to a
Stock Pledge Agreement between the Corporation and the FDIC dated January 31,
1995 (the "Stock Pledge Agreement"). The Stock Pledge Agreement provides that
the Corporation retains the right to receive all cash dividends declared and
paid on the pledged shares of CSB Common Stock and to exercise all voting rights
with respect to such shares for so long as no event of default exists
thereunder. Payment of principal and interest under the Note is deferred until
the "Maturity Date," which is January 31, 1997. If prior to such Maturity Date
the Corporation and the Bank have entered into a definitive agreement regarding
either an acquisition or recapitalization of the Corporation and the Bank that,
in either case, provides the Corporation with proceeds sufficient to pay the
FDIC the unpaid principal amount and interest under the Note, the Maturity Date
will be extended until the earlier of (i) July 31, 1997, (ii) the first business
day following January 31, 1997 on which such definitive agreement is terminated
or (iii) the date of closing of the acquisition or recapitalization of the
Corporation and the Bank.
The Note bears interest (i) at a rate per annum equal to 5% from January 31,
1995 through February 1, 1996 and at a rate per annum equal to 6.5% thereafter
(compounded quarterly) to and including the earlier of (x) the date on which the
FDIC receives payment of the unpaid principal amount and accrued interest in
full or (y) the day prior to the Maturity Date; or alternatively, in the event
that there is an acquisition of the Bank by a third party, (ii) in an aggregate
amount equal to one half of any proceeds over $11.5 million received by the
Corporation from the sale of the Bank. The Amended and Restated Settlement
Agreement provides that if the Bank is sold prior to the Maturity Date, the
aggregate consideration paid by the acquiror in connection with such transaction
will be distributed in satisfaction of the Corporation's obligations under the
Note as follows: the first $9 million will be paid to the FDIC, the next $2.5
million of such consideration will be paid to the Corporation, and any
consideration over $11.5 million will be divided equally between the FDIC and
the Corporation.
As a result of the consummation of the Amended and Restated Settlement Agreement
on January 31, 1995, including the issuance of the Note in the principal amount
of $9 million to the FDIC, the Corporation recognized an extraordinary charge to
earnings of $9 million in the financial statements for the year ended December
31, 1994. In addition, as a result of the settlement, the Corporation no longer
complies with the Federal Reserve's capital adequacy guidelines. The Corporation
received a letter from the Federal Reserve Bank of Boston dated November 3,
1994, which, among other things, confirmed that the Federal Reserve has no
objection to the settlement between the Corporation and the FDIC. In such
letter, the Federal Reserve further states that in determining whether any
supervisory response is warranted on a going forward basis, the Federal Reserve
will closely monitor the efforts of the Corporation in fulfilling its
obligations under the terms of the Amended and Restated Settlement Agreement and
the attendant effect such actions will have on restoring the capital of the
Corporation.
8
The Corporation is exploring various options to satisfy its obligations to the
FDIC under the Note, including a possible recapitalization or sale of the Bank.
Management currently has no definitive plans relating to either a
recapitalization or a sale of the Bank and there can be no assurance that any
such transaction will occur or if pursued, what the terms of such transaction
might ultimately be.
Effective as of January 23, 1992, Coastal consented to an Order to Cease and
Desist (the "Order") issued by the FDIC and concurred with by the Maine
Superintendent of Banking (the "Maine Superintendent"). The Order required
Coastal to cease and desist from operating with an excessive volume of adversely
classified assets, engaging in any lending or management practices which are
detrimental to the Bank, engaging in violations of applicable laws and
regulations, operating with inadequate loan documentation, engaging in practices
which produce inadequate operating income and excessive loan losses, operating
with inadequate allowance for loan losses for the kind and quality of loans
held, failing to submit Reports of Condition and Income to the FDIC in
accordance with instructions, operating with inadequate liquidity and operating
with excessive interest rate risk exposure. The Order also required that certain
affirmative actions be taken relating to the preparation of certain plans and
analyses and the maintenance of specified capital ratios.
Effective December 8, 1994, the Regional Director of the Boston Regional Office
of the FDIC terminated the Order. The Order was replaced with a Memorandum of
Understanding ("Memorandum") among the Board of Directors of the Bank, the FDIC
and the Maine Superintendent effective as of November 22, 1994. The Memorandum
provides, among other things, that (i) the Bank continue to maintain its
allowance for loan and lease losses in accordance with applicable regulatory
requirements, (ii) the Board of Directors of the Bank continue to review the
adequacy of the Bank's loan and lease loss reserves and provide for adequate
reserves, (iii) the Bank continue to have tier 1 capital at or in excess of 6%
of the Bank's total assets, (iv) the Bank continue to comply with the FDIC's
Statement of Policy on Risk-Based Capital, (v) the Bank provide monthly progress
reports regarding substandard or doubtful assets, (vi) the Bank agree not to
extend or renew credit to, or for the benefit of, any borrower who or which has
a loan or other extension of credit with the Bank that has been charged off or
classified in whole or in part, loss, doubtful or substandard and is uncollected
unless certain conditions are met, (vii) the Bank not declare or pay any
dividends without the prior written consent of the FDIC and the Maine
Superintendent, and (viii) the Bank continue to furnish written progress reports
detailing the form and manner of any action taken to seek to secure compliance
with the Memorandum. In addition, the Board of Directors is required to develop
a written plan of action to reduce the Bank's risk position with respect to each
borrower who had outstanding principal debt owing to the Bank in excess of
$500,000 and for the formulation of a strategic plan and policies covering
investments, funds management and various lending policies.
In March 1988 the Corporation entered into a Memorandum of Understanding with
the Federal Reserve Bank of Boston which provides, among other things, for the
formulation of plans and policies covering capital adequacy, funds management,
the Corporation's management information system and the adoption of a written
dividend policy consistent with Federal Reserve
9
Board policies regarding the payment of cash dividends by bank holding
companies. Management originally addressed these matters by developing plans and
policies which were submitted to the Federal Reserve in 1988, and updated such
plans and policies in 1992 and 1995. Effective March 13, 1995, the Federal
Reserve Bank of Boston terminated the Memorandum of Understanding.
NOTE B - ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of the
Corporation have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles ("GAAP") for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
three months ended March 31, 1995 are not necessarily indicative of the results
that may be expected for the year ending December 31, 1995. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Corporation's Annual Report on Form 10-K for the year
ended December 31, 1994.
Most of the Corporation's commercial real estate loans as of March 31, 1995 are
collateralized by real estate in Maine, which has experienced a significant
decline in value since the market peak in the late 1980s. In addition, all the
real estate owned ("REO") and in-substance repossessions ("ISR") are located in
this same market. Accordingly, the ultimate collectibility of a substantial
portion of the Corporation's loan portfolio and the recovery of a substantial
portion of the carrying amount of REO and ISRs is particularly susceptible to
changes in market conditions in Maine.
While management uses available information to recognize losses on loans, REO
and ISRs, future additions to the allowance or write-downs may be necessary
based on changes in economic conditions. In addition, various regulatory
authorities, as an integral part of their examination process, periodically
review the Corporation's allowance for loan losses and the carrying value of REO
and ISRs. Such authorities may require the Corporation to recognize additions to
the allowance and/or write down the carrying value of REO or ISRs based on their
judgments of information available to them at the time of their examination.
Given the current real estate environment, additions to non-performing assets
are anticipated; however, management believes that such additions will be at
levels below those experienced in prior years. Because of uncertainties that
continue to exist in the current real estate environment, the effect of these
non-performing assets on interest income, liquidity and capital resources cannot
be adequately assessed.
10
Investment Securities
Effective January 1, 1994, with the implementation of Financial Accounting
Standards Board ("FASB") Statement No. 115, investment securities classified as
available for sale are reported at fair value, with unrealized gains and losses
excluded from earnings and reported in a separate component of stockholders'
equity. Investment securities held to maturity are stated at cost adjusted for
amortization of bond premiums and accretion of bond discounts. There was no
effect to the Corporation's Financial Statements on January 1, 1994 as a result
of implementing FASB Statement No. 115. For the three months ended March 31,
1995, investment securities decreased in fair value by $113,000 from December
31, 1994 as a result of declining interest rates.
As of December 31, 1994, the Corporation's Investment Accounting Policy states
that all securities purchased with an original maturity of over one year, other
than mortgage backed securities originated by the Bank with current loan
production, will be classified as available for sale. Securities purchased with
an original maturity of one year or less will be considered heldto-maturity.
Mortgage backed securities originated by the Bank with current loan productions
will be classified as trading securities.
Assets Held for Sale Stated at Market Value
Assets held for sale, consisting primarily of residential mortgages originated
for the purpose of potential sale, are valued at the lower of cost or market.
Loans
Interest on loans is accrued and credited to operations based on the principal
amount outstanding. The accrual of interest income is discontinued when a loan
becomes delinquent and, in management's opinion, borrowers may be unable to meet
contractual obligations. Such accrual is discontinued where interest or
principal is 90 days or more past due, unless the loans are deemed to be
adequately secured and in the process of collection. In these instances,
interest is recognized only when received. When interest accruals are
discontinued, unpaid interest credited to income in the current year is reversed
and interest accrued in prior years is charged to the allowance for loan losses.
Loan origination fees and certain direct loan origination costs are deferred and
the new amount amortized as an adjustment to the related loan yield over the
estimated contractual life of the loan.
Allowance for Loan Losses
The Corporation adopted FASB Statement No. 114, Accounting by Creditors for
Impairment of a Loan, on January 1, 1995. Under the new standard, a loan is
considered impaired, based on current information and events, if it is probable
that the Corporation will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of
11
the loan agreement. The measurement of impaired loans is generally based on the
present value of expected future cash flows discounted at the historical
effective interest rate, except that all collateral-dependent loans are measured
for impairment based on the fair value of the collateral. The adoption of FASB
Statement No. 114 resulted in no additional provision for loan losses as
determined at January 1, 1995.
Income Taxes
During 1993 Coastal adopted FASB Statement No. 109, Accounting for Income Taxes.
Statement No. 109 requires a change from the deferred method of accounting for
income taxes of APB Opinion 11 to the asset and liability method of accounting
for income taxes. Under the asset and liability method of Statement No. 109,
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. At December 31, 1994, the Corporation estimated that net operating loss
(NOL) carryforwards for federal income tax return purposes of $6.9 million were
available to offset future taxable income. Due to the uncertainty that the NOL
carryforwards will be realized, no deferred tax asset and liability accounts
have been recorded at December 31, 1994 and March 31, 1995.
12
PART I - Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
Total Assets
At March 31, 1995, total assets were $146.6 million, representing a decrease of
$7.6 million, or 4.9%, from total assets of $154.2 million at December 31, 1994.
This continued decrease, primarily related to (i) a decrease in borrowings, as
all maturing advances are paid off, and (ii) a steady decline in deposits, which
is attributable to the historically low level of deposit interest rates which
has caused depositors to seek alternative investment options. Given the decrease
in interest rates experienced during the first three months of 1995, it is
anticipated that these deposit outflows may continue. However, there can be no
certainty that the current trend in market conditions will continue.
Investments
Investment securities of $16.9 million at March 31, 1995 remained relatively
unchanged as compared to $16.7 million at December 31, 1994. Investment
securities classified as available for sale are reported at fair value, with
unrealized gains and losses excluded from earnings and reported in a separate
component of stockholders' equity. Investment securities held to maturity are
stated at cost adjusted for amortization of bond premiums and accretion of bond
discounts.
The following table sets forth the amortized cost and fair value of investment
securities for each major security type at March 31, 1995.
March 31, 1995
--------------------------------------------
Amortized Fair Unrealized
(in thousands) Cost Value Loss
- - - - - - ----------------------------------------------------------------------------------------------------------
Available for Sale:
U.S. Government Agency and Obligations $4,994 $4,939 $(55)
Mortgage backed Securities 848 840 (8)
Equity 4,000 3,950 (50)
Other 320 320 -
------- ------- -----
$10,162 $10,049 $(113)
======= ======= =====
Held to Maturity:
U.S. Government Agency and Obligations 6,849 6,846 (3)
------ ------ -----
$6,849 $6,846 $ (3)
====== ====== =====
13
The unrealized loss on investment securities classified as available for sale
decreased by $172,000 at March 31, 1995 compared to December 31, 1994. This
reduction in unrealized security losses is attributable to the slight decline in
yields on the treasury securities throughout the first three months of 1995. The
Corporation will continue to give consideration to further investments in U.S.
Government Agency and Obligations and Mortgage backed securities, after giving
consideration to the potential impact on the fair value of these securities that
may result from interest rate fluctuations in comparison to alternative
investment securities.
The following table represents the contractual maturities for investments in
debt securities for each major security type at March 31, 1995.
March 31, 1995
------------------------------------------------
Maturing
------------------------------------------------
Within After One But After
(in thousands) One Year Within Five Years Five Years
- - - - - - ----------------------------------------------------------------------------------------------------------
Available for Sale:
U.S. Government Agency and Obligations $1,972 $2,967 -
Mortgage backed Securities - - 840
------ ------ -----
$1,972 $2,967 $ 840
====== ====== =====
Held to Maturity:
U.S. Government Agency and Obligations 6,849
$6,849
Nonperforming Assets
Nonperforming assets were as follows:
March 31, December 31,
(in thousands) 1995 1994
- - - - - - --------------------------------------------------------------------------------------------------
Nonaccrual loans $3,086 $4,340
Accruing loans past due 90 days or more 243 258
Restructured loans 2,055 1,483
Real estate owned 2,139 2,222
In-substance repossessions 593 703
------ ------
Total $8,116 $9,006
====== ======
The peak level in nonperforming assets relating to the recent economic downturn
was reached on July 31, 1992 at $29.2 million. While the downward trend in
nonperforming assets that has developed since that time is significant, the
Corporation continues to hold a large concentration of commercial real estate
loans that remain vulnerable to default. Many of these loans were made at or
near the peak in the commercial real estate market in the late 1980's and the
collateral coverage
14
for many loans may not be adequate to protect the Bank from potential losses in
the event such loans become nonperforming. Deterioration in the local economy or
real estate market, or upward movements in interest rates, could have an adverse
impact on currently performing commercial real estate loan relationships. These
factors could result in an increased incidence of loan defaults and, as a
result, an increased level of nonperforming loans.
At March 31, 1995, the recorded investment in loans for which impairment has
been recognized in accordance with FASB Statement No. 114 totaled $6.3 million,
of which $1 million related to loans with no allocated reserve because the loans
have been partially written down through charge-offs and $5.3 million related to
loans with a corresponding allocated reserve of $1.4 million for the three
months ended March 31, 1995. Included in the impairment loans total is $3.1
million in nonaccrual and $2.1 million in restructured loans.
Impaired loans consisted of the following:
(in thousands) March 31, 1995
- - - - - - --------------------------------------------------------------------------------
Real estate mortgage loans:
Residential $ 230
Commercial 5,624
Real estate construction loans -
Commercial and industrial loans 154
Consumer and other loans 263
------
$6,271
REO consists of properties acquired through mortgage loan foreclosure
proceedings or in satisfaction of loans. At March 31, 1995, REO consisted of 12
commercial and residential real estate properties.
ISR consists of properties where the borrower has little or no remaining equity
in the property considering its fair value; where repayment can only be expected
to come from the operation or sale of the property; and where the borrower has
effectively abandoned control of the property or it is doubtful that the
borrower will be able to rebuild equity in the property. At March 31, 1995, ISR
consisted of 4 commercial real estate loans secured by apartment buildings and
one land loan.
Both REO and ISR are initially recorded at the lower of cost or fair value
(minus estimated costs to sell) at the date of foreclosure or in-substance
foreclosure and any difference is charged to the allowance for loan losses at
the time of reclassification. Subsequently, the values of such properties are
reviewed by management and writedowns, if any, are charged to expense. Costs
relating to the development and improvement of properties are capitalized;
holding costs are charged to expense.
15
Allowance for Loan Losses
The Corporation's allowance for loan losses was $3.6 million at March 31, 1995
compared to $4 million at December 31, 1994. The allowance for loan losses
represented 3.4% and 3.7% of total loans, and 67.2% and 66.5% of nonperforming
loans at March 31, 1995 and December 31, 1994, respectively.
The allowance for loan losses is maintained at a level believed adequate by
management to absorb potential losses inherent in the current loan portfolio.
Management's determination of the adequacy of the allowance is based on an
evaluation of the portfolio, past and expected loan loss experience, current
economic conditions, growth and diversification of the loan portfolio, the
results of the most recent regulatory examinations, the nature and level of
nonperforming assets and loans that have been identified as potential problems,
the adequacy of collateral and other relevant factors. The allowance is
increased by provisions for loan losses charged against income and recoveries on
loans previously charged off.
While the current level of allowance for loan losses is believed to be adequate,
the Corporation continues to hold a large concentration of commercial real
estate loans that remain vulnerable to loan default. Deterioration in the local
economy or real estate market, or upward movements in interest rates, could have
an adverse impact on the loan portfolio that could result in the need for an
increased allowance for loan losses. Conversely, further improvement in overall
asset quality, favorable local economic conditions or a favorable local real
estate market, could all positively impact the allowance for loan losses.
Liquidity - Coastal
Deposits totaled $127 million at March 31, 1995, a decrease of $3 million (or
2.3%) from deposits of $130 million at December 31, 1994. This continued
decrease is primarily attributable to the historically low level of deposit
interest rates which have caused depositors to seek alternative investment
options. However, deposit rates do not reprice at exactly the same time as
market interest rate levels change, and therefore the decrease in deposit levels
experienced during the first three months of 1995 should not be relied upon as a
sole indicator of how the Corporation will be affected by subsequent changes in
interest rate levels.
Coastal's liquidity ratio within a one-year timeframe was 26.8% at March 31,
1995 compared to 29.1% at December 31, 1994. An integral part of the
Corporation's liquidity plan is the immediate availability of funds if and when
unforeseen events should so dictate. Coastal has the capability of borrowing
additional funds from the Federal Home Loan Bank ("FHLB") with three-day advance
notice when adequately secured by qualified collateral. Effective as of June 8,
1993, the FHLB notified Coastal that due to "uncertainty regarding the impact of
the FDIC's cross guaranty rights on the future viability of the institution",
FHLB advances to Coastal have been restricted to maturities of six months or
less. As a result of the consummation of the Amended and Restated Settlement
Agreement and the unconditional and irrevocable waiver and release of the cross
guaranty claim, the Corporation requested the removal of the foregoing
restrictions imposed by the FHLB. On May 1, 1995, the Corporation received a
letter from the FHLB stating that it will lengthen the
16
maturity restriction on new fixed term and fixed rate advances from six months
to one year. Management believes liquidity is adequate as of March 31, 1995.
Liquidity - Parent
On a parent company only ("parent") basis, the Corporation conducts no separate
operations. Its business consists of the business of its banking subsidiary. In
addition to the Note in the principal amount of $9 million issued by the
Corporation to the FDIC on January 31, 1995 in connection with the settlement of
the cross guaranty claim and the consummation of the Amended and Restated
Settlement Agreement, the Corporation's expenses primarily include Delaware
franchise taxes associated with the Corporation's authorized capital stock,
certain legal and various other expenses. Expenses, including certain audit and
professional fees, insurance and other expenses, are allocated to Coastal based
upon the relative benefits derived. At March 31, 1995, the parent's assets
(other than its investment in subsidiaries) consisted of $186,000 in cash and
fixed assets of $11,000.
Payment of dividends by the Corporation on its stock is subject to various
restrictions. Among these restrictions is a requirement under Delaware corporate
law that dividends may be paid by the Corporation out of its surplus or, in the
event there is no surplus, out of its net profits for the fiscal year in which
the dividend is declared and/or the preceding fiscal year.
The Amended and Restated Settlement Agreement, which was consummated on January
31, 1995, prohibits the payment of dividends by the Corporation to its
stockholders on any class of stock (except for a dividend paid in shares of the
Corporation's common stock, or in any other stock of the Corporation) until the
unpaid principal amount and interest under the Note are paid in full in
accordance with the terms thereof.
The principal source of cash for the parent company would normally be a dividend
from Coastal; however, certain restrictions also exist regarding the ability of
Coastal to transfer funds to the Corporation in the form of cash dividends,
loans or advances. The most significant of these are described below.
Maine corporate law generally provides that dividends may only be paid out of
unreserved and unrestricted earned surplus or unreserved and unrestricted net
earnings of the current fiscal year and the next preceding fiscal year taken as
a single period. Maine banking law also imposes certain restrictions, including
the requirement that the Bank establish and maintain adequate levels of capital
as set forth in rules adopted by the Maine Superintendent.
The Amended and Restated Settlement Agreement provides that the Bank may not
declare any dividends, except as necessary to pay the operating expenses of the
Corporation as approved from time to time by both the FDIC and the Maine
Superintendent. The Amended and Restated Settlement Agreement further provides
that such operating expenses may not include any amounts for accrued interest on
the Note.
The Memorandum (effective November 22, 1994) provides that the Bank may not pay
or declare any dividends without the prior written consent of the FDIC and the
Maine Superintendent.
17
On November 30, 1994 following the receipt of appropriate regulatory approvals,
Coastal paid the Corporation a cash dividend of $175,000 for certain current and
anticipated operating expenses of the Corporation.
Capital
The following table sets forth the various capital requirements and capital
ratios of each of the Corporation and Coastal at March 31, 1995.
First Coastal
Coastal Savings
(dollars in thousands) Corporation Bank
- - - - - - -------------------------------------------------------------------------------------------------
Tier 1 Leverage Ratio
Qualifying capital $ 2,474 $ 11,381
Actual % 1.66% 7.63%
Minimum requirement % 4.00% - 5.00% 6.00%
Average assets for first quarter $149,354 $149,206
Risk Based Capital - Tier 1
Qualifying capital $ 2,474 $ 11,381
Actual % 2.52% 11.56%
Minimum requirement % 4.00% 4.00%
Risk Based Capital - Total
(Tier 1 and Tier 2)
Qualifying capital $ 3,733 $ 12,641
Actual % 3.80% 12.85%
Minimum requirement % 8.00% 8.00%
Gross risk weighted assets $98,344 $98,409
The Memorandum of Understanding among the Board of Directors of Coastal, the
Regional Director of the Boston Region of the FDIC and the Maine Superintendent
requires that Coastal maintain a leverage capital ratio of 6% or greater.
Coastal's leverage capital ratio at March 31, 1995 was 7.63%. As a result of the
consummation of the Amended and Restated Settlement Agreement on January 31,
1995, including the issuance of the Note in the principal amount of $9 million
to the FDIC, the Corporation recognized an extraordinary charge to earnings of
$9 million in the financial statements for the year ended December 31, 1994. In
addition, as a result of the settlement the Corporation no longer complies with
the Federal Reserve's capital adequacy guidelines. The Corporation received a
letter from the Federal Reserve Bank of Boston dated November 3, 1994, which,
among other things, confirmed that the Federal Reserve has no objection to the
settlement between the Corporation and the FDIC. In such letter, the Federal
Reserve further states that in determining whether any supervisory response is
warranted on a going forward basis, the Federal Reserve will closely monitor the
18
efforts of the Corporation in fulfilling its obligations under the terms of the
Amended and Restated Settlement Agreement and the attendant effect such actions
will have on restoring the capital of the Corporation.
The stockholders of the Corporation have approved a proposal to effect a one for
ten reverse stock split with respect to the issued and outstanding common stock
of the Corporation and to provide for the payment of cash in lieu of fractional
shares otherwise issuable in connection therewith.
Upon consummation of the reverse stock split, the number of outstanding shares
of common stock of the Corporation will be reduced from 6,006,745 shares
(determined at the close of business on April 27, 1995) to approximately 600,675
shares (subject to adjustment due to the purchase of fractional shares).
Fractional shares which would otherwise be issued as a result of the reverse
stock split will be purchased by the Corporation.
The effective date of the reverse stock split has not yet been determined;
however, management currently expects the reverse stock split to be effected
during the second quarter of 1995.
The following table reflects the effect of the reverse stock split on historical
earnings per share for the three months ended March 31, 1995 and 1994:
For the three months ended March 31,
------------------------------------
1995 1994
- - - - - - -----------------------------------------------------------------------------------------------------------
Weighted Average shares outstanding (historical) 6,006,745 6,006,745
Approximate weighted average shares outstanding after
reverse stock split 600,675 600,675
Net income (loss) per share $.42 $(.40)
The Corporation's stockholders' equity at March 31, 1995 was $2.4 million
compared to $2 million at December 31, 1994. The $397,000 increase is
attributable to (i) net income for the three months ended March 31, 1995 of
$225,000, and (ii) the decrease in the unrealized loss on investment securities
which are classified "Available for Sale," totaling $172,000. The Corporation
suspended the quarterly payment of cash dividends to its stockholders in the
fourth quarter of 1989 and has not paid any cash dividends to its stockholders
since that time. Pursuant to the Amended and Restated Settlement Agreement, no
dividends may be paid to the Corporation's stockholders until the unpaid
principal and interest under the Note payable to the FDIC is paid in full.
19
RESULTS OF OPERATIONS
Net Income(Loss)
The net income for the three months ended March 31, 1995 was $225,000, as
compared to a loss of $243,000 for the same period last year. Excluding $73,000
in interest expense associated with the Corporation's $9 million Note to the
FDIC, net income for the period would have been $297,000. A contributing factor
to the Corporation's improved earnings is the increase in the Corporation's net
interest income of $178,000 for the three months ended March 31, 1995 as
compared to the same period last year. For the quarter ended March 31, 1994,
Other Expenses included $355,000 of non-recurring expenses associated with the
settlement of the FDIC's cross guaranty claim against the Bank. Excluding these
settlement related expenses, the Corporation would have reported a $112,000
profit for the quarter ended March 31, 1994.
Net Interest Income
Net interest income for the three months ended March 31, 1995 was $1.5 million,
an increase of $.2 million as compared to $1.3 million for the three months
ended March 31, 1994. This increase is mainly attributable to a rising interest
rate environment throughout 1994 and which resulted in an increase in rates on
existing adjustable rate loans and investments. Notwithstanding the increased
rate environment that was experienced throughout 1994, the Corporation's rates
paid on deposit transaction accounts remained relatively unchanged, thereby
increasing the spread on Earning Assets versus Sources of Funds, positively
impacting net interest income. However, Earning Assets and Sources of Funds do
not reprice in exactly the same manner as interest levels change. Because
interest rate increases on deposit accounts tend to lag behind increases in
market rates, management expects an increase in rates paid on deposit
transaction accounts throughout 1995. Another factor contributing to the
increase in net interest income was the investment of interest earning deposits
in higher earning securities of approximately $8 million.
Provision for Loan Losses
The provision for loan losses for the three months ended March 31, 1995 was
$100,000 as compared to $67,000 for the three months ended March 31, 1994. In
1992 and 1991, significant provisions were made to recognize the perceived
deteriorating real estate market. In 1993, there was present a more stable
environment. Also, many of the previously recognized loan problems were worked
out or reclassified to a foreclosed status. In addition, loan balance levels
declined in 1993 and 1994 compared to prior years. There remains the continued
need to provide for the provision for loan losses primarily due to the
uncertainty in the Maine economy and the potential adverse effect on real estate
values and the ability of borrowers to repay loans.
The Corporation continues to hold a large concentration of commercial real
estate loans that remain vulnerable to loan default. Deterioration in the local
economy or real estate market, or
20
upward movements in interest rates, could have an adverse impact on the loan
portfolio that could result in the need for increased provision for loan losses.
The Corporation's policy is to provide an allowance by charging operations for
estimated losses based on periodic evaluations of the loan portfolio and current
economic trends. All of the Corporation's commercial real estate loans are
located in the depressed markets in Maine. Accordingly, the ultimate
collectibility of a substantial portion of the Corporation's loan portfolio is
particularly susceptible to changes in local market conditions. Management has
seen indications that the depressed Maine real estate market and the economy in
general have stabilized.
Management believes that the allowance for losses on loans is adequate at March
31, 1995 and that foreclosed real estate is recorded at the lower of cost or
estimated fair value. While management uses available information to recognize
losses on loans, real estate owned and in-substance repossessions, future
additions to the allowance and writedowns may be necessary based on changes in
the financial condition of various borrowers, new information that becomes
available relative to various borrowers and loan and/or real estate collateral
and changes in economic conditions in New England. In addition, various
regulatory authorities, as an integral part of their examination process,
periodically review the Corporation's allowance for losses on loans and the
carrying value of real estate owned and in-substance repossessions. Such
authorities may require the Corporation to recognize additions to the allowance
for losses on loans and/or write down the carrying value of real estate owned
and in-substance repossessions based on their judgments of information available
to them at the time of their examination.
Other Operating Income
Other operating income for the three months ended March 31, 1995 was $168,000 as
compared to $231,000 for the same period in 1994. This decrease is primarily the
result of a decrease in gain on sales of mortgage loans as a result of a steady
reduction in loan origination volume caused by rising interest rates experienced
during 1994; consequently, fewer mortgage backed securities were sold.
Other Operating Expenses
Other operating expenses were $1.4 million and $1.8 million for the three months
ended March 31, 1995 and 1994, respectively. The $.4 million decrease is
attributable to three items: (i) a reduction in settlement agreement related
expenses of approximately $300,000, (ii) a reduction in occupancy expense of
$56,000 as a result of the closure of two banking offices in the second and
third quarters of 1994, and (iii) the reduction of other real estate owned
expense of $140,000, which includes a $50,000 expense accrual posted in the
fourth quarter of 1994 and reversed in the first quarter of 1995, and additional
revenues on REO properties being received in 1995 as compared to 1994.
21
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
Information required by this Item is set forth under Note A -
Regulatory Matters on pages 6 to 8 hereof, which is incorporated herein
by reference.
Item 4. Submission of Matters to a Vote of Security Holders
(a) The 1994 Annual Meeting of Stockholders of the Corporation was held on
January 31, 1995.
(b) Not applicable.
(c) The results of the voting at the Annual Meeting of Stockholders were as
follows:
(i) Amended and Restated Settlement Agreement, dated as of
November 23, 1994. For: 2,617,443; Against: 36,660; Abstain:
29,375; Broker Non-Votes: 1,896,646
(ii) One for Ten Reverse Stock Split pursuant to an amendment to
the Corporation's Certificate of Incorporation.
For: 3,810,596; Against: 76,921; Abstain: 23,867
(iii) Election of Directors:
Nominee For Withhold Authority
------- --- ------------------
Normand E. Simard 4,545,187 34,937
Edward K. Simensky 4,545,187 34,937
(iv) Ratification of Coopers & Lybrand as Independent Public
Accountants. For: 4,544,595; Against: 14,325; Abstain: 24,204
(d) Not applicable.
22
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3(ii) Amended and Restated Bylaws of the Corporation
27 Financial Data Schedule
(b) Reports on Form 8-K
(i) A report on Form 8-K dated January 31, 1995 was filed to
report that following stockholder approval, the Corporation,
the Bank and the FDIC consummated the Amended and Restated
Settlement Agreement with the FDIC pursuant to which the FDIC
unconditionally and irrevocably waived and released the cross
guaranty claim against the Bank. In connection with the
consummation of the Amended and Restated Settlement Agreement,
the Corporation issued to the FDIC a non-recourse promissory
note in the principal amount of $9 million.
(ii) A report on Form 8-K dated February 24, 1995 was filed to
report that James H. Whittaker informed the Boards of
Directors of the Corporation and the Bank of his intention to
resign as Chairman, President and Chief Executive Officer of
the Corporation and the Bank.
23
FIRST COASTAL CORPORATION
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 CORPORATION
Date: May 12, 1995 By: /S/ Gregory T. Caswell
----------------------
Gregory T. Caswell
President and Chief
Executive Officer
Date: May 12, 1995 By: /S/ Dennis D. Byrd
------------------
Dennis D. Byrd
Treasurer
(Principal Financial and
Accounting Officer)
24