UNITED STATES
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 the quarterly period ended MARCH 31, 1996
OR
[ ] 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 30, 1996 (approximate): 600,361 shares
INDEX
FIRST COASTAL CORPORATION AND SUBSIDIARY
PART I - FINANCIAL INFORMATION
PAGE
----
Item 1. Financial Statements
Condensed Consolidated Balance Sheets (Unaudited) as of
March 31, 1996 and December 31, 1995 3
Condensed Consolidated Statements of Operations (Unaudited)
for the three months ended March 31, 1996 and 1995 4
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the three months ended March 31, 1996 and 1995 5
Notes to Condensed Consolidated Financial Statements
(Unaudited), March 31, 1996 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Changes in Securities 19
Item 3. Defaults Upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 21
2
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
FIRST COASTAL CORPORATION AND SUBSIDIARY
(IN THOUSANDS) MARCH 31, 1996 DECEMBER 31,1995
-------------- ----------------
ASSETS
Noninterest earning deposits and cash $ 4,316 $ 4,466
Interest earning deposits 14,087 4,375
--------- --------
Cash and cash equivalents 18,403 8,841
Federal funds sold - 10,000
Investment securities:
Held-to-maturity 11,798 11,786
Available-for-sale (at market value) 12,767 7,926
--------- --------
24,565 19,712
Federal Home Loan Bank stock-at cost 1,315 1,315
Loans held for sale 1,781 281
Loans 96,024 100,550
Less: Deferred loan fees, net (15) (22)
Allowance for loan losses (2,646) (2,659)
--------- --------
93,363 97,869
Premises and equipment 3,159 3,073
Real estate owned and repossessions 2,164 1,973
Other assets 2,259 2,389
--------- --------
TOTAL ASSETS $147,009 $145,453
--------- --------
--------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits $126,746 $125,665
Advances from Federal Home Loan Bank 6,000 6,000
FDIC Note 9,000 9,000
Accrued interest on FDIC Note 559 419
Accrued expenses and other liabilities 433 372
--------- --------
TOTAL LIABILITIES 142,738 141,456
STOCKHOLDERS' EQUITY
Preferred Stock, $1.00 par value; Authorized
1,000,000 shares; none outstanding
Common Stock, $1.00 par value; Authorized 6,700,000
shares; issued and outstanding as of March 31, 1996
and December 31, 1995 - 600,361 (See Note B for
information regarding the reverse stock split) 600 600
Paid-in Capital 29,375 29,375
Retained earnings deficit (25,679) (26,016)
Unrealized gain (loss) on available for sale securities (25) 38
--------- --------
TOTAL STOCKHOLDERS' EQUITY 4,271 3,997
--------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $147,009 $145,453
--------- --------
--------- --------
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,
1996 1995
--------- --------
INTEREST AND DIVIDEND INCOME
Interest and fees on loans $2,426 $2,430
Interest and dividends on investment securities 325 269
Other interest income 252 218
--------- --------
TOTAL INTEREST AND DIVIDEND INCOME 3,003 2,917
--------- --------
INTEREST EXPENSE
Deposits 1,263 1,154
Borrowings
Advances from Federal Home Loan Bank 88 172
FDIC Note 141 73
--------- --------
Total Interest Expense 1,492 1,399
--------- --------
Net Interest Income Before Provision for Loan Losses 1,511 1,518
Provision for Loan Losses - 100
--------- --------
Net Interest Income After Provision for Loan Losses 1,511 1,418
OTHER INCOME
Service charges on deposit accounts 70 58
Gain on investment securities transactions 7 -
Loss on sales of mortgage loans (8) -
Other 62 110
--------- --------
131 168
--------- --------
OTHER EXPENSES
Salaries and employee benefits 513 542
Occupancy 130 112
Net cost of operation or real estate owned
and repossessions 56 (7)
Other 606 714
--------- --------
1,305 1,361
--------- --------
Income Before Income Taxes 337 225
Income Tax - -
--------- --------
NET INCOME $ 337 $ 225
--------- --------
--------- --------
PER SHARE AMOUNTS
Weighted Average Shares Outstanding 600,361 600,361
Income Per Share (See Note B for information regarding
the reverse stock split) $ .56 $ .37
--------- --------
--------- --------
See Notes to condensed consolidated financial statements.
4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
First Coastal Corporation and Subsidiary
(IN THOUSANDS) THREE MONTHS ENDED MARCH 31,
1996 1995
--------- ---------
OPERATING ACTIVITIES
Net Income $ 337 $ 225
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses - 100
Writedowns of REO 27 14
Provision for depreciation and amortization 80 73
Amortization of investment security (discounts) (10) (93)
Realized investment securities (gains) (7) -
(Gains) from assets held in trading accounts - (33)
Realized losses on assets held for sale 8 -
Decrease in trading account securities - 948
Net change in loans held for sale (1,508) (53)
Decrease in interest receivable 116 58
Increase in interest payable 156 72
Net change in other assets (510) 648
Net change in other liabilities 45 (121)
--------- --------
Net cash provided by operating activities (1,266) 1,838
--------- --------
INVESTING ACTIVITIES
Decrease in federal funds sold 10,000 -
Proceeds from sales and maturities of investment
securities available for sale 1,080 1,049
Maturities of securities held to maturity 5,000 -
Purchases of investment securities available
for sale (5,976) -
Purchases of investment securities held to maturity (5,003) (936)
Net change in loans 4,812 911
Net purchases of premises and equipment (166) (11)
--------- --------
Net cash provided (used) by investing activities 9,747 1,013
--------- --------
FINANCING ACTIVITIES
Net change in deposits 1,081 (3,010)
Payments on borrowings - (4,945)
--------- --------
Net cash used by financing activities 1,081 (7,955)
--------- --------
Increase (decrease) in cash and cash equivalents 9,562 (5,014)
Cash and cash equivalents at beginning of period 8,841 11,337
--------- --------
Cash and cash equivalents (interest and noninterest
bearing) at end of period $18,403 $ 6,233
--------- --------
--------- --------
NONCASH INVESTING ACTIVITIES
Change in unrealized holding losses on investment
securities available for sale $ 63 $ 172
Securities available for sale collateralized by
portfolio mortgage loans -
Transfer of loans to real estate owned and repossessions 306 583
See Notes to consolidated financial statements.
5
FIRST COASTAL CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
NOTE A - CERTAIN REGULATORY MATTERS
RECEIVERSHIP OF SUFFIELD BANK
On September 6, 1991, First Coastal Corporation (the "Company") announced that
Suffield Bank was placed into receivership by the Connecticut Banking Department
and the Federal Deposit Insurance Corporation ("FDIC") was appointed as the
receiver. Following the receivership of Suffield Bank, management's efforts
were focused for an extended period of time on resolving the cross guaranty
claim, as described below, and improving operations of the Company's subsidiary,
Coastal Savings Bank ("Coastal" or the "Bank").
SETTLEMENT OF FDIC CROSS GUARANTY CLAIM
On January 31, 1995, the Company and the Bank consummated a settlement with the
FDIC in accordance with the terms and conditions of the Amended and Restated
Settlement Agreement, dated as of November 23, 1994 (the "Amended and Restated
Settlement Agreement"), pursuant to which the FDIC waived and released its cross
guaranty claim against the Bank. The cross guaranty claim was the result of the
September 1991 failure of Suffield Bank. As part of the settlement, the Company
issued to the FDIC a non-recourse promissory note in the principal amount of
$9.0 million (the "Note" or the "FDIC Note"), secured by the Company's pledge of
the outstanding stock of the Bank. In 1994, the Company incurred an
extraordinary charge to earnings resulting from the issuance of the Note.
Principal and interest under the FDIC Note are deferred until its maturity date,
which is January 31, 1997, subject to extension under certain circumstances.
The Company announced on January 31, 1996 that it intends to pursue a
recapitalization of the Company as the means to facilitate the satisfaction of
the FDIC Note. On April 18, 1996, the Company filed with the Securities and
Exchange Commission a registration statement on Form S-2 with respect to a
proposed registered public offering of 750,000 shares of the Company's common
stock. As part of the recapitalization, the Company expects to raise
approximately $3.0 to $4.0 million through such offering of its common stock,
including a rights offering to the Company's existing stockholders. The
offering will be made only by means of a prospectus. In addition to the
proceeds from the common stock offering, the Company also expects to use funds
derived from dividends from the Bank and the proceeds from a loan to satisfy its
obligation under the FDIC Note. The recapitalization and related transactions
are subject to a number of conditions, including the receipt of appropriate
regulatory approvals, and there can be no assurance that such recapitalization
and related transactions will be consummated or that the Company will be
successful in repaying the FDIC Note. The Company anticipates that the
recapitalization would be completed in the third quarter of 1996.
MEMORANDUM OF UNDERSTANDING
Effective as of January 23, 1992, Coastal consented to an Order to Cease and
Desist (the "Order to Cease and Desist" or the "Order") issued by the FDIC and
concurred with by the Maine Bureau of Banking (the "Maine Bureau of Banking").
The Order required Coastal to cease and desist from engaging in certain
activities and practices detrimental to the Bank and also required, among other
things, the maintenance by the Bank of specified capital ratios. Effective
December 8, 1994, the Order was terminated.
The Order was replaced with a Memorandum of Understanding ("Memorandum") among
the Bank, the FDIC and the Maine Bureau of Banking effective as of November 22,
1994. The Memorandum provides, among other
6
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 a Tier 1 capital to total assets ratio at or in excess
of 6.0%, (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
Bureau of Banking, 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 which was classified substandard, in
whole or in part, and other real estate owned with a book value in excess of
$500,000, as well as the formulation of a strategic plan and policies
covering investments, funds management and various lending policies. At
March 31, 1996, the Bank had a Tier 1 capital to total assets ratio of 9.45%.
In March 1988, the Company entered into a Memorandum of Understanding with the
Federal Reserve Bank of Boston which provided, among other things, for the
formulation of plans and policies covering capital adequacy, funds management,
the Company's management information system and the adoption of a written
dividend policy consistent with the policies of the Board of Governors of the
Federal Reserve System (the "Federal Reserve") regarding the payment of cash
dividends by bank holding companies. Management 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.
REGULATORY CAPITAL REQUIREMENTS
Under applicable federal regulations, the Company and Coastal are each required
to maintain minimum levels of regulatory capital. The Federal Reserve has
adopted a leverage-based capital requirement for bank holding companies with a
composite rating of 1 under the bank holding company rating system of a minimum
level of tier 1 capital to total assets of 3.0%. All other bank holding
companies or bank subsidiaries of bank holding companies are required to
maintain a minimum ratio of tier 1 capital to total assets of 4.0% to 5.0%.
Under the Federal Reserve's risk-based capital guidelines, bank holding
companies or banks also are required to maintain a minimum ratio of qualifying
total capital to risk-weighted assets of 8.0%. The guidelines apply on a
consolidated basis to bank holding companies with consolidated assets of $150
million or more. For bank holding companies which have less than $150 million in
consolidated assets, as did the Company for each of the quarters ended March 31,
1995, June 30, 1995, September 30, 1995, December 31, 1995 and March 31, 1996,
the guidelines are applied on a bank-only basis (as opposed to a consolidated
basis) unless (i) the parent bank holding company is engaged in nonbank activity
involving significant leverage or (ii) the parent company has a significant
amount of debt that is held by the general public. The Federal Reserve capital
adequacy guidelines provide that "debt held by the general public" is debt held
by parties other than financial institutions, officers, directors, and
controlling stockholders of the banking organization or their related interests.
The FDIC Note is not considered to be "debt held by the general public" for
purposes of such capital guidelines. As a result, applied on a bank-only basis,
the Company's ratios of tier 1 capital to total assets, tier 1 capital to risk-
weighted assets, qualifying total capital to risk-weighted assets of 9.45%,
15.21%, and 16.48%, respectively, at March 31, 1996 were in compliance with such
guidelines.
7
The FDIC has also adopted minimum capital requirements as regulations for state
non-member banks such as the Bank. Under the minimum leverage capital
requirement, insured state non-member banks must maintain a Tier 1 capital to
total assets ratio of at least 3% to 5% depending on the CAMEL rating of the
bank. The Memorandum requires that the Bank continue to maintain a Tier 1
capital to total assets ratio at or in excess of 6.0%. At March 31, 1996, the
Bank had a Tier 1 capital to total assets ratio of 9.45%.
In addition, under such regulations insured non-member banks must maintain a
minimum ratio of qualifying total capital to risk-weighted assets of 8.0%,
including a minimum ratio of Tier 1 capital to risk-weighted assets of 4.0%. At
March 31, 1996, the Bank had a ratio of Tier 1 capital to risk-weighted assets
of 15.21% and a ratio of qualifying total capital to risk-weighted assets of
16.48%.
NOTE B - ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of the
Company have been prepared in conformity 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, 1996 are not necessarily indicative of the results
that may be expected for the year ending December 31, 1996. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1995.
Most of the Company's commercial real estate loans as of March 31, 1996 are
collateralized by real estate in Maine which has experienced a significant
decline in value since the market peak in the late 1980's. In addition, all of
the real estate owned ("REO") are located in this same market. Accordingly, the
ultimate collectibility of a substantial portion of the Company's loan portfolio
and the recovery of a substantial portion of the carrying amount of REO have
been impacted by this real estate market decline and are particularly
susceptible to changes in market conditions in Maine.
While management uses available information to recognize losses on loans and
REO, future additions to the allowance for loan losses ("Allowance") or
writedowns 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 Company's Allowance and the
carrying value of REO. Such authorities may require the Company to recognize
additions to the Allowance and/or write down the carrying value of REO based on
their judgments of information available to them at the time of their
examination.
NEW ACCOUNTING STANDARDS
In May 1995, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standard (SFAS) No. 122, MORTGAGE SERVICING RIGHTS,
which amends FASB Statement No. 65, ACCOUNTING FOR CERTAIN MORTGAGE BANKING
ACTIVITIES. This standard eliminates the distinction between purchased and
originated mortgage servicing rights and establishes the use of a valuation
allowance to recognize any impairment in the fair value of mortgage servicing
rights. There was no effect to the Company's financial statements or results of
operations on January 1 and March 31, 1996 as a result of implementing FASB
Statement No. 122.
8
In addition, during October 1995, FASB issued SFAS No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION, which establishes fair-value based accounting to
recognize compensation expense related to stock-based transactions. For
employers, the fair-value based recognition provisions are not mandatory;
however, certain disclosure requirements are provided. The Company intends to
comply with the disclosure requirements when required in 1996.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with a maturity of
three months or less to be cash equivalents.
INVESTMENT SECURITIES
Effective January 1, 1994 with the implementation of 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 as 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 Company's financial
statements or results of operations on January 1, 1994 as a result of
implementing FASB Statement No. 115. For the three months ended March 31, 1996,
investment securities classified as available for sale reflected an unrealized
loss of $25,000.
As of March 31, 1996, the Company'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, or callable U.S. government agency notes, will be
considered held-to-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.
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 Allowance 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
9
diversification of the loan portfolio, the results of the most recent
regulatory examinations, the nature and level of nonperforming assets,
impaired loans 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.
The Company 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 Company will be unable to collect the scheduled payments of principal
or interest when due according to the contractual terms of the loan agreement.
Management identifies impaired loans on a loan-by-loan basis. The measurement
of impaired loans is generally based on the present value of expected future
cash flows discounted at the historical effective interest rate, with the
exception of all collateral-dependent loans, which 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 and March 31, 1996.
REAL ESTATE OWNED ("REO")
REO, other than bank premises, consists of properties acquired through mortgage
loan foreclosure proceedings or in satisfaction of loans. REO is initially
recorded at the lower of cost or fair value (minus estimated costs to sell) at
the date of foreclosure and any difference is charged to the Allowance at the
time of reclassification. Subsequently, the values of such properties are
reviewed by management and writedowns, if any, are charged to expense.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated provisions for
depreciation and amortization, computed using the straight-line method over
estimated useful lives.
REVERSE STOCK SPLIT
On May 31, 1995, the Company effected a one-for-ten reverse stock split with
respect to the issued and outstanding shares of the Company's common stock,
which was approved by the Company's stockholders on January 31, 1995. As a
result of the reverse stock split, the number of outstanding shares of common
stock of the Company was reduced from 6,006,745 shares (determined at the close
of business on May 31, 1995) to 600,361 shares. As a result, $5,407,000 was
transferred from the Company's common stock account to paid-in capital. All
applicable share and per share data appearing in the consolidated financial
statements and notes thereto have been retroactively adjusted for the reverse
stock split.
INCOME TAXES
The Company adopted FASB Statement No. 109, ACCOUNTING FOR INCOME TAXES, in 1993
which 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,
1995, the Company estimated that net operating loss ("NOL") carryforwards for
federal income tax return purposes of $6.8 million were available to offset
future taxable income. Due to the uncertainty that the benefit of net deferred
tax assets will be realized, a full valuation allowance has been recorded at
March 31, 1996 and December 31, 1995.
10
PART I - Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FINANCIAL CONDITION
TOTAL ASSETS
At March 31, 1996, total assets were $147.0 million, representing an increase
of $1.5 million (or 1.1%) from total assets of $145.5 million at December 31,
1995. This increase was primarily attributable to the $1.0 million increase
in deposits. However, as of April 26, 1996, the Company consummated the sale
of its Kezar Falls branch to Maine Bank & Trust Company which resulted in a
decrease in deposits and overall total assets of approximately $9.9 million
in the second quarter of 1996. See "Financial Condition - Liquidity -
Coastal" for more information concerning the branch sale.
INVESTMENTS
The Company's investment portfolio is comprised primarily of U.S. government and
agency obligations and also contains miscellaneous equity securities. Total
investment securities at March 31, 1996 were $24.6 million compared to $19.7
million at December 31, 1995. This increase is attributable to the purchase of
$5.0 million in U.S. government agency callable notes, $4.0 million in GNMA
mortgage-backed securities and $2.0 million in U.S. treasury securities,
partially offset by maturities of U.S. treasury securities totaling $2.0 million
and $4.0 million of U.S. government agency callable notes which were called
during the first quarter of 1996. 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, 1996.
March 31, 1996
----------------------------------------------------
Fair Gross Gross
Amortized Market Unrealized Unrealized
(IN THOUSANDS) Cost Value Gain Losses
- -------------------------------------------------------------------------------------------
Available for sale:
U.S. government obligations $ 5,958 $ 5,968 $18 $ (8)
Mortgage backed securities 4,724 4,695 10 (39)
Equity/mutual fund 2,000 1,994 - (6)
Other 110 110 - -
------- ------- --- -----
$12,792 $12,767 $28 $ (53)
------- ------- --- -----
------- ------- --- -----
Held to maturity:
U.S. government callable notes 11,798 11,688 5 (115)
------- ------- --- -----
$11,798 $11,688 $ 5 $(115)
------- ------- --- -----
------- ------- --- -----
The net unrealized loss on investment securities classified as available for
sale was $25,000 at March 31, 1996, versus a net unrealized gain of $38,000 at
December 31, 1995. The net unrealized loss on securities available for sale is
attributable to an increase in interest rates during the first three months of
1996. The Company will continue to give consideration to further investments in
U.S. government agency, U.S. government obligations and mortgage
11
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, 1996.
March 31, 1996
----------------------------------------------------
Maturing
----------------------------------------------------
After One
Within But Within After
(IN THOUSANDS) One Year Five Years Five Years Total
- -------------------------------------------------------------------------------------------
Available for sale:
U.S. government obligations $4,007 $1,961 - $ 5,968
Mortgage backed securities - - 4,695 4,695
------ ------ ------ -------
$4,007 $1,961 $4,695 $10,663
------ ------ ------ -------
------ ------ ------ -------
Held to maturity:
U.S. government agency callable
notes (final maturity) - 7,998 3,800 11,798
------ ------ ------ -------
$ - $7,998 $3,800 $11,798
------ ------ ------ -------
------ ------ ------ -------
LOANS
Loans consisted of the following:
March 31, December 31,
(IN THOUSANDS) 1996 1995
- ------------------------------------------------------------------------------
Real estate mortgage loans:
Residential $28,724 $ 30,966
Commercial 49,258 50,797
Commercial and industrial loans 2,264 2,524
Consumer and other loans 15,778 16,263
------- --------
$96,024 $100,550
------- --------
------- --------
Loans decreased $4.5 million (or 4.5%) at March 31, 1996 as compared to
December 31, 1995. The most significant reason for the decrease was the
prepayment of loans in advance of their scheduled maturity dates, as borrowers
refinanced at lower interest rates.
ALLOWANCE FOR LOAN LOSSES
The Company's allowance for loan losses ("Allowance") was $2.6 million at
March 31, 1996 compared to $2.7 million at December 31, 1995. The Allowance
represented 2.76% and 2.65% of total loans, and 182.48% and 47.96% of
nonperforming loans, at March 31, 1996 and December 31, 1995, respectively.
Although the balance of the Allowance remained relatively unchanged at March 31,
1996 as compared to December 31, 1995, the level is still expected to trend
moderately downwards for the remainder of 1996. This is anticipated to occur as
previously identified loan loss exposure is quantified and recognized (charged-
off),
12
either through negotiations and work out efforts, or through the
commencement of collateral liquidations. Management believes there will not be
a dramatic decline in the Allowance such as was experienced at the end of 1995.
In determining reserve adequacy, management places a high reliance upon the
review of individual commercial loan assets to determine whether or not loss
exposure exists. All such loans classified substandard or worse are assigned
individual allocated loan loss reserves, where appropriate. Consistent with
current guidelines, a five percent reserve is also established against loans
graded special mention and various reserve percentages are established against
the non-classified balance of the commercial portfolio, as well as residential
loans, construction loans and consumer loans. This methodology relies upon a
combination of current and anticipated trends, along with historical trends, in
establishing the appropriate reserve percentages for the different portfolios.
While the current level of the Allowance is believed to be adequate, the Company
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
effect on the performance of 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 positively effect the Allowance.
NONPERFORMING ASSETS
Information with respect to nonperforming assets is set forth below:
March 31, December 31,
(IN THOUSANDS) 1996 1995
- ------------------------------------------------------------------------------
Nonaccrual loans $ 736 $1,948
Accruing loans past due 90 days or more 89 169
Restructured loans 625 3,427
Real estate owned 2,164 1,973
------- -------
Total $3,614 $7,517
------- -------
------- -------
The level of nonperforming assets declined 51.9% from December 31, 1995 to
March 31, 1996, from $7.5 million to $3.6 million, respectively. The current
level of nonperforming assets represents an 86.8% decline from the level
established at December 31, 1991 of $27.3 million. While the downward trend
in nonperforming assets that has developed since 1991 is significant, the
Company 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 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.
IMPAIRED LOANS
Management reviews loans on a case by case basis to determine which loans should
be classified as impaired. If management believes there is a high probability
of a loss of principal or interest, then such loans are determined to be
impaired. At March 31, 1996, the recorded investment in loans for which
impairment has been recognized
13
in accordance with FASB Statement No. 114 totaled $1,251,000 compared to
$3,728,000 at December 31, 1995. The corresponding allocated reserves for
these loans was $304,000 for the period ended March 31, 1996. All loans
classified as impaired totaling $1,251,000 are also classified as
nonperforming assets at March 31, 1996, of which $626,000 are nonaccrual and
$625,000 are troubled debt restructures. All impaired loans were secured by
real estate at March 31, 1996 and accounted for by the lower of the fair
value of the collateral or amortized loan value.
Impaired loans consisted of the following:
(IN THOUSANDS) March 31, 1996 December 31, 1995
- ---------------------------------------------------------------------------------
Real estate mortgage loans:
Residential $ 70 $ 301
Commercial 1,181 3,427
Real estate construction loans - -
Commercial and industrial loans - -
Consumer and other loans - -
------ ------
$1,251 $3,728
------ ------
------ ------
REAL ESTATE OWNED ("REO")
At March 31, 1996, REO consisted of 8 commercial and residential real estate
properties equaling $2,081,000 and 5 repossessed assets equaling $83,000.
REO is initially recorded at the lower of cost or fair value (minus estimated
costs to sell) at the date the Bank acquires title to the property and any
difference is charged to the Allowance at the time the property is classified as
REO. 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.
LIQUIDITY - COASTAL
Deposits totaled $126.7 million at March 31, 1996, an increase of $1.0 million
(or 0.9%) from the level of $125.7 million at December 31, 1995.
On April 26, 1996, the Bank consummated its sale of the Kezar Falls branch to
Maine Bank & Trust Company. Included in the sale were all of the branch
deposits totaling $9.9 million and certain of the furniture, fixtures and
equipment of the branch. The Bank recognized a premium paid on the deposits of
$403,000, which was offset by expenses relating to the sale of $37,000.
On April 20, 1996, the Bank implemented a new deposit program featuring seven
new checking account products. The new program will entail increased
expenditures in marketing and a new mix of deposit products, which the Bank
believes will help to facilitate its efforts to increase its market share and
its non-interest income and to decrease its cost of funds.
Coastal has the capability of borrowing additional funds from the Federal Home
Loan Bank ("FHLB") of Boston with three-day advance notice when adequately
secured by qualified collateral. Effective as of June 8, 1993, the FHLB of
Boston restricted new advances to maturities of six months or less as a result
of the cross guaranty claim. On May 1, 1995, the Bank received a letter from
the FHLB of Boston stating that it would lengthen the
14
maturity restriction on new fixed term and fixed rate advances from six
months to one year. Coastal is also approved by the Federal Reserve Bank of
Boston to obtain liquidity from its "Discount Window" provided that assets
are pledged to the Federal Reserve Bank's satisfaction.
LIQUIDITY - PARENT
On a parent company only ("parent") basis, the Company conducts no separate
operations. Its business consists of the business of its banking subsidiary.
In addition to debt service relating to the FDIC Note in the principal amount of
$9.0 million issued by the Company to the FDIC on January 31, 1995 in connection
with the settlement of the cross guaranty claim, the Company's expenses consist
primarily of Delaware franchise taxes associated with the Company's authorized
capital stock, and certain legal and various other expenses. Expenses,
including certain audit and professional fees, insurance and other expenses, are
allocated between Coastal and the Company based upon the relative benefits
derived. At March 31, 1996 the parent's assets (other than its investment in
its subsidiary) consisted of $47,000 in cash.
Payment of dividends by the Company 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 Company 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 (the "Amended and Restated Settlement Agreement"), prohibits the
payment of dividends by the Company to its stockholders on any class of stock
(except for a dividend paid in shares of the Company's common stock, or in any
other stock of the Company) 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 Company 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 Bureau of Banking.
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
Company as approved from time to time by both the FDIC and the Maine Bureau of
Banking. 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 Bureau of Banking.
On May 3, 1996, November 13, 1995 and November 30, 1994, following the receipt
of appropriate regulatory approvals, Coastal paid the Company cash dividends of
$200,000, $200,000 and $175,000, respectively, for certain current and
anticipated operating expenses of the Company and certain expenss related to the
Company's recapitalization, some of which are reimbursable expenses related to
the proposed equity offering by the Company.
15
CAPITAL - COASTAL
The table below sets forth the regulatory capital requirements and capital
ratios for Coastal at March 31, 1996:
(DOLLARS IN THOUSANDS)
- -------------------------------------------------------------------------------
TIER 1 CAPITAL (LEVERAGE) TO TOTAL ASSETS RATIO (1)
Qualifying capital $ 13,740
Actual % 9.45%
Minimum requirement % 6.00%
Average assets for first quarter $145,368
TIER 1 CAPITAL TO RISK-WEIGHTED ASSETS
Qualifying capital $ 13,740
Actual % 15.21%
Minimum requirement % 4.00%
Total capital to risk-weighted assets
(TIER 1 AND TIER 2)
Qualifying capital $ 14,888
Actual % 16.48%
Minimum requirement % 8.00%
Gross risk-weighted assets $ 90,345
________________________
(1) Calculated on an average quarterly basis
Note: As described in Note A to the Consolidated Financial Statements, the
Memorandum (effective November 22, 1994) among Coastal, the FDIC and the Maine
Bureau of Banking requires Coastal to maintain a Tier 1 capital to total assets
ratio of 6.0% or greater. Coastal's Tier 1 capital to total assets ratio at
March 31, 1996 was 9.45%.
CAPITAL - COMPANY
The Federal Reserve capital adequacy guidelines apply on a consolidated basis to
bank holding companies with consolidated assets of $150 million or more. For
bank holding companies which have less than $150 million in consolidated assets,
as did the Company for each of the quarters ended March 31, 1995, June 30, 1995,
September 30, 1995, December 31, 1995 and March 31, 1996, the guidelines are
applied on a bank-only basis (as opposed to a consolidated basis) unless (i) the
parent bank holding company is engaged in nonbank activity involving significant
leverage or (ii) the parent company has a significant amount of debt that is
held by the general public. The Federal Reserve capital adequacy guidelines
provide that "debt held by the general public" is debt held by parties other
than financial institutions, officers, directors, and controlling stockholders
of the banking organization or their related interests. The FDIC Note is not
considered to be "debt held by the general public" for purposes of such capital
guidelines. As a result, applied on a bank-only basis, the Company's ratios of
tier 1 capital to total assets, tier 1 capital to risk-weighted assets, and
qualifying total capital to risk-weighted assets of 9.45%, 15.21%, and 16.48%,
respectively, at March 31, 1996 were in complaince with such guidelines. If the
Company were required to calculate its ratios of tier 1 capital to total assets,
tier 1 capital to risk-weighted
16
assets, and qualifying total capital to risk-weighted assets on a
consolidated basis, such ratios would be 2.90%, 4.68% and 5.95%, respectively,
at March 31, 1996.
The Company suspended the 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 Company's stockholders until the unpaid principal
and interest under the Note payable to the FDIC are paid in full.
RESULTS OF OPERATIONS
NET INCOME (LOSS)
The net income for the three months ended March 31, 1996 was $337,000,
compared with net income of $225,000 for the same period last year. The
improvement in earnings for 1996 is primarily attributable to no provision
for loan loss expense for the quarter ended March 31, 1996, as compared to
$100,000 of provision expense for the same period last year. Effective April
26, 1996, the Company consummated the sale of its Kezar Falls branch to Maine
Bank & Trust Company and will recognize in the second quarter of 1996 a net
gain of $366,000, calculated by deducting $37,000 in expenses associated with
the closing from the gross deposit premium received of $403,000.
NET INTEREST INCOME
Net interest income remained relatively unchanged for the three months ended
March 31, 1996 as compared to the three months ended March 31, 1995, at $1.5
million. Included in the March 31, 1996 and March 31, 1995 net interest income
total is interest expense of $141,000 and $73,000, respectively, for the
Company's $9.0 million Note payable to the FDIC. Although net interest income
remained relatively unchanged, the Company's average earning assets and average
interest bearing liabilities declined $4.7 million and $6.0 million,
respectively, for the three months ended March 31, 1996 as compared to the
three months ended March 31, 1995. This drop in average earning assets and
average interest bearing liabilities was largely offset in part by an increase
in the interest margin between earning assets and interest bearing liabilities.
The yield on average earning assets increased from 7.81% at March 31, 1995 to
8.26% at March 31, 1996, a gain of .45%, as compared to an increase in the cost
of average interest bearing liabilities from 3.75% for the quarter ended March
31, 1995 to 4.10% for the quarter ended March 31, 1996, or .35%.
PROVISION FOR LOAN LOSSES
There was no provision for loan loss expense for the three months ended March
31, 1996, versus $100,000 provision expense for the three months ended March
31, 1995. This is attributable to several factors, including the essentially
unchanged level of the Allowance, both in dollars ($2.6 million at March 31,
1996 versus $2.7 million at December 31, 1995) and as a percentage of total
loans (2.76% at March 31, 1996 versus 2.65% at December 31, 1995), the
decline in nonperforming loans, and management's review of the portfolio and
its determination of the adequacy of the Allowance as of March 31, 1996.
The Company's policy is to fund the Allowance by charging operations in the
form of provision for loan loss expense which represents estimated loss
exposure based on periodic evaluations of the loan portfolio and current
economic trends. The Company continues to hold a large concentration of
commercial real estate loans. The ultimate collectibility of the Company's
commercial real estate loan portfolio is particularly susceptible to changes
in local real estate market conditions. Deterioration in the local economy
or real estate market, or upward
17
movement in interest rates, could have an adverse impact on the loan portfolio
that could result in the need for increased provision for loan loss expense.
Management believes that the Allowance is adequate at March 31, 1996. However,
future additions to the Allowance may be necessary based on changes in the
financial condition of various borrowers, new information that becomes available
relative to various borrowers and loan real estate collateral, as well as
changes in local, regional or national economic conditions. In addition,
various regulatory authorities, as an integral part of their examination
process, periodically review the Company's Allowance. Such authorities may
require the Company to recognize additions to the Allowance based upon
information available to them and their judgments at the time of their
examination.
OTHER OPERATING INCOME
Other operating income for the three months ended March 31, 1996 was $131,000,
as compared to $168,000 for the same respective period in 1995. Other income
for the three months ended March 31, 1995 includes a realized gain on trading
accounts of $33,000.
OTHER OPERATING EXPENSES
Other operating expenses for the three months ended March 31, 1996 was $1.3
million, as compared to $1.4 million for the same respective period in 1995.
The $56,000 decline is primarily attributable to three items: (i) a reduction
in legal expenses of $89,000, (ii) a $36,000 reduction in FDIC insurance expense
on deposits resulting from a decrease in the Bank's assessment rate, (iii)
partially offset by an increase in the net cost of REO of $63,000 as a result of
increased expenditures on various properties. Additionally, as a result of the
implementation of the Bank's new deposit program, management believes that its
other operating expense category will increase in the future, mainly in the
marketing area, in order for the Bank to facilitate its efforts to increase the
Bank's market share of deposits As of March 31, 1996, the Bank had
approximately $50,000 in prepaid expenses associated with the new program which
are anticipated to be expensed during the second quarter of 1996.
18
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Information required by this Item is set forth under Note A - Certain
Regulatory Matters, under the caption "Settlement of the Cross Guaranty
Claim." As of March 31, 1996, there were various claims and lawsuits
pending against the Company incidental to the ordinary course of business.
In the opinion of management, after consultation with legal counsel,
resolution of these matters is not expected to have a material effect on
the consolidated financial position or results of operations.
ITEM 2. CHANGES IN SECURITIES.
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of the Company's security holders during
the first quarter of 1996.
ITEM 5. OTHER INFORMATION.
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The exhibits that are filed with this Form 10-Q, or that are incorporated
herein by reference, are set forth below:
3.1(i) Restated Articles of Incorporation (filed as Exhibit 3.1(i) to
the Annual Report on Form 10-K for the year ended December 31, 1995, File
No. 0-14087 ("1995 Form 10-K"), and incorporated herein by reference).
3.1(ii) Amended and Restated Bylaws (filed as Exhibit 3.1(ii) to 1995
Form 10-K, and incorporated herein by reference).
10.1 Suffield Financial Corporation Stock Option Plan and Suffield
Bank Stock Option Plan (filed as Exhibits 4.5 and 4.6, respectively, to
the Company's Registration Statement on Form S-8, File No. 33-11400, and
incorporated herein by reference).
10.2 Coastal Savings Bank Stock Option Plan (filed as Exhibit 4.7 to
Post-Effective Amendment No. 1 on Form S-8 to Form S-4, File No. 33-10189,
and incorporated herein by reference).
19
10.3 First Coastal Corporation Director's Deferred Compensation Plan
(filed as Exhibit 10.13 to the Annual Report on Form 10-K for the year
ended December 31, 1993, File No. 0-14087, and incorporated herein by
reference.)
10.4 Amended and Restated Settlement Agreement, dated as of November 23,
1994, among First Coastal Corporation, Coastal Savings Bank and the Federal
Deposit Insurance Corporation (filed as Exhibit 99a to Current Report on
Form 8-K, filed December 5, 1994, and incorporated herein by reference).
10.5 Promissory Note, dated January 31, 1995, by First Coastal
Corporation for the benefit of the Federal Deposit Insurance Corporation
(filed as Exhibit 99b to Current Report on Form 8-K, filed February 13,
1995 ("1995 Form 8-K"), and incorporated herein by reference).
10.6 Stock Pledge Agreement, dated as of January 31, 1995, between First
Coastal Corporation and the Federal Deposit Insurance Corporation (filed as
Exhibit 99c to 1995 Form 8-K, and incorporated herein by reference).
10.7 Memorandum of Understanding, among Coastal Savings Bank, the
Federal Deposit Insurance Corporation and the Maine Bureau of Banking,
effective as of November 22, 1994 (filed as Exhibit 10.16 to Annual Report
on Form 10-K for the year ended December 31, 1994, File No. 0-14087 ("1994
Form 10-K"), and incorporated herein by reference).
10.8 Employment Agreement, dated December 21, 1994, between Coastal
Savings Bank and James H. Whittaker (filed as Exhibit 10.17 to 1994
Form 10-K, and incorporated herein by reference).
10.9 Employment Protection Agreement, dated December 21, 1994, between
Coastal Savings Bank and Dennis D. Byrd (filed as Exhibit 10.18 to 1994
Form 10-K, and incorporated herein by reference).
10.10 Employment Protection Agreement, dated December 21, 1994, between
Coastal Savings Bank and Gregory T. Caswell (filed as Exhibit 10.19 to 1994
Form 10-K, and incorporated herein by reference).
10.11 Purchase and Assumption Agreement, dated February 22, 1996,
between Coastal Savings Bank and Maine Bank & Trust Company (filed as
Exhibit 10.11 to 1995 Form 10-K, and incorporated herein by reference).
10.12 Agreement for Data Processing Services, dated February 28, 1996,
between Coastal Savings Bank and Data Dimensions Inc. (filed as Exhibit
10.12 to 1995 Form 10-K, and incorporated herein by reference).
27 Financial Data Schedule
(b) No Form 8-K was filed by the Company during the first quarter of 1996.
20
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 14, 1996 By: /S/ Gregory T. Caswell
------------------------------------
Gregory T. Caswell
President and Chief Executive Officer
Date: May 14, 1996 By: /S/ Dennis D. Byrd
------------------------------------
Dennis D. Byrd
Treasurer
(Principal Financial and Accounting Officer)
21