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, 1997
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 May 1, 1997: 1,357,861 shares
INDEX
FIRST COASTAL CORPORATION AND SUBSIDIARY
PART I - FINANCIAL INFORMATION
---------------------
Page
----
Item 1. Financial Statements
Consolidated Balance Sheets (Unaudited) as of March 31,
1997 and December 31, 1996 3
Consolidated Statements of Operations (Unaudited) for
the three months ended March 31, 1997 and 1996 4
Consolidated Statements of Cash Flows (Unaudited) for
the three months ended March 31, 1997 and 1996 5
Notes to Consolidated Financial Statements
(Unaudited), March 31, 1997 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
PART II - OTHER INFORMATION
-----------------
Item 1. Legal Proceedings 16
Item 2. Changes in Securities 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 18
2
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
First Coastal Corporation and Subsidiary
March 31, December 31,
---------------------------------------------------
(in thousands) 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
ASSETS
Noninterest earning deposits and cash $ 4,032 $ 2,898
Interest earning deposits 7,165 8,555
-------- --------
Cash and cash equivalents 11,197 11,453
Investment securities:
Available for sale (at market value) 21,487 16,890
Held to maturity (at cost) 7,803 9,802
-------- --------
29,290 26,692
Federal Home Loan Bank stock (at cost) 1,315 1,315
Loans held for sale (at market value) 506 1,490
Loans 101,156 98,546
Less: Deferred loan fees, net (47) (31)
Allowance for loan losses (2,697) (2,666)
-------- --------
98,412 95,849
Premises and equipment 3,402 3,428
Accrued income receivable 931 1,079
Real estate owned and repossessions 337 478
Deferred tax asset 4,671 4,811
Other assets 1,082 1,139
-------- --------
TOTAL ASSETS $151,143 $147,734
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits $116,612 $115,085
Advances from Federal Home Loan Bank 16,828 15,000
Savings Bank Notes 4,000 4,000
Accrued expenses and other liabilities 276 261
-------- --------
TOTAL LIABILITIES 137,716 134,346
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, 1997 and December 31, 1996 - 1,357,861 shares 1,358 1,358
Paid-in Capital 31,740 31,740
Retained earnings (deficit) (19,364) (19,631)
Unrealized loss on available for sale securities (307) (79)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 13,427 13,388
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $151,143 $147,734
======== ========
See Notes to consolidated financial statements.
3
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
First Coastal Corporation and Subsidiary
Three Months Ended March 31,
-----------------------------
(in thousands, except per share amounts) 1997 1996
- --------------------------------------------------------------- ----------- ---------
INTEREST AND DIVIDEND INCOME
Interest and fees on loans $ 2,240 $ 2,426
Interest and dividends on investment securities 462 325
Other interest income 142 252
---------- --------
TOTAL INTEREST AND DIVIDEND INCOME 2,844 3,003
---------- --------
INTEREST EXPENSE
Deposits 1,101 1,263
Borrowings
Advances from Federal Home Loan Bank 245 88
Savings Bank Notes 109 141
---------- --------
Total Interest Expense 1,455 1,492
---------- --------
Net Interest Income Before Provision for Loan Losses 1,389 1,511
Provision for Loan Losses - -
---------- --------
Net Interest Income After Provision for Loan Losses 1,389 1,511
NONINTEREST INCOME
Service charges on deposit accounts 100 70
Gain on investment securities transactions 130 7
Loss on sales of mortgage loans (4) (8)
Other 35 62
---------- --------
261 131
---------- --------
OPERATING EXPENSES
Salaries and employee benefits 538 513
Occupancy 113 130
Net cost of operation of real estate owned and repossessions 33 56
Other 560 606
---------- --------
1,244 1,305
---------- --------
INCOME BEFORE INCOME TAXES 406 337
Income Tax 139 -
---------- --------
NET INCOME $ 267 $ 337
========== ========
PER SHARE AMOUNTS
Weighted Average Shares Outstanding (1) 1,380,402 600,361
Income Per Share $.19 $.56
========== ========
(1) The calculation of weighted average shares outstanding for the period ended
March 31, 1997 includes the weighted average shares outstanding of common stock
and common stock equivalents totaling 1,357,861 and 22,541, respectively.
See Notes to consolidated financial statements.
4
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
First Coastal Corporation and Subsidiary
Three Months Ended March 31,
------------------------------
(in thousands) 1997 1996
- ---------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net Income $ 267 $ 337
Adjustments to reconcile net income to net cash provided by operating activities:
Writedowns of REO 20 27
Depreciation and amortization 78 80
Amortization of investment security premium (discounts) 15 (10)
Realized investment securities gains (130) (7)
Realized losses on assets held for sale 4 8
Loans originated and acquired for resale (719) (2,517)
Sales of loans originated and acquired for sale 1,699 1,009
(Increase) decrease in interest receivable (148) 116
Increase in interest payable 12 156
Net change in other assets 614 (510)
Net change in other liabilities 3 45
------- -------
Net cash provided (used) by operating activities 1,715 (1,266)
------- -------
INVESTING ACTIVITIES
Decrease in federal funds sold - 10,000
Sales and maturities of securities available for sale 2,318 1,080
Maturities of securities held to maturity 2,000 5,000
Purchases of investment securities available for sale (7,029) (5,976)
Purchases of investment securities held to maturity - (5,003)
Net change in loans (2,563) 4,812
Net purchases of premises and equipment (52) (166)
------- -------
Net cash provided (used) by investing activities (5,326) 9,747
------- -------
FINANCING ACTIVITIES
Net change in deposits 1,527 1,081
Proceeds from borrowings 2,000 -
Payments on borrowings (172) -
------- -------
Net cash used by financing activities 3,355 1,081
------- -------
Increase (decrease) in cash and cash equivalents (256) 9,562
Cash and cash equivalents at beginning of period 11,453 8,841
------- -------
Cash and cash equivalents (interest and noninterest bearing) at end of period $11,197 $18,403
======= =======
NONCASH INVESTING ACTIVITIES
Change in unrealized holding losses on investment securities
available for sale $ ( 228) $ (63)
Transfer of loans to real estate owned and repossessions - 306
See Notes to consolidated financial statements.
5
FIRST COASTAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 1997
NOTE A BASIS OF PRESENTATION
---------------------
The accompanying unaudited condensed consolidated financial statements of First
Coastal Corporation (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 of the
Securities and Exchange Commission. Accordingly, they do not include all of the
information and notes required by generally accepted accounting principles 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 and other data for the three
months ended March 31, 1997 are not necessarily indicative of the results that
may be expected for the year ending December 31, 1997. 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, 1996.
NEW ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 128, Earnings Per Share
and SFAS No. 129, Disclosure of Information about Capital Structure. SFAS No.
128 will require a change in how the Company calculates earnings per share and
SFAS No. 129 will require disclosure of certain information about the Company's
capital structure. The requirements of these pronouncements are effective for
the Company's fiscal year ending December 31, 1997 and are not expected to have
a material effect on the Company's financial statements.
RECAPITALIZATION AND ISSUANCE OF COMMON STOCK
On July 24, 1996, the Company completed its recapitalization plan, whereby the
Company repaid in full its promissory note obligation (the "FDIC Note") to the
Federal Deposit Insurance Corporation (the "FDIC") in the amount of $9.75
million ($9.0 million loan principal amount plus accrued interest). The funds
utilized to repay the obligation came from (i) the sale of 750,000 shares of the
Company's common stock at $5.00 per share by means of a registered public
offering; (ii) a dividend of $3.2 million from Coastal Savings Bank (the "Bank")
to the Company; and (iii) the borrowing of $4.0 million from a group of four
Maine savings banks (the "Savings Banks")and the issuance by the Company of
promissory notes in the aggregate amount of $4.0 million (the "Savings Bank
Notes"), secured by the pledge by the Company of 100% of the outstanding common
stock of the Bank. The public offering resulted in an increase in common stock
outstanding from 600,361 shares to 1,357,861 shares, as of July 24, 1996.
INCOME TAXES
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. Due to the uncertainty that the benefit of net deferred tax assets would
be realized, a full valuation allowance was recorded at December 31, 1995. As a
result of the completion of the July 1996 recapitalization, the payoff of the
$9.0 million FDIC Note (incurred as a result of the settlement of the cross
guaranty claim), and the improved financial condition of the Company, the
uncertainties relating to the prospective utilization of the net operating loss
carryforwards were reduced and in accordance with SFAS No. 109, in the fourth
quarter of 1996 the valuation allowance against the deferred tax asset was
reduced and a $4.8 million income tax benefit was recognized. For financial
reporting purposes only, earnings on a going forward basis will be tax effected.
6
On June 11, 1996 following stockholder approval, the Company filed an amendment
to its Restated Certificate of Incorporation of the Company which generally
provides that no person shall become or make an offer to become the beneficial
owner of five percent or more of the Company's voting stock for a three year
period, which expires June 11, 1999. This amendment helps to reduce the
likelihood that there will be an "ownership change" as defined in Section 382 of
the Internal Revenue Code, which could result in a reduction in the amount of
net operating loss carryforwards for tax purposes.
PART I - Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
BUSINESS
First Coastal Corporation (the "Company"), a Delaware corporation, is a bank
holding company whose sole operating subsidiary is Coastal Savings Bank (the
"Bank"), a Maine chartered savings bank headquartered in Westbrook, Maine. The
Bank was formed in 1981 through the consolidation of Brunswick Savings
Institution and York County Savings Bank, which were organized in 1858 and 1860,
respectively. The Company has no separate operations and its business consists
of the business of the Bank. The Bank is engaged in customary banking
activities, including attracting deposits and various lending activities, and
conducts its business from seven offices in the counties of Cumberland,
Sagadahoc and York. The Bank's deposits are insured by the FDIC up to the
limits provided by law.
RESULTS OF OPERATIONS
OVERVIEW
The Company reported net income of $267,000 (or $.19 per share) for the three
months ended March 31, 1997, compared to net income of $337,000 (or $.56 per
share) for the same period in 1996. The results for 1997 include a $130,000 gain
on securities and income is on a fully taxed basis, as compared to the 1996
results which reflect a $7,000 gain on securities and is not tax effected.
Additionally, earnings for the three months ended March 31, 1997 were further
reduced by a decline in net interest income as compared to the three months
ended March 31, 1996 as discussed below.
NET INTEREST INCOME
Net interest income equaled $1,389,000 and $1,511,000 for the three months ended
March 31, 1997 and 1996, respectively (a decrease of $122,000). The overall
decline in net interest income is due in part to a reduction in the net amount
of interest income received on nonaccrual loans for the quarter ended March 31,
1997 as compared to the quarter ended March 31, 1996 of approximately $108,000.
Changes in net interest income are caused by changes in the amount and
composition of interest earning assets and interest bearing liabilities,
interest rate movements and the repricing of assets and liabilities as a result
of these movements, and changes in the level of noninterest earning assets and
noninterest bearing liabilities.
7
The following table sets forth, for the periods indicated, information regarding
(i) the total dollar amount of interest income from interest-earning assets and
the resultant average yields, (ii) the total dollar amount of interest expense
on interest-bearing liabilities and the resultant average cost, (iii) net
interest income, (iv) interest rate spread, and (v) net interest margin.
Quarter Ended March 31,
-------------------------------------------------------------------
1997 1996
---------------------------------- --------------------------------
Average Average
(in thousands) Balance Interest Yield /(1)/ Balance Interest Yield /(1)/
- -------------------------------------------------------------------------------------------------------------------
ASSETS:
Cash $ 10,731 $ 142 5.37% $ 18,792 $ 252 5.39%
Investments 28,444 462 6.59 20,687 325 6.31
Loans /(2)/
Residential real estate mortgages 33,500 704 8.53 30,614 673 8.84
Commercial real estate mortgages 48,936 1,117 9.26 49,985 1,304 10.49
Commercial and industrial loans 2,529 55 8.74 2,200 56 10.29
Consumer loans 15,259 364 9.66 16,049 393 9.85
-------- ---- ------- ------
Total loans 100,224 2,240 9.06 98,848 2,426 9.87
Total interest earning assets 139,399 2,844 8.27 138,327 3,003 8.73
Noninterest earning assets 11,282 7,080
-------- --------
Total assets $150,681 $145,407
======== ========
LIABILITIES:
Deposits
Savings $ 34,828 $ 235 2.74% $ 41,347 $ 290 2.82%
NOW and money market accounts 19,040 105 2.24 15,996 89 2.24
Certificates of deposits 57,357 761 5.38 63,439 884 5.60
-------- ---- -------- ------
Total interest bearing deposits 111,225 1,101 4.01 120,782 1,263 4.20
Borrowings 20,409 354 7.05 15,000 229 6.15
-------- ---- -------- ------
Total interest bearing liabilities 131,634 1,455 4.48% 135,782 1,492 4.42%
Noninterest bearing deposits 5,480 4,868
Noninterest bearing liabilities 177 910
Stockholders' equity 13,390 3,847
-------- --------
Total liabilities and stockholders' equity $150,681 $145,407
======== ========
Net interest income $1,389 $1,511
====== ======
Net interest rate spread /(3)/ 3.79% 4.31%
Net interest margin /(4)/ 4.04% 4.43%
/ (1)/ Annualized.
/ (2)/ For purposes of these computations, loans held for sale and nonaccrual
loans are included in the average loan amounts outstanding.
/ (3)/ Return on interest earning assets less cost of interest bearing
liabilities.
/ (4)/ Net interest income divided by average earning assets.
Interest income for the three months ended March 31, 1997 declined $159,000 as
compared to the three months ended March 31, 1996. The decrease for the three
months ended March 31, 1997 is primarily attributable to a reduction in the net
amount of interest income recognized on nonaccrual loans as compared to the same
period in 1996, as described above, and a reduced yield on the overall loan
portfolio, caused primarily by the downward repricing of the loan portfolio on
an aggregate basis as a result of an overall decline in the interest rate of
certain loan indices utilized by the Company for loan repricing purposes. The
loan yield declined from 9.87% at March 31, 1996 to 9.06% at March 31, 1997. The
net
8
difference in nonaccrual interest income between March 31, 1996 (for
which nonaccrual income was higher than normal) and March 31, 1997 is equal
to.45%, resulting in a net (after consideration of nonaccrual interest) decline
in the yield on the portfolio of .36%. The loan interest income decline was
offset in part by an increase in income on securities and other interest income
of $27,000.
Interest expense for the three months ended March 31, 1997 declined $37,000 as
compared to the same quarter in 1996. The overall decrease is primarily
attributable to a decrease in interest expense paid on deposits of $162,000
(resulting from the sale of the Company's Kezar Falls branch in the second
quarter of 1996 which included interest bearing deposits totaling approximately
$9.3 million) along with a .19% decline in deposit costs largely attributable to
certificate of deposits, partially offset by increased borrowing expense as
overall borrowings increased $5.0 million and borrowing costs increased by .90%,
primarily attributable to the higher interest rate paid on the Savings Bank
Notes in 1997 as compared to the interest rate paid on the FDIC Note in 1996.
PROVISION FOR LOAN LOSSES
There was no provision for loan losses expense for the three months ended March
31, 1997 and 1996. The absence of provision for loan losses is attributable to
(i) the essentially unchanged level of the allowance for loan losses (the
"Allowance"), both in dollars ($2.7 million at March 31, 1997 and 1996) and as a
percentage of total loans (2.67% at March 31, 1997 versus 2.75% at March 31,
1996), and (ii) management's review of the portfolio and its determination of
the adequacy of the Allowance as of March 31, 1997.
Although management utilizes its judgment in providing for possible losses,
there can be no assurance that the Company will not have to increase its
provisions for loan losses in the future as a result of a decline in the quality
of the loan portfolio, an adverse change in the real estate market or economic
conditions in the Company's primary market area, adverse changes in the amount
of nonperforming assets, or other reasons, any or all of which could affect the
Company's results of operations. In addition, various regulatory agencies, as
an integral part of their examination process, periodically review the Company's
Allowance. Such agencies may require the Company to recognize changes to the
Allowance based on their judgments about information available to them at the
time of the examination.
NONINTEREST INCOME
Noninterest income increased $130,000, from $131,000 for the three months ended
March 31, 1996 to $261,000 for the three months ended March 31, 1997. The
primary reason for this increase was the $130,000 gain on securities for the
three months ended March 31, 1997. In addition, service charges on deposit
accounts for the quarter ended March 31, 1997 increased $30,000 as compared to
the quarter ended March 31, 1996, primarily due to the Bank's new deposit
program which was implemented in April 1996. These increases were partially
offset by reduced fee income on loans serviced for others totaling $22,000,
resulting from a reduction in servicing fees paid and balances of loans serviced
for others.
OPERATING EXPENSES
The $61,000 decrease in operating expenses for the three months ended March 31,
1997 as compared to the same respective period in 1996 was primarily
attributable to (i) decreased occupancy expense resulting from the sale of the
Bank's Kezar Falls branch in April 1996, (ii) a decrease in the net cost of real
estate owned and repossessions ("REO"), as REO balances declined from $2.2
million at March 31, 1996 to $0.3 million at March 31, 1997, and (iii) a decline
in computer expenses as a result of the August 1996 conversion of the Bank's
computer system from a service bureau environment to an in-house based computer
system. Such decreases in expenses were offset in part by an increase in salary
expense as the Bank has added additional staff and paid associated employment
fees.
9
FINANCIAL CONDITION
- -------------------
TOTAL ASSETS
At March 31, 1997, total assets were $151.1 million, representing an increase of
$3.4 million (or 2.3%) from total assets of $147.7 million at December 31, 1996.
This increase was primarily attributable to an increase in borrowings of $1.8
million and an increase in deposits of $1.5 million.
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, 1997 were $29.2 million compared to $26.7
million at December 31, 1996. This increase is attributable to the purchase of
$3.0 million in mortgage-backed securities and $4.0 million in U.S. treasury
securities, partially offset by maturities of U.S. treasury securities totaling
$1.0 million, sales of mutual funds of $1.0 million and $2.0 million of U.S.
government agency callable notes which were called during the first quarter of
1997. 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, 1997.
March 31, 1997
-------------------------------------------
Gross Gross Fair
Amortized Unrealized Unrealized Market
(in thousands) Cost Gain Loss Value
- --------------------------------- ---------- ---------- ------- --------------
Available for sale:
U.S. government obligations $ 7,925 - $ (68) $ 7,857
Mortgage backed securities 13,764 $9 (248) 13,525
Other 105 - - 105
------- -- ----- -------
$21,794 $9 $(316) $21,487
======= == ===== =======
Held to maturity:
U.S. government callable notes $ 7,803 - $(218) $ 7,585
------- -- ----- -------
$ 7,803 - $(218) $ 7,585
======= == ===== =======
The net unrealized loss on investment securities classified as available for
sale was $307,000 at March 31, 1997, versus a net unrealized loss of $79,000 at
December 31, 1996. The increase in the unrealized loss on securities available
for sale is attributable to an increase in the market interest rate for
investments similar in nature to those contained in the Company's investment
portfolio.
10
The following table represents the contractual maturities for investments in
debt securities for each major security type at March 31, 1997.
March 31, 1997
-------------------------------------------
Maturing
-------------------------------------------
After One
Within But Within After
(in thousands) One Year Five Years Five Years Total
- -------------------------------------------------------------------------------
Available for sale:
U.S. government obligations - $ 7,857 - $ 7,857
Mortgage backed securities - - $13,525 13,525
---------- ------- ------- -------
- $7,857 $13,525 $21,382
========== ======= ======= =======
Held to maturity:
U.S. government agency callable
notes (final maturity) - $ 5,000 $ 2,803 $ 7,803
---------- ------- ------- -------
- $5,000 $ 2,803 $ 7,803
========== ======= ======= =======
LOANS HELD FOR SALE
Loans held for sale (all of which were residential mortgages carried at market
value) equaled $506,000 at March 31, 1997 as compared to $1,490,000 at December
31, 1996, a decrease of $984,000. The outstanding dollar amount of loans held
for sale can vary greatly from period to period by factors such as mortgage
origination levels, the timing and delivery of loan sales, changes in market
interest rates and asset/liability management strategies.
LOANS
Loans consisted of the following:
March 31, December 31,
-----------------------
(in thousands) 1997 1996
- ----------------------------------------------------------
Real estate mortgage loans:
Residential $ 32,784 $30,981
Commercial 49,032 48,456
Real estate construction loans 1,127 769
Commercial and industrial loans 3,028 3,059
Consumer and other loans 15,185 15,281
-------- -------
$101,156 $98,546
======== =======
Loans increased $2.6 million (or 2.6%) at March 31, 1997 as compared to
December 31, 1996. The increases were primarily in the categories of
residential and commercial mortgages attributable to new originations by the
Bank.
11
ALLOWANCE FOR LOAN LOSSES ("ALLOWANCE")
The Company's Allowance was $2.7 million at March 31, 1997 and December 31,
1996. The Allowance represented 2.67% and 2.71% of total loans, and 121.49% and
124.29% of nonperforming loans, at March 31, 1997 and December 31, 1996,
respectively.
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. 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,
deterioration in the local economy or real estate market, upward movements in
interest rates, the Company's large concentration in commercial real estate
loans or other factors 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 affect the Allowance.
NONPERFORMING ASSETS
Information with respect to nonperforming assets is set forth below:
March 31, December 31,
--------- ------------
(in thousands) 1997 1996
- ----------------------------------------- --------- ------------
Nonaccrual loans $2,105 $1,944
Accruing loans past due 90 days or more 115 201
Restructured loans - -
Real estate owned and repossessions 337 478
------ ------
Total $2,557 $2,623
====== ======
The level of nonperforming assets remained relatively unchanged from December
31, 1996 to March 31, 1997. The modest increase in nonaccrual loans was offset
by a decline in accruing loans past due 90 days or more and a decline in REO.
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, a portion of which 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,
upward movements in interest rates, or other factors could have an adverse
impact on currently performing loans. These factors could result in an
increased incidence of loan defaults and, as a result, an increased level of
nonperforming loans.
12
IMPAIRED LOANS
Management reviews loans on a case by case basis to determine which loans should
be classified as impaired. If management believes that it is probable that there
will be a loss of scheduled principal or interest, then such loans are
determined to be impaired. At March 31, 1997, the recorded investment in loans
for which impairment has been recognized in accordance with SFAS No. 114 totaled
$3,374,000, as compared to $3,845,000 at December 31, 1996. The corresponding
portion of the Allowance allocated against these loans ("Allocated Reserves")
was $616,000 as of March 31, 1997. An amount equal to $2,065,000 of the
$3,374,000 total impaired loans were classified as nonaccrual and the remaining
$1,309,000 were classified as potential problem loans at March 31, 1997. The
income recorded on a cash basis relating to impaired loans equaled $39,000 and
the average balance of outstanding impaired loans was $3.4 million. All of the
impaired loans were secured by real estate at March 31, 1997 and accounted for
by the lower of the fair value of the collateral (net of the $616,000 Allocated
Reserves) or amortized loan value.
REAL ESTATE OWNED ("REO")
REO consists of properties acquired through mortgage loan foreclosure
proceedings, repossessions or in full or partial satisfaction of outstanding
loan obligations. At March 31, 1997, REO totaled approximately $337,000,
consisting of $211,000 in 1-4 family residential real estate, $90,000 in land
and $36,000 in other repossessed assets.
LIQUIDITY - BANK
Deposits totaled $116.6 million at March 31, 1997, an increase of $1.5 million
(or 1.33%) from the level of $115.1 million at December 31, 1996.
Deposit balances were as follows:
March 31, December 31,
--------- ------------
(in thousands) 1997 1996
- ------------------------------------- --------- ------------
Noninterest bearing demand deposits $ 5,675 $ 5,790
Interest bearing demand deposits 18,290 15,090
Savings and escrow deposits 35,083 36,445
Time deposits 57,564 57,760
-------- --------
Total $116,612 $115,085
======== ========
The increase in deposit levels is primarily attributable to a single new money
market municipal checking account in the first quarter of 1997, with a balance
at March 31, 1997 of $2.5 million.
LIQUIDITY - COMPANY
On a parent company only basis ("parent"), the Company conducts no separate
operations. Its business consists of the operations of its banking
subsidiary. In addition to debt service relating to the Savings Bank Notes in
the aggregate principal amount of $4.0 million, 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
13
between the Bank and the Company based upon the relative benefits derived. At
March 31, 1997 the parent's assets consisted of $587,000 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.
In addition, as a condition to the approval by the Maine Bureau of Banking ofthe
payment on July 24, 1996 of the dividend in the amount of $3.2 million by the
Bank to the Company in connection with the recapitalization of the Company, the
Maine Bureau of Banking required the Company to agree that it would not pay cash
dividends to its stockholders as long as the Company's debt to equity ratio (on
a parent company only basis) exceeds 25% without the prior approval of the Maine
Bureau of Banking. The Company's debt to equity ratio (on a parent company only
basis) at March 31, 1997 equaled 29.79%.
The principal source of cash for the Company would normally be a dividend from
the Bank; however, certain restrictions also exist regarding the ability of the
Bank to transfer funds to the Company in the form of cash dividends, loans or
advances. 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 Loan Agreement dated July 24, 1996 between the Company and the Savings
Banks, contains certain terms, restrictions and covenants, including covenants
restricting the amount of borrowings that may be incurred by the Company and the
Bank, restrictions regarding the conditions under which cash dividends may be
paid by the Company (including a prohibition of the payment of cash dividends to
its stockholders as long as the Company's debt-to-equity ratio on a parent-only
basis exceeds 30%), and a requirement that the Company and the Bank maintain
certain minimum capital ratios.
On March 26, 1997, July 24, 1996, May 3, 1996, November 13, 1995 and November
30, 1994, the Bank paid the Company cash dividends of $500,000, $3.2 million,
$200,000, $200,000 and $175,000, respectively.
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.
14
CAPITAL - BANK
The table below sets forth the regulatory capital requirements and capital
ratios for the Bank at March 31, 1997 and December 31, 1996:
March 31, December 31,
-------------------------
(dollars in thousands) 1997 1996
- ------------------------------------------------------------------------------
Tier 1 capital (Leverage) to total assets /(1)/ratio
- ----------------------------------------------------
Qualifying capital $12,806 $ 12,738
Actual % 8.73% 9.28%
Minimum requirement for capital adequacy % 4.00% 4.00%
Average quarterly assets $146,757 $137,317
Tier 1 capital to risk-weighted assets
- ---------------------------------------
Qualifying capital $12,806 $12,738
Actual % 14.40% 14.31%
Minimum requirement for capital adequacy % 4.00% 4.00%
Total capital to risk-weighted assets
(Tier 1 and Tier 2)
- ---------------------------------------
Qualifying capital $13,953 $ 13,888
Actual % 15.68% 15.60%
Minimum requirement for capital adequacy % 8.00% 8.00%
Risk-weighted assets $88,958 $ 89,026
/(1)/ Calculated on an average quarterly basis.
CAPITAL - COMPANY
The table below sets forth the regulatory capital requirements and capital
ratios for the Company at March 31, 1997 and December 31, 1996:
March 31, December 31,
- -----------------------------------------------------------------------------------------
(dollars in thousands) 1997 1996
- ------------------------------------------------------------------------------------------
Tier 1 capital (Leverage) to total assets /(1)/ratio
- ------------------------------------------------------
Qualifying capital $ 9,517 $ 9,104
Actual % 6.54% 6.62%
Minimum requirement for capital adequacy % 4.00-5.00% 4.00-5.00%
Average quarterly assets $ 145,354 $137,488
Tier 1 capital to risk-weighted assets
- ------------------------------------------------------
Qualifying capital $ 9,517 $ 9,104
Actual % 10.70% 10.21%
Minimum requirement for capital adequacy % 4.00% 4.00%
Total capital to risk-weighted assets
(Tier 1 and Tier 2)
- ------------------------------------------------------
Qualifying capital $ 10,701 $ 10,291
Actual % 12.03% 11.54%
Minimum requirement for capital adequacy % 8.00% 8.00%
Risk-weighted assets $ 88,925 $ 89,162
/(1)/ Calculated on an average quarterly basis.
15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
- -------------------------
As of March 31, 1997, 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 Company's 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
- -----------------------------------------------------------
Not applicable.
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)(a) Restated Certificate of Incorporation (filed as Exhibit 3.1(i)
to 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(i)(b) Certificate of Amendment of Restated Certificate of
Incorporation (filed as Exhibit 3.1(i)(b) to Amendment No. 3 to Form 10-K
for the year ended December 31, 1995, File No. 0-14087 ("1995 Form 10-
K/A"), and incorporated herein by reference).
3.1(ii) Amended and Restated Bylaws (filed as Exhibit 3.1(ii) to Annual
Report on Form 10-K for the year ended December 31, 1996, File No. 0-
14087, and incorporated herein by reference).
10.1 First Coastal Corporation Director's Deferred Compensation Plan
(filed as Exhibit 10.13 to Annual Report on Form 10-K for the year ended
December 31, 1993, File No. 0-14087, and incorporated herein by
reference).
16
10.2 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).
10.3 First Coastal Corporation 1996 Stock Option and Equity Incentive Plan
(filed as Exhibit 10.13 to 1995 Form 10-K/A, and incorporated herein by
reference).
10.4 Loan Agreement, dated as of July 24, 1996, among First Coastal Corporation
and Androscoggin Savings Bank, Bangor Savings Bank, Machias Savings Bank and
Norway Savings Bank (collectively, the "Lenders") and Machias Savings Bank, as
agent (filed as Exhibit 10.9 to Quarterly Report on Form 10-Q for the Quarter
Ended June 30, 1996 ("June 1996 Form 10-Q"), and incorporated herein by
reference).
10.5 Stock Pledge Agreement, dated as of July 24, 1996, between First Coastal
Corporation and Machias Savings Bank, for itself and as agent for the Lenders
(filed as Exhibit 10.10 to June 1996 Form 10-Q, and incorporated herein by
reference).
10.6 Promissory Note, dated July 24, 1996, by First Coastal Corporation for the
benefit of Androscoggin Savings Bank (filed as Exhibit 10.11 to June 1996 Form
10-Q, and incorporated herein by reference).
10.7 Promissory Note, dated July 24, 1996, by First Coastal Corporation for the
benefit of Bangor Savings Bank (filed as Exhibit 10.12 to June 1996 Form 10-Q,
and incorporated herein by reference).
10.8 Promissory Note, dated July 24, 1996, by First Coastal Corporation for the
benefit of Machias Savings Bank (filed as Exhibit 10.13 to June 1996 Form 10-Q,
and incorporated herein by reference).
10.9 Promissory Note, dated July 24, 1996, by First Coastal Corporation for the
benefit of Norway Savings Bank (filed as Exhibit 10.14 to June 1996 Form 10-Q,
and incorporated herein by reference).
10.10 Employment Agreement, dated as of July 31, 1996, among Coastal Savings
Bank, First Coastal Corporation and Dennis D. Byrd (filed as Exhibit 10.15 to
June 1996 Form 10-Q, and incorporated herein by reference).
10.11 Employment Agreement, dated as of July 31, 1996, among Coastal Savings
Bank, First Coastal Corporation and Gregory T. Caswell (filed as Exhibit 10.16
to June 1996 Form 10-Q, and incorporated herein by reference).
27 Financial Data Schedule
(b) No Reports on Form 8-K were filed by the Company during the first quarter of
1997.
17
FIRST COASTAL CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
FIRST COASTAL CORPORATION
Date: May 14, 1997 By: /s/ Gregory T. Caswell
------------------------------------------
Gregory T. Caswell
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Date: May 14, 1997 By: /s/ Gregory T. Caswell
-------------------------------------------
Gregory T. Caswell
President and Chief Executive Officer
(Principal Executive Officer)
Date: May 14, 1997 By: /s/ Dennis D. Byrd
-------------------------------------------
Dennis D. Byrd
Treasurer
(Principal Financial and Accounting Officer)
18