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 JUNE 30, 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 August 8, 1997: 1,359,194 shares
INDEX
FIRST COASTAL CORPORATION AND SUBSIDIARY
PART I - FINANCIAL INFORMATION
---------------------
Page
----
Item 1. Financial Statements
Consolidated Balance Sheets (Unaudited) as
of June 30, 1997 and December 31, 1996 3
Consolidated Statements of Operations (Unaudited)
for the three and six months ended
June 30, 1997 and 1996 4
Consolidated Statements of Cash Flows
(Unaudited) for the six months
ended June 30, 1997 and 1996 6
Notes to Consolidated Financial Statements
(Unaudited), June 30, 1997 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II - OTHER INFORMATION
-----------------
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 19
2
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
First Coastal Corporation and Subsidiary
June 30, December 31,
--------- -------------
(in thousands) 1997 1996
- ------------------------------------------------------------------------------------- --------- -------------
ASSETS
Noninterest earning deposits and cash $ 3,711 $ 2,898
Interest earning deposits 7,354 8,555
-------- ------------
Cash and cash equivalents 11,065 11,453
Investment securities:
Available for sale (at market value) 20,438 16,890
Held to maturity (at cost) 7,801 9,802
-------- ------------
28,239 26,692
Federal Home Loan Bank stock (at cost) 1,315 1,315
Loans held for sale (at market value) 996 1,490
Loans 103,219 98,546
Less: Deferred loan fees, net (63) (31)
Allowance for loan losses (2,624) (2,666)
-------- ------------
100,532 95,849
Premises and equipment, net 3,402 3,428
Accrued income receivable 1,085 1,079
Real estate owned and repossessions 192 478
Deferred tax asset 4,477 4,811
Other assets 1,083 1,139
-------- ------------
TOTAL ASSETS $152,386 $147,734
======== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits $117,443 $115,085
Advances from Federal Home Loan Bank 16,652 15,000
Savings Bank Notes 4,000 4,000
Accrued expenses and other liabilities 226 261
-------- ------------
TOTAL LIABILITIES 138,321 134,346
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 June 30, 1997 and December 31, 1996 - 1,359,194
and 1,357,861 shares, respectively 1,359 1,358
Paid-in Capital 31,746 31,740
Retained earnings (deficit) (19,013) (19,631)
Unrealized loss on available for sale securities (27) (79)
-------- ------------
TOTAL STOCKHOLDERS' EQUITY 14,065 13,388
-------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $152,386 $147,734
======== ============
See Notes to consolidated financial statements.
3
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
First Coastal Corporation and Subsidiary
Three Months Ended June 30,
---------------------------
(in thousands, except per share amounts) 1997 1996
- ------------------------------------------------------------------------------------------
INTEREST AND DIVIDEND INCOME
Interest and fees on loans $ 2,423 $ 2,256
Interest and dividends on investment securities 508 433
Other interest income 80 103
---------- --------
TOTAL INTEREST AND DIVIDEND INCOME 3,011 2,792
---------- --------
INTEREST EXPENSE
Deposits 1,129 1,182
Borrowings
Advances from Federal Home Loan Bank 254 87
FDIC Note - 155
Savings Bank Notes 108 -
---------- --------
Total Interest Expense 1,491 1,424
---------- --------
Net Interest Income Before Provision for Loan Losses 1,520 1,368
Provision for Loan Losses - -
---------- --------
Net Interest Income After Provision for Loan Losses 1,520 1,368
NONINTEREST INCOME
Service charges on deposit accounts 109 85
Gain on investment securities transactions 16 17
Gain (loss) on sales of mortgage loans 98 (2)
Other 34 413
---------- --------
257 513
---------- --------
OPERATING EXPENSES
Salaries and employee benefits 545 523
Occupancy 118 97
Net cost of operation of real estate owned and repossessions 33 13
Other 535 692
---------- --------
1,231 1,325
---------- --------
INCOME BEFORE INCOME TAXES 546 556
Income Tax 195 -
---------- --------
NET INCOME $ 351 $ 556
========== ========
PER SHARE AMOUNTS
Weighted Average Shares Outstanding /(1)/ 1,381,392 600,361
Income Per Share $.25 $.93
========== ========
/(1)/ The calculation of weighted average shares outstanding for the three
months ended June 30, 1997 includes the weighted average shares outstanding
of common stock and common stock equivalents totaling 1,358,652 and 22,740,
respectively.
See Notes to consolidated financial statements.
4
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
First Coastal Corporation and Subsidiary
Six Months Ended June 30,
-------------------------
(in thousands, except per share amounts) 1997 1996
- ------------------------------------------------------------------------------------------
INTEREST AND DIVIDEND INCOME
Interest and fees on loans $ 4,663 $ 4,682
Interest and dividends on investment securities 970 758
Other interest income 222 355
---------- --------
TOTAL INTEREST AND DIVIDEND INCOME 5,855 5,795
---------- --------
INTEREST EXPENSE
Deposits 2,230 2,445
Borrowings
Advances from Federal Home Loan Bank 499 175
FDIC Note - 296
Savings Bank Notes 217 -
---------- --------
Total Interest Expense 2,946 2,916
---------- --------
Net Interest Income Before Provision for Loan Losses 2,909 2,879
Provision for Loan Losses - -
---------- --------
Net Interest Income After Provision for Loan Losses 2,909 2,879
NONINTEREST INCOME
Service charges on deposit accounts 209 155
Gain on investment securities transactions 146 24
Gain (loss) on sales of mortgage loans 94 (10)
Other 69 475
---------- --------
518 644
---------- --------
OPERATING EXPENSES
Salaries and employee benefits 1,083 1,036
Occupancy 231 227
Net cost of operation of real estate owned and repossessions 66 69
Other 1,095 1,298
---------- --------
2,475 2,630
---------- --------
INCOME BEFORE INCOME TAXES 952 893
Income Tax 334 -
---------- --------
NET INCOME $ 618 $ 893
========== ========
PER SHARE AMOUNTS
Weighted Average Shares Outstanding /(1)/ 1,379,634 600,361
Income Per Share $.44 $1.49
========== ========
/(1)/ The calculation of weighted average shares outstanding for the period
ended June 30, 1997 includes the weighted average shares outstanding of
common stock and common stock equivalents totaling 1,358,259 and 21,375,
respectively.
See Notes to consolidated financial statements.
5
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
First Coastal Corporation and Subsidiary
Six Months Ended June 30,
--------------------------
(in thousands) 1997 1996
- --------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net Income $ 618 $ 893
Adjustments to reconcile net income to net cash provided by operating activities:
Writedowns of REO 20 44
Depreciation 126 142
Amortization of investment security premium (discounts) 30 (18)
Realized investment securities gains (146) (24)
Realized (gains) losses on assets held for sale (94) 10
Loans originated and acquired for resale (2,866) (3,140)
Sales of loans originated and acquired for sale 3,454 2,307
(Increase) decrease in interest receivable (6) (79)
Decrease (increase) in interest payable (28) 297
Net change in other assets 656 246
Net change in other liabilities (7) (53)
------- -------
Net cash provided (used) by operating activities 1,757 625
------- -------
INVESTING ACTIVITIES
Decrease in federal funds sold - 10,000
Sales and maturities of securities available for sale 4,646 2,284
Maturities of securities held to maturity 2,001 5,000
Purchases of investment securities available for sale (8,026) (9,939)
Purchases of investment securities held to maturity - (5,003)
Net change in loans (4,683) 4,965
Net purchases of premises and equipment (100) (307)
------- -------
Net cash provided (used) by investing activities (6,162) 7,000
------- -------
FINANCING ACTIVITIES
Net change in deposits 2,358 (8,405)
Proceeds from borrowings 2,000 -
Payments on borrowings (348) -
Proceeds from issuance of stock options 7 -
------- -------
Net cash used by financing activities 4,017 (8,405)
------- -------
Increase (decrease) in cash and cash equivalents (388) (780)
Cash and cash equivalents (interest and noninterest bearing) at beginning of period 11,453 8,841
------- -------
Cash and cash equivalents (interest and noninterest bearing) at end of period $11,065 $ 8,061
======= =======
NONCASH INVESTING ACTIVITIES
Change in unrealized holding losses on investment securities available for sale $ 52 $ 176
Transfer of loans to real estate owned and repossessions - 353
See Notes to consolidated financial statements.
6
FIRST COASTAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 1997
NOTE A BASIS OF PRESENTATION
---------------------
The accompanying unaudited 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 and six months
ended June 30, 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.
In June 1997, FASB issued SFAS No. 130, Reporting Comprehensive Income. SFAS
No. 130 will require that all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. The requirements of the pronouncement are effective for
the Company's fiscal year beginning after December 15, 1997. The impact of this
statement on the Company's financial statements has not yet been determined.
In June 1997, FASB issued SFAS No. 131, Financial Reporting for Segments of a
Business Enterprise. SFAS No. 131 will require that a public business
enterprise report financial and descriptive information about its reportable
operating segments. The requirements of this pronouncement are effective for
financial statements for the periods beginning after December 15, 1997. The
impact of this statement on the Company's financial statements has not yet been
determined.
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 principal amount of $4.0 million (the "Savings
Bank Notes") which matures on December 31, 2001, 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.
7
DEFINED BENEFIT PLAN
The Board of Directors of Coastal Savings Bank (the "Bank") elected to terminate
the Bank's defined benefit plan and implement a 401(k) defined contribution
plan. The defined benefit plan was frozen effective July 31, 1997 and will be
subsequently terminated effective September 30, 1997. Although the termination
of the defined benefit plan is not expected to have a material effect on the
Company's financial statements, effective August 1, 1997 the Company currently
expects to incur pension expense in the form of matching 401(k) contributions.
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 as to whether or not the net operating loss carry
forwards would be utilized, and the benefit of net deferred tax assets 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.
On June 11, 1996 following stockholder approval, the Company filed an amendment
to its Restated Certificate of Incorporation 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 $351,000 (or $.25 per share) and $618,000 (or
$.44 per share) for the three and six months ended June 30, 1997, compared to
net income of $556,000 (or $.93 per share) and $893,000 (or $1.49 per share) for
the same respective period in 1996. The results for the three and six months
ended June 30, 1997 reflect an income tax expense of $195,000 and $334,000,
respectively, as compared to no income tax expense for the three and six months
ended June 30, 1996. Additionally, the three and six months ended June 30, 1997
reflect a $94,000 gain resulting from the sale of loan servicing rights relating
to $7.9 million of Maine State Housing Authority loans. The year-to-date
security/loan gains and losses also includes a $126,000 gain
8
received in the first quarter of 1997. The three and six months ended June 30,
1996 includes a $366,000 gain recorded as noninterest income, received from the
sale of the Bank's Kezar Falls branch, and $115,000 of other expenses which were
incurred in connection with the Company's recapitalization, which closed July
24, 1996.
NET INTEREST INCOME
Net interest income equaled $2,909,000 and $2,879,000 for the six months ended
June 30, 1997 and 1996, respectively (an increase of $30,000). The overall
increase in net interest income is, in part primarily attributable to an
increase in interest income on securities and cash balances of $79,000, offset
by an increase in interest expense of $30,000 resulting from increased borrowing
expense. 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, changes in the level of noninterest earning assets and
noninterest bearing liabilities and income recognition and income reversals
related to noninterest earning assets which become noninterest earning assets.
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.
Six Months Ended June 30,
------------------------------------------------------------------
1997 1996
-------------------------------- --------------------------------
Average Average
(in thousands) Balance Interest Yield /(1)/ Balance Interest Yield /(1)/
- ---------------------------------------------- -------- -------- ------------ -------- -------- ------------
ASSETS:
Cash $ 7,842 $ 222 5.71% $ 13,352 $ 355 5.35%
Investments 29,950 970 6.53 23,826 758 6.40
Loans /(2)/
Residential real estate mortgages 35,027 1,482 8.53 30,425 1,336 8.83
Commercial real estate mortgages 48,511 2,294 9.53 49,407 2,464 10.03
Commercial and industrial loans 3,250 156 9.69 2,180 111 10.23
Consumer loans 15,171 731 9.71 15,847 771 9.79
-------- ------ -------- ------
Total loans 101,959 4,663 9.22 97,859 4,682 9.62
Total interest earning assets 139,751 5,855 8.45 135,037 5,795 8.63
Noninterest earning assets 11,452 7,313
-------- --------
Total assets $151,203 $142,350
======== ========
LIABILITIES:
Deposits
Savings $ 34,847 $ 470 2.72% $ 39,939 $ 553 2.78%
NOW and money market accounts 18,728 234 2.52 15,290 170 2.24
Certificates of deposits 57,192 1,526 5.38 62,116 1,722 5.57
-------- ------ -------- ------
Total interest bearing deposits 110,767 2,230 4.06 117,345 2,445 4.19
Borrowings 20,561 716 7.02 15,000 471 6.31
-------- ------ -------- ------
Total interest bearing liabilities 131,328 2,946 4.52% 132,345 2,916 4.43%
Noninterest bearing deposits 5,675 4,787
Noninterest bearing liabilities 175 962
Stockholders' equity 14,025 4,256
-------- --------
Total liabilities and stockholders' equity $151,203 $142,350
======== ========
Net interest income $2,909 $2,879
====== ======
Net interest rate spread /(3)/ 3.92% 4.20%
Net interest margin /(4)/ 4.20% 4.29%
/(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.
9
Interest income for the six months ended June 30, 1997 increased $60,000 as
compared to the six months ended June 30, 1996. The increase for the six months
ended June 30, 1997 is primarily attributable to an increase of $79,000 in
interest earned on cash and investment securities resulting from increased
balances of $4.0 million and a 13 basis point increase on the overall yield of
securities. This increase is offset in part by a decrease of $19,000 in loan
interest income, resulting from a decline in loan yields, from 9.62% at June 30,
1996 to 9.22% at June 30, 1997. This reduced loan yield on the current loan
portfolio is mainly attributable to two factors: the change in the composition
of the Bank's loan portfolio, in particular the $4.7 million increase in
residential real estate mortgages which had an average yield of 8.53% for the
six months ended June 30, 1997 and the downward repricing of the loan portfolio
on an aggregate basis, resulting from an overall decline in interest rates of
certain loan indices utilized by the Company for loan repricing purposes.
Interest expense for the six months ended June 30, 1997 increased $30,000 as
compared to the six months ended June 30, 1996. The overall increase is
attributable to an increase in interest expense paid on borrowings of $245,000
resulting from $10.7 million in additional FHLB borrowings from June 30, 1996.
This was offset in part by a decrease in interest expense on deposits of
$215,000 which was largely the result of the sale of the Company's Kezar Falls
branch in the second quarter of 1996, including interest bearing deposits
totaling approximately $9.3 million.
PROVISION FOR LOAN LOSSES
There was no provision for loan losses expense for the six months ended June 30,
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"), $2.6 million at June 30, 1997 and $2.7 million at June 30, 1996,
and (ii) management's review of the portfolio and its determination of the
adequacy of the Allowance as of June 30, 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 decreased $126,000, from $644,000 for the six months ended
June 30, 1996 to $518,000 for the six months ended June 30, 1997. The decline
was primarily attributable to (i) the $366,000 gain on the sale of the Bank's
Kezar Fall's branch in the second quarter of 1996, and (ii) a $40,000 reduction
in fee income on loans serviced for others for the six months ended June 30,
1997 as compared to the six months ended June 30, 1996, which resulted from a
reduction in servicing fees received and balances of loans serviced for others.
These variances were partially offset by (i) an increase of $122,000 in
securities gains and (losses) for the six months ended June 30, 1997 as compared
to the same respective period in 1996, (ii) a $94,000 gain in the second quarter
of 1997 resulting form the sale of certain loan servicing rights, and (iii) an
increase of $54,000 in service charges on deposit accounts for the six months
ended June 30, 1997 as compared to the six months ended June 30, 1996.
10
OPERATING EXPENSES
Operating Expenses declined $155,000 for the six months ended June 30, 1997 as
compared to the same respective period in 1996. The six months ended June 30,
1996 included $115,000 of other expenses which were incurred in connection with
the Company's recapitalization plan, which closed in July 1996. Additionally,
computer expenses declined as a result of the August 1996 conversion from a
service bureau environment to an in-house based computer system. These 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.
FINANCIAL CONDITION
- -------------------
TOTAL ASSETS
At June 30, 1997, total assets were $152.4 million, representing an increase of
$4.7 million (or 3.15%) from total assets of $147.7 million at December 31,
1996. This increase was attributable to a $4.7 million increase in loans (the
majority of which are residential real estate), and funded by an increase in
borrowings of $1.7 million, an increase in deposits of $2.4 million and $0.7
million in capital, through retained earnings.
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 June 30, 1997 were $28.2 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 $5.0 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, sales of U.S. treasury
securities and mortgage backed securities of $2.0 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 June 30, 1997.
June 30, 1997
-------------------------------------------
Gross Gross Fair
Amortized Unrealized Unrealized Market
(in thousands) Cost Gain Loss Value
- -----------------------------------------------------------------------------
Available for sale:
U.S. government obligations $ 7,933 $ 14 $ (15) $ 7,932
Mortgage backed securities 12,427 30 (56) 12,401
Other 105 - - 105
------- ----- ------- -------
$20,465 $ 44 $ (71) $20,438
======= ===== ======= =======
Held to maturity:
U.S. government callable notes $ 7,801 - $ (121) $ 7,680
------- ----- ------- -------
$ 7,801 - $ (121) $ 7,680
======= ===== ======= =======
The net unrealized loss on investment securities classified as available for
sale was $27,000 at June 30, 1997, versus a net unrealized loss of $79,000 at
December 31, 1996. The decrease in the unrealized loss on securities
11
available for sale is attributable to a decrease in the market interest rate for
investments similar in nature to those contained in the Company's investment
portfolio.
The following table represents the contractual maturities for investments in
debt securities for each major security type at June 30, 1997.
June 30, 1997
-----------------------------------------
Maturing
-----------------------------------------
After One
Within But Within After
(in thousands) One Year Five Years Five Years Total
- -----------------------------------------------------------------------------
Available for sale:
U.S. government obligations - $ 7,932 - $ 7,932
Mortgage backed securities - - $12,401 12,401
-------- ------- ------- -------
- $ 7,932 $12,401 $20,333
======== ======= ======= =======
Held to maturity:
U.S. government agency callable
notes (final maturity) - $ 5,000 $ 2,801 $ 7,801
-------- ------- ------- -------
- $ 5,000 $ 2,801 $ 7,801
======== ======= ======= =======
LOANS HELD FOR SALE
Loans held for sale (all of which were residential mortgages carried at market
value) equaled $996,000 at June 30, 1997 as compared to $1,490,000 at December
31, 1996, a decrease of $494,000. The outstanding dollar amount of loans held
for sale can vary greatly from period to period effected by such 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:
June 30, December 31,
----------------------
(in thousands) 1997 1996
- ------------------------------------------------------------
Real estate mortgage loans:
Residential $ 35,434 $30,981
Commercial 47,038 48,456
Real estate construction loans 1,323 769
Commercial and industrial loans 4,355 3,059
Consumer and other loans 15,069 15,281
-------- -------
$103,219 $98,546
======== =======
Loans increased $4.7 million (or 4.7%) at June 30, 1997 as compared to December
31, 1996. The increases were primarily in the residential mortgage category and
attributable to new originations by the Bank.
12
ALLOWANCE FOR LOAN LOSSES ("ALLOWANCE")
The Company's Allowance was $2.6 million and $2.7 million, at June 30, 1997 and
December 31, 1996, respectively. The Allowance represented 2.54% and 2.71% of
total loans, and 91.46% and 124.29% of nonperforming loans, at June 30, 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:
June 30, December 31,
------------------------
(in thousands) 1997 1996
- --------------------------------------------------------------------
Nonaccrual loans $2,787 $1,944
Accruing loans past due 90 days or more 82 201
Restructured loans - -
Real estate owned and repossessions 192 478
------ ------
Total $3,061 $2,623
====== ======
Nonperforming assets increased $438,000 at June 30, 1997 compared to December
31, 1996 as a result of a single loan totaling $1.2 million being classified as
nonaccrual. This was offset in part by a decline in accruing loans past due 90
days or more and a reduction in REO.
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.
13
IMPAIRED LOANS
Management reviews the loan portfolio 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 June 30, 1997, the recorded investment in loans
for which impairment has been recognized in accordance with SFAS No. 114 totaled
$2,814,000, as compared to $3,845,000 at December 31, 1996. The corresponding
portion of the Allowance allocated against these loans ("Allocated Reserves")
was $448,000 as of June 30, 1997. An amount equal to $2,747,000 of the
$2,814,000 total impaired loans were classified as nonaccrual and the remaining
$67,000 were classified as potential problem loans at June 30, 1997. The income
recorded on a cash basis relating to impaired loans equaled $52,000 and the
average balance of outstanding impaired loans was $3.1 million. The
preponderance of the impaired loans were secured by real estate at June 30, 1997
and accounted for by the lower of the fair value of the collateral (net of the
$448,000 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 June 30, 1997, REO totaled approximately $192,000,
consisting of $66,000 in 1-4 family residential real estate, $90,000 in land and
$36,000 in other repossessed assets.
LIQUIDITY - BANK
Deposits totaled $117.4 million at June 30, 1997, an increase of $2.4 million
(or 2.05%) from the level of $115.1 million at December 31, 1996.
Deposit balances were as follows:
June 30, December 31,
-----------------------
(in thousands) 1997 1996
- ----------------------------------------------------------------
Noninterest bearing demand deposits $ 6,356 $ 5,790
Interest bearing demand deposits 18,872 15,090
Savings and escrow deposits 34,787 36,445
Time deposits 57,428 57,760
-------- --------
Total $117,443 $115,085
======== ========
The increase in deposit levels is primarily attributable to a single new
municipal money market checking account opened in the first quarter of 1997,
with a balance at June 30, 1997 of $1.5 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 between the
14
Bank and the Company based upon the relative benefits derived. At June 30,
1997, the parent's assets consisted of $457,000 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 of
the 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 June 30, 1997 equaled 28.44%.
The principal source of cash for the Company would normally be a dividend from
the Bank. Certain restrictions exist, however, 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.
In addition 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, $3,200,000,
$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.
15
CAPITAL - BANK
The table below sets forth the regulatory capital requirements and capital
ratios for the Bank at June 30, 1997 and December 31, 1996:
June 30, December 31,
------------------------
(dollars in thousands) 1997 1996
- --------------------------------------------------------------------------------
Tier 1 capital (Leverage) to total assets /(1)/ratio
- ------------------------------------------------------
Qualifying capital $ 13,496 $ 12,738
Actual % 9.16% 9.28%
Minimum requirement for capital adequacy % 4.00% 4.00%
Average quarterly assets $147,331 $137,317
Tier 1 capital to risk-weighted assets
- ------------------------------------------------------
Qualifying capital $ 13,496 $ 12,738
Actual % 15.06% 14.31%
Minimum requirement for capital adequacy % 4.00% 4.00%
Total capital to risk-weighted assets
(Tier 1 and Tier 2)
- ------------------------------------------------------
Qualifying capital $ 14,635 $ 13,888
Actual % 16.33% 15.60%
Minimum requirement for capital adequacy % 8.00% 8.00%
Risk-weighted assets $ 89,605 $ 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 June 30, 1997 and December 31, 1996:
June 30, December 31,
--------------------------
(dollars in thousands) 1997 1996
- ----------------------------------------------------------------------------------
Tier 1 capital (Leverage) to total assets /(1)/ratio
- ------------------------------------------------------
Qualifying capital $ 10,074 $ 9,104
Actual % 6.84% 6.62%
Minimum requirement for capital adequacy % 4.00-5.00% 4.00-5.00%
Average quarterly assets $ 147,273 $137,488
Tier 1 capital to risk-weighted assets
- ------------------------------------------------------
Qualifying capital $ 10,074 $ 9,104
Actual % 11.23% 10.21%
Minimum requirement for capital adequacy % 4.00% 4.00%
Total capital to risk-weighted assets
(Tier 1 and Tier 2)
- ------------------------------------------------------
Qualifying capital $ 11,213 $ 10,291
Actual % 12.51% 11.54%
Minimum requirement for capital adequacy % 8.00% 8.00%
Risk-weighted assets $ 89,668 $ 89,162
/(1)/ Calculated on an average quarterly basis.
16
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
- -------------------------
As of June 30, 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
- -----------------------------------------------------------
(a) The 1997 Annual Meeting of Stockholders of the Company was held on May 21,
1997.
(b) Nominees: Normand E. Simard and Edward K. Simensky were elected for three-
year terms to expire in 2000. The continuing directors are Dennis D. Byrd,
Gregory T. Caswell, David B. Hawkes, Roger E. Klein and Charles A. Stewart
III.
(c) The results of the voting at the 1997 Annual Meeting of Stockholders
(pursuant to a record date of April 16, 1997) were as follows:
(i) Election of Directors. 1,007,871 shares were voted to elect nominee
Normand E. Simard and Edward K. Simensky as a directors of the Company
for three year terms and 81,143 shares were voted to withhold
authority.
(ii) Ratification of Coopers & Lybrand L.L.P. as Independent Public
Accountants for the year ending December 31, 1997. For: 1,039,031;
Against: 48,780; Abstain: 1,203.
(d) 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).
17
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).
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 second quarter
of 1997.
18
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: August 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: August 14, 1997 By: /s/ Gregory T. Caswell
-------------------------------------
Gregory T. Caswell
President and Chief Executive Officer
(Principal Executive Officer)
Date: August 14, 1997 By: /s/ Dennis D. Byrd
------------------------------------
Dennis D. Byrd
Treasurer
(Principal Financial and Accounting
Officer)
19
EXHIBIT INDEX
Exhibit No. Description of Exhibit
- ----------- ----------------------
27 Financial Data Schedule
20