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 SEPTEMBER 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 October 30, 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 September 30, 1997 and
December 31, 1996 3
Consolidated Statements of Operations (Unaudited) for the three months
ended September 30, 1997 and 1996 4
Consolidated Statements of Operations (Unaudited) for the nine months
ended September 30, 1997 and 1996 5
Consolidated Statements of Cash Flows (Unaudited) for the nine months
ended September 30, 1997 and 1996 6
Notes to Consolidated Financial Statements (Unaudited),
September 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 18
Item 2. Changes in Securities and Use of Proceeds 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 20
2
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
First Coastal Corporation and Subsidiary
September 30, December 31,
-----------------------------------
(in thousands) 1997 1996
- -----------------------------------------------------------------------------------------------------------------------
ASSETS
Noninterest earning deposits and cash $ 4,297 $ 2,898
Interest earning deposits 8,574 8,555
-------- --------
Cash and cash equivalents 12,871 11,453
Investment securities:
Available for sale (at market value) 13,079 16,890
Held to maturity (at amortized cost) 7,801 9,802
-------- --------
20,880 26,692
Federal Home Loan Bank stock (at cost) 1,315 1,315
Loans held for sale (at lower of cost or market) 2,015 1,490
Loans 104,376 98,546
Less: Deferred loan fees, net (80) (31)
Allowance for loan losses (2,650) (2,666)
-------- --------
101,646 95,849
Premises and equipment, net 3,443 3,428
Accrued income receivable 901 1,079
Real estate owned and repossessions 180 478
Deferred tax asset 4,299 4,811
Other assets 1,021 1,139
-------- --------
TOTAL ASSETS $148,571 $147,734
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits $116,332 $115,085
Advances from Federal Home Loan Bank 14,475 15,000
Savings Bank Notes 3,000 4,000
Accrued expenses and other liabilities 279 261
-------- --------
TOTAL LIABILITIES 134,086 134,346
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 September 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) (18,679) (19,631)
Unrealized gain (loss) on available for sale securities 59 (79)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 14,485 13,388
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $148,571 $147,734
======== ========
See Notes to consolidated financial statements.
3
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
First Coastal Corporation and Subsidiary
Three Months Ended September 30,
--------------------------------
(in thousands, except per share amounts) 1997 1996
- ---------------------------------------------------------------------------------------
INTEREST AND DIVIDEND INCOME
Interest and fees on loans $ 2,453 $ 2,248
Interest and dividends on investment securities 423 423
Other interest income 126 82
---------- ----------
Total Interest and Dividend Income 3,002 2,753
---------- ----------
INTEREST EXPENSE
Deposits 1,122 1,151
Borrowings
Advances from Federal Home Loan Bank 224 89
FDIC Note - 39
Savings Bank Notes 175 81
---------- ----------
Total Interest Expense 1,521 1,360
---------- ----------
Net Interest Income Before Provision for Loan Losses 1,481 1,393
Provision for Loan Losses - -
---------- ----------
Net Interest Income After Provision for Loan Losses 1,481 1,393
NONINTEREST INCOME
Service charges on deposit accounts 124 90
Gain on investment securities transactions 98 14
Gain on sales of mortgage loans 11 5
Other 50 54
---------- ----------
283 163
---------- ----------
OPERATING EXPENSES
Salaries and employee benefits 608 531
Occupancy 67 101
Net cost of operation of real estate owned and repossessions 27 (8)
Other 550 674
---------- ----------
1,252 1,298
---------- ----------
INCOME BEFORE INCOME TAXES 512 258
Income tax expense (benefit) 178 (48)
---------- ----------
NET INCOME $ 334 $ 306
========== ==========
PER SHARE AMOUNTS
Weighted Average Shares Outstanding /(1)/ 1,386,530 1,160,252
Income Per Share $ .24 $ .26
========== ==========
/(1)/ The calculation of weighted average shares outstanding for the three
months ended September 30, 1997 includes the weighted average shares
outstanding of common stock and common stock equivalents totaling
1,359,194 and 27,336, respectively.
See Notes to consolidated financial statements.
4
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
First Coastal Corporation and Subsidiary
Nine Months Ended September 30,
-----------------------------------
(in thousands, except per share amounts) 1997 1996
- -------------------------------------------------------------------------------------
INTEREST AND DIVIDEND INCOME
Interest and fees on loans $ 7,116 $ 6,930
Interest and dividends on investment securities 1,393 1,181
Other interest income 348 437
---------- --------
Total Interest and Dividend Income 8,857 8,548
---------- --------
INTEREST EXPENSE
Deposits 3,352 3,596
Borrowings
Advances from Federal Home Loan Bank 723 264
FDIC Note - 335
Savings Bank Notes 392 81
---------- --------
Total Interest Expense 4,467 4,276
---------- --------
Net Interest Income Before Provision for Loan Losses 4,390 4,272
Provision for Loan Losses - -
---------- --------
Net Interest Income After Provision for Loan Losses 4,390 4,272
NONINTEREST INCOME
Service charges on deposit accounts 333 245
Gain on investment securities transactions 244 38
Gain (loss) on sales of mortgage loans 105 (5)
Other 119 529
---------- --------
801 807
---------- --------
OPERATING EXPENSES
Salaries and employee benefits 1,691 1,567
Occupancy 298 328
Net cost of operation of real estate owned
and repossessions 93 61
Other 1,645 1,972
---------- --------
3,727 3,928
---------- --------
INCOME BEFORE INCOME TAXES 1,464 1,151
Income tax expense (benefit) 512 (48)
---------- --------
NET INCOME $ 952 $ 1,199
========== ========
PER SHARE AMOUNTS
Weighted Average Shares Outstanding /(1)/ 1,382,354 788,354
Income Per Share $.69 $1.52
========== ========
/(1)/ The calculation of weighted average shares outstanding for the period
ended September 30, 1997 includes the weighted average shares outstanding
of common stock and common stock equivalents totaling 1,358,574 and
23,780, respectively.
See Notes to consolidated financial statements.
5
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
First Coastal Corporation and Subsidiary
Nine Months Ended September 30,
-----------------------------------
(in thousands) 1997 1996
- ---------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net Income $ 952 $ 1,199
Adjustments to reconcile net income to net cash provided by
operating activities:
Writedowns of REO 36 5
Depreciation 234 201
Amortization of investment security premium (discounts) 40 (25)
Realized investment securities gains (244) (38)
Realized (gains) losses on assets held for sale (105) 5
Loans originated and acquired for resale (5,761) (4,799)
Proceeds from sales of loans 5,341 3,645
Decrease in accrued interest receivable 178 69
Increase (decrease) in accrued interest payable 10 (508)
Net change in other assets 892 294
Net change in other liabilities 8 (95)
-------- -------
Net cash provided (used) by operating activities 1,581 (47)
-------- -------
INVESTING ACTIVITIES
Decrease in federal funds sold - 10,000
Sales and maturities of securities available for sale 14,320 6,371
Maturities of securities held to maturity 2,001 5,000
Purchases of investment securities available for sale (10,167) (9,939)
Purchases of investment securities held to maturity - (5,003)
Net change in loans (5,797) 3,637
Net purchases of premises and equipment (249) (340)
-------- -------
Net cash provided by investing activities 108 9,726
-------- -------
FINANCING ACTIVITIES
Net change in deposits 1,247 (7,629)
Proceeds from borrowings 2,000 4,000
Payments on borrowings (3,525) (9,000)
Proceeds from sale of Common Stock - 3,178
Proceeds from issuance of stock options 7 -
-------- -------
Net cash used by financing activities (271) (9,451)
-------- -------
Increase in cash and cash equivalents 1,418 228
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 $ 12,871 $ 9,069
======== =======
NONCASH INVESTING ACTIVITIES
Change in unrealized holding losses on investment securities
available for sale $ 138 $ 170
Transfer of loans to real estate owned and repossessions - 505
See Notes to consolidated financial statements.
6
FIRST COASTAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 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 nine months
ended September 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
requirements of this pronouncement 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") incurred as a result of the
settlement of the cross guaranty claim 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") pursuant to which the Company issued 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 and certain
concurrent restricted stock awards to the Company's executive officers 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 the Bank terminated the Bank's defined benefit plan
and implemented a 401(k) defined contribution plan. The defined benefit plan
was frozen effective July 31, 1997 and terminated effective September 30, 1997.
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
Bank began 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
carryforwards 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, 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, subsequent to January 1, 1997, earnings are reported on a
tax effected basis.
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 was intended to reduce the likelihood
that there would 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 $334,000 (or $.24 per share) and $952,000 (or
$.69 per share) for the three and nine months ended September 30, 1997, compared
to net income of $306,000 (or $.26 per share) and $1,199,000 (or $1.52 per
share) for the same respective period in 1996. The results for the three and
nine months ended September 30, 1997 reflect an income tax expense of $178,000
and $512,000, respectively, as compared
8
to an income tax benefit of $48,000 for the three and nine months ended
September 30, 1996. The Company made an unscheduled principal payment to the
Savings Banks of $1 million against its $4 million Savings Bank Notes
obligation, incurred in connection with the Company's recapitalization which
closed July 24,1996. As a result of the $1 million payment, the Company incurred
additional interest expense of $65,000 in the form of a $40,000 prepayment
penalty and a $25,000 expense relating to the accelerated recognition of
expenses incurred in connection with origination of the loan and which were
previously being amortized. The three and nine months ended September 30, 1997
reflect security/loan gains of $109,000 and $349,000, as compared to $19,000 and
$33,000 for the same respective periods in 1996. The nine months ended September
30, 1996 includes a $366,000 gain recorded as noninterest income, received from
the sale of the Bank's Kezar Falls branch, and $170,000 of other expenses which
were incurred in connection with the Company's July 1996 recapitalization.
NET INTEREST INCOME
Net interest income equaled $1.5 million and $4.4 million for the three and nine
months ended September 30, 1997, as compared to $1.4 million and $4.3 million
for the three and nine months ended September 30, 1996. The overall increase in
net interest income is primarily attributable to an increase in loan balances,
offset in part by an increase in borrowing expense (as described more fully
below).
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.
9
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.
Nine Months Ended September 30,
------------------------------------------------------------------
1997 1996
------------------------------- -------------------------------
Average Average
(in thousands) Balance Interest Yield /(1)/ Balance Interest Yield /(1)/
- --------------------------------------------- -------- -------- ------------ -------- -------- ------------
ASSETS:
Cash $ 8,323 $ 348 5.59% $ 10,894 $ 437 5.35%
Investments 28,429 1,393 6.55 24,546 1,181 6.43
Loans /(2)/
Residential real estate mortgages 36,266 2,318 8.54 30,759 1,999 8.68
Commercial real estate mortgages 47,987 3,413 9.51 49,051 3,594 9.79
Commercial and industrial loans 3,733 277 9.91 2,230 171 10.22
Consumer loans 15,115 1,108 9.80 15,722 1,166 9.90
-------- -------- -------- --------
Total loans 103,101 7,116 9.23 97,762 6,930 9.47
Total interest earning assets 139,853 8,857 8.47 133,202 8,548 8.57
Noninterest earning assets 11,071 7,212
-------- --------
Total assets $150,924 $140,414
======== ========
LIABILITIES:
Deposits
Savings $ 34,956 $ 711 2.72% $ 39,108 $ 810 2.77%
NOW and money market accounts 18,375 340 2.48 15,127 255 2.25
Certificates of deposits 57,122 2,301 5.39 61,239 2,531 5.52
-------- -------- -------- --------
Total interest bearing deposits 110,453 3,352 4.06 115,474 3,596 4.16
Borrowings 19,852 1,115 7.50 13,741 680 6.61
-------- -------- -------- --------
Total interest bearing liabilities 130,305 4,467 4.58% 129,215 4,276 4.42%
Noninterest bearing deposits 6,138 5,121
Noninterest bearing liabilities 186 658
Stockholders' equity 14,295 5,420
-------- --------
Total liabilities and stockholders' equity $150,924 $140,414
======== ========
Net interest income $4,390 $4,272
====== ======
Net interest rate spread/(3)/ 3.89% 4.15%
Net interest margin /(4)/ 4.20% 4.28%
/(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.
10
Interest income for the three and nine months ended September 30, 1997 increased
$249,000 and $309,000, respectively, as compared to the three and nine months
ended September 30, 1996. The increase for the nine months ended September 30,
1997 is primarily attributable to an increase of $186,000 in interest earned on
loans, resulting from a $5.4 million increase in average loan balances, offset
in part by a decrease in loan yields of 24 basis points. 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 $5.5
million increase in average residential real estate mortgage balances which had
an average yield of 8.54% for the nine months ended September 30, 1997 and a
decline in the average yield on all of the major loan categories. Additionally,
interest earned on cash and investments increased $123,000 as a result of higher
yields and balances.
Interest expense for the three and nine months ended September 30, 1997
increased $161,000 and $191,000 as compared to the three and nine months ended
September 30, 1996. The overall increase in interest expense for the nine
months ended September 30, 1997 is primarily attributable to an increase in
interest expense paid on FHLB borrowings of $459,000 resulting from $8.5 million
in additional FHLB borrowings as compared to September 30, 1996. Additionally,
the Company incurred additional interest expense of $65,000 in the third quarter
of 1997 as a result of the $1 million principal payment on the Savings Banks
Notes. This was offset in part by a decrease in interest expense on deposits of
$244,000 which was largely the result of the sale of the Bank's Kezar Falls
branch in the second quarter of 1996, including interest bearing deposits
totaling approximately $9.3 million and a ten basis point decline in overall
deposit costs.
PROVISION FOR LOAN LOSSES
There was no provision for loan losses expense for the nine months ended
September 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") ($2.7 million at September 30, 1997 and September 30,
1996), and (ii) management's review of the portfolio and its determination of
the adequacy of the Allowance as of September 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 growth in the size of
the loan portfolio, 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 for the three and nine months ended September 30, 1997
equaled $283,000 and $801,000, respectively, as compared to $163,000 and
$807,000 for the three and nine months ended September 30, 1996. While
noninterest income remained relatively unchanged for the nine months ended
September 30, 1997 and 1996, there were changes in the composition of
noninterest income. The results for the nine months ended September 30, 1996
include a $366,000 gain on the sale of the Bank's Kezar Falls branch in the
second quarter of 1996, and fee income on loans serviced for others declined
$35,000 for the nine months ended September 30, 1997 as compared to the nine
months ended September 30, 1996, resulting from a reduction in servicing fees
received and balances of loans serviced for others. These variances were
partially offset by (i) an increase of $84,000 and $206,000 in securities gains
for the three and nine months ended September 30, 1997, respectively, as
compared to the same respective period in 1996, (ii) a $94,000 gain in the
second quarter of 1997 resulting from the sale of certain loan servicing rights,
and (iii) an increase of $34,000 and $88,000 in service charges on deposit
accounts for the three and nine months ended September 30, 1997, respectively,
as compared to the three and nine months ended September 30, 1996.
11
OPERATING EXPENSES
Operating Expenses declined $46,000 and $201,000 for the three and nine months
ended September 30, 1997, respectively, as compared to the same respective
periods in 1996. The nine months ended September 30, 1996 included $170,000 of
other expenses which were incurred in connection with the Company's
recapitalization, which closed in July 1996. Additionally, the Bank's 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 (i) an increase in salary expense resulting from
the addition of staff at the Bank, including associated employment fees for
certain additions, and (ii) an increase in pension expense in the form of
matching 401(k) contributions.
FINANCIAL CONDITION
- -------------------
TOTAL ASSETS
At September 30, 1997, total assets were $148.6 million, representing an
increase of $837,000 from total assets of $147.7 million at December 31, 1996.
The increase in total assets was funded primarily by current year earnings.
However, total assets declined by $3.8 million from June 30, 1997 to September
30, 1997, which was primarily attributable to the maturity of $2.0 in FHLB
borrowings, a $1.0 million cash payment on the Savings Bank Notes and a decline
in deposit balances of $1.1 million, offset in part by a $0.4 million increase
in equity.
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 September 30, 1997 were $20.9 million compared to $26.7
million at December 31, 1996. This decrease is attributable to 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
$10.9 million, a $2.0 million decline in U.S. government agency callable notes
($2.0 million of which were called during the first quarter of 1997), and $1.1
million in amortization of mortgage backed securities, offset in part by the
purchase of $5.2 million in mortgage-backed securities and $5.0 million in U.S.
treasury securities. 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 September 30, 1997.
September 30, 1997
-----------------------------------------
Gross Gross Fair
Amortized Unrealized Unrealized Market
(in thousands) Cost Gain Loss Value
- -----------------------------------------------------------------------------
Available for sale:
U.S. government obligations $ 1,984 $ 8 $ - $ 1,992
Mortgage backed securities 10,936 54 (3) 10,987
Other 100 - - 100
------- ---- ------- -------
$13,020 $ 62 $ (3) $13,079
======= ==== ======= =======
Held to maturity:
U.S. government callable notes $ 7,801 1 $ (52) $ 7,750
------- ---- ------- -------
$ 7,801 1 $ (52) $ 7,750
======= ==== ======= =======
12
The net unrealized gain on investment securities classified as available for
sale was $59,000 at September 30, 1997, versus a net unrealized loss of $79,000
at December 31, 1996. The increase in the unrealized gain on securities
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 September 30, 1997.
September 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 - $1,992 - $ 1,992
Mortgage backed securities - - $10,987 10,987
-------- ------ ------- -------
- $1,992 $10,987 $12,979
======== ====== ======= =======
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 $2.0 million at September 30, 1997 as compared to $1.5 million at
December 31, 1996, an increase of $0.5 million. The outstanding dollar amount
of loans held for sale can vary greatly from period to period affected by such
factors as mortgage origination levels, the timing and delivery of loan sales,
changes in market interest rates and asset/liability management strategies.
LOANS
Loans (excluding loan fees) consisted of the following:
September 30, December 31,
---------------------------
(in thousands) 1997 1996
- --------------------------------------------------------------
Real estate mortgage loans:
Residential $ 36,076 $30,981
Commercial 46,670 48,456
Real estate construction loans 1,835 769
Commercial and industrial loans 4,596 3,059
Consumer and other loans 15,199 15,281
-------- -------
Total $104,376 $98,546
======== =======
Loans increased $5.8 million (or 5.8%) at September 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.
13
ALLOWANCE FOR LOAN LOSSES ("ALLOWANCE")
The Company's Allowance was $2.7 million at September 30, 1997 and December 31,
1996. The Allowance represented 2.54% and 2.71% of total loans, and 116.84% and
124.29% of nonperforming loans, at September 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:
September 30, December 31,
---------------------------
(in thousands) 1997 1996
- ----------------------------------------------------------------------
Nonaccrual loans $2,186 $1,944
Accruing loans past due 90 days or more 82 201
Restructured loans - -
Real estate owned and repossessions 180 478
------ ------
Total $2,448 $2,623
====== ======
Nonperforming assets decreased $175,000 at September 30, 1997 compared to
December 31, 1996. The Company continues to hold a large concentration of
commercial real estate loans. 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.
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 September 30, 1997, the recorded investment in
loans for which impairment has been recognized in accordance with SFAS No. 114
totaled $2,226,000, as compared to $3,845,000 at December 31, 1996. The
corresponding portion of the Allowance allocated against these loans ("Allocated
Reserves") was $439,000 as of September 30, 1997. An amount equal to $2,161,000
of the $2,226,000 total impaired loans was classified as nonaccrual and the
remaining $65,000 was classified as potential problem loans at September 30,
1997. The income recorded on a cash basis relating to impaired loans equaled
$73,000 and the average balance
14
of outstanding impaired loans was $2.8 million. The preponderance of the
impaired loans were secured by real estate at September 30, 1997 and accounted
for by the lower of the fair value of the collateral (net of the $439,000
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 September 30, 1997, REO totaled approximately $180,000,
consisting of $66,000 in 1-4 family residential real estate, $90,000 in land and
$24,000 in other repossessed assets.
LIQUIDITY - BANK
Deposits totaled $116.3 million at September 30, 1997, an increase of $1.2
million (or 1.1%) from the level of $115.1 million at December 31, 1996.
Deposit balances were as follows:
September 30, December 31,
---------------------------
(in thousands) 1997 1996
- ------------------------------------------------------------------
Noninterest bearing demand deposits $ 8,215 $ 5,790
Interest bearing demand deposits 17,337 15,090
Savings and escrow deposits 34,466 36,445
Time deposits 56,314 57,760
-------- --------
Total $116,332 $115,085
======== ========
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 $3.0 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
Bank and the Company based upon the relative benefits derived. At September 30,
1997, the parent's assets consisted of $277,000 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 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
15
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. The Company's debt-to-equity
ratio (on a parent company only basis) at September 30, 1997 equaled 20.71%.
On September 25, 1997 and March 26, 1997, the Bank paid the Company cash
dividends of $1,000,000 and $500,000.
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.
CAPITAL - BANK
The table below sets forth the regulatory capital requirements and capital
ratios for the Bank at September 30, 1997 and December 31, 1996:
September 30, December 31,
-----------------------------
(dollars in thousands) 1997 1996
- -------------------------------------------------------------------------------------
Tier 1 capital (Leverage) to total assets /(1)/ratio
- ------------------------------------------------------
Qualifying capital $ 13,206 $ 12,738
Actual % 9.02% 9.28%
Minimum requirement for capital adequacy % 4.00% 4.00%
Average quarterly assets $146,334 $137,317
Tier 1 capital to risk-weighted assets
- ------------------------------------------------------
Qualifying capital $ 13,206 $ 12,738
Actual % 14.68% 14.31%
Minimum requirement for capital adequacy % 4.00% 4.00%
Total capital to risk-weighted assets
(Tier 1 and Tier 2)
- ------------------------------------------------------
Qualifying capital $ 14,349 $ 13,888
Actual % 15.95% 15.60%
Minimum requirement for capital adequacy % 8.00% 8.00%
Risk-weighted assets $ 89,955 $ 89,026
/(1)/ Calculated on an average quarterly basis.
On September 25, 1997, the Bank paid the Company a dividend in the amount of $1
million, which was utilized by the Company to make an unscheduled principal
payment of the same amount against its $4 million Saving Bank Notes obligation
to the Savings Banks, reducing the principal balance of the Savings Bank Notes
to $3.0 million.
16
CAPITAL - COMPANY
The table below sets forth the regulatory capital requirements and capital
ratios for the Company at September 30, 1997 and December 31, 1996:
September 30, December 31,
-----------------------------
(dollars in thousands) 1997 1996
- -------------------------------------------------------------------------------------
Tier 1 capital (Leverage) to total assets /(1)/ratio
- ------------------------------------------------------
Qualifying capital $ 10,592 $ 9,104
Actual % 7.23% 6.62%
Minimum requirement for capital adequacy % 4.00-5.00% 4.00-5.00%
Average quarterly assets $ 146,427 $ 137,488
Tier 1 capital to risk-weighted assets
- ------------------------------------------------------
Qualifying capital $ 10,592 $ 9,104
Actual % 11.77% 10.21%
Minimum requirement for capital adequacy % 4.00% 4.00%
Total capital to risk-weighted assets
(Tier 1 and Tier 2)
- ------------------------------------------------------
Qualifying capital $ 11,736 $ 10,291
Actual % 13.04% 11.54%
Minimum requirement for capital adequacy % 8.00% 8.00%
Risk-weighted assets $ 90,002 $ 89,162
/(1)/ Calculated on an average quarterly basis.
17
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
- -------------------------
As of September 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 and Use of Proceeds
- --------------------------------------------------
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).
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).
18
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 third quarter
of 1997.
19
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: November 7, 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: November 7, 1997 By: /s/ Gregory T. Caswell
-------------------------------------
Gregory T. Caswell
President and Chief Executive Officer
(Principal Executive Officer)
Date: November 7, 1997 By: /s/ Dennis D. Byrd
-------------------------------------------
Dennis D. Byrd
Treasurer
(Principal Financial and Accounting Officer)
20
EXHIBIT INDEX
Exhibit No. Description of Exhibit
- ----------- ----------------------
27 Financial Data Schedule