UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark one): [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission file number 0-14087
FIRST COASTAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 06-1177661
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
36 Thomas Drive, Westbrook, Maine 04092
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (207) 774-5000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
The number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date, is:
Class: Common Stock, Par Value $1.00 per share
Outstanding at May 11, 1999: 1,360,527 shares
INDEX
FIRST COASTAL CORPORATION AND SUBSIDIARY
PART I - FINANCIAL INFORMATION
---------------------
Item 1. Financial Statements
Consolidated Balance Sheets (Unaudited) as of March 31, 1999 and
December 31, 1998 3
Consolidated Statements of Operations (Unaudited) for the three months
ended March 31, 1999 and 1998 4
Consolidated Statements of Cash Flows (Unaudited) for the three months
ended March 31, 1999 and 1998 5
Consolidated Statements of Comprehensive Income (Unaudited) for the
three months ended March 31, 1999 and 1998 6
Notes to Consolidated Financial Statements (Unaudited), March 31, 1999 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk 20
PART II - OTHER INFORMATION
-----------------
Item 1. Legal Proceedings 21
Item 2. Changes in Securities and Use of Proceeds 21
Item 3. Defaults Upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 21
SIGNATURES 22
2
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
- -----------------------------
CONSOLIDATED BALANCE SHEETS (Unaudited)
First Coastal Corporation and Subsidiary March 31, December 31,
----------- ------------
(in thousands) 1999 1998
- -------------------------------------------------------------------------------------------------------------
ASSETS
Noninterest earning deposits and cash $ 3,907 $ 4,509
Interest earning deposits 18,320 28,118
-------- --------
Cash and cash equivalents 22,227 32,627
Investment securities:
Available for sale (at market value, amortized cost: 1999 $49,531; 1998 $47,037) 49,381 47,048
Federal Home Loan Bank stock (at cost) 1,315 1,315
Loans held for sale (at market value) 886 83
Loans 110,808 105,873
Less: Deferred loan fees, net (88) (97)
Allowance for loan losses (2,782) (2,735)
-------- --------
107,938 103,041
Premises and equipment 2,491 2,554
Accrued income receivable 1,053 1,132
Real estate owned and repossessions 12 15
Deferred tax asset 3,172 3,354
Other assets 349 244
-------- --------
TOTAL ASSETS $188,824 $191,413
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits $146,458 $148,545
Advances from Federal Home Loan Bank 21,349 22,545
Savings Bank Notes 2,600 2,600
Secured borrowings 1,503 967
Accrued expenses and other liabilities 256 442
-------- --------
TOTAL LIABILITIES 172,166 175,099
STOCKHOLDERS' EQUITY
Preferred Stock, $1.00 par value; Authorized 1,000,000 shares, none outstanding - -
Common Stock, $1.00 par value; Authorized 6,700,000 shares, issued and
outstanding as of March 31, 1999 and December 31, 1998 - 1,360,527 shares 1,361 1,361
Paid-in-capital 31,751 31,751
Retained earnings (deficit) (16,350) (16,805)
Accumulated other comprehensive income (104) 7
-------- --------
TOTAL STOCKHOLDERS' EQUITY 16,658 16,314
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $188,824 $191,413
======== ========
See notes to consolidated financial statements.
3
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
First Coastal Corporation and Subsidiary Three Months Ended March 31,
-----------------------------
(in thousands, except share and per share amounts) 1999 1998
- -------------------------------------------------------------------------------------------------------------
Interest and Dividend Income
Interest and fees on loans $ 2,340 $ 2,477
Interest and dividends on investment securities 773 394
Other interest income 225 107
---------- ----------
Total Interest and Dividend Income 3,338 2,978
Interest Expense
Deposits 1,394 1,079
Borrowings
Advances from Federal Home Loan Bank 299 213
Savings Bank Notes 74 83
Secured borrowings 14 -
---------- ----------
Total Interest Expense 1,781 1,375
---------- ----------
Net Interest Income Before Provision for Loan Losses 1,557 1,603
Provision for loan losses - -
---------- ----------
Net Interest Income After Provision for Loan Losses 1,557 1,603
Noninterest Income
Services charges on deposit accounts 114 116
Loss on investment securities transactions (19) -
Gain on sales of mortgage loans 467 6
Other 20 22
---------- ----------
582 144
Operating Expenses
Salaries and employee benefits 680 637
Occupancy 164 131
Net cost of operations of real estate owned and repossessions 1 (3)
Other 607 537
---------- ----------
1,452 1,302
---------- ----------
Income Before Income Taxes 687 445
Income Taxes 232 160
---------- ----------
NET INCOME $ 455 $ 285
========== ==========
PER SHARE AMOUNTS
Basic earnings per share:
Weighted average shares outstanding 1,360,527 1,359,194
Net income per share $ 0.33 $ 0.21
========== ==========
Diluted earnings per share:
Weighted average shares outstanding 1,374,838 1,381,707
Net income per share $ 0.33 $ 0.21
========== ==========
See notes to consolidated financial statements.
4
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
First Coastal Corporation and Subsidiary Three Months Ended March 31,
-----------------------------
(in thousands) 1999 1998
- ----------------------------------------------------------------------------------------------------------------
Operating Activities
Net Income $ 455 $ 285
Adjustments to reconcile net income to net cash provided by operating activities
Writedowns of REO 2 -
Gain (loss) on sales of REO - (5)
Depreciation and amortization 99 90
Amortization of investment securities premiums (discounts) 55 27
Realized investment securities (gains) losses 19 -
Realized (gains) losses on assets held for sale (467) (6)
Loan originated and acquired for sale (796) (2,134)
Sales of loans originated and acquired for sale - 1,812
Decrease in interest receivable 79 44
Increase (decrease) in interest payable 12 (70)
Net change in other assets 538 239
Net change in other liabilities (198) 68
-------- -------
Net cash (used) provided by operating activities (202) 350
-------- -------
Investing Activities
Sales and maturities of securities available for sale 4,616 953
Maturities of securities held to maturity - 6,000
Purchases of investment securities available for sale (7,134) (3,933)
Purchases of investment securities held to maturity - (2,193)
Net change in loans (4,897) (537)
Net purchases of premises and equipment (36) (294)
-------- -------
Net cash used by investing activities (7,451) (4)
-------- -------
Financing Activities
Net change in deposits (2,087) 3,526
Proceeds from borrowings - 4,000
Payments on borrowings (1,196) (4,183)
Net change in secured borrowings 536 -
-------- -------
Net cash (used) provided by financing activities (2,747) 3,343
-------- -------
Increase (decrease) in cash and cash equivalents (10,400) 3,689
Cash and cash equivalents at beginning of period 32,627 7,554
-------- -------
Cash and cash equivalents (interest and noninterest bearing) at end of period $ 22,227 $11,243
======== =======
Noncash Investing Activities
Change in unrealized holding gains and losses on investment securities
available for sale $ (111) $ (4)
Transfer of loans to real estate owned and repossessions - 121
See notes to consolidated financial statements.
5
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
First Coastal Corporation and Subsidiary Three Months Ended March 31,
------------------------------
(dollars in thousands) 1999 1998
- ----------------------------------------------------------------------------------------------------------------
Net Income $ 455 $ 285
Other comprehensive income:
Unrealized holding gains (losses) arising during the period (net of income taxes:
1999 - $(64); 1998 - $(1)) (124) (4)
Reclassification adjustment for realized (gains) losses included in net income
(net of income taxes: 1999 - $6; 1998 - $0) 13 -
-------- --------
(111) (4)
-------- --------
Comprehensive income $ 344 $ 281
======== ========
See notes to consolidated financial statements.
6
FIRST COASTAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 1999
NOTE A BASIS OF PRESENTATION
---------------------
The accompanying unaudited condensed consolidated financial statements of First
Coastal Corporation (the "Company") and its subsidiary, Coastal Bank (the
"Bank"), have been prepared in conformity with generally accepted accounting
principles for interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission.
Accordingly, they do not include all of the information and notes required by
generally accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results and other data for the three months ended March 31, 1999 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 1999. 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, 1998.
Significant Events
On February 22, 1999, the Bank entered into a definitive purchase and assumption
agreement to sell its branch located in Kennebunk, Maine. Under the terms of
the purchase and assumption agreement, the purchaser will acquire all of the
branch's deposits and certain branch assets, as well as assume responsibility
for the Bank's lease obligations. Regulatory approvals were received and the
sale is expected to take place in the second quarter of 1999. At the time the
sale closes, a pretax gain in the amount of approximately $1.1 million is
anticipated to be recorded. The actual amount of the gain to be recorded at
closing will be subject to actual deposit levels, the mix of deposits and other
factors, and could be higher or lower than the amount currently anticipated.
Computation of Earnings per Share
Financial Accounting Standards Board ("FASB") Statement of Financial Accounting
Standard ("SFAS") No. 128, Earnings Per Share, provides reporting standards for
basic and diluted earnings per share and is effective for financial statement
periods ending after December 15, 1997. Basic earnings per share is computed by
dividing income available to common stockholders by the weighted-average number
of common shares outstanding for the period. Diluted earnings per share
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock that then shared in the earnings of the
entity. All prior period earnings per share data has been restated to conform
to the provisions of this statement. The table below sets forth the approximate
number of shares used to calculate basic and diluted earnings per share ("EPS")
for the three months ended March 31, 1999 and 1998.
Three Months Ended
March 31,
-----------------------------
1999 1998
-----------------------------
Weighted average shares outstanding for basic EPS 1,360,527 1,359,194
Effect of dilutive stock options 14,311 22,513
--------- ---------
Weighted average shares outstanding for diluted EPS 1,374,838 1,381,707
========= =========
7
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 Bank (the "Bank"), a
Maine chartered 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 eight
offices in the counties of Cumberland, Sagadahoc and York. The Bank's deposits
are insured by the Federal Deposit Insurance Corporation up to the limits
provided by law.
This Quarterly Report on Form 10-Q, including statements made in this
Management's Discussion and Analysis of Financial Condition and Results of
Operations, contains certain "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995. Any statements with
regard to the Company's expectations as to its financial results and other
aspects of its business, including the Company's strategic business initiatives,
net interest margin, deposit growth, interest rates, additional branches, market
and growth opportunities and loan volume, constitute forward-looking statements.
Certain, but not necessarily all, of such forward-looking statements can be
identified by the use of forward-looking terminology, such as "believes,"
"expects," "may," "will," "should," "estimates," or "anticipates" or the
negative thereof or other variations thereof or comparable terminology. All
forward-looking statements involve known and unknown risks, uncertainties and
other factors which may cause the actual transactions, results, performance or
achievements of the Company to be materially different from those expressed or
implied by such forward-looking statements. Although the Company has made such
statements based on assumptions which it believes to be reasonable, there can be
no assurance that the actual transactions, results, performance or achievements
will not differ materially from the Company's expectations. For example, there
are a number of important factors with respect to such forward-looking
statements that could materially and adversely affect such forward-looking
statements, such as (i) the impact of changes in market rates of interest on the
Company's deposit products and loan demand; (ii) the possibility that certain
transactions, such as the Kennebunk branch sale, the identification, development
and successful transition to a suitable new headquarters branch /operations
center, the opening of new branches, the introduction of new banking products or
other events, may not occur; (iii) the possibility that operating expenses may
be higher than anticipated; (iv) the effect of general economic and competitive
conditions in markets in which the Company operates; (v) the Company's ability
to continue to control its provision for loan losses and noninterest expense,
interest earning assets and noninterest income, as well as maintain its margin;
and (vi) the level of demand for new and existing products. Should one or more
of these risks or other uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from those
described in the forward-looking statements. The Company does not intend to
update forward-looking statements. Investors are also directed to other
information related to the Company in documents filed by the Company with the
Securities and Exchange Commission.
RESULTS OF OPERATIONS
Overview
The Company reported net income of $455,000 for the three months ended March 31,
1999, compared to net income of $285,000 for the same respective period in 1998.
The increase in net income for the three months ended March 31, 1999 as compared
to the same period in 1998 is primarily attributable to an after tax gain of
$300,000 received on the sale of the Bank's mortgage servicing asset, offset in
part by a $150,000 increase
8
in other expenses relating to several business initiatives implemented during
the first six months of 1998 and further discussed below in the category
Operating expenses.
Net Interest Income
Net interest income decreased by $46,000 for the three months ended March 31,
1999 as compared to the same period in 1998. A combination of relatively
significant growth stimulated primarily by an increase in funding sources, in
particular the Company's new High Rise Savings program implemented in late March
1998, and lower yields on earning assets are the primary reasons behind the
decline in net interest income. The Company's average assets increased $41.2
million (27.8%) for the three months ended March 31, 1999 as compared to the
same period in 1998, with increases in average savings balances ($30.5 million)
and borrowings ($8.2 million) providing the bulk of the corresponding increase
in liabilities. The increased funds available from deposits and borrowings were
primarily invested in interest earning deposits and investment securities, with
the average balances of these two lower yielding asset categories (as compared
to loans) increasing $11.0 million and $31.7 million, respectively, at March 31,
1999 as compared to March 31, 1998. Correspondingly, investment securities and
interest earning deposits represented a larger percentage of the Bank's average
earning assets, 40.8% for the three months ended March 31, 1999 as compared to
22.4% for the three months ended March 31, 1998. The combination of the growth
in these lower yielding assets (as compared to loans), combined with a decline
in the yield on average earning assets (including cash, investment securities
and loans), resulted in a decline in the Company's net interest rate spread and
margin. The Company's net interest rate spread for the three months ended March
31, 1999 decreased to 3.06% as compared to 4.29% for the same period in 1998,
and the net interest margin for the three months ended March 31, 1999 decreased
to 3.50% as compared to 4.70% for the three months ended March 31, 1998.
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 interest earning assets which become noninterest earning assets.
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.
Quarter Ended March 31,
---------------------------------------------------------------------------
1999 1998
---------------------------------------------------------------------------
Average Average
Balance Interest Yield(1) Balance Interest Yield(1)
- -------------------------------------------------------------------------------------------------------------------------
Assets:
Cash $ 18,638 $ 225 4.83% $ 7,646 $ 107 5.67%
Investments 55,011 773 5.70 23,354 394 6.84
Loans /(2)/(3)
Residential real estate mortgages 33,551 670 7.99 37,244 790 8.48
Commercial real estate mortgages 54,042 1,232 9.24 49,579 1,199 9.81
Commercial and industrial loans 5,982 134 9.12 5,622 136 9.83
Consumer loans 13,414 304 9.19 14,978 352 9.53
-------- ------ -------- ------
Total loans 106,989 2,340 8.87 107,423 2,477 9.35
Total interest earnings assets 180,638 3,338 7.50 138,423 2,978 8.72
Noninterest earning assets 8,726 9,760
-------- --------
Total assets $189,364 $148,183
======== ========
Liabilities:
Deposits
Savings $ 65,355 $ 617 3.83% $ 34,872 $ 235 2.73%
NOW and money market accounts 18,986 109 2.33 17,664 103 2.37
Certificates of deposits 52,413 668 5.17 55,679 741 5.40
-------- ------ -------- ------
Total interest bearing deposits 136,754 1,394 4.14 108,215 1,079 4.04
Borrowings 25,871 387 6.06 17,695 296 6.78
-------- ------ -------- ------
Total interest bearing liabilities 162,625 1,781 4.44% 125,910 1,375 4.43%
Noninterest bearing deposits 8,820 6,964
Noninterest bearing liabilities 370 107
Stockholders' equity 17,549 15,202
-------- --------
Total liabilities and stockholders' equity $189,364 $148,183
======== ========
Net interest income $1,557 $1,603
====== ======
Net interest rate spread (4) 3.06% 4.29%
Net interest rate margin (5) 3.50% 4.70%
(1) Annualized.
(2) For purposes of these computations, loans held for sale and nonaccrual
loans are included in the average loan amounts outstanding.
(3) Fees from loans are included in interest income from loans.
(4) Return on interest earning assets less cost of interest bearing
liabilities.
(5) Net interest income divided by average earning assets.
10
Interest income increased $360,000 for the three months ended March 31, 1999 as
compared to the three months ended March 31, 1998. The increase is primarily
attributable to an increase in average earning assets of $42.2 million,
including increases in investment securities ($31.7 million) and interest
earning deposits ($11.0 million), partially offset by a decrease in average loan
balances ($0.4 million). The increase in interest earning assets was primarily
the result of an increase in total deposit balances, largely attributable to the
introduction of the Bank's new High Rise Savings product. Savings deposit
average balances increased $30.5 million for the three months ended March 31,
1999 as compared to the same period in 1998. This deposit growth was primarily
invested in interest bearing deposits and investment securities, increasing the
Bank's concentration of these lower yielding assets (as compared to loans),
thereby lowering the overall yield on earning assets. In addition, the average
yield on total loans declined from 9.35% for the three months ended March 31,
1998 to 8.87% for the three months ended March 31, 1999. It is management's
intent to reduce the percentage of earning assets comprising interest bearing
deposits in 1999 and to increase loans as a percentage of earning assets, which
would positively impact the Company's net interest rate spread and net interest
rate margin. Some progress was made in this regard during the three months
ended March 31, 1999. Although average loan balances equaled $106.9 million for
the three months ended March 31, 1999, ending loan balances equaled $110.8
million at March 31, 1999. This variance is attributable to $4.5 million in new
loan volume, primarily commercial mortgage loans, originated late in the month
of March.
Competition with regard to loan originations has continued to be intense. As a
result, the yields on new loan originations, and in particular commercial real
estate and commercial and industrial loans, may decline relative to interest
rates in general. Competitive factors resulted in increased loan prepayments in
1998 as compared to that which might ordinarily have been expected, as well as
some reductions in contract interest rates for existing customers. It is
unknown how the interest rate environment and competitive factors may impact
loan prepayments in 1999.
Interest expense increased $406,000 for the three months ended March 31, 1999 as
compared to the same respective period in 1998. The increase is primarily the
result of increases in interest rates paid on savings deposits equal to
$382,000 (attributable to a $30.5 million increase in average deposit balances
and a 1.1% increase in rate). This increase was partially offset by a $73,000
decline in interest expense paid on certificates of deposits (attributable to a
$3.3 million decline in average deposit balances and a 0.23% decline in rates).
Borrowing expense increased $91,000, primarily the result of an increase in
average balances of $8.2 million, offset by a reduction in rate of 0.72%.
On March 23, 1998, the Company introduced a new savings deposit product called
High Rise Savings. The introductory interest rate paid on this product was
tiered (initially ranging from 4.64% to 5.59%) and was guaranteed through
December 31, 1998 for accounts opened during the initial introductory period
which ended July 3, 1998 (following the initial introductory period, the
product's interest rates were reduced). The Company generated significant new
deposit balances as a result of this promotion. In addition, a portion of the
Bank's existing deposit customers converted their pre-existing accounts to High
Rise Savings accounts (generally at higher rates). High Rise balances at March
31, 1999 equaled $39.9 million. Largely as a result of the introduction of the
High Rise program, average savings deposit balances increased from $34.9 million
at March 31, 1998 to $65.4 million at March 31, 1999, and the average interest
rate paid on savings deposits increased from 2.73% to 3.83%, thereby increasing
the overall cost of deposits to the Bank. The interest rate paid on the
introductory High Rise Savings accounts was reduced in January, March and May of
1999, by 0.50%, 0.25% and 0.25%, respectively.
As competitive pressures continue, the cost of funds to financial institutions
may rise relative to market interest rates, thereby narrowing the spread on
interest earning assets as compared to interest bearing liabilities.
11
Provision for Loan Losses
There was no provision for loan losses expense for the three months ended March
31, 1999 and 1998. The absence of provision for loan losses in 1999 and 1998
is primarily attributable to the continuing low level of nonperforming loans and
potential problem loans (as compared to historical levels) and management's
review of the portfolio and its determination of the adequacy of the allowance
for loan losses (the "Allowance") at March 31, 1999. Despite the absence of
provision expense, the level of the Allowance remained essentially unchanged as
charged-off loans of $3,000 and $27,000 for the three months ended March 31,
1999 and 1998, respectively, were offset by recoveries totaling $50,000 and
$58,000, for the same respective periods.
Noninterest Income
Noninterest income totaled $582,000 for the three months ended March 31, 1999,
an increase of $438,000 as compared to the same period in 1998. Noninterest
income for the three months ended March 31, 1999 includes a $460,000 pre-tax
gain received on the sale of the Bank's residential mortgage servicing
portfolio. This gain was offset by a $19,000 loss on investment securities
transactions. In conjunction with the sale of the Bank's mortgage servicing
portfolio on January 31, 1999 and the implementation of the Bank's new
residential mortgage lending program, the Bank intends to sell saleable loans on
a servicing released basis and recognize the servicing fee income at the time of
sale rather than recording the income on servicing fees over the life of the
loan.
Operating Expenses
Operating expense increased $150,000 for the three months ended March 31, 1999
as compared to the same period in 1998. The increase in operating expenses was
primarily the result of additional costs associated with several business
initiatives implemented by the Bank during the first and second quarters of
1998. These initiatives include the opening of the Portland branch, the
development and implementation of an Internet banking program for businesses,
the development and introduction of a new line of cash management services for
businesses, and additional staffing resulting from increased commercial lending
activity. The increase in salaries and benefits was primarily attributable to
changes in staffing levels (including additional staff at the new Portland
office) and annual salary increases. Management anticipates operating expenses
for 1999 and 2000 to further increase as a result of several additional business
initiatives that are currently either underway or contemplated, including (i)
the Bank's lease or purchase of a new headquarters branch/operations center, and
related furniture, fixtures, equipment and relocation expenses, (ii) the opening
of additional branches over the next two to three years in the Greater Portland
market, (iii) the introduction of a number of new retail banking products which
will expand the Bank's retail product array, and (iv) the Bank's continued
expansion of its commercial lending activities.
FINANCIAL CONDITION
- -------------------
Total Assets
At March 31, 1999, total assets equaled $188.8 million, representing a decrease
of $2.6 million (or 1.4%) from total assets of $191.4 million at December 31,
1998. Cash and cash equivalents decreased $10.4 million, partially offset by
increases in loan balances ($4.9 million) and investment securities ($2.3
million). Deposits declined $2.1 million and borrowings declined $1.2 million
during this period.
Investments
The Company's investment portfolio is comprised primarily of U.S. government and
agency obligations and also contains miscellaneous equity securities. Total
investment securities at March 31, 1999 were $49.4
12
million compared to $47.0 million at December 31, 1998. This increase is
attributable to the purchase of $4.2 million in U.S. government obligations (of
which $2.0 million are Treasury Inflation Indexed Securities), $1.0 million in
U.S. government agency notes, and $1.9 million in commercial notes, partially
offset by the sale of $1.9 million in U.S. government obligations and $2.7
million in prepayments and amortization on mortgage-backed 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.
The following table sets forth the amortized cost and fair value of investment
securities for each major security type at March 31, 1999.
March 31, 1999
--------------------------------------------
Gross Gross Fair
Amortized Unrealized Unrealized Market
(in thousands) Cost Gain Loss Value
- ---------------------------------------------------------------------------
Available for sale:
U.S. government obligations $16,570 $ 3 $186 $16,387
U.S. government agency 1,002 - - 1,002
Mortgage backed securities 29,544 89 42 29,591
Commercial notes 1,943 - 14 1,929
Equity securities 472 - - 472
------- --- ---- -------
$49,531 $92 $242 $49,381
======= === ==== =======
The tax effected net unrealized gain (loss) on investment securities classified
as available for sale was $(104,000) and $7,000, at March 31, 1999 and December
31, 1998, respectively.
The following table represents the contractual maturities for investments in
debt securities for each major security type at March 31, 1999.
March 31, 1999
-------------------------------------------
Maturing
-------------------------------------------
After One
Within But within After
(in thousands) One Year Five Five Years Total
- --------------------------------------------------------------------------
Available for sale:
U.S. government obligations $472 $2,038 $13,877 $16,387
U.S. government agency - - 1,002 1,002
Mortgage backed securities - - 29,591 29,591
Commercial notes - - 1,929 1,929
---- ------ ------- -------
$472 $2,038 $46,399 $48,909
==== ====== ======= =======
Loans Held for Sale
Loans held for sale (all of which were residential mortgages carried at market
value) equaled $886,000 at March 31, 1999 as compared to $83,000 at December 31,
1998, an increase of $803,000. The outstanding dollar amount of loans held for
sale can vary greatly from period to period, affected by such factors as
13
mortgage origination levels, the timing and delivery of loan sales, changes in
market interest rates and asset/liability management strategies.
Loans
Loans consisted of the following:
March 31, December 31,
-------------------------
(in thousands) 1999 1998
- ------------------------------------------------------
Real estate mortgage loans:
Residential $ 32,101 $ 32,555
Commercial 57,804 52,747
Real estate construction 1,358 1,384
Commercial and industrial 6,326 5,872
Consumer and other 13,219 13,315
-------- --------
Total $110,808 $105,873
======== ========
Loans increased $4.9 million (or 4.7%) at March 31, 1999 as compared to
December 31, 1998. The increase is attributable to a $5.1 million increase in
commercial real estate loans and $0.5 million in commercial and industrial
loans, partially offset by decreases in residential and consumer loans. The
increase in commercial loans is the result of the Company's strategic focus on
developing a strong commercial banking team and growth in commercial loan volume
and loan balances. Management believes commercial lending represents an area in
which the Bank can develop a profitable, increased market share.
Allowance for Loan Losses ("Allowance")
The Company's Allowance was $2.8 million at March 31, 1999 and December 31,
1998. The Allowance represented 2.5% and 2.6% of total loans, and 503.1% and
496.4% of nonperforming loans, at March 31, 1999 and December 31, 1998,
respectively. Management believes that in accordance with the Bank's Allowance
for Loan Loss Policy, the Allowance is adequate at March 31, 1999. However,
future additions to the Allowance may be necessary based on changes in the
financial condition of various borrowers, new information that becomes available
relative to various borrowers and loan collateral, growth in the size or changes
in the mix or concentration risk of the loan portfolio, problems borrowers may
experience with regard to Year 2000 computer related issues, as well as changes
in local, regional or national economic conditions. In addition, various
regulatory authorities, as an integral part of their examination process,
periodically review the Bank's Allowance. Such authorities may require the Bank
to recognize additional provision for loan losses based upon information
available to them and their judgments at the time of their examination.
14
Nonperforming Assets
Information with respect to nonperforming assets is set forth below:
March 31, December 31,
-------------------------
(in thousands) 1999 1998
- ------------------------------------------------------------------
Nonaccrual loans $ 439 $ 430
Accruing loans past due 90 days or more 114 121
Restructured loans - -
Real estate owned and repossessions 12 15
----- -----
Total $ 565 $ 566
===== =====
The level of nonperforming assets remained relatively unchanged at March 31,
1999 as compared to December 31, 1998. While the current level of nonperforming
assets is low compared to historical levels, the Bank continues to hold a large
concentration of commercial real estate loans. The collateral coverage for
these loans, should they become nonperforming, may not be adequate to protect
the Bank from potential losses. Deterioration in the local economy or real
estate market, or upward movements in interest rates could adversely impact the
performance and/or value of the underlying collateral for these loans and could
have an adverse impact on the Bank's loan portfolio, and in particular,
currently performing commercial real estate loans. In addition, deterioration
in the local economy or adverse changes in the financial condition of various
borrowers could have an impact on the Bank's entire loan portfolio (including
commercial real estate). These factors could result in an increased incidence
of loan defaults and, as a result, an increased level of nonperforming loans and
assets. In addition, while the downward trend in nonperforming assets is
encouraging, the current level of nonperforming assets is considered by
management to be at such a low level that it is not likely to be sustained.
Impaired Loans
Management identifies impaired loans on a loan by loan basis. Though the
measurement of impaired loans is generally based on the present value of
expected future cash flows discounted at the historical effective interest rate,
all of the Company's impaired loans were collateral-dependent, which are
measured for impairment based on the fair value of the collateral. At March 31,
1999 and December 31, 1998, the recorded investment in loans for which
impairment has been recognized in accordance with SFAS No. 114 totaled $439,000.
The corresponding portion of the Allowance allocated against the total recorded
investment in loans ("Allocated Reserves") was $57,000 and $55,000 as of March
31, 1999 and December 31, 1998, respectively. All of the impaired loans were
classified as nonaccrual at March 31, 1999. At December 31, 1998, an amount
equal to $430,000 of the $439,000 total impaired loans was classified as
nonaccrual or troubled debt restructures and the remaining $9,000 was classified
as potential problem loans. The income recorded on a cash basis relating to
impaired loans equaled $2,000 and $22,000 at March 31, 1999 and December 31,
1998, respectively. The average balance of outstanding impaired loans was
$439,000 and $414,000 at March 31, 1999 and December 31, 1998, respectively.
All of the impaired loans were collateralized by real estate at March 31, 1999
and accounted for by the lower of the fair value of the collateral (net of the
$57,000 Allocated Reserves) or amortized loan value.
Real Estate Owned ("REO")
REO consists of properties acquired through mortgage loan foreclosure
proceedings, repossessions or in full or partial satisfaction of outstanding
loan obligations. At March 31, 1999, REO totaled $12,000, consisting of a
single mobile home.
15
Liquidity - Bank
Deposits totaled $146.5 million at March 31, 1999, a decrease of $2.1 million
(or 1.4%) from the level of $148.6 million at December 31, 1998.
Deposit balances were as follows:
March 31, December 31,
-------------------------
(in thousands) 1999 1998
- --------------------------------------------------------------
Noninterest bearing demand deposits $ 8,707 $ 10,447
Interest bearing demand deposits 19,470 21,680
Savings and escrow deposits 66,372 63,393
Time deposits 51,909 53,025
-------- --------
Total $146,458 $148,545
======== ========
The decline in deposit levels is primarily attributable to a $5.1 million
decline in demand deposit accounts and time deposits. This decrease was offset
by a $3.0 million increase in savings deposit balances attributable to the
Company's High Rise Savings program.
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 promissory notes issued to a group
of four Maine savings banks (the "Savings Banks") in the aggregate principal
amount of $2.6 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.
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; however, certain restrictions also exist regarding the ability of the
Bank to transfer funds to the Company in the form of cash dividends, loans or
advances. Maine corporate law generally provides that dividends may only be
paid out of unreserved and unrestricted earned surplus or unreserved and
unrestricted net earnings of the current fiscal year and the next preceding
fiscal year taken as a single period. Maine banking law also imposes certain
restrictions, including the requirement that the Bank establish and maintain
adequate levels of capital as set forth in rules adopted by the Maine Bureau of
Banking.
The Loan Agreement, dated July 24, 1996, between the Company and the Savings
Banks contains certain terms, restrictions and covenants, including covenants
restricting the amount of borrowings that may be incurred by the Company and the
Bank, restrictions regarding the conditions under which cash dividends may be
paid by the Company (including a prohibition of the payment of cash dividends to
its stockholders as long as the Company's debt-to-equity ratio on a parent-only
basis exceeds 30%), and a requirement that the Company and the Bank maintain
certain minimum capital ratios.
16
On December 22, 1998, September 23, 1998 and March 25, 1998, the Bank paid the
Company cash dividends of $680,000, $500,000 and $500,000, respectively. At
March 31, 1999, the parent's cash and cash equivalents totaled $721,000.
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 March 31, 1999 and December 31, 1998:
(dollars in thousands) March 31, 1999 December 31, 1998
- -----------------------------------------------------------------------------------------------
Tier 1 capital (Leverage) to total assets /(1)/ ratio
Qualifying capital $ 15,248 $ 14,709
Actual % 8.20% 7.90%
Minimum requirements for capital adequacy % 4.00% 4.00%
Average quarterly assets $185,984 $186,077
Tier 1 capital to risk-weighted assets
Qualifying capital $ 15,248 $ 14,709
Actual % 15.22% 14.33%
Minimum requirements for capital adequacy % 4.00% 4.00%
Total capital to risk-weighted assets (Tier 1 and Tier 2)
Qualifying capital $ 16,519 $ 16,010
Actual % 16.49% 15.60%
Minimum requirement for capital adequacy % 8.00% 8.00%
Risk-weighted assets $100,156 $102,612
(1) Calculated on an average quarterly basis
17
Capital - Company
The table below sets forth the regulatory capital requirements and capital
ratios for the Company at March 31, 1999 and December 31, 1998:
(dollars in thousands) March 31, 1999 December 31, 1998
- -----------------------------------------------------------------------------------------------
Tier 1 capital (Leverage) to total assets /(1)/ ratio
Qualifying capital $ 14,590 $ 13,453
Actual % 7.79% 7.20%
Minimum requirements for capital adequacy % 4.00-5.00% 4.00-5.00%
Average quarterly assets $ 187,192 $ 186,757
Tier 1 capital to risk-weighted assets
Qualifying capital $ 14,590 $ 13,453
Actual % 14.43% 13.05%
Minimum requirements for capital adequacy % 4.00% 4.00%
Total capital to risk-weighted assets (Tier 1 and Tier 2)
Qualifying capital $ 15,873 $ 14,759
Actual % 15.70% 14.32%
Minimum requirement for capital adequacy % 8.00% 8.00%
Risk-weighted assets $ 101,121 $ 103,071
(1) Calculated on an average quarterly basis less disallowed portion of the
deferred tax asset.
Year 2000 Issue
The Company is aware of potential problems that may be experienced with
computerized and other electronic systems at the turn of the millennium,
beginning January 1, 2000. These problems exist because many systems rely on
two digit fields instead of four digit fields to store the year of date
sensitive information. An example of the type of problem that may arise is that
some systems will interpret the 00 in its year field to mean 1900 instead of
2000. This problem will not only affect software programs but hardware as well,
and could result in a system failure or miscalculations causing disruptions of
operations including, among other things, a temporary inability to process
transactions or engage in normal business activities.
The Company's State of Readiness. The Federal Financial Institutions
Examination Council (FFIEC) has issued several statements providing guidance on
the Year 2000 issue. The statements address key phases of the Year 2000 project
management process, outline specific responsibilities of senior management and
the Board of Directors to address these risks, assist financial institutions in
developing prudent risk controls to manage risks related to the Year 2000 and
outline the due diligence process that financial institutions should adopt to
manage these risks. In response, the Company has formed a Year 2000 Action
Committee which is comprised of various members of the Bank's senior and middle
management. The Committee has developed a detailed plan for mitigating Year
2000 risk as it relates to the Bank's Information Technology systems and Non-
Information Technology systems. In accordance with FFIEC guidelines, the Year
2000 project management process has five phases, which include Awareness,
Assessment, Renovation, Validation and Implementation of all systems.
Awareness Phase. During the Awareness phase, the Company is required to (i)
define the Year 2000 problem as it relates to specific circumstances and gain
executive support for the resources necessary to perform compliance work, (ii)
establish a Year 2000 Committee, and (iii) develop an overall strategy that
encompasses in-house systems, service bureaus for systems that are outsourced,
vendors, auditors, customers and suppliers (including correspondents).
18
The Company has completed activities related to the Awareness Phase. As stated
previously, the Company has formed a Year 2000 Committee which has developed and
implemented a strategy to minimize the impact of Year 2000 technology problems.
The Committee provides regular updates to the Company's Board of Directors and
Executive management.
Assessment Phase. As part of the Assessment phase, the Company is required to
(i) assess the size and complexity of issues related to the Year 2000 issue,
(ii) detail the magnitude of effort and resources necessary to address Year 2000
issues, (iii) identify all hardware, software, networks, automated teller
machines, other various processing platforms, and customer and vendor
dependencies affected by the Year 2000 date change, and (iv) develop a
contingency plan for the items addressed in the action plan. The assessment
phase must go beyond information systems and include facilities and
environmental systems that are dependent on embedded microchips, such as
security systems, elevators, and vaults.
The Company has already completed the Assessment phase, which included assessing
all Information Technology (i.e. computer software, hardware, third party
vendors and other electronic devices) and non-Information Technology systems
(i.e. vaults, security and environmental systems) for compliance with the year
2000. The Committee prioritized each item to determine if non-compliance with
the Year 2000 date change would adversely impact customers, shareholders or
employees. During this assessment, 19% of the Bank's IT system applications and
services met this criteria and were classified as mission critical.
Renovation Phase. As part of the Renovation Phase, the Company is required to
prioritize work based on information gathered during the Assessment phase, and
includes code enhancements, hardware and software upgrades, system replacements,
vendor certification and other associated changes. For institutions relying on
outside services or third-party software providers, ongoing discussions and
monitoring of vendor progress is necessary.
The Company has already completed a significant portion of activities related to
the renovation phase of mission critical applications (approximately 97%), with
the remainder targeted for completion by June of 1999. All non-mission critical
applications are anticipated to be completed by September 1999. A majority of
the Company's systems are supplied by third-party vendors and are being
renovated by the vendors. The Company has been provided with a Year 2000 ready
release by its primary data processing vendor. This release has already been
installed and has been validated by the Year 2000 Action Committee for future
date processing accuracy.
Validation Phase. The Validation Phase includes actual testing of incremental
changes to hardware and software components. In addition to testing upgraded
components, connections with other systems must be verified, and all changes
should be accepted by internal and external users. The Company should also
establish controls to assure the effective and timely completion of all hardware
and software testing prior to final implementation.
The Company's Year 2000 Action Committee is responsible for testing the primary
data processing systems and all mission critical server-based applications for
Year 2000 readiness. Validation and testing of updates supplied by the
Company's third-party vendors is almost complete. Primary functional
transaction types such as deposits, withdrawals, payments, maturities, interest
postings, inquiries on deposit and loan accounts, and other typical business
processes, continue to be tested for key date validity and accuracy. Key dates
include dates before, during and after the century change and the century leap
year. The Company has completed validation testing on approximately 95% of
mission critical applications and anticipates that all non-mission critical
applications will be completed by September 1999.
19
Implementation Phase. During the Implementation Phase, systems should be
certified as Year 2000 compliant and be accepted by the business users. For any
system failing certification, the business effect must be assessed clearly and
the Company's contingency plans should be implemented. In addition, this phase
must ensure that any new systems or subsequent changes to verified systems are
compliant with Year 2000 requirements.
A significant number of the Company's mission critical applications are supplied
by third party vendors. Each vendor is responsible for making revisions to its
software, performing testing and providing the updates to the Company. Software
updates have been provided and installed by a majority of the Company's third-
party vendors and the Company is currently in the process of validating the
software for Year 2000 readiness on its systems. At this time, the
implementation phase has not yet been completed, however the Company expects to
have completed the implementation phase for all mission critical applications by
June of 1999 and all non-mission critical applications by September of 1999.
Costs Related to the Year 2000 Issue
Management does not expect the costs associated with the Year 2000 issues to
have a material effect on the Company's financial statements. To date, the
Company has incurred approximately $21,000 in external costs for its Year 2000
program. The Company currently estimates that it will incur additional expenses
between now and December 31, 1999 to complete its Year 2000 compliance work,
however, these costs are not anticipated to exceed $50,000 for both mission
critical and non-mission critical systems. These costs, which may vary from the
estimates, have been, and will continue to be, expensed as incurred.
Risks Related to the Year 2000 Issue
Though the Company is diligently working to ensure that there is no disruption
in its operations due to Year 2000 systems problems, and believes it will be
successful in this regard, there can be no guarantee that all of the systems
critical to the operational performance of the Bank will be Year 2000 compliant
and fully functional at the turn of the millennium. While management is working
diligently to protect the Company against such an occurrence, it is possible
that a vendor upon whom the Bank is reliant could, despite possible assurances
to the contrary, ultimately fail to provide Year 2000 compliant services to the
Company, or said services could prove incompatible with the Company's systems.
A significant systems failure could have a material adverse impact on the
financial condition of the Company.
Contingency Plan
A Year 2000 contingency plan is being drafted and incorporated into the
Company's overall contingency plan to address potential worst case scenarios
relating to the Year 2000 issue. The Company is developing alternative
solutions for business resumption and approaches to minimize the impact of
different scenarios. Possible alternatives to address these scenarios include
increasing cash reserves, designating existing branch locations as emergency
regional offices, (with alternative power sources and alternative communication
methods), increasing customer and community awareness, and having staff
available on site during the turn of the millennium.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
- -------------------------------------------------------------------
There were no material changes to the Company's market risk analysis during
the current quarter.
20
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
- -------------------------
As of March 31, 1999, 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) Restated Certificate of Incorporation (filed as Exhibit 3.1(i) to
Annual Report on Form 10-K for the year ended December 31, 1997, File No. 0-
14087 ("1997 Form 10-K"), and incorporated herein by reference).
3.1(ii) Amended and Restated Bylaws (filed as Exhibit 3.1(ii) to 1997
Form 10-K, and incorporated herein by reference).
27 Financial Data Schedule (filed herewith).
(b) The Company filed a Current Report on Form 8-K on March 26, 1999 announcing
that its 1999 annual meeting of stockholders will be held on May 18, 1999.
21
FIRST COASTAL CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
FIRST COASTAL CORPORATION
Date: May 14, 1999 By: /s/ Gregory T. Caswell
-------------------------------------
Gregory T. Caswell
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Date: May 14, 1999 By: /s/ Gregory T. Caswell
--------------------------------------
Gregory T. Caswell
President and Chief Executive Officer
(Principal Executive Officer)
Date: May 14, 1999 By: /s/ Dennis D. Byrd
--------------------------------------
Dennis D. Byrd
Vice President and Treasurer
(Principal Financial and Accounting
Officer)
22
EXHIBIT INDEX
Exhibit No. Description of Exhibit
- ----------- ----------------------
3.1(i) Restated Certificate of Incorporation (filed as Exhibit
3.1(i) to Annual Report on Form 10-K for the year ended
December 31, 1997, File No. 0-14087 ("1997 Form 10-K"), and
incorporated herein by reference).
3.1(ii) Amended and Restated Bylaws (filed as Exhibit 3.1(ii) to
1997 Form 10-K, and incorporated herein by reference).
27 Financial Data Schedule (filed herewith).
23