UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark one): [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 August 12, 1999: 1,360,027 shares
INDEX
FIRST COASTAL CORPORATION AND SUBSIDIARY
PART I - FINANCIAL INFORMATION
---------------------
Page
----
Item 1. Financial Statements
Consolidated Balance Sheets (Unaudited) as of June
30, 1999 and December 31, 1998 3
Consolidated Statements of Operations (Unaudited)
for the three and six months ended June 30, 1999
and 1998 4
Consolidated Statements of Cash Flows (Unaudited)
for the six months ended June 30, 1999 and 1998 6
Consolidated Statements of Comprehensive Income
(Unaudited) for the three and six months ended
June 30, 1999 and 1998 7
Notes to Consolidated Financial Statements
(Unaudited), June 30, 1999 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 21
PART II - OTHER INFORMATION
-----------------
Item 1. Legal Proceedings 22
Item 2. Changes in Securities and Use of Proceeds 22
Item 3. Defaults Upon Senior Securities 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 23
SIGNATURES 24
2
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
- -----------------------------
CONSOLIDATED BALANCE SHEETS (Unaudited)
First Coastal Corporation and Subsidiary June 30, December 31,
--------------- ---------------
(in thousands) 1999 1998
- -------------------------------------------------------------------------------------------------------------
ASSETS
Noninterest earning deposits and cash $ 5,159 $ 4,509
Interest earning deposits 2,971 28,118
--------------- ---------------
Cash and cash equivalents 8,130 32,627
Investment securities:
Available for sale (at market value, amortized cost: 1999 $54,890;
1998 $47,037) 54,060 47,048
Federal Home Loan Bank stock (at cost) 1,315 1,315
Loans held for sale 364 83
Loans 113,500 105,873
Less: Deferred loan fees, net (86) (97)
Allowance for loan losses (2,811) (2,735)
--------------- ---------------
110,603 103,041
Premises and equipment 2,432 2,554
Accrued income receivable 1,225 1,132
Real estate owned and repossessions 10 15
Deferred tax asset 2,820 3,354
Other assets 293 244
--------------- ---------------
TOTAL ASSETS $ 181,252 $ 191,413
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits $138,071 $148,545
Advances from Federal Home Loan Bank 21,152 22,545
Savings Bank Notes 2,400 2,600
Secured borrowings 2,134 967
Accrued expenses and other liabilities 210 442
--------------- ---------------
TOTAL LIABILITIES 163,967 175,099
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 June 30, 1999 and December 31, 1998 - 1,360,527 shares 1,361 1,361
Paid-in-capital 31,751 31,751
Retained earnings (deficit) (15,279) (16,805)
Accumulated other comprehensive income (548) 7
--------------- ---------------
TOTAL STOCKHOLDERS' EQUITY 17,285 16,314
--------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 181,252 $ 191,413
=============== ===============
See notes to consolidated financial statements.
3
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
First Coastal Corporation and Subsidiary Three Months Ended June 30,
-----------------------------
(in thousands, except share and per share amounts) 1999 1998
- ---------------------------------------------------------------------------------------------
Interest and Dividend Income
Interest and fees on loans $ 2,455 $ 2,514
Interest and dividends on investment securities 891 414
Other interest income 156 221
------------- --------------
Total Interest and Dividend Income 3,502 3,149
Interest Expense
Deposits 1,307 1,260
Borrowings
Advances from Federal Home Loan Bank 291 190
Savings Bank Notes 75 87
Secured borrowings 18 10
------------- --------------
Total Interest Expense 1,691 1,547
------------- --------------
Net Interest Income Before Provision for Loan Losses 1,811 1,602
Provision for loan losses - -
------------- --------------
Net Interest Income After Provision for Loan Losses 1,811 1,602
Noninterest Income
Services charges on deposit accounts 121 124
Gain on investment securities transactions 41 36
Gain on sales of mortgage loans 50 10
Gain on sale of branch 1,110 -
Other 25 38
------------- --------------
1,347 208
Operating Expenses
Salaries and employee benefits 703 640
Occupancy 145 128
Net cost of operations of real estate owned and repossessions 3 5
Other 648 586
------------- --------------
1,499 1,359
------------- --------------
Income Before Income Taxes 1,659 451
Income Taxes 588 159
------------- --------------
NET INCOME $ 1,071 $ 292
============= ==============
PER SHARE AMOUNTS
Basic earnings per share:
Weighted average shares outstanding 1,360,527 1,359,633
Net income per share $ 0.79 $ 0.21
============= ==============
Diluted earnings per share:
Weighted average shares outstanding 1,374,426 1,380,177
Net income per share $ 0.78 $ 0.21
============= ==============
See notes to consolidated financial statements.
4
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
First Coastal Corporation and Subsidiary Six Months Ended June 30,
---------------------------------------
(in thousands, except share and per share amounts) 1999 1998
- --------------------------------------------------------------------------------------------------------------------------
Interest and Dividend Income
Interest and fees on loans $ 4,795 $ 4,991
Interest and dividends on investment securities 1,664 808
Other interest income 381 328
------------- -------------
Total Interest and Dividend Income 6,840 6,127
Interest Expense
Deposits 2,701 2,339
Borrowings
Advances from Federal Home Loan Bank 590 403
Savings Bank Notes 149 170
Secured borrowings 32 10
------------- -------------
Total Interest Expense 3,472 2,922
------------- -------------
Net Interest Income Before Provision for Loan Losses 3,368 3,205
Provision for loan losses - -
------------- -------------
Net Interest Income After Provision for Loan Losses 3,368 3,205
Noninterest Income
Services charges on deposit accounts 235 240
Gain on investment securities transactions 22 36
Gain on sales of mortgage loans 517 16
Gain on sale of branch 1,110 -
Other 45 60
------------- -------------
1,929 352
Operating Expenses
Salaries and employee benefits 1,383 1,277
Occupancy 309 259
Net cost of operations of real estate owned and repossessions 4 2
Other 1,255 1,123
------------- -------------
2,951 2,661
------------- -------------
Income Before Income Taxes 2,346 896
Income Taxes 820 319
------------- -------------
NET INCOME $ 1,526 $ 577
PER SHARE AMOUNTS
Basic earnings per share:
Weighted average shares outstanding 1,360,527 1,359,415
Net income per share $ 1.12 $ 0.42
============= =============
Diluted earnings per share:
Weighted average shares outstanding 1,374,641 1,380,689
Net income per share $ 1.11 $ 0.42
============= ================
See notes to consolidated financial statements.
5
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
First Coastal Corporation and Subsidiary Six Months Ended June 30,
------------------------------
(in thousands) 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
Operating Activities
Net Income $ 1,526 $ 577
Adjustments to reconcile net income to net cash provided by operating activities
Writedowns of REO 5 -
Gain on sales of REO - (5)
Depreciation and amortization 219 194
Amortization of investment securities premiums 90 54
Realized investment securities gains (22) (36)
Realized gains on assets held for sale (517) (16)
Loans originated and acquired for sale (2,963) (6,040)
Sales of loans originated and acquired for sale 2,682 6,966
Decrease (increase) in interest receivable (93) 36
Increase (decrease) in interest payable 12 (17)
Net change in other assets 1,276 294
Net change in other liabilities (232) (124)
-------------- --------------
Net cash provided by operating activities 1,983 1,883
-------------- --------------
Investing Activities
Sales and maturities of securities available for sale 9,490 2,835
Maturities of securities held to maturity - 6,000
Purchases of investment securities available for sale (17,411) (15,008)
Purchases of investment securities held to maturity - (3,193)
Net change in loans (7,562) 131
Net purchases of premises and equipment (97) (389)
------------- --------------
Net cash used by investing activities (15,580) (9,624)
------------- --------------
Financing Activities
Net change in deposits (10,474) 24,011
Proceeds from borrowings - 4,000
Payments on borrowings (1,593) (4,569)
Net change in secured borrowings 1,167 1,454
Proceeds from issuance of common stock options 0 7
------------- --------------
Net cash (used) provided by financing activities (10,900) 24,903
------------- --------------
Increase (decrease) in cash and cash equivalents (24,497) 17,162
Cash and cash equivalents at beginning of period 32,627 7,554
------------- --------------
Cash and cash equivalents (interest and noninterest bearing) at end of period $ 8,130 $ 24,716
============= ==============
Noncash Investing Activities
Change in unrealized holding gains and losses on investment securities available
for sale $ (841) $ (20)
Transfer of loans to real estate owned and repossessions - 121
See notes to consolidated financial statements.
6
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
First Coastal Corporation and Subsidiary Three Months Ended June 30,
-----------------------------------------
(dollars in thousands) 1999 1998
- --------------------------------------------------------------------------------------------------------------------------
Net Income $ 1,071 $ 292
Other comprehensive income:
Unrealized holding gains (losses) arising during the period (net of income
taxes: 1999 - $(214); 1998 - $(9) ) (416) (16)
Reclassification adjustment for realized (gains) losses included in net income
(net of income taxes: 1999 - $(13); 1998 - $(12)) (28) (24)
------------- -------------
(444) (40)
------------- -------------
Comprehensive income $ 627 $ 252
============= =============
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
First Coastal Corporation and Subsidiary Six Months Ended June 30,
----------------------------------------
(dollars in thousands) 1999 1998
- -------------------------------------------------------------------------------------------------------------------------
Net Income $ 1,526 $ 577
Other comprehensive income:
Unrealized holding gains (losses) arising during the period (net of income
taxes: 1999 - $(278); 1998 - $(10)) (540) (20)
Reclassification adjustment for realized (gains) losses included in net income
(net of income taxes: 1999 - $(7); 1998 - $(12) ) (15) (24)
------------- ------------
(555) (44)
------------- ------------
Comprehensive income $ 971 $ 533
============= ============
See notes to consolidated financial statements.
7
FIRST COASTAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JUNE 30, 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 and six months ended June 30,
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 and
other documents filed by the Company with the Securities and Exchange
Commission.
Certain Events
On May 14, 1999, the Bank sold its branch located in Kennebunk, Maine and
recognized a pretax gain of $1.1 million. Under the terms of the purchase and
assumption agreement, the purchaser acquired all of the branch's deposits and
certain branch assets, as well as assuming responsibility for the Bank's lease
obligations.
On August 4, 1999, the Company entered into the First Amendment to Loan
Agreement (the "First Amendment to Loan Agreement") amending the terms of the
Loan Agreement, dated as of July 24, 1996 (the "Loan Agreement"), between the
Company and a group of four Maine savings banks (the "Four Savings Banks").
Pursuant to the Loan Agreement, the Company borrowed a total of $4.0 million
evidenced by promissory notes (the "Savings Bank Notes") in the amount of $1.0
million to each of the Four Savings Banks. Prior to the effective date of such
modification to the Loan Agreement, the Savings Bank Notes bore interest,
payable quarterly, at an annual rate of 10.85%, with semi-annual principal
payments of $200,000 beginning in June 1998. The original maturity date was
December 31, 2001. Pursuant to the First Amendment to Loan Agreement and the
amended Savings Bank Notes (the "Amended Savings Bank Notes"), the term loan
(current balance $2.4 million) bears interest at an annual rate of 8.0% until
August 4, 2002, at which time the interest rate will convert to the Prime Rate
as published in The Wall Street Journal (the "WSJ"), adjustable daily, until the
new maturity date of August 4, 2004. In addition, the Company is entitled to
draw against a working capital line of credit up to a combined aggregate limit,
including the balance outstanding at any time of the term loan, of $4.0 million.
The interest rate on the line of credit is equal to the Prime Rate as published
in the WSJ, adjusted daily and the maturity date is August 4, 2004.
In addition to reducing the interest rate, extending the maturity date, and
providing the Company with a line of credit, the First Amendment to Loan
Agreement modified or eliminated certain covenants and conditions contained in
the Loan Agreement, including among other things: (i) limitations on borrowing
by the Company and the Bank; (ii) prohibitions on transfers of assets of the
Company or any subsidiary; (iii) prohibition of capital expenditures over
$500,000 in any fiscal year; and (iv) certain provisions providing that it was a
default by the Company not to make certain reports or payments within specified
time frames, which provisions have been generally liberalized as to time or
amount. In addition, the First Amendment to Loan Agreement modified the
prohibition on the payment of cash dividends by the Company contained in the
Loan Agreement when the Company's debt-to-equity ration on a parent only-basis
exceeds 30% to increase the permissible ratio threshold to 50%.
8
In connection with the Amended Savings Bank Notes, one of the Four Savings Banks
notes was purchased by one of the remaining three lenders. There is no
prepayment penalty associated with the Amended Savings Bank Notes. Other terms
and conditions, including the pledge of all of the Company's stock in the Bank
as collateral, were affirmed and remain in effect.
Stock Repurchase Program
On May 18, 1999, the Company announced that its Board of Directors authorized a
stock repurchase program whereby the Company intends to repurchase up to 68,026
shares of its common stock, representing approximately 5% of the 1,360,527
shares then outstanding. The common stock may be purchased by the Company from
time to time in the open market or privately negotiated transactions. The shares
repurchased will be held as treasury stock to be used for general corporate
purposes. The stock repurchase program will be in effect for a total of
approximately twelve months or until June 2000. Under the program, no shares
knowingly will be purchased from officers or directors of the Company or from
persons who hold in excess of 5% of its outstanding common stock.
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. 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. The
table below sets forth the approximate number of shares used to calculate basic
and diluted earnings per share ("EPS") for the three and six months ended June
30, 1999 and 1998.
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- --------------------------
1999 1998 1999 1998
----------- ------------- ------------ ------------
Weighted average shares outstanding for basic EPS 1,360,527 1,359,633 1,360,527 1,359,415
Effect of dilutive stock options 13,899 20,544 14,114 21,274
----------- ------------- ------------ ------------
Weighted average shares outstanding for diluted
EPS 1,374,426 1,380,177 1,374,641 1,380,689
=========== ============= ============ ============
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 seven
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.
9
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. 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, economic conditions, or competitive factors
on the Company's deposit products and loan demand; (ii) the possibility that
certain transactions, such as the identification, development and successful
transition to a suitable new headquarters/operations center, the opening of new
branches, the introduction of new banking products or other planned or
contemplated events, may not occur; (iii) the possibility that operating
expenses may be higher than anticipated; (iv) the effect of changes in the
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, noninterest expense, and to 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 $1.1 million and $1.5 million for the three
and six months ended June 30, 1999, compared to net income of $292,000 and
$577,000 for the same periods in 1998. The increase in net income for the three
months ended June 30, 1999 as compared to the same period in 1998 is primarily
attributable to an after tax gain of $733,000 received on the sale of the Bank's
branch located in Kennebunk, Maine. The increase in net income for the six
months ended June 30, 1999 as compared to the same period in 1998 is
attributable to the branch sale and the after tax gain of $300,000 on the sale
of the Bank's mortgage servicing asset in the first quarter of 1999.
Net Interest Income
Net interest income increased by $209,000 and $163,000 for the three and six
months ended June 30, 1999 as compared to the same periods in 1998. Increases in
net interest income for the three and six months ended June 30, 1999 are
primarily attributable to increased securities and cash balances and higher
yields received on the Bank's portfolio of Treasury Inflationary Indexed
securities ("TIPs"). These increases were offset in part by declines in loan
interest income as a result of lower loan yields, and increases in borrowing and
deposit expenses resulting from higher balances, primarily as a result of the
Bank's High Rise Savings program implemented in late March 1998. For more
information see below under the caption "Interest Income" and "Interest
Expense."
Changes in net interest income are caused by changes in the amount and
composition of interest earning assets and interest bearing liabilities,
interest rate movements and the repricing of assets and liabilities as a result
of these movements, changes in the level of noninterest earning assets and
noninterest bearing liabilities and
10
income recognition and income reversals related to interest earning assets which
become noninterest earning assets.
The following table sets forth, for the periods indicated, information regarding
(i) the total dollar amount of interest income from interest-earning assets and
the resultant average yields, (ii) the total dollar amount of interest expense
on interest-bearing liabilities and the resultant average cost, (iii) net
interest income, (iv) interest rate spread, and (v) net interest margin.
For the Six Months Ended June 30,
-----------------------------------------------------------------------------------
1999 1998
--------------------------------------- -----------------------------------------
Average Average
Balance Interest Yield /(1)/ Balance Interest Yield /(1)/
- ----------------------------------------------------------------------------------------------------------------------------------
Assets:
Cash $ 15,731 $ 381 4.81% $ 11,891 $ 328 5.48%
Investments 53,100 1,664 6.32% 24,933 808 6.54
Loans /(2)/ /(3)/
Residential real estate mortgages 32,830 1,309 7.98 36,685 1,579 8.61
Commercial real estate mortgages 57,258 2,589 9.12 50,214 2,440 9.80
Commercial and industrial loans 6,531 293 9.04 5,605 273 9.82
Consumer loans 13,330 604 9.14 14,726 699 9.58
------------- --------- ---------- ---------
Total loans 109,949 4,795 8.80 107,230 4,991 9.39
Total interest earnings assets 178,780 6,840 7.72 144,054 6,127 8.58
Noninterest earning assets 9,509 10,297
------------- ----------
Total assets $188,289 $154,351
Liabilities: ============= ==========
Deposits
Savings $ 64,513 $1,193 3.73% $ 41,750 $ 674 3.25%
NOW and money market accounts 19,251 221 2.31 17,626 201 2.30
Certificates of deposit 50,991 1,287 5.09 54,875 1,464 5.38
------------- -------- ---------- ---------
Total interest bearing deposits 134,755 2,701 4.04 114,215 2,339 4.13
Borrowings 25,733 771 6.08 17,273 583 6.81
------------- -------- ---------- ---------
Total interest bearing liabilities 160,488 3,472 4.36% 131,524 2,922 4.48%
Noninterest bearing deposits 9,311 7,154
Noninterest bearing liabilities 381 110
Stockholders' equity 18,109 15,563
------------- -----------
Total liabilities and stockholders'
equity $188,289 $154,351
============= ===========
Net interest income $ 3,368 $3,205
Net interest rate spread /(4)/ ======== 3.36% ========= 4.10%
Net interest rate margin /(5)/ 3.80% 4.49%
/(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 interest earning assets.
11
The Company's net interest rate spread for the six months ended June 30, 1999
decreased to 3.35% as compared to 4.10% for the same period in 1998, and the net
interest rate margin for the six months ended June 30, 1999 decreased to 3.80%
as compared to 4.49% for the same period in 1998. However, for the three months
ended June 30, 1999, the Company's net interest rate spread and net interest
rate margin increased to 3.67% and 4.11%, as compared to 3.06% and 3.50% for the
three months ended March 31, 1999.
The following table sets forth, for the periods indicated, information regarding
the Company's ratios of net interest rate spread and net interest rate margin:
For the Three Months Ended
-------------------------------------------------------------
6/30/99 3/31/99 12/31/98 9/30/98 6/30/98 3/31/98
--------- --------- ---------- --------- --------- ----------
Net Interest Rate
Spread 3.67% 3.06% 3.40% 3.48% 3.91% 4.29%
Net Interest Rate
Margin 4.11% 3.50% 3.86% 3.89% 4.29% 4.70%
Interest income increased $353,000 and $713,000 for the three and six months
ended June 30, 1999 as compared to the same periods in 1998. The increase for
the six months ended June 30, 1999 is primarily attributable to an increase in
average earning assets of $34.7 million, including increases in the average
balance on investment securities ($28.2 million), interest earning deposits
($3.8 million) and loan balances ($2.7 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 High Rise
Savings product in March 1998 and increases in Federal Home Loan Bank ("FHLB")
borrowings. Savings deposit average balances increased $22.8 million for the six
months ended June 30, 1999 as compared to the six months ended June 30, 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
9.39% for the six months ended June 30, 1998 to 8.80% for the six months ended
June 30, 1999. Entering 1999 it was management's intent to reduce the percentage
of interest earning deposits comprising earning assets and to increase loans as
a percentage of earning assets. Some progress was made in this regard during the
six months ended June 30, 1999. Although average loan balances equaled $109.9
million for the six months ended June 30, 1999, ending loan balances equaled
$113.5 million at June 30, 1999, an increase of $7.6 million (7.2%) over ending
loan balances at December 31, 1998. The progress in increasing loan balances is
primarily attributable to approximately $17 million in new commercial loan
volume generated in the first half of 1999, primarily consisting of commercial
real estate loans.
Additionally, the Bank's yield on TIPs securities increased from 4.70% for the
three months ended March 31, 1999 to 8.45% for the three months ended June 30,
1999. This increase in yield is the result of increases in the consumer price
index ("CPI"), the inflation index used in calculating the actual yield over the
real rate of interest. The monthly yield on TIPs will vary with the monthly CPI
report published by the Department of Labor. TIPs balances were approximately
$15.9 million and $18 million at March 31, 1999 and June 30, 1999, respectively.
Competition for loan originations has been strong. As a result, the yield on new
loan originations has declined during the six months ended June 30, 1999 as
compared to the same period ended June 30, 1998. Competition or other factors
may cause this trend to continue.
Interest expense increased $144,000 and $550,000 for the three and six months
ended June 30, 1999 as compared to the same periods in 1998. The increase for
the six months ended June 30, 1999 is primarily the result of increased interest
expense on savings deposits of $519,000 (attributable to a $22.8 million
increase
12
in average balances and a 0.48% increase in yield). This increase was partially
offset by a $177,000 decline in interest expense paid on certificates of deposit
(attributable to a $3.9 million decline in average balances and a 0.29% decline
in yield). Borrowing expense increased $188,000, primarily the result of an
increase in average balances of $8.5 million, offset by a 0.73% reduction in
yield. The Company's cost of funds for the six months ended June 30, 1999 was
4.36% as compared to 4.48% for the same period in 1998. The Company's cost of
funds is expected to be positively impacted as a result of the First Amendment
to Loan Agreement which, among other things, reduced the interest rate under the
Loan Agreement from 10.85% to 8.00%, fixed for three years (then variable for
the next two years). For further information, see above, under the caption
"Certain Events."
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 and offered a promotional rate 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 June 30, 1999 equaled $38.1 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 $62.5
million at June 30, 1999, and the average interest rate paid on savings deposits
increased from 2.73% to 3.73%. 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.
Provision for Loan Losses
There was no provision for loan losses expense for the six months ended June 30,
1999 and 1998. The absence of a provision for loan losses in 1999 and 1998 is
primarily attributable to the continuing reduction of nonperforming loans and
potential problem loans (as compared to historical levels), and from the results
of management's review of the portfolio and determination of the adequacy of the
allowance for loan losses (the "Allowance") at June 30, 1999. Despite the
absence of provision expense, the level of the Allowance modestly increased, as
charged-off loans of $6,000 and $31,000 for the six months ended June 30, 1999
and 1998, respectively, were offset by recoveries totaling $82,000 and $92,000,
for the same periods.
Noninterest Income
Noninterest income increased $1.1 and $1.6 million for the three and six months
ended June 30, 1999 as compared to the same periods in 1998. This increase is
attributable to a $1.1 million pre-tax gain on the sale of the Bank's branch
located in Kennebunk, Maine in the second quarter of 1999 and a $460,000 pre-tax
gain received on the sale of the Bank's residential mortgage servicing portfolio
in the first quarter of 1999. In conjunction with the sale of the Bank's
mortgage servicing portfolio, the Bank intends to sell saleable residential
mortgage loans on a servicing released basis and recognize the potential
servicing fee income at the time of sale rather than retain servicing and record
the income on servicing fees over the life of the loan.
Operating Expenses
Operating expense increased $140,000 and $290,000 for the three and six months
ended June 30, 1999 as compared to the same periods 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
13
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 several years in the Greater Portland market,
(iii) the introduction of a number of new retail banking products to expand the
Bank's retail product array, and (iv) the Bank's continued expansion of its
commercial lending activities.
FINANCIAL CONDITION
- -------------------
Total Assets
At June 30, 1999, total assets equaled $181.3 million, representing a decrease
of $10.1 million (or 5.3%) from total assets of $191.4 million at December 31,
1998. This decline was the results of a $24.4 million decline in cash and cash
equivalents, partially offset by increases in loan balances ($7.6 million) and
investment securities ($7.0 million). Deposits declined ($10.5) million, largely
as a result of the sale of the Bank's Kennebunk, Maine branch, which consisted
of $12.5 million in deposits at the time of the sale on May 14, 1999.
Investments
The Company's investment portfolio is comprised primarily of U.S. government and
agency obligations and also contains miscellaneous equity securities. Total
investment securities at June 30, 1999 were $54.1 million compared to $47.0
million at December 31, 1998. This increase is attributable to the purchase of
$8.1 million in U.S. government obligations (of which $4.0 million are TIPs),
$2.0 million in U.S. government agency notes, $6.1 million in mortgage-backed
securities and $1.9 million in commercial notes, partially offset by the sale of
$3.9 million in U.S. government obligations, $1.0 million in government agency
notes, $2.0 million in commercial notes and $4.1 million in prepayments and
amortization on mortgage-backed securities and amortization of premiums or
discounts on investment 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 June 30, 1999.
June 30, 1999
-----------------------------------------------
Gross Gross Fair
Amortized Unrealized Unrealized Market
(in thousands) Cost Gain Loss Value
- ------------------------------------------------------------------------------
Available for sale:
U.S. government obligations $19,726 - $354 $19,372
U.S. government agency 1,000 - 42 958
Mortgage backed securities 33,692 27 461 33,258
Equity securities 472 - - 472
------------ ----------- -------- ---------
$54,890 $27 $857 $54,060
============ =========== ======== =========
14
The tax effected net unrealized gain (loss) on investment securities classified
as available for sale was $(548,000) and $7,000, at June 30, 1999 and December
31, 1998, respectively.
The following table represents the contractual maturities for investments in
debt securities for each major security type at June 30, 1999.
June 30, 1999
-----------------------------------------------
Maturing
-----------------------------------------------
After One
Within But within After
(in thousands) One Year Five Five Years Total
- ------------------------------------------------------------------------------
Available for sale:
U.S. government obligations $474 $2,053 $16,845 $19,372
U.S. government agency - - 958 958
Mortgage backed securities - - 33,258 33,258
----------- --------- ----------- ---------
$474 $2,053 $51,061 $53,588
=========== ========= =========== =========
Loans Held for Sale
Loans held for sale equaled $364,000 at June 30, 1999 as compared to $83,000 at
December 31, 1998, an increase of $281,000. 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 consisted of the following:
June 30, December 31,
-------------------------
(in thousands) 1999 1998
- ----------------------------------------------------------------------------
Real estate mortgage loans:
Residential $ 30,534 $ 32,555
Commercial 61,621 52,747
Real estate construction 942 1,384
Commercial and industrial 7,406 5,872
Consumer and other 12,997 13,315
----------- -----------
Total $113,500 $105,873
=========== ===========
Loans increased $7.6 million (or 7.2%) at June 30, 1999 as compared to December
31, 1998. The increase is attributable to a $8.9 million increase in commercial
real estate loans and $1.5 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.
Allowance for Loan Losses ("Allowance")
The Company's Allowance was $2.8 million at June 30, 1999 and $2.7 million at
December 31, 1998. The Allowance represented 2.5% and 2.6% of total loans at
June 30, 1999 and December 31, 1998, respectively. Management believes that in
accordance with the Bank's Allowance for Loan Loss Policy, the Allowance is
15
adequate at June 30, 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 that 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.
Nonperforming Assets
Information with respect to nonperforming assets is set forth below:
June 30, December 31,
------------------------
(in thousands) 1999 1998
- -----------------------------------------------------------------
Nonaccrual loans $ 135 $ 430
Accruing loans past due 90 days or more 56 121
Restructured loans - -
Real estate owned and repossessions 10 15
------------------------
Total $ 201 $ 566
========================
Nonperforming assets declined $365,000 at June 30, 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 are collateral-dependent, which are measured
for impairment based on the fair value of the collateral. At June 30, 1999 and
December 31, 1998, the recorded investment in loans for which impairment has
been recognized in accordance with SFAS No. 114 totaled $135,000 and $439,000,
respectively. The corresponding portion of the Allowance allocated against the
total recorded investment in loans was $24,000 and $55,000 as of June 30, 1999
and December 31, 1998, respectively. All of the impaired loans were classified
as nonaccrual at June 30, 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 $3,000 and $22,000 at June 30, 1999 and December 31, 1998, respectively.
The average balance of outstanding impaired loans was $286,000 and $414,000 at
June 30, 1999 and December 31, 1998, respectively.
16
Real Estate Owned ("REO")
REO consists of properties acquired through mortgage loan foreclosure
proceedings, repossessions or in full or partial satisfaction of outstanding
loan obligations. At June 30, 1999, REO totaled $10,000, consisting of a single
mobile home.
Liquidity - Bank
Deposits totaled $138.0 million at June 30, 1999, a decrease of $10.5 million
(or 7.1%) from the level of $148.6 million at December 31, 1998.
Deposit balances were as follows:
June 30, December 31,
------------------------
(in thousands) 1999 1998
- -------------------------------------------------------------
Noninterest bearing demand deposits $ 10,166 $ 10,447
Interest bearing demand deposits 18,303 21,680
Savings and escrow deposits 62,458 63,393
Time deposits 47,144 53,025
------------------------
Total $138,071 $148,545
========================
The decline in deposit levels is attributable to the sale of the Bank's branch
located in Kennebunk Maine, with deposits totaling $12.5 million at the time of
the sale on May 14, 1999. This decrease was offset by an increase in savings
deposit balances.
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 Amended Savings Bank Notes in the
aggregate principal amount of $2.4 million, the Company's expenses consist
primarily of Delaware franchise taxes associated with the Company's authorized
capital stock, and various other expenses. Expenses, including legal, certain
audit and other professional fees, insurance and other expenses, are allocated
between the Bank and the Company based upon the relative benefits derived.
On May 18, 1999, the Company's Board of Directors authorized a stock repurchase
program whereby the Company intends to repurchase up to 68,026 shares of its
common stock, representing approximately 5% of the 1,360,527 shares then
outstanding. The stock repurchase program will be in effect for a total of
approximately twelve months or until June 2000.
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 only 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
17
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, as amended pursuant to the First Amendment to Loan
Agreement, contains certain terms, restrictions and covenants, such as
restrictions regarding the conditions under which cash dividends may be paid by
the Company (including a prohibition on the payment of cash dividends to its
stockholders as long as the Company's debt-to-equity ratio on a parent-only
basis exceeds 50%), and a requirement that the Company and the Bank maintain
certain minimum capital ratios. At June 30, 1999, the Company's debt-to-equity
ratio and regulatory capital requirements would not have prohibited payment of a
dividend.
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 June
30, 1999, the parent's cash and cash equivalents totaled $625,000.
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 June 30, 1999 and December 31, 1998:
(dollars in thousands) June 30, 1999 December 31, 1998
- -------------------------------------------------------------------------------------------------
Tier 1 capital (Leverage) to total assets /(1)/ ratio
Qualifying capital $ 16,393 $ 14,709
Actual % 8.95% 7.90%
Minimum requirements for capital adequacy % 4.00% 4.00%
Average quarterly assets $183,137 $ 186,077
Tier 1 capital to risk-weighted assets
Qualifying capital $ 16,393 $ 14,709
Actual % 16.67% 14.33%
Minimum requirements for capital adequacy % 4.00% 4.00%
Total capital to risk-weighted assets (Tier 1 and Tier 2)
Qualifying capital $ 17,642 $ 16,010
Actual % 17.94% 15.60%
Minimum requirement for capital adequacy % 8.00% 8.00%
Risk-weighted assets $ 98,331 $ 102,612
/(1)/ Calculated on an average quarterly basis
18
Capital - Company
The table below sets forth the regulatory capital requirements and capital
ratios for the Company at June 30, 1999 and December 31, 1998:
(dollars in thousands) June 30, 1999 December 31, 1998
- ------------------------------------------------------------------------------------------------------
Tier 1 capital (Leverage) to total assets /(1)/ ratio
Qualifying capital $ 15,598 $ 13,453
Actual % 8.49% 7.20%
Minimum requirements for capital adequac % 4.00-5.00% 4.00-5.00%
Average quarterly assets $ 183,721 $ 186,757
Tier 1 capital to risk-weighted assets
Qualifying capital $ 15,598 $ 13,453
Actual % 15.83% 13.05%
Minimum requirements for capital adequacy % 4.00% 4.00%
Total capital to risk-weighted assets (Tier 1 and Tier 2)
Qualifying capital $ 16,849 $ 14,759
Actual % 17.10% 14.32%
Minimum requirement for capital adequacy % 8.00% 8.00%
Risk-weighted assets $ 98,539 $ 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 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
19
in-house systems, service bureaus for systems that are outsourced, vendors,
auditors, customers and suppliers (including correspondents).
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 completed all activities related to the renovation phase of
mission critical applications. 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 all mission critical applications
and anticipates that all non-mission critical applications will be completed by
September 1999.
20
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. The implementation phase is
100% complete for all mission-critical applications and the Company expects to
have completed the implementation phase for 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 $20,000 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 has been completed 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.
21
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
- -------------------------
As of June 30, 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
- -----------------------------------------------------------
(a) The 1999 Annual Meeting of Stockholders of the Company was held on May 18,
1999.
(b) Nominees Dennis D. Byrd and Roger E. Klein were elected for three-year terms
to expire in 2002. The continuing directors are Gregory T. Caswell,
MaryEllen FitzGerald, David B. Hawkes, Sr., Normand E. Simard, Edward K.
Simensky and Charles A. Stewart III.
(c) The results of the voting at the 1999 Annual Meeting of Stockholders
(pursuant to a record date of April 15, 1999) were as follows:
(i) Election of Directors: 1,059,509 shares were voted to elect nominees
Dennis D. Byrd and Roger E. Klein as directors of the Company for
three year terms and 162,144 shares were voted to withhold authority.
(ii) Amendment No. 1 to First Coastal Corporation 1996 Stock Option and
Equity Incentive Plan. For: 460,375; Against: 243,541; Abstain: 8,886.
(iii) Ratification of PricewaterhouseCoopers LLP as Independent Public
Accountants for the year ending December 31, 1999. For: 1,210,825;
Against: 6,552; Abstain: 4,275.
(d) Not applicable.
Item 5. Other Information
- -------------------------
Not applicable.
22
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).
10.1 First Amendment to Loan Agreement, dated as of August 4,
1999, among First Coastal Corporation and Androscoggin Savings Bank, Machias
Savings Bank and Norway Savings Bank (collectively, the "Lenders") and Machias
Savings Bank, as agent (filed herewith).
10.2 Acknowledgment and Agreement, dated as of August 4, 1999,
among First Coastal Corporation and the Lenders (filed herewith).
10.3 Note Modification Agreement (Machias Note #1), dated as of
August 4, 1999 for the benefit of Machias Savings Bank (filed herewith).
10.4 Note Modification Agreement (Machias Note #2), dated as of
August 4, 1999 for the benefit of Machias Savings Bank (filed herewith).
10.5 Note Modification Agreement (Androscoggin Note), dated as of
August 4, 1999 for the benefit of Androscoggin Savings Bank (filed herewith).
10.6 Note Modification Agreement (Norway Note), dated as of
August 4, 1999 for the benefit of Norway Savings Bank (filed herewith).
27 Financial Data Schedule (filed herewith).
(b) The Company filed a Current Report on Form 8-K on June 1, 1999 announcing
that its Board of Directors authorized a stock repurchase program.
23
FIRST COASTAL CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
FIRST COASTAL CORPORATION
Date: August 13, 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: August 13, 1999 By: /s/ Gregory T. Caswell
-------------------------------------
Gregory T. Caswell
President and Chief Executive Officer
(Principal Executive Officer)
Date: August 13, 1999 By: /s/ Dennis D. Byrd
-------------------------------------
Dennis D. Byrd
Vice President and Treasurer
(Principal Financial and Accounting
Officer)
24
EXHIBIT INDEX
Exhibit No. Description of Exhibit
- ----------- ----------------------
10.1 First Amendment to Loan Agreement, dated as of August 4, 1999,
among First Coastal Corporation and Androscoggin Savings Bank,
Machias Savings Bank and Norway Savings Bank (collectively, the
"Lenders") and Machias Savings Bank, as agent (filed herewith).
10.2 Acknowledgment and Agreement, dated as of August 4, 1999, among
First Coastal Corporation and the Lenders (filed herewith).
10.3 Note Modification Agreement (Machias Note #1), dated as of August
4, 1999 for the benefit of Machias Savings Bank (filed herewith).
10.4 Note Modification Agreement (Machias Note #2), dated as of August
4, 1999 for the benefit of Machias Savings Bank (filed herewith).
10.5 Note Modification Agreement (Androscoggin Note), dated as of August
4, 1999 for the benefit of Androscoggin Savings Bank (filed
herewith).
10.6 Note Modification Agreement (Norway Note), dated as of August 4,
1999 for the benefit of Norway Savings Bank (filed herewith).
27 Financial Data Schedule (filed herewith).